Thursday, July 02, 2009

In Search of Pro-Poor Taxation in Bangladesh

ASA Tower, one of the "poverty reduction towers" as the headquarters of large Micro-Finance banks are popularly known in Dhaka. Their social business arms established with MNCs are among the few good tax payers.

Tax Justice Network in partnership with Action Aid Bangladesh organised a workshop in Dhaka on the 23rd June titled “Understanding Tax Dynamics: Issues and Perspectives”. Going to Bangladesh gave TJN the opportunity to familiarise with tax issues in Bangladesh, and approach the issue of tax justice form the perspective of one of the most unequal countries on earth.

The dynamics of taxation are truly revealing when studying the case of Bangladesh. For a population of 156 million, the National Board of Revenue (NBR) tells us that there are only 0.6 million taxpayers. As we inquire who are the largest taxpayers, the list is topped by British American Tobacco (BAT).

Among the ten biggest taxpayers according to the Large Taxpayers Unit (LTU) are also Grameen Phone and BRAC bank, two social businesses who put their profits and dividends from these business arms into their social programmes running schools, clinics and other social programmes.

The reason why social businesses top the league is that they act ethically and pay all due taxes, while their competitors might not do so. They are often not-for-profit partnerships between large businesses like Grameen Danone Foods and Grameen-Veolia Water Ltd. and an NGO or not-for-profit micro finance institution in Bangladesh. Businesses gain market knowledge, while NGOs get dividends to finance their work in education, health and other areas.

The state levies a lot of its taxes through the VAT, which according to Faizul Latif Chowdhury previously a revenue commissioner, replaced trade taxes in 1991 when the last major change took place in the tax system. The VAT raises about a third of government revenue, and it’s disproportionately a tax on the poor as our speakers argued at the event.

If the poor buy their rice from a market, they probably won’t get a VAT receipt, but the whole sellers would have paid it, and passed the tax on to their customers. Taxes paid by the poor are largely invisible, and thus give much less chances for representation than the taxes paid by single companies like BAT.

An emphasis on gender inequality gives a further insight to the dynamics of how taxation affects the very poorest in Bangladesh. Dr. Pratima Paul Majunder of Bangladesh Institute of Development Studies (BIDS) argues that while taxation is an important tool in the hands of the government to empower women.

However, many of the tax incentives end up being enjoyed by men, whether they are on farming or poultry or for Export Processing Zones (EPZs) where most companies are foreign-owned. Income transfer programmes could benefit women and families in particular, making the case for levying further income taxes on gender parity grounds. Also the peculiarity of mobile phone taxation has pro-poor implications, and women make good use of mobiles as well.

Dr. Ananya Raihnan from D-Net in his talk raised the dependency on foreign loans and grants (often a toxic mix of the two) meaning that the government’s current expenditure is rather raised from the Asian Development Bank (ADB) or the World Bank (WB) rather than its own citizens. Recently the building of the $1.5 billion bridge is often reported as “assistance” or “contribution” while it in reality is a loan.

Uma Chowdhury from SUPRO-Campaign for Good Governance, a budget monitoring group, is among the groups worried about further debt mounting as a result of such projects. Why not collect more taxes to finance these bridges through taxes, and involve local construction companies and not the Japanese who finance the ADB loans to do the job?

The most heated issue in the 2009 budget is maybe the “black money whitening” idea of bringing black money (both from licit and illicit sources) to the economy with a much lower 10% tax when invested to key sectors. The ethical implications of these tax amnesties are enormous on the tax morale, and they become an endemic part of tax policy. Dr Raihnan mentions that it’s the 8th time the government makes such an amnesty.

Rachel Moussié (Action Aid UK) mentioned some of the solutions to these issues lie in the international sphere, where Action Aid UK advocates for country-by-country reporting, meaning that every MNC would provide a set of accounts for Bangladesh instead of filing accounts for several separate entities without capturing all trade in the country in a single set of accounts. This consolidated approach would help tax inspectors to figure out potential fraud.

In the domestic sphere Matti Kohonen of TJN proposed that a focus on income taxes would possibly be the best measure to reap immediate benefits. This means clear rules for settling income tax bills, increasing staffing and efficiency of the NBR, and ensuring that tax rates are realistically set according to the capacity to pay rather than being perceived as a penalty for compliance.

Saif Islam Dilaj of the Centre for Policy Dialogue (CPD), raised several issues related to the tax morale. Before the income tax payments are due, employees are encouraged to buy savings bonds that give tax exemptions, only to sell them right after the taxes are filed in. Taxation should therefore be a CSR issue, where companies would rather encourage paying taxes, rather than dodge them and assist their employees to do the same.

Ultimately the solution, as Prodib Stanley Gomes of Caritas Bangladesh mentions, is therefore a moral issue, encouraging a different culture of tax is a process of making clearer the rights and responsibilities of every citizen. A tax contract in the making?

These are the ways out of endemic aid and debt dependence, which make Bangladesh a basket case for aid, rather than the breadbasket for entire region from its immensely rich agricultural lands, fisheries and garments that are the pride of every Bangladeshi – while currently undervalued and mispriced in international markets.


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