Assignment on

Public Finance for Bangladesh Perspective

SUBMITTED TO: Mohammad Moniruzzaman; Chartered Accountant Lecturer Department of Accounting & Information Systems Faculty of Business Studies University of Dhaka SUBMITTED BY: Md. Nazib Ullah ID- 16071; Section- A BBA 16th Batch
Department of Accounting & Information Systems

Faculty of Business Studies University of Dhaka Date of Submission: November 1, 2011

Question1: What should be our tax system? Answer: It is not an easy task to introduce an optimum Tax Structure in an economy. There is an inevitable conflict between defined policies and the ability to execute them. Various characteristics and institutions of an economy may come in the way of adopting an ideal system such as the paucity of data; level of education, cultural patterns etc. but a tax system has to be politically acceptable in conformity with administrative capabilities of authorities. Moreover, several taxes tend to work at cross purposes. An equitable and progressive tax system is likely to be a distinctive for saving and capital accumulation. According to the canons provided by Adam Smith (Wealth of Nation) our Tax System/ Structure should be: Canon of Equality Designing and applying forceful and efficient strategies to deal with noncompliance. Freeze/ takeover of bank accounts of tax defaulters. Modernizing the VAT Law and Rules to reflect international best practices. Assuring strong control of the largest taxpayers, in a dedicated office (and with specialized units for the most critical sectors), as a key step towards introducing risk assessment and fuller taxpayer segmentation. Implementing policies and procedures that limit opportunities for rent seeking and help identify and punish inappropriate behavior in the revenue administration. Canon of Certainty Establishing effective revenue administrations making proper use of withholding and third-party information, and capable of building on these to implement voluntary compliance and self-assessmenttaxpayers calculating and remitting tax themselves, subject to audit and penaltiesboth as a prerequisite for expanding the tax base and to help address corruption. Ensuring that laws and regulations are reasonably simple, readily available, and coherent across taxes, and provide good taxpayer protection (including effective appeals procedures).

 Replacing inefficient production or sales taxes, after adequate preparation of both the administration and taxpayers, by a simple VATincluding catalyzing administrative reforms. Canon of Convenience Reestablishing the input credit mechanism through all points/levels of sale to ensure: Avoidance of cascading (tax on tax) effect. Encourage broadening of horizontal integration. Enhance documentation through built-in the incentive mechanism, and improve tax compliance. Simplifying the negative list for goods and services and phasing out avoidable exemptions. Developing tax culture and improving tax compliance. This will entail: Processing of tax returns within a week to identify the non-filers, stop-filers, and irregular filers. At the moment all focus is an account current and tax returns are not even examined and there is no regular follow up based on returns. Sending out automatic computer generated official notices to the registered taxpayers who did not file for the month. Processing of returns for internal consistency and against certain industry specific tax incidence criteria. Present system of account current will be replaced by return based tax payment. This will entail: No advanced payment of VAT before clearing the goods from factories or services rendered. Taxes will be paid only once a month along with the submission of tax return. Shipment of goods however will be accompanied by shipping documents, and in the event of sale also with sales invoices. In addition to treasury chalans, payments can be made through: a. Certified checks b. Wire transfers from the registered persons bank accounts c. Credit cards and other electronic means. Input tax credit and tax refund will be greatly simplified in the interest of taxpayers and exporters:

 Taxpayers will be able to deduct input tax credit themselves based on valid invoices. Tax obligations against domestic sales may be offset against export related refunds. Export refunds would be based on actual taxes paid on inputs, supported by documents. Canon of Economy Avoiding exemptionsunder all taxesthat jeopardize revenue and good governance, are hard to reverse, and generate no clearly offsetting social benefit. Removing minor taxes and fees that are inordinately costly to comply with and administer. Canon of Productivity Extending the coverage of the PIT (particularly through inclusion of smaller businesses and professionals) and establishing coherent taxation of capital income, with an effective rate structure consistent with the authorities distributional preferences. Exploiting the potential for regional cooperation, in both policy and administration particularly on business taxation and excisesto limit mutually damaging competition. Balancing royalties, auctioning and profit-related charges in taxing natural resources. Canon of Buoyancy Administrative efficiency through increased dependence on IT will be the key to revenue generation and relief for taxpayers. Canon of Flexibility Return forms will be reviewed and simplified, as appropriate. Broad-based use of invoices will bring flexibility. Canon of Simplicity Simplifying the procedures for tax compliance, including payment of taxes, maintenance of accounts, submission of returns, and registration of taxpayers.

VAT registration may be given through a single unified electronic registration system. Persons engaged in taxable activities should be able to register electronically. Returns may be submitted electronically as well as by mail to processing centers. Persons may also drop their returns at the drop box in VAT offices. Non-filers will be notified through computer generated letters sent by mail and e-mails. Preliminary return processing may be done centrally at processing centers based on standardized criteria. Building CITs that are simple (in their depreciation and carry forward provisions, for instance) and sufficiently broad-based to allow statutory rates competitive by international standards, with effective tax rates that are reasonably low and uniform across investments. Adopting modern accounts based tax administration and minimizing ad-hoc interactions leading to difficulties for taxpayers. Settle audit disputes. Bilateral meeting with the aim of settling outstanding income taxes. Strengthen monitoring mechanism with a view to ensure deposit of withholding tax and outstanding income tax. Strengthen legal initiatives to end large-revenue related disputes and appealed legal cases in the higher courts of law. Retrieve household asset holding number from municipality and trade-license related information of businesses and thus identify new tax payers. Identify forged TIN (Tax Identification Number). Regular visit in order to coordinate the works of field level offices. Establish tax offices at district level. Create tax related database.

Question: what should be objective of TAX for our country? Answer: Our country, Bangladesh, being a developing country, faces a number of problems connected with economic growth on the one hand and removal of poverty and inequalities on the other. In this case, the primary objectives of TAX are not related to instability of income and employment. In our country, we have the additional problems of chronic unemployment and regional disparities also.

The above considerations enable us to lay down certain objectives of the tax policy which the government, through National Board of Revenue (NBR) should try to pursue for our total development. The objectives are: 1. We must try to come out of our vicious circle of poverty. In this regard, our TAX system must be designed in such a way that the collected TAX revenue will be invested for more industries, create employment. 2. Should promote specific products to fill both the supply and demand gap which will ultimately create savings and capital accumulation. 3. Need to exempt TAX from the agricultural products irrespective of divisions. 4. Should impose higher TAX on unnecessary import. 5. Must promote import substitution and exports by providing TAX incentive. 6. Impose higher tax on unnecessary and conspicuous private consumption to increase TAX revenue. 7. The TAX coverage will have to be increased in both direct and indirect TAX. 8. In order to serve the objective of equity, luxuries and articles of conspicuous consumption should be taxed heavily. 9. Necessities should generally be spared and some articles of mass consumption may be taxed only at low rates. 10. To ensure the equity and resource mobilization, TAX burden should be evenly distributed as between sectors and as between individuals. 11. Encouraging investment in backward regions of the economy. 12. Encourage import substitution and export promotion to overcome balance of payments difficulties. 13. TAX system should be simple, with a few and low rates, and with minimum exemption and rebates. 14. Must rely heavily on indirect TAX such as Value Added Tax for collecting adequate revenue.