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JBT No #02, Volume –XII, July- December, 2017

Factors Affecting Evasion of Income Tax in

Bangladesh: A Study on Individual
Assesses in Bangladesh
MD. MASUD RANA *
MD. MASUKUJJAMAN 

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

II. LITERATURE REVIEW

Tax evasion is an act of avoiding tax payment illegally with the violation of tax
laws of any specific country (Akdede 2006; Sandmo 2005). It is the action of
abstaining from the tax payment, therefore, has received enormous research
attention throughout the world. Notably, it is studied all over the word in the past
few decades (e.g., Smatrakalev 2012; Litina & Palivos 2011, Traxler 2009).
Mughal (2012) investigated causes of tax avoidance and evasion in Pakistan and
found a significant positive relationship between individual variables of
reasons/causes of tax avoidance and evasion in Pakistan. Lefebvre et al. (2011)
conducted a study in Netherlands, France, and Belgium (Flanders and Wallonia)
while examining the behavior of people. He compared the behavior of people
regarding the welfare dodging and tax evasion.
On the contrary, Ashby, Webley, & Haslam, (2009) have found a complex
relationship between occupational identity and taxpaying culture, by using a
social identity framework in their empirical investigation. They have reached the
conclusion that paying tax is about hearts and minds as well as carrots and sticks,
and those hearts and minds are not structured in a social vacuum, but by group
memberships and the values and norms, these instill. Thus, Torgler and
Schneider (2009) suggested to investigate not only the importance of objective
variables (such as the tax burden, rate of public expenditure, or the density of
regulation), but also the subjective perceptions, expectations, attitudes, and
motivations (such as tax morale or the perceived institutional quality).
Accordingly, Bangladesh is not far behind on such research initiatives. Hasan
(2013) studied the tendency toward tax evasion in Bangladesh, where he found
that among various demographic factors only marital status and income level
were common that influenced both male and female respondents in tax evasion
practice. On the other hand, none of the intellectual factors were common among
male and female respondents. Monir (2012) examined the key issues associated
with the tax policy formulation, implementation and compliance processes and
their likely roles in facilitating tax evasion. The study investigated the
involvement and nexus of various stakeholders and their alleged contribution to
tax evasion in Bangladesh. During the compliance process, the absence of a tax
culture among income earners, inadequate taxpayer service, complexities and
unfairness in tax estimation, weak enforcement and the negative image of the tax
department work as influential driving forces for tax non-compliance. The
4 Journal of Business and Technology (Dhaka)

empirical findings also revealed that the corrupt nexus of self-interested

policymakers, rent-seeking officials of tax, self-utility maximizer taxpayers,
including business people, professionals, self-employed persons, and their
intermediaries, tax agents, facilitate tax evasion.
Corruption in tax administration is held responsible for the tax evasion around
the world. Batson (2008) put the light on the corruption that obstructs to tax
collection in Asian countries. He mentioned that the tax collections against the
total population in Asian countries are very poor where corruption is manifold
responsible. This is admitted in the study of Chowdhury (1992) in Bangladesh,
where he reported corruption as one of the root causes of tax evasion. There are
some other factors like the proper implementation of the law or public awareness.
Rahman, Rahman, and Yasmin (2010) investigated the factors responsible for the
leakage of tax revenues in Bangladesh. They found that lack of awareness,
official harassment, complexities of tax laws, and lack of social benefit as the
major reasons for revenue losses.

III. HYPOTHESIS DEVELOPMENT

The following null hypotheses are generated to conduct this research:

Ho1: There is no association between higher tax rate and tax evasion in
Bangladesh.
Ho2: Low quality of the services in return for tax and tax evasion is not associated.
Ho3: Corruption by tax authorities and tax evasion are not associated.
Ho4: Tax evasion and lower risk of getting caught are not associated.
Ho5: Lack of transparency in the tax collection system in NBR and tax evasion
is not associated.

IV. METHODOLOGY

This is an empirical research based on primary data collected through a survey

using the direct interview method with the formal and structured questionnaire.
All the questions were close-ended and the dichotomous scale was used to frame
the questionnaire. The questionnaire included two sets of questions; those who
pay taxes and who are not, so that comparison can be shown in the correlations of
Rana & Majukujjaman: Factors Affecting Evasion of Income Tax in Bangladesh 5

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.

V. ANALYSIS AND FINDINGS

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

Gender Classification Frequency Percent

Male 112 80.0
Female 28 20.0
Age < 40 86 61.4
Above 40 54 38.6
Educational level Below Graduation 34 24.3
Graduation 106 75.7
Income (yearly) < Tk.250000 8 5.7
> Tk. 250000 132 94.3
Sources of income One 77 55.0
Two 50 35.7
Three 11 7.9
Four 2 1.4
Occupation Job 95 67.9
Business/Self-employed 37 26.4
Others: (specify) 8 5.06
Total 140 100.0
Source: Primary survey data.

Correlation (Multi-multicollinearity) Analysis

Before going for the factor analysis, this section finds the multicollinearity of
the independent variables within it. Multicollinearity is a problem occurs when
more than two predictors (independent) variables are inter-correlated. Although
in regression analysis, multicollinearity does not effect on the result, it is a matter
that affects in factor analysis. It is because the individual effect on the dependent
variable is measured separately in factor analysis. If the correlation (r) between
two independent variables exceeds 0.95, it is said to be multicollinearity
(Baguley 2012). The result (Table 7) shows that none of the correlation exceeds
the standard (r >0.95) and thereby it is fit for the further factor analysis.
Rana & Majukujjaman: Factors Affecting Evasion of Income Tax in Bangladesh 7

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

The ranking of selected factors of tax evasion in Bangladesh

Factors Cross loading Ra-nking
The corrupting practice of government tax and 0.901 1
administration authority
The government collected taxes used inefficiently in 0.867 2
Bangladesh
Lack of transparency in tax collecting system in 0.811 3
NBR
Low punishment and risk of getting caught in 0.787 4
Evading tax
Harassments by the tax officer adversely affect tax 0.766 5
payment.
Sources: primary sources

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)

VI. CONCLUSION AND POLICY RECOMMENDATIONS

The purpose of this paper was to identify the factors affecting tax evasion or
avoidance in Bangladesh. Further, the prominent factors were tested in terms of
association with the dependent factors. This study has ascertained that the
corrupting practice of government tax and administration authority, inefficient
tax return system, lack of transparency in the tax collection 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. From the
hypothesis test, it is further cleared 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 the taxpayers and preventing the tax evasion, the
government should take rapid action against the corruptions made by the tax
authorities. The increase of government salary was seemed to be the way to
reduce government official corruption is not working at present after doubling
the pay scale. The rules of law for taxation practice (for both the management
people and those who evade tax) in Bangladesh have to be maintained strictly
and punishment for evasion and avoidance should have to be ensured. The
employee and assesse should be persuaded to act ethically along with ensuring
sufficient punishment in case of corruption in tax administration.
Besides, a reduction of harassment by a tax officer at the time of submitting a
return and paying the tax can significantly change the current level of tax evasion
and avoidance in Bangladesh. The automated (online) system can ensure harass
free and transparent tax system. Although the government took initiatives in
favor of the online tax assessment, still it is not stained free. The digital system
should be more user-friendly and accurate in operation. Simultaneously, the
awareness of income tax rules and knowledge should have to be extended to the
people by taking the different campaign and promotional program by tax
administration authority. The different indirect benefit coupled with direct benefit
can be offered to the regular taxpayer and the acknowledgment has to be ensured.
Finally, the tax authority and all the assesse of Bangladesh has to be concerned
enough about the proper practice of tax law and their role in economic
development in Bangladesh.
Rana & Majukujjaman: Factors Affecting Evasion of Income Tax in Bangladesh 11

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 Rana & Majukujjaman: Factors Affecting Evasion of Income Tax in Bangladesh 13

ANNEXE

Annexe 1: Table 6 shows the variables of the study

Variables Questions
Caught Did you pay/avoid tax regularly due to avoid the risk of getting
caught in evading income tax?
Punishment Did you pay/ avoid tax regularly due to avoid potential punishment,
if one is caught in evading tax?
Knowledge Did you pay/avoid tax regularly due to a proper knowledge of the
tax system?
Efficiency Did you pay/avoid tax regularly as the government using collected
taxes efficiently for the development of Bangladesh?
Rate Did you pay/avoid tax regularly as income tax rate is higher/lower
in Bangladesh?
Ethics Did you pay/avoid tax regularly from moral and ethical obligation?
Transparency Did you pay/avoid tax regularly due to the transparency of the tax
collecting system of Bangladesh?
Leg. Obligation Did you pay/avoid tax regularly due to the fulfillment of legal
obligation?
Harassments Did you pay/avoid tax regularly due to avoid harassment from tax
officer?

Annexe 2: Table 7 Correlation Coefficients of the factors for the taxpayers

Items Caught Puni. Know Effi. Rate Ethics Trans. L.Ob Harr.
Caught 1
Puni. .801** 1
Know .398** .309** 1
** **
Effi. .367 .386 .273** 1
* *
Rate .224 .202 .181 .093 1
Ethics .129 .071 .001 .171 .000 1
** ** ** ** **
Trans. .415 .394 .297 .358 .325 -.028 1
L. Ob .197* .144 .095 .100 -.095 .325** .066 1
** ** ** *
Harr. .420 .439 .178 .367 .078 .028 .197 .241* 1
*. Correlation is significant at the 0.05 level (2-tailed). **. Correlation is significant at the 0.01
level (2-tailed).

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