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Firm Formalization in Bangladesh: Directions for Research and Policy

Learn about the benefits of firm formalization for tax policy in Bangladesh. Explore research findings, interventions, and potential impacts.

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Firm Formalization in Bangladesh: Directions for Research and Policy

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  1. Firm Formalization in Bangladesh: Directions for Research and Policy Raj Chetty (Harvard University and IGC) Mushfiq Mobarak (Yale University and IGC) Aminur Rahman (World Bank Group) Monica Singhal (Harvard University and IGC)

  2. Background • Both the Finance Minister and the National Board of Revenue have publicly expressed that increasing the number of taxpayers in Bangladesh is a key priority • The Finance Minister has stated a goal of reaching 10 million taxpayers in major newspapers • A first step in this process is to get individuals and firms appropriately registered, but this can be challenging • In this presentation we will: • Present results from a survey of firms in Bangladesh • Discuss implications for tax policy and directions for research collaboration

  3. Data • The World Bank conducted a survey of firms in 2010 designed to examine firm informality (N=1724 total; N=431 for Dhaka) • Most variables are self-reported by firms; nevertheless, a number of patterns in the data are quite striking • Summary statistics on reported formality status: • % of firms with a Trade License 87% • % of firms with a TIN 47% • % of firms with a VAT License 34%

  4. TIN and Firm Outcomes • We observe significant positive associations of having a TIN (controlling for other firm characteristics) with: • Having a bank account and having an account in the business name • Having a loan from a government or private bank • having a sign, having goods grouped appropriately, shelves fully stocked, no dust/dirt, and well-lit • All of these observable characteristics are positively associated with profitability

  5. TIN and Tax Outcomes

  6. Benefits of Administrative Data • Surveys of firms must rely (for the most part) on firm self reports • This may be particularly problematic when looking at tax outcomes • There are a number of questions on formalization that could be examined with existing administrative data on tax registrations and filings: • How accurate are firm self reports on formality status and tax payments? • Extent of “overformalization” • Matching of firms in individual income tax and VAT data to check consistency of information provided

  7. A Note on “Overformalization" • We have focused so far on the policy problem of getting firms to formalize • There may be another, less recognized problem: “overformalization” • Discussions with officials in Bangladesh suggest that it is quite common for a firm to have multiple TINs

  8. Proposal for Interventions • The results of the baseline survey suggest that formalization may be good for tax revenue and for firm outcomes • The results also indicate several possibilities for encouraging firm formalization: • Providing firms with information on the process of getting formalized • Assisting firms with the process of becoming formalized • Subsidizing firms to get formalized • De Mel, McKenzie, and Woodruff (2010) find that cash incentives are successful in getting firms to formalize in Sri Lanka • Open question: Could such a policy actually produce a net return for the government?

  9. Proposal for Interventions • We propose randomizing these interventions among a selected sample of firms in Dhaka • We would then work closely with a few associated tax offices to track firm formalization and subsequent tax payments. Firm outcomes would be measured in a follow up survey. • The project would generate rigorous quantitative evidence on the effectiveness of informational, procedural or financial interventions on: • The propensity of firms to formalize • Tax revenues generated from those firms • The results would be informative for the stated policy goals of the NBR and the Finance Ministry

  10. Concluding Thoughts • Our research team would be very interested to collaborate with policymakers in Bangladesh, particularly the National Board of Revenue, on this project or on other tax related programs • Analysis of administrative data which could be mutually beneficial • Working with you to build in research components to ongoing tax reforms (VAT reforms, e-governance initiatives) • We welcome your thoughts. Thank you.

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