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15The Cost and Management, July-August, 2010 16 The Cost and Management, July-August, 2010 17The Cost and Management, July-August, 2010 18 The Cost and Management, July-August, 2010

19The Cost and Management, July-August, 2010 20 The Cost and Management, July-August, 2010 15The Cost and Management, November-December, 2009 16 The Cost and Management, September-October, 2009

Tax Evasion and Avoidance- A Real Challenge for Bangladesh to Achieve Millennium Goal

Md. Abdul Based Mondal, FCMA*

Mohan L Roy**

1.0 PrologueThe difference between the amount of tax legally owed and the amount actually collected by a government is called the tax gap. In the economics of tax gap, Nobel laureate economist Gary Becker (1968) theorized the economics of crime stating as long as the countrys laws fail to plug loopholes of taxing system, the misdeed in government revenues remain alive ( Allingham and Sandmo,1972). In this outlook, the purpose of taxation is to take out as much money as possible from the population to serve the sovereign with the least possible fuss and bother. That which could not be collected at least not without a lot of hissing and other unpleasantness is handpicked left interrupted by further law. Yet as citizens of a democratic system every one expects that the burden of financing the public services that citizens demand should be allocated in a fair way among the people. Unanimously mostly agree that tax liability should be allocated in a way based on peoples ability to pay tax. As citizens of a democratic state, every concern people believes that the tax laws peoples elected representatives have enacted meet peoples standards of fair dealing. Thus, all able and conscious citizen should do care about taxes owed, reported and paid, albeit overpaid taxes benefit the sovereign.

This paper addresses issues related to measurement of the tax gap the difference between tax liability under the National Board of Revenue (NBR) tax rules and taxes paid by the payers. In view of doing this, we review the main components of the tax gap in present perspective and retrospect, and go and get how the NBR estimates it. With the succeeding parts, some major issues in national policies for ballpark figure of tax gap are drawn. Probable inherent

flaws of the exiting policies for current estimates and suggestive actions are also pencil in finally. The countrys tax gap estimation is leaded by the changing political governments views (Chowdhury, R. A. 2008), albeit some people might mull over this a dubious honor. However estimating underpayment taxes that supposedly be paid on time but are not materialized inherently differ in different political regime (see table 3). Observed quantities of revenues collection actually differ in three governments rule1.

2.0 Tax Evasion and avoidance - in perspective and retrospective

The gross idea tax gap leads two meaning2tax evasion and tax avoidance. The tax evasion also translates two meanings as (a) understatement, concealment by the tax payers of the income and the tax due on it or simply of the taxable object, or (b) failure to pay a tax voluntary and on time. The second, tax avoidance on the other flip, is the use of shortcomings in the existing fiscal laws to evade taxes unintended by the legislators. The most recent tax administration ballpark figure of crores taka that some car importers dodge by manipulating the ages of used cars. The NBR estimates this gap of import duty is an extra Tk.1000 crores earnings likely3. The net tax gap is the gross tax gap in any tax year less payments of that years tax liability that come in later through either voluntary late payments or NBR enforcement activities. Payments of interest and penalties associated with late payments or underreported tax liability are not counted in either the gross or net tax gap measures.

The gross tax evasion and avoidance have three components non-filing, underreporting of tax owed, and underpayment (see table-2). The three components are mutually exclusive and add up to the total tax gap. The non-filing gap is the tax not paid on time by taxpayers

who have a legal requirement to file a tax return, but do not file on time. The underreporting gap is the tax owed by taxpayers who file returns on time, but underreport the amount of tax they owe. The underpayment gap is the loss of revenue owed by taxpayers who file returns on time, but do not pay their reported tax due on time. The largest component of the tax gap is expected to be underreporting.

Tax gap by sources in absolute Taka and percent figure with respect to the total gap are presented in table-1. The biggest single line item in the tax gap is customs income comprising import duty, supplementary duty, and excise in the business and individual income tax, which amounts to Tk. 65 billion or almost a 41 percent of the estimated tax gap4. Adding in the underpayment of value added tax (VAT), the underpayments of business income on individual income tax returns contributes to 58 percent of the total tax gap; over half of the underpayments gap attributable to total taxpayers. Based on the NBR estimates, the tax gap crisis is primarily a crisis of underreporting of tax by individual taxpayers with income from businesses, rents and royalties, farms, partnerships, and other flow through entities (Sarker and Kitamura , 2002). Most of the tax gap comes from noncompliance by individuals and businesses participating in officially recorded economic activities, who are either failing to file tax returns, underreporting tax owed on tax returns, or failing to pay taxes due on time (Rahman and Yasmin, 2008). But the tax gap also includes tax evasion by participants in illegitimate activities in the subversive financial system (Rashid, 2007), that is, the portion of economic activity that goes unrecorded in official economic statistics. These partakers are informal suppliers, such as moonlighting professionals who work off the books and do not report income or taxes owed (Chowdhury, R. A. 2008). The tax gap, however, does not count unpaid taxes by people engaged in the portion of the subversive economy consisting of all illegitimate activities.

Table-1: Tax Gap by Sourcesa (2009-10)

Sources Tax Target Collection Up to April 2010

Tk (in billion) % Tk (in Blln) %

Income tax 165.6 27.5 112.5 68

VAT 227.89 33.99 188.5 83

Custom 232.36 38.09 167.3 72

Others 4.69 0.77 3.142 67

Total 630.54 471.4 75

3.0 Tax Evasion and Avoidance Estimation3.1 Estimating Non-filing Tax Gap

On filing compliance, the NBR regularly may produce estimates of the non-filing rate. To do this, the NBR can set non-filing tax return compliance cell on the basis of information provided in national ID program of Bangladesh Election Commission and the Bangladesh Bureau of Statistics (BBS). In compliance with Ministry of Finance and Bangladesh Bank statistics, the non-filing return rate can also be developed. Based on family, business (SME but not corporation) and profession characteristics and reported incomes, it is to tabulate the individual tax units with a requirement to file a tax return on time. This non-filing percentage does not reveal the size of the non-filing gap because it supplies no information on the characteristics of

taxpayers who do not file returns on time or on how much tax would have been due if they had filed. The NBR has yet to anticipate such a non-filing gap for taxes; howbeit it would not be irrational to assume that a large portion of prospective returnable numbers is unlikely to file tax returns. The non-filing gap for the tax revenue is anticipated to be 1.2 to 1.5 billion USD (Sarker and Kitamura, 2002). It is reported that the NBR has taken a move to locate 1.2 million taxpayers who remain unidentified for years despite having the TIN. Currently there are 2.238 million TIN holders, but only 1.0 million of them file tax returns every year5. Thus it can be conservatively estimated that TK 200 billion were left in non-filing income tax return that leaded a grand total of TK 314.4 billion for the fiscal year 2009-10 (see table -2).

3.2 Estimating Underreporting Tax Gap The NBR primarily can use a stratified random sample audit of tax return method to estimate the underreporting gap and then project the audit results to population totals. For doing this, periodic audit survey studies of individual income tax returns and business returns may be conducted6. Of the three estimations, this is most difficult to take a presumption for underreporting tax return. As described above, underreporting is illegal/legal way of evading tax payments by tax payers. In this country, there are various legible ways of lowering tax liability in the forms of exemptions, incentives, rebates and credits. If illegal ways of evading tax payments are added, the underreporting figure might be exceeding the virtual payments of taxes. In a recent conference report (McGee, 2006), it is shown that Bangladesh lie in lowest ebb among 13 developing countries in Asia where 98.1% of the sampled respondents reported justifies tax evasion in terms of underreporting. It is to note that in favor of their justification, they argued that tax payers supposedly enjoy a little return in exchange of their payments to the government. Black money transactions made an underground economy which believed to be stronger or larger than the economy the state dealt in publicly. Consequently it is conservatively estimated that the only underreporting amount for income tax would never be lower than TK 150 billion in a year7. The other sectoral projections have been made on same ground (see table -2)

Table 2: Non-filing and Underreporting Tax Gap

(Projection In billion Taka)8

Components

Tax sources Non-filing Under reporting Total

(%) (%) (%)

Income tax 200 (64) 150(33) 350 (45)

VAT 100(32) 200(44) 300(39)

Custom 10 (3) 100(22) 110(14)

Turnover 0.5 (0.1) 0.6(0.13) 1.1(.14)

Travel 0.0(0.0) 0.5 (0.10) 0.5(.06)

Excise 2.0(0.6) 2.0(0.43) 4.0(.52)

Others 2.0(0.6) 2.0(0.43) 4.0(.52)

Total 314.5 455.1 769.6

.3 Estimating underpayment tax gap

The underpayment gap is the loss in revenue from taxpayers who have filed timely returns, but have not fully paid their reported tax on time. The NBR tabulates the underpayment gap annually and monthly from tax return and payment data on its files (see tables- 3).

Table -3a: Underpayment Tax Gap (2006-07)

In crores Taka

Target collection Gap (-) %

Import duty 8279 8154.76 -1.50

VAT (import) 6252 6311.17 +0.90

SD (import) 1231 1196.63 -2.79

Excise 185 183.49 -0.816

VAT (local) 7425 7471.13 +0.621

SD (local) 4864 4846.09 -0.368

Turnover tax 6 6 0.00

Income tax 8924 8721.24 -2.27

Travel 311 326.91 +5.11

Other 2 1.9 -5.00

Total (grand) 37479 37219.32 -0.700

These tabulations are accurate measure of the underpayment gap because NBR knows both the amounts reported on timely returns and the amounts paid on time. Interest and penalties associated with delayed payments are not counted as part of the tax gap because they are not part of tax liability. They are included, however, in data on revenues from NBR enforcement activities.

Table- 3b: Underpayment Tax Gap (2007-08)

(In crores Taka) Gap (-)

Target Collection %

Import duty 9300 9619.19 +3.43

VAT (import) 8240 8474.66 +2.85

SD (import) 1845 1752.86 -5.01

Subtotal 19385 19846.71 +2.38

Excise 213 212.79 -0.10

VAT (local) 8767 9090.35 +3.69

SD (local) 6125 6016.41 -1.77

Turnover tax 6 4.61 -23.17

Subtotal 15111 15324.16 +1.41

Income tax 11005 11579.65 +5.22

Travel 467 448.82 -3.89

Other 2 1.59 -20.50

Subtotal 469 450.41 -3.96

Total direct taxes 11474 12030.06 +4.85

Total (grand) 45970 47200.93 +2.68

Table -3c: Underpayment Tax Gap (2008-09)

(In crores Taka) Gap (-)

Target Collection %

Import duty 9570 9330.59 -2.50

VAT (import) 9360 9186.95 -1.84

SD (import) 2392 2339.24 -2.20

Subtotal 21322 20856.78 -2.18

Excise 237 238.26 +0.53

VAT (local) 10751 10943.10 +1.78

SD (local) 6729 6172.55 -8.26

Turnover tax 5 4.55 -9.00

Subtotal 17722 17358.46 -2.05

Income tax 13538 13889.34 +2.59

Travel 417 415.06 +0.46

Other 1 0.13 -87.0

Subtotal 418 415.19 -0.67

Total direct taxes 13956 14304.53 +2.49

Total (grand) 53000 52519.77 -0.91

4.0 Issues of Assessing Tax Gap in BangladeshThere are both technical and conceptual issues in determining the correct measure of the tax gap. Some of the more crucial issues are adjustments for failure to detect underreporting on individual income tax returns, underreporting of income through flow-through entities, measurement of over-reporting of individual tax liability, fairness of data, conceptual issues in measuring the corporate tax gap, and special problems in estimating the portion of the tax gap due to sophisticated tax avoidance techniques.

4.1 Tax Evasion and Avoidance: It would not be not be irrational to expect that underreporting of net income of businesses which are organized as flow through entities may contribute significantly to underreporting of individual income tax by their owners (Rahman and Yasmin, 2008). Yet individual income tax returns are systematically examined for extracting the underlying income of flow through business houses in which the audited individuals owned shares (Annual Budget, 2010). Moreover, traditional examining techniques that focus on examining one taxpayer at a time may fail to detect tax evasion from transactions between houses. In effect, all parties may be reporting gross income correctly, but nonetheless tax gets evaded by shifts in income and deductions between entities. While use of these techniques holds the promise of better detection of abusive avoidance schemes, the preliminary evidence it has found of avoidance that occurs through income shifting among taxpayers and tax-indifferent entities suggests another source of noncompliance that current tax gap studies may fail to detect. Nonetheless, the preliminary research in this area has yet to bring into being any prediction of the magnitude of the difficulty.

4.2 Possible Overstatement of Tax Liability

If an auditor finds a taxpayer has made an error in the governments favor, the return will be corrected and NBR will repay any amount the taxpayer overpaid as a result of over-reporting tax liability (Chowdhury, R.A. 2008). In anticipating the tax gap, as noted, NBR adjusts for an estimate of the amount of underreported income that examiners fail to detect. There is no corresponding adjustment, however, for unclaimed offsets to income or to tax that NBR fails to detect. While NBR willingly refunds taxes that have been incorrectly paid, one might suspect that NBR examiners are not over-zealous in searching for and finding unclaimed tax benefits. Simple computational errors and misinterpretations of the law will typically

be adjusted, but it is less likely that examiners will search hard for potential deductions and other tax benefits that the taxpayer overlooks. Clearly, this is an area where further research may be in order, especially as the tax rules continues to be cluttered with new and more multifarious incentives involving prickly options and choices.

4.3 Aptness of Data

For years, NBR anticipations have suffered from being based on outdated sample data, extrapolated by the growth in overall tax liability (Sarker and Kitamura, 2006). The changeover of 2006-07 to 2009-10 tax return data represents a major improvement in the timeliness of the data on which the underpayment tax gap estimates are based. But 2006-07 and onward database will rapidly become outdated as well, as tax laws continue to evolve and as the age composition of the countrys population, the composition of the workforce, and the distribution of employment by industries and occupations change. Short of constructing a random set of SME and large firm taxpayers to audit and issues to examine in a new corporate tax gap study, the most practical way to obtain more updated estimates in a reasonable time frame at reasonable cost is to use recent operational audit data to develop the new estimates.

For individual income taxes, the objective would be to update the estimates on a regular basis. Ways need to be found to reduce the annual cost of NBR if the program is to be sustained. To develop timely estimates of individual income tax reporting compliance and frequent updates of audit selection formulas, the NBR needs comprehensive plan to perform random audits of smaller samples of individual tax returns under the tax audit program every year. NBR will combine results of these audits to develop tax gap estimates over rolling three-year periods, with a new years worth of audits added and one old year dropped every year.

Another possibility would be to include data from operational audits, using econometric methods to adjust for the non-randomness of operational data (Feinstein, J. S. 1981). Data from these operational audits could supplement data from the random tax audits to perform annually. The random audits would serve as a check on the method of extrapolating from the operational sample to the population and allow for identification of emerging issues that tax audits based on past estimates of probable noncompliance might fail to detect. Use of a blend of random and operational tax audits could effectively expand the sample size and enable NBR to produce more compliance estimates for more segments of the taxpaying population.

4.4 Estimating the Tax Gap in tricky Transactions

Tax gap comes from companies and wealthy individual taxpayers while they use highly-paid tax lawyers and chartered accountants to work out obscure design to reduce tax liability to a small fraction of their economic income (Mahmud, et. al., 2009). The existence of large underground economy is responsible for low tax base in Bangladesh9.

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.

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.

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 advalorem 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).

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 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).

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 government10. 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).

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.

5.0 Time befitting Taxation Policy formulation and Implications

The tax gap measures can be developed and made completing ongoing work on flow-through entities, and setting in motion processes that would ensure continuous annual updating of individual tax gap measures, even if that involves fewer random audits per year, in place of the occasional large random audit study. A system should be devised to systematically identify firms and individuals who do not file any tax return. Survey, online return submission, electronic record management and enhancement of scope of withholding tax may be added with the system.

5.1 Black moneywhite money concept: In this country tax evasion is an enlargement trade and the parallel and underreporting money has been conservatively estimated at Tk. 360 billion. This magnifies the socio-economic woe. What then may be the policy implications concerning tax underreporting? Tax amnesty means giving full legal approval to deliberate and systematic evasion of tax and also payment of tax at reduced rates (Baree, M.A. 1992). Any such provision is self-contradictory anti-compliance. Govt. rules are meant to create and maintain a weak balance between the conflicting and divergent interests of various individuals and groups in the society and as such no law should contain such conflicting and opposing elements which would tear down its very rationale and basics. The entire breadth of our fiscal law, rules and tax machinery becomes hollow and serves no purpose when such tax amnesty has been continued year after year. The justification to tax any income higher than the amnesty rate can be seriously questioned and may be termed a great slip in our fiscal discipline. It is reported that out of an estimated Tk.360 billion of black money in our economy only 2.98 billion have been declared not even 10% of the estimation. The invisible social cost of this policy is enormous and beyond any repairable limit (Khan, Z. A. et al., 2000). What government can do is to strengthen its machinery to catch the lawbreakers in the first place instead of opening the door and then beginning back to the thieves. Moreover, the practice does have a serious effect upon the morale of tax officials.

5.2 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 tax payers, exchanging information, etc.

5.3 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 (2010-11) 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.

5.4 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 tax payers. The national budget 2010-11 precludes cigarette, bidi, gul, zarda, 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.

5.5 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 multi-national companies 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.

5.6 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 (Baree, M. A., 1989; Sarker and Kitamura, 2006; Rahman and Yasmin, 2008). However, the current fiscal policy has proposed to introduce e-tax filing11, e-tax calculator on NBR web etc.

5.7 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 tax payers 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.

5.8 Standardization of public utility price: The policy of taxation and user charges for services provided by nationalized state enterprises, i.e., PDB, WASA, DESA, GAS 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.

5.9 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 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 117-119 empower 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.

6.0 Concluding Remarks The idea of the tax arrangement should be to develop a sycophancy liaison in which the tax controls work in cycle to create an ambiance wherein individuals and firms are aware of appreciative to pay assessment, find that they can afford to pay assessed liability, and feel justified in paying it by their fellow peer groups observance. 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.

In fine we conclude by quoting the great words of Jean Baptiste Colbert (1619-1683), French Economist and Minister of Finance under King Louis XIV in this regard: The art of taxation consists in so plucking the goose as to obtain the largest possible amounts of feathers with the smallest possible amount of hissing. r

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http://www.uakron.edu/law/lawreview/taxjournal/atj23/docs/paternak08.pdf.

** Income tax withheld is the final discharge of tax liability u/s 82C.

Abstracts: Tax evasion tendency of all walks- of- lives is nothing new in this country. It is surprisingly noticed that last year 42 lawmakers did not pay taxes. The NBR chairman quoted that only 1.5 percent (2.238 million) of the countrys 150 million people holds TIN (Tax Identification Number) and out of which 97.63 percent are non-corporate TIN holders and the rest 2.37 percent are corporate ones. Irrespective of countrys identity falls in the so called categorization third world or first world, tax dodging prevalence is common. However, in Bangladesh this problem is acute. No attempt has been taken yet to estimate tax evasion amount. In this study effort, we simply screen out the loopholes of the implied taxing approaches and the tax revenue regimes in particular meet the gap often. Of the four primary tax revenue segments viz., income tax, VAT and supplementary duty, customs and excise, and others, the VAT segment lies in lowest ebb. This study envisages opinion how to silt the loopholes and reduce the tax gap at minimum level.

Keywards: Tax Gap, TIN, Black money, White money, Business Expenses, Personal expanses.

* Mr. Md. Abdul Based Mondal, B. Sc., FCMA, Additional Director, Education, ICMAB, Dhaka

** Mr. Mohan L Roy, M.Com (Fin), M. Com (Mgt), M. Com (Acc), Associate Professor, Finance and Accounting, IBAIS University, Dhaka.

1. BNP, Caretaker and Bangladesh Awami League (2005-06; 2006-08;2008-09) 2. Baree, M.A. (1992), p.371

3. The Star Business, Dhaka Friday, June 4, 2010. 4. The estimated tax gap figure is rounded up to April 2010.

5. In a pre-budget discussion meeting the NBR chairman has given this information (FE report June 9, 2010).

6. The NBR vows DIFD to launce a new project - The Administration Capacity and Tax Payers Services (TACTS) to increase tax base.

7. The estimation has been made considering only income tax return recorded in the fiscal year 2008-09.

8. The projection has been made on the basis of fiscal year 2008-09 and reported statement in the daily news papers. 9 The Financial Express reports (June 20, 2010) citing the NBR chairman statement. 10 In 2009-10 fiscal year, VAT was targeted almost 34% of total budgeted taxes revenue.

11 E-tax filing has already been implemented on a pilot basis in a specified tax zone.