Report On National Board Of Revenue Bangladesh. 2e2m3w

University of Dhaka Faculty of Business Studies Department of ing & Information Systems A thesis paper on “A study on National Board of Revenue__ present, past and future.”

Supervisor: Dr. Syed Masud Husain Professor Department of ing & Information Systems University of Dhaka Submitted by:

Md. Nazmul Husain Roll# 13041; Section- A B.B.A 13th Batch Department of ing & Information Systems University of Dhaka Submission Date: 10th August 2011

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LETTER OF TRANSMITTAL August 10, 2011 To, Dr. Syed Masud Husain Professor Department of ing & Information Systems University of Dhaka Subject: Submission of the thesis paper on “A study on National Board of Revenue___ present, past and future.” Dear Sir, It is a great pleasure for me to present the thesis paper which was assigned by you. It was a great opportunity for me to prepare this thesis paper. I have concentrated my best efforts to achieve the objectives of the report and hope that my endeavor will serve the purpose. I sincerely believe that the knowledge and experience I have gathered during the preparation of the thesis paper will immensely help me in my future professional life. I thank you for providing me with this opportunity. I have enjoyed working on the thesis paper & hope that you will consider all my mistakes generously. Sincerely, Md. Nazmul Husain BBA 13th Batch ID: 13041; Section: A Department of ing & Information Systems University of Dhaka

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Acknowledgement In preparing this thesis paper, I had to need a number of assistance and guidance from reliable sources. I would like to express my deepest respect to my honorable teacher and supervisor, Dr. Syed Masud

Husain,

Professor,

Department

of

ing

&

Information Systems, University of Dhaka. His valuable guidance and continuous supervision has inspired me to complete such research, relatively new issues in “National Board of Revenue__ present, past and future.” I have received cooperation from Md. Abdul Aziz, head librarian, and Md. Samad Ali, assistant librarian, National Board of Revenue. I am very thankful to them. I am thankful to all the people including my all friends who have helped me in completing this thesis paper.

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ii EXECUTIVE SUMMARY The National Board of Revenue (NBR) is the central authority for tax istration in Bangladesh. The main responsibility of NBR is to collect domestic revenue (primarily, Import Duties and Taxes, VAT and Income Tax) for the government. Other responsibilities include istration of all matters related to taxes, duties and other tax producing fees. In chapter 01, I have described the introduction, methodology and limitations of this report where all the information related to have been described. In chapter: 02, I have discussed about the background and history of tax of National Board of Revenue where all history and background of NBR have been detailed. In chapter 03, I have discussed at first, the overview the National Board of Revenue where the overall conditions have been described. In second portion of this chapter, I have discussed the functions of the National Board of Revenue where all the key works done by this organization have been discussed. And at last, the sources of revenues of NBR like income tax, VAT, Customs Duty and Excise Duty have been detailed. In chapter 04, I have described the Present, past and future perspectives of National Board of Revenue where the overall perspectives and performances of National Board of Revenue have been detailed. In chapter 05, I have discussed Initiatives taken to motivate taxpayers and revenue collection of NBR where two sub-chapters have covered its procedures taken named Modernization Plan 2011-2016 and Steps taken to collect more revenues. In chapter 06, I have discussed the findings of this analysis and tried to clarify the problems and ultimate benefits of National Board of Revenue by which this organization will grow swiftly.

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TABLE OF CONTENTS Letter of Transmittal

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Acknowledgement Executive Summary Table of contents

ii iii iv-v

Chapter: 01 Introduction

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1.1 Objectives of the report

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1.2 Methodology of the report 3 1.3 Limitations of the report 4 Chapter: 02 Background and history of tax of National Board of Revenue 5-9 2.1 Background tax 5 2.2 History of tax 6 Chapter: 03 National Board of Revenue, its functions and sources of revenues. 10-37 3.1 Overview of National Board of Revenue 3.2 Functions of National Board of Revenue 3.3 Some and conditions 3.3.1 Tax authorities of Bangladesh

10 13 14-16 14

3.3.2 Types of Income

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3.3.3 Classification of Tax systems

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3.3.4 Types of Taxation

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3.4 Sources of revenues of National Board of Revenue 3.3.1 Income tax 3.3.2 Value Added Tax 3.3.3 Excise Duty 3.3.4 Customs Duty

16 31 34 37

Chapter: 04 Present, past and future perspectives of National Board of Revenue 39-43 Chapter: 05 Initiatives taken to motivate taxpayers and collection 44-79 5.1 NBR Modernization Plan 2011-2016 44 5.2 Steps taken to collect more revenue 48 Chapter: 06 Findings of the analysis and conclusion 72

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Chapter: 01 Introduction National Board of Revenue (NBR) is an organ of the Ministry of Finance. It lies at the apex of the whole revenue organization of the government and is responsible for the istration of almost all the direct and indirect taxes. The main direct taxes are the income tax, wealth tax (collected as a surcharge of income tax since assessment year 1999-2000) and gift tax, while the indirect taxes are the customs duty, excise duty,

VALUE ADDED

TAX (VAT), turnover tax, supplementary duty and

infrastructure development surcharge. Estimates for the period between1990-2000 showed that on average, the NBR is responsible for collection of about 93% of total tax revenue and about 81% of the total revenue of the government in a year. The taxes collected by organs other than the NBR are narcotics duty, land revenue, sale of non-judicial stamp, registration and motor vehicles tax. In addition to collection of taxes, NBR plays a key role in formulation and implementation of the

FISCAL POLICY

of the

government. NBR was constituted in 1972 under the National Board of Revenue Order 1972, which repealed and replaced the Central Board of Revenue Act 1924. The secretary of the Internal Resources Division of the Ministry of Finance is the ex-officio chairman of the Board. The chairman is assisted by four of the customs, excise and VAT cadre and four of the income tax cadre. The of NBR hold the rank of additional secretary. There are 367 posts under the organization structure of the Board. Of them 70 are class-I officers, and 193 are class-III and 109 are class-IV employees. There are 38 directorates under the control of the Board and 22 of them are related with direct tax istration, 15 with indirect tax istration and 1 with the complaints (investigation) on both direct and indirect taxes.

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Objectives of the study The objectives of this analysis are mainly as follows: 1. To understand the revenue calculation procedures of National Board of Revenue (NBR). 2. To acquire knowledge about the s prepared by NBR for the purpose of income tax, VAT and other revenue collection. 3. To understand the difference between the taxes and revenue collection procedures from individuals, company and other incorporated companies. 4. To understand the significance of revenue collection of NBR. 5. To understand the significance of NBR as it plays the most important roles for overall development of the country. 6. To understand and get an overall ideas and functions as well as the development of NBR. 7. TO get knowledge about Excise Duty and customs Duty. 8. How economic control to achieve their micro economic control. 9.

Effect of the tax system of Bangladesh to economic development.

10. How national income is raised in desired level. Methodology of the study This is a descriptive paper incorporating both primary and secondary data. Primary data has been collected through relevant information search, observation, analysis and interpretation. This paper primarily is based on desk based research and therefore depends mostly on the secondary data. It used synthesized information collected from several recognized books, annual reports and web based publications. Collected data are analyzed with respect to the objectives of the study. While interpreting the findings, apart from using these sources the writer also incorporated his experiences about the study matters with

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some people who are working in NBR. This paper discusses the relevant issues and analyses the current as well as past situation of NBR Limitations of the study 1. The study could not cover the sufficient data due to time constraint. 2. The study could not cover the sufficient data due to lack of sufficient publications related this report paper. 3. The study does not cover practical example because of confidentiality the NBR did not provide actual information. 4. There is also lack of resource constraints about the income tax calculation procedures of business in Bangladesh. 5. The authority was not at all co-operative. 6. Due to several causes caused by the authority make this paper insufficient. 7. There is lack of flexibility of providing necessary information. 8. The duration that is for assignment program is not enough to learn about the tax system of Bangladesh. 9. This assignment does not analyze the critical analysis of different sectors in the tax system of Bangladesh in details. The assignment has encountered these limitations that may have hinder progress. But with constant effort, our goal was to minimize the negative efforts of these limitations.

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CHAPTER: 02 Background of NBR:

The National Board of Revenue (NBR) is the central authority for tax istration in Bangladesh. It was established by President's Order No. 76 of 1972. istratively, it is under the Internal Resources Division (IRD) of the Ministry of Finance (MoF). MoF has 3 Divisions, headed by 3 permanent Secretaries to the Government, namely, the Finance Division the Internal Resources Division (IRD) and the Economic Relations Division (ERD). The Secretary, IRD is the ex-officio Chairman of NBR. NBR is responsible for formulation and continuous re-appraisal of tax-policies and tax-laws, negotiating tax treaties with foreign governments and participating in inter-ministerial deliberations on economic issues having a bearing on fiscal policies and tax istration. The main responsibility of NBR is to collect domestic revenue (primarily, Import Duties and Taxes, VAT and Income Tax) for the government. Other responsibilities include istration of all matters related to taxes, duties and other tax producing fees. Under the overall control of IRD, NBR isters the Excise, VAT, Customs and Income-Tax services consisting of 3434 officers of various grades and 10195ing staff positions (Approved set up as on 09 Feb., 2000 AD). Negotiating tax treaties with foreign governments and participating in inter-ministerial deliberations on economic issues having a bearing on fiscal policies and tax istration are also NBR's responsibilities. The main responsibility of NBR is to mobilize domestic resources through collection of import duties and taxes, VAT and income tax for the 9

government. Side by side with collection of taxes, facilitation of international trade through quick clearance of import and export cargoes has also emerged as a key role of NBR. Other responsibilities include istration of matters related to taxes, duties and other revenue related fees/charges and prevention of smuggling. Under the overall control of IRD, NBR isters the excise, VAT, customs and income-tax services consisting of 3434 officers of various grades and 10195 ing staff positions.

Taxation and its history Taxation- one of the major sources of public revenue to meet a country's revenue and development expenditures with a view to accomplishing some economic and social objectives, such as redistribution of income, price stabilization and discouraging harmful consumption. It supplements other sources of public finance such as issuance of currency notes and coins, charging for public goods and services and borrowings. The term “Tax” has been derived from the French word “Taxe” and etymologically, the Latin word “Taxare” is related to the term 'tax', which means 'to charge'. Tax is 'a contribution exacted by the state'. It is a non-penal but compulsory and unrequited transfer of resources from the private to the public sector, levied based on predetermined criteria. According to Article 152(1) of the Constitution of Bangladesh, taxation includes the imposition of any tax, rate, duty or impost, whether general, local or special, and tax shall be construed accordingly. Rate is a local tax imposed by local government on its residents or the property owners of the locality, a duty is a tax levied on a commodity, and an impost is a tax imposed for an entry into a country. Under the provision of article 83 of the Constitution, "no tax shall be levied or collected except by or under the authority of an Act of Parliament". Bangladesh inherited a system of taxation from its past British and Pakistani rulers. The system, however, developed based on generally accepted canons. And there had been efforts towards rationalizing the tax istration for optimizing revenue collection, reducing tax evasion and preventing 10

revenue leakage through system loss. Taxes include narcotics duty (collected by the Department of Narcotics Control, Ministry of Home Affairs), land revenue (istered by the Ministry of Land and collected at local Tahsil offices numbered on average, one in every two Union Parishads), non-judicial stamp (collected under the Ministry of Finance), registrationfee (collected by the Registration Directorate of the Ministry of Law, Justice and Parliamentary Affairs) and motor vehicle tax (collected under the Ministry of Communication). The tax structure in the country consists of both direct (income tax, gift tax, land development tax, non-judicial stamp, registration, immovable property tax, etc) and indirect (customs duty, excise duty, motor vehicle tax, narcotics and liquor duty, VAT, SD, foreign travel tax, TT, electricity duty, ment tax, etc) taxes. The present land revenue system of Bangladesh has its base in the East Bengal state acquisition and tenancy act 1950 which established a direct contract between the taxpayer and the government. The most important tax on the value of transferred property is the nonjudicial stamp tax (levied under the Stamp Act 1899), which has been in existence since January 1899. Current rates of non-judicial stamp duty are provided in the First Schedule of the Finance Act 1998, ranging from Tk. 4 to Tk. 10,000 in case of absolute rate, or from 0.07% to 1.5% of the value of consideration in case of advalorem rate. The judicial stamp tax is being levied under the Court Fees Act 1870, although the levy of court fees originated in the introduction of the Bengal Regulation No. 38 of 1795. The first sales tax was introduced in the former Central Provinces of India in 1938. In Bengal, sales tax was adopted in 1941. In 1948, sales tax was transferred as a central tax under the General Sales Tax Act of 1948. The Sales Tax Act 1951 came into force on 1 July 1951 by repealing the Pakistan General Sales Tax Act of 1948.Until 1982, sales tax was being collected under the 1951 Act, which was replaced by the Sales Tax Ordinance 1982. 11

The VAT law was promulgated by repealing the Business. Income tax was first introduced in the subcontinent by the British in 1860 to makeup the revenue deficit caused by the sepoy revolt, 1857. After independence of Bangladesh, income tax was made effective under the Income Tax Act 1922 ed on the basis of the recommendations of the AllIndia Income Tax Committee appointed in 1921. Currently, income tax has been imposed under the Income Tax Ordinance 1984 (ITO) promulgated on the basis of recommendations of the Final Report of the Taxation Enquiry Commission submitted in April 1979. Income taxpayer’s (assesses) are classified as individuals, partnership firms, Hindu undivided families (HUF), associations of persons (AOP), companies (publicly traded and private), local authorities, and other artificial juridical persons. Tax rates and scope of taxable income differ based on residential status of an assesses (resident or non-resident). From fiscal or assessment year, (AY) 2000-01, there is a filing threshold of annual total income of Tk. 100,000 applicable for individuals (including non-resident Bangladeshis), partnership firms, HUF, AOP and assesses other than companies and local authorities. In case an identity of this group has a total annual income less than this level, he is not required to submit tax return but if someone's income is higher, he is to pay a minimum tax of Tk. 1,000.Bangladesh inherited a system of taxation from its past British and Pakistani rulers.

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Chapter: 03 National Board of Revenue and its functions 3.1: Overview of NBR: The National Board of Revenue (NBR) is the central authority for tax istration in Bangladesh. It was established by President's Order No. 76 of 1972. NBR was constituted in 1972 under the National Board of Revenue Order 1972, which repealed and replaced the Central Board of Revenue Act 1924. The secretary of the Internal Resources Division of the Ministry of Finance is the ex-officio chairman of the Board istratively; it is under the Internal Resources Division (IRD) of the Ministry of Finance (MoF). It has 4 Divisions, headed by 4 permanent Secretaries to the Government, namely, the Finance Division the Internal Resources Division (IRD), the Banking Division and the Economic Relations Division (ERD). The Secretary, IRD is the ex-officio Chairman of NBR. NBR is responsible for formulation and continuous re-appraisal of tax-policies and tax-laws, negotiating tax treaties with foreign governments and participating in inter-ministerial deliberations on economic issues having a bearing on fiscal policies and tax istration. The main responsibility of NBR is to collect domestic revenue (primarily, Import Duties and Taxes, VAT and Income Tax) for the government. Other responsibilities include istration of all matters related to taxes, duties and other tax producing fees. The taxes collected by organs other than the NBR are narcotics duty, land revenue, sale of non-judicial stamp, registration and motor vehicles tax. In addition to collection of taxes, NBR plays a key role in formulation and implementation of the

FISCAL POLICY

of the

government. The chairman is assisted by four of the customs, excise and VAT cadre and four of the income tax cadre. The of NBR hold the rank of additional secretary. There are 367 posts under the organization structure of the Board 13

Under the overall control of IRD, NBR isters the Excise, VAT, Customs and Income-Tax services consisting of 3434 officers of various grades and 10195 ing staff positions (Approved set up as on 09 Feb., 2000 AD). Of them 70 are class-I officers, and 193 are class-III and 109 are class-IV employees. There are 38 directorates under the control of the Board and 22 of them are related with direct tax istration, 15 with indirect tax istration and 1 with the complaints (investigation) on both direct and indirect taxes. The National Board of Revenue (NBR), as the central authority of tax policy and istration in Bangladesh, plays a critical part in the development of the country. During the current fiscal year (FY 2010-11), NBR is expected to collect Taka 75,600 crore, providing much needed to the government’s development efforts. In recent years, Bangladesh’s tax collection has recorded an impressive growth averaging 20% per annum. Despite this good achievement, a lot remains to be done. Bangladesh’s tax-GDP ratio at 9.3% remains quite low when compared with other similarly placed countries in South Asia. Less than 1% of the population pays income tax and tax evasion is persistent even though a significant amount of tax revenue is given up in the form of tax incentives. Together, curbing tax evasion and dealing with tax incentives could add 5 percentage points to the tax-GDP ratio, potentially adding about 40,000 crore to the revenue collection. Most of NBR‟s processes are manual and there is little in the nature of taxpayer service and taxpayer education. The NBR also faces problems in its functioning due to its current istrative structure. Despite being under the same board, the different wings of the NBR (Income Tax, Value Added Tax (VAT) and Customs) operate almost independently providing little to each other in combating tax evasion and providing a unified front to taxpayers.

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Moreover, the NBR faces the problems of acute shortage of trained manpower as well as physical infrastructure. These weaknesses of the NBR have not gone well with the business community and individual taxpayers. In response to these challenges, the NBR has embarked on far reaching reforms both on tax policy and tax istration. In addition, as part of the government’s Digital Bangladesh agenda, the NBR has undertaken several initiatives on automation of its tax processes to improve its efficiency and provide better taxpayer service. The NBR is also being ed by several bilateral donors and the multilateral organizations on reforms on tax policy as well as istration. While, all these efforts have ed NBR‟s reform efforts, the reform agenda appears to lack proper sequencing, prioritization and comprehensiveness and at times leading to duplication of efforts. In March 2011, the NBR took the decision to chart out a comprehensive modernization plan, encoming all components of NBR reform efforts under one Plan that could be implemented with a view to achieving the intended goals over the next five years. Two retreats were organized, the first in March and the second in May, 2011, to bring together the senior NBR officials from the different wings towards a common purpose of motivating them about reforms.

3.2: Functions done by NBR NBR performs the same functions and is vested with the same powers and duties as those of the former Central Board of Revenue. The main functions of NBR are: 1) collecting direct and indirect taxes, 2)

formulating and dealing with policy matters including continuous re-appraisal of tax policies and tax laws;

3) controlling and supervising direct and indirect tax istration;

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4)

helping in formulating tax policy and processing legislation, preparing tax revenue budget, negotiating agreements relating to tax, donations, debts and general cooperation with foreign governments and international agencies, and also vetting tax clauses of agreements with foreign governments, agencies or institutions;

5)

performing all the functions and exercising the powers vested in the government by various tax laws, such as disposing of revision application under the customs, excise and VAT laws, and dealing with exemptions from various taxes; and

6) helping in preventing smuggling, implementing import and export policies, and formulating policies for domestic industrialization or encouraging DIRECT INVESTMENT.

FOREIGN

In its secretariat functions, NBR participates in inter-

ministerial deliberations on all economic policies having a taxation bearing. Till 1995, it was the highest appellate authority on matters of assessments of customs duty. A

CUSTOMS, EXCISE AND VAT APPELLATE TRIBUNAL

was established in 1995 under the

Finance Act 1995 to deal with appeal cases relating to customs, excises and VAT.

3.3: Some and conditions related to NBR 3.3.1: Tax Authorities of Bangladesh 1. There are 3-divisions under the Ministry of Finance (MOF) and Secretary leads each division. 2. The Chairman of NBR (National Board of Revenue) is working under Internal Resource Division (IRD). 3. NBR is the apex body of the Tax istration. It consists of two parts :( 1) Customs & VAT (2) Income Tax. Both are under the same authority. There are 4 under NBR. •

Under the NBR, a Commissioner of Taxes is the head of the department and he is in charge of a taxes Zone

•

There are 8-Zones in Bangladesh. 16

3.3.2: Types of Income I n c o m e : Income means anything received in cash or in kind unless exempted by laws. 1) A s s e s s a b l e I n c o m e : Assessable Incomes are those incomes, which are included in the determination of total income of a taxpayer. a) Taxable Income: Taxable Incomes are those incomes that the tax is to be paid on those incomes. b) Non- Taxable Income: Non – taxable income is taken into total income for taxation rate purpose but no tax is to be paid on this part of income. 2) N o n - A s s e s s a b l e I n c o m e : Non- assessable incomes are those incomes which are not included in the determination of total income of a taxpayer. 3.3.3: Classification of Tax systems 1. Multiple Taxes 2. Single Tax 1 . S i n g l e T a x : Only one tax for everybody. Single tax is the poll tax or the head tax or adolescent tax, which is imposed on a person simply because he is there in the society. 2 . M u l t i p l e T a x e s : A system under which different types of taxes shall be levied by the govt. according to suitability. Ex. Income Tax, VAT. 3.3.4: Types of Taxation a) Progressive Tax b) Regressive Tax c) Proportional Tax a) Direct Tax b) Indirect Tax 17

Types of Taxation a) Direct Tax: Direct tax is a sort of tax the impact of effect incidents and which fallback on the person on whom it is imposed. i.e.: Income Tax, Marriage Tax etc. b) Indirect Tax: Indirect taxes are those burden of which can be ed on others through price vehicles. c) Progressive Tax: The tax rate increases as the taxable income/amount increases. d) Regressive tax: The opposite of a progressive tax is a regressive tax where the tax rate decreases as the taxable income/amount increases .e ) P r o p o r t i o n a l T a x : In between is a proportional tax, where tax is fixed as the amount to which the rate is applied increases. 3.3: SOURCES OF RVENUES OF NBR Income tax: Sources of Income Tax: For the purpose of computation of total income and charging tax thereon, sources of income can be classified into 7 categories, which are as follows •

Salaries

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Interest on securities

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Income from house property

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Income from agriculture

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Income from business or profession

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Capital gains

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Income from other sources.

•

Tax Rate (Assessment Year- 2011-12)

•

Other than Company:

For individuals other than female taxpayers, senior taxpayers of 70 years and above and retarded taxpayers, tax payable for the First 1,65,000/- Nil Next 2,75,000/- 10%Next 3,25,000/- 15%Next 3,75,000/- 20%Rest Amount 25%For female taxpayers, senior taxpayers of age 70 years and above and retarded taxpayers, tax payable for the First 1,80,000/- Nil Next 2,75,000/- 10%Next 3,25,000/- 15%. 18

Next 3,75,000/- 20%Rest Amount 25%Minimum tax for any individual assesses is Tk. 2,000 Non-resident Individual 25%(other than non-resident Bangladeshi) •

For Companies

Publicly Traded Company 27.5%Non-publicly Traded Company 37.5%Bank, Insurance & Financial Company 45%Mobile Phone Operator Company 45%If any publicly traded company declares more than 20% dividend, 10% rebate on total tax is allowed. Tax Rebate for investment Rate of Rebate: Amount of allowable investment is either up to 25% of total income or Tk.5, 00,000/whichever is less. Tax rebate amounts to 10% of allowable investment. Types of investment qualified for the tax rebate are: •

Life insurance

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Contribution to deferred annuity

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Contribution to Provident Fund to which Provident Fund Act, 1925 applies

•

Self contribution and employer's contribution to Recognized Provident Fund

•

Contribution to Super Annuation Fund

•

Investment in approved debenture or debenture stock, Stocks or Shares

•

Contribution to deposit pension scheme

•

Contribution to Benevolent Fund and Group Insurance

•

Contribution to Zakat Fund

•

Donation to charitable hospital approved by National Board of Revenue

•

Donation to philanthropic or educational institution approved by the Government.

•

Donation to socioeconomic or cultural development institution established in Bangladesh by Aga Khan Development Network. 19

Who should submit Income Tax Return? 

If total income of any individual other than female taxpayers, senior taxpayers of 70 years and above and retarded taxpayers during the income year exceeds Tk 1,65,000/-.



If total income of any female taxpayer, senior taxpayer of 70 years and above and retarded taxpayer during the income year exceeds Tk 1,80,000/-.



If any person was assessed for tax during any of the 3 years immediately preceding the income year.



A person who lives in any city corporation/paurashava/divisional HQ/district HQ and owns a building of more than one storey and having plinth area exceeding 1,600 sq. feet/owns motor car/owns hip of a club ed under VAT Law.



If any person subscribes a telephone.



If any person runs a business or profession having trade license.



Any professional ed as doctor, lawyer, income tax practitioner, Chartered ant, Cost & Management ant, Engineer, Architect and Surveyor etc.



Member of a Chamber of Commerce and Industries or a trade Association.



Any person who participates in a tender.



A person who has a Taxpayer's Identification Number (TIN).



Candidate for Union Parishad, Paurashava, City Corporation or Parliament.



Any company ed under Companies Act, 1930.

Time to Submit Income Tax Return For Company

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By fifteenth day of July next following the income year or, where the fifteenth day of July falls before the expiry of six months from the end of the income year, before the expiry of such six months.

For Other than Company Unless the date is extended, by the Thirtieth day of September next following the income year. Consequences of Non-Submission of Return Imposition of penalty amounting to 10% of tax on last assessed income subject to a minimum of Tk. 1,000/In case of a continuing default a further penalty of Tk. 50/- for every day of delay. Assessment Procedures For a return submitted under normal scheme, assessment is made after hearing. For returns submitted under Universal Self Assessment Scheme, the acknowledgement slip is determined to be an assessment order. Universal Self Assessment is of course subject to audit Appeal against the order of DCT A taxpayer can file an appeal against DCT's order to the Commissioner (Appeals)/Additional or t Commissioner of Taxes (Appeals) and to the Taxes Appellate Tribunal against an Appeal order. Tax withholding functions In Bangladesh withholding taxes are usually termed as Tax deduction and collected at source. Under this system both private and public limited companies or any other organization specified by law are legally authorized and bound to withhold taxes at some point of making payment and deposit the same to the Government Exchequer. The taxpayer receives a certificate from the withholding authority and gets credits of tax against assessed tax on the basis of such certificate. Heads of Income Subject to deduction or collection of income tax at source with specified rates of deduction. 21

Major areas for final settlement of tax liability  Tax deducted at source for the following cases is treated as final discharge of tax liabilities. No additional tax is charged or refund is allowed in the following cases  Supply or contract work  Band rolls of handmade cigarettes  Import of goods  Transfer of properties  Export of manpower  Real Estate Business  Export value of garments  Local shipping business  Royalty, technical know-how fee  Insurance agent commission.  Auction purchase  Payment on of survey by surveyor of a general insurance company  Clearing & forwarding agency commission.  Transaction by a member of a Stock Exchange.  Courier business  Export cash subsidy  Winning lotteries. Tax Recovery System In case of non-payment of income tax demand the following measures can be taken against a taxpayer for realization of tax: Imposition of penalty Attachment of bank s, salary or any other payment. Filing of Certificate case to the Special Magistrate Advance Payment of Tax

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Every taxpayer is required to pay advance tax in four equal installments falling on15th September; 15th December; 15th March and 15th June of each year if the latest assessed income exceeds Taka three lakh. Penalty is imposed for default in payment of any installment of advance tax.

Fiscal incentives Following are fiscal incentives available to a taxpayer: a) Tax holiday: Tax holiday is allowed for industrial undertaking, tourist industry and physical infrastructure facility established between 1st July 2008 to30th June 2011 in fulfillment of certain conditions. Industrial Undertaking Eligible for Tax holiday: (i) An industry engaged in production of textile, textile machinery, jute goods, high value garments, pharmaceuticals, melamine, plastic products, ceramics, sanitary ware, steel from iron ore, MS Rod, CI Sheet, fertilizer, insecticide & pesticide, computer hardware, petro-chemicals, agriculture machinery, boilers, compressors, basic raw materials of drugs, chemicals and pharmaceuticals. (ii)

An industry engaged in agro-processing, ship building, diamond cutting.

Physical Infrastructure Eligible for Tax holiday: Sea or river port, container terminals, internal container depot, container freight station, LNG terminal and transmission line, CNG terminal and transmission line, gas pipe line, flyover, mono rail, underground rail, telecommunication other than mobile phone, large water treatment plant & supply through pipe line, waste treatment plant, solar energy plant, export processing zone. Tourism Industry Eligible for Tax holiday 23

Residential hotel having facility of three stars or more b) Accelerated depreciation: Accelerated depreciation on cost of machinery is issible for new industrial undertaking in the first year of commercial production 50%, in the second year 30% and in the third year 20%. c) Income derived from any Small and Medium Enterprise (SME) engaged in production of any goods and having an annual turnover of not more than taka twenty four lakh is exempt from tax. d) Industry set up in EPZ is exempt from tax for a period of 10 years from the date of commencement of commercial production. e)

Income from fishery, poultry, cattle breeding, dairy farming, horticulture, floriculture, mushroom cultivation and sericulture are exempt from tax up to 30thJune, 2011, subject to investing at least 10% of the exempted income that exceeds one lakh Taka, in government bonds

f)

Income derived from export of handicrafts is exempted from tax up to 30thJune, 2011.

g) An amount equal to 50% of the income derived from export business is exempted from tax. h) Listed companies are entitled to 10% tax rebate if they declare dividend of 20% or more. i)

Income from Information Technology Enabled Services (ITES) business is exempted up to 30th June, 2011.

Avoidance of Double Taxation Agreement There are agreements on avoidance of double taxation between Bangladesh and 28countries which are:(1) United Kingdom of Great Britain and Northern Ireland (02) Singapore (03) Sweden (04) Republic of Korea 24

(05) Canada (06) Pakistan (07) Romania (08) Sri Lanka (09) (10) Malaysia (11) Japan (12) India (13) (14) The Netherlands (15) Italy (16) Denmark (17) China (18) Belgium (19) Thailand (20) Poland (21) Philippines (22) Vietnam (23) Turkey (24) Norway (25) USA (26) Indonesia (27) Switzerland (28) Oman

Steps for collecting Income Tax in Bangladesh Submission of income tax returns is generally due by: ►30th September in case of non-companies and ►31st December in case of companies. Assessment is made in several procedures. They are: 25

1. Self assessment 2. Presumptive assessment 3. Spot assessment 4. Pre-audit based assessment. However, certain percent of self assessment cases are selected for audit. Assesses can prefer appeal if aggrieved by his assessment. There are three primary forums for appeal. They are to the Appellate Commissioner/Additional Commissioner/t Commissioner or to the Commission for reviews. The decisions of Appellate Commissioner/Additional Commissioner/t Commissioner can be challenged to the next Appellate Court named as Appellate Tribunal. Withholding tax is levy able on a number of items including contractors, imports, transfer of urban land/building, bank deposits etc.

Procedure of Assessment Generally the followings steps are followed in case of Assessment of the Company and the Corporation: Computation of Business Income: Step-1 Computation of Total Income Step-2 Determination of Total Tax Liabilities Step-3 Determination of Net Tax Liabilities Step-4 According to Sections 28, 29 and 30 of ITO, 1984 Income from business is to be calculated after considering issible and inissible expenses to this end. Total Income of the Company is to be calculated by adding other income with income from business. Total Tax liabilities are to be determining by applying prescribed tax rate.Net Tax liability is to be ascertained by deducting the following tax rebate from Total Tax liabilities: ►10% Tax rebate on foreign income ►Tax rebate on increased production in case of industrial company, if applicable. ►Tax rebate on export income (at rate applicable) ►Tax rebate and average rate on tax free income Problems for collecting Income Tax:

26

Tax avoidance is one of the main problems for collecting Income Tax by the Income Tax Authority in Bangladesh. It is the legal utilization of the tax regime to one's own advantage, in order to reduce the amount of tax that is payable by means that are within the law. By contrast tax evasion is the general term for efforts to not pay taxes by illegal means. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term of tax avoidance. Latterly the term has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the lawmakers from tax avoidance which exploits loopholes in the law. Based on these concepts arise the pillars of Tax Protesters as well as Tax Resistance: Some of those attempting not to pay tax believe that they have uncovered interpretations of the law that show that they are not subject to being taxed: these individuals and groups are sometimes called tax protesters. An unsuccessful tax protestor has been attempting openly to evade tax, while a successful one avoids tax. Tax resistance is the declared refusal to pay a tax for conscientious reasons(because the resister does not want to the government or some of its activities). Tax resistors typically do not take the position that the tax laws are themselves illegal or do not apply to them (as tax protesters do) and they are more concerned with not paying for particular government policies that they oppose.

Responses to tax avoidance: Avoidance also reduces government revenue and brings the tax system into disrepute, so governments need to prevent tax avoidance or keep it within limits. The obvious way to do this is to frame tax rules so that there is no scope for avoidance. In practice, this has not proved achievable and has led to an ongoing battle between governments amending legislation and tax advisors' finding new scope for tax avoidance in the amended rules. Tax evasion: By contrast, tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax 27

authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions).

Illegal income and tax evasion: Who earn income by illegal means (gambling, theft, drug trafficking etc.) is required to report unlawful gains as income when filing annual tax returns. Suspected lawbreakers have therefore been charged with tax evasion when there is insufficient evidence to try them for their non-tax related crimes. Other times, tax evasion can be used as a "one more nail in the coffin" by prosecutors by stating that if a person earns illegal income, s/he may also be guilty of tax evasion. Those who attempt to report illegal income as coming from a legitimate source could be charged with money laundering. Evasion of Value Added Tax (VAT): During the latter half of the twentieth century, Value Added Tax (VAT) has emerged as a modern form of consumption tax through the world. Producers who collect VAT from the consumers may evade tax by under-reporting the amount of sales. Control of evasion: Level of evasion depends on a number of factors one of them being fiscal equation. People's tendency to evade income tax declines when the return for due payment of taxes is not obvious. Evasion also depends on the efficiency of the tax istration. Corruption by the tax officials often renders control of evasion difficult. Tax istrations resort to various means for plugging in scope of evasion and increasing the level of enforcement. Public opinion on tax avoidance: Tax avoidance may be considered to be the dodging of one's duties to society, or alternatively the right of every citizen to structure one's affairs in a manner allowed by law, to pay no more tax than what is required. Attitudes vary from approval through neutrality 28

to outright hostility. Attitudes may vary depending on the steps taken in the avoidance scheme, or the perceived unfairness of the tax being avoided.

Corruption by tax officials: Corrupt tax officials cooperate with the tax payers who intend to evade taxes. When they detect an instance of evasion, they refrain from reporting in return for illegal gratification or bribe. Corruption by tax officials is a serious problem for the tax istration in a huge number of underdeveloped countries. The distinction in various jurisdictions of Tax Evasion and Tax Avoidance: The use of the tax avoidance and tax evasion can vary depending on the jurisdiction. In general, the term "evasion" applies to illegal actions and "avoidance" to actions within the law. The term "mitigation" is also used in some jurisdictions to further distinguish actions within the original purpose of the relevant provision from those actions that are within the letter of the law, but do not achieve its purpose.

2.3.1:Value Added Tax: (i) VAT is imposed on goods and services at import stage, manufacturing, wholesale and retails levels; (ii) A uniform VAT rate of 15 percent is applicable for both goods and services; (iii)

15 percent VAT is applicable for all business or industrial units with an annual turnover of Taka 2 million and above;

(iv)

(iv) Turnover tax at the rate of 4 percent is leviable where annual turnover is less than Taka 2 million;

(v) VAT is applicable to all domestic products and services with some exemptions;

29

(vi) VAT is payable at the time of supply of goods and services; (vii) Tax paid on inputs is creditable/adjustable against output tax; (viii) Export is exempt; (ix) Cottage industries (defined as a unit with an annual turnover of less than Taka 2 million and with a capital machinery valued up to Taka 3,00,000) are exempt from VAT; (x) Tax returns are to be submitted on monthly or quarterly or half yearly basis as notified by the Government. (xi) Supplementary Duty (SD) is imposed at local and import stage under the VAT Act, 1991. Existing statutory SD rates are as follows: (a) On goods: 20%, 35%, 65%, 100%, 250% & 350% (b) On services: 10%, 15% & 35%. Tax Base for VAT: Import Stage:

Customs Assessable Value + Customs duty +

Supplementary Duty Domestic/Local Stage: a) Goods (manufacturing): [Production cost + Profit and Commission (if any) + Supplementary duty (if any)] b)

Services: [total receipts excluding VAT but including

supplementary duty (if any)] Truncated Base / Fixed Value Addition: In some of the cases of goods and services producers and sellers face difficulties in availing VAT credit/adjustment facilities due to non availability of invoices from the sellers of input. In order to remove this operational difficulty fixed bases such as 10%, 25%, 30%, and 60% value addition is taken into for calculation of VAT for a number of goods and services. In such circumstances net VAT rate for different rates of value addition comes to 1.5%, 2.25%, 4.5% and 9%.

30

VAT at the wholesale and retail stage: In case of wholesalers and retailers, there is a special provision for a 1.5% percent VAT known as Trade VAT on the total sale, provided that the wholesaler/retailer do not avail the facility of input credit/adjustment. Such tax is also collected at the import stage from importers of finished goods as an advance trade VAT. Tariff Value for imposition of VAT: Under the VAT Law, the government is empowered to fix Tariff Value for some items for the collection of VAT. Example: tariff value for mild-steel products produced from imported/locally procured re-rollable scraps is TK 4000.00 per MT. Normal VAT input credit is also not available under this system. Deduction of VAT at source: As deduction at source is also practiced in case of VAT on certain services, Government, Semi-Government, Autonomous Bodies, NGOs, Banks, Insurance Companies and Limited Companies are authorized by the government to deduct applicable VAT on the services at source. Excise Duty: At present excise duty applies to only two items: bank deposits and domestic air ticket (Tk. 250 per journey).

Customs Duty Customs Duty synonymous to tariff and involves a tax on commodities entering and leaving the country. Customs duty is sometimes called an 'external excise tax', which includes an export duty or an import duty. The origin of customs duty dates back to the 'customary levies' of ancient times. As recorded in the Kautiliyam Arthasastram (circa 321-300 BC), the highest revenue officer of the time was called the Samaharta (collector-general) and his responsibility was to arrange revenue collection from seven types of places, of which the seventh was the vanikpaths (trade routes) of 2 kinds, land routes and sea-routes. The subcontinent witnessed the levy of chungi during the Mughal period (1526-1707). The country was then divided into subas or provinces and chungi was leviable on commodities 31

moving from one province to the other. Customs levy were also imposed on goods imported from abroad by sea. Chungi ghar of those days were perhaps the precursor of today's customs house. In British India, Lord Cornwallis abolished customs duty in 1788 but it was reintroduced again in 1801. Collection of customs duty in 1839-40 was Rs 4,103,298 ing for 5% of public revenue. In the early twentieth century, 'taxes on imports and exports' were the seventh major source of public revenue. The present customs system came into being in the nineteenth century. The entire law and machinery for collection was consolidated in 1878, when the Sea Customs Act was enacted on the pattern of the British customs law, giving legal authority for the levy and collection of customs duty. The istration was initially vested in the provincial government until 1924, when it was brought under the central control with the establishment of the Central Board of Revenue (CBR) under CBR Act of 1924. The Land Customs Act was also promulgated in 1924 to enable the central government to enforce control on the movement of goods and engers by land routes and frontiers from the subcontinent to ading territories and vice versa or in transit from one country to the other via the subcontinent. The Customs Act 1969 was enacted to consolidate and amend the law relating to the levy and collection of customs duties and provide for allied matters. As a result, under Section 220 of the Customs Act 1969, four acts (the Sea Customs Act 1878, the Inland Bonded Warehouses Act 1896, the Land Customs Act 1924, and the Tariff Act 1934) and Section 14 of the Civil Aviation Ordinance 1960 were repealed. This put an end to legal features, which had so long separated the sea customs, land customs, and air customs from one another. After the emergence of Bangladesh, the government abolished CBR and created

NATIONAL BOARD OF REVENUE

tax authority with power to take over customs istration. 32

(NBR) as the apex

The Customs Act was made effective in Bangladesh by President's Order no. 48 of 1972 with effect from 01 January 1970. The primary function of the customs authority is the istration of revenue under the Customs Act 1969 and the Value Added Tax Act 1991.

The customs authority is responsible mainly for assessment and collection of customs duties,

VALUE ADDED TAX,

supplementary duty and other taxes and charges leviable on

imported or exported goods. Its collateral function includes prevention of smuggling, implementation of the Imports and Exports (Control) Act 1950, and the enforcement of the Foreign Exchange Regulation Act 1947. In its auxiliary function, the customs authority also maintains the security measures under different statutes, namely the Arms Act 1878, the Explosives Act 1884, the Merchandise Marks Act 1889, the Livestock Importation Act 1898, the Narcotics Control Act 1990, etc. Duties and taxes collected on international trade now comprise the largest share of tax revenue in Bangladesh. More than three-fourth of total taxes comes from indirect taxes, about 70% of which is collected at customs-station. Customs duties represent about 30% of total tax or about 40% of indirect tax. However, due to tariff reduction after the g of the World Trade Organization (WTO) Agreement, the share of customs duty in the tax structure has been falling in recent years.

Excise Duty Excise Duty a tax on goods produced inland. The term 'excise tax' in lieu of 'excise duty' is more comprehensive and covers taxes levied on the manufacture, sale, or purchase of any commodity or service. Unlike the excise tax, which applies to domestic and imported goods alike, the excise duty is levied on domestic products only. Excise duty is a tool of government revenue collection. The government can use it with the motive of 'income distribution' or for implementing the benefit principle of

TAXATION

through excise on particular products (like

and using the funds for assisting

TOBACCO)

people affected by consumption of that product. 33

i.e., collection of funds

Excise duty is also imposed to discourage the consumption of certain so-called 'undesirable' commodities (e.g., liquor and tobacco) or to control or ration the consumption of certain commodities in times of external scarcity (such as in wartime) or inflationary pressure. The basis of tax computation may be ad valorem (as in a

VALUE ADDED TAX)

rem (i.e., on the physical units).Of the three main indirect taxes -

or specific or in

CUSTOMS DUTY,

excise

and sales tax - customs duty was the first to be introduced in Bengal as early as in the period of ancient India (before 300 BC). The subcontinent witnessed a similar tax known as chungi during the Mughal period and sales tax was introduced only in 1938. The Muslim rulers in India introduced the salt tax, considered equivalent to an excise duty, and although Emperor

AKBAR

had issued an order to abolish salt tax, the order was not properly carried

out in remote provinces. Muslim invaders brought opium to India from Persia and the tax on opium, similar to excise duty, was a major source of income of the Muslim rulers. Excise duty is imposed in Bangladesh under the Excise and Salt Act 1944 (Act I of 1944) enacted on 24 February 1944. This law was introduced to levy and collect excise duties on salt and on goods manufactured or produced in the sovereign territory of the country. Before introducing Value Added Tax (VAT) in July 1991, the excise constituted the second largest source of revenue for the government (about 22% of total revenue). But VAT had reduced the taxcoverage of excise duty to a minimum. In 1991-92, the tax-net of excise duty was reduced to only 25 items (22 items of goods and 3 items of services) from the 99 items (90 items of goods and 9 items of services) subject to excise duty until the end of the previous fiscal year. The change was caused by shifting 74.7 percent of coverage of excise duty to that of VAT. The share of excise duty in total tax in 1990-91was 26.53%, which fell to 17.8% in 1991-92, 3.68% in 1992-93, and to only 1.4% in 2000-2001.All kinds of produced alcohol are subject to narcotics duty at the rates specified in the Second Schedule of the Narcotics Control Act 1990, and not subject to excise duty or VAT. The excisable goods and services kept outside the VAT-net in 199192 include tobacco,

NATURAL GAS

and

PETROLEUM

products, newsprint, gold or silver and

products thereof, salt, bank cheques and ordinary bricks.

34

The goods and services subject to excise duty are listed in the First Schedule of the Excise and Salt Act 1944 and their list includes

BIDI,

cloth and cloth goods, and bank services.

Excise duty is collected by the Customs, Excise and VAT wing of the NATIONAL BOARD OF REVENUE.

35

Chapter: 04 Present, past and future perspectives of National Board of Revenue Collection of NBR from 2004-2005 to 2009-2010 Fiscal year Estimated revenue Collected revenue Percentage of collection 2004-2005 32190 29904.46 92.90 2005-2006 35652 34002.43 95.37 2006-2007 41055 37219.32 90.66 2007-2008 43850 47435.66 108.18 2008-2009 54500 52527.25 96.38 2009-2010 61000 62045.77 101.71

70000

60000

50000

40000 Est. revenue 30000

collected revenue

20000

10000

0 2004-05

2005-06

2006-07

2007-08

2009-10

Collection by NBR, Non-NBR and by other sources from 2002-2003 to 2007-2008

36

sources

2002-

2003-

2004-

2005-

2006-

2007-

2003 2365.12

2004 26193.7

2005 29904.4

2006 34002.4

2007 37219.3

2008 47435.66

Collection by Non-NBR

1066.03

7 1237.00

6 1421.00

3 1526

2 1856

2313.00

Collection by other sources

6157.50

6513.00

7543.00

8603

8837

10086.00

30874.9

33943.7

38868.4

44131.4

47912.3

59864.66

2

7

6

4

2

Collection by NBR

Grand Total

Graphical representation of collection of Revenues of NBR

2007-2008

2008-2009

2009-2010

37

The National Board of Revenue has achieved a big success in revenue receipts, 27 percent or around Tk 3,000 crore more than the target, in the first six months of current fiscal year. If the trend continues, NBR will be able to realise more revenues than the target at the end of the current fiscal year. During July-December, the revenue collected Tk 33,550 crore in revenues, up from Tk 26,394 crore in the same period of the previous fiscal year. The body set a target to gather Tk 72,590 crore in revenues in fiscal 2010-11, which was fixed at Tk 30,720 crore for the first six months. The revenues collected from income taxes saw a growth of 34 percent, the highest this time. Realization of value-added-tax (VAT) increased by 34 percent at local level while the collection went up 27 percent at import level. the tax collection process had been made simpler. The electronic tax collection has been introduced in many cases. These actually helped the organization collect the revenues at all levels. The NBR has taken many people-based programmes this time, which helped increase the number of income tax returns submissions, The number of submissions as of December 2010 was 9.83 lakh, up from 7.72 lakh in the same-year-ago period, the target for revenue earnings from the sector will not fall short despite a recent fall in the share market.

38

NBR made the tax projection from the share market anticipating a daily transaction of Tk 1,500 crore. The average daily transaction will maintain the projected rate, regardless of a decrease in transactions in recent times. In future we will attach highest emphasis to income tax. Mentioning the NBR team’s recent visit to South Africa, only 4 percent of the tax comes from import level and 24 percent from VAT. The tenure of pre-shipment inspection system has been extended to December 2012. The appointment of a new company is now under process.

Future perspectives Recommendations for increasing revenue: • Expand the tax base by introducing a comprehensive tax payment system, • An equitable tax system should be introduced • Improve istrative efficiency by reducing corruptionin the system. Current system entails high transactioncosts for the potential taxpayers. • Further enhance the scope and coverage of the Large Taxpayers’ Units • Make tax payment system easier and online in order to reduce istrative hassle. Concerns on Some Changes in Taxes: Tax reduced: � For LP gas, import duty (ID) has been reduced from 5% to 0% - Meter system should be introduced for efficient gas utilization. � For LED lamps and T5 tube lights, ID has been reduced from 25% to 12%Tax increased: � Text books for Primary and secondary (5 to 12%) revision � Optical fiber cables (3 to 12%)

39

� Tax at source for export items (.4 or 0.5 to 1.5%): 1% may be OK � Supplementary duty for imported motor vehicles � Wealth Tax: If wealth/asset value at the time of purchase exceeds Tk. 2 crore, Surcharge@10% will be imposed. � Capital Market: 10% tax on Brokerage house commission Reforms in Tax istration-Budget FY12: • By 2016, e-filing and e-registration, • By 2013, online tax return • Alternative Dispute Resolution (ADR) • Initiatives are taken to increase staff of NBR.

40

CHAPTER: 05 5.1: NBR Modernization Plan 2011-2016 The National Board of Revenue (NBR) is the apex national tax policy and tax collection and tax systems istration agency of the Government of the People’s Republic of Bangladesh (GOB). The NBR is responsible for end to end oversight and superintendence over both direct taxes as well as indirect taxes. These include Income Tax, VAT and Customs. The NBR in turn reports to the Internal Resources Division (IRD) of the Ministry of Finance, Government of the People’s Republic of Bangladesh. The Secretary to GOB in the IRD also serves as the Chairman of the NBR. Other of the Board include professional tax cadre officers from the three tax wings under NBR control. The NBR has undertaken an aggressive and comprehensive organizational renewal program that seeks to put in place an efficient, effective, fair and responsive tax regime which is benchmarked against international best practice. The envisaged reform program covers all the three taxes i.e. Income Tax, VAT and Customs. The reform will review and modernize both, (i) the tax policy (tax laws and statutory rules) and (ii) tax istration (business process, organizational design, HR policies, taxpayer services etc.). Tax performance in Bangladesh has been ing a steady incremental annual improvement over the years with an average 20% growth over the last four years. However the gap between tax policy expectation and tax performance is significant. This gap is going to become far wider in future as the GOB expects the three taxes to deliver revenue outturns that would be more than 200% higher than the current tax performance over the next five years. The macroeconomic framework underpinning the budget envisages the Bangladesh economy to grow by 7% in FY 2011-12. This outcome is predicated upon a significantly enhanced revenue outturn by allowing the government to finance a much larger Annual Development Program. 41

However, the NBR faces several challenges in fulfilling this goal. The tax base in Bangladesh is very narrow with fewer than one million income tax filers. Non-reporting and under-reporting of taxes afflict all the three taxes. The present tax information gap between what the taxpayer knows and what the three tax departments know about their taxpayers is very wide. In effect, the taxes that get paid are what the taxpayer chooses to pay and not what he/she is obliged to pay under law. The NBR is woefully short on istrative resources in of manpower, finance as well as physical infrastructure. Its tax management procedures and business rules are desperately in need of review and improvement and its processes are cumbersome, being largely manual and paper intensive. There are obvious leakages of tax revenue from even tax filers on of inadequate ing procedures. The present tax istration structure, methods and business processes were designed for a manual paper based work environment and are inadequate. These do not equip the NBR to deliver on its ambitious service and compliance improvement goals, which in turn are critical for the NBR to fulfill its revenue outcome / tax performance vision. Hence the NBR has chosen to embrace ICT as a key driver in its comprehensive tax istration reform effort. This part of the reform is the program, “Digital NBR” which in turn is a subset of the national program, Digital Bangladesh”. The NBR does have pockets of computerization in some work areas. However, this is largely on standalone PCs‟ and does not produce strategic value for the NBR. In fact, the disaggregated computer programs run side by side with the legacy manual processes have not replaced any significant part of the legacy tax management work. There is no integrated information system and different functions even within the same building do not communicate with each other. The present weaknesses in tax laws and tax istration severely limit the capacity of the NBR and its field formations. 42

Thus the NBR cannot expect to deliver the desired growth in revenue outcomes without first fixing the tax laws through a comprehensive policy reform and ing such policy reforms with concurrent tax istration reforms. The NBR has accordingly put in place a major reform agenda that seeks to push across the broad reforms in the three national tax systems through several concurrent short-term and long-term reform tracks. The purpose of this document is to link these different parallel/sequential tracks or proposed tracks into one comprehensive master plan that sets out a critical path with milestone dates for different tracks to converge on the critical path. The short-term objective is to ensure early wins along the critical path while pulling together the different components of the policy/istration reform for the full blown reformed tax systems in the context of the overarching revenue improvement and other goals under the Modernization Plan. The Modernization Plan of the NBR is the result of a series of engagements that the NBR has had with its rank and file and key stakeholders to address the problems outlined above. It covers a period of five years and has well defined goals and sub-goals under nine strategic areas.

The goals of the Modernization Plan are i.

A sound tax policy in line with the international best practice while also being consistent with the local conditions in Bangladesh as well as the higher economic and fiscal policy goals and imperatives of the GOB.

ii.

Significant growth in revenue performance through widening and deepening of the existing tax base across all the three taxes.

43

iii.

Enriched and enhanced taxpayer experience through an array of easily accessible taxpayer services available at multiple remote/ customer facing touch points.

iv.

Reducing compliance cost for the taxpayer by reducing unnecessary paper works and s between tax istration and taxpayers thereby establishing a regime that makes the relationship between the tax departments and the honest and diligent taxpayer incident free.

v.

Shifting tax compliance management from the traditional subjective audit selection approach to a computer assisted intelligent selection approach based on efficient data mining and revenue risk management tools.

vi. Setting up an efficient, integrated national tax ing network that will correctly for, reconcile and record tax payment information at a transactional level for all the three taxes and make visible this information in real time basis to taxpayers and to all stakeholders including GOB, NBR, tax officers, Bangladesh Bank and taxpayers.

vi.

Reassignment of tax personnel from non priority routine work to priority compliance and tax collection work through separation and consolidation of non-priority non-taxpayer facing high volume low knowledge, tasks like return receipt and processing, tax s, taxpayer registration with TIN/BIN, record keeping etc. in a remote centralized mass processing center.

vii. viii. Creating an istrative and legal framework that ensures the collection of sovereign taxes in a fair / accurate manner while also ing the competitiveness of Bangladeshi businesses in a transnational global economy. ix. Strengthening of tax evasion detecting unit like Central Intelligence Cell (CIC) and other intelligence units. x. Increased cooperation and coordination with other government and non-government agencies. xi. Human resource development through effective training. 44

5.2: Steps taken to reach the modernization goals The Modernization Plan of the NBR is the result of a series of engagements that the NBR has had with its rank and file and key stakeholders to address the problems outlined above. It covers a period of five years and has well defined goals and sub-goals under nine strategic areas. 1. Tax Policy Reforms This covers a new Income Tax Act, a new VAT Act and Customs Tariff rationalization and modernization of the Customs Act 2. Integrated Revenue Management Program – Business Process Reform This component aims to streamline the business processes across the different taxes for greater efficiency and better tax compliance. This component is closely dependent on the automation process as well as the reform that re-organizes the NBR by function and size 3. Integrated Revenue Management Program – Automation of the Tax Processes: This component includes the automation of the different wings of the NBR. A key part of this is the allotment of Taxpayer Identification Number (TIN) and Business Identification Number (BIN) for income tax payers and VAT payers respectively. The other major components are the setting up of an NBR Data Center, Centralized Processing for Income Tax and VAT Returns, Tax Information Network and installing a Integrated Tax istration Software that would help tax officials perform their functions in a computerized environment. 4. Redefining the Status and Regulatory Power of the NBR

45

This work stream addresses the overarching istrative structure of the NBR. This includes strengthening the Headquarters including autonomy of financial and personnel management, modifying reporting lines for greater efficiency and the place of NBR within the executive and its relation with the government. 5. Restructuring NBR according to Function and Size This component looks at means to improve the efficiency of the tax istration by organizing it to deal with taxpayers by size (The Large Taxpayer Unit, Medium Taxpayer Unit and Small Taxpayer Unit). Efficiency could also be derived by merging functions (such as tax collection, and filing of tax returns) across the different taxes. 6. Strategic Communication and Taxpayer Outreach, Education and Assistance This part includes deg a comprehensive communication strategy for the NBR, devising taxpayer education modules, ing taxpayers through direct face-to-face assistance provided in taxpayer service centers and through call centers, and a Web interface that provides comprehensive to taxpayers. 7. Enforcement Improvement Program This component focuses at efforts to improve tax compliance through better audits, better investigation including combating international tax evasion, improving collection of tax arrears and addressing taxpayer grievances through quick disposal of tax appeals including alternative dispute resolution (ADR) mechanism. 8. Human Resources and Institutional Development Program This component looks at the various resources to successfully manage the implementation of the Modernization Plan. It includes human resources (HR) management such as performance management, developing a research wing within the NBR and upgrading the training infrastructure including the two tax training institutions. 9. Infrastructure Development Program

46

This component looks at the requirement of the physical infrastructure such as building and furniture as well as the IT hardware requirements to the automation of the tax processes. 1.1. Tax Policy Reforms Underpinning any tax modernization plan is a sound tax policy that is efficient equitable and that can be easily istered. The Income Tax Ordinance of 1984 has become out of date and complicated over time due to several amendments through successive Finance Acts. The VAT Act of 1991 is badly in need of reform to move it from an excise based system towards a true VAT. The Customs Tariff is also in need of restructuring and the Customs Act, 1969 needs to be modernized. 1.1.1. Formulation of Income Tax Law There are several weaknesses in the current Income Tax Ordinance. These include, the excessive discretion provided to tax authorities on policy issues, the proliferation of tax incentives and concessions, poor compliance arising due to weak enforcement, limited use of information of taxpayers from other taxes as well as third party information from other agencies, and over dependence on presumptive taxes as a final tax irrespective of taxpayer size. The NBR is undertaking a comprehensive review and re-casting of the Income Tax Ordinance through a new Income Tax Act. The policy framework for the proposed Code seeks to simplify and streamline tax laws, reduce opportunities for disputes and litigation, correct and check transfer of national tax resources to locations outside the country and move to a full-fledged self-assessment tax regime in line with international best practices. The Code will also rationalize and streamline work distribution pattern and enable and centralized operations and return processing, electronic filing, gathering of thirdparty information and improved compliance management methods. The Code will do away with desk audit and other manpower hungry procedures and assist in re-allocation of istrative resources for tax compliance and customer service. The new Code is likely to be signed into law within the next one year.

47

1.1.2 Formulation of VAT Act The VAT Act of 1991 suffers from several weaknesses that several Finance Act amendments have not been able to rectify and requires a comprehensive and new law. The main problem is that the existing VAT is primarily built around the old excise system that it replaced. The problems are, excessive use of physical monitoring of businesses rather than the use of secondary information, treatment of each unit of a multi unit business as a separate business entity, use of deemed value added based on a percentage of sales (truncated VAT), tax liability based on approved prices rather than actual prices, over reliance on presumptive VAT, etc A working draft of the new VAT Act has already been prepared and is under discussion with the key stakeholders. The proposed statute seeks to replace the existing VAT Act and will rationalize the operation of the law as well as facilitate country-wide istration of the VAT regime. The proposed statute will facilitate electronic interface for taxpayers and a national tax ing platform for VAT credits and refunds/adjustments of input/output tax. It will also facilitate centralized processing of returns and effective flagging and reporting of exceptions for compliance intervention by field staff. The new VAT Act is also likely to be signed into law in the next one year. 1.1.3 Customs Tariffs restructuring and Rationalization including modernization of Customs Act: This program will seek to improve the policy content and framework of the Customs Act, 1969 in the context of the national vision of Bangladesh as well as the required operational efficiency of the customs interface in the country. The reform of the Customs Act would include, (a) Provision for full implementation of Revised Kyoto Convention (RKC) (b) Introduction of WCO SAFE Framework of Standards (FoS) (c) Review of related SROs

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(d) Introduction of Authorized Economic Operators (AEO) (e) Tariff rationalization to promote investments and prevent mis-declarations and eliminate distortions. The modernization program, at the policy level will also factor in the mutation in the role and mandate of the customs authority from being a pure revenue collecting agency in the era of the high tariff walls to a multi-role organization in the current era of borderless movement of goods, services and currency flows. The modernization of the Customs Act also envisages improved risk management techniques, de-congestion and sharp turn-around cycle times at port facilities for customs clearance, remote centralized pre-arrival processing of duty payment and customs clearance with intelligent selection methods for full audit and verification in high risk cases. The proposals will streamline the tariff structure and bring the customs statute and practice in line with international practices. 1.2 Integrated Revenue Management Program: Business Process Though Income-tax, VAT and Customs Departments function under the NBR, there is very little data inter-change among the three tax departments and the possible synergy among the three is entirely absent. An integrated revenue management program seeks to connect the three departments at transactional level by linking the taxpayer identification numbers i.e. TIN and BIN in the data base. The three departments substantially deal with the same client base or sub-sets of the same base. Hence it makes good business sense to create a data mining facility with modern risk management techniques to enforce better tax compliance. The methodology for setting up such an integrated system is to first centralize the data base and transaction processing of the three departments at one location and then to build an information system that can mine data in the three data bases and thereafter process the same for exception reports. The separate Modernization Plans under the different tax wings should not be seen as independent verticals but limited to tax specific activities that cannot be integrated across 49

the different taxes. The integrated revenue management program will enable the desired flow of information and consequent synergy among the three tax wings of the NBR. 1.2.1 Direct Tax Modernization Program: The policy content of the new Direct Tax Code will put in place an efficient and modern direct tax regime in the country. The design will seek to encourage wide voluntary compliance by the over-whelming majority of taxpayers. This is sought to be achieved by making it simple for the honest taxpayer to meet his/her tax obligations with minimum inconvenience and with no additional compliance cost. The design will also seek to increase the cost of non-compliance and make the likelihood of detection of evasion much higher. This will be achieved by a strong and efficient third party reporting system. This will enable an integrated platform for capturing, analyzing and disseminating information after identifying logical inconsistencies between such information and information reported by a taxpayer in his/her tax return. Improved risk management methods will enable focused deployment of compliance resources in high revenue yielding cases and this in turn will produce a compelling compliance regime that will widen the tax base. Tax istration reforms will segregate and consolidate non-customer facing non-discretionary, high volume mass tax tasks in a centralized processing centre for efficient processing and closure. The manpower released from this re-design will be re-assigned for compliance, customer service, collection, market surveys, intelligence gathering and other customer facing activities. The policy and istrative procedure will seek to widen the taxpayer base to at least two million taxpayers from the present one million. 1.2.2 VAT Modernization Program The objective is to modernize the VAT istration in order to improve voluntary compliance and customer convenience in meeting tax obligations under the law. The Act and procedure as well as business process will also establish an efficient risk management 50

regime for compliance intervention to ensure wide adherence to the VAT Act, which is capable of significant improvement in revenue outcomes. The Draft VAT law being discussed envisages a markedly different way of istering the VAT from the current „excise-type‟ system. This implies restructuring of the VAT istration to take advantage of the efficiencies provided through automation that enables information exchange across the different taxes. The officer-jurisdiction centric istration would need to be changed to more flexible arrangements that would help in meeting the challenges posed by understatement of sales in evasion prone sectors, improper valuation of value added on services as well as loss of tax from internet based marketing. 1.2.3 Customs Modernization Program The customs modernization program will incorporate the latest ICT technology for better compliance in all its land, sea and air ports. This includes evaluating the practice of PreShipment Inspection (PSI) and its gradual phase out. PSI adds to cost of doing business in Bangladesh and reduces the competitiveness of national businesses as similar costs are not imposed on businesses of neighboring countries. The replacement of the Pre-shipment Inspection will entail training of the customs officials in modern valuation techniques. The Customs Modernization Program has several components; a. Develop policy units at the NBR with strong and reliable MIS and statistical capability; b. Formulate and update Standard Operating Procedures (SOP) on Risk Management, Post Clearance Audit, Assessment, Physical Inspection, Non-Intrusive Inspection, engers' baggage handling at ports etc.; c. Develop audit manual for regular audit of activities and performance by internal and external agencies. (this is in addition to CGA audit); d. Strengthen and modernize intelligence and risk management, improve valuation and audit capacity; e. Redefine scope of work at customs stations through reduction in discretionary powers redeg working process; 51

f. Strengthen and modernize Customs Training Academy and review HR policy for retention of core competences (risk management, PCA, valuation, classification etc.) at respective offices; g. Redefine the role of PSI Agencies to procure services like conducting investigations against customs fraud at overseas locations, gather trade data (price, forecasting etc.) for valuation database, quality certifications etc; h. Establish connectivity with important partners for providing Single Window Services; and i. Recruit new officers and impart training. 1.3 Integrated Revenue Management Program: Digitization Program This program will seek to set up a country-wide integrated ICT platform to the capture of all tax payment information from tax returns, banks, TDS deductors, third party collection agencies etc. It will also reconcile such payments through a two-way or a threeway match with information reported by the taxpayer in returns and other filings It will further reconcile this with the version of the payment available with the Bangladesh Bank. This is to ensure that there is only one version of the truth and the information with the taxpayer, the NBR, Bangladesh Bank, Sonali Bank and other collecting banks about a particular payment is the same and there is no other version of this truth as is possible under the present circumstances. The integrated revenue management system will also receive third party returns i.e. TDS returns, Annual Information Returns (AIR) etc. and generate MIS reports, exception reports etc. It will make clean tax payment information available to the NBR and its three tax wings in a clean, reconciled and confirmed online format. The system will also establish a revenue performance dash board accessible online to all authorized NBR/GOB s to view revenue collection figures at the national, zonal or office levels on real time basis. These goals would be achieved by the following work streams: with the department.

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1.3.1 Taxpayer Identification Number (TIN)/Business Identification Number (BIN) Project The Taxpayer Identification Number (TIN) is the foundation for any automation of tax istration. The TIN enables the maintenance of a single taxpayer , enables the exchange of information of taxpayer transactions across the different taxes and high value transactions outside. This ensures that taxpayers have the correct status of their tax liabilities and also ensures that the tax evaders are targeted based on the information collated from multiple agencies. The existing TIN is a manual registration program that suffers from many defects including representation errors, duplicate numbers, incomplete database and inconvenience of a decentralized registration procedure. The NBR is in the process of replacing this number by an efficient nationally unique number or new TIN which will also be linked with the national ID Number. The program will centralize the database, the transaction processing and allotment process and maintain high service standards. It will also allot a TIN card to each TIN applicant under a promised service turn-around time. The program will also set up 100 or more TIN Facilitation Counters (TIN FC) in all districts of the country to enable ease of application and service for applicants. It will also set up an e-filing portal for remote online application and also put in place an express service for urgent cases. The program is to be launched under a managed service model in a public private partnership framework. The Business Identification Number (BIN) program for ing businesses and branches of businesses for VAT istration is also being revamped and a new series of VAT is being allotted that would follow up, and be derived from the TIN. This will enable proper management of VAT payers. 1.3.2 Centralized Processing of Income Tax and VAT Returns program A modern tax istration makes the maximum use of technology to relegate routine tasks to the background to be outsourced with high quality data that would then be made available to tax officers. A big part of such routine tasks involves the data entry and 53

arithmetic processing of tax returns. Under this program, a Central Processing Centre is to be set up for processing all Income-tax and VAT returns, whether e-filed or paper filed at one integrated processing centre. The entire database and transaction processing will reside at the NBR Primary Data Centre (PDC) and the economies of scale achieved will enable quick service turn-around time as well as efficient information management for all the three taxes. This centre will draw tax payment information from the tax record keeping ing agency or CRA and deliver products and services to tax-payers, to NBR and other key stakeholders. The centralization of high volume low knowledge, repetitive jobs like receipt and processing of returns and ing for taxes etc. will free critical trained manpower of the NBR for attending to the highly neglected tax compliance activities. This change in management of tax work will significant improvements in revenue mobilization. 1.3.3 NBR Data Centre The NBR will set up centralized hardware architecture to cover the whole country. This will establish a Primary Data Centre (PDC) at the data centre of the Bangladesh Computer Council in Dhaka. The Primary Data Centre will be linked to a Business Continuity Centre (BCC) located in a different building in Dhaka. This in turn will be connected, along-with the PDC to the Disaster Recovery Centre (DRC) to be located in an NBR building at Rajshahi or within another seismic zone. This will serve as a backbone for ICT for the NBR and this in turn will be linked to client machines across all locations covering the three taxes under the NBR. The entire database and transaction processing will be carried out at the PDC and will be mirrored and mimicked at the BCC/DRC. The data centre and the network are intended to be established through a Systems Integrator (SI) Project, possibly under a BOT model. 1.3.4 Tax Information Network 54

Under this project, it is planned to establish an integrated tax ing system which will be able to tax payment claims against actual receipt by the government in banks, consolidate tax s and field formations with accurate tax payment information online. It will also the NBR and the government with real time accurate revenue performance information. A Central Record Keeping (CRA) Agency is to be established on a managed service model as a public private partnership to serve all the three tax wings of the NBR with an efficient ing system. The system will also produce output reports and actionable compliance information for correcting delinquency in income tax, VAT and This intervention is likely to significantly improve revenue performance and compliance environment in the three taxes under NBR control. The program can be implemented and stabilized within a period of 3 – 6 months. 1.3.5 Integrated Tax istration Software (ITAS) Project The Tax Information Network, the Centralized Processing and the Data Center are key ingredients to generate the required data for tax istration to function. There is a need for front-end software that would take this data and provide for risk based audit modules for audit, managing tax assessments manage tax appeals and adjust tax liabilities, prepare reports for senior management, manage the HR, etc. The Integrated Tax istration Software Project will look for customized or off the shelf solutions to address these issues. This is the software that will be on the desktops of the tax officials and senior management for managing a lot of their day-to-day work. 1.4 Redefining the Status and Regulatory power of NBR:

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Modernization Plan intends to re-orient NBR away from the traditional department of the government to one that is run as a corporate entity with the focus on management rather than istration. This requires the redefining the role of the NBR and its relation with the government. With this end in view, the project would look at the needs to redefine the status, role and regulatory power of the NBR in light of the necessary modifications of the 55

Presidential Order 76 of 1972 or through the enactment of new Act of Parliament based on ongoing international best The objective is to give the NBR a corporate entity with autonomy of financial, organizational and personnel management and performance matters and also empowering it to make investments from revenue collection, implement transparent tax policies in an integrated manner. Under the scheme, the Tax Policy Unit of the NBR is to be separated from tax enforcement. This project would look at strengthening the NBR to its new and refined role. 1.5 NBR and Field Formations Restructuring (By Function and Size) Program: The existing officer-centric istration while most appropriate in a manual environment with little information exchange across offices and taxes is unsuitable in today’s more complex environment. Taxpayers undertake transactions that have implications across the various taxes and bringing this information together provides the assessing officer with valuable information to assess the tax liability without having to resort to time-consuming physical inspections. Further, moving several routine tasks such as, collection of tax forms, arithmetic checking of tax returns, automatic processing of refunds/sending of notice for deficiency, to be outsourced releases the to do more useful high end tasks. As several of these tasks are cross cutting across the different taxes, these tasks could be merged by function saving precious resources by not duplicating these tasks. Taxpayers benefit by having to deal with one interface of the NBR rather than its three different tax wings separately. Presently, NBR tax offices are designed along the traditional jurisdictional system where crossfunctional authority is vested in the Circle Officer or corresponding first line functionary in VAT or Customs. This design has severe limitations, particularly of scalability. Increases in workload never correspond with increases in manpower and other istrative resources like financial outlay or physical infrastructure. The consequence is growing inefficiency and neglect and collapse of several prescribed tax tasks like ing, record keeping etc.Moreover, the design encourages one to one 56

relationships between taxpayers and tax officials and generates a discretionary rent seeking environment. It also crowds out serious compliance effort as offices tend to get swamped with routine low knowledge jobs. It is recognized that there is a strong case for functional distribution of tax work at the line level so that economies of scale can be achieved and more efficient and specialized approach to tax management is possible. It is also not possible to efficiently and effectively computerize the legacy manual istrative design and procedure that s cross-functional responsibility for all tax work in a given territory with only one individual. Hence, the NBR is moving towards distribution of work according to function and size in order to achieve a more balanced reassignment of istrative resources across functions. For example, in the front offices of the NBR, audit assessment, collections, customer service, risk profiling, investigations and intelligence will all be separate functions that would encourage specialization and professional excellence. Similarly in the back office or Central Processing Centers and CRA, return receipts, return processing, tax reconciliation, exceptional handling, refunds, call centers and customer facilitation, problem resolution, record keeping/archiving will all be separate specialized functions. The integrated information system and ICT platform will create a seamless environment for inter-function and intra-function flow of information. The LTUs have largely been a success as they ensure a highly trained workforce tackling the cases that generate about 80% of the tax revenue. Among the remaining taxpayers are those who are medium and small/micro taxpayers. The small and micro taxpayers require a very different approach from the medium taxpayers as they require a greater emphasis on service and assistance than on audit. The segmented istration by size ensures a customized approach to taxpayers that enable the tax istration to manage their resources accordingly. 1.6 Strategic Communication and Taxpayer Outreach, Education and Assistance:

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Bangladesh has a very narrow tax base and a very small percentage of the population bears the burden of taxation. Most of the direct tax revenues come from TDS whereas a larger percentage should be coming from corporate tax as well as from businesses and professions through advance tax (PAYE). The logical inference is gross under reporting or nonreporting from various eligible categories. The tax performance across the board is inconsistent with the GDP and economic growth in Bangladesh. Obviously, in addition to improved taxpayer experience and effective compliance, there is a strong case for educating eligible taxpayers with their tax filing obligations as well as with information on how to go about it. Centralization and automation of tax s and return processing coupled with an efficient TIN database will provide valuable tools for analyzing taxpayer profile and behavior. Such analysis and information will be used to undertake an aggressive taxpayer education program. This will assist taxpayers to behave as responsible citizens/residents and to meet tax obligations arising from taxable income and activities within the sovereign territory of Bangladesh. The taxpayer education program will make available a menu of offerings through remote outlets like websites, internet etc. as well as through customers facing one to one or group interface with the NBR Customer Service Wing. 1.6.1 Strategic Communication and Taxpayer Outreach and Education: Tax reforms are not painless. Changes in tax procedures and new taxes are likely to be opposed by the public and important stakeholders frustrating reform efforts. Strategic communication is extremely important to obtain taxpayer and key stakeholder for tax reforms. The NBR needs to strengthen its internal capacity to undertake such communication with stakeholders and where required use external firms to convey its message. The process should start with a communication strategy that at first maps out the key stakeholders such as the parliamentarians, the judiciary and the media and then recommends the appropriate communication needs and vehicles. 58

Another important aspect of communication is taxpayer education. Taxpayers need to be informed of the various tax procedures in a manner that they can grasp easily. Apart from the media, important intermediaries such as business associations, ants and tax lawyers play a crucial role in educating taxpayers. The purpose of taxpayer education will also be to develop mutual trust between tax departments and taxpayers with the assurance that there will be intra-taxpayer equity and the NBR will work towards ensuring that every person pays his/her due share of tax. 1.6.2 Website Development Project The NBR has a reasonably informative and useful website. The NBR is working towards building strong back end systems and data management capacity through its effort of centralizing s, centralizing returns receipt and processing, centralizing transaction processing, centralizing taxpayer registration and rationalizing tax laws. Once these are in place, the quality and experience of accessing a range of the NBR taxpayer services through the official website will achieve a much superior level and will in effect make the website an interactive forum that would allow taxpayers to find links to a range of tax facilitation offerings. 1.6.3 Taxpayer Service Centre Project This program will work towards providing direct to taxpayers through conveniently located facilitation centers. This program will also include the setting up of call centers that could provide answers to taxpayers‟ questions. These centers will assist taxpayers in preparation of returns, in calculation of tax liabilities, in understanding of tax payment milestone dates etc. The service centers will also coordinate taxpayer education programs at the tax offices, at commerce and industry association forums, at tax advocates/CA forums and at other community organizations. The taxpayer service center project will also provide remote service through mobile phone, internet etc.

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1.7 Enforcement Improvement Program Enforcement will be entirely revamped and re-organized along modern and efficient lines. The traditional system of subjective selection and intuitive enforcement with no measurement criteria for success will be replaced by a risk based compliance regime that will seek to make a distinction between honest and delinquent taxpayers. It will encourage delinquent taxpayers to the voluntary compliance mainstream. The compliance system will be assisted by modern data mining audit selection tools that will identify and give a risk rating to different taxpayers and persons for enforcement action. The enforcement system will also be informed by the ing CRA databases for identifying delinquency in TDS compliance. This will identify eligible non-deductors, deductors who deduct but do not pay, deductors who short deduct, and deductors who deduct and pay late. The exception reporting system will generate case specific compliance action information for the enforcement wing to help enforce compliance to the TDS regime. 1.7.1 Audit: Skill (Training and Manual) Development Project; capacity build-up: Since the Circle Officer handles every tax task in his jurisdiction in relation to every taxpayer, audit is only one of his/her several responsibilities. Hence, even competent and experienced tax officers have neither the time nor the opportunity to develop skills in effective audit work. In fact, the audit work has been largely crowded out on of increase in workload and lack of manpower and other resources. Once routine and repetitive jobs are centralized in C, CRA, Centralized TIN istration etc., the Circle Officer will have the space and opportunity for quality audit work. An aggressive program for skill development and training in audit work is planned. Additionally, access to taxpayer specific third party information, TDS information, tax s information and industry specific performance information will enable the audit wing for moving to information driven audit of cases selected through an identity blind

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intelligent selection criteria. Skill development will include the latest techniques in combating international tax evasion, tax avoidance and transfer pricing.

1.7.2 Investigation: Training, Skill and Manual Development Capacity Building: The function of audit is the right of the tax department to select a certain percentage of cases from the self-assessment basket for verification and intensive audit. This reinforces voluntary compliance by keeping taxpayers assured that their cases can be picked up for detailed and intensive audit. This process encourages taxpayers to report correctly and within time. Investigation is at a level higher than regular audit and cases selected for investigation will also be based on identification through an efficient risk evaluation system. Investigations can be case specific, group specific or industry specific. The investigation wing will be informed by an effective evaluation and analysis of first party, second party and third party information in diverse data bases of the NBR. The investigation wing will also depend on field based enquiries and surprise checks and its operations will be evaluated and improved through a system of outcome measurement and . 1.7.3 Collection: Organization and Structure and Development: The NBR faces a serious problem with managing its tax arrears. This component would look into ways of managing the tax dues owed but not paid. Collection is a key function of any tax regime. Today it is a disaggregated and de-centralized operation with no clear information about who owes what or how much to the NBR. In the functional distribution of work, the collection function will need to be completely re-organized with a centralized database and a centralized/decentralized enforcement teams. All information related to taxes payable will be captured concurrently from diverse sources and will inform the collection enforcement teams automatically. The collection teams will 61

run a reverse call center to call up delinquent taxpayers for payment of tax through periodic calls and reach them through reminder letters. All residual amounts not paid in spite of three calls and two letters will go to the front end enforcement teams for enforcement action to collect the tax through attachment sale etc. It is the experience that such an approach results in at least 70% of itted tax dues being collected by just the remote actions and field enforcement is required only in 30% of the cases. 1.7.4 Litigation: Structure, Management Capacity Building, ADR Dispute resolution is a key issue in taxation. Currently, the dispute resolution mechanism within the NBR is inadequate and most of the disputes go up to forums outside the control of the NBR like Courts etc. The objective of the reform is to rationalize taxes at both policy and implementation levels and to discourage disputes as far as possible. In the event of disputes, the objective would be to settle disputes within the department wherever practical through a variety of tools including the ADR system. Improvement in voluntary compliance experience, taxpayer education, and an efficient information/riskbased compliance regime will itself reduce the volume of disputes. 1.8 HR and Institutional Development Program A shift to a back office/front office format of tax management as well as a distribution of work based on function and size will call for a major overhaul in the HR approach to deployment and training of manpower. Since functionaldistribution will encourage specialization amongst tax officials, the transfer and deployment policies will have to address ing specialization and skill development in specific functions based on aptitude, flair, skill sets and ability. The HR policies will also have to address issues of intensive HR development and motivation as well as training. Since it is intended that at the senior supervisory levels, NBR officials will have cross-functional as well as functional responsibilities, it is 62

proposed to expose officers of the NBR to different functions in the first few years of service.

1.8.1 Performance Appraisal, Integrity Management Development Project: With the implementation of the organizational renewal and modernization plan, performance appraisal has to be strongly re-visited with emphasis shifting on established measurement standards for tasks performed by the NBR officers and staff. Presently, the appraisal is largely dependent upon subjective evaluation. Integrity needs to be reinforced and improved in any tax system and it is proposed to put in place an effective ethics management policy that encourages adherence to expected ethics standards and values across the NBR and also adoption of incentives/disincentives schemes based on quantifiable performance appraisal system. Since the NBR delivers an important publicly managed service that leaves a large imprint on the public face of the government as a whole, improving NBR services and efficiency to a much higher standard that reinforce and strengthen the trust of citizens in public services offered by the GOB is intended. 1.8.2 Research Wing Development Project: Tax systems face several challenges in developing countries. These include a poor compliance environment and a wide tax information gap. These in turn result in under performance of tax systems. While these challenges have not been adequately addressed, globalization of the economy and dismantling of trade and tariff barriers have thrown up further challenges of transnational jurisdiction shopping and transfer of national tax resources to other countries and tax havens. In order to address these challenges through an

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institutional mechanism, this program would look at developing a research wing which will carry out in-depth research. These will include international tax jurisprudence, in-house data analysis, market survey and research both within and through outsourcing. The effort is to the three tax wings of the NBR to intervene with policy options as well as istrative re-adjustment for dealing with existing and emerging challenges. This will help reduce the tax gap which is the difference between taxes legally owed to the State and tax actually paid and collected.With strong and powerful back end systems being developed by the NBR for information and data management, the research wing will have enough width and depth for undertaking research and empirical studies to serve tax policy and istration. 1.8.3 Tax Academy Program: The expanding training needs of the NBR require strong Tax Academies that would be able to provide year round training of international quality to tax officials of all tax systems. The current training infrastructure is sorely in need of improvement. The curriculum of the Tax Academies and their staffing and technology requirements has to be assessed and then upgraded. There is also need to tie up with international tax training institutions from around the world with the curriculum of the tax academies so as to keep their knowledge on tax matters up to date. 1.9 Infrastructure Development Program: This project will look at the physical infrastructure requirements of the NBR offices throughout the country including buildings, equipment such as backup generators, furniture, computer hardware, etc. 1.9.1:IT Infrastructure Project:

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Since the IT platform will be an integrated data center with distributed client systems on the desktops of NBR staff as well as with several service providers (manning services like C, TIN, CRA, Customs, VAT etc.) inter-operatibility between different IT players (like SI, network, information systems, database, web server, application server, COTS providers, middleware providers and host of others) will be a key issue. These will have to be managed by a strong team at the NBR in order to ensure uninterrupted performance, functionality and uptime. Additionally, contract management for ICT and the management of licenses would become major istrative responsibilities for the NBR and it will require a full-fledged Directorate of Systems to manage these issues. 1.9.2 Estates and Building Management Project As a modern tax system, the NBR is committed to giving taxpayers the same experience in every office and outlet. This requires that the NBR has high quality physical infrastructure to facilitate customers as well as to keep the morale of the tax officials high. Hence a fullfledged Facility Management Group (FMG) is required to be set up within the NBR with wide responsibility for up gradation of present buildings and infrastructure and for development of new infrastructure in line with the re-design of the organization in the context of movement towards functional distribution as well as ICT enablement. The establishment of uniformity in interiors, furniture design, signage etc. will build brand equity for the NBR and make NBR buildings and facilities easily recognizable.

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Chapter: 06 Findings of the analysis and conclusion It is risky for the State to depend upon too few a source of public revenue. Such a system is bound to breed a lot of uncertainty for the treasury. It is also likely to be inequitable as between different sections of the society. On the other hand, if the tax revenue comes from diversified sources and then any reduction in tax revenue on of any one cause is bound to be very small. However, too much multiplicity to taxes is also to be avoided. That leads to unnecessary cost of collection and violates the canon of economy. In general, we must that the tax structure is a part of the economic organization of a society and should, therefore, fit in its overall economic philosophy. No tax system that does not satisfy this basic condition can be termed a good one. Over time, therefore, ideas regarding what should form a good tax system have undergone an evolution. In the following section we would briefly discuss the characteristics of a good tax system in the light of modern economic philosophy. The tax system should not be too complicated. That makes it difficult to understand and ister and breeds problems of interpretation and legal disputes. It should be possible for the authorities, without undue delay, to revise the tax structure, both with respect to its coverage and rates, to suit the changing requirements of the economy and of the treasury. Cost of collection of taxes should be the minimum possible. It is useless to impose taxes which are too widespread and difficult to ister. These taxes entail an unnecessary burden upon the society in the form of additional istrative expense. The productive efforts of the people suffer due to this wastage. Realizing that the tax collections are being wasted, the tax-payers also tend to evade them. These roles of taxation have a sound philosophy behind them and exhibit an insight into the practical aspects of tax istration and its effect. Day by day, the rates of collections of revenues have increased along with the increasing of tax payers of different areas of the country. As I analyzed all the perspectives of NBR there I saw the bright development in the revenue collections as well as the development of the economy of the country.

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As NBR is the sole authority to collect and make all rules-regulations, it should be more digitalized to provide information and making the procedures of paying tax and other duties with more flexibility.

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