Increasing Tax Compliance through Social Recognition in Bangladesh

International Growth Centre (IGC) and BRAC Institute of Governance and Development (BIGD), BRAC University, hosted a seminar on ‘Increasing Tax Compliance through Social Recognition in Bangladesh’ by Mushfiq Mobarak, Associate Professor, Yale School of Management, on 5 November 2014. The seminar was held from 9.30 am-12.30 pm at Meghna, Pan Pacific Sonargaon, 107 Kazi Nazrul Islam Avenue, Dhaka.

We are pleased to inform that Mr. M A Mannan, MP, the Honorable Minister of State, Ministry of Finance and Ministry of Planning kindly consented to grace the seminar as the Guest of Honour. Mr. Md. Ghulam Hussain, Chairman, National Board of Revenue, kindly consented to be the Special Guest at the seminar. The event was chaired by Dr. Sultan Hafeez Rahman, Country Director, IGC Bangladesh. The seminar was widely participated by policymakers, government officials, researchers and members of the private sector.

Dr. Mushfiq Mobarak presented the findings of the IGC commissioned study ‘Increasing Tax Compliance through Social Recognition in Bangladesh’. In this study, researchers from Harvard and Yale Universities partnered with the Bangladesh National Board of Revenue to implement a range of programs that attempt to exploit firms’ interest in social incentives and peer recognition to increase voluntary VAT compliance among firms.

Based on information collected through a baseline survey, an initial letter was provided to 16,252 firms containing information about that firm’s registration and payment status and a list of firms in their cluster. Subsequently the following information treatments were randomly assigned to the firms – (a) Baseline compliance information containing statistics on cluster compliance in 2012 (b) Peer recognition: Firms informed that their compliance behaviour would be made public to neighbours in a subsequent letter and (c) Recognition cards: Firms informed about eligibility for gold, silver, and bronze cards based on their compliance and the cluster compliance.

The study rigorously evaluates the impact of these programs on tax payments. In neighbourhoods where some firms are compliant, the promise of exposing information about all firms’ tax payment behaviour led to a positive response and an increase in tax compliance, especially among firms who had not paid the previous year. In high compliance clusters, firms receiving the peer information treatment were not only more likely to pay, but conditional on paying, paid more than firms not receiving this treatment. Combining these two effects, firms receiving the peer information treatment paid 17% more on average during the study period than other firms.

The study finds clear evidence that firms do respond to social incentives. In particular, firms care about their compliance behaviour being made public to their neighbours. The cost of printing and hand-delivering these letters is quite low, resulting in a benefit-cost ratio of about 5 to 1. Firm responses are consistent with model where social pressure is most effective when a firm is deviating from the local norm. The cost of intervention is estimated to be TK 23 per firm while the benefit is TK108 per firm.

The results suggest that social incentives and recognition may be an effective way to improve tax compliance and has led to quantitatively meaningful increase in total revenues. The treatments tested consist of interventions that governments could implement on a large scale which in turn may lead to significant improvement in tax compliance and revenue collection.

A vibrant discussion took place following the presentation by Dr. Mobarak on the findings of the study.

Dr. Nasiruddin Ahmed, Commissioner, Anti-Corruption commission commented that based on the study findings, it is now worthwhile to use social incentives to mobilize revenues and improve compliance of other forms taxes including VAT. Recognition of tax complying firms publicly may also steer customers to tax compliant businesses and thus provide further motivation to firms to register and thereby broaden the tax base and also be tax compliant. There is a need to expand tax efforts through using innovative and cost effective ideas like social recognition in all major cities and towns in Bangladesh.

Mr. Ghulam Hossain, Chairman, National Board of Revenue commented that in light of the concrete evidence that social incentives and peer recognition is an important mechanism to improve tax compliance of firms, there is an urgent need to leverage this cost effective idea for revenue mobilization. A committee overseeing revenue mobilization efforts is currently looking into ways of adapting and scaling the intervention of this pilot study to improve voluntary tax compliance. He noted that additional recognition programmes can be introduced to acknowledge and incentivise tax compliance of small and medium firms. The Chairman noted that peer recognition is in itself a form of enforcement and as firms can be incentivised to monitor themselves, this voluntary compliance can have substantial cost savings in terms of resources and human capital of NBR.

Members of the private sector welcomed social incentive and peer recognition as an innovative and way to supplement the tax enforcement efforts compared to traditional costly punishment based approach involving legal sanctions and litigation.

Mr. M A Mannan, MP, the Honourable Minister of State, Ministry of Finance and Ministry of Planning commented that the study is very pertinent for Bangladesh.

He suggested that to address the acute infrastructure challenges and to sustain economic growth, investments are necessary which in turn requires raising revenues. IGC should continue to provide evidence based research; cost effective and innovative ideas are critical to facilitate the growth agenda in Bangladesh. By integrating new ideas from studies like ‘Increasing Tax Compliance through Social Recognition in Bangladesh’ may be of considerable help in augmenting resources necessary for economic growth and development.