Tax Tax Evasion Evasion and Av Avoida oidance nce Crime Crimes – A Study Study on Some Some Corpora Corporate Firms Firms of Bangla Banglade desh sh Dr. Md. Jahirul Hoque, Mohammad Zahid Hossain Bhuiyan and Afzal Ahmad Tax Evasi Evasion on and and Avoi Avoida dan nce Crim Crimes-A Stud Study on Some Some Corp Corporat orate e Firms Firms of Bang Banglad ladesh is based based on a total otal numbe umberr of 6 (six) (six) tax tax appea appeall cases and opinion opinions s of a total otal num number of 16(sixt 16(sixteen) een) responden respondents ts belonging belonging to relevant relevant tax officials and tax practiti practitioner oners. s. The main reason of select s electing ing the topic topic is the lar large scal scale e prev revalen lence of the tax evasio sion and and avoidance crimes in Bangladesh which adversely affect both the volum volume and natu nature re of Governm Government ent finance. finance. This study study high ighligh lightts the main ain reas reason ons s for tax evas evasio ion n and and tax avoi avoida dan nce, ce, major ajor tech echniq niques/m ues/mod odes es adop adoptted by the corpor corporat ate e firm firms in evadi evading ng and avoid avoiding ing corpora corporatte taxe taxes, s, aut authori horitties ies resp respon onsib sible le for for det detect ecting ing tax evasi evasion on and and avoi avoida danc nce e crim crimes and and the techni echniqu ques es foll follow owed ed ther thereo eof, f, auth authori oritties empo empower wered ed for disposal disposal of the the crime crime cases and and their heir main func functtions ions of respo responsi nsibi bili litties ies in such such respe respect cts, s, impact impact of tax evasion and avoidan avoidance ce crimes crimes on the the revenu revenue e
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 circumvent taxation while simultaneously reducing the risk of being detected (GIZ Sector Programme Public Finance, Administrative Reform; 2010). Tax evasion and fiscal corruption have been universal and persistent problems throughout history with manifold economic consequences. Two thousand five hundred years ago, Plato was writing about tax evasion, and the Ducal Palace of Venice has a stone with a hole in it, through which people once informed the Republic about tax evaders (Tanzi, 2000a). The five year plans of the Government of the People’s Republic of Bangladesh (As for example The First Five Years Plan of Bangladesh, 1973) have indicated that a sizeable number of persons especially the businessmen evade & avoid taxes. As a result, the yield of income tax is very low in Bangladesh as a percentage of Gross Domestic Product. The following Table 01 presents the picture in this regards.
Table 01: Collection of Tax Revenue in Bangladesh (in core Taka) Sources of Tax Revenue
FY 03-04
Total Tax Revenue (in absolute Figure)
28,300
FY 04-05
FY 05-06
FY 06-07
FY-07-08
FY 08-09
FY-09-10
Average
31,950
36,175
39,247
48,012
55,526
63,956
43,309
To achieve the main objective, the study highlights the following specific objectives:
1. To point out the main reasons for tax evasion and tax avoidance. 2. To find out the techniques/modes adopted by the corporate firms in evading and avoiding corporate taxes. 3. To identify the authorities responsible for detecting tax evasion and avoidance crimes and the techniques followed thereof. 4. To identify the authorities empowered for disposal of the crime cases and their main functions of responsibilities in such respects. 5. To examine the impact of tax evasion and avoidance crimes on the revenue of the Government in particular and the economy of the country, as a whole. 6. To find out ways and means of preventing tax evasion and avoidance crimes.
1.3. Limitation of the study The main limitation of the study is the limited coverage of the samples e.g. only 07 (seven) appeal cases and only 16 respondents of two categories such as Tax practitioners and Tax officials. This is because of time and money constraints at the disposal of the researchers, on one hand, and the unwillingness and the busy schedule of the Tax officials, in the other, in order to provide us with more appeal cases and their valued opinions. However, we had to convince the respondents by giving gentlemen word that the names of the corporate firms would not be disclosed
4. “Tax Planning In J ordan J oint Stock Companies Working in Service sector”. Noor and Ibrahem, 1999. The study aimed to recognize the process of tax planning generally and to study the extent of applying it in the companies working particularly in service sector in Jordan. 5. “Income Tax Monitoring Means in Yemen Republic”, Omer, 1999. The study dealt with tax monitoring in Yemen republic to figure out its weakness points and suggest some means necessary to develop it in order to maintain the rights of public treasury and, on the other, implement tax justice. 6. “Addressing tax evasion and tax avoidance in developing countries”, GIZ Sector Programme Public Finance, Administrative Reform; 2010. The findings suggest that there are various reasons and facilitating factors for tax evasion and tax avoidance. In order to develop methods and instruments for fighting tax evasion and avoidance, it is important to establish a broad understanding of the different reasons underlying these problems.
3. Methodology and Research Design Two kinds of data were used in this study: 1. Primary data: They were obtained from collecting necessary data throughout the questionnaire designed especially for this study and containing a group of questions
4. Discussion on Findings The whole discussion on the findings has been divided into two parts. Part one deals with presentation of the collected appeal cases and the second part deals with the opinions of the learned respondents.
4.1. Part 1: Presentation of Appeal Cases Appeal Case-I 1. Assessee and Assessment Year: The assessee was a company engaged in the manufacture of vegetable oil. The appeal case was related to the assessment year 2005-2006. 2. Facts of the Case: The relevant DCT added back to the net profit of the company a sum of TK. 65,690 as excessive depreciation in the name of extra shift allowance for double shift only for 100 days. DCT disallowed the amount as excessive depreciation. 3. Appeal and Disposal: The company made an appeal to Appellate Joint Commissioner of Taxes (AJCT) against the decision passed by DCT. After giving necessary hearing to the assessee; the AJCT maintained DCT’s addition of TK 65,690 to the net profit of the company for tax purpose.
Appeal Case-III 1. Assessee and Assessment Year: The assessee was a company engaged in the manufacture of textiles. The appeal case was related to the assessment year 2005-2006. 2. Facts of the Case: In the concerned previous year, the company showed excessive wastage @ 7% of raw materials used. But the concerned DCT allowed the wastage @3% only as being reasonable and added back the difference to the net profit of the company. 3. Appeal and Disposal: The company made an appeal before the relevant AJCT against the decision of DCT of adding back excessive wastage of raw material to the net profit of the company. But, the AJCT considering all the circumstances relating to volume and nature of the production, however, opined that it would be fair and justice to allow wastage @5% instead of 3% as allowed by DCT. 4. Conclusion: In this case, the assessee tried to evade taxes by charging excessive wasted of raw materials.
Appeal Case-IV 1 Assessee and Assessment Year:
10,984. Thus the company evaded huge amount of tax by underinvoicing import purchase to the extent of TK 72,88,50,464 (TK79,72,10,984-TK 6,83,60,520). The relevant DCT after proper investigation of invoicing the import purchase of the company added back the underinvoiced amount of TK72, 88, 50,464 to the amount of total income of the company and then reassessed the tax liability of the company.
3. Appeal and Disposal: The aggrieved company made an appeal to the relevant AJCT against the decision of the DCT of adding back the underinvoiced amount. The AJCT after proper scrutiny of the import purchase of the company maintained the decision of DCT of adding back the underinvoiced amount of import purchases and the determination of the new tax liability of the company. 4. Conclusion: In this case, the assessee tried to evade a large amount of taxes by underinvoicing the import purchases.
Appeal Case-VI 1. Assessee and Assessment Year: The assessee was a company engaged in the shipping agency business. The appeal case was related to the assessment year 2008-09. 2. Facts of the Case: The said company charged against its profit some inadmissible expenses
i.
ii. iii. iv. v. vi.
vii.
Charging deprecation at higher rates than permissible under Income Tax Ordinance, 1984 which, in turn, reduces the net profit as well as tax liability of the company. Showing revenue income as capital income thereby reducing net profit and hence tax liability of the firm. Charging inadmissible expenses as admissible under ITO, 1984 thereby reducing net profit and hence tax liability of the firms. Recognizing capital expenditures as revenues expenditure and charging the same against net profit thereby reducing tax liability of the firms. Charging personal expenses as business expenses thereby reducing net profit and hence tax liability of the firms. Showing low rates of gross profit than the actual ones by charging excess manufacturing depreciation, under valuing closing inventory etc., which, in turn, reduces taxable income of the assessee. Showing excessive wastage of raw materials in the course of production by the manufacturing industries thereby showing low net profit than the actual one which in turn reduces taxable income of the assessee.
Part 2: Analysis of Respondents Opinions 4.3. Techniques and modes adopted by the tax payers in evading and avoiding Taxes as opined by the respondents
4.4. Reasons for tax evasion and tax avoidance crimes There are various reasons for tax evasion and tax avoidance. These reasons can be filed 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. However, the learned respondents of the study have pointed out the following reasons for tax evasion and avoidance crimes: i. Low tax morale ii. Low quality of the service in return for taxes iii. Tax system and perception of fairness iv. Low transparency and accountability of public institutions v. High level of corruption vi. Lack of rule of law and weak fiscal jurisdiction vii. High compliance costs
ii. iii. iv. v. vi. vii.
Remaining constant vigilant of the DCT while assessing any assesses’s taxable income and tax liability Making thorough bank search of the respective tax payers Intelligent inspections of the books of accounts and others relevant documents of the tax payers Critically examining the audit reports of the tax payers Critically examining the Cash Book, Sales Register, Purchase Register, Profit and lose account, Balance Sheet and other relevant documents thereto Critically examining the Import-Export invoices, Latter of Credit and other relevant document thereto.
4.6. Authorities empowered for settlement of tax evasion and tax avoidance cases It is the Appellate and Inspecting Division under the National Board of Revenue which deals with appeal cases of the assessees whether individuals, partnership firms and corporate firms. In the Appellate and Inspecting Division, Commissioner of Taxes, Additional Commissioner of Taxes, Joint Commissioner of Taxes are the authorities empowered for settlement of tax evasion and tax avoidance cases. The aggrieved assessees make an appeal to the Appellate Joint Commissioners of Taxes (AJCT). The AJCTs settle the appeal cases after giving necessary hearing to the respective assessees.
4.7 Adve
im
of t
asion and
oida
study report, the TIB identified tax evasion as a major reason for the country’s poor tax-GDP ratio as indicated in Table 1 of the study. (The Financial Express, 2011)
4.8. Ways and means of prevention of tax evasion and tax avoidance The learned respondents of the study pointed out that the followings are the major ways and means of prevention of tax evasion and tax avoidance: i. Creating awareness of paying taxes for the welfare of the state and its citizens ii. More and more publicity of paying taxes through media about the socioeconomic responsibility of the citizens. iii. Effective implementation of the tax rules and provisions iv. Making stringent rules and provisions of the tax v. Appointing adequate trained and experienced tax officials vi. Empowering tax officials to take necessary panel actions vii. Imposing physical punishment to the tax evaders and avoiders under sections 164 and 165 of ITO, 1984 viii. Imposing high monetary penalty in the form of fines ix. Ensuring access of the tax officials to the bank accounts and relevant software of the tax payers x. Strengthening collection of the requisite data and information from the respective tax payers xi. Measures improving tax compliance by properly educating the tax payers and addressing tax compliance costs and administrative costs.
removing loopholes of the existing tax provisions. ii.
Training facilities of the tax personnel needs to be improved covering the professional as well as Islamic ethics of the tax officials. In this regards, the existing Tax Academy has a great role to play.
iii.
The successful top level administration of the Tax Authority namely Chairman and other members of NBR need to be nationally awarded by providing both financial and non-financial incentives. In this respect, one of the important criteria may be increase in the collection of tax revenues by curving tax evasion and tax avoidance crimes.
iv.
The successful key tax officials namely Deputy Commissioner of Taxes from the Administrative Divisions and Appellate Joint Commissioner of Taxes from Appellate and Inspecting Divisions also need to be awarded locally with financial and non-financial incentives. One of the most important criteria of the successful Tax Officials may be detecting the tax fraud cases as much as possible during the fiscal year.
v.
The top officials of the NBR must supervise and monitor the activities of the key tax officials on a regular basis with a view to curving Tax evasion and Tax avoidance crimes, in one hand, and control of unnecessary tax compliance as well as administrative costs, on the other.
vi.
Quality of the service to the tax payers in return for their tax payment needs
Joummah, 1993,“Tax planning in Banks Operating in Jordan”, Master’s thesis, University of Jordan. Klitgaard, R. 1994. ‘A framework for a country program against corruption.’ Occasional Working Paper No. 4 (1994). Berlin: Transparency International. Mann, A. 2004. Are semi-autonomous revenue authorities the answer to tax administration problems in developing countries? A practical guide. Washington DC: USAID. Ministry of Finance, Finance Division, Government of the People’s Republic of Bangladesh, Bangladesh Economic Review 2010, Noor and Ibrahem; 1999, “Tax Planning In Jordan Joint Stock Companies Working in Service sector”. Omer and Abdullah Ahmad, 1996, ‘Income Tax Monitoring Means in Yemen Republic”, Master’s thesis, University of Bagdad. Planning Commission, Government of the Peoples Republic of Bangladesh, The First Five Year Plan, 1973-78, Nov. 1973, p-42. Shihattah and Mohammad, 1997, “Factors Controlling Pricing the Spent Stock”, Magazine for Economy and Trade, Ain Shams University.
APPENDIX Table 1: Showing responses as regards techniques and modes adopted in evading and avoiding taxes Sl. No.
Specific technique and mode
1 2
Not recording cash transactions Under invoicing by importers and exporters Showing benami transactions Showing cash credit Showing excessive depreciation Showing personal expenses as business expenses Showing excessive wastage of raw materials in production process Showing bogus bad debts Creating reserve and provision for bad debts Making wrong classification of business expenditures as capital and revenue Showing inadmissible expenses as allowable
3 4 5 6 7 8 9 10 11
No. of respondens
% of respondents
10 8
62.5 50.0
16 8 12 8
100.0 50.0 75.0 50.0
10
62.5
8 8
50.0 50.0
16
100.0
16
100.0
Figure: 1 Organogram of Tax Authority in Bangladesh
National Board of Revenue
TaxAdministration TaxAppeal and I nspecting Commissioner of Taxes
DG Central IntelligenceCell
Additional Commissioner of
Commissioner of Taxes
J oint Commissioner of Taxes
DG Inspection Deputy Commissioner of
DG Training
J oint Commissioner of Taxes
Assistant Commissioner of Assistant Extra Commissioner of
TaxRecovery Officer
Additional Commissioner of
Inspectors of Taxes
Source: OrganizationManual for NBR
