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Indebtedness of income tax system: Bangladesh Perspective

July 2010

Indebtedness of income tax system: Bangladesh

Perspective

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A Research Report on Indebtedness of income tax system: Bangladesh perspective submitted to the School of Business in partial fulfillment of the requirements of Research & Methodology course Summer 2010
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Indebtedness of income tax system: Bangladesh Perspective

Indebtedness of income tax system: Bangladesh Perspective


Submitted To: Dr. Md. Taufiqul Islam Associate Professor Faculty of Arts and Social Science American International University Bangladesh

Submitted By: Hazra Sabbir Hossain (08-10241-1) M. Hasib Uddin (08-10116-1) Md. Yamin (08-10323-1)

July 20, 2010

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Indebtedness of income tax system: Bangladesh Perspective

1. Introduction
Taxes are primary sources if governmental revenue in Bangladesh. Taxation means imposition of a non-penal yet compulsory levy for transfer of resources from private to public sector, imposed by the public representative based on pre-determined criteria and without reference to any specific commitment, in order to accomplish some nations economic and social objective. These are dues that we pay for the privileges of membership in an organized civil society. Tax is imposed in the assessment year based on income year. Tax is a internal revenue, which collected through two types of tax in many countries.[1] Those are direct tax and indirect tax, where direct tax deals with income tax and indirect tax deals with Value Added Tax (VAT) and Custom Duties. In spite of the structure of taxation and the lack of unwillingness of citizens to fulfilling its citizenry duties, it is indeed very inconvenient task collecting taxes from tax payers in Bangladesh.
[2]

Bangladesh

inheritances a week economic infrastructure from British era and later from Pakistan ruler although it nit posses a vast amount of natural resources.
[3]

These limitations have caused slow growth in production,

saving, in capital formulation and in capital investments.[2] Moreover, the economic activities outside the agricultural sector are disjointed and fragmented, which has contributed the problem.

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1.1 Basics of the Study


The term tax has been derived from the French word taxe and etymologically, the Latin word taxare is related to the term tax, which means to change. Tax is a contribution exacted by the state. It is a non-penal but compulsory and unrequited transfer of resources from the private to the public sector, levied on the basis of predetermined criteria. According to Article 152(1) of the Constitution of Bangladesh, taxation includes the imposition of any tax, rate, duty or import, whether general, local or special, and tax shell be constructed accordingly. Taxes are the most important source of revenue of the modern governments. It is a compulsory levy, to be paid by the citizens who are liable to pay it, imposed by the government. Many economists like Seligman, Adam Smith, Bastable, Taussig and Dalton hold the unanimous opinion that tax is a compulsory payment to the government by taxpayers without any expectations of some specified return. But essence of the argument is this that the tax payer is not entitled to claim return of his taxes though he may receive benefits of the service which the State provides by means of the taxes collection from him and many other like him. According to P. E. Taylor, Taxes are compulsory payer. According to Dalton, A tax is a compulsory contribution imposed by a public authority irrespective of the exact amount of service rendered to the tax payer in return and not imposed as a penalty for any legal offence. According to Section 2(62) of the ITO 1984, tax means the income tax payable under the ordinance and includes any additional tax, excess profit tax, penalty, interest, fees or other charges leviable or payable under this ordinance.
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payment to

government without expectation of direct return in benefit to the tax

Indebtedness of income tax system: Bangladesh Perspective

The above definitions make it clear about the tax, that it is a compulsory contribution by the tax payers to the government.
[11]

1.2 Background of the Study


Income tax concept was first introduced by Mauryan ruler Chandragupta in 322BC. Maurya Empire converted the revenue producing economy of Northern India to a predominant agrarian economy and large areas of land were brought under cultivation. It was found that the land revenue was the most important source of income for the government and assessment at regular intervals brought about increase in land revenue. Collection of taxes was a matter of concern for the administration during the Mauryan rule.
[4]

After that in every civilization scholars found the

sign of taxation system in a moderate way that it was before. Income tax laws ware first introduced in the year of 1860 in this subcontinent and remained in force until the partition of India and Pakistan. The present income tax law came into the new shape after passing three eras from 1947. [2] Income tax in the Indian sub-continent had its origin in 1886 via the Indian income Tax Act. In Bangladesh, this was further streamlined by the Income Tax Act 1922 which was used, albeit with modifications, until 1984, when the present Income Tax Ordinance was introduced. A major reorganization and expansion of the Income Tax Department (ITD) took place in 1992, with a further expansion in 2001. The ITD acts as one of the two executive arms of the National Board of Revenue for the collection of revenue. The ITD is divided into zones headed by a commissioner. There are two types of zones, i.e. for making assessments and collection of taxes (executive zone), and, for the hearing for appeals (appeals zone). Besides these zones, there are specialized offices (i.e. Directorates of Inspection) tasked with conducting audits of selected cases and performing internal audits. In
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Indebtedness of income tax system: Bangladesh Perspective

respect of the training of personnel, there is a separate Directorate of Training or Tax Academy. There are also specialized zones used to identify new taxpayers, and for selected large taxpayers (i.e. Large Taxpayers Unit (LTU)).
[8]

The charge of tax of a person depends on its

residential status and income level. Since 1984 income tax collection never reached the forecasted level of Bangladesh government. Though there has a huge amount of high income residents in Bangladesh, there has a very few amount of regular tax payer. This problem is getting serious and uncontrollable government. Bangladesh is divided into 18 tax- collection zones where 10 zones are located in Dhaka; 3 zones are in Chittagong and; 1 zone in each division of Rajshahi, Sylhet, Khulna and Barishal and 1 zone in the district of Rangpur. There have total 304 tax-offices under these tax zones in which 156 tax offices are located in Dhaka city.
[6]

by the

Though the tax collection is not satisfactory in the

present perspective and not sufficient for the growth in production, saving, capital formulation and capital investments. Another research shown that, revenue loses from 30 files in tax offices in Dhaka city, depicts that revenue loses due to taxpayers noncompliance with laws of income tax is a growing problem in Bangladesh, where in the past five year period (2000-2004).
[2]

1.3 Importance of the topic


One of the most commonly discussed issues in economics is collection taxes relate to economic growth. The main source of revenue of Bangladesh government is Income Tax. So, socio economic and infrastructure development fully depends on the Income Tax. Where the government could not collect the income taxes form those, who are eligible to pay tax. Ultimately the economic, infrastructure and, overall development is getting hampered. Taxation principles argued that

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Indebtedness of income tax system: Bangladesh Perspective

paying tax is not a penalty to the citizens; its a willful contribution to the overall development of the country. By paying tax a citizen can not clime any benefit from that, but the benefit of the taxes will be provided as commonly as the citizen facilities, such as, road, bridge, public infrastructure constructions, poverty reduction, employment etc. In the holly Quran (holly book of Muslims) has also the notification of paying tax as it is a contribution of Zakzt (contribution to the poor). Although there has a moderate industrial and cultural development in Bangladesh as it is a developing country, there is a very insignificant infrastructure development, huge unemployment, Population below poverty line: 36.3% (2008 EST.).[7] The main reason behind these situations is the less revenue income and the losses of revenue of government. It is really important to seek the reasons behind the less revenue income where Bangladesh a large number of citizens who are eligible to pay tax, but there has a few who are paying tax in respect to the total eligible population, which leads to increase black money and corruption in Bangladesh.

1.4 Literature Review


There are a few number of research reports and theoretical works on Indebtedness of income tax and; noncompliance of income tax and its laws. In many of them, research scholars have identified different views on the issue of taxpayers noncompliance of income tax laws in Bangladesh is a growing problem, which results a significant amount of revenue loses each year. However, a very limited amount of empirical work is available on this particular issue in the case of indebtedness of Income tax system of Bangladesh. Matiur (2007) analyzed six factors or causes which are identified that might have contribution to the magnitudes of revenue loses in each category of taxpayers, specially; Public Ltd, Private Ltd, Financial Institutions, Rental, Professionals and

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Indebtedness of income tax system: Bangladesh Perspective

Individuals, namely, Evasion (EV), Lack of awareness (LA), Official Harassments (OH), Complexity of the Law(CL), Lack of Social Benefits(LS), And other reasons including the rest of the reasons mentioned above and involves high compliance cost, political pressure, nepotism, not want to disclose income or assets, illegal and black money earned, giving unlawful benefit to taxpayers by tax officials talking bribe etc. Sarker (2003) has identified as the main problems of the income tax system in Bangladesh are (i) the narrowness of the tax base, (ii) evasion and avoidance of tax, and, (iii) inadequate tax administration. Thus setting up of a simple and road based tax system is crucial to the development of a better tax administration. Studies have identified the main impediments as the lack of tax education among the taxpayers followed by poor public relation activities and inadequate penalty provisions for errant taxpayers. The need to increase training and improve the working environment of tax officials, as well as establish an information management system are also seen as important factors to be met for better tax administration. He was trying to convince by his study that Self-Assessment Systems (SAS) can improve the compliance of income tax as the Japan government does. Japan adopted the SAS in 1947 and after more than five decades, the system is firmly established as part of the tax regime. Bangladesh, if it wants to improve its own SAS, it would be wise to study the public relation activities undertaken by the Japanese tax authorities in relation to the Japanese SAS. The Japanese use of tax counseling is also a crucial element that could be AISA-PACIFIC TAX BULLETIN adopted in developing countries. Sarker (2003) analyses the crucial measures to be taken for better tax administration in Bangladesh and has found that the adoption of an entire self-assessment would be a timely endeavor for improved tax compliance.

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Sarker (2003) The present system of tax administration in Bangladesh has failed to achieve a satisfactory level of compliance, since it first came into effect almost thirty years ago. There has been a need to change the system of administration from an official assessment system to a fully-fledged SAS. The objective of this study is to highlight the issues and problems associated with the official assessment system and make recommendations on ways in which self-assessment can be successfully implemented by interpreting the lessons from the Japanese system. The opportunity that the advantages of SAS as one of the ways in which many countries have improved their tax administration system. One of these advantages is that the taxpayers right is exercised democratically resulting in the increased involvement of the taxpayers in tax affairs. The taxpayers are given the opportunity to compute their income and pay their tax to the national treasury voluntarily. The tax revenues are paid in advance and hence improve the enforcement system and may also reduce operational and administrative costs. Therefore, the study of Sarker (2003) to find out methods to overcome difficulties in the Bangladeshi, SAS is important. Though Sarker have found the opportunities is self assessment system, its implementation in Bangladesh is really difficult task. Because most of the people have a very minimum educational level, so they need to go other place to assess their income tax. I have the consideration to find out the reason of my argument to the failure of Self Assessment System. According to Sarker (2006) The heavy reliance on indirect taxation has been treated as one of the main obstacles in attaining economic progress in developing countries. The problem arises mainly due to the fact that only a few taxpayers share the burden of taxes. Bangladesh is no exception which is also trying to reform its tax structure for long time through structural adjustment and growing demands have been placed on it to suggest

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Indebtedness of income tax system: Bangladesh Perspective

towards a desirable tax system. A huge segment of the population living in acute poverty and disparity is also evident in income distribution. Tax burden is ultimately shared by a limited number of individual taxpayers and corporations. Thus attaining a broad based and optimal taxation system is a much desirable task for the government. This study tries to keep forward such an endeavor by analyzing the distribution of burden of income taxation in Bangladesh. Taxes are the major source of mobilizing internal resources of an economy. Bangladesh revenue structure has been burdened by taxes from indirect sources for long time and usually characterized by heavy import and excise duties. To cope with the challenge due to globalization, government of many such countries has to cut down such duties and levies. NBR annual reports (1997-2000) shows that from 1991 to 2001 there has a stable situation of revenue collection though there has a significant change in economic and industrial development. It shows that income tax first started increasing in early nineties but sharply declined in the middle and still trying to get its way back. A major reform of tax administration in the history of Bangladesh happened that time and a democratic government took over the paddle of the economy after a long military rule. Previous findings have reported mostly results that are based on purely theoretical considerations. Given the circumstances, the present study takes the initiative to conduct an empirical investigation based on a new approach that evaluates the reasons of indebtedness of Income tax system in Bangladesh. The findings from this study are valuable in guiding professionals and policy-makers to further formulate effective compliance of income tax.

1.5 Objectives of the study

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I have done this research as the course requirement of Research and Methodology for the partial fulfillment of Bachelor of Business Administration. Thus the main purpose and objective of this study was to find out the relationship among the causes of the indebtedness of taxation system and the revenue income as well as the economic development. Over this the objectives are given below: Tax payers perception around the taxation system (Income tax). Convenience ness of taxation system. Moral Values toward paying tax. Individual perception toward other tax payers. Measuring the efficiency level of taxation system. Overall obligations of taxation system etc.

Toward conducting this research, Instead of rushing to conclusions about the relationships, we developed our hypotheses (s) on the relationships of independent variables with dependent variables and then statistically taste them. Independent Variables authority, helplessness etc. Dependent Variables (A): Problems facing to pay tax. Independent Variables complexity of law, : Lack of awareness, lack of social benefit, burden, having bribe money, official : Time Lose, documentation, complexity,

(A)

corrupted system, unfriendly, big line, harassment, inattention of

(B)

huge

harassment, illegal Income, bureaucratic policy, etc. Dependent Variables (B): Citizens intention to escape the tax liability. Independent Variables (C): Individual Value, Taxation System Dependent Variables (C): Reason of Indebtedness.

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Null Hypothesis (Ho): No relationship exists between independent and dependent variables. Alternative Hypotheses: HoA: No relationship corrupted exists between time lose, big documentation, harassment, complexity, tax. HaA: A relationship exists between Time Lose, big documentation, harassment, complexity, tax. HoB: No relationship exists between Lack of awareness, lack of social benefit, complexity of law, huge burden, having bribe money, official harassment, illegal Income, bureaucratic policy, etc.; and Citizens intention to escape the tax liability. HaB: A relationship exists Lack of awareness, lack of social benefit, complexity of law, huge burden, having bribe money, official harassment, illegal Income, bureaucratic policy, etc.; and Citizens intention to escape the tax liability. HoC: No relationship exists between Individual Value and Taxation System; and Reason of Indebtedness. HaC: A relationship exists between Individual Value and Taxation System; and Reason of Indebtedness. In the discussion, result and findings part we have discussed and tried to incorporate all the hypotheses as they are tasted. corrupted system, unfriendly, line, system, unfriendly, line, Hypothesis (Ha): No relationship exists between independent and dependent variables.

inattention of authority, helplessness etc.; and problems facing to pay

inattention of authority, helplessness etc.; and problems facing to pay

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2. Operational Definition 2.1 Study Material


The main source of data used was a field-level survey conducted during the summer session of 2010 on some actual tax payers. Those who have paid tax on the income year 2009- 2010 and tax assessment year 20102011. In order to measure results in different perspective, the weighted average method was applied. The scale was converted 6 to .40 , 5 to . 30, 4 to .20, 3 to .10 , 2 to .00; and 1 to .10. The computed weighted average value for the particular variable would indicate the particular level of significance. As per this method, a higher value is assigned for greater weight. Thus most of the scale was individually identical, therefore individual analysis has been done over them. Therefore, doing this research I used some general statistical and graphical tools such as, MS Excel.

2.2 Methods of collecting data


2.2.1 Techniques of selecting samples The samples are randomly selected from 4 categories namely Teachers, Government service holders, Private Service holders and Businessmen. Data were collected from 80 tax payers . Among them, 20 tax payers were Teachers, 20 ware Businessmen, 20 were Private service holders and 20 were Government service holders. 2.2.2 Methods of survey A structured questionnaire was used in the survey, which has been attached in the Appendix- 1 of this article. The respondents (tax payers) were asked to what degree the obligations of taxation system with respect to the 47 variables related to the 12 dimensions problems considering individual perceptions and knowledge. For this measurement, a score of 1 on the scale indicates No comment and a

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score of 6 indicates strong agreement and others are individually detected. The questionnaire was pre-tested on tax payers, and finally, data were collected from 80 tax payers . Among them, 20 tax payers were Teachers, 20 ware Businessmen, 20 were Private service holders and 20 were Government service holders. The taxpayers were interviewed face to face through personal visits by the authors to their places and filled up a self administrative questionnaire. The respondents said which score best indicated how they would describe the attributes being rated. Though the study is on entire Bangladesh, means all tax zones, due to time constraints we have tried to accumulate all tax zones of Dhaka city and took nine samples from a tax zone out of Dhaka city, which is in Comilla and Chittagong.

2.3 Methods of analyzing data


A reliability test was conducted to verify the internal consistency of the variables obtained in the sample. Several statistical analytical techniques were used to measure the level of indebtedness of taxation system (income tax) and; tax payers perception and tax behavior according to their individual belief , perception and practice, and tried to incorporate all the findings of analysis in different tabular and graphical form of representation.

2.4 Limitations of the study


First of all it must be mentioned that I am a beginning level researcher, and not professional researcher, therefore a consideration from the course instructor would be welcoming. The major limitation factor for this study is complexity of the topic. Lacking of information was a big factor, as this is a newer topic in Bangladeshi perspective. We have conducted the assignment during our ongoing course, thus facing serious time constrains. Therefore I did not

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collect and consider a large amount of sample, which always making a question mark on the accuracy of the results of the analyzed data. The collection of primary data is hard to ensure the authenticity of the data due to a small sample. While working for this report I found it very difficult to get assistance from the internets, books, articles, research papers. As a result, it took a lot of time to gather information from various sources and enclosed them to create the report.

3. Result, Discussion & Findings


As my sample were 80. Among them, 25% tax payers were Teachers, 25% ware Businessmen, 25% were Private service holders and 25% were Government service holders
(Graph- 1).

We found that means 100%

respondents are regular tax payer. From the all sample 15% are 25-30 years, 18% are 31-35 years, 22% are 36-40 years, 15% are 41-45 years 9 are 46-50 years, 13% are 51-55 years, 5% are 56-60 years and 3% are above 60 years old
(Graph-2).

Among all my sample 76% is male and 24 %

is female (Graph-3). The samples are paying tax for different time horizons. 29% of them are paying for 1-5, 36% of them are paying for 6-10, 19% of them are paying for 11-15, 10% of them are paying for 16-20, and 6% of them are paying for 21-25 years
(Graph- 4).

From the total, 55%

populations highest tax rate 10%, 18.25% populations highest tax rate 15%, 15% populations highest tax rate 20% and 11.25% populations highest tax rate 25% (Graph- 5). Most of the tax payers of Bangladesh think that the tax rate is so satisfy able in which rate they are paying.

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Convinced with the tax Rate by the total sample

No Comment 1% Not Convinced 44% Convinced 55%

Convinced Not Convinced No Comment

Graph-6: Convinced with the tax Rate by the total sample

Graph-6 shows that 55% tax payers are convinced with their rate, they are paying. Another 44% are not convinced and 1% did not give any comment, that shows, they dont think about the rate. Among all the teachers, 50% convinced and rest of them not convinced (Graph7).

Research shows that teachers who are paying lowest rate they are convinced and who are paying at a high rate, they are not convinced. Convinced rate among the businessmen and the private service holders are same, 55%
(Graph- 8 & 10) ,

where the 45% population are not

convinced. This rate among the government service holders can not be matched, because the convinced rate is highest of all, 60%, not convinced 35%, which is lowest; and another 5% didnt do any comment
(Graph- 9).

A large no. of population think that tax rate is not equally justified and need more further modification. The graph justified , and 3% didnt make any comment shows that 80% of total population think that tax rate are not equally justified, 17% think its
(Graph-11).

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Justification of Tax Rate by total Sam ple


N o com m ent 3%

Justified 17%

N ot Justified 80%

Justified

Not Justified

No com ment

Graph-11: Justification of Tax Rates by total Sample

The most interesting thing is that who are paying at the highest tax rate, most of them think that tax rate is equally justified and who pay at low rates they think its not equally justified. So actually Bangladesh Income tax system is not considering the canon of equality defined by economist Adam Smith. Among the all responses 45% teachers think its justified and others think not justified
(Graph- 12).

Businessmen and private

service holders perception about the justification is almost same. 100% businessmen think tax rate is not equally justified, where 95% private service holders think as not justified equally justified
(Graph-14). (Graph-13-15).

But 20% government

service holders think that tax rate is equally justified and 70% think not

The overall taxation system is so so familiar to most of the respondents as 61% is familiar with it, 21% knows very few about it and 18% is totally unfamiliar with it
(Graph-16).

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Taxation System Familiarity by Total Sample

Very Few Familiarity 21%

Unfamiliar 18%

Familiar 61%

Graph-16: Taxation System Familiarity by Total Sample

So, it can be said that Bangladesh taxation system is about to meet the canon of certainty, that every body should know about the taxation system, defined by Adam Smith. Among all 50% teachers, 50% businessmen, 70% government service holders and 75% private service holders have a clear understanding about the taxation system. On the other hand 15% teachers, 30% businessmen, 25% government service holders and 15% private service holders know very few about it where 35% teachers, 20% businessmen, 5% government service holders and 10% private service holders dont know about the system at all
18, 19, 20). (Graph- 17,

This shows that teachers and businessmens understanding

about the taxation system is comparatively less than the government and private service holders. Perception about the taxation system is mixed and identical
(Graph- 21- 25).

Most of the respondents think that taxation system is problematic, where most of the businessmen think that, then government and private service holders and then the teachers.
Table- 1: Perception about the taxation system

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Government Service Perceptions Efficient Friendly Problematic Effective Unfriendly No Problem Complex Easy No comment Teachers 1 1 8 0 10 0 12 0 2 Businessmen 0 0 18 10 1 0 12 0 2 holder 1 1 14 1 13 0 12 1 0

Private Service holder 0 1 14 0 14 0 12 1 0

Tot al 2 3 54 11 38 0 48 2 4

Sources: A survey conducted for this research in July, 2010

Perception of Taxation System by Total Sample


60 50 40 Responses 30 20 11 10 2 0 1 Perspectives 3 0 2 4 38 54 48
Efficient Friendly Problematic Effective Unfriendly No Problem Complex Easy No comment

Graph-21: Perception of Taxation System by Total Sample

The second most perception is that the taxation system is very complex, where teachers, businessmen, government and private service holders have equally rated perception. Very few businessmen and government service holders think taxation system is effective for the economy, but no teachers and private service holders think that it is effective. The third most rated perception is unfriendly. Most of the respondents think that the taxation system is not user friendly. Different types of problem they face, when they entered into the system. Most problem faced as

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unfriendly system by the private and government service holders and then the teachers. Here the businessmens perception is not identical. Very few have, who think taxation system is friendly, efficient and easy, but they are less than 1% of total population. 1% teachers and businessmen didnt do any comment. Income tax law defined that tax is a willful contribution, but 80% of total population think, paying tax in Bangladesh is not a willful contribution, it is one kind of pressure to them (Graph-36).
Thinking on Paying Tax by Total Population

Willful contribution/ Not Pressure 20%

Not willful contribution/ Pressure 80%

Graph-36: Thinking on Paying Tax by Total Population

In respect to this tax is a huge burden to 46% population, where 45% teachers, 60% businessmen, 45% government service holders and 35% private service holders think tax is a huge burden to them others. As I found earlier the taxation system is problematic and unfriendly, the most of the times the tax payers face a various types of problems to pay tax (Graph 31-35).
(Graph- 26-30).

It

mainly shows that the businessmen feel much burden to pay tax than

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Problems face to pay tax, total population


60 50 40 30 20 10 0 Problems

53 47 41 37 33 24 14

52
Time Lose Unfriendly Inattention of authority

Respondents

33

Documentation Big line Helplessness Complexity Harassment Corrupted System None

Graph-31: Problems face to pay tax, total population

The first most faced problem is tome lose, more than 66% people face a serious time lose to pay. Some times they loosed a entire day or sometimes a week even. Among all the businessmen face this problem most then the private service holders, then government service holders and teachers. The second most problem is unnecessary harassment by the authority, 65% respondents has been harassed during paying tax, among all mostly harassed population is private service holders and businessmen. More than 58% population faced the inattention of the authority. Some times they ware waiting for several hours, but the authority didnt pay attention to them. This time also businessmen faced this problem most. In this situation the tax payers feel helpless, and dont get any help from anybody there. More than 50% of total population face helplessness during pay tax, where government service holders and businessmen face this most. Then the most rated problem is complexity of the system. Around 50% respondents of all category of sample faced the complexity if law and the system. Corruption is a very familiar term in Bangladesh, specially in the government offices. To get earlier services and avoid harassment tax payers sometimes have to pay bribe to the authoritative officials and peons. More than 41% of total population have to give bribe to pay
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income tax and get return. Among all specially the businessmen faced most corruption in the system.
Table- 2: Problems face to pay tax
Governmen Teacher Faced Problems Time Lose Unfriendly Inattentio n of authority Documentation Big line Helplessness Complexity Harassment Corrupted System None 9 11 5 9 8 10 9 14 11 7 11 12 13 11 12 5 1 14 9 12 7 12 6 1 7 8 17 6 47 33 14 41 37 52 33 7 s 10 9 Businessm en 16 7 t Service holder 13 6 Private Service holder 14 2 Tota l 53 24

2 1 1 3 Sources: A survey conducted for this research in July, 2010

Same as corrupted system 41% of the population faced problems in documentation. Although they have proper documentation, the faced the rejection by the authority. The businessmen and teachers most face that documentation is a major problem. Among all population 33% faced unfriendly system and about 9% of total population did not do any comment and the majority ware private service holders and teachers. In most cases, Tax payers want to escape their tax liability as they tried to find out the maximum way of tax exemption, so sometimes they tried to collect documents in a wrong way, which may cause of tax exemption. In this study maximum think that people have the intention to escape the tax liability and the rate is 96% (Graph- 41).

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Intention to escape tax liability

No 4% Yes 96%

Graph-41: Intention to escape tax liability

There have a several reasons behind this intention, which are identical in Table-3.
Table-3: Reasons to escape the tax liabilities.

Government Teacher Reasons Lack of awareness Lack of social benefit Complexity of Law Huge burden Having bribe money Official Harassment Illegal Income Bureaucratic policy No Comment s 13 16 8 8 7 14 10 5 0 Businessme n 10 15 12 9 15 11 17 5 1 Service holder 10 11 9 10 11 17 15 5 0

Private Service holder 11 7 10 5 12 14 13 6 0 Total 44 49 39 32 45 56 55 21 1

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Sources: A survey conducted for this research in July, 2010

Official harassment is the top most reason of escaping the tax liability, total 70% of the population rated this. As their perspective, due to probability of official harassment most of the people do not pay tax, who are eligible. Illegal income is the second most rated, about 70%, specially by the businessmen and government service holders. They think people who have illegal income, if they went to pay tax, they can be identified as illegal earner. Then the lack of social benefit is rated most, more than 61%, almost equally rated. Everybody think that, their tax is increasing governments revenue, but no improvement in governance and citizen facilities. So, if they pay tax it would be used properly and also in return they will not get anything except harassment by the authority. Tax is a contribution to the government to operate the country. One is paying his or her a part of income, so if he or she have to give bribe, it is unacceptable to the tax payer. But in our revenue governance they face this unacceptable situation. Most then think not to pay tax. 55% of all population and more than 65% teachers think that people is not aware about paying tax, about its necessity and importance, which cause escaping the tax liability. Almost 50% respondents think Bangladesh income tax law is very complex. To avoid complexity they have to do, what the tax authority wish or not to pay tax. So, in most cases they do not pay tax as long as it is not a necessity. About 40% tax payers think, tax and unjustified tax rate is a huge burden to the people, among the 40% tax payers most of them are government service holders. There are 26%, who think people escape tax liability due to problematic bureaucratic policy.
(Graph 42-46)

To find the main obligation of tax revenue generation, considering all views I found the individual values and the taxation system. Most of the respondents think that the taxation system is the main obligation of generation income tax revenue, about 55%. Other 32% think individual

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value is the main obligation behind that, and 13% of total population is fully neutral to make recommend the obligation that I found
Obligations of Tax Revenue No comment 13%
(Graph- 47).

Individual Value 33%

Taxation System 54%

Graph-47: Obligations of Tax Revenue

Overall the taxation system is not efficient, depending on the majority dont agree that taxation system of Bangladesh is efficient, then the second majority neutrally agree considering on the execution of the governance. 10% among all think taxation system is efficient, 11% didnt do any comment and 6% strongly disagree on this comment
(Graph- 48).

System Efficiency

10%

0%

11% 6%
No comment Strongly Disagree Do not agree Moderately Agree

34% 39%

Agree Strongly Agree

Graph-48: System Efficiency

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[All the related charts and graphs shown in the Appendix-2, which are discussed above mentioning the graph no.]

4. Conclusion
In the end it can be concluded that, this research has found a lots of significant issues that is directly against the revenue generation. Indebtedness of income tax is a growing problem, which can results a significant amount of revenue losses every year in Bangladesh. Bangladesh is a country with little over 140 million population; however, little over one percent of the population pays their taxes [10]. Moreover, this population has no adequate tax education. As a result, these taxpayers are not aware of the moral and legal aspects of payment of taxes that requires running an independent government and sustaining development efforts. As a result tax payers do not comply with tax laws, especially, income tax law that causes substantial amount of revenue losses in Bangladesh. Relying on the out comes of the survey, intentionally conducted in this study of this thesis identified the causes of indebtedness from Bangladesh point of view and then categorized then into main two parts, one is centralized and another is decentralized. The centralized one is namely; Individual Value and The Taxation System and the decentralized one are namely; Official harassment, Illegal income, lack of social benefit, complexity of law, huge burden, bureaucratic policy and other reasons. Obviously, the results of this research may help the policy makers, that how much changes should be included in crafting tax regulations and effectiveness of the Tax Administration in their practice. In Bangladesh perspective, since it is the one of very few and one way concentration on the issue of indebtedness, I hope that this thesis contains the groundwork of further research, which may find useful tools to Bangladesh Tax Administration for designing effective policy measures or tax regulations considering the probable solutions of the problem in the long run.

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Indebtedness of income tax system: Bangladesh Perspective

No study has been done to measure the effect of democratic environment on the revenue administration and governance for Bangladesh; however it could be inferred that the sudden increase was due to the result of a transition towards good governance and major extension of income tax department. The analysis of revenue structure of Bangladesh shows that direct taxes contribute the lions share in the overall revenue earnings. In other words, income taxes are still one of the primary sources of generating internal resources for Bangladesh. However, for doing this research we used our best analysis and learned knowledge. The work has undoubtedly simulated the practicing of brainstorming for the members to a never-before-imagined extent. We acknowledge that we tried to make the research as full proof but due to a short sample, we can not recommend it is full proof and also recommend for require further modification as we believe that research is a never ending process.

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Indebtedness of income tax system: Bangladesh Perspective

5.1 Appendix-1
Survey Form
Dear Sir, We are doing a research on the perceptive of the tax payers on indebtedness of income tax system in Bangladesh. We are very hopeful for your kind cooperation towards completing the research. (As your understanding indebtedness in the easy way is the obligations of tax system)

1. Are you regular tax payer? Yes No

2. Your current age? 3. Your gender? Male Female

(Such as 30yr)

4. What is your residential location or tax paying zone (location)? ( Present)

5. What is your home district?

6. How many years you are paying tax? 1-5 years 10-15 years 5-10 years 15-20 years More than 20 years Annual income If no 165000- 440000 440001- 765000 765001- 1140000 More than 114000 Rate (%) 10% 15% 20% 25%

7. Do you know the existing tax rates? Yes If yes, 8. What is your current tax rate? 10%
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No

20% None 28 25%

15%

Indebtedness of income tax system: Bangladesh Perspective

9. Are you convinced with your tax rate you are paying? Yes No

10. Is the tax rates are equally justified? Yes No

11. Do you familiar with the taxation system? Yes No Very few

12. Can you calculate taxable income by yourself? Yes No

13. What do you think about Bangladesh taxation system? (Can be more than one answer) Friendly Problematic Efficient Effective Complex Unfriendly No Comment No Problem Easy

Other(specify) ______________________________________________ 14. Do you think paying tax is a huge burden for you? Yes No

15. Do you think tax authority is cooperative? Yes No 16. If no, what types of problem you face to pay tax? (Can be more than one answer) Time Lose Documentation Complexity
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Unfriendly Big line Harassment

Inattention of authority Helplessness None

Corrupted System

Other(specify)_______________________________ 29

Indebtedness of income tax system: Bangladesh Perspective

17. Do you think tax payers pay tax as willful contribution? Yes 18. If not, is it a pressure? Yes No No

19. What do you think that people have the intention to escape the tax liability? Yes No

20. Why people have the intention to escape the tax liability? (Can be more than one answer) Lack of awareness Huge burden Illegal Income Bureaucratic policy No Comment Other(specify)________________________

Lack of social benefit Having bribe money Complexity of Law Official Harassment

21.What is the main reason of this obligation?

Individual Value

Taxation System

No comment

22. Overall the Bangladeshi taxation system is efficient?


1. No comment 2. Strongly Disagree 3. Do not agree 4. Moderately Agree 5. Agree 6. Strongly Agree

Thank you very much for your cooperation

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Indebtedness of income tax system: Bangladesh Perspective

Collected survey data are summarized in the Tables 1(a) 5(a), as it is used for empirical test and graphical representation. Table- 1(a) Data summary on convinced rate with tax rate (Sample size= 80)
Category Teachers Businessmen Government Service holder Private Service holder Total Convinced 10 11 12 11 44 Not Convinced 10 9 7 9 35 No Comment

1 1

Table- 1(b) Data summary on justification of tax rate (Sample size= 80)
Category Teachers Businessmen Government Service holder Private Service holder Total Justified 9 0 4 1 14 Not Justified 11 20 14 19 64 No comment

2 2

Table- 2(a) Data summary on familiarity of taxation system (Sample size= 80)
Category Teachers Businessmen Government Service holder Private Service holder Total Familiar 10 10 14 15 49 Unfamiliar 7 4 1 2 14 Very Few Familiarity 3 6 5 3 17

Table- 2(b) Data summary on thinking of taxation system (Sample size= 80)
Individual Thoughts Efficient Friendly Problematic Effective Unfriendly Businessme n 0 0 18 10 1 Government Service holder 1 1 14 1 13 Private Service holder 0 1 14 0 14

Teachers 1 1 8 0 10

Total 2 3 54 11 38

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Indebtedness of income tax system: Bangladesh Perspective

No Problem Complex Easy No comment

0 12 0 2

0 12 0 2

0 12 1 0

0 12 1 0

48 2 4

Table- 3(a) Data summary on liability of tax (Sample size= 80)


Category Teachers Businessmen Government Service holder Private Service holder Total Huge 9 12 9 7 37 Not Huge 11 8 11 13 43

Table- 3(b) Data summary on thinking on tax payment (Sample size= 80)
Category Teachers Businessmen Government Service holder Private Service holder Total Willful contribution/ Not Pressure 3 4 4 5 16 Not willful contribution/ Pressure 17 16 16 15 64

Table- 4(a) Data summary on problems to pay tax (Sample size= 80)
Businessme n 16 7 14 11 7 11 12 Government Service Holder 13 6 12 5 1 14 9 Private Service holder 14 2 12 6 1 7 8

Problems Time Lose Unfriendly Inattention of authority Documentation Big line Helplessness Complexity

Teachers 10 9 9 11 5 9 8

Total 53 24 47 33 14 41 37

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Indebtedness of income tax system: Bangladesh Perspective

Harassment Corrupted System None

10 9 2

13 11 1

12 7 1

17 6 3

52 33 7

Table- 5(a) Data summary on Reasons of Escaping tax liability (Sample size= 80)
Teacher s 13 16 8 8 7 14 10 5 0 Businessm en 10 15 12 9 15 11 17 5 1 Government Service holder 10 11 9 10 11 17 15 5 0 Private Service holder 11 7 10 5 12 14 13 6 0

Reasons Lack of awareness Lack of social benefit Complexity of Law Huge burden Having bribe money Official Harassment Illegal Income Bureaucratic policy No Comment

Total 44 49 39 32 45 56 55 21 1

Table- 5(a) Data summary on obligations of tax revenue (Sample size= 80)
Category Teachers Businessmen Government Service holder Private Service holder Total Individual Value 6 6 6 8 26 Taxation System 10 10 12 12 44 No comment 4 4 2 0 10

Table- 5(a) Data summary on efficiency of taxation system (Sample size= 80)
No comment 3 3 1 Strongly Disagree 2 1 1 Do not agree 8 9 7 Moderately Agree 6 5 8 Strongly Agree 0 0 0

Category Teachers Businessmen Government Service

Agree 1 2 3

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Indebtedness of income tax system: Bangladesh Perspective

holder Private Service holder Total

2 9

1 5

7 31

8 27

2 8

0 0

5.2 Appendix-2
Graphs and Charts
G v rn e t o e mn S rv e e ic h ld r o e 2% 5

Ta h r ec e 2% 5

P ae riv t S rv e e ic h ld r o e 2% 5

B s es e u in s mn 2% 5

D a gig t no t t l s mle is g r aio f oa a p

Graph 1: Dis-aggregation of Sample

5 -55 1 13%

5 -6 6 0 5%

A v 6 bo e 0 3%

25 -30 15 %

4 6-50 9%

3 1-35 1 8%

4 -45 1 15%

25-30 31-35 36-40 41-45 46-50 51-55 56-60 A ove 60 b

36 -40 2 2%

Graph-2: Age group of total sample

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Indebtedness of income tax system: Bangladesh Perspective

Gender of total Sample


Female 24%
Male

Male 76%

Female

Graph-3: Gender of the total sample

6% 10% 29%
01 to 05 6 to 10

19%

11 to 15 16 to 20 21 to 25

36%

Graph-4: Tax paying years


Highest Tax Rate No. of Respondents (%) 60% 50% 40% 30% 20% 10% 0% 55%

18.75%

15% 20%Tax

11.25% 25% Tax

10% Tax

15% Tax

Tax Rate Bases

Graph-5: Highest Tax Rate

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Indebtedness of income tax system: Bangladesh Perspective

Convinced with the tax rate by the teachers

Not Convinced 50%

Convinced 50%

Convinced Not Convinced No Comment

Graph-7: Convinced with the tax rate by the teachers


Convinced with the tax rate by the Businessmen

Not Convinced 45% Convinced 55%


Convinced Not Convinced

Graph-8: Convinced with the tax rate by the Businessmen


Convinced with the tax rate by the Govt. service holders
No Comment 5%
Convinced Not Convinced No Comment

Not Convinced 35% Convinced 60%

Graph-9: Convinced with the tax rate by the Govt. service holders
Convinced with the tax rate by the Private service holders

Not Convinced 45% Convinced 55%

Convinced Not Convinced

Graph-10: Convinced with the tax rate by the Private Service holders

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Indebtedness of income tax system: Bangladesh Perspective

Justification of Tax Rate by Teachers

Justified 45% Not Justified 55%

Graph-12: Justification of Tax Rate by Teachers


Justification of Tax Rate by Businessmen

Justified 0%

Not Justified 100%

Graph-13: Justification of Tax Rate by Businessmen


Justification of Tax Rate by Govt. Service holders

No comment 10%

Justified 20%

Not Justified 70%

Graph-14: Justification of Tax Rate by Govt. Service holders


Justification of Tax Rate by Private Service holders

Justified 5% Not Justified 95%

Graph-15: Justification of Tax Rate by Private Service holders

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Indebtedness of income tax system: Bangladesh Perspective

Taxation System Familiarity by Teachers


Very Few Familiarity 15%

Familiar 50% Unfamiliar 35%

Graph-17: Taxation System Familiarity by Teachers


Taxation System Familiarity by Businessmen

Very Few Familiarity 30% Familiar 50%

Unfamiliar 20%

Graph-18: Taxation System Familiarity by Businessmen

Taxation System Familiarity by Govt. Service holder

Very Few Familiarity 25%

Unfamiliar 5%

Familiar 70%

Graph-19: Taxation System Familiarity by Govt. Service holder


Taxation System Familiarity by Private Service holders
Very Few Familiarity 15%

Unfamiliar 10% Familiar 75%

Graph-20: Taxation System Familiarity by Private Service holders

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Indebtedness of income tax system: Bangladesh Perspective

Perception of Taxation by Teachers 14 12 10 8 6 4 2 0


nt Ef fic ie

12 10 8 2 0
en dl y m at ic le m ive

Responses

1
dl y

0
pl ex sy

0
m m en N o
12

ie n

Ef fe ct

Pr ob

nf ri

Fr

om

le

Ea

Pr ob

Perceptions

Graph-22: Perception of Taxation by Teachers


Perception of Taxation by Businessmen
Responses 20 15 10 5 0
nt Ef fic ie

18 10 0
ly ie nd

co
0 2
Ea sy
12 1 Complex Easy

0
en dl y ive

1
Pr ...

0
pl ex

Ef fe ct

Pr ob

nf ri

Fr

om

Perceptions

Graph-23: Perception of Taxation by Businessmen


Perception of Taxation by Govt. Service holders
15 Responses 10 5 1 0 Efficient Friendly Problematic Effective Unfriendly Perceptions 1 1 0 No Problem 0 No comment 14 13

Graph-24: Perception of Taxation by Govt. Service holders


Graph-25 16 14 12 10 8 6 4 2 0
Ef fi c ie nt

Perception of Taxation by Private Service holders


14 14 12

Responses

0
Fr ie nd ly

1
at ic Ef fe ct iv e

0
nf ri e nd ly bl em

0
pl ex Ea sy

1
m en t N o co m

o
0

bl em

Pr o

Pr o

Perceptions

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om

c. ..

l..

39

Indebtedness of income tax system: Bangladesh Perspective

Graph-25: Perception of Taxation by Private Service holders


Tax Burden for total sample

Not Huge 54%

Huge 46%

Graph-26: Tax Burden for total sample


Tax Burden for Teachers

Not Huge 55%

Huge 45%

Graph-27: Tax Burden for Teachers


Tax Burden for Businessmen Not Huge 40% Huge 60%

Graph-28: Tax Burden for Businessmen


Tax Burden for Govt. Service holder
Huge 45% Not Huge 55%

Graph-29: Tax Burden for Govt. Service holder

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Indebtedness of income tax system: Bangladesh Perspective

Tax Burden for Private Service holder

Huge 35% Not Huge 65%

Graph-30: Tax Burden for Private Service holder


Problems face to pay tax, teachers
12 10 8 6 4 2 0
Lo

Respondents

10

11

9 5

10

9 2

dl y

es s

se

ity

ss m en

es sn

en ta

pl ex

en

S. ..

of

nf ri

m e

Bi

om

ar a

tte

Graph-32: Problems face to pay tax, teachers


Problems face to pay tax, Businessmen
Respondents 20 15 10 5 0
se Lo

16 7

In a

14

11

11

12

or ru pt

nt io

el pl

Ti

oc u

13

ed

11 1

en dl y

ss

pl ex ity

en ta tio

ss m en

es sn e

of

nf ri

m e

Bi

om

tio

oc um

In at

Graph-33: Problems face to pay tax, Businessmen


Problems face to pay tax, Govt. Service holders
16 14 12 10 8 6 4 2 0
Lo

Respondents

13 6

12 5 1
dl y n

14 9

12 7 1

sn es s

ar as sm en t

pl ex ity

se

or ru pt

te n

el pl

Ti

ar a

ed

en

en ta

S. ..

of

m e

nf ri

Bi

es

om

In at te

Graph-34: Problems face to pay tax, Govt. Service holders

HSH

or ru pt

nt io

el pl

Ti

oc u

ed

on e

a. ..

tio

lin

on e

...

lin

...

on e

a. ..

tio

lin

41

Indebtedness of income tax system: Bangladesh Perspective

Problems face to pay tax, Private Service holders


18 16 14 12 10 8 6 4 2 0
se Lo

Respondents

17

14

12 6 2
.. . n dl y th o e

7 1

ys te m

ss

ity

en ta

ss m en

sn e

pl ex

en

au

nf ri

ig

m e

es

om

of

ar a

oc u

el pl

Ti

t te

Graph-35: Problems face to pay tax, Private Service holders


Thinking on Paying Tax by Teachers Willful contribution/ Not Pressure 15%

In a

Not willful contribution/ Pressure 85%

Graph-37: Thinking on Paying Tax by Teachers


Thinking on Paying Tax by Businessmen Willful contribution/ Not Pressure 20% Not willful contribution/ Pressure 80%

Graph-38: Thinking on Paying Tax by Businessmen


Thinking on Paying Tax by Govt. Service holders Willful contribution/ Not Pressure 20%

Not willful contribution/ Pressure 80%

Graph-39: Thinking on Paying Tax by Govt. Service holders

HSH

or ru pt

nt io

ed

on e

tio

lin

42

Indebtedness of income tax system: Bangladesh Perspective

Thinking on Paying Tax by Private Service holders Willful contribution/ Not Pressure 25%

Not willful contribution/ Pressure 75%

Graph-40: Thinking on Paying Tax by Private Service holders


Reasons of Evasion Evaluated by Teachers
Respondents 20 15 10 5 0
of aw a. ..

13

16 8 8 7

14

10 5

en

Graph-43: Reasons of Evasion Evaluated by Teachers


Respondents

Reasons of Evasion Evaluated by Businessm en


18 16 14 12 10 8 6 4 2 0
w a

15 10

12 9

15 11

e Bu re au cr at ic. ..
17 5
e m re au cr a tic po li c y

a. ..

..

Co m pl

Hu ge

La ck

La ck

Ha vi

ci

O ffi

aw

ss

..

en

en

ss m

re n

m o

rd

nt

Ille
Ill e g a

lb

ci a

pl ex i

H u

of

ck

C o

vi n

ff

ic ia

of

ck

lH a

so

ri

H a

Graph-44: Reasons of Evasion Evaluated by Businessmen

HSH

B u

lI n

ra

ty

co

ga lI nc om

so ci

ex it y

br ib ...

bu rd

of

ng

al H

ar . ..

43

Indebtedness of income tax system: Bangladesh Perspective

Reasons of Evasion Evaluated by G ovt. Service Holders


18 16 14 12 10 8 6 4 2 0
aw a

Respondents

17 10 11 10 11

15

ey

fit

ss

aw

nt

al be ne

bu rd en

ss m e

re ne

of L

ga lI n

co m

ci al H

H av in g

ck

m p

of

I ll e

C o

ck

O ffi

La

Graph-45: Reasons of Evasion Evaluated by Govt. Service Holders


Reasons of Evasion Evaluated by Private Service Holders
16 14 12 10 8 6 4 2 0
of aw ar en e

La

Respondents

11 7

10 5

12

14

ur e

au cr at ic

br ib e

le xi ty

so ci

H u

of

ge

ar a

13 6

ey

fit

ss

aw

nt

bu rd en

al be ne

ga lI nc om

ar as sm e

of L

of so ci

ck

m p

ng

ci

H av i

C o

O ffi

La

ck

Graph-46: Reasons of Evasion Evaluated by Private Service Holders [Here have all the graphs except those, what are already used in the main body]

6. References
1. The Annual Statistical Report- 2000-2001, NBR, Dhaka, Bangladesh. 2. Dr. A K M Matiur Rahman (2007), Noncompliance of Income Tax Laws in Bangladesh: Challenges and Remedies, 13, 32, 38, 77, 79, 71-73, 100. 3. Mustafa Tariq Hossain, Shafket Prokshoni, Dhaka, Bangladesh (1997), Direct Taxes in Bangladesh. 4. http://www.indianetzone.com/43/economy_maurya_empire.htm

HSH

La

ur e

au cr at ic

le xi ty

br ib e

ge

al H

H u

I ll e

po lic y

on

po lic y

on

44

Indebtedness of income tax system: Bangladesh Perspective

5. Md. Syedur Rahman, Parvez Akhter Linkon (2006), Direct Taxes in Bangladesh, 2 & 3. 6. Government of Bangladesh (1984), The Income Tax Manual, Part-1, The income Tax Ordinance- 1984. 7. http://www.indexmundi.com/bangladesh/population_below_poverty_li ne.html 8. Tapan K. Sarker (2003) ,Improving Tax Compliance in Developing Countries via Self-Assessment Systems - What Could Bangladesh Learn from Japan?, Internet Addition, 1-5. 9. Tapan 10. 11. 1. 12. Muhammad Anwarul Islam, The Bangladesh Development Studies (1979), Tax Effort in Bangladesh: Some Empirical Observation, Volume VII, No. 1. 13. Nuimuddin Chowdhury, The Bangladesh Development Studies(September 1988), Income Tax Incidence in Bangladesh, 1980-84, Volume XVI, No.3. K Sarker (2006), Incidence of income taxation in Bangladesh, Internet Addition. The statistical report-2004, The National Board of Revenue, Nikhil Chandra Shil, Mohammad Zakaria Masud, Mohammad Dhaka, Bangladesh. Faridul Alam (2007), Bangladesh Income Tax: Theory and Practice,

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