Photo : Collected
Bangladesh lost about Tk 2 lakh crore in potential revenue from VAT in the fiscal year 2018-19 due to policy decisions and compliance issues, the World Bank has said.
The amount is more than twice the actual VAT revenue and most of the gap was caused by policy choices, said the global lender in the Bangladesh Development Update April 2024, which was released on Tuesday.
The World Bank came up with the figure after performing a VAT gap analysis for FY19. The analysis is based on the methodology introduced by Hutton (2017) for the International Monetary Fund Revenue-Administration Gap Analysis programme.
Bangladesh in FY19 collected just over Tk 85,000 crore in VAT revenue, around 4.5 per cent of total consumption. However, the reference revenue, which implies full compliance of firms and individuals (zero compliance gap) and no distortions due to exemptions, truncated rates, and registration thresholds (zero policy gap) under a VAT rate of 15 per cent, is as high as Tk 2.8 trillion, said the World Bank.
“When policy distortions, including exemptions and incentives, are taken into consideration, the potential VAT becomes Tk 1.5 trillion, indicating a policy gap of Tk 1.3 trillion,” it also said.
Accordingly, the decomposition of the VAT gap into policy gap and compliance gap indicates that just over two-thirds (69 per cent) of the gap is due to policy choices that prevailed under the VAT Act in FY19, according to the World Bank.
A sectoral analysis shows that manufacturing and agriculture contribute the most to the policy gap. VAT exemptions and truncated rates usually target the protection of the poor, but in Bangladesh they do not seem to benefit the poor more than the high-income earners, the Washington-based lender further said.
“Bangladesh currently collects approximately half of its potential revenue, given its economic structure, level of development, and trade openness," said the report.
“The low revenue collection significantly limits the fiscal space necessary for critical public investments in sectors, such as energy, transportation, municipal infrastructure, human capital development, and social sector spending to support vulnerable sections of the population,” it said.
Rationalising tax expenditures, adopting a uniform VAT rate, amending the VAT law to facilitate full automation, and reducing supplementary duty and regulatory duty rates to the minimum necessary for transparency and efficiency are critical steps to increase domestic revenue mobilisation, according to the World Bank.
Comparing Bangladesh’s VAT gap to that in other countries suggests that the compliance gap is relatively large. Estimated compliance gaps range from 5-10 per cent in South Africa to 28-31 per cent in Costa Rica whereas it is 42 per cent in Bangladesh, noted the World Bank.
It also said in terms of policy gap, Bangladesh is less of an outlier. Policy gaps range from 25-32 per cent in South Africa to 64 per cent in Sri Lanka, with Bangladesh’s policy gap estimated at 49 per cent of reference revenue.
“The National Board of Revenue (NBR) has struggled to increase the share of direct taxes in total revenue. Contribution of taxes on income, profits, and capital gains in total revenues is low and fluctuated within a narrow band of 25 to 28 per cent in the last several years,” said the report.
Tax compliance has been extremely low, with only about 3 to 3.5 million people paying income taxes out of about 10 million tax identification number (TIN) holders. About one-third of the income tax revenue comes from the Large Taxpayers Unit (LTU), consisting of major mobile phone operators, tobacco companies, private banks, and high-earning individuals, the World Bank added.
Messenger/Fameema
