Revenue — a good news story
This is Dr Nasiruddin Ahmed. Chances are, you’ve never heard of him. I hadn’t until recently. And yet, he is arguably the most successful econocrat in today’s Bangladesh. Dr Ahmed is the Secretary of the Internal Resources Division of the Ministry of Finance, and the Chairman of National Board of Revenue. That is, he is the country’s main Taxman. Under his leadership, since April 2009, NBR — the taxation agency of Bangladesh — has led the effort to raise revenue for the government.
As this chart shows, revenue-to-GDP ratio has been rising steadily over the past decade. The chart also shows that since 2009-10 financial year, revenue-GDP ratio has risen at a faster pace.
More importantly, and in a rare feat for Bangladeshi bureaucracy, revenue-to-GDP ratio has essentially met the target set by the 2010-11 Budget over the subsequent two years.
And now, in the latest Budget, the government has set an even more ambitious task for the taxmen.
Will they achieve their task? I am cautiously optimistic that they will.
Before explaining the reasons for my optimism, let me spend some time on exactly how the government expects to raise revenue-to-GDP ratio by over three percentage points in the next five years.
Bangladesh has basically five sources of revenue: income and profit taxes; VAT and supplementary duties; customs and other NBR taxes; non-NBR taxes; and non-tax revenue. Of these, government expects action in only the first two. VAT and supplementary duties in particular is expected to rise from current 5.5% of GDP to 7.2% of GDP by FY2017. This is, of course, expected given the government’s recent dealings with the IMF.
So, why am I optimistic?
Firstly, because the government hasn’t just announced a lofty target. For the past three years, the government has laid out detailed plans on how it will meet those targets. Here is the latest example. Read the last five pages to get an idea of what’s coming.
Secondly, the government has met its target in the past three years. This chart shows the deviation of the final revenue collection from the initial target. The pattern in the past was that revenue would come in 6-8% below the original target. While revenue came in above target in FY2008, that had more to do with the de facto army regime than any fundamental improvement in the tax system. The old pattern returned in FY2009.
In more recent years, however, there has been a marked improvement. Targets were met in FY2010 and FY2011. While target was missed in FY2012, the shortfall was much smaller than what we used to see. As they say in macroeconomics, once is happenstance, twice coincidence, but if it happens three times in a row, you have a trend. I am cautiously optimistic that we are on a better trend.
Each of these countries have similar institutional problems as us. Further, they have some additional problems that Bangladesh doesn’t.
Bangladesh is geographically much smaller, and population is more homogenous. This should help curb tax evasion. If Indonesia or Pakistan can have revenue-to-GDP ratio well into the teens, then so should Bangladesh.