Higher tax rate for high-income earners planned in FY25

To increase tax revenues from high-income individuals, the National Board of Revenue (NBR) is considering a return to the pre-coronavirus maximum rate of 30%.looked at add an additional Tk10,000 crore to the state coffers.

The top individual income tax rate was reduced from 30% to 25% in the financial year 2020-21 (FY21) to provide some relief to people and the economy from the shocking pandemic.

The NBR Income Tax Department is working on a proposal for a 5 percentage point increase in the top marginal income tax rate for the upcoming FY25 budget, which will be announced in June, tax officials said on condition of anonymity.

The NBR currently collects personal income tax in five installments.

Beyond the tax-free income threshold of Tk3.5 lakh, the rates are structured as follows: 5% on income up to Tk4.5 lakh, 10% on income up to Tk7.5 lakh, 15% on income up to Tk11.5 lakh, 20% on income up to Tk16.5 lakh and 25% on any income above Tk16.5 lakh.

A senior NBR official, seeking anonymity, told TBS: “We are thinking of increasing the rate for the highest slab, which was reduced when the pandemic hit the country in 2020.” However, he did not reveal the specific rate.

Experts hoped the move would bring some tractionoutcome, but warned that influential groups, especially those who pay significant taxes and are able to influence NBR policies, could oppose this proposal.

Before the pandemic, in FY2020, the highest tax bracket for individual taxpayers was 30%, while the lowest was 10%.

In response to the income challenges posed by the pandemic, the government has opted to reduce both the lowest and highest tax brackets by five percentage points in FY21, providing relief to taxpayers.

“Discussions are underway to bring back the top income tax to pre-Covid levels,” said another NBR official.

According to NBR data, Tk72,311 crore was collected as income tax and travel tax in the first eight months (July-February) of FY24. The collection target for the entire financial year is around Rs 1,46,000 crore.

In FY23, the NBR collected over Rs 1,13,000 crore as income tax and travel tax against a target of Tk1,22,100 crore.

Under the terms of the $4.7 billion IMF loan package, the NBR is required to increase the tax-GDP ratio by 0.5 percentage points in the current fiscal year. An earlier forecast by local think tank Policy Research Institute (PRI) suggests that the revenue council will have to collect an additional Tk2.34 lakh crore to raise Bangladesh’s tax-GDP ratio from 7.8% to 9.5 by June 2026 %. , the think tank calculates, to achieve the target, the NBR needs to earn Tk4.10 lakh crore in tax revenue in FY24, Tk4.84 lakh crore in FY25 and Tk5.80 lakh crore in FY26.

Nearly 40% of NBR’s revenue comes from personal and corporate taxes.

The PRI believes that the goal, while challenging, is achievable if policy reforms are implemented within the timeframe agreed with the IMF, whose review missions routinely visit tax and finance officials to take stock of the implementation status of the agreed reforms.

Both optimism and caution

But like the tax-GDP ratio, the top tax rate on individual income in Bangladesh is lower than in most countries. In India it is 42.7%, in Pakistan and Sri Lanka 35%. The highest rate cap in Singapore is 22%, although rich countries have higher rate caps, such as 37% in the US and 45% in the UK.

Experts have differing views on the NBR’s plan. Former NBR member Dr Syed Md Aminul Karim welcomed the NBR’s plan to increase the tax rate for high income earners.

The NBR increased the top tax slab from 25% to 30% in FY12. Aminul Karim was in charge of tax policy at the time.

He told TBS: “The rate increase would be a very positive step. The tax system should be progressive, rather than regressive. If the rate in the top bracket is increased, those who have more income will have to pay more tax, which makes sense. .”

A field official from a tax zone in Dhaka also termed the move as logical as it would not harm the lower-income taxpayer group.

Dr. However, Ahsan H Mansur, executive director of the Policy Research Institute, said tax rates in Bangladesh were already high and so it was unreasonable to further burden individual taxpayers.

“While the International Monetary Fund (IMF) calls for increased tax collection, it favors an increase in the minimum rate rather than higher tax brackets,” he added.

Dr. Muhammad Abdul Mazid, former chairman of the NBR, also opposed the idea of ​​only increasing tax rates for existing taxpayers without expanding the tax base at the same time.

He said: “The NBR is not achieving the expected growth in revenue from new taxpayers. It is unreasonable to further burden existing taxpayers. Such a move could deter individuals from entering the tax net.”

Currently, the country has more than one crore Tax Identification Number (TIN) holders. Last year, around 36 lakhs of them filed returns, though some filed zero returns, exempted from tax liability.

Taxpayers are allowed to deduct certain expenses from their income, including medical treatment and house rent, up to a maximum of Tk4.5 lakh or one-third of total income, whichever is lower. In addition, taxpayers receive tax credits on government-approved investments.

Can a 5% increase fetch an additional Tk10,000cr?

Former NBR member Aminul Karim said, “When we increased the rate from 25% to 30% in FY12, our projections indicated an additional tax revenue of around Rs 5,000 crore. Now this is estimated at at least Rs 10,000 crore.”

The precise number of taxpayers in the top bracket, or those subject to the 25% rate, remains unconfirmed.

NBR sources indicated a figure of around Rs 17 lakh for FY22, but no confirmation was received from the relevant department of the NBR.

Exact figures on the share of total taxes collected from individual taxpayers were also not available.

Nevertheless, NBR’s annual report for FY 2020 shows that almost 40% of tax revenue comes from the non-corporate sector, which includes various forms of businesses and sectors beyond individual taxpayers.

Power play

Stakeholders expect significant resistance from influential groups, especially those who pay significant taxes and can influence NBR policies, to the imposition of additional taxes.

A senior official of a field-level tax office, speaking on condition of anonymity, expressed doubts over whether the NBR initiative would ultimately materialize as a budget proposal or whether it would ultimately face resistance from influential quarters.

Former NBR member Syed Md Aminul Karim also foresees potential pressure this quarters.