Anda di halaman 1dari 34

Jagannath University, Dhaka

Assignment on:

Budget Analysis 2016-17 of Bangladesh


(Comparison between 2015-16 F.Y. &
2016-17 F.Y)

Course Title: Development Finance


Course Code: FIN-4105
Submitted to
Sk Alamgir Hossain
Assistant Professor,
Department of Finance
Jagannath University, Dhaka.
Submitted by
Sharif Asraful Haque
ID: B120203051
7th Batch,
Department of Finance
Jagannath University, Dhaka.

Submission Date: 27.07.2016

Government Budget
A government budget is a government document presenting the
government's proposed revenues and spending for a financial year that is
often passed by the legislature, approved by the chief executive or president
and presented by the Finance Minister to the nation. The budget is also known
as the Annual Financial Statement of the country. This document estimates the
anticipated government revenues and government expenditures for the
ensuing (current) financial year.
The two basic elements of any budget are the revenues and expenses. In
the

case

of

the

government,

revenues

are

derived

primarily

from taxes. Government expenses include spending on current goods and


services,

which

economists

call government

consumption; government

investment expenditures such as infrastructure investment or research


expenditure; and transfer payments like unemployment or retirement
benefits.
Government budgets have economic, political and technical basis.
Unlike a pure economic budget, they are not entirely designed to
allocate scarce resources for the best economic use. They also have a political
basis wherein different interests push and pull in an attempt to obtain
benefits and avoid burdens. The technical element is the forecast of the likely
levels of revenues and expenses.

Budget Deficit in Economy Good or


Bad
It is a status of financial health in which expenditures exceed
revenue. The term "budget deficit" is most commonly used to refer to
government spending rather than business or individual spending. When
referring to accrued federal government deficits, the term "national debt is
used.
The deficit is at the top of the political agenda, and cuts to spending
are certain to come, but how urgent is the deficit problem in reality? Is it
important that we cut as much as we can as soon as we can, or is there time
for a more patient and deliberative approach?
The Good
The first thing to recognize is that deficits are not always bad. When the
economy goes into recession, deficit spending through tax cuts or the
purchase of goods and services by the government can stop the downward
spiral and help to turn the economy back around? Thus, deficits can help us to
stabilize the economy. In addition, as the economy improves due to the deficit
spending the outlook for businesses also improves, and this can lead to
increased investment, an effect known as crowding in. Deficits also allow us to
purchase infrastructure and spread the bills across time similar to the way
households finance the purchase of a car or house, or the way local
governments finance schools with bond issues. This allows us to purchase
infrastructure that we might not be able to afford if it had to be financed all at

once (this can also force future generations who benefit from the spending to
share the construction costs). Finally, deficits can be used to finance wars, but
whether this is a good or a bad depends upon your view of whether the war is
just. So let's turn to the bad next.
The Bad
The main worry about deficits is crowding out. Crowding in was just
described it occurs when deficits cause output to go up and business
confidence is increased. Crowding out comes about when deficit spending
raises interest rates. There is a limited amount of funds available for
investment, and when government competes with the private sector for a
share of these funds to finance its deficit spending, it drives the cost of these
funds

interest rates higher. The increase in the interest rates causes

investment to fall and lower investment translates into lower output and
lower economic growth. In addition, to the extent that the private sector is
more efficient than the public sector, crowding out, i.e. more government
spending and less private investment, can result in a less efficient use of
resources (though in the case of public goods government can be the more
efficient provider, and hence it is not always the case that efficiency falls).
Another worry about deficits is that they will be monetized leading to
inflation. Debt monetization occurs when the Fed prints new money and uses
it to purchase government bonds help by the private sector. This removes
debt from the private sector and replaces it with money, and if the money is
used to purchase goods and services, as it's likely to be, this can be
inflationary (though when there is an excess supply of goods, as in a deep
recession, inflation is unlikely to be a problem).

High Foreign Reserve Plays an


Important Role in Economy - Explain
There is a growing debate about the need to hold so many
reserves. Some critics point out that holding a lot of reserves is costly. Critics
also note that the yield on reserves is much lower than the potential return
they could earn by using those reserves to make real investments in the
economy, such as building roads, bridges, and schools.
Those who support holding large reserve balances argue that the cost of
doing so is small compared to the economic consequences of a sharp
depreciation in the value of the currency that is often associated with financial
crises in emerging markets. A reduction of the currency raises a countrys
costs of paying back debt titled in foreign currency as well as its costs of
imported goods, and it also raises the scale of inflation. With a large stockpile
of foreign exchange reserves, a countrys monetary authority can buy up its
currency in the foreign capital markets, which helps to uphold its value. By
having its own ammunition to defend its currency in a crisis, a country with
large holdings of reserves also avoids being shut out of international capital
markets due to concerns that the government or the private sector will default
on foreign debt payments. Therefore, these proponents argue, holding
large reserve stockpiles is wise policy for those occasions when
defending the value of the currency makes sense.
One of the important reason to increase foreign reserve is the
governments desire to smooth consumptionthat is, to spread out over

time the costs of shocks, such as sudden outflows of international capital


when it faces difficulty raising funds either through international capital
markets (because investors recognize a high risk that the government or the
private sector will default) or through domestic tax collection.
Another reason leading to a buildup of reserves is loss aversion after
the 1997-1998 Asian financial crisis. Loss aversion is the tendency of people
in the economy to be more sensitive to reductions in their consumption than
to increases. In our model, we modify a generalized expected utility
framework so that it attaches bigger weights to bad outcomes and smaller
weights to good outcomes.
Several factors may explain how much foreign exchange reserves a country
wants to holdOne factor is related to the size of international financial transactions
that occur there; that is, reserves holdings are likely to increase both
with the size of the countrys population and with its standard of living.
Another factor is related to the instability of international receipts and
payments, insofar as reserves are intended to help cushion the
economy; that is, reserve holdings are likely to increase with more
instability in a countrys export receipts.
A third factor is vulnerability to external shocks; reserve holdings are
likely to increase with a countrys average tendency to import, which is
a measure of the economys openness and vulnerability to external
shocks.
Finally, a countrys tolerance for greater exchange rate flexibility should
reduce its demand for reserves, because its central bank would not need

a large reserve stockpile to manage a fixed exchange rate; therefore,


reserve holdings are likely to be lower the more variable the countrys
exchange rate is.
Including some important needs there are also some drawbacks related to
high foreign reserveThe problem with holding foreign currency reserves is that they can
lose their value. Inflation erodes the value of currencies not fixed
against gold (fiat exchange rates). Therefore, a Central Bank will need
to keep buying foreign reserves to maintain the same purchasing
power in markets. Also, there may have been many better (higher
yielding uses of the capital).
In theory a Central bank can make money through the appreciation of
other currencies it holds. However, many Central Banks have been
losing money through the long term decline in the value of the dollar.
This particularly applies to China who have over $1900 billion of
foreign reserves, mostly held in dollars.

Budget Allocation on Different Sector


Comparison to 2015-16
The new budget is 15.5 percent larger than the current FYs initial
budget and 29 percent higher than the revised outlay. The new budget is
equivalent to 17.37 percent of Bangladeshs GDP, which is Tk 19.61 trillion.
The current FY budget represented 17.2 percent of the GDP. In the new
budget, Tk 1.17 trillion has been earmarked for development expenditure,
including Tk 1.11 trillion for the Annual Development Program (ADP).
Non-development expenditure has been set at Tk 2.16 trillion, 32
percent higher than the current FYs figure. A large portion of the nondevelopment budget will be spent on salaries, allowances and pension benefit
of government employees. Foreign borrowing will also be repaid from the
non-development budget.
Government has plans to collect Tk 2.43 trillion, or 71 percent of the
budget amount, from the revenue sector. Of the figure, Tk 2.03 trillion will be
raised through the National Board of Revenue.
The highest amount of Tk 727.64 billion has been projected to come
from Value Added Tax (VAT) which is 35 percent higher than the current
budget figure. A revenue collection target of Tk 642.62 billion was set from
VAT in the initial budget for the current FY, but it was later downsized to Tk
539.13 billion in the revised budget.

BUDGET AT A GLANCE
Budget

Revised

Budget

2016-17

2015-16

2015-16

2,42,752

1,77,400

2,08,443

2,10,402

1,55,400

1,82,244

2,03,152

1,50,000

1,76,370

7,250

5,400

5,874

32,350

22,000

26,199

5,516

5,027

5,800

2,48,268

1,82,427

2,14,243

2,15,744

1,63,751

1,84,559

1,88,966

1,50,379

1,64,571

39,951

31,669

35,109

38,240

30,044

33,396

1,711

1,625

1,713

Non-Development Capital Expenditure/2 (Statement IV)

26,778

13,371

19,988

Net Outlay for Food Account Operation/3 (Statement VIII)

- 594

201

227

Loans & Advances (Net)/4 (Statement VIA)

8,428

4,705

7,755

1,17,027

95,908

1,02,559

354

585

633

4,147

2,687

3,339

1,10,700

91,000

97,000

1,826

1,636

1,587

Description (Taka in Crore)

Revenue and Foreign Grants


Revenues (Statement I)
Tax Revenue
NBR Tax Revenue
Non-NBR Tax Revenue
Non-Tax Revenue
Foreign Grants/1 (Statement V)
Total :

Expenditure
Non-Development Expenditure
Non-Development Revenue Expenditure (Statement III)
of which
Domestic Interest
Foreign Interest

Development Expenditure
Development Programs Financed from Revenue Budget/5
(Statement IV)
Non-ADP Project (Statement VIA)
Annual Development Program/6 (Statement IX)
Non-ADP FFW and Transfer/7 (Statement X)
Total - Expenditure :
Overall Deficit (Including Grants) :

3,40,605
-

(In percent of GDP) :


Overall Deficit (Excluding Grants) :
(In percent of GDP) :

92,337
- 4.7

97,853
- 5.0

2,64,565
- 82,138
- 4.7
- 87,165
- 5.0

2,95,100
- 80,857
- 4.7
- 86,657
- 5.0

BUDGET AT A GLANCE

Budget

Description (Taka in Crore)

2016-17

Financing
Foreign Borrowing-Net
Foreign Borrowing (Statement V)
Amortization (Statement IX)

Domestic Borrowing (Statement VIB)

Revised
2015-16

Budget
2015-16

30,789

19,963

24,335

38,947

27,047

32,239

8,158 -

7,084 -

7,905

61,548

62,175

56,523

38,938

31,675

38,523

Long-Term Debt (Net)

28,910

21,118

24,182

Short-Term Debt (Net)

10,028

10,557

14,341

Non-Bank Borrowing (Net)

22,610

30,500

18,000

19,610

28,000

15,000

3,000

2,500

3,000

92,337

82,138

80,857

19,61,017

17,29,567

17,16,700

Borrowing from Banking System (Net)

National Savings Schemes (Net)


Others/8 (Statement VII)
Total - Financing :
Memorandum Item :
GDP

Source of Revenue Generation of


Proposed Budget
FY17 budget targets additional Tk. 65,351 crore revenue with a 35.4%
growth over RBFY15.
NBR to take the lead role (accounting for 81.3% of incremental revenue)
with 35.4% growth
30.8% of incremental revenue from income tax; while 28.8% from VAT.
Two-third of total income tax will be collected from companies. Belated
implementation of new VAT act will pose serious challenge.
Import duty collection growth target is set at 31.1%
Non-NBR revenue (non-tax plus non-NBR tax) growth for FY17 is at a
very ambitious level (44.5%). Much will depend on mobile spectrum
fee.
Resource Collected from

Resource Used for

Under such a scenario required growth rate for revenue in FY17 may
shoot up to around 44.5% (from 36.8%), while for NBR the actual target
may stand around 41.1% (from 35.4%). Such a high growth rates were
never achieved before.

Budget Analysis (Sector Wise)


Agriculture:
A number of positive fiscal measures have been proposed in
support of agriculture which will provide higher protection to domestic
agricultural sector:
25% CD on imported rice instead of present 10% CD.
Higher import duties on imported rapeseed cake/soya cake at
10% from 5%
Reduction of SD to 10% from 20% on stabilizer for
milk (used for the preparation of milk products)
Reduction of import duties to 1% on agricultural machineries
from earlier 3%
Continuation of the current duty tax concessions for the
existing items along with some new items in the poultry sector

Domestic Market Oriented Industry:

Fiscal measures related to VAT, customs duty,


supplementary duty etc. are likely to have positive impact on
domestic industries
Exemption of VAT on Ribbed Smoked Sheets (rubber industries),
wheat crusher, dyeing, printing, finishing and calendaring of grey
fabrics

Continuation of VAT exemption on Refrigerator, Fridge and Air


Conditioner, Palm oil, soya bean oil and natural stone extracted
from Maddhapara
Reduced CD and taxes for inputs (chemical) for toiletries, paper,
ceramics and rubber
Introduction of a new slab of 15% CD
Duty reduction on inputs used in plastic, poultry and dairy food,
construction, chemical, electrical, CKD motorcycle for transport
sector

Export Promotion:
Rise in AIT rate from 0.6% to 1.5% for all export-oriented industries,
need to be rethought from a number of perspectives.
Diverse level of capacity of different export oriented industries
to accommodate the revised AIT
Needs to be revised considering governments multiple
objectives & targets.
Cash incentives to continue for 19 sectors including three
recently included sectors

RMG:
Two fiscal measures targeting RMG sectors are likely to neutralize
the overall effect Negative effect of rise of AIT will be partly neutralized through
reduced corporate tax rate.
Rate of AIT needs to be revised considering multiple objectives
& targets.

Budget Allocation (Findings)


Compare to previous fiscal year, there are lot of changes in
budget allocation of different sectors. These changes are shown in graphically
here.
Decreasing Sectors
Increasing Sectors

2016-17

Sectors (%)

2015-16

2016-17

Sectors (%)

2015-16

6.2

Public Order

4.2

13.9

Public Administration

14.2

5.8

Social Security

5.3

0.9

Housing

1.0

6.5

Defense

5.3

4.4

Energy & power

6.3

6.7

Agriculture

3.5

6.9

Local Government

7.0

5.1

Health

4.1

11.7

Interest

11.9

3.5

Industrial Service

34.6

11.0

Transport &
Communication

9.5

15.6

Education

10.9

3.5

Industrial Service

34.6

1.0

Culture

0.9

0.8

Misc. Expenditure

0.8

Objectives of the Proposed Budget


Analyzing the Budget report, we have found some important issue
which can be the objectives that the Government wants to fulfill. Such
objectives are

High growth of revenue targeted for underwriting overreaching


expenditure

Harmonization of taxes and tariff in line with the new VAT and SD

Act 2012

Higher allocation for building physical infrastructure to enhance


capacities

Enhanced allocation for social sector

There are some important topics that have to be mentioned.


High growth of revenue targeted for underwriting overreaching
expenditure
Harmonization of taxes and tariff in line with the new VAT and SD
Act 2012
Higher allocation for building physical infrastructure to enhance
capacities
Enhanced
reform agenda to enhance budget implementation capacity
The GDP growth target for allocation for social sector
Follow-up on major economic FY17 has been set at 7.2% (7.05% in
FY16, provisional)
Inflation is expected to decline to 5.8%
Increase in import duty to some machineries & instruments to
protect local industry. (such as agricultural tools)
Both revenue and total expenditure (as % of GDP) to grow in FY17
by about 2.1 percentage points
Reduction of Import duty in Industrial machineries can influence
increasing private investment.
Reliance on domestic sources in financing budget deficit led by bank
borrowing

Tax-free minimum income remains same ( 0.25 million)


To achieve 7.2 % GDP growth, extra 32.4% investment should be
increased.
More importance is given in revenue collection than foreign help as a
source of budget. That is a good sign of self dependency.
Emerging increase of budget in Education & social security.
Government is planning to increase investment by imposing more
tax & VAT on general public.
Steady increase of budget in Infrastructure sector.
For the first time in budget history, more amount of budget is
allocated in non-development sector than development sector. This
is interesting.
Modern improvement in GDP growth & public investment increased.
Private investment as a share of GDP (23.3%) is required to rise by
1.5% points.
To apply such investment, an additional Tk. 80,000 crore private
investment will be required.
Growth, investment & Inflation compare to Previous year:

Indicators
GDP growth (%)

FY15 (A)
6.6

FY16 (B)
7.0

Investment (as % of GDP)

28.9

30.1

Private (as % of GDP)

22.1

22.8

Public (as % of GDP)

6.8

7.3

ICOR

4.4

4.3

CPI inflation (%)

6.4

6.2

Budget speech mentions that during 2010-15, 4.7 million people


joined the labor market of which 98% found job in domestic market.
Both revenue and total expenditure (as % of GDP) to grow in FY17
by about 2.1 percentage points

Export growth is projected to be same as FY16 (10%) as a reasonable


target.

Reliance on domestic sources in financing budget deficit led by


bank borrowing.

Currently about 57% of the public debt is attributable to domestic


source and 43% to foreign finance. Due to increase in local debt,
public debt will increase insignificantly.

Interest payment for domestic debt has already risen substantially.


Public Debt (as % of GDP)
Actual

Budget

FY15

FY16

Total Debt

31.9

35.0

Domestic

18.2

20.2

External

13.6

14.8

Indicators

Remittance inflow is expected to bounce back and grow at 10% in


FY17 some recovery from stagnant performance is expected in
view the recent upsurge in outflow of Bangladeshi migrant workers.

Revenue (36.8%) projected to grow faster (to collect additional Tk.


65,351 crore) than public expenditure (28.7%) which will spend
additional Tk. 76,040 crore. Total budget expenditure is set at 17.4%
of GDP (15.3% in FY16). Revenue income will be 12.4% of GDP
(10.3% in FY16)

Budget deficit has been projected at 5.0% of GDP (same in FY16)

Government has identified 10 Fast Track projects that will


accelerate GDP growth.

About 106% of incremental Deficit is programmed to be financed by


foreign source.
Share of domestic financing 62.9% (71.3% in RBFY16)
Tk 38,938 crore (39.4%) will come from the bank borrowing (36.3%
in RBFY16)
Tk 22,610 crore (23.1%) will come from non-bank sources (35.0% in
RBFY16).
Share of foreign financing will be 37.1% in FY17 (28.7% in RB of
FY16)
Much will depend on project & utilization of ADP 89.4% of total
foreign resource.

Budget Deficit & Financing


Description
Revenue Collection
Total Expenditure
ADP
Non-ADP
Overall Deficit (Excl Grants):
Financing
Foreign Grants
Foreign Loan-Net
Foreign Loan
Amortization
Domestic Borrowing
Bank Borrowing (Net)
Non-Bank Borrowing (Net)

BFY17

RBFY16

% of GDP

% of GDP

12.4
17.4
5.6
11.7
5.0

10.3
15.3
5.3
10.0
5.0

0.3
1.6
2.0
0.4
3.1
2.0
1.2

0.3
1.2
1.6
0.4
3.6
1.8
1.8

Sources of Deficit Financing

Challenges to be Faced:
Implementation of budget for FY17 will continue to face a number of
familiar challenges. Attaining the proposed fiscal framework for FY17 is going
to be an uphill task Because of

Inability to mobilize the targeted domestic resources

Inability to spend the earmarked allocation

Failing to use foreign aid in the pipeline and opting for nonconcessional foreign loans

Quality of public expenditure will continue to remain suspected

Structural and institutional weaknesses continue to stand between


the nation and its potential achievements. The vision is not supported by
courage and innovation in this regard.

Budget Allocation (Drawbacks)


As a big budget applied to next fiscal year & important to
our economy, government has drawn Quantitative & analytical analysis to
make it possible. During analyzing this budget, I have found some drawbacks
that can badly affect to our economy & society.
As import duty imposes more on importing medical instruments,
medical service will be costly.
Though there is an increase in Education & health sector, as a
questionable performance in recent, there is also some risk in using
this budget properly.
To collect this huge revenue, we have to depend on NBR. But this
organization is not well enough skilled & organized to collect this
enormous revenue.
Bureaucracy & corruption are the major obstacles to apply this budget.
As the value of money is overvalued, there is a negative impact on
export revenue.
As private investment is not well enough, the pace of job creation will
slow down.
Government will cover deficit budget by taking local loan. That
initiates the speed of increasing interest as well as non-development
cost.
In this budget, no instruction is provided about how private
investment will be increased.

According to this budget, lots of job will be created. As private


investment isnt well enough, this will be questionable.
There is a target of achieving 10% fund through remittance. This
target is impossible as money is overvalued day by day through
inflation.
More money is used in non-developing sector. This will hinder the
development goals.
In this Budget, Government will make huge investment in stock
market & banking sector to accelerate GDP growth. But current
market situation isnt well competent as there is an unrest situation.
Tax rebates in private investment has lessened from30% to 20% .This
change may negatively impact on investment target.
Tax hike in all types of exported product may negatively influence on
export revenue.
Though budget allocation in agricultural sector has increased, that is
not well enough to maintain.
Most of the projects undertaken by ADP are city- centered. That will
hinder the decentralization of development. (around 57% projects
applies in Dhaka city)

Budget Allocation (Recommendation)


To apply this budget, some flourishment is needed in
budgetary planning & performance. During my finding I want to put some
recommendation for these adjustments.
Education & Health sector should be authorized more accurately so that
this budget will be properly used.
More VAT can be applied in Tobacco products. These will reduce social
cost as well as health costing.
NBR should make more organized planning to collect revenue from
people. They should expand the range of collecting revenue.
If possible, taxation system should be re-organized or re-constructed to
boost up the revenue collection.
Strong public administration is required for taking out bureaucracy &
special law should be imposed to clear corruption. But public awareness
is most important.
More importance should be given on private investment to achieve
targeted GDP growth. Thats why government has to take initiatives to
influence people. Tax deduction, maximizing depreciation & such
initiatives is needed.
To fund deficit budget, government can use foreign endowment to less
the financing cost.
Scope of collecting foreign help have to be utilized & made proper use as
these funds doesnt need to return.

Skilled governance on Stock market & Banking sector should be made to


influence the private investment.
Revenue collection method should be modernized & expanded
throughout the mass population.
More

development

projects

should

be

applied

to

accelerate

decentralized development.
More allocation is needed in Social security & Defense to develop &
modernize in accordance with the current unrest situation.
More reconciliation is needed in LGRD sector so that revenue collection
& resource appliance will be more efficient.
In big budgeted project, local sector should be given more priority for
financing (Such as PPP) rather than taking high costly foreign loans.
Number of taxpayer should be increased rather than imposing more tax
upon existing taxpayer.
Ensure greater involvement of parliamentary standing committees in
formulating and overseeing implementation of the budget
Provide quarterly reports on budget implementation in Parliament (The
Finance Minister missed out 11 out of 21)
Establish an effective result-based-monitoring system to ensure high
quality delivery
Make closing fiscal framework figures of elapsing fiscal year (FY16)
available at the earliest and revise budget for FY17 at an early stage
Bring more transparency in budget formulation, implementation and
assessment procedures:
Establish a Public Expenditure Review Commission
Formulate appropriate follow up mechanisms for monitoring

government tax incentives


Disclose financial accounts of state-owned enterprises
including BPC and contingent liabilities in detail
Establish transparency in governments asset acquisition
Formulate an appropriate foreign aid policy in view of the
changed global aid architecture and Bangladesh becoming the
(lower) middle income country
More sunshine in defense economy
Introduce separate but integrated budget for local government
Integrate NGO financing in the public expenditure structure

Different Strategies Regarding Fiscal


Policy to Enhance Revenue
Fast-growing economies that dont strengthen their tax administrations
miss a chance to create long-term fiscal stability. Some initiatives can
deliver positive results within a year.
Numerous challenges can undo the benefits of rapid growth in emerging
economies. One of the most often overlooked is making tax administration
more effective. Successful reform can enable a country to tackle the challenges
of rapid growth and ensure that the flow of revenue is stable and longer
lasting.
In many emerging nations, tax administrations are, at best, only sound.
While improving them isnt easy, it is critical, especially in emerging markets.
Countries that fail to capitalize on the benefits of rapid economic growth are
missing a tremendous opportunity to improve the quality of life for their
citizens. In a rapidly developing economy, a 10 to 15 percent increase in tax
revenueswhich sounds ambitious but is quite achievableoften translates
into an ability to double expenditures on, for example, health care or
education.
Although large-scale structural reforms are an important part of a wellfunctioning tax administration, they are extremely challenging to implement,
and they take time. We have therefore developed a set of quick-win initiatives
that can achieve a significant revenue impact within a year of introduction.

These recommendations are based on our experience supporting clients in


over 20 countries through more than 120 public-finance projects over the
past five years. We also drew on information from our proprietary global taxbenchmarking database, which contains the details of over 100 tax practices
in more than a dozen countries. The quick-win approach is designed not only
to make tax administrations more effective and to address their most pressing
needs but also to provide a powerful proof of concept for broader efforts.
Focus resources on improved auditing, processes, and tools
Fast-moving growth creates opportunities for tax evasion and may
encourage a culture of noncompliance. Auditing can not only detect and
penalize evasion attempts but also signal a tax administrations intention to
prioritize more aggressive enforcement. One such administration, for
example, installed a group of some 50 auditors while at the same time training
about 100 tax examiners. To automate parts of the process, the administration
developed specific audit tools, which simplified procedures and improved the
overall quality and consistency of audits. Within six months, the auditors
productivity rose more than tenfold and audit-related collections increased
fiftyfold. Voluntary compliance increased substantially thanks to the
perception of increased controls. As a result, revenue from the corporate
income tax has risen by over 30 percent year on year.
Use simple segmentation to identify larger collection opportunities
Most rapidly developing economies lack the advanced analytic tools and
databases necessary to flag and follow up on suspicious taxpayer behavior
automatically. Nonetheless, simply segmenting taxpayers according to

attributes such as size, sector, and past behavior can help tax authorities
quickly perform a risk analysis identifying discrepancies between an
individual taxpayers behavior or payments and that of his or her cohort. By
applying

this

technique

to

approximately

500

taxpayers,

the

tax

administration in one African country, then in the early stages of its


improvement journey, identified a small number of taxpayers who together
owed 5 percent of the nations total uncollected tax debt. The administration
expects to recover over half of this amount.
Target collections in the tax offices with the largest outstanding
debts
In many emerging markets, tax collection is neither automated nor
centralized. Collection rates are often low, and there is little awareness of how
much is truly owed. In response to this challenge, one customs authority
identified the importing businesses that owed the most in back taxes and put
in place a technical team to negotiate payment terms directly with debtors.
The program helped minimize opportunities for importers to accumulate
more debt and also served to publicize the customs authoritys intention to act
against evaders. Within three months of launch, the initiative helped collect
approximately 15 percent of the customs departments outstanding debt
corresponding to some 2 percent of its yearly revenueand reduced the rate
of new-debt formation by more than half.
Ensure regular updates to the taxpayer registry
In many rapidly growing markets, it can be difficult to maintain an
accurate central taxpayer registry, as much of the economy is made up of

informal and small-scale businesses, and tax authorities lack the external
controls necessary to ensure that such entities stay within the system. To
counteract this, registration should be made more rigorous and feedback
systems introduced to ensure that taxpayers regularly update their
information. Additionally, quick and simple controls can be put in place to
raise the alarm if taxpayers fail to comply with their obligations.
One tax administration in Africa, for example, launched an aggressive
two-week effort to improve its registry. During this period, the authority
closed selected branches and sent their officials into the field to identify and
register informal businesses in specific areas. Taxpayer registry entrys
increased by 20 to 30 percent in the targeted districts.
Introduce account managers to oversee large taxpayers
In most countries, a very small number of taxpayers account for the
majority of tax revenue. Although tax administrations usually have largetaxpayer units, these LTUs often use the same processes, rules, and resources
as general tax offices. LTU account managers, supported by a back office
devoted to their needs, can provide large taxpayers with differentiated and
improved services that will ensure increased revenues. One sub-Saharan
country, for example, doubled the number of auditors in the audit teams of its
large-taxpayer unit and implemented an ambitious training program to raise
their technical skills and the quality of their work quickly. In parallel, the unit
launched a focused effort to analyze and close a small number of high-value,
complex cases in specific sectors by using specialized audit teams with sector-

specific training and skills. The additional revenue the specialist teams
identified equaled 2 to 3 percent of the tax authoritys total yearly revenue.
Use electronic channels for simple transactions
In many rapidly developing economies, mobile and Internet penetration
are comparatively high. Tax administrations can therefore introduce
electronic channels such as Internet portals, mobile-payment options, and
ATMs. By using these channels for simple taxpayer transactions (such as
declarations and payments), a tax administration can increase the level of
voluntary payments while conveying a strong sense of its public purpose.
Such approaches reduce the length of queues at tax offices while also
removing a barrier to compliance.
Communicate the benefits of the quick wins widely
Communication about tax programs should address three areas:
promoting the benefits of paying taxes, educating taxpayers about how to
comply, and increasing the perception of risk for noncompliance. The
communication plan should include both institutional and initiative-specific
messages. It can incorporate appeals that have an emotional elementfor
example, linking the use of tax revenue to the funding of schools or
highlighting sanctions for failure to comply. Other messages, such as
explaining changes to tax laws or procedures, can be purely informative.
Effective

communication

promotes

voluntary

compliance.

By

communicating specific tax initiatives even to residents who werent

necessarily affected by them, one country more than doubled their impact
because the general population felt obliged to comply with broader tax rules.
Analyze opportunities to close tax loopholes
With input from senior tax officials, tax administrations can perform a
top-down, granular analysis of each type of tax to establish whether there are
opportunities to close sector-specific tax loopholes quickly. The analysis
should establish whether there are any significant gaps between the expected
and the effective tax rates.
Using this approach, a Latin American country identified two large
economic sectors that had exploited loopholes (for example, legacy tax
exemptions) to pay effective tax rates from a quarter to a sixth of the nominal
corporate income-tax rate. With only limited legislative changesand still
keeping nominal tax rates for these two sectors lower than they were in
neighboring countriesthe administration increased total corporate incometax revenues by more than 10 percent in one fiscal year.
Simplify the tax system to encourage formalization
The tax systems in most rapidly growing economies are highly informal
and often unnecessarily complex. Simplifying the tax code encourages
voluntary compliance, while at the same time sending the message that efforts
to formalize the system are a priority. For example, in 2009 South Africa
introduced a less complicated turnover tax as an alternative to the normal
corporate income tax and value-added tax. The system attracted more than

7,000 new taxpayers in the first year alone. A large portion of them were
converted from the informal economy.
Create external checks that enforce compliance
Often, informal businesses that dont pay taxes nevertheless interact
with government agencies as part of normal operations. Tax administrations
can work with these agencies to verify the tax status of businesses. Such
checks need not be overly intrusive but can still effectively encourage
formalization. One rapidly developing country, for instance, passed a law
requiring government workers to check the tax administrations registry
when residents attempted to import goods, send funds abroad, sponsor
applications for work visas, or apply for public contracts. The law was then
broadly publicized in the media, showcasing the governments commitment to
formalizing the tax system and ultimately increasing voluntary compliance.
How to do it
We have identified four broad success factors that help taxadministration reform programs achieve the desired level of impact. While
these factors are important in all such programs, they are especially critical in
rapidly growing markets, where implementation is particularly challenging.
The program must be coordinated across all the relevant government
functions, including communications, human resources, IT, and
legislation.
Governments must secure a sufficient long-term commitment of
financial and organizational resources at the outset. Such a

commitment will minimize the possibility that a program will be


abandoned as a result of a change in political actors.
The program must deliver some early successes, as these will provide
legitimacy and finance longer-term initiatives.
A technical team focusing solely on this work (and operating
separately from any political structure) should collaborate closely
with the tax-administration staff responsible for day-to-day business.
The team must design and implement the initiatives, establish clear
metrics, and closely monitor the results.