TAX EVASION & AVOIDANCE -

A REAL PROBLEM FOR BANGLADESH

INTRODUCTION:
Tax evasion and avoidance are both phenomena that are probably as old as taxation itself.
Wherever and whenever authorities decide to levy taxes, individuals and firms try to avoid
paying them. Though this problem has always been present, it becomes more pressing in the
course of globalization as this process extends the range of opportunities to dodge taxation while
simultaneously reducing the risk of being detected. Developing and emerging countries like
Bangladesh are particularly vulnerable to tax evasion and avoidance activities of individual
taxpayers and corporations. While tax revenues in OECD-countries are almost 35 per cent of
GDP ,in case of Bangladesh it is only around 10%.This can be considered one of the primary
reasons for large differences in the ability to mobilize own resources between developed and
developing countries.
Tax evasion and tax avoidance is a great problem in our country. In Bangladesh there are many
individual taxpayers and corporations who are evading or avoiding tax. As a result governments
developments activities are hampered. So, we should know about the tax evasion and tax
avoidance and thereby its preventives measures.

For development of a country government needs to create infrastructure and invest in various
sectors. For this activities government needs founds and tax revenue is the main source for the
purpose. But due to tax evasion and tax avoidance governments revenue generation is not
sufficient. So, it is very much important for us to stop tax evasion and avoidance for accelerating
economic development.

Objectives of Taxation:

Taxation is the major source of revenue for the government. In order to accelerate economic
development as well as to ensure the defense, administration, social welfare and other
development activities government needs huge amount of resources. The main objectives of tax
are mentioned below:

Tax is a major source of revenue for the government. In Bangladesh tax revenue accounts for
more than 80 percent of the total government revenue.

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 One of the main objectives of taxation is to reduce inequalities in income and wealth.

In order to ensure the economic growth, the tax system must be so designed as to raise the rates
of savings and investments.

The government not only raises revenue through taxation but it also imposes restriction on the
use of certain goods and services.

In order to protect the local industries from the uneven competition government may provide
tax incentives for poor local industries.

The tax revenue can be used by the government to ensure the economic development of a
country.

Export of products and import activities can be directed in favor of industries through tax
policy.

One of the important objectives of tax is to lead the economy to full employment stage.

Taxation is an important tool to control inflation, push money to the economy, and develop
certain sectors of economy.

So, it can be said that the purpose of tax is not only the collection of revenue, but also to ensure
the economic development and social welfare of the country.

What is tax evasion & tax avoidance?

Definition of Tax Evasion:

Tax evasion may be defined either as the understatement or concealment of taxable object or as
the failure to pay tax in time either by the assessee or his agent. So it is illegal. In case of tax
evasion, tax liability is reduced or tax is not paid at all.
Tax evasion means illegally hiding income or concealing the particulars of income or concealing
particular source of income or manipulating account so as to inflate expenditure and other
outgoings with a view to illegally reduce the burden of taxation. Hence ,tax evasion is illegal.

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Definition of Tax Avoidance:

Tax avoidance is the minimization of tax liability by the tax-payer or his agent by efficient tax
planning. It is possible by fully complying with the tax laws and meeting tax liabilities. Thus tax
avoidance takes the advantages of the loopholes in the existing fiscal laws. The avoider is just
smart taxpayer who exploits loopholes in the tax laws (and related laws) to reduce tax liability.

Effects of Tax Evasion and Avoidance in Economic Development:

Tax Evasion and Avoidance has a great impact in economic development. The effects of tax
evasion and tax avoidance in economic development are as follows:

Tax revenue is used to build the infrastructure, to invest in social security programs, in various
poverty elevation programs. But due to tax evasion and tax avoidance above the development
activities are hampered.

Tax evasion and tax avoidance hamper the social welfare. It obliges the government to borrow
loan that affects the economic development.

Economic growth is co-related with budget. It is natural that higher government`s income
support to do large budget and large budget helps to accelerate economic development of a
country. But due to tax evasion and tax avoidance a lot amount of revenue is not collected. As a
result the government has to shortcut the budget.

In capitalist and mixed economy private sector is supposed to play vital role in investment and
development. But sometimes direct investment by the governments is necessary. Due to tax
evasion and tax avoidance the government cannot supply the expected fund for investment.

The government has to take various plans for economic development. But lack of fund the plan
cannot be implemented. If the people would not evade tax, the government could implement the
plans.

Due to tax evasion and tax avoidance the government cannot ensure the employment
opportunity. Because the government needs fund to create employment opportunity.

It also hampers structural development such as roads, bridges, transportation, industrial

development etc.

Social security cannot be provided fully by the government due to lack of fund. Tax evasion and
tax avoidance is the main obstacle to create sufficient fund.

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 If tax rules are not sufficient to check the tax evasion and avoidance, it may lead to the
development of a culture of evasion. So a vicious cycle of tax evasion may take place.

Tax evaded incomes are used for conspicuous consumption in the form of buying luxurious
goods. As a result honest tax payers find various methods of tax evasion and tax avoidance. So
the stability of the society will be endangered. Such illegal money is also transferred abroad
weakening the economy of the country.

Due to tax evasion and tax avoidance a huge amount of tax revenue is lost. As a result the
government cannot provide basic needs for mass people.

Development expenses fall due to tax evasion and tax avoidance. It affects the distribution
function of wealth of the government and adversely affects the economic development of a
country.

From the above discussion it is clear to us that tax evasion and tax avoidance affect the
economic development of a country severely. Because a large part of the government income is
collected by tax revenue.

Reasons for tax evasion and tax avoidance

There are various reasons for tax evasion and tax avoidance. In order to develop methods and
instruments for fighting tax evasion and avoidance, it is very much important to establish a broad
understanding of the different reasons underlying these problems. These reasons can be divided
in two categories. The first category comprises factors that negatively affect taxpayers
compliance with tax legislation. These factors can be subsumed either contributing to a low
willingness to pay taxes (low tax morale) or to high costs to comply with tax laws. The second
category contains reasons for the low ability of tax administration and fiscal courts to enforce tax
liabilities. These factors can be summarized as resulting from insufficiencies in the
administration and collection of taxes as well as weak capacity in auditing and monitoring tax
payments which limit the possibility to detect and prosecute violators.

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1. Low level of (voluntary) tax compliance
1.1. Low tax morale

Taxpayers willingness to pay taxes differs widely across the world. It cannot be viewed as
simply depending on the tax burden. Rather, empirical research indicates that taxpayers
throughout the world pay more taxes than can be explained by even the highest feasible levels of
auditing, penalties and risk-aversion (Alm et al. 1992, 2007). These high levels of tax
compliance result from the tax morale of society that fosters self-enforcement of tax compliance.
Tax morale is, however, not easy to establish. Especially countries without a deep-rooted
culture and habit of paying taxes find it difficult to establish tax morale. This willingness to
pay of the taxpayer is influenced by the following factors:

Low quality of the service in return for taxes

In general, citizens expect some kind of service or benefit in return for the taxes paid. If the
government fails to provide basic public goods and services or provides them insufficiently,
citizens may not be willing to pay taxes and tax evasion and avoidance will be the consequence

Tax system and perception of fairness

Some studies suggest that high tax rates foster evasion. The intuition is that high tax rates
increase the tax burden and, hence, lower the disposable income of the taxpayer. However, the
level of the tax rate may not be the only factor influencing peoples decision about paying taxes.
In fact, the structure of the overall tax system has an impact as well. If, for example, the tax rate
on corporate profits is relatively low, but individuals are facing a high tax rate on their personal
income, they may perceive their personal tax burden as unfair and choose to declare only a part
of their income. Similarly, large companies can often more easily take advantage of tax
loopholes, thereby contributing to the perceived unfairness of the system. Tax rates and the
overall structure of the tax system, therefore, have a significant effect on the disposition to evade
and avoid taxes.

Low transparency and accountability of public institutions

Lack of transparency and accountability in the use of public funds contributes to public distrust
both with respect to the tax system as well as the government. This, in turn, increases the
willingness to evade taxes.

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 High level of corruption

If due to high levels of corruption, citizens cannot be certain whether their paid taxes are used to
finance public goods and services their willingness to pay suffers and it becomes more likely
that they evade their tax liabilities. A tax-payer might consider evading taxes if the cost of
bribing a tax auditor is lower than the potential benefit from tax evasion.

Lack of rule of law and weak fiscal jurisdiction

Strong fiscal courts are essential to protect taxpayers rights and safeguard them from
arbitrariness. If the legal system does not operate in accordance with the rule of law, citizens
have to fear arbitrariness, discrimination, unequal attendance in court, etc. The lack of rule of law
reduces transparency of public action and fosters distrust among citizens. As a result, citizens
may not be willing to finance the state through taxes, and decide to evade these liabilities.

1.2. High compliance costs

High compliance costs, that are the costs the taxpayer has to bear to gather the necessary
information, fill out tax forms etc, can be an additional reason for tax evasion and avoidance. The
World Banks 2008 World Development Indicator for time to prepare and pay taxes shows
huge differences between countries. This situation led businesses to worry more about the
administrative burden than about the actual tax burden. In such a situation it can be assumed that
compliance costs are very high and the probability of the taxpayer complying with such a great
variety of taxes low. Above all it is the paperwork that has to be mastered to comply with tax
legislation which is deterring firms from paying their taxes appropriately.

2. Weak enforcement of tax laws

While the preceding section discussed the sources for low voluntary compliance and high
regulatory costs of tax compliance, the current section turns to challenges in the enforcement of
tax laws. There exist several circumstances that restrain tax administrations from performing
their functions properly thereby increasing the possibility of tax evasion. Shortfalls in tax
collection procedures as well as weak capacities of tax administrations to detect and prosecute
tax violators are both factors that contribute to a low enforcement of tax legislation.

2.1. Insufficiencies in tax collection

Regarding tax collection, like many developing countries Bangladesh also faces difficulties with
respect to important premises for a well functioning tax administration, especially with respect to
identifying and administering those citizens and firms that are liable to tax payments. Problems
of insufficient capacity may also occur due to the organizational set up of the tax administration
and its relationship to the ministry of finance. Additionally, unclear responsibilities regarding the
collection and administration of specific types of taxes by different institutions can lead to
inefficiencies and tax losses and require a reorganization of the tax administration. Typically, an

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organizational approach according to the functions of tax administrations is considered more
efficient than one following different tax and revenue types. Tax policy directly affects the costs
and the organization of the tax administration. Additionally, the capacities of tax administration
influence the way tax policy is implemented. Thus, both areas tax policy as well as tax
administration have to be taken into consideration when designing successful tax reforms.
Otherwise, the proper functioning of the overall system is affected. For this reason, the tax
system should be aligned to the administrative and legal prerequisites of the country. Qualified,
well trained and motivated tax officials are crucial for the collection of taxes and the
performance of tax administration bodies as a whole. In order to motivate tax officials to work in
accordance with the interests of the government and to reduce their vulnerability to corruption,
attention has to be given to wages and other incentives.

2.2. Weak capacity in detecting and prosecuting inappropriate tax practices

A well-functioning body of tax investigation is essential for the detection and prosecution of
cases of tax fraud. The lack of sufficient capacities in tax administrations reduce the probability
of detection that again influences the decision of a taxpayer as to whether evade or not.
Additionally, the legal frame-work is an important prerequisite for any enforcement activity. For
example, the size and nature of penalties that are incurred after evasion has been detected is
directly connected to the level of tax compliance. Finally, complicated tax legislation and
ongoing changes of the tax code confuse tax administrators and taxpayers alike. This produces
ample opportunity for tax avoidance. Furthermore, it results in tax evasion which is not
intentional, but occurs due to lack of knowledge ignorance. In extreme cases, tax evasion and
avoidance even become inevitable when the tax system becomes too complex and/or
contradictory to follow.

Often, tax evasion and avoidance are by-products of deficient political, economic and social
governance in a country. Especially in these circumstances which are not untypical for many
developing countries any exit strategy away from evasion and avoidance needs to be based on
a profound analysis of the current situation and the types of tax evasion and avoidance used
predominantly.

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Modes of tax evasion and avoidance
1.Tax shelter and tax haven:

The tricky transactions involve shifting of income between taxpayers and tax-indifferent entities
through composite chains of interrelated entities are of this type. The use of offshore bank
accounts in tax haven countries to hide unreported income, which can later be accessed through
credit cards to finance personal consumption at home. For transactions that are clearly outside
the tax law, the only question for tax gap measurement is the ability of NBR to find and identify
them.

2. Legal vagueness:

Often these consist of a series of separate transactions, all of them within the letter of the tax law,
that reduce tax liability, but produce no expectation of pretax economic gain. Tax result depends
on definitions of legal terms which are usually vague. For example, vagueness of the distinction
between business expenses and personal expenses is of much concern for taxpayers and tax
authorities. More generally, any term of tax law, has a vague penumbra, and is a potential source
of tax avoidance (Pasternak and Rico, 2008). These transactions create issues for tax gap
measurement because it is not always clear what true tax liability should be, even when the
terms of the transaction are transparent. Individual tax liability may be legally avoided by
creation of a separate legal entity to which ones property is donated. The separate legal entity is
often a trust, or foundation. Assets are transferred to the welfare foundation or trust so that gains
may be released, or income earned, within this legal entity rather than earned by the original
owner, back to an individual, then for a creator of trust to avoid tax liability.

3.PSI agencies and dodging of customs duty:

Customs duties are the important sources of tax revenue in the developing countries like
Bangladesh. It is often alleged that tax lawyers and chartered accountants help taxpayers
including firms and companies in evading taxes. In the same vein, the C & F agents help in
evasion of customs duties. The importers contend to evade customs duty by under invoicing and
misstatement of quantity and product-description. Under-pricing is used for reduced tax base to
avoid ad valorem import duty. Prevalent misstatement of quantity is often used to avoid specific
duty (Chowdhury, F.L., 2006). Production description is changed match an H.S. Code
commensurate with a lower rate of duty. Pre-shipment Agencies (PSI) like SGS, COTECNA etc.
are employed to prevent evasion of customs duty through under-invoicing and misstatement.
However, in the recent times, allegations have been lodged that PSI agencies have actively
cooperated with the importers in evading customs duties. Authority in Bangladesh has found
COTENCA guilty of complicity with the importers for evasion of customs duties on a huge scale
(Alam, D. 1999).

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4.Underground trafficking:

An importation or exportation of illegal products through unauthorized way. This act is resorted
to for total evasion of taxable revenues as well as for importation of contraband(smuggled goods)
items. A purported trafficker does not have to pay any customs duty since the products are not
routed through an authorized or notified customs port and therefore, not subjected to declaration
and payment of duties and taxes (Chowdhury, F.L., 2006).

5. Elusive VAT and Turnover taxes:

VAT is the most talking and latest issue of the time of modern taxation age. This indirect form of
taxation basically inherits an extended form of turnover or sales taxes. An ultimate consumer
who bears the real burden of this taxation has little scope to evade, but producers or distributors
who collect VAT from the consumers may evade tax by under-reporting the amount of sales
(Islam, R. 1999). In Bangladesh broad-based consumption tax at the overwhelming majority of
consumer products are being collected combining both formsVAT and turnover taxes. Since the
first introduction of VAT in Bangladesh, it has grown not only to exceeding its teenage but also at
stage of exceeding other contributory sectors of tax revenues to government. But the dark side of
this taxation is its most vulnerability of being underreported (Islam, R.1999). Low ethical ground
of the VAT collectors, producers and distributors, is mainly responsible of such dodging in taxes
revenues. In addition to this, corruptions in levy system are another defaulting cause of
underreporting. International borders in this country are inherently lack customs offices or
similar facilities that could effectively control the movement of any goods carried in private
vehicles from one jurisdiction to another. The respective districts and divisional authority simply
lack the manpower and resources to pursue and prosecute every case of sales tax evasion arising
from purchases which do not cross borders other than for major purchases (Sarker and Kitamura,
2002).

6.Dishonesty of tax officials and hissing of paying taxes to respective order:

Sleaze tax officials cooperate the tax payers who intend to evade taxes is an open-secrete matter
in the most developing country like Bangladesh. When they detect an instance of evasion, they
refrain from reporting in return for illegal gratification or bribe. Corruption by tax officials is a
serious problem for the tax administration in a huge number of underdeveloped countries like
Bangladesh (Khan and Senhadji, 2000). Measuring the tax gap resulting from tax administration
traditional and annoyance strategies imposes special challenges; more work needs to be done on
this.

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7.Profit shifting/Capital flight: Typically, subsidiaries of a MNC are treated as separate entities
by tax authorities, i.e. they are liable to taxes in the country where they operate and reside. The
separate entity approach is considered as a viable option to avoid double taxation as profits of the
MNCs are taxed only once in the residence country of the subsidiary. However, the approach
can also be applied by the MNCs to minimize the overall corporate tax burden. Multinational
companies (MNCs) dodged paying taxes worth 186 million pound sterling and took away over
600 million pound sterling in capital illicitly from Bangladesh during 2005-07 period, according
a study report prepared by an adviser to the US Congress. MNCs have subsidiaries in developed
and developing countries and it is easier for them to manipulate price of commodities within
their own subsidiaries for tax evasion or Capital flight purpose. If the duty rate is low in
Bangladesh, MNCs increase the price of imported goods to fly capital from the country and if the
rate is higher they lower the price to dodge tax. Bangladesh has neither expertise nor resources to
fight back such malpractice .Bangladesh tax authority should develop a comprehensive trade
database to have a clear understanding of disputed items and prepare itself for any legal
challenge.
If the authority challenges a suspected transaction by a MNC, it may resort to legal course and
the National Board of Revenue (NBR) must have the capacity to back its claims.
The Bangladesh government should voice its concern in the international arena to make the
MNCs accountable and more transparent in their accounting disclosure.
The MNCs maintain consolidated global accounts and do not disclose where they make their
profit and pay their taxes. There should be a global standard under which all the MNCs will
declare how much profit each subsidiary is making and how much tax it is paying. The MNCs
not only manipulate prices of physical products but also distort prices of intangible assets such as
intellectual property rights (IPR), management services and insurance. The MNCs use 'trade
mispricing' in which a subsidiary in one country charges a vastly reduced rate for goods and
services to another subsidiary based elsewhere to minimize tax liability.

Strategies against tax evasion and tax avoidance

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1. Social awareness program: Create awareness among the people and motivate the wealthy
section of the society to pay taxes. Apart from the NBR, it must be ensured that the tax payers
should be free from various complications and harassments in tax offices while coming to pay
taxes. The NBR in alignment with the government concerned department can initiate
motivational campaign in raising consciousness explaining how regular payment of taxes serves
the country and ensures justice in the society. This can be done not only by appropriate NBR
personnel, educational campaigns and by seeking support and co-operation from professionals
like chartered accountants, tax lawyers, etc. A strong fiscal and financial discipline in all the
government departments, agencies or enterprises may increase its legitimacy (Rahman and
Shilpi, 1996). People must encourage regional and other types of co-operation among tax
administrators to reduce the extent of tax evasion by individuals, domestic and transnational
corporations. This may be achieved by arranging frequent meeting, seminars, education program
for taxpayers, exchanging information, etc.

2. Broad band tax net: A wide base and a low rate structure would maximize the tax revenue.
Presumptive tax on professionals such as accountants, lawyers, doctors, engineering and
management consultants, university teachers may be brought to the tax net. Assessments on
coaching center, private university, English medium schools, and private educational institutions
for professional development are still at large from tax net. The fiscal (2011-12) budget failed to
bring them in tax notice. Special turnover tax (not VAT) may be imposed on coaching centers
and private educational institutions including university and English medium schools. Certain tax
administration measures, such as selectively increasing the audit frequency and audit
thoroughness for upper bracket tax payers and for hard to catch individuals, firms or
professionals such as doctors, lawyers, etc., use of cross checking procedures in line with other
social or economic indicators of the assesses may be used to re-fix the presumptive tax pointed
out earlier.

3.Special watch-dog for excise and turnover taxes: It presumes that the business houses and
industrial firms are engaged in tax evasion in a significant scale. The success of government
machinery for revenue collection is largely relied on administering the gamut involves in
collection process, NBR policies and the honesty of the taxpayers. The national budget 2010-11
precludes cigarette, bidi, chanachur, juice, energy drink and M.S products from cottage industries
facilities is an appreciable step but policy formulation is not enough to plug the loopholes of the
perpetrators movements.

4. Reengineering custom duty net: Halting evasion of tax by means of under invoicing, proper
valuation of should be placed at most important custom centers of the country. The present
custom net is too poor to fish many cross borders trade. Tax evasion by multinational companies

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through transfer pricing is a global phenomenon. Revenue people in many countries including
USA, India have been given special power and training to examine extensively the transfer
pricing mechanism of those companies. In this country too, there is possibility of tax
underreporting through this mechanism.

5. Simplified Income Tax system: The present income tax system is too complicated to
understand. Chartered accountants, tax lawyers and related professionals often allegedly are
abusing this complexity. Their dubious roles as middle man help underreporting many income
tax cases. People are likely to go for self assessments are discouraged by the difficult system.
The problem is more acute in a poor economy like ours with high illiteracy and poor record
keeping and accounting habits. The demands placed on administration- very poorly staffed with
poor pay and inadequate logistics support have probably resulted in greater dishonest practices
than would have been the case otherwise. However, the current fiscal policy has proposed to
introduce e-tax filing11, e-tax calculator on NBR web etc.

6. Penalty and Reward: Appropriate design of a penalty rate structure also appears to be anti-
evasive and anti-avoidance. The rate of penalty should be progressively higher with the amount
of tax evaded and must also reflect the current market conditions. At present, the provision of
penalty in the statute books is one sided. The tax payers only to be penalized for an act of
omission or default but there is no corresponding provision to penalize dishonest, inefficient or
unjust tax officials (Chowdhury, R.A., 2008). Moreover, there is no reward for them who pays
taxes regularly and on time. Highest taxpayers or tax payers above a specified bracket are
proposed to be awarded with a tax card providing civilian VIP status in all state programs and
public facilities.

7. Standardization of public utility price: The policy of taxation and user charges for services
provided by nationalized state enterprises, i.e., PDB, WASA, DESA, etc., should be well
formulated. The latter when based on standard marginal pricing would collect more revenue and
would generate less resistance by the tax payers. The result may be low income tax rate and
lesser tax evasion.

8. Updating Anti-evasion Provisions in the ITO, 1984: Income Tax Ordinance 1984 was
equipped supposedly adequate legible provisions to tackle concurrent tax underreporting-evasion
and avoidance, and penal provision for purported taxpayers. Section 19 deals with unexplained

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investment, Section 115 for detecting concealment, Section 123-124 deal with imposing penalty
for tax evasion and chapter XXI for offences and prosecution. Special provisions are
incorporated in Section 93, 104 and 106 for escaped income assessment or non-filing tax return;
and Sections 117-119empower NBR officials to raid, search, seize and retain the concealments of
bullion or valuables required to be disclosed under the ITO, 1984. But long standing these
provisions cannot be befitting of all time or age. For example, new cyber tax laws to book
transactions through e-banking, e-commerce, and web-capital market etc. is a demand of time.
The ITO 1984 offers a variety of exemptions and incentives and their continuation and misuse
erode the tax base.

CONCLUSION:

The revenue of government has been greatly affected due to the current tax system which gives
room for loopholes, the corrupt tax officials, the lack of adequate data and many more have
worsened the situation. A reduction in tax rate is not an optimum solution to the problem, simply
because some people would still attempt to evade or avoid taxes no matter the rates of taxes.
Great care must be taken in drafting the tax laws, since some of the opportunities for tax evasion
and avoidance arise from the poor drafting thereof. Moreover, once the laws are passed, prompt
rules, regulations or circulars must be issued by the authorities requiring minimum compliance
costs. Administrative producers for the resolution of disputes and controversies must be made
clear and must be settled quickly. The existing tax structure should be tailored to the attainable
efficiency in tax administration. While preparing annual budget, this point deserved special
attention to keep government expenditure within tax collection efficiency of tax officials.
Otherwise, arbitrary targets to collect tax revenue when imposed make them running wildly to
fulfill the target which ultimately destroys theirs and tax payers confidence in tax
administration. . It is recommended to the NBR to ensure efficiency, transparency and
accountability in the revenue board to help boost tax collection.

References

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