Our socio-political scenario and tax administration

Socio-Political Scenario

Social Security

In Bangladesh there is no insurance contribution in its tax structure whereas, in developed and industrialized countries, national insurance contribution comprises more than 25% of their tax revenue. The OECD/industrialized countries spent 34.4% of total central government expenditure on social security and welfare during 1992-95 whereas developing countries spent almost nothing on social security (data on social security is consistently absent in the reports for these countries meaning that there is no significant formal social security system). People with social securities are expected to have higher motivation to pay tax than people without such securities. In a country without social security, even those who can afford to pay tax will have motivation to avoid it because by doing so they themselves insure their social security. It is however, to be noted that social security benefits across the world are mainly financed out of payroll taxes paid by employees and employers. Even in the US, the conventional social security system of the state and private sector does not cover the household, farm, and self-employed workers whose incomes are very low. Obstacles in the way of expanding conventional social insurance coverage in Bangladesh are many including a large population, the large rural population, the large informal sector (about 90%), huge unemployed labor force, low per capita income, and the higher incidence of poverty.

Closely-Held Family Structure

Social relationship in Bangladesh is closely related. Well-to-do family members are used to take some burden off less well-to-do family members. Children take care of their parents in their old age. Old age pensions and elderly homes are almost nonexistent when the total population is taken into consideration. Still, there are joint-families where a group of people who cook at one hearth, who hold property in common and who participate in common family worship and are related to each other as some particular type of kindred. At present the data suggests that most families although not operating jointly, are nevertheless linked by a keener sense of mutual obligations and a more intense loyalty to distant relatives than are families in the West. Traditionally, the spouse takes her food after feeding her husband and other family members. Furthermore, family size is higher in Bangladesh compared to developed countries, and all members cannot be trained, educated, and cared for equally because of social and economic realities. As a result, all members cannot earn equal social and economic status. So even a well-to-do member earning taxable income has motivation to avoid and evade tax because he thinks for other family members who are dependent on him. In fact, the dependency ratio in Bangladesh is one of the highest in the world.

Politics

The bureaucracy in Bangladesh is highly politicized. Particularly, during the last fifteen years (three parliaments), there have been sharp changes in bureaucratic positions with the change in the party in the parliament (cosmetic parliament though). If one looks at the government-nominated directors (non-executive directors) in various state agencies including banks and financial institutions, one would find that the majority of them were party leaders and holding high political positions. This behavior is against the spirit of the role of "independent" non-executive directors suggested by worldwide corporate governance bodies. Political appointees to a public agency serve at the pleasure of the appointing authority and may be dismissed or transferred if they are not responsive to its programmatic goals. In this situation, political appointees are judged less on the basis of results than for loyalty to their political superiors.

Quality of Earnings

The quality of earnings in business and bureaucracy is probably the worst. The study by Transparency International of the perceptions of executives, businessmen, and policy makers across the world ranked Bangladesh business and bureaucracy as the most corrupt in the world. Bank loan default culture is a national crisis in Bangladesh where 30% to 40% loans in commercial and development financial institutions are classified. In the public sector, private gain in the form of bribe is common. There are widespread irregularities in the tender processes, and salary, allowances, and benefits. In fact, 12.1% of the total number of audit objections in the government audit during 1996 was related to tender related irregularities and 14.2% were related to unauthorized salary, allowances, and benefits. So when sources of earnings are non-transparent, the revelation of these earnings is expected to be non-transparent (tax evasion). About salaried incomes, it is however, to be noted that majority of the salaried employees in both the public and private sector, earn poverty level or slightly higher than poverty level incomes.

Migration, Immigration, and Short-termism

Bangladesh had a long history of zamindar (landlord) system (1793-1950) where some landlords were in possession of the vast amount of the country's land and they used to collect rent from the peasants for leased lands. Most of them were Hindu zamindars. Development work, mainly education, was Calcutta based (Calcutta being the capital city of British India). So money and resources were used to be transferred to that part of British India. Many historians blame the British for promoting of the semi-feudal zamindar system for draining the region of its wealth. Partition of the Indian subcontinent in 1947 led to a transfer of about 15 million Hindus and Muslims between the newly created States of India and Pakistan. After 1947, Pakistan started exploiting East Pakistan economically and politically, causing separation of East Pakistan, now Bangladesh, from Pakistan in 1971. Parnwell, in his book, Population Movements and the Third World, shows that inequalities in the pattern and process of development influenced migration in the Third World. During the recent years, the great majority of all long-term and permanent immigrants to Australia came from countries of the British Commonwealth. Immigration from Bangladesh to the US has increased from 800 in 1984 to 1600 in 1987. It is observed that a significant number of members of the business faculties in the country's universities with a western degree have migrated or immigrated to overseas countries. The impact of migration and immigration depends upon who is moving, the circumstances which led to the move, the purpose of the movement, the form of the movement, and the extent to which the migrant succeeds in achieving his or her objectives. However, the mission and vision towards immigration could create a culture of short-termism in the sending country that might hamper its long-term development.

The Parliament

The parliament, although it has limitations, is universally considered as the apex body for a country's good governance. Ilbert, in his book, Parliament, its History, Constitution and Practice, showed that the word parliament originally meant to talk; it was a council or conference of great men to discuss grievances. Campion and others in their book, Parliament: A Survey, defined parliament as a government by talk, or control of the government by talk. The Commons became the effective controllers of taxation during the fourteenth century in England. In the modern parliaments, the House deals with issues of national importance and various standing committees deal with specific issues of various departments of the bureaucracy, and thus try to establish accountability and responsibility in the country's machineries. The parliament regulates not only the public sector but also the private sector business, commerce, and trade in an economy. The countries without the parliament are characterized by lack of democracy, dictatorship, autocracy, and military rule. In Bangladesh's thirty years of history since 1971, there was no parliament in twelve years. In the rest of the period, the parliament was largely cosmetic, and characterized by quorum crisis, long boycott from the opposition, and shorter duration. The parliamentary standing committees were dominated by the members from the ruling party (chairman always from the ruling party). The Public Accounts Committee could recover only 10% of the money involved in the Comptroller and Auditor General's audit objections. More than 20% (the second highest) of the number of audit objections in government audit during 1996 was related to taxation.

Conclusion

Bangladesh has not any conventional social security system of the state and private sector, it has a closely-held family structure, its bureaucracy is highly politicized, the parliament is inactive, the earnings of taxable people are largely nontransparent, and there are waves of migration and immigration of rich people -- all these taken together led to higher scopes for the people for tax evasion. In this poor socio-political scenario, our tax administration is weak and its control mechanisms such as survey work, intelligence and investigation, and inspection and audit cannot function independently. Successive governments have mainly relied upon incentives but could not enforce the control mechanisms. Corporate tax rate has been reduced from 45% in the 1980s to 35% in the 1990s; earnings threshold for income tax has been continuously raised; self-assessment system has been made easier; tax holiday benefits have been extended year after year; and discretionary powers of tax officials have been reduced. But the institutional control mechanisms are getting weaker year after year. Good governance must have an element of incentives on the one hand and some disciplining mechanisms on the other hand. There is evidence that this system has proved successful in families, modern corporations, and national governments.

Dr Dhiman Chowdhury is Associate Professor of Accounting, Dhaka University.