Contribution of Indirect Taxes on GDP of Bangladesh

Transcription

1 Asia Pacific Journal of Research Vol: I. Issue XXXVIII, April 2016 ISSN (Print) : ISSN (Online) : Contribution of Indirect Taxes on GDP of Bangladesh Md. Rayhanul Islam* Lecturer in Accounting, Department of Business Administration, Daffodil International University, Bangladesh Abstract: Presently indirect taxes play prime roles for increasing the collection of government revenues and subsequently on the GDP. This study has been conducted to investigate the contribution of indirect taxes on GDP of Bangladesh, where indirect taxes have been classified under two broad categories- import export level and local level indirect taxes. Data have been analyzed by using SPSS and MS Excel program after they have been collected from various sources like- research journals, reports, texts and relevant websites. From the regression result the study found almost perfect positive correlation between indirect taxes and GDP in Bangladesh during the period covering to It has also been investigated that during the study period upto contribution of import export level indirect taxes was more than the local indirect taxes on GDP. But after , amount of locally collected indirect taxes exceeded the collection of import export level indirect taxes because of faster increase of local indirect tax collection. In the study the literature claims that indirect taxes are one of the reasons for the gap between poor and rich classes of people that can be minimized by decreasing the dependency on indirect taxes and increasing the collection of direct taxes. Key words: Tax, Indirect tax, GDP, Import-Export level indirect tax, Local indirect tax, Tax evasion. 1. INTRODUCTION: The term tax which has close relation with the latin word taxare has been derived from the french word taxes which means to charge. In most of the times taxation refers to the act of a taxing authority (National Board of Revenue in Bangladesh) exercizing the power of levying tax. The tax can be imposed by the government of the country- central or local government. According to the 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. The Income tax Ordinance 1984 (ITO-1984) defines in its section 2(62) as tax means the income tax payable under the ordinance and includes any additional tax, excess profit tax, penalty, interest, fees or other charges leviable or payable under this ordinance. Tax can be defined as the charge levied by the government of a country on its citizens for its need for the purpose of providing facilities to the public of that country. Tax is neither a donation nor a voluntary payment to the government. Rather it is a forceful payment to the government by a group of people. Presently tax revenue is the prime source of total revenue for all the modern governments of the world. The purpose of taxes is to create welfare for the society by providing public services, protecting local industries, ensuring economic infrastructure and defense expenses etc. The apex objectives of taxation include revenue collection for the government, reducing the inequalities by taxing rich people heavily and conferring benefits to the poorer people, accelerating economic growth, protecting poor local industries and controlling the consumption of unhealthy (eg- tobacco, carbon) and luxurious goods (eg- Fancy cars, Rolex watches, Diamond). Presently there are two major types of taxes: Direct taxes and Indirect taxes. As the major source of government revenue indirect taxes contribute more than the direct taxes. Direct tax is a tax that is paid directly by an individual or organization to the imposing entity (Investopedia.com). In case of direct taxes the tax payers are generally more curious to know about their taxed income. That s why stress the government for the representation of its consumption. Taxes are levied at different percentage rates. (Aamir et al., 2011). These rates are determined by comparing income and consumption level of the people. Direct taxes include income taxes, property taxes, taxes on assets, gift tax etc. An indirect tax (such as sales tax, per unit tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer). The intermediary later files a tax return and forwards the tax proceeds to government with the return ( wiki/indirect_tax). Indirect taxes include Value Addition Taxes, Sales taxes, Customs, Airport value tax, service taxes, entertainment taxes etc. Because of the simplified and transparent system, the collection of indirect taxes is more mentionable. Due to the scope of cross audit, tax evasion is very difficult in case of indirect taxes. 2. LITERATURE REVIEW: Taxation is a branch of accounting and taxes are very old phenomenon; taxes are as old as human civilization 213

2 214 CONTRIBUTION OF INDIRECT TAXES ON GDP OF BANGLADESH itself. The taxation history goes back to ancient days when we found certain reference about taxes in many old books like Arthshastra written by Kotilya popularly known as Chankya. This book includes valuable information regarding taxation concepts, rules and regulations. According to Arthshastra, in ancient time, taxes were levied and collected in both cash and kind. Gradually taxes have been classified in various ways and direct tax and indirect tax are two of them. In most of the countries specially in developing countries like Bangladesh, tax policies are used as a tool for correcting the fiscal imbalances where indirect taxation plays the vital roles. From the very beginning of the inception of indirect taxes, it is found that indirect taxes contribute more than the direct taxes. A study, conducted by Joshua Aizenman and Yothin Jinjarak in the year of 2005 says that VAT, an indirect tax is a major part of tax system in over 136 countries. Amir et al. (2011) found that in Pakistan, contribution of tax revenue on total government revenue gradually increased between to Their study also reported that, in the total tax revenue of Pakistan contribution of indirect taxes were more than the direct taxes. Their study titled Determinants of Tax Revenue: A Comparative Study of Direct taxes and Indirect taxes of Pakistan and India further reports that in India, collection of tax revenues showed an increasing trend over the period between to where the part of indirect taxes is much more than the direct tax revenue. More than 140 countries have introduced GST (an indirect tax) in some form to other and is fast becoming the preferred form of indirect tax in the Asia Pacific region, Vasanthagopal (2011). In India with a giant economy of Asia two categories of VAT (an indirect tax) are found. One is central VAT popularly known as CENVAT and another is State VAT and jointly CENVAT and State VAT plays major roles in the reform of indirect taxes in India. The Irish research on the issue of distributional effects of indirect taxes comes from Leahy et al. (2011). Their assessments are based on indirect taxes (primarily VAT) paid by households as a proportion of weekly disposable income. According to the OECD s Consumption Tax Trends 2014, 164 countries in the world levied a VAT as of 1st January 2014: 46 in Africa, 1 in North America, 18 in Central America and the Caribbean, 12 in South America, 28 in Asia, 51 in Europe, and 8 in Oceania. The rate of indirect taxes varies from country to country ranging from minimum 1.5% in Aruba to maximum indirect tax rate of 27% in Hungary. Indirect tax in 2015, a review of global indirect tax developments and issues reports that average standard VAT rate in 28 EU Member States and the OECD Member countries is gradually increasing. KPMG, the leading audit firm regularly surveys the corporate tax rate and indirect tax rates of various countries. According to their survey reports between the periods in most of the countries like- Australia, Canada, Denmark, Brazil, UK and France the indirect tax rates show either increasing trend or constant trend. KPMG s very recent report in 2014 says that a number of countries including Italy, Montenegro, Pakistan, Slovenia, Japan, France and in Israel the indirect tax rates have increased. The origin of Value Added Tax (VAT) as far back as the writings of F Von Siemens, who proposed it in 1918 as a substitute for the then newly established German turnover tax (Bangladesh Income Tax: Theory and Practice- 7 th Edition). On the otherhand, Petruta & Claudia told VAT had been introduced during the beginning of 1970 in the European Economic Community by means of the first and the second VAT norm, replacing the various production and consumption taxes applied until then by the member States, taxes that represented obstacles for the trades. In Bangladesh VAT emerged as the leading element of indirect taxes in the year of by the Value Added Tax Bill 1991 which was passed on 9 July 1991 in the parliament of Bangladesh. At the very beginning of the inception the authority had to face lots of protest against the VAT but gradually it has become a very popular and effective source of government revenues. Presently in Bangladesh indirect taxes have been classified under two broad categories- one is import- export level that includes Import tarrif, VAT (import-export), Subsidiary tarrif and Export tarrif. Another broad category is local level indirect taxes having subcategories of Excise duty, VAT (Local), Subsidiary tarrif and Turnover tax. Since VAT plays a vital role on the GDP of Bangladesh, government sometimes tries to impose VAT on new items. Very recently government of Bangladesh imposed a compulsory 10% VAT on private education institutes like private universities which at one stage was reduced to 7.5% and finally was withdrawn on the students demand and protest. 3. STUDY OBJECTIVES: The study aims to investigate the contribution of indirect taxes on the GDP of Bangladesh. The study objectives also include investigating the dependency on indirect taxes by measuring the contribution of the subcategories of the indirect taxes on the GDP. Finally the study expects to explore the scope of further researches in this area. 4. DATA SOURCES AND METHODOLOGY: For measuring the contribution of indirect taxes on the GDP of Bangladesh collection of indirect taxes has been shown against the total GDP. Data were collected from various published sources including national and international journals, books, relevant websites etc. The study shows the collection of two broad categories of indirect taxes for the period covering to Both import-export level indirect taxes and local level indirect taxes were shown separately against the total GDP of each fiscal year of the period covered. To know the

3 215 Md. Rayhanul Islam effect of indirect taxes on total GDP, regression analysis was made by using SPSS (Statistical Package for Social Sciences). The GDP of Bangladesh was considered as dependent variable and collection of indirect taxes were considered as independent variables. Microsoft excel has also been used for showing the trends of GDP, Indirect taxes, Import export level indirect taxes and Local level indirect taxes. 5. CURRENT SCENARIO OF GDP AND INDIRECT TAXES IN BANGLADESH ( TO ): 5.1 GDP trend Table-1 shows an increasing trend of GDP over the period between fiscal year to GDP of Bangladesh was Tk. 273, crore in the year of and increased to Tk. 37, crore in fiscal year after that the increasing rate improved further and GDP increased to Tk. 79, crore in the year of which was an increase of 13.11% of the previous year( ). Finally The total GDP of Bangladesh became Tk. 134, crore in the year of Trend of Indirect Tax Collection From table 2, it has been seen that the collection of indirect taxes has an increasing trend except some small fluctuations. In the fiscal year of indirect tax collection was only Tk. 16, crore which was increased to Tk. 28, crore in the year of After that the trend of indirect tax collection shows a small fluctuation and topped to Tk. 38, crore in In the following year it increased by 16.63% and the figure of indirect tax collection was Tk. 44, Finally in the year of the collection of indirect taxes was Tk crore. 5.3 Collection of Indirect Taxes under two broad categories The line chart in table 3 in previous page shows the collection of two broad categories of indirect taxes in Table: 1 Table: 2

4 216 CONTRIBUTION OF INDIRECT TAXES ON GDP OF BANGLADESH Table: 3 Bangladesh. From the line chart it can be observed that, collection of both import export level and local level indirect taxes is gradually increasing. The line chart also tells that, from to both import export level and local level indirect tax collection increased parallel. After the collection of import export level indirect taxes increased very slow while the local level indirect tax collection continued to increased faster. In the year of the collection of local and import export level indirect taxes were Tk. 21, crore and Tk. 22, crore respectively. In two years the collection of local level and import export level indirect taxes increased by 59% and 37% respectively in the year of The table also shows that, though at the beginning of the study period ( ) import export level indirect taxes were more than that of local indirect taxes, after collection of local indirect taxes exceeded the collection of import export level indirect taxes. Finally in the fiscal year the local indirect tax collection climbed to Tk. 43, crore while the import export level indirect tax collection remained only at Tk. 33, crore. GDP t = a + b 6. ANALYSIS AND FINDINGS: IndirectTa xt α = Intercept β = Slope of Indirect taxes ɛ = Error variable + ɛ Table 4 shows that the value of R- square is 0.986, which indicates that indirect taxes have 98.6% contribution on the GDP of Bangladesh. It shows approximately Table: 4 Model R Square Adjusted R Square Std. Error of the Estimate Table: 5 Model Unstandardized Coefficients t Sig. B Std. Error 1 (Constant) Indirect taxes *** Note: *** indicates significant at 1% level perfect positive correlation between GDP and the Indirect taxes. From table 5 in the previous page, it is evident that indirect tax is significant to explain GDP of Bangladesh. Thus, the regression line can be expressed as: GDP= Indirect Tax+ error term According to the above equation, if the collection of indirect taxes increases by Tk. 1, the GDP will increase by Tk Thus, statistically the indirect taxes have significant effect on the GDP of Bangladesh even though it doesn t make very sound sense. 7. CONCLUSION: From the analysis it can be said that, indirect taxes have mentionable contribution on the GDP of Bangladesh where collection of indirect tax has almost perfect positive

5 217 Md. Rayhanul Islam correlation with GDP. The statistics supports that, collection of indirect taxes has been increasing with the increase of GDP over the period though its speed fell a bit down in the year of If the collection efficiencies of indirect taxes under two broad categories are compared, it is noticed that collection of both import export level and local level indirect taxes are gradually increasing although it is evident that collection of local level indirect taxes is increasing faster than the collection of import export level indirect taxes. Upto the collection of import export level indirect taxes was healthier than the local level indirect taxes. Afterward, contribution of locally collected indirect taxes gradually increased faster and its amount exceeded the collection of import export level indirect taxes. As a result, presently local indirect taxes have more contribution on GDP of Bangladesh. The review of literature claims that, the proportion of indirect taxes must be less than that of direct taxes. And the more the indirect taxes in a country, the larger will be the gap between rich and the poor classes of people. Since taxes are the most important and reliable source of government revenue in any country, taxes must be imposed and collected for the smooth operation of the government. But while designing and redesigning the taxation system, the authority should try to decrease the dependency on the indirect taxes by increasing the collection of direct taxes. If it can be done, the exploitation of the poor class people will decrease which will act for lowering the gap between poor and rich classes of people, the fundamental goal of taxation. 8. REFERENCES: 1. Aamir et al.(2011). Determinants of Tax Revenue: A Comparative Study of Direct taxes and Indirect taxes of Pakistan and India. International Journal of Business and Social Science Vol 2 No. 19 (Special issue- October) 2. Ahmad and Stern (1984). The Theory of Reform and Indian Indirect Taxes. Journal of Public Economics, Vol Ahsan, Syed M. (1995). Tax Reform in Bangladesh: Some Theoretical and Practical Issues. Bangladesh Economy: Evaluation and a Research Agenda, Dhaka: University Press 4. Aizenman and Jinjarak (2005). The collection efficiency of the value added tax: theory and international evidence. (Publisher s name unknown) 5. Asher, M., & Rajan, R. (1999). Globalization and Tax Systems: Implications for Developing Countries with Particular Reference to Southeast Asia. CIES Discussion Paper, Vol. 99 (No.23). 6. Annual report of National Bureau of Bangladesh Bhuiyan. M.N.U. and Malek. M. (2005). Target Costing as Tool for Cost Management- Some Lessons from Japanese Experience. Dhaka University Journal of Business Studies. Vol XXVI, No 2 8. Bangladesh Economic Update, May Saez. E(2002). Direct or Indirect Tax Instrument for Redistribution on Short-Run versus Long-Run. A publication of National Bureau of Economic Research 10. Das, S. P. (2011). The Political Economy of Revenue Pressure and Tax Collection Efficiency. Indian Growth and Development Review, Vol 4 (Issue 1) 11. Hussain, S. (1999) Taxation in Bangladesh: Measures for Improving the Income-Tax System (unpublished) 12. Islam, M. R.I.(2013) Present Scenario of Gift Tax in Bangladesh. European journal of Developing Country Studies. Vol Income Tax Ordinance (ITO) 1984 of Bangladesh. 14. Jaiparkash (2014). Indirect Tax Reform in India and a Way Ahead for GST. International Journal of Computing and Corporate Research. Volume 4 Issue 1 January 15. Karim and Alauddin (2012). Emerging Tax Issues in Asian Countries. Presented at IMF Japan High Level Tax Conference for Asian and Pacific Countries 16. KPMG s Corporate and Indirect Tax Survey 2014, 2010 & Mansur and Yunus. An Evaluation of the Tax System in Bangladesh. 18. Petruta and Claudia. The Harmonization of the Indirect taxation in the European Union. (Publisher s detail unknown) 19. Revenue Mobilisation and Economic Growth Bangladesh Economic Update November 2013, Published by Unnayan Onneshan 20. Shil et al. (2012). Bangladesh Income Tax: Theory and practice - 6 th Edition. Shams Publications, Nilkhet, Dhaka. 21. Sarker, K.T.( 2006). Who bears the burden of taxation in developing countries: A case of Income taxation in Bangladesh. Pakistan Economic and Social Review. Vol Vasanthagopal, R.(2011) GST in India: A Big Leap in the Indirect Taxation System. International Journal of Trade, Economics and Finance, Vol. 2, No. 2, April.

6 218 CONTRIBUTION OF INDIRECT TAXES ON GDP OF BANGLADESH APPENDICES: Apendix-1 Collection of Import-Export level Indirect taxes Year Import tarrif VAT Subsidiary tarrif Export tarrif Total Source: Annual report of NBR (Amounts are in Crore Taka) Apendix-2 Collection of Local Level indirect taxes Year Excise duty VAT(Local) Subsidiary tarrif Turnover tax Total Source: Annual report of NBR (Amounts are in Crore Taka)

7 219 Md. Rayhanul Islam Apendix-3 Total Indirect Tax and GDP Year Total indirect taxes Total GDP Import- export & Local Source: Annual Report of NBR (Amounts are in Crore Taka)