Professional Documents
Culture Documents
Factors Affecting Evasion of Income Tax in Bangladesh: A Study On Individual Assesses in
Factors Affecting Evasion of Income Tax in Bangladesh: A Study On Individual Assesses in
net/publication/326605761
CITATIONS READS
0 1,311
2 authors:
Some of the authors of this publication are also working on these related projects:
Ministry of Education of the People’s Republic of China, Grant Number is 20XJC790015 View project
Ministry of Education of the People’s Republic of China, Grant Number is 20XJC790015. View project
All content following this page was uploaded by Mohammad Masukujjaman on 25 July 2018.
ABSTRACT
This study aims to explore the factors affecting evasion of income tax in
Bangladesh. Further, it examines the relationships of these factors with tax
evasion for the individual assesse. This is an empirical research based on
primary data collected through a survey using direct interview method with a
formal and structured questionnaire. Involving 140 respondents, it is based on
convenience sampling and the respondents are from Dhaka city. The study
uses factor analysis and principal component analysis method to identify the
factors and to establish the relationships it used Chi-square test of
independence with the help of Statistical Package for Social Science (SPSS)
version-16. The study confirms that the corrupting practice of government tax
and administration authority, inefficient tax return system, lack of
transparency in the tax collecting system, the harassments by the tax officer
and low punishment and risk of getting caught are the factors that influence
the tax evasion or avoidance in Bangladesh. It further reveals that low-quality
service in a tax return and corruption by tax authorities are significantly
associated with the tax evasion or avoidance in Bangladesh. To increase the
number of taxpayers the study puts forward some recommendations such as
taking rapid action against the corruptions and inefficiency of tax
administration personnel, employing effective technology-based tax
administration, increasing the knowledge level of tax system-employees.
Keywords: Corruption, Factor analysis, Policymakers, Tax evasion.
I. INTRODUCTION
*
Assistant Professor of Accounting, Department of Business Administration, Northern
University Bangladesh (NUB), Dhaka; E-mail: masudrana86bd@yahoo.com
**
Senior Lecturer of Finance, Department of Business Administration, Northern
University Bangladesh (NUB), Dhaka; E-mail: masuknub@gmail.com
2 Journal of Business and Technology (Dhaka)
Income tax is a direct tax that acts as the best revenue generating sources all
over the world and so does in Bangladesh. According to the fiscal policy of
Bangladesh, income tax is charged along with other direct and indirect sources of
taxes, vat (Value-added Tax), excise duty, gift tax, etc. It is considered as the
most important source of government revenue to ensure the equitable distribution
of revenue. It is levied on the taxable income of a person or entity as per the
provision of the income tax ordinance 1984. An analysis of revenue collection
activities of Bangladesh in the year of 2014-2015 reveals that tax revenue
accounts for 84.88 percent of government revenue, whereas direct tax represents
only about 38.85 percent of total tax revenues. The ratio of tax revenue to Gross
Domestic Product (GDP) is very low compared to other developing countries.
The Tax-GDP ratio was around 12.5% in 2014-15 fiscal years, which seems to be
unsatisfactory.
On the other hand, tax evasion and avoidance are considered as the common
phenomena all over the world. In fact, it is a great problem in a developing
country like Bangladesh. Despite National Board of Revenue’s (NBR’s) untiring
effort, the progress is still unsatisfactory. People and corporate firms use various
measures to evade tax using loopholes in the current tax system. In a country of
153 million of people, only 1.2 million of individuals and companies paid income
tax in Bangladesh during the assessment year 2014-2015, which is less than 1%
of the total population (B.M.F., 2015). This fact reflects the harsh reality of the
tax-evasion situation in Bangladesh.
Bangladesh has been nominated to be upgraded to the status of a developing
country from its present status of Least Developed Country (LDC) recently. For
the confirmation of such prestigious tag in its name, the country needs to
maintain some of the indicators until 2024 (UN 2012). The indicators like the
economic vulnerability index and per capita income is very much related to the
internal revenue stream. A country’s healthy-earning situations protects it from
any sort of unwanted fluctuations in the economic growth and generating
employment by the increased government investment in the economy coupled
with reducing inflation through increased subsidies. So, it is a high time to
understand the reasons underlying the tax evasion problems, so as to develop
strategies. Thus, this study focuses on the factors that influence tax avoidance
and evasion by the tax assesse in Bangladesh. Specifically, the research aims to
identify the factor(s) that has the greatest influence on tax evasion and to
investigate the relationship of different factors with tax avoidance and evasion in
Bangladesh.
Rana & Majukujjaman: Factors Affecting Evasion of Income Tax in Bangladesh 3
IV. METHODOLOGY
the study identifying the major factors. The study also used secondary data
collected from the official website of the National Board of Revenue (NBR) of
Bangladesh and different books, journal articles, websites and newspaper articles.
A convenient random sample method has been applied while selecting the
sample. To make things convenient, a sample size of 140 individuals of Dhaka
city was taken as the final sample size. After collection of the data, it was
analyzed using Statistical Package for Social Science (SPSS) version-16 to fulfill
the objective of the research. The study used factor analysis in the Principal
Component Analysis method to identify the significant factors affecting the tax
evasion in Bangladesh. Factor analysis is usually used to pinpoint the variables
(factors) for explaining the pattern of correlations from the total observed
variables. Factor analysis attempts to reduce data for identifying an abridged
number of factors which is capable of explaining the most of the variance
observed from the highest number of obvious variables. It also used correlation
and chi-square test to establish the relationship and association between the
variables undertaken in the hypothesis. The hypothesis is tested using the Chi-
square test of independence.
Demographic profile
A frequency distribution analysis was adopted illustrating the respondents’
profile in the study. The distribution of respondents indicates (Table 1) that about
80% of the respondents in the sample were male and 20% were female, while
the majority of the respondents are from the age less than 40 years (around
61.4%) and 38.6% are more than 40 years old in terms of gender and age
respectively. The majority of the respondents (approximately 75.7%) were
graduate and 24.3% were below graduation in their level of education. About
94.3% of the respondents have yearly income more than Tk. 250000, which
means everyone is supposed to be a tax assessee in the Tax Ordinance Act, 1984.
Almost 55% of the respondents had one source of income, where 35.7% of the
respondents have two sources of income and the rest 7.9% of the respondent has
three sources of income also a few respondents have four sources of income.
6 Journal of Business and Technology (Dhaka)
TABLE 1
Demographic profile
Factor Analysis
Based on the principal component analysis, the obtained value (Table 2) of
Kaiser-Meyer-Olkin (KMO) is 0.674, which is more than 0.6. It signifies that the
data are sufficient (reliable) for applying for factor analysis. Bartlett Test is
applied to identify whether variables used in factor analysis are related. The
results show that a relationship exists between the variables (p<0.05.).
Table 2
KMO and Bartlett's Test
KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .674
Bartlett's Test of Approx. Chi-Square 398.651
Sphericity D.f. 105
Sig. .000
TABLE 3
Total Variance Explained
Total Variance Explained
Comp Initial Eigenvalues Rotation Sums of Squared Loadings
onent Total % of Cumulative Total % of Cumulative
Variance % Variance %
1 3.322 22.149 22.149 3.138 20.922 20.922
2 1.891 12.608 34.757 1.612 10.749 31.671
3 1.706 11.372 46.129 1.573 10.485 42.156
4 1.233 8.221 54.350 1.452 9.683 51.839
5 1.047 6.978 61.329 1.423 9.490 61.329
6 0.967 6.448 67.777
7 0.847 5.644 73.422
8 0.756 5.042 78.464
9 0.686 4.575 83.039
10 0.593 3.951 86.990
11 0.553 3.690 90.679
12 0.464 3.094 93.773
13 0.384 2.559 96.332
14 0.375 2.499 98.831
15 0.175 1.169 100.000
Extraction Method: Principal Component Analysis.
Sources: Primary Data
8 Journal of Business and Technology (Dhaka)
The outcome of extraction (Table 3) shows all the factors extracted into five
factors, which cumulatively explains the 61.33% of the total variance for
explaining the variation in tax evasion and avoidance of every assesse. The
standard for acceptable eigenvalue is more than one which only complies with
the first 5 among 9 factors. It is seen that in the above table that five-factor have
an eigenvalue greater than one thus finally. Based on the cross-loadings the
factors are ranked into highest to lowest in Table 4.
The highest ranked factor (0.901) for predicting tax evasions is the corrupting
practice of government tax and administration authority, followed by the factor
the inefficient tax return system (0.867) and lack of transparency in the tax
collection system (0.811). The least ranking factor is the harassments by the tax
officer (0.766), which is succeeded by the factor of low punishment and risk of
getting caught (0.801).
TABLE 4
Testing Hypothesis
The first hypothesis (H01) was that there is no association between higher tax
rate and tax evasion/ avoidance in Bangladesh. It is accepted at a level of
significance (α=.05) of 5% since the Chi-square value from the calculation of
data is more than the chi-square value from the chart at a level of significance.
This signifies that tax evasion and avoidance in Bangladesh is not predicted by
the excessive rate of income tax. People do not avoid tax as it is higher for them
to pay. The second hypothesis was the low quality of the services in return for
tax and tax evasion/ avoidance is not associated in Bangladesh, which is rejected
Rana & Majukujjaman: Factors Affecting Evasion of Income Tax in Bangladesh 9
at the significance level (α=.05) of 5%. This illustrates that the low quality of the
services in return for the tax is associated with the tax evasion in Bangladesh.
The poor tax return facility is responsible for the tax evasion in Bangladesh.
Almost similar result found in hypothesis (H03) where corruption by tax
authorities and tax evasion were assumed to not be associated. The result
indicates it is rejected (independent) at the significance level (α=.05) of 5%. This
implies that corruption by tax authorities and tax evasion are associated with
Bangladesh. Thus, the corruption in tax administration is responsible for the tax
evasion in Bangladesh. The fourth hypothesis (H03) presumed that lower risk of
getting caught and tax evasion are not associated with Bangladesh. This
hypothesis is accepted into this study at the 5% level of significance. This
highlights that lower level of risks of caught does not have a significant influence
on the tax evasion based on the data of this study. The fifth hypothesis (Ho5)
holds that lack of transparency in the tax collection system in NBR and tax
evasion is not associated with Bangladesh. This is accepted into this study
(α=.05) which indicates that lack of transparency in the tax collection system
does not have any association with the tax evasion practice in Bangladesh.
TABLE 5
TEST OF HYPOTHESIS
Chi- Degree Chi- Acceptation/
Square of Squared Rejection (at
value from freedom value 5% level of
data from the the sig.)
chart
Ho1: There is no association between .143 1 3.841 Accept
higher tax rate and tax evasion/
avoidance in Bangladesh.
Ho2: Low quality of the services in 5.143 1 3.841 Reject
return for tax and tax evasion/
avoidance is not associated with.
Ho3: Corruption by tax authorities and tax 9.143 1 3.841 Reject
evasion are not associated with.
Ho4: Lower risk of getting caught and tax .571 1 3.841 Accept
evasion are not associated with.
Ho5: Lack of transparency in the tax 1.275 1 3.841 Accept
collection system in NBR and tax
evasion is not associated with.
Source: Results from SPSS
10 Journal of Business and Technology (Dhaka)
REFERENCES
Akdede, S. H. (2006), ‘Corruption and Tax Evasion’, Dogus Universitesi Dergisi, Vol. 7,
No.2, pp. 141-149
Ashby, J. S., Webley, P., & Haslam, A. S. (2009). The role of occupational taxpaying
cultures in taxpaying behaviour and attitudes. Journal of Economic Psychology,
30(2), 216-227.
Baguley, T. (2012). Serious stats: A guide to advanced statistics for the behavioral
sciences. Basingstoke: Palgrave.
Bangladesh Ministry of Finance (2015) Bangladesh Economic Review 2015, Ministry of
Finance, Bangladesh.
Batson, A. (2008), ‘In China, Collecting Income Tax Proves Problematic: While
Corporate Levies, Top Earners Fill Coffers, Few Common Folk Pay’, Wall
Street Journal, February 11, Retrieved September 02, 2017, from
http://online.wsj.com/article/SB120269250627657785.html
Chowdhury, F. L. (1992), ‘Evasion of Customs Duty in Bangladesh’, MBA Thesis,
Monash University, Melbourne
Hasan, R.,( 2013). The Tendency toward Tax Evasion in Bangladesh. Proceedings of 9th
Asian Business Research Conference 20-21 December 2013, BIAM Foundation,
Dhaka, Bangladesh.
Lefebvre, M., Pestieau, P., Riedl, A., & Villeval, M. C. (2011). Tax Evasion, Welfare
Fraud, and'The Broken Windows' Effect: An Experiment in Belgium, France,
and the Netherlands.
Litina, A. and Palivos, T. (2011), ‘Explicating Corruption and Tax Evasion: Reflections
on Greek Tragedy’, Discussion Paper Series, Retrieved February 20, 2017, from
http://www.fundp.ac.be/eco/economie/cred/CORRUPTION%20AND%20EDU
CATION%20LITINA.pdf, pp. 1-31
Monir, N.R., (2012). Political Economy of Corruption: The Case of Tax Evasion in
Bangladesh. PhD. Thesis Proceedings of Department of Politics and
International Relations School of Political and Social Inquiry, Faculty of Arts
Monash University.
Mughal, M.M & Akram, M., (2012). Reasons of Tax Avoidance and Tax Evasion:
Reflections from Pakistan. Journal of Economics and Behavioral Studies, Vol. 4,
No. 4, pp. 217-222.
12 Journal of Business and Technology (Dhaka)
Rahman, A. K. M., Rahman A. M., and Yasmin, S. (2010), ‘Leakage of Tax Revenues in
Bangladesh under Direct Taxation: A Study of Factor Detection and Monetary –
Loss Estimation’, AIUB Journal of Business and Economics, Vol. 9, No. 1, pp.
35-68
Sandmo, A. (2005), ‘The Theory of Tax Evasion: A Retrospective View’, National Tax
Journal, Vol.58, No. 4, pp.643-663
Smatrakalev, G. (2012), ‘Is Tax Evasion Our National Sport? The Bulgarian Case’,
Chapter 23, in R. W. McGee (Ed.), The Ethics of Tax Evasion: Perspectives in
Theory and Practices, DOI 10.1007/978-1-4614-1287-8_23, Springer Science+
Business Media, LLC, pp. 371-385
Torgler, B., & Schneider, F. (2009). The impact of tax morale and institutional quality on
the shadow economy. Journal of Economic Psychology, 30(2), 228-245.
Traxler, C. (2009), ‘Voting Over Taxes: The Case of Tax Evasion’, Public Choice, Vol.
140, pp. 43-58
UN (2012) Booming Bangladesh looks forward to LDC graduation, United Nations.
Accessed on January 15, 2018, accessed at
https://www.un.org/ldcportal/booming-bangladesh-looks-forward-to-ldc-
graduation/
Rana & Majukujjaman: Factors Affecting Evasion of Income Tax in Bangladesh 13
ANNEXE