GDP grows as fraction of an increase in revenue collection

Enhanced revenue from personal income tax could unlock 0.5 percentage points of additional growth, a study shows unveiled on Wednesday at a press conference held at PRI premises in the capital Dhaka.

PRI director Bazlul Haque Khondker while presenting the findings of the study said low tax effort had been identified as a key impediment to adequate collection particularly in social sector and infrastructure in level.
 
Revenue increases generally support important areas for development, such as education, health, social protection and infrastructure, he mentioned.
The study found that an increase in overall tax revenues, to fund increased spending, would also contribute to reduced poverty and inequality.

A 2-percentage point increase in overall tax revenue would lead to a 0.2-percentage point increase in real GDP growth, assuming additional revenues were invested in public services, it said.

If the increase in tax revenue is focused on personal income tax, this would have the greatest benefit on the overall economy with a 2-percentage point increase resulting in a 0.5-percentage point increase in real GDP growth above current levels, the report read.

The report, however, said that due to inflationary effects, increases in VAT revenues would have a negative impact on economic growth, as well as household income and consumption. VAT reform is still required, but tax increases should focus more on personal income taxes, it opined.

Bangladesh has one of the lowest levels of tax revenue in the world as a percentage of GDP, the PRI report mentioned saying that this posed a risk to the country, both in terms of stabilising the economy in the short-term and maintaining a positive track toward development in the medium-term as Bangladesh sought to become a developed nation by 2041.

At 7.6 per cent of GDP, Bangladeshs tax revenues as a proportion of GDP are currently half of that of similar countries like Vietnam, the PRI said. To support future economic growth, the PRI recommended that the government should consider an ambitious strategy to increase tax-GDP ratio.

The study report suggested adopting measures to increase revenues from personal income tax, including expanding the number of taxpayers and increasing compliance.

Regarding VAT, the PRI urged the government to focus on reform and eliminating inefficiencies rather than simply increasing taxes - implementing the strategies that were laid out in the original VAT act of 2012.

Corporate tax revenues could also be improved by eliminating tax exemptions and improving compliance, the report suggested. PRI executive director Ahsan H Mansur said the government should focus on personal income tax.

He said the government was giving tax exemption facility worth more than Tk 60,000 crore a year but it was not clear who was enjoying the benefit.

This is the right time for the government to go for reforms in tax system and additional 50 percent of the exempted tax should be collected in the next financial year, Mansur said.

PRI chairman Zaidi Sattar said that nearly one third of the National Board of Revenues (NBR) revenue came from customs duty and it was mostly distortionary tax.

He also termed the protective tax structure as the key impediment to export diversification. Zaidi said that the protective tax made the domestic market more profitable than the export market.

PRI research director Mohammad Abdur Razzaque said increasing revenue collection was important to ensure required allocations for the public spending, including infrastructure, health, education and social safety net.

If the country failed to increase its public expenditure, the economic growth would be slow in future, he said. Razzaque said income inequality was one of the big concerns for the country and direct tax could play an important role to reduce the inequality.