A Study into the Factors Determining the Gap Between Projected and Actual Revenue Collection from the Banking Sector in Bangladesh: A Trend Analysis

Abstract

Significantly higher accumulation and mobilization of domestic resources for financing national budget was the panacea of recent rapid economic growth of Bangladesh. Though internal resource is crucial for the economic development, the tax revenue collection gap in Bangladesh is unusually high. Focusing on the banking sector which is the largest direct tax revenue source of NBR, the study attempts to explore the reasons, factors and the interrelationship among the factors that determine the tax revenue collection and the difference between expected and actual revenue collection from the bankingsector. Amultiple regression method was used to ascertain the determinants of the propensity to pay tax whilst an Ordinary Least Square (OLS ) procedure was used to estimate the factors that explain the tax gap. The results from the econometric estimations of the study show that change in the factors such as non-performing loan, operating cost, fees and commission, tax rate, inflation and Gross Domestic Product (GDP )have significant effects on the tax collection and its gap. The qualitative factors such as political intervention, tax avoidance tendency, tax evasion affect the quantitative factors significantly. Finally, the calculations of the tax gap for thirty-six (36)individual banks of Bangladesh for the period of six years (2012-2017 )were displayed. The observations, analysis, and findings of the study suggest that ensuring internal control and compliance by banks is highly important to manage the bank specific factors that determine the tax revenue collection and its gap. Monitoring and observation by Bangladesh Bank should be held on regular basis in this perspective. Tax-net should be expanded by NBR, the procedure of tax administration should be digitalized and simplified through business process reengineering, a fully functioning research unit should be established, a systematic methodological standard should be followed to estimate the projected revenue properly, new tax code and rules should be enacted and implemented. The potential of generating tax revenue is very high which needs to be captured and the revenue composition pattern should be reversed to ensure equity and justice in the society in line with the constitutional obligation through optimal tax policy and proper administration of tax laws following international best practices.