Indebtedness of Income Tax System

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Indebtedness of income tax system: Bangladesh Perspective

HSH

July 2010

[ Indebtedness of income tax system: BangladeshPerspective]A Research Report on Indebtedness of income tax system: Bangladesh

perspective submitted to the School of Business in partial fulfillment of the

requirements of Research & Methodology course Summer 2010

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Indebtedness of income tax

system: Bangladesh

Perspective

Submitted To:

Dr. Md. Taufiqul Islam

Associate Professor

Faculty of Arts and Social Science

American International University Bangladesh

Submitted By:

Hazra Sabbir Hossain (08-10241-1)

M. Hasib Uddin (08-10116-1)

Md. Yamin (08-10323-1)

July 20, 2010

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1. Introduction

Taxes are primary sources if governmental revenue in Bangladesh.

Taxation means imposition of a non-penal yet compulsory levy for

transfer of resources from private to public sector, imposed by the

public representative based on pre-determined criteria and without

reference to any specific commitment, in order to accomplish some

nations economic and social objective. These are dues that we pay for

the privileges of membership in an organized civil society. Tax is

imposed in the assessment year based on income year. Tax is a internal

revenue, which collected through two types of tax in many countries.[1]

Those are direct tax and indirect tax, where direct tax deals with income

tax and indirect tax deals with Value Added Tax (VAT) and Custom

Duties.

In spite of the structure of taxation and the lack of unwillingness of

citizens to fulfilling its citizenry duties, it is indeed very inconvenient

task collecting taxes from tax payers in Bangladesh. [2] Bangladesh

inheritances a week economic infrastructure from British era and later

from Pakistan ruler although it nit posses a vast amount of natural

resources. [3] These limitations have caused slow growth in production,

saving, in capital formulation and in capital investments.[2] Moreover, the

economic activities outside the agricultural sector are disjointed and

fragmented, which has contributed the problem.

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1.1 Basics of the Study

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 change. 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 on the basis of predetermined

criteria. According to Article 152(1) of the Constitution of Bangladesh,

taxation includes the imposition of any tax, rate, duty or import, whether

general, local or special, and tax shell be constructed accordingly.

Taxes are the most important source of revenue of the modern

governments. It is a compulsory levy, to be paid by the citizens who are

liable to pay it, imposed by the government. Many economists like

Seligman, Adam Smith, Bastable, Taussig and Dalton hold the

unanimous opinion that tax is a compulsory payment to the government

by taxpayers without any expectations of some specified return. But

essence of the argument is this that the tax payer is not entitled to

claim return of his taxes though he may receive benefits of the service

which the State provides by means of the taxes collection from him and

many other like him.

According to P. E. Taylor, Taxes are compulsory payment to

government without expectation of direct return in benefit to the tax

payer.

According to Dalton, A tax is a compulsory contribution imposed by a

public authority irrespective of the exact amount of service rendered to

the tax payer in return and not imposed as a penalty for any legaloffence.

According to Section 2(62) of the ITO 1984, 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.

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The above definitions make it clear about the tax, that it is a compulsory

contribution by the tax payers to the government. [11]

1.2 Background of the Study

Income tax concept was first introduced by Mauryan ruler Chandragupta

in 322BC. Maurya Empire converted the revenue producing economy of

Northern India to a predominant agrarian economy and large areas of

land were brought under cultivation. It was found that the land revenue

was the most important source of income for the government and

assessment at regular intervals brought about increase in land revenue.

Collection of taxes was a matter of concern for the administration during

the Mauryan rule. [4] After that in every civilization scholars found the

sign of taxation system in a moderate way that it was before. Income

tax laws ware first introduced in the year of 1860 in this subcontinent

and remained in force until the partition of India and Pakistan. The

present income tax law came into the new shape after passing three

eras from 1947. [2] Income tax in the Indian sub-continent had its origin

in 1886 via the Indian income Tax Act. In Bangladesh, this was further

streamlined by the Income Tax Act 1922 which was used, albeit with

modifications, until 1984, when the present Income Tax Ordinance was

introduced. A major reorganization and expansion of the Income Tax

Department (ITD) took place in 1992, with a further expansion in 2001.

The ITD acts as one of the two executive arms of the National Board of

Revenue for the collection of revenue. The ITD is divided into zones

headed by acommissioner. There are two types of zones, i.e. for making

assessments and collection of taxes (executive zone), and, for the

hearing for appeals (appeals zone). Besides these zones, there are

specialized offices (i.e. Directorates of Inspection) tasked with

conducting audits of selected cases and performing internal audits. In

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respect of the training of personnel, there is a separate Directorate of

Training or Tax Academy. There are also specialized zones used to

identify new taxpayers, and for selected large taxpayers (i.e. Large

Taxpayers Unit (LTU)). [8] The charge of tax of a person depends on its

residential status and income level.

Since 1984 income tax collection never reached the forecasted level of

Bangladesh government. Though there has a huge amount of high

income residents in Bangladesh, there has a very few amount of regular

tax payer. This problem is getting serious and uncontrollable by the

government.

Bangladesh is divided into 18 tax- collection zones where 10 zones are

located in Dhaka; 3 zones are in Chittagong and; 1 zone in each division

of Rajshahi, Sylhet, Khulna and Barishal and 1 zone in the district of

Rangpur. There have total 304 tax-offices under these tax zones in which 156 tax

offices are located in Dhaka city. [6] Though the tax collection is not satisfactory in the

present perspective and not sufficient for the growth in production, saving, capital

formulation and capital investments. Another research shown that,

revenue loses from 30 files in tax offices in Dhaka city, depicts that

revenue loses due to taxpayers noncompliance with laws of income taxis a growing problem in Bangladesh, where in the past five year period

(2000-2004). [2]

1.3Importance of the topic

One of the most commonly discussed issues in economics is collection

taxes relate to economic growth. The main source of revenue of

Bangladesh government is Income Tax. So, socio economic andinfrastructure development fully depends on the Income Tax. Where the

government could not collect the income taxes form those, who are

eligible to pay tax. Ultimately the economic, infrastructure and, overall

development is getting hampered. Taxation principles argued that

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paying tax is not a penalty to the citizens; its a willful contribution to

the overall development of the country. By paying tax a citizen can not

clime any benefit from that, but the benefit of the taxes will be provided

as commonly as the citizen facilities, such as, road, bridge, public

infrastructure constructions, poverty reduction, employment etc. In the

holly Quran (holly book of Muslims) has also the notification of paying

tax as it is a contribution of Zakzt (contribution to the poor). Although

there has a moderate industrial and cultural development in Bangladesh

as it is a developing country, there is a very insignificant infrastructure

development, huge unemployment, Population below poverty line:

36.3% (2008 EST.).[7] The main reason behind these situations is the less

revenue income and the losses of revenue of government. It is really

important to seek the reasons behind the less revenue income where

Bangladesh a large number of citizens who are eligible to pay tax, but

there has a few who are paying tax in respect to the total eligible

population, which leads to increase black money and corruption in

Bangladesh.

1.4 Literature Review

There are a few number of research reports and theoretical works on

Indebtedness of income tax and; noncompliance of income tax and its

laws. In many of them, research scholars have identified different views

on the issue of taxpayers noncompliance of income tax laws in

Bangladesh is a growing problem, which results a significant amount of

revenue loses each year. However, a very limited amount of empirical

work is available on this particular issue in the case of indebtedness ofIncome tax system of Bangladesh. Matiur (2007) analyzed six factors or

causes which are identified that might have contribution to the

magnitudes of revenue loses in each category of taxpayers, specially;

Public Ltd, Private Ltd, Financial Institutions, Rental, Professionals and

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Individuals, namely, Evasion (EV), Lack of awareness (LA), Official

Harassments (OH), Complexity of the Law(CL), Lack of Social

Benefits(LS), And other reasons including the rest of the reasons

mentioned above and involves high compliance cost, political pressure,

nepotism, not want to disclose income or assets, illegal and black money

earned, giving unlawful benefit to taxpayers by tax officials talking bribe

etc.

Sarker (2003) has identified as the main problems of the income tax

system in Bangladesh are (i) the narrowness of the tax base, (ii)

evasion and avoidance of tax, and, (iii) inadequate tax administration.

Thus setting up of a simple and road based tax system is crucial to the

development of a better tax administration. Studies have identified the

main impediments as the lack of tax education among the taxpayers

followed by poor public relation activities and inadequate penalty

provisions for errant taxpayers. The need to increase training and

improve the working environment of tax officials, as well as establish an

information management system are also seen as important factors to

be met for better tax administration.

He was trying to convince by his study that Self-Assessment Systems(SAS) can improve the compliance of income tax as the Japan

government does.

Japan adopted the SAS in 1947 and after more than five decades, the

system is firmly established as part of the tax regime. Bangladesh, if it

wants to improve its own SAS, it would be wise to study the public

relation activities undertaken by the Japanese tax authorities in relation

to the Japanese SAS. The Japanese use of tax counseling is also a crucial

element that could be AISA-PACIFIC TAX BULLETIN adopted in

developing countries. Sarker (2003) analyses the crucial measures to be

taken for better tax administration in Bangladesh and has found that the

adoption of an entire self-assessment would be a timely endeavor for

improved tax compliance.

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Sarker (2003) The present system of tax administration in Bangladesh

has failed to achieve a satisfactory level of compliance, since it first

came into effect almost thirty years ago. There has been a need to

change the system of administration from an official assessment system

to a fully-fledged SAS. The objective of this study is to highlight the

issues and problems associated with the official assessment system and

make recommendations on ways in which self-assessment can be

successfully implemented by interpreting the lessons from the Japanese

system.

The opportunity that the advantages of SAS as one of the ways in which

many countries have improved their tax administration system. One of

these advantages is that the taxpayers right is exercised democratically

resulting in the increased involvement of the taxpayers in tax affairs.

The taxpayers are given the opportunity to compute their income and

pay their tax to the national treasury voluntarily. The tax revenues are

paid in advance and hence improve the enforcement system and may

also reduce operational and administrative costs. Therefore, the study of

Sarker (2003) to find out methods to overcome difficulties in the

Bangladeshi, SAS is important.Though Sarker have found the opportunities is self assessment system,

its implementation in Bangladesh is really difficult task. Because most of

the people have a very minimum educational level, so they need to go

other place to assess their income tax. I have the consideration to find

out the reason of my argument to the failure of Self Assessment System.

According to Sarker (2006)

The heavy reliance on indirect taxation has been treated as one of the

main obstacles in attaining economic progress in developing countries.

The problem arises mainly due to the fact that only a few taxpayers

share the burden of taxes. Bangladesh is no exception which is also

trying to reform its tax structure for long time through structural

adjustment and growing demands have been placed on it to suggest

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towards a desirable tax system. A huge segment of the population living

in acute poverty and disparity is also evident in income distribution. Tax

burden is ultimately shared by a limited number of individual taxpayers

and corporations. Thus attaining a broad based and optimal taxation

system is a much desirable task for the government. This study tries to

keep forward such an endeavor by analyzing the distribution of burden

of income taxation in Bangladesh.

Taxes are the major source of mobilizing internal resources of an

economy. Bangladesh revenue structure has been burdened by taxes

from indirect sources for long time and usually characterized by heavy

import and excise duties. To cope with the challenge due to

globalization, government of many such countries has to cut down such

duties and levies.

NBR annual reports (1997-2000) shows that from 1991 to 2001 there

has a stable situation of revenue collection though there has a

significant change in economic and industrial development. It shows

that income tax first started increasing in early nineties but sharply

declined in the middle and still trying to get its way back. A major reform

of tax administration in the history of Bangladesh happened that timeand a democratic government took over the paddle of the economy

after a long military rule.

Previous findings have reported mostly results that are based on purely

theoretical considerations. Given the circumstances, the present study

takes the initiative to conduct an empirical investigation based on a new

approach that evaluates the reasons of indebtedness of Income tax

system in Bangladesh. The findings from this study are valuable in

guiding professionals and policy-makers to further formulate effective

compliance of income tax.

1.5 Objectives of the study

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I have done this research as the course requirement of Research and

Methodology for the partial fulfillment of Bachelor of Business

Administration. Thus the main purpose and objective of this study was to

find out the relationship among the causes of the indebtedness of

taxation system and the revenue income as well as the economic

development. Over this the objectives are given below:

Tax payers perception around the taxation system (Income tax).

Convenience ness of taxation system.

Moral Values toward paying tax.

Individual perception toward other tax payers.

Measuring the efficiency level of taxation system.

Overall obligations of taxation system etc.

Toward conducting this research, Instead of rushing to conclusions

about the relationships, we developed our hypotheses (s) on the

relationships of independent variables with dependent variables and

then statistically taste them.

Independent Variables (A): Time Lose, documentation, complexity,

corrupted system, unfriendly, big line, harassment, inattention of

authority, helplessness etc.

Dependent Variables (A): Problems facing to pay tax.

Independent Variables (B): Lack of awareness, lack of social benefit,

complexity of law, huge burden, having bribe money, official

harassment, illegal Income, bureaucratic policy, etc.

Dependent Variables (B): Citizens intention to escape the tax liability.

Independent Variables (C): Individual Value, Taxation System

Dependent Variables (C): Reason of Indebtedness.

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Null Hypothesis (Ho): No relationship exists between independent and

dependent variables.

Alternative Hypothesis (Ha): No relationship exists between

independent and dependent variables.

Hypotheses:

HoA: No relationship exists between time lose, documentation,

complexity, corrupted system, unfriendly, big line, harassment,

inattention of authority, helplessness etc.; and problems facing to pay

tax.

HaA: A relationship exists between Time Lose, documentation,

complexity, corrupted system, unfriendly, big line, harassment,

inattention of authority, helplessness etc.; and problems facing to pay

tax.

HoB: No relationship exists between Lack of awareness, lack of social

benefit, complexity of law, huge burden, having bribe money, official

harassment, illegal Income, bureaucratic policy, etc.; and Citizens

intention to escape the tax liability.HaB: A relationship exists Lack of awareness, lack of social benefit,

complexity of law, huge burden, having bribe money, official

harassment, illegal Income, bureaucratic policy, etc.; and Citizens

intention to escape the tax liability.

HoC: No relationship exists between Individual Value and Taxation

System; and Reason of Indebtedness.

HaC: A relationship exists between Individual Value and Taxation System;

and Reason of Indebtedness.

In the discussion, result and findings part we have discussed and tried to

incorporate all the hypotheses as they are tasted.

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2. Operational Definition

2.1 Study Material

The main source of data used was a field-level survey conducted during

the summer session of 2010 on some actual tax payers. Those who havepaid tax on the income year 2009- 2010 and tax assessment year 2010-

2011.

In order to measure results in different perspective, the weighted

average method was applied. The scale was converted 6 to .40 , 5 to .

30, 4 to .20, 3 to .10 , 2 to .00; and 1 to .10. The computed weighted

average value for the particular variable would indicate the particular

level of significance. As per this method, a higher value is assigned for

greater weight. Thus most of the scale was individually identical,

therefore individual analysis has been done over them.

Therefore, doing this research I used some general statistical and

graphical tools such as, MS Excel.

2.2 Methods of collecting data

2.2.1 Techniques of selecting samples

The samples are randomly selected from 4 categories namely Teachers,

Government service holders, Private Service holders and Businessmen.

Data were collected from 80 tax payers . Among them, 20 tax payers

were Teachers, 20 ware Businessmen, 20 were Private service holders

and 20 were Government service holders.

2.2.2 Methods of survey

A structured questionnaire was used in the survey, which has been

attached in the Appendix- 1 of this article. The respondents (tax payers)

were asked to what degree the obligations of taxation system with

respect to the 47 variables related to the 12 dimensions problems

considering individual perceptions and knowledge. For this

measurement, a score of 1 on the scale indicates No comment and a

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collect and consider a large amount of sample, which always making a

question mark on the accuracy of the results of the analyzed data. The

collection of primary data is hard to ensure the authenticity of the data

due to a small sample. While working for this report I found it very

difficult to get assistance from the internets, books, articles, research

papers. As a result, it took a lot of time to gather information from

various sources and enclosed them to create the report.

3.Result, Discussion & Findings

As my sample were 80. Among them, 25% tax payers were Teachers,

25% ware Businessmen, 25% were Private service holders and 25%

were Government service holders (Graph- 1). We found that means 100%

respondents are regular tax payer. From the all sample 15% are 25-30

years, 18% are 31-35 years, 22% are 36-40 years, 15% are 41-45 years

9 are 46-50 years, 13% are 51-55 years, 5% are 56-60 years and 3% are

above 60 years old (Graph-2). Among all my sample 76% is male and 24 %

is female (Graph-3).The samples are paying tax for different time horizons.

29% of them are paying for 1-5, 36% of them are paying for 6-10, 19%

of them are paying for 11-15, 10% of them are paying for 16-20, and 6%

of them are paying for 21-25 years (Graph- 4). From the total, 55%

populations highest tax rate 10%, 18.25% populations highest tax rate

15%, 15% populations highest tax rate 20% and 11.25% populations

highest tax rate 25% (Graph- 5).

Most of the tax payers of Bangladesh think that the tax rate is so satisfy

able in which rate they are paying.

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Convinced55%

Not Convinced44%

No Comment

1%

Convinced with the tax Rate by the total sample

Convinced

NotConvinced

NoComment

Graph-6: Convinced with the tax Rate by the total sample

Graph-6 shows that 55% tax payers are convinced with their rate, they

are paying. Another 44% are not convinced and 1% did not give any

comment, that shows, they dont think about the rate. Among all the

teachers, 50% convinced and rest of them not convinced (Graph- 7).

Research shows that teachers who are paying lowest rate they are

convinced and who are paying at a high rate, they are not convinced.

Convinced rate among the businessmen and the private service holders

are same, 55% (Graph- 8 & 10), where the 45% population are not

convinced. This rate among the government service holders can not be

matched, because the convinced rate is highest of all, 60%, not

convinced 35%, which is lowest; and another 5% didnt do any comment

(Graph- 9).

A large no. of population think that tax rate is not equally justified and

need more further modification. The graph shows that 80% of total

population think that tax rate are not equally justified, 17% think its

justified , and 3% didnt make any comment (Graph-11).

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Justified

17%

Not Justified80%

No comment3%

Justification of Tax Rate by total Sam

Justified Not Justified No comment

Graph-11: Justification of Tax Rates by total Sample

The most interesting thing is that who are paying at the highest tax rate,

most of them think that tax rate is equally justified and who pay at low

rates they think its not equally justified. So actually Bangladesh Income

tax system is not considering the canon of equality defined by

economist Adam Smith. Among the all responses 45% teachers think its

justified and others think not justified (Graph- 12). Businessmen and privateservice holders perception about the justification is almost same. 100%

businessmen think tax rate is not equally justified, where 95% private

service holders think as not justified (Graph-13-15). But 20% government

service holders think that tax rate is equally justified and 70% think not

equally justified (Graph-14).

The overall taxation system is so so familiar to most of the respondents

as 61% is familiar with it, 21% knows very few about it and 18% is

totally unfamiliar with it (Graph-16).

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Taxation System Familiarity by Total Sample

Familiar

61%

Unfamiliar

18%

Very Few

Familiarity21%

Graph-16: Taxation System Familiarity by Total Sample

So, it can be said that Bangladesh taxation system is about to meet the

canon of certainty, that every body should know about the taxation

system, defined by Adam Smith. Among all 50% teachers, 50%

businessmen, 70% government service holders and 75% private service

holders have a clear understanding about the taxation system. On the

other hand 15% teachers, 30% businessmen, 25% government service

holders and 15% private service holders know very few about it where

35% teachers, 20% businessmen, 5% government service holders and

10% private service holders dont know about the system at all (Graph- 17,

18, 19, 20). This shows that teachers and businessmens understanding

about the taxation system is comparatively less than the government

and private service holders.

Perception about the taxation system is mixed and identical (Graph- 21- 25).

Most of the respondents think that taxation system is problematic,

where most of the businessmen think that, then government and private

service holders and then the teachers.

Table- 1: Perception about the taxation system

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Perceptions Teachers Businessmen

Government Service

holder

Private Service

holder

Tot

al

Efficient 1 0 1 0 2

Friendly 1 0 1 1 3

Problematic 8 18 14 14 54

Effective 0 10 1 0 11

Unfriendly 10 1 13 14 38

No Problem 0 0 0 0 0

Complex 12 12 12 12 48

Easy 0 0 1 1 2No

comment 2 2 0 0 4

Sources: A survey conducted for this research in July, 2010

Perception of Taxation System by Total Sample

2 3

54

11

38

0

48

2

4

0

10

20

30

40

50

60

1

Perspectives

Responses

Efficient

Friendly

Problematic

Effective

Unfriendly

No Problem

Complex

EasyNo comment

Graph-21: Perception of Taxation System by Total Sample

The second most perception is that the taxation system is very complex,

where teachers, businessmen, government and private service holders

have equally rated perception. Very few businessmen and government

service holders think taxation system is effective for the economy, but

no teachers and private service holders think that it is effective. The

third most rated perception is unfriendly. Most of the respondents think

that the taxation system is not user friendly. Different types of problem

they face, when they entered into the system. Most problem faced as

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unfriendly system by the private and government service holders and

then the teachers. Here the businessmens perception is not identical.

Very few have, who think taxation system is friendly, efficient and easy,

but they are less than 1% of total population. 1% teachers and

businessmen didnt do any comment.

Income tax law defined that tax is a willful contribution, but 80% of total

population think, paying tax in Bangladesh is not a willful contribution, it

is one kind of pressure to them (Graph-36).

Thinking on Paying Tax by Total Population

Willful contribution/

Not Pressure

20%

Not willful

contribution/

Pressure

80%

Graph-36: Thinking on Paying Tax by Total Population

In respect to this tax is a huge burden to 46% population, where 45%

teachers, 60% businessmen, 45% government service holders and 35%

private service holders think tax is a huge burden to them (Graph- 26-30). It

mainly shows that the businessmen feel much burden to pay tax than

others.

As I found earlier the taxation system is problematic and unfriendly, themost of the times the tax payers face a various types of problems to pay

tax (Graph 31-35).

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Problems face to pay tax, total population

53

24

47

33

14

41

37

52

33

7

0

10

20

30

40

50

60

Problems

Respondents

Time Lose

Unfriendly

Inattention of authority

Documentation

Big line

Helplessness

Complexity

Harassment

Corrupted System

None

Graph-31: Problems face to pay tax, total population

The first most faced problem is tome lose, more than 66% people face a

serious time lose to pay. Some times they loosed a entire day or

sometimes a week even. Among all the businessmen face this problem

most then the private service holders, then government service holders

and teachers. The second most problem is unnecessary harassment by

the authority, 65% respondents has been harassed during paying tax,

among all mostly harassed population is private service holders and

businessmen. More than 58% population faced the inattention of the

authority. Some times they ware waiting for several hours, but the

authority didnt pay attention to them. This time also businessmen faced

this problem most. In this situation the tax payers feel helpless, and

dont get any help from anybody there. More than 50% of total

population face helplessness during pay tax, where government service

holders and businessmen face this most. Then the most rated problem is

complexity of the system. Around 50% respondents of all category ofsample faced the complexity if law and the system.

Corruption is a very familiar term in Bangladesh, specially in the

government offices. To get earlier services and avoid harassment tax

payers sometimes have to pay bribe to the authoritative officials and

peons. More than 41% of total population have to give bribe to pay

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income tax and get return. Among all specially the businessmen faced

most corruption in the system.

Table- 2: Problems face to pay tax

Faced Problems

Teacher

s

Businessm

en

Governmen

t Service

holder

Private

Service

holder

Tota

l

Time Lose 10 16 13 14 53

Unfriendly 9 7 6 2 24Inattentio

n of

authority 9 14 12 12 47

Documentation 11 11 5 6 33

Big line 5 7 1 1 14

Helplessness 9 11 14 7 41

Complexity 8 12 9 8 37

Harassment 10 13 12 17 52Corrupted

System 9 11 7 6 33

None 2 1 1 3 7Sources: A survey conducted for this research in July, 2010

Same as corrupted system 41% of the population faced problems in

documentation. Although they have proper documentation, the faced

the rejection by the authority. The businessmen and teachers most face

that documentation is a major problem. Among all population 33% faced

unfriendly system and about 9% of total population did not do any

comment and the majority ware private service holders and teachers.

In most cases, Tax payers want to escape their tax liability as they tried

to find out the maximum way of tax exemption, so sometimes they tried

to collect documents in a wrong way, which may cause of tax

exemption. In this study maximum think that people have the intention

to escape the tax liability and the rate is 96% (Graph- 41).

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Intention to escape tax liability

Yes

96%

No

4%

Graph-41: Intention to escape tax liability

There have a several reasons behind this intention, which are identical

in Table-3.

Table-3: Reasons to escape the tax liabilities.

Reasons

Teacher

s

Businessme

n

Government

Service

holder

Private

Service

holder TotalLack of

awareness 13 10 10 11 44Lack of social

benefit 16 15 11 7 49Complexity of

Law 8 12 9 10 39

Huge burden 8 9 10 5 32Having bribe

money 7 15 11 12 45Official

Harassment 14 11 17 14 56

Illegal Income 10 17 15 13 55Bureaucratic

policy 5 5 5 6 21

No Comment 0 1 0 0 1

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Sources: A survey conducted for this research in July, 2010

Official harassment is the top most reason of escaping the tax liability,

total 70% of the population rated this. As their perspective, due to

probability of official harassment most of the people do not pay tax, who

are eligible. Illegal income is the second most rated, about 70%,

specially by the businessmen and government service holders. They

think people who have illegal income, if they went to pay tax, they can

be identified as illegal earner. Then the lack of social benefit is rated

most, more than 61%, almost equally rated. Everybody think that, their

tax is increasing governments revenue, but no improvement in

governance and citizen facilities. So, if they pay tax it would be usedproperly and also in return they will not get anything except harassment

by the authority. Tax is a contribution to the government to operate the

country. One is paying his or her a part of income, so if he or she have

to give bribe, it is unacceptable to the tax payer. But in our revenue

governance they face this unacceptable situation. Most then think not to

pay tax. 55% of all population and more than 65% teachers think that

people is not aware about paying tax, about its necessity and

importance, which cause escaping the tax liability. Almost 50%

respondents think Bangladesh income tax law is very complex. To avoid

complexity they have to do, what the tax authority wish or not to pay

tax. So, in most cases they do not pay tax as long as it is not a

necessity. About 40% tax payers think, tax and unjustified tax rate is a

huge burden to the people, among the 40% tax payers most of them are

government service holders. There are 26%, who think people escape

tax liability due to problematic bureaucratic policy. (Graph 42-46)

To find the main obligation of tax revenue generation, considering all

views I found the individual values and the taxation system. Most of the

respondents think that the taxation system is the main obligation of

generation income tax revenue, about 55%. Other 32% think individual

HSH 24


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value is the main obligation behind that, and 13% of total population is

fully neutral to make recommend the obligation that I found (Graph- 47).

Obligations of Tax Revenue

Individual

Value

33%

No comment

13%

Taxation

System

54%

Graph-47: Obligations of Tax Revenue

Overall the taxation system is not efficient, depending on the majority

dont agree that taxation system of Bangladesh is efficient, then the

second majority neutrally agree considering on the execution of the

governance. 10% among all think taxation system is efficient, 11%didnt do any comment and 6% strongly disagree on this comment

(Graph- 48).

System Efficiency

11%

6%

39%

4%

10% 0%

No comment

Strongly Disagree

Do not agree

Moderately Agree

Agree

Strongly Agree

Graph-48: System Efficiency

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[All the related charts and graphs shown in the Appendix-2, which are

discussed above mentioning the graph no.]

4. Conclusion

In the end it can be concluded that, this research has found a lots of

significant issues that is directly against the revenue generation.

Indebtedness of income tax is a growing problem, which can results a

significant amount of revenue losses every year in Bangladesh.

Bangladesh is a country with little over 140 million population; however,

little over one percent of the population pays their taxes [10]. Moreover,

this population has no adequate tax education. As a result, these

taxpayers are not aware of the moral and legal aspects of payment of

taxes that requires running an independent government and sustaining

development efforts. As a result tax payers do not comply with tax laws,

especially, income tax law that causes substantial amount of revenue

losses in Bangladesh. Relying on the out comes of the survey,

intentionally conducted in this study of this thesis identified the causes

of indebtedness from Bangladesh point of view and then categorized

then into main two parts, one is centralized and another is

decentralized. The centralized one is namely; Individual Value and TheTaxation System and the decentralized one are namely; Official

harassment, Illegal income, lack of social benefit, complexity of law,

huge burden, bureaucratic policy and other reasons.

Obviously, the results of this research may help the policy makers, that

how much changes should be included in crafting tax regulations and

effectiveness of the Tax Administration in their practice.

In Bangladesh perspective, since it is the one of very few and one way

concentration on the issue of indebtedness, I hope that this thesis

contains the groundwork of further research, which may find useful tools

to Bangladesh Tax Administration for designing effective policy

measures or tax regulations considering the probable solutions of the

problem in the long run.

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No study has been done to measure the effect of democratic

environment on the revenue administration and governance for

Bangladesh; however it could be inferred that the sudden increase was

due to the result of a transition towards good governance and major

extension of income tax department. The analysis of revenue structure

of Bangladesh shows that direct taxes contribute the lions share in the

overall revenue earnings. In other words, income taxes are still one of

the primary sources of generating internal resources for Bangladesh.

However, for doing this research we used our best analysis and learned

knowledge. The work has undoubtedly simulated the practicing of

brainstorming for the members to a never-before-imagined extent. We

acknowledge that we tried to make the research as full proof but due to

a short sample, we can not recommend it is full proof and also

recommend for require further modification as we believe that

research is a never ending process.

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5.1 Appendix-1Survey Form

Dear Sir,

We are doing a research on the perceptive of the tax payers on indebtedness

of income tax system in Bangladesh. We are very hopeful for your kind

cooperation towards completing the research. (As your understanding indebtedness in

the easy way is the obligations of tax system)

1. Are you regular tax payer?

2. Your current age? (Such as 30yr)

3. Your gender?

4. What is your residential location or tax paying zone (location)? ( Present)

5. What is your home district?

6. How many years you are paying tax?

7. Do you know the existing tax rates?

If yes,

8. What is your current tax rate?

HSH

Annual income Rate (%)

165000- 440000 10%

440001- 765000 15%

765001- 1140000 20%

More than 114000 25%

28

Yes No

1-5 years

10-15 years

5-10 years

15-20 years

More than 20

years

Yes No

10%

15%

20%

25%

None

Male Female

If no


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9. Are you convinced with your tax rate you are paying?

10. Is the tax rates are equally justified?

11. Do you familiar with the taxation system?

12. Can you calculate taxable income by yourself?

13. What do you think about Bangladesh taxation system?

(Can be more than one answer)

14. Do you think paying tax is a huge burden for you?

15. Do you think tax authority is cooperative?

16. If no, what types of problem you face to pay tax?


HSH

Yes No

Yes No Very few

Yes No

29

Time Lose

Documentation

Complexity

Corrupted System

Unfriendly

Big line

Harassment

Other(specify)_______________________________

Efficient

Effective

Complex

Other(specify) ______________________________________________

Yes No

Yes No

Yes No

Friendly

Unfriendly

No Comment

Problematic

No Problem

Easy

Inattention of authority

Helplessness

None


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17. Do you think tax payers pay tax as willful contribution?

18. If not, is it a pressure?

19. What do you think that people have the intention to escape the tax liability?

20. Why people have the intention to escape the tax liability?


21.What is the main reason of this obligation?

22. Overall the Bangladeshi taxation system is efficient?

HSH

1.No

comment

2.Strongly

Disagree

3.Do not

agree

4.Moderately

Agree

5.Agree

6.Strongly Agree

30

Yes No

Yes No

Lack of awareness

Lack of social benefit

Complexity of Law

Huge burden

Having bribe

money

Official

Harassment

Illegal Income

Bureaucratic policy

No Comment

Other(specify)________________________

Yes No

Thank you very much for your cooperation

Individual Value Taxation System No comment


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Collected survey data are summarized in the Tables 1(a) 5(a), as it is used for empirical

test and graphical representation.

Table- 1(a) Data summary on convinced rate with tax rate

(Sample size= 80)

Category Convinced Not Convinced No Comment

Teachers 10 10

Businessmen 11 9

Government Service holder 12 7 1

Private Service holder 11 9

Total 44 35 1

Table- 1(b) Data summary on justification of tax rate

(Sample size= 80)

Category Justified Not Justified No comment

Teachers 9 11

Businessmen 0 20

Government Service holder 4 14 2


Total 14 64 2

Table- 2(a) Data summary on familiarity of taxation system

(Sample size= 80)

Category Familiar UnfamiliarVery Few

Familiarity

Teachers 10 7 3

Businessmen 10 4 6Government Serviceholder 14 1 5

Private Service holder 15 2 3

Total 49 14 17

Table- 2(b) Data summary on thinking of taxation system(Sample size= 80)

IndividualThoughts Teachers

Businessmen

GovernmentServiceholder

PrivateServiceholder Total

Efficient 1 0 1 0 2

Friendly 1 0 1 1 3

Problematic 8 18 14 14 54

Effective 0 10 1 0 11

Unfriendly 10 1 13 14 38

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No Problem 0 0 0 0

Complex 12 12 12 12 48

Easy 0 0 1 1 2

No comment 2 2 0 0 4

Table- 3(a) Data summary on liability of tax

(Sample size= 80)

Category Huge Not Huge

Teachers 9 11

Businessmen 12 8Government Serviceholder 9 11


Total 37 43

Table- 3(b) Data summary on thinking on tax payment

(Sample size= 80)

CategoryWillful contribution/

Not PressureNot willful contribution/

Pressure

Teachers 3 17

Businessmen 4 16Government Serviceholder 4 16

Private Service holder 5 15Total 16 64

Table- 4(a) Data summary on problems to pay tax

(Sample size= 80)

Problems TeachersBusinessme

n

GovernmentServiceHolder


Time Lose 10 16 13 14 53Unfriendly 9 7 6 2 24Inattention ofauthority 9 14 12 12 47

Documentation 11 11 5 6 33

Big line 5 7 1 1 14

Helplessness 9 11 14 7 41

Complexity 8 12 9 8 37

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Harassment 10 13 12 17 52

Corrupted System 9 11 7 6 33

None 2 1 1 3 7

Table- 5(a) Data summary on Reasons of Escaping tax liability

(Sample size= 80)

ReasonsTeacher

sBusinessm

en

GovernmentServiceholder


Lack of awareness 13 10 10 11 44Lack of socialbenefit 16 15 11 7 49

Complexity of Law 8 12 9 10 39

Huge burden 8 9 10 5 32Having bribe money 7 15 11 12 45

Official Harassment 14 11 17 14 56

Illegal Income 10 17 15 13 55

Bureaucratic policy 5 5 5 6 21

No Comment 0 1 0 0 1

Table- 5(a) Data summary on obligations of tax revenue

(Sample size= 80)

Category Individual ValueTaxationSystem No comment

Teachers 6 10 4

Businessmen 6 10 4Government Serviceholder 6 12 2

Private Service holder 8 12 0

Total 26 44 10

Table- 5(a) Data summary on efficiency of taxation system

(Sample size= 80)

CategoryNo

commentStronglyDisagree

Do notagree

ModeratelyAgree

AgreeStrongly

Agree

Teachers 3 2 8 6 1 0

Businessmen 3 1 9 5 2 0GovernmentService

1 1 7 8 3 0

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holderPrivateService holder 2 1 7 8 2 0

Total 9 5 31 27 8 0

5.2 Appendix-2Graphs and Charts

Teacher

25%

Businessmen

25%

Private

Service

holder

25%

Government

Service

holder

25%

Disaggrigationof total sample

Graph 1: Dis-aggregation of Sample

25-30

15%

31-35

18%

36-40

22%

41-45

15%

51-55

13%

56-60

5%

Above 60

3%

46-50

9%

25-30

31-35

36-40

41-45

46-50

51-55

56-60

Above 60

Graph-2: Age group of total sample

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Gender of total Sample

Male

76%

Female

24%

MaleFemale

Graph-3: Gender of the total sample

29%

36%

19%

10%

6%

01 to 05

6 to 10

11 to 15

16 to 20

21 to 25

Graph-4: Tax paying years

Highest Tax Rate

55%

18.75% 15%11.25%

0%

10%

20%

30%

40%

50%60%

10% Tax 15% Tax 20%Tax 25% Tax

Tax Rate Bases

No.ofResponde

nts

(%)

Graph-5: Highest Tax Rate

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Convinced with the tax rate by the teachers

Convinced

50%

Not Convinced

50%

Convinced

Not Convinced

No Comment

Graph-7: Convinced with the tax rate by the teachers

Convinced with the tax rate by the Businessmen

Convinced

55%

Not Convinced

45%

Convinced

Not Convinced

Graph-8: Convinced with the tax rate by the Businessmen

Convinced with the tax rate by the Govt. service holders

Convinced

60%

Not Convinced

35%

No Comment

5%

Convinced

Not Convinced

No Comment

Graph-9: Convinced with the tax rate by the Govt. service holders

Convinced with the tax rate by the Private service holders

Convinced

55%

Not Convinced

45% Convinced

Not Convinced

Graph-10: Convinced with the tax rate by the Private Service holders

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Justification of Tax Rate by Teachers

Justified

45%

Not Justified55%

Graph-12: Justification of Tax Rate by Teachers

Justification of Tax Rate by Businessmen

Justified

0%

Not Justified

100%

Graph-13: Justification of Tax Rate by Businessmen

Justification of Tax Rate by Govt. Service holders

Justified

20%

No comment

10%

Not Justified

70%

Graph-14: Justification of Tax Rate by Govt. Service holders

Justification of Tax Rate by Private Service holders

Justified

5%

Not Justified

95%

Graph-15: Justification of Tax Rate by Private Service holders

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Taxation System Familiarity by Teachers

Familiar

50%

Unfamiliar

35%

Very Few Familiarity

15%

Graph-17: Taxation System Familiarity by Teachers

Taxation System Familiarity by Businessmen

Familiar50%

Unfamiliar

20%


30%

Graph-18: Taxation System Familiarity by Businessmen

Taxation System Familiarity by Govt. Service holder

Familiar

70%

Unfamiliar

5%


25%

Graph-19: Taxation System Familiarity by Govt. Service holder

Taxation System Familiarity by Private Service holders

Familiar

75%

Unfamiliar

10%


15%

Graph-20: Taxation System Familiarity by Private Service holders

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Perception of Taxation by Teachers

1 1

8

0

10

0

12

0 2

0

2

4

68

10

12

14

Efficient

Friendly

Problem

atic

Effective

Unfriendly

NoProble

m

Complex

Easy

Nocomment

Perceptions

R

esponses

Graph-22: Perception of Taxation by Teachers

Perception of Taxation by Businessmen

0 0

18

10

1 0

12

0 20510

1520

Efficient

Friendly

Probl

...

Effective

Unfriendly

NoPr...

Complex

Easy

Noc...

Perceptions

Respo

nses

Graph-23: Perception of Taxation by Businessmen

Perception of Taxation by Govt. Service holders

1 1

14

1

13

0

12

10

0

5

10

15

Efficient Friendly Problematic Effective Unfriendly No Problem Complex Easy No comment

Perceptions

Respon

ses

Graph-24: Perception of Taxation by Govt. Service holders

Perception of Taxation by Private Service holders

0 1

14

0

14

0

12

1 00246810

121416

Efficient

Friendly

Proble

matic

Effective

Unfriendly

NoProble

m

Complex

Easy

Nocom

ment

Perceptions

Respon

ses

Graph-25

HSH 39


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Graph-25: Perception of Taxation by Private Service holders

Tax Burden for total sample

Huge

46%Not Huge

54%

Graph-26: Tax Burden for total sample

Tax Burden for Teachers

Huge

45%Not Huge

55%

Graph-27: Tax Burden for Teachers

Tax Burden for Businessmen

Huge

60%

Not Huge

40%

Graph-28: Tax Burden for Businessmen

Tax Burden for Govt. Service holder

Huge

45%Not Huge

55%

Graph-29: Tax Burden for Govt. Service holder

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Tax Burden for Private Service holder

Huge

35%

Not Huge

65%

Graph-30: Tax Burden for Private Service holder

Problems face to pay tax, teachers

10 9 911

5

9 810 9

2

02468

1012

TimeLos

e

Unfriend

ly

Inattentionofa.

..

Docum

entatio

n

Biglin

e

Helplessnes

s

Com

plexity

Harassme

nt

Corrupted

S...

None

Respondents

Graph-32: Problems face to pay tax, teachers

Problems face to pay tax, Businessmen

16

7

1411

711 12

1311

1

0

5

10

15

20

TimeLo

se

Unfriendly

Inattentionof

...

Documentatio

n

Big

line

Helplessness

Complexity

Harassment

Corrupted

...

None

R

espondents

Graph-33: Problems face to pay tax, Businessmen

Problems face to pay tax, Govt. Service holders

13

6

12

5

1

14

912

7

1024

68

10121416

Tim

eLo

se

Unfriendly

Inattentionof

a...

Documentatio

n

Big

line

Helplessness

Complexity

Harassment

Corrupted

S...

None

Res

pondents

Graph-34: Problems face to pay tax, Govt. Service holders

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Problems face to pay tax, Private Service holders

14

2

12

6

1

7 8

17

63

0

2468

1012141618

Tim

eLo

se

Unf

riend

ly

Inat

tentio

nof

autho

...

Doc

umen

tatio

n

Big

line

Hel

ples

snes

s

Com

plex

ity

Har

assm

ent

Cor

rupt

edSys

tem

Non

e

Respondent

Graph-35: Problems face to pay tax, Private Service holders

Thinking on Paying Tax by TeachersWillful

contribution/ Not

Pressure

15%

Not willful

contribution/

Pressure

85%

Graph-37: Thinking on Paying Tax by Teachers

Thinking on Paying Tax by Businessmen

Willful

contribution/ Not

Pressure

20%

Not willful

contribution/

Pressure

80%

Graph-38: Thinking on Paying Tax by Businessmen

Thinking on Paying Tax by Govt. Service holders

Willful

contribution/ Not

Pressure

20%Not willfulcontribution/

Pressure

80%

Graph-39: Thinking on Paying Tax by Govt. Service holders

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Thinking on Paying Tax by Private Service holders

Willful

contribution/ Not

Pressure

25%Not willful

contribution/

Pressure

75%

Graph-40: Thinking on Paying Tax by Private Service holders

Reasons of Evasion Evaluated by Teachers

1316

8 8 7

1410

5

05

10

15

20

Lack

ofa

wa...

Lack

ofs

ocia

...

Complexity

..

Huge

burden

Havingbrib

...

OfficialHar...

IllegalIncom

e

Bureaucratic.

..

Respondents

Graph-43: Reasons of Evasion Evaluated by Teachers

Reasons of Evasion Evaluated by Businessmen

10

1512

9

15

11

17

5

02468

1012141618

Lackofawarene

Lackofsocialben.

ComplexityofL

Hugeburde

Havingbribemon

OfficialHarassm

IllegalIncom

Bureaucraticpoli

Responde

Graph-44: Reasons of Evasion Evaluated by Businessmen

HSH 43


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Reasons of Evasion Evaluated by Govt. Service Holders

10 11 9 1011

1715

5

0246

81012141618

Lack

ofa

war

ene

Lack

ofs

ocialb

en

Com

plexity

ofL

a

Hug

ebu

rde

Hav

ingbrib

em

on

Offi

cial

Haras

sme

Illegal

Incom

Bur

eauc

ratic

poli

Res

ponde

Graph-45: Reasons of Evasion Evaluated by Govt. Service Holders

Reasons of Evasion Evaluated by Private Service Holders

11

7

10

5

12 14 13

6

02468

10121416

Lack

ofa

war

enes

Lack

ofs

ocialb

enef

Compl

exity

ofL

a

Hug

eburd

en

Havingbribem

one

Official

Harassm

en

IllegalInc

ome

Bureau

craticpolicy

Responden

Graph-46: Reasons of Evasion Evaluated by Private Service Holders

[Here have all the graphs except those, what are already used in the

main body]

6. References

1. The Annual Statistical Report- 2000-2001, NBR, Dhaka, Bangladesh.

2. Dr. A K M Matiur Rahman (2007), Noncompliance of Income Tax Laws

in Bangladesh: Challenges and Remedies, 13, 32, 38, 77, 79, 71-73,

100.

3. Mustafa Tariq Hossain, Shafket Prokshoni, Dhaka, Bangladesh (1997),

Direct Taxes in Bangladesh.

4. http://www.indianetzone.com/43/economy_maurya_empire.htm

HSH 44
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45/45


5. Md. Syedur Rahman, Parvez Akhter Linkon (2006), Direct Taxes in

Bangladesh, 2 & 3.

6. Government of Bangladesh (1984), The Income Tax Manual, Part-1,

The income Tax Ordinance- 1984.

7. http://www.indexmundi.com/bangladesh/population_below_poverty_li

ne.html

8. Tapan K. Sarker (2003) ,Improving Tax Compliance in Developing

Countries via Self-Assessment Systems - What Could Bangladesh

Learn from Japan?, Internet Addition, 1-5.

9. Tapan K Sarker (2006), Incidence of income taxation in

Bangladesh, Internet Addition.

10. The statistical report-2004, The National Board of Revenue,

Dhaka, Bangladesh.

11. Nikhil Chandra Shil, Mohammad Zakaria Masud, Mohammad

Faridul Alam (2007), Bangladesh Income Tax: Theory and Practice,

1.

12. Muhammad Anwarul Islam, The Bangladesh Development Studies

(1979), Tax Effort in Bangladesh: Some Empirical Observation,

Volume VII, No. 1.13. Nuimuddin Chowdhury, The Bangladesh Development

Studies(September 1988), Income Tax Incidence in Bangladesh,

1980-84, Volume XVI, No.3.
http://www.indexmundi.com/bangladesh/population_below_poverty_line.htmlhttp://www.indexmundi.com/bangladesh/population_below_poverty_line.htmlhttp://www.indexmundi.com/bangladesh/population_below_poverty_line.htmlhttp://www.indexmundi.com/bangladesh/population_below_poverty_line.htmlhttp://www.indexmundi.com/bangladesh/population_below_poverty_line.html

Documents

Indebtedness of Income Tax System