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Improving Compliance of Income Tax in Developing Countries: Bangladesh Perspective

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Improving Compliance of Income Tax in Developing Countries: Bangladesh Perspective Improving Compliance of Income Tax in Developing Countries: Bangladesh Perspective Thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Sams Uddin Ahmed LLB (Hons), LLM (University of Dhaka) LLM (University of New South Wales) School of Law Deakin University Melbourne, Victoria Australia May 2016 Dedication This work is dedicated to My parents, Sultan Uddin Ahmed, Advocate and Asiya Sultan who passed away unexpectedly, leaving me alone and helpless, before I was able to finish this thesis. Acknowledgements At the outset, I am privileged to thank profusely my principal supervisor, Dr John Morss, without whom my journey towards this project could not even have begun. He never stopped trusting in my ability to carry on the pursuit. God has given ability to people, but we need the opportunity to demonstrate it. For me, that opportunity was created by my supervisor. Thank you ever so much, John. I cannot repay your debt, and your contribution to my life is precious and goes without saying. I also give my profuse thanks to Professor Julie Cassidy, who kindly consented to assist me during the final year of my candidature. She aptly guided me and made useful comments on my thesis to work it into its final shape. Next, I thank Professor Neil Brooks of Osgoode Hall Law School, York University, Toronto, Canada, who is like a custodian and mentor of mine. I had the opportunity to interact with Professor Neil long before I began my PhD project at Deakin Law School. He has been a fountain of inspiration and advice for me during my long and tedious academic journey. He did not compromise in guiding me along the right track by providing valuable suggestions on chapters of my thesis, as well as important materials. I also profusely thank my former teacher from the University of New South Wales, Faculty of Law, Professor Paul Redmond, who has been a source of inspiration for me during my research project. He remains in my life as a beacon of light and hope in days of difficulty and failure. His fatherly attitude holds much value for me. Next, I would like to thank Professor Mirko Bagaric, the Head of Deakin Law School. He is like a big brother who always helped me when necessary with advice and administrative assistance during my candidature at the Law School. I found him very sympathetic and generous. I also acknowledge the contribution of Professor Danuta Mandelson, Associate Head and Chair (Research) of the School. She is like an older sister who always inspired me generously. I took many opportunities to use her valuable time for my purposes. I would also like to have the opportunity to thank Professor Samantha Hepburn, who I met regularly at the school. She cared about my wellbeing and never hesitated to advise me correctly in time and when I needed the same to get along. She always kept her fingers crossed for me. My thanks and gratitude know no bounds for some of the people I had the opportunity to meet and work with at Deakin Law School. They are Dr Julie Clarke, Dr Jason Taliadoros, Ms Lidia Xynas, Mr Athula Pathinayake, Dr Claudio Boozi, Mr Dilan Thampapillai, Mr Rami Hanebi, Mr Troy Keily, Mr Obs West, Dr Firew Tiba, Ms Eva Wawruszak, Ms Sheryl Pascoe and Ms Debbie Doherty. Special thanks to Professor Evan Fox-Decent of McGill University School of Law, and Professor John Hasseldine for their advice. It would be unjust if I failed to acknowledge the contribution of my wife, Dr. Lutfunnahar Begum, to my research project. Her insistence caused me to undertake this research project. She inspired me throughout and always worked as a catalyst during my difficult times. How can I forget to thank my dearest son, Master Abrar Ahmed, whom I deprived of fatherly love constantly because of my full-time engagement in the research? I do not have the words to apologise to him. Dear son, please forgive me for such unjust deprivation of love and affection. You mean everything to me. Words of thanks are not enough to acknowledge your role in my life. Along with the joy and pride of pursuing my academic journey at Deakin Law School, I also faced the most grievous and frustrating time of my life. During this time, I lost both of my parents—my mother, Asiya Sultan, and my father, Advocate Sultan Uddin Ahmed. I am so wretched and unfortunate that I was unable to be beside them during their sad demise. With a heavy heart, I acknowledge this failure on my behalf and profusely thank my brothers and sisters who were with them. Dear parents, you gave me the chance to come to this world, but did not give me the opportunity to repay your debt, even in the slightest. My success is not success without your presence, my joy is grief without you, and my life is meaningless without you. May you rest with peace in Heaven. Abstract Tax noncompliance is a problem that is inherent in the taxation system itself—the history of tax evasion is as old as the history of taxation. While tax evasion is a problem for both developed and developing countries, it is more acute in developing countries, which have high rates of tax noncompliance. Several theories and models have been presented in an attempt to analyse the problem of tax compliance, with the main three theories being the economic deterrence theory of tax compliance, psychological theory and sociological models. The deterrence theory emphasises punishment for noncompliance, while the psychological theory emphasises persuasion, rather than deterrence. In contrast, sociological models tend to view compliance behaviour within the structure of the social system, considering tax evasion a social phenomenon. However, no single theory has been able to explain the phenomenon in its entirety. Thus, a comprehensive approach that combines all theories is considered necessary to improve compliance. The Australian Taxation Office (ATO) model is based on the responsive regulatory theory. It offers a comprehensive approach that combines persuasion and punishment in a pyramidal manner, given that empirical research has found that persuasion alone does not work—it must be accompanied by deterrence. Against this backdrop, the purpose of this thesis is to suggest a comprehensive approach for Bangladesh based on the ATO compliance model, and to argue that the relationship between taxpayers and the state is a fiduciary one. While doing so, this thesis aims to critically discuss different theories of tax compliance, including the ATO enforcement pyramid. It also examines some legal tools employed by the income tax administration of Bangladesh to ensure compliance. These tools include tax amnesty and the third-party tax information reporting system. This thesis argues that tax amnesty has failed to be an effective legal mechanism to prevent tax evasion. In addition, this thesis argues that the current law regarding third-party information reporting is insufficient. By examining tax information reporting regimes in different countries, such as Australia, India, New Zealand and the United States, this thesis suggests best practice for Bangladesh. In the context of Bangladesh, no temporary solution to the problem of tax compliance will work effectively. Rather, a sustainable and pragmatic approach is necessary to improve compliance in the long term. In i consideration of that goal, this thesis also presents some policy suggestions for the income tax administration of Bangladesh. ii Contents Declaration .................................................................................................................. 1 Access to Thesis A………………………………………………………………………………………………………..2 Dedication .................................................................................................................... 3 Acknowledgements ..................................................................................................... 4 Abstract ........................................................................................................................ i Contents ...................................................................................................................... iii List of Figures ........................................................................................................... vii List of Tables ............................................................................................................. vii List of Abbreviations ............................................................................................... viii Chapter 1: Introduction ............................................................................................. 1 1.1 Background to the Research ............................................................................... 1 1.2 Literature Review ............................................................................................... 5 1.3 Structure of the Thesis ...................................................................................... 21 Chapter 2: The Fiduciary Aspect of the State–Taxpayer Relationship .............. 27 2.1 Introduction ...................................................................................................... 27 2.2 The State–Citizen Fiduciary Relationship ........................................................ 29 2.2.1 The State as Real Fiduciary ....................................................................... 32 2.3 State–Taxpayer Fiduciary Relationship ........................................................... 36 2.3.1 Entrustment: The Basis of the State–Taxpayer Fiduciary Relationship...
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