1

Tax Evasion and Tax Avoidance

Taxation is the backbone of any government, providing the essential funds for public services like
roads, schools, and hospitals. It's a mandatory contribution that individuals and businesses make
to support the collective well-being. However, it's also human nature to want to keep as much of
your hard-earned money as possible, and this often leads people to look for ways to lessen their
tax burden. This desire manifests in two very different ways: tax evasion and tax avoidance. While
both aim to reduce the amount of tax paid, their legality and ethical standing couldn't be more
different, and their impact on a developing economy like Bangladesh is profound. For a nation
striving for sustainable development, understanding and tackling these issues is absolutely crucial.

Tax Evasion:

Tax evasion is outright illegal. It's about deliberately not paying taxes you legitimately owe, or
intentionally underpaying them. Think of it as a fraudulent game where people hide income, inflate
expenses, or provide false information to the tax authorities. This deliberate deception is a criminal
offense, and those caught face serious consequences: hefty fines, prison time, and a tarnished
reputation. The heart of evasion lies in the intent to defraud the government of its rightful revenue.
In Bangladesh, tax evasion is a massive hurdle for the National Board of Revenue (NBR),
contributing significantly to one of the lowest tax-to-GDP ratios in South Asia. Worryingly, studies
by organizations like the Centre for Policy Dialogue (CPD) suggest Bangladesh lost an astonishing
Tk226,236 crore (around $20 billion USD) to tax evasion in FY23 alone – a figure that has more
than doubled in just a decade.

Key characteristics of tax evasion include:

 Illegality: It's a clear violation of tax laws, not a gray area. In Bangladesh, specific legal
provisions exist to prosecute such offenses.

 Intentional Deception: The defining feature is a deliberate effort to mislead tax authorities,
often through active concealment or misrepresentation of financial facts. This "guilty
mind" is vital for proving tax evasion.
Common examples of tax evasion in Bangladesh:

 Underreporting Income: Many small businesses and individuals in Bangladesh's vast

informal sector operate primarily on cash, making it easy to conceal earnings. Think
undeclared rental income, unreported freelance work, or hidden foreign income often
moved through illicit channels. There have even been reports of NBR officials allegedly
facilitating large-scale evasion through bribes.

 Claiming False Deductions or Credits: This involves fabricating expenses that never
happened or claiming deductions you're not entitled to. An individual claiming a family
 2

vacation as a business trip, or a business inflating costs with fake invoices, are classic
examples.

 Falsifying Financial Records: Creating fake receipts, altering accounting books, or

generating sham invoices to reduce reported profits or increase expenses. This is especially
tough to catch in sectors with less formalized accounting.

 Hiding Assets in Undisclosed Offshore Accounts: Moving money or assets to foreign bank
accounts in secrecy jurisdictions without declaring them. This "capital flight" is a huge
concern for Bangladesh, as it starves the country of potential tax revenue and investment.

 Not Filing Tax Returns When Required: Simply failing to submit tax declarations, hoping
to avoid detection. Despite a large population, a surprisingly small percentage of eligible
Bangladeshi citizens are registered taxpayers, and even fewer actually file returns. This
direct refusal to acknowledge tax obligations significantly contributes to the low tax base.

Tax Avoidance:

Tax avoidance, on the other hand, is completely legal. It's about using legitimate methods within
the existing tax laws to reduce your tax liability. It involves smartly taking advantage of
permissible deductions, credits, exemptions, and tax-advantaged investments that the tax code
explicitly allows. The goal is to maximize your after-tax income by arranging your financial affairs
in a tax-efficient way, strictly adhering to the "letter of the law." No laws are broken, and no false
information is provided. While legal, tax avoidance often sparks ethical debates, especially when
aggressive strategies exploit loopholes that seem to go against the spirit of the law, potentially
shifting a disproportionate tax burden onto compliant citizens and smaller businesses.

Key characteristics of tax avoidance include:

 Legality: It operates entirely within the existing tax laws and regulations, leveraging
provisions put in place by lawmakers.

 Strategic Planning: It involves careful and often sophisticated financial planning, often
proactively, to use legal provisions to your advantage. This requires a deep understanding
of the tax code.

 Transparency (in principle): While the aim is to reduce tax, the methods used are generally
disclosed to tax authorities as part of the normal tax filing process. Its legality hinges on
full and accurate disclosure, even if the interpretation of the law is aggressive.
Common examples of tax avoidance in Bangladesh:

 Contributing to Tax-Deferred Retirement Accounts: Investing in provident funds, pension

plans, or government-approved savings schemes allows you to deduct contributions from
 3

your current taxable income, deferring tax until retirement. Bangladesh's tax laws offer
various such incentives.

 Claiming All Eligible Deductions: Meticulously identifying and claiming all permissible
deductions, such as interest paid on home loans, medical insurance premiums, or legitimate
business expenses like office supplies. Businesses often use depreciation allowances on
assets for legal tax reduction.

 Utilizing Tax Credits: Applying for any tax credits you qualify for, such as those for certain
investments, charitable donations, or specific expenditures the government wants to
encourage.

 Investing in Tax-Exempt Securities: Purchasing government savings certificates or other

instruments whose interest income is partially or fully exempt from tax, thereby reducing
your overall taxable income.

 Choosing a Business Structure for Tax Benefits: Selecting a legal entity for your business
(e.g., a private limited company with specific allowances) that provides more favorable tax
treatment, often to avoid higher corporate tax rates or double taxation on profits.

 Timing Income and Expenses: Strategically deferring income to a future tax year or
accelerating deductions into the current year to manage your taxable income and
potentially move into a lower tax bracket. This is a common year-end tax planning practice.

 Double Taxation Avoidance Agreements (DTAAs): For international businesses and

individuals, Bangladesh has DTAAs with various countries. These agreements legally
prevent you from being taxed twice on the same income (once in the source country and
once in the resident country) or allow for reduced tax rates, minimizing your global tax
burden.

While perfectly legal, aggressive tax avoidance schemes that exploit loopholes are often subjects
of ethical debate. Governments frequently introduce new legislation or "General Anti-Avoidance
Rules" (GAARs) to counteract arrangements whose sole purpose is tax reduction. The line between
"acceptable" and "abusive" tax avoidance can be very fine and is often a point of contention
between taxpayers and tax authorities in Bangladesh, especially as the government strives to
expand its tax base and ensure fair contributions from everyone.

Why Do People Evade and Avoid Taxes?

The reasons behind tax evasion and avoidance are complex, weaving together economic,
psychological, and systemic factors that influence how individuals and companies approach their
tax obligations. These motivations are particularly pronounced in developing nations like
Bangladesh, where institutional weaknesses and socio-economic dynamics play a significant role.
 4

Reasons for Tax Evasion

 High Tax Rates: A major economic driver for evasion is the feeling that tax rates are simply
too high. In Bangladesh, even with a relatively low overall tax-to-GDP ratio, certain rates
(like corporate tax) are perceived as high compared to regional competitors. When people
feel a huge chunk of their earnings is taken, they might seek illegal ways to keep more of
their money.

 Weak Enforcement and Low Risk of Detection: If the chances of getting caught by tax
authorities are low, and the penalties aren't tough enough, people are more willing to risk
evasion. In Bangladesh, the NBR often struggles with a shortage of skilled staff, inadequate
digital tools, and reliance on manual processes, making it hard to catch and prosecute
evaders, especially the wealthy and large corporations. Sadly, reports of corruption within
the tax system, where officials allegedly accept bribes, only worsen this problem.
 Complexity and Lack of Clarity in Tax Laws: Tax systems can be incredibly confusing,
even for those with good intentions. Bangladesh's tax laws are often criticized for their
complexity, frequent changes, and unclear guidance. This complexity can lead to genuine
mistakes that might look like evasion, but more importantly, it can also create loopholes
for deliberate misrepresentation, making it harder for authorities to distinguish between
errors and fraud.

 Lack of Trust in Government and Public Services: When citizens feel that their tax money
is being wasted, misused, or that public services are inadequate despite their contributions,
their willingness to pay taxes can plummet. In Bangladesh, public skepticism about the
efficient and transparent use of tax revenues is a common reason for low "tax morale." If
people believe their taxes aren't helping society or that corruption is rampant, they might
feel justified in evading taxes as a stand against a broken system.

 Informal Economy: A large informal economy provides fertile ground for evasion. In
Bangladesh, the informal sector accounts for a huge portion of economic activity and
employment (estimated at nearly 85% of the workforce). Cash-based businesses,
undeclared freelance work, and illegal activities are inherently harder for tax authorities to
track. This segment largely operates outside the tax net, making it easy to hide true
earnings, leading to substantial revenue losses.

 Moral Hazard and Social Norms: If tax evasion is seen as a common or even acceptable
practice within a social group or society, individuals are more likely to engage in it. In
Bangladesh, a prevailing "culture of non-compliance" or a lack of strong "tax culture" is
often cited. This "everyone else is doing it" mentality can lower individual moral barriers
and reduce the stigma of non-compliance.

 Economic Hardship: During tough economic times, recessions, or personal financial

distress, individuals or small businesses might resort to evasion out of desperation to
 5

survive or maintain their living standard. Immediate financial pressure can override ethical
concerns or fear of legal consequences.

 Desire for Greater Personal Wealth: At its core, a fundamental human desire to maximize
personal wealth drives many to illegally reduce their tax payments. This can be a purely
self-interested motive, where the perceived benefit of keeping more money simply
outweighs the risk of punishment. This is particularly true for affluent individuals and large
corporations who stand to gain immensely.

Reasons for Tax Avoidance

 Legal Incentives and Policy Objectives: Governments intentionally design tax codes with
deductions, credits, and exemptions to encourage specific behaviors or boost certain
economic sectors. For example, tax breaks for retirement savings promote financial
security, while R&D tax credits encourage innovation. In Bangladesh, various tax holidays
and incentives are offered to attract investment in key sectors or underdeveloped regions.
Taxpayers are simply taking advantage of these provisions as intended by lawmakers,
aligning their financial decisions with tax benefits and contributing to policy goals while
reducing their tax burden.

 Maximizing After-Tax Income and Profit: Individuals and businesses naturally want to
optimize their financial position legally. Tax avoidance strategies allow them to reduce
their taxable income and, consequently, their tax liability, leading to higher disposable
income for individuals or increased profits for businesses. This is considered sound
financial management and is often a fiduciary duty for corporate managers to their
shareholders.

 Professional Advice and Financial Planning: Tax laws are complex, requiring specialized
knowledge. Many taxpayers in Bangladesh, especially high-net-worth individuals and
large corporations, rely heavily on tax professionals (accountants, financial advisors, tax
lawyers) to help them understand the system and identify all available legal avenues for
tax reduction. Effective tax planning is a core service these professionals offer.

 Competitive Advantage (for Businesses): For corporations in Bangladesh's competitive

market, legally minimizing tax expenses can provide a significant edge. Lower tax burdens
free up capital for reinvestment, R&D, more competitive pricing, or higher shareholder
returns. A company that effectively manages its tax burden can easily outperform less tax-
savvy rivals.

 Global Tax Differences and International Operations: Multinational corporations operating

in or from Bangladesh leverage differences in tax laws and rates across various countries.
This global landscape offers opportunities for sophisticated tax avoidance strategies.
Practices like "transfer pricing" (setting prices for transactions between related entities in
different countries) or establishing subsidiaries in lower-tax countries ("tax havens") allow
 6

these corporations to legally shift profits to environments with lower tax, minimizing their
overall global tax liabilities. Bangladesh's DTAAs also fall into this category, providing
legal avenues for reducing double taxation.

 Risk Aversion: Unlike evasion, which carries significant legal and reputational risks, tax
avoidance carries minimal legal risk when executed correctly and within the law. This
makes it a preferred method for those who want to reduce taxes without exposing
themselves to criminal prosecution or severe penalties. The focus is on certainty and
compliance, albeit with a goal of tax minimization.

 Complexity of Tax Laws (as an Opportunity): While complexity can fuel evasion, it also
creates fertile ground for sophisticated tax planning. Bangladesh's intricate tax code, with
its numerous sections, rules, and exemptions, can be a maze for the uninitiated but a
treasure trove for tax experts. These professionals can delve into the details, identify
nuances, and exploit ambiguities or unintended consequences in the law that allow for legal
tax minimization strategies not obvious to the average taxpayer. This constant interplay
between tax law and tax planning leads to an evolving landscape of avoidance strategies,
often pushing the boundaries of what's considered legitimate.

In a nutshell, tax evasion is a deliberate act of dishonesty and illegality, driven by a desire to escape
tax obligations through fraudulent means. It fundamentally undermines the rule of law and the
integrity of the tax system, leading to substantial revenue losses vital for Bangladesh's
development. Tax avoidance, on the other hand, is a strategic and legal approach to reducing tax
burdens by fully utilizing the provisions and incentives embedded within the tax system. While
legal, its ethical implications, particularly in its more aggressive forms that exploit legislative
loopholes, are a continuous subject of public and governmental scrutiny in Bangladesh. Both
practices significantly impact government revenue, economic fairness, and societal trust.