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17th Round RRC

DEADLINE EXTENDED

CALL FOR RESEARCH PROPOSAL

SANEI 17th Round Regional Research Competition (RRC)
TAX POLICY AND REFORMS IN SOUTH ASIAN COUNTRIES
Deadline: 15th September 2015

DEADLINE EXTENDED

CALL FOR RESEARCH PROPOSAL

SANEI 17th Round Regional Research Competition (RRC)
Deadline: 15th September 2015

TAX POLICY AND REFORMS IN SOUTH ASIAN COUNTRIES


Concept Note

A major problem in all South Asian countries is the low and stagnant revenue productivity in their tax systems. The countries in the region except India have a tax-GDP ratio of about 10 per cent and in India, it is just about 16.5 per cent which is much below the levels seen in countries with comparable level of development. The low and static revenues from the tax systems have seriously constrained their ability to finance the much need physical infrastructure and human development in these countries.  This has also led to high level of dependence on foreign aid for financing even the basic requirements resulting in uncertain and unstable flow of resources to these sectors thereby constraining the developmental efforts. There are resource allocation implications of the tax systems as well. Although pursuit of efficiency in the tax policy may not have much relevance in developing countries, there are issues of taxing the informal sector and responses to tax policies in avoiding and evading taxes. Indeed, much of the tax theory recognizes that taxes are distortionary. However, contrary to what is presumed in much of the tax theory, markets are not perfect in the absence of taxation. Therefore, the distortions in taxes may be used to correct market distrotions (Stiglitz, 2010). The challenge, however, is to recognize the nature of market distrotions and design tax policies to correct the distrotions and improve revenue productivity. Therefore, it is important to analyse the tax systems of the countries in the region to understand the reasons for the persistence of low revenue productivity, analyse the economic consequences of the taxes, particularly their impact on resource allocation, design the policies to improve the resource allocation and examine the efficacy of the tax system in achieving its broad objectives and the desired state of redistribution.
    The best practice approach to tax reform is to reduce the three costs associated with taxes namely, the administrative cost, the compliance cost and cost to the economy in terms of the distortions they create (Bird and Zolt, 2008). All taxes create distortions and major lesson from the optimal tax theories is that the distortions should be minimized.  Given that markets are imperfect even in the absence of taxes, ideally, the taxes should be designed to correct market imperfections. However, in the absence of perfect information, the approach that is followed is to follow the thumb rule of minimizing distortions from taxes.  Thus, the best practice approach to tax policy is to broaden the bases, reduce the rates and minimize rate differences to evolve simple and transparent tax systems.  Studies have shown that the ability of the tax system to alter the distribution of incomes is limited and therefore, the focus of equity should shift from reducing inequalities to abolishing poverty which implies that equity must be pursued more through the expenditure side of the budgets by making larger allocations to pro-poor public social spending such as on social protection, basic education and primary healthcare.
    The tax systems in the countries of the South Asia region suffer from a number of shortcomings. The tax bases continue to be low as income from agriculture completely is exempt. The pursuit of several objectives through tax policy besides generating revenues through various tax exemptions, concessions and deductions has not only rendered the tax bases narrow but also has distorted resource allocations. Most countries burden the tax policies with many objectives such as promoting savings and investment, exports, providing incentives to infrastructure sectors, regional development and promotion of small scale industries which have eroded the tax base and complicated the tax systems. The tax administrations have limited capacity to administer the complex tax system and the much needs to be done to improve the use of technology and information system.  Most multinational companies operating in these countries pay very little tax by creating subsidiaries and locating them in tax havens, reducing the profits through transfer pricing and royalty payments, and the tax administrations in these countries do not have the capacity to deal with them effectively.
    An important component in the modern tax system is the value added tax on goods and services (VAT). Although most of the countries in the region have implemented the VAT, the tax base is far from being broad and comprehensive. In some countries services are still to be included in the base. In some others, the tax is confined to the value added up to the production stage. There are also problems of including the small businesses.  Unlike in most other countries where the VAT has been a money spinner, the experience in South Asia has not been impressive.  From the Bangladesh experience, Emran and Stiglitz generalise that VAT is a tax on the formal sector and has led to the spreading of the informal sector.  (Emran and Stiglitz, "On Selective Indirect Reform in Developing Countries" Journal of Public Economics, Vol 89 (4); pp. 599-623.
     The distinctive roles of the tax system and its impact on allocative efficiency and public resource mobilization are often poorly understood. For example, VAT and any supplementary duty (additional VAT on luxuries) are often applied at differential rates at the import stage and on domestic production; thus, instead of being an incentive-neutral tax on consumption, these taxes serve to protect domestic industries on top of customs duties.  This also raises the issue of the political economy aspects of tax reforms, such as the pressure from vested interest groups. The temptation to pursue populist policies such as allowing too many tax waivers is another important aspect of the political economy of tax reforms.
     There are very few empirical studies on tax policy and reforms in the region. It is important that the studies should address tax policy issues in the broader context of fiscal management and the role of public finance in South Asian economic development. Analysis of the structure and operational details of the tax systems of the countries in the region are important to identify the reasons for low revenue productivity and stagnancy of tax revenues.  Research can be undertaken in a number of aspects of tax policy and reforms. These include: (i) exploration into the possibility of expanding tax bases including the strategies to include unorganised "small" businesses through a simplified tax system (presumptive taxes); (ii) studies on the tax gaps in the countries of the region; (iii) Estimate the cost and efficacy of various tax incentives; (iv) studies on the effect of tax policies in savings, investment and growth; (v) Base erosion and profit shifting by multinational companies.  (vi) coordinating and harmonizing of tax systems of different levels of government in multilevel fiscal systems; (vii) analysis of the effectiveness of earmarking taxes to overcome taxpayer resistance; (viii) sumptuary taxation of alcohol and cigarettes; (ix) Estimate the incidence of taxes using alternative assumptions; (ix) problems and prospects of levying local taxes including the reform of property taxes; (x) estimation and analysis of compliance costs of taxes; and (xi) analysis and reform of tax administration and using technology in tax administration.  The scope of research in tax policy and reforms is wide and these are only a few indicative areas.

References:
Bird, Richard M. and Eric Zolt, (2008), "Tax Policy in Emerging Countries", Environment and Planning C: Government and Policy, Vol 26; No. 1. Pp. 73-88.

Emran, Shahe and Joseph Stiglitz, “On Selective Indirect Reform in Developing Countries” Journal of Public Economics, Vol 89 (4); pp. 599-623.

Stiglitz, Joseph (2010), "Development-oriented Tax Policy" on Roger Gordon (ed), Taxation in Developing Countries, New York: Columbia University Press,

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Announcement

"SAARC Recognized Body" status of SANEI, renewed | SANEI Secretariat relocated in Kathmandu, Nepal | The Global Development Awards Competition is an innovative award scheme launched by GDN with the generous support from the Ministry of Finance, Government of Japan. The Awards Competition recognizes excellence in policy-oriented research, supports research capacity development of researchers in developing countries and funds innovative social development projects benefiting marginalized groups in the developing world. Since its inception in 2000, GDN has provided US$ 3.8 million in awards and travel grants to finalists and winners. The winners of the current round will be chosen by an eminent jury at GDN’s 17th Annual Global Development Conference to be held in Peru from 17-18 March, 2016; an event expected to be attended by over 200 practitioners in the field of development where finalists will present their proposals. Finalists from both award categories will be invited to present their proposals at the Conference. | SANEI is now associate member of International Economic Association |