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DOCUMENT OF

THE WORLD BANK

FOR OFFICIAL USE ONLY

Report No: 85595-BD

PROJECT APPRAISAL DOCUMENT

ON A PROPOSED CREDIT

IN THE AMOUNT OF SDR 38.8 MILLION

(US$60 MILLION EQUIVALENT)

TO THE

PEOPLE’S REPUBLIC OF BANGLADESH

FOR A

REVENUE MOBILIZATION PROGRAM FOR RESULTS:

VAT IMPROVEMENT PROGRAM (VIP)

April 15, 2014

Governance and Public Sector Management Group South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective: January 28, 2013)

Currency Unit = Bangladeshi Taka (BDT) BDT 77.75 = US$ 1.00

FISCAL YEAR July 1 – June 30

ABBREVIATIONS AND ACRONYMS

ACC Anti-Corruption Commission CAS Country Assistance Strategy COTS Commercial off the Shelf Software CPTU Central Procurement Technical Unit DFID Department for International Development DLI Disbursement-Linked Indicator e-GP Electronic Government Procurement ERD Economic Relations Division, of the Ministry of Finance ESSA Environmental and Social Systems Assessment FAPAD Foreign Aided Project Audit Directorate FY Fiscal Year GDP Gross Domestic Product GoB Government of the People’s Republic of Bangladesh ICT Information and Communication Technology IDA International Development Association IMF International Monetary Fund IFC International Finance Corporation IFSA Integrated Fiduciary Systems Assessment IRD Internal Resources Division of the Ministry of Finance IT Information Technology M&E Monitoring and Evaluation MoF Ministry of Finance NBR National Board of Revenue NCB National Competitive Bidding OCAG Office of the Comptroller and Auditor General PDO Program Development Objective PforR Program for Results PPA Project Preparation Advance RFP Request for Proposals RTI Right to Information Act, 2009 PROMIS Procurement Monitoring Information System TIN Tax payers identification number VAT Value Added Tax VIP VAT Improvement Program

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Vice President: Philippe H. Le Houerou

Country Director: Johannes Zutt

Sector Director:

Sector Manager:

Ernesto May

Alexandre Arrobbio

Task Team Leader: Tracey M. Lane

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Revenue Mobilization Program for Results:

VAT Improvement Program (VIP)

Table of Contents

I. STRATEGIC CONTEXT ..................................................................................................... 6

A. Country Context ................................................................................................................... 6 B. Sectoral and Institutional Context ....................................................................................... 7 C. Relationship to the CAS and Rationale for Use of Instrument ............................................ 9

II. PROGRAM DESCRIPTION ............................................................................................. 12

A. Program Scope................................................................................................................... 12 B. Program Development Objective ....................................................................................... 15 C. Program Key Results and Disbursement Linked Indicators .............................................. 15 D. Key Capacity Building and System Strengthening Activities ............................................. 17

III. PROGRAM IMPLEMENTATION ................................................................................... 18

A. Institutional and Implementation Arrangements ............................................................... 18 B. Results Monitoring and Evaluation ................................................................................... 19 C. Disbursement Arrangements and Verification Protocols .................................................. 20

IV. ASSESSMENT SUMMARY .............................................................................................. 20

A. Technical (Including Program Economic Evaluation) ...................................................... 20 B. Fiduciary ............................................................................................................................ 21 C. Environmental and Social Effects ...................................................................................... 26 D. Integrated Risk Assessment Summary ................................................................................ 27 E. Program Action Plan ......................................................................................................... 28 Annex 1: Detailed Program Description .................................................................................. 29 Annex 2: Results Framework Matrix ........................................................................................ 36 Annex 3: Disbursement Linked Indicators, Disbursement Arrangements and Verification Protocols ................................................................................................................................... 41 Annex 4: Summary Technical Assessment ................................................................................ 50 Annex 5. Summary Fiduciary Systems Assessment ................................................................... 74 Annex 6. Summary Environmental and Social Systems Assessment ......................................... 86 Annex 7: Integrated Risk Assessment ........................................................................................ 89 Annex 8: Program Action Plan ................................................................................................. 98 Annex 9: Implementation Support Plan .................................................................................. 103

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Tables Table 1: Bangladesh Key Macroeconomic Indicators, Projections and Outturns FY10-13 ........... 6 Table 2: Relationship with the CAS FY11-14 ................................................................................ 9 Table 3: Program Financing Summary, US$ Million .................................................................. 12 Table 4: Program Results, Scope and Activities ........................................................................... 13 Table 5: Disbursement Linked Indicators Summary ................................................................... 17 Table 6: Expenditure Framework US$ million 2012/3-2018/19 .................................................. 22 Table 7: Integrated Risk Assessment Summary ........................................................................... 27 Table 8: Results Framework ......................................................................................................... 36 Table 9: Disbursement-Linked Indicator Matrix (US$ Millions) ................................................ 41 Table 10: DLI Verification Protocol Table ................................................................................... 45 Table 11: Bank Disbursement Table............................................................................................. 47 Table 12: VAT Indicators for Bangladesh and Comparator Country Groups .............................. 54 Table 13: VAT Staff Positions and Vacancies, 2012 ................................................................... 56 Table 14: Expenditure Framework, Consolidated Program Expenditures, US$ millions 2012/3-2019/20 ......................................................................................................................................... 75 Table 15: Summary of Fiduciary Actions to be Undertaken ........................................................ 82 Table 16: Program Action Plan..................................................................................................... 98 Table 17: Capacity Building Plan ............................................................................................... 100 Table 18: Main focus of Implementation Support ...................................................................... 104 Table 19: Task Team Skills Mix Requirements for Implementation Support ........................... 104 Table 20: Role of Partners in Program Implementation ............................................................ 105 Figures Figure 1: Tax Revenue (in Percent of GDP) for South Asian Region, 1994-2012 ........................ 8

Boxes Box 1: Lessons Learned from World Bank Tax Projects ............................................................ 64

PAD DATA SHEET


VAT Improvement Program

PROJECT APPRAISAL DOCUMENT

South Asia Region SASGP

Basic Information

Date: April 15, 2014 Sectors: Public administration- Information and communications (50%), General public administration sector (50%)

Country Director: Johannes Zutt Themes: Public expenditure, financial management and procurement (25%), Tax policy and administration (25%), Managing for development results (25%), e-Government (25%)

Sector Manager/Director:

Alexandre Arrobbio /Ernesto May

Program ID: P129770

Team Leader: Tracey M. Lane

Program Implementation Period:

Expected Financing Effectiveness

Expected Financing Closing Date:

Start Date: June 30, 2014

Date: June 30, 2014

June 30, 2020

End Date: December 31, 2019

Program Financing Data

[ ] Loan [ ] Grant [ ] Other

[ X ] Credit

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For Loans/Credits/Others (US$M):

Total Program Cost: US$ 73 million

Total Bank Financing :

US$ 60 million

Total Financing : US$ 73 million

Financing Gap :

Financing Source Amount

BORROWER/RECIPIENT US$ 13million

IBRD/IDA US$ 60 million

Total US$ 73 million

Borrower: The Government of Bangladesh

Responsible Agency: National Board of Revenue (NBR), Ministry of Finance

Contact: Mr. Md. Ghulam Hussain Title: Secretary, Internal Resources Division, Ministry of Finance &Chairman, National Board of Revenue

Telephone No.:+880 9348344 Email: [email protected]

Responsible Agency: Economic Relations Division

Contact: Mr. Arastoo Khan Title: Additional Secretary

Telephone No.: +880171537503 [email protected]

Expected Disbursements (in US$ Million)

Fiscal Year FY 13-14 FY 14-15 FY 15-16 FY16-17 FY 17-18 FY18-

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Annual 13.5 11.5 13.5 10.5 10.5 0.5

Cumulative 13.5 25.0 38.5 49.0 59.5

0.5

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mailto:[email protected]

Annual with advance 28.5 11.5 13.5 6.5 0 0

Program Development Objective(s)

To improve revenue mobilization and transparency in the VAT administration.

Compliance

Policy

Does the program depart from the CAS in content or in other significant respects?

Y [ ] N [ X ]

Does the program require any waivers of Bank policies applicable to Program-for-Results operations?

Y [ ] N [ X ]

Have these been approved by Bank management? Y [ X ] N [ ]

Is approval for any policy waiver sought from the Board? Y [ ] N [ X ]

Is approval for any policy waiver sought from the Board? Y [ ] N [ X ]

Does the program meet the Regional criteria for readiness for implementation?

Y [ X ] N [ ]

Overall Risk Rating: Substantial

Legal Covenants

Program Action Plan

By no later than June 30, 2016, the Recipient shall establish the Active Registered Baseline referred to in DLR#2.1, the On-line Filing Baseline referred to in DLR#3.1 and the LTU Baseline referred to in DLR#4.1 of the table set forth in Section IV.A.2 of Schedule 2 to the Financing Agreement in substance and manner acceptable to the Association.

The Recipient shall carry out, under terms of reference acceptable to the Association, the following independent taxpayer satisfaction surveys: (a) 2014 survey by no later than June 30, 2015; (b) 2016 survey by no later than June 30, 2017; and (c) 2018 survey by no later than June 30, 2019.

By no later than twelve (12) months after the Effective Date, the Recipient shall install, and thereafter maintain throughout the implementation of the Program, a fixed asset tracking software in the VAT Wing in order to record, track and manage assets procured under the Program, including the provision of training to VAT Wing staff in the use of such software.

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By no later than one (1) month after the Effective Date, the Recipient shall form, and thereafter maintain throughout the implementation of the Program, a seven-member team evaluation committee, under terms of reference acceptable to the Association, responsible for high value (i.e. more than US$ 2 million) IT procurements under the Program; such committee to be composed by at least one national expert and two international experts under terms of reference acceptable to the Association.

By no later than six (6) months after the Effective Date, the Recipient shall report, and thereafter continue reporting throughout the implementation of the Program, on key procurement indicators agreed with the Association using the Recipient’s procurement monitoring systems acceptable to the Association.

By no later than three (3) months after the Effective Date, the Recipient shall: (a) appoint under terms of reference acceptable to the Association, and thereafter maintain throughout the implementation of the Program, a focal point within the ERD responsible for, inter alia, coordinating, monitoring and supporting the resolution of any Program monitoring and fund release issues, including the handling of complaints and financial irregularities; and(b) (i) start collecting and compiling into formats agreed with the Association, and thereafter continue collecting and compiling throughout the implementation of the Program, all Program fraud and corruption complaints; and (ii) submit, throughout the implementation of the Program, the aforementioned reports to the Association on a semi-annual basis.

By no later than June 30, 2015, the Recipient shall: (a) carry out a training on e-waste handling to IT NBR staff; and (b) start, and thereafter maintain throughout the implementation of the Program, proper record keeping of equipment purchase, reused and auctioned.

By June 30, 2015, the Recipient shall set up the NBR’s contact center, under terms of reference acceptable to the Association, responsible for, inter alia, properly running a complaint mechanism; such mechanism shall be available on NBR’s website.

Team Composition

Bank Staff

Name Title Specialization Unit

Tracey M. Lane Senior Economist and TTL

Governance and Public Sector

SASGP

Jorge Luis Alva-Luperdi

Senior Counsel Law LEGES

Junxue Chu Senior Finance Officer

Finance CTRLN

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Anna Pinto-Hebert Senior Operations Officer

Governance INTSC

Daniel Alvarez Senior Public Sector Specialist

Tax Administration LCSPS

Sebastian James Senior Investment Policy Officer

Tax Administration CICTI, IFC

Mohammad Azad Rahman

Investment Officer Tax Administration CSAIC, IFC

Vikram Chand Lead Governance Specialist

Right to Information

SASGP

Ana Bellver Senior Public Sector Specialist

Public Sector PRMPS

Jonas Arp Fallov Senior Public Sector Specialist

Public Financial Management

SASGP

Syed Khaled Ahsan Public Sector Specialist

Public Sector SASGP

Siou Chew Kuek ICT Policy Specialist ICT TWICT

Suraiya Zannath Senior Financial Management Specialist

Financial Management

SARFM

Tanvir Hossain Senior Procurement Specialist

Procurement SARPR

Shakil Ahmed Ferdausi

Senior Environment Specialist

Environmental Safeguards

SASDI

Iqbal Ahmed ETC, Environment Specialist

Environmental Assessment

SASDI

Mridula Singh Senior Social Development Specialist

Social Assessment SASDS

Dilshad Dossani Operations Analyst Operations, Analytical and Coordination

SASGP

Jody Zall Kusek Lead Specialist Monitoring and Evaluation

SASGP

Thomas Jeffrey Ramin Senior Operations Officer

Monitoring and Evaluation

SASGP

Nafisa Rusmila Team Assistant Administration SASGP

Non-Bank Staff

Name Title City

Eduardo Talero Consultant, E Governance

Washington, DC

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Jonathan Rose Consultant, Political Economy

Dhaka, Bangladesh/ Washington, DC

Manzoor Hasan Consultant, RTI Dhaka, Bangladesh

Iffat Idris Consultant, RTI Islamabad, Pakistan

Julia Dhimitri Consultant, Tax Administration

Washington, DC

Nasiha Musarrat Consultant, Governance

Dhaka, Bangladesh

Teresa Petrocco Consultant, Tax Administration

Vernon, British Columbia, Canada

Wyatt Grant Consultant, Tax Administration

Ottawa, Ontario, Canada

Saiful Islam Consultant, Fiduciary Assessment

Dhaka, Bangladesh

Dr. M. Maniruzzaman Consultant, Social System Assessment

Dhaka, Bangladesh

Md. Delwar Hossain Consultant, Environmental Assessment

Dhaka, Bangladesh

Syed Ahmed Ali Consultant, Procurement

Dhaka, Bangladesh

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I. STRATEGIC CONTEXT

A. Country Context

1. Bangladesh has had a strong development performance since independence with sustained, pro-poor economic growth; a steady decline in poverty and improvements in social indicators. Bangladesh is a densely populated, low-income country (Gross National Income per capita is US$901)1 with 157 million citizens, of whom 47 million live in poverty. In spite of global shocks, natural crises and governance challenges, Bangladesh’s economy has maintained a healthy real Gross Domestic Product (GDP) growth rate of 6 percent per year on average over the last 10 years, exceeding the Country Assistance Strategy 2011-14 (CAS) projections (see Table 1). Bangladesh has even accelerated annual GDP growth, increasing by around one percentage point every decade from 3 percent a year in the 1970s. The poverty challenges are considerable nonetheless, an estimated 31.5 percent live below the national poverty line. However, there has been a substantial reduction (46 percent) in the number of extreme poor, to 26 million in 2010; and Bangladesh is on track to achieve the poverty Millennium Development Goals.

Table 1: Bangladesh Key Macroeconomic Indicators, Projections and Outturns FY10-13

Source: Bangladesh Bank, Bangladesh Bureau of Statistics, and IMF-World Bank Staff Estimates. Notes: P refers to provisional estimates.

2. Economic growth will need to further accelerate to at least 7.5-8 percent per annum on average, if Bangladesh is to achieve its target of middle-income country status by 2021. Macroeconomic management has been strong, inflation has typically been below 10 percent, international reserves are currently at four months; the public debt to GDP ratio is below 40 percent; and the government is on track with the $987 million International Monetary Fund (IMF) Extended Credit Facility-supported reform program which was adopted in April 2012.2 However, there are challenges. Bangladesh is considered a risky place to do business, with constraints in land administration, perceptions of corruption, and lengthy bureaucratic procedures. While the governance environment of the past may have been just adequate to keep growth going, it could become a constraint to the accelerated growth needed to put Bangladesh firmly on the path to middle income status.3 Other challenges include a somewhat politicized

1Atlas method current data for FY13 with the base year of 1995-96. 2 IMF Country Report No. 13/61, March 2013. 3 See Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth –opportunities and Challenges World Bank 2012; and

Bangladesh: Strategy for Sustained Growth, 2007. The required growth of GDP rate of 7.6 percent assumes the share of

CAS Projections Actual Outruns FY10 FY11 FY12 FY10 FY11 FY12 FY13p

Real GDP Growth (%) 5.5 5.8 6.3 6.1 6.7 6.2 6.0 Export Growth (US$ value) (%) 1.8 12.4 15.7 4.1 41.5 5.9 10.3 Current Account Balance (% of GDP)

2.4 2.1 1.7 3.7 0.8 −0.4 1.9

Reserves (in months of imports) 5.1 5.3 5.5 5.1 3.9 3.3 4.6 Total Revenue (% of GDP) 11.5 11.6 12.1 10.9 12.1 12.4 12.4 Public Debt (% of GDP) 43.8 44.0 43.7 42.9 44.2 42.6 39.3 External Debt (% of GDP) 22.3 21.7 20.8 22.3 22.7 22.0 19.6

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public administration and a lack of meritocracy in recruitment and promotion practices. Public institutions are rated poorly in citizen surveys, despite attempts to improve them and are characterized by low-levels of modernization. In addition, the government recognizes the need to improve processes where citizens engage with the public sector in order to obtain better services.

B. Sectoral and Institutional Context

3. Low revenue mobilization in Bangladesh stands out as one of the critical constraints to improving physical infrastructure and investing in human capital to accelerate growth. The level of tax collection in Bangladesh was 10.4 percent of GDP in 2012, an improvement over the 2004-2009 period when it averaged 8.3 percent of GDP. Nonetheless, as shown in Figure 1 Bangladesh is performing below many other countries in South Asia. Furthermore, Bangladesh has not been able to sustain improvements in tax collection, particularly in VAT, in the first half of 2013. This places Bangladesh at a distinct disadvantage over the medium term in being able to fund critical infrastructure investments; improve service delivery, and address governance concerns. At this level, tax revenue provides an insufficient base of domestic revenue for Bangladesh to finance the investment in human and physical infrastructure required to alleviate poverty levels and propel Bangladesh into a middle income category by 2021, as is envisioned in the country's development strategy—the Sixth Five Year Plan FY2011-FY2015.

4. Financing the investments needed for the government’s development strategy, will require a significant increase in domestic resources, and a widening of the tax base. While total government revenue has improved in recent years, up from 10.9 percent of GDP in FY10 to 12.5 percent in FY12, tax revenue improvements cannot be sustained without improvements in the efficiency of the tax administration, a reduction in the extent of non-compliance, and the introduction of policy reform with simplified tax structures which are easier to administer. The tax base is narrow, and increasing the number of registered taxpayers is important for the revenue targets to be achieved, as well as for strengthening the compact between taxpayers and the government for the delivery of basic services. The National Board of Revenue (NBR) of the Internal Resources Division of the Ministry of Finance has made inroads with improving the tax administration, such as introducing automation projects to improve efficiency, but with limited success. Learning from these experiences the government has adopted a more comprehensive approach to modernization, based on both policy reform, as well as business process improvements, including sharing information and moving toward common systems across the tax wings, as well as automating processes.

5. Bangladesh’s relatively low revenue to GDP ratio is primarily due to inherent weaknesses in the tax system. The main problems result from: (a) an inefficient tax administration due to a “type of tax” organizational structure, poor management, weak human resources and lack of skilled staff, poor support systems, scope for discretionary behavior, and poor physical infrastructure; (b) a narrow tax base due to the informal structure of the economy (there are around three million and seven hundred registered income taxpayers of which only half file tax returns; and just fifty thousand registered businesses that pay VAT); (c) a skewed tax

remittances in GDP remains constant at 9 percent; for the middle income status benchmark to be realized.

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structure, with indirect taxes contributing the most; (d) a complex and non-transparent tax system; and (e) corruption and tax evasion enabled in part by the relatively low compensation of tax officials.

Figure 1: Tax Revenue (in Percent of GDP) for South Asia Region, 1994-2012

Source: World Development Indicators.

6. In response to these challenges, the National Board of Revenue (NBR) has adopted a comprehensive Tax Modernization Plan (2011-2016). The Tax Modernization Plan (2011-2016) was also endorsed by Parliament in June 2011. The Plan recognizes the critical need to increase tax revenue in order to achieve the national development plan’s medium-term revenue target of a tax-to-GDP ratio of 12.2 percent by FY2016. To address the tax policy and administration reforms required, the Tax Modernization Plan outlines nine strategic areas dealing with: tax policy reform; business process reform; automation of tax processes; redefining the status and regulatory power of NBR; restructuring NBR according to function and size; strategic communication and outreach; enforcement improvement program; human resource program; and infrastructure development program.

7. As a centerpiece of the government’s Tax Modernization Plan, a new VAT Law was passed by Parliament in November 2012. The new VAT Law addresses many shortcomings of the 1991 VAT, and if properly implemented and effectively administered, it has the potential to increase the VAT tax yield, broaden the tax base and contribute towards establishment of a modern and service oriented VAT administration. It provides a simpler VAT regime with fewer exemptions and is due to come into effect in July 2015.

8. The VAT Improvement Program (VIP) 2014-2019 supports implementation of the new VAT law. The new Law provides the VAT Wing with an opportunity to modernize the administration in order to bring the administrative and policy improvements together in support

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of greater revenue mobilization. The adoption of a plan to implement the new VAT and modernization the administration is also considered a central reform in the program with the IMF supported by the three year Extended Credit Facility.

9. In addition to enhancing revenue mobilization, the VIP supports the greater transparency of the VAT administration. This operation will support the VAT Wing to be fully compliant with the Right to Information (RTI) Act, 2009. Through the VIP the government is committed to effective proactive disclosure (as required under the rules and regulations of the RTI Act) and additional voluntary disclosure of key performance indicators, including information such as the actual VAT collection, taxpayer satisfaction survey results, the proposed new contact (or call) center and processing center performance reports.4

C. Relationship to the CAS and Rationale for Use of Instrument

10. The proposed Program is closely aligned with the World Bank's Country Assistance Strategy (CAS) 2011-15, the CAS Progress Report (Report No. 73983-BD of November 20, 2013, discussed at the Board January 14, 2014) and the government’s development priorities. Reflecting lessons from the implementation of the previous CAS, the ongoing CAS calls for engagement in areas where credible commitment from government exists and the likelihood of reform success is substantial. The CAS progress report recognizes that weak governance in Bangladesh poses major challenges for sustaining economic growth and social development and thus improving governance is a theme that cuts across all activities. The linkage to the revised CAS results framework is presented in Table 2 below.

Table 2: Relationship to the CAS Results Framework FY11-15

Strategic Objective CAS Outcomes FY11-14

Revised CAS Results Framework FY11-15

VIP Outcomes

FY 13-FY19

Pillar 4. Improved governance.

4.2 Enhanced transparency and accessibility of public services

Enhanced transparency and accessibility of public services

Improved transparency of VAT administration, and improved taxpayer services with annual public disclosure of performance and taxpayer satisfaction results.

11. The Program supports the CAS governance objective by enhancing transparency and improving taxpayer services. The progress report also identified revenue generation as a focus area for the Bank’s engagement over the medium term. The CAS progress report proposes to take a pragmatic approach, by supporting specific government initiatives such as implementing the access to information legislation and through measures to improve governance

4 The Right To Information Act, 2009 and rules and regulations allow for the citizen’s to request information and require the public sector to proactively disclose certain information. The NBR has already been assessed as being compliant with the majority of the information required under the Act is already disclosed. The transparency of performance information will go beyond the basics required under the Act, and align the VAT Wing with a higher level of proactive disclosure.

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within Bank-financed operations. The program will also improve revenue mobilization over the medium term to create the fiscal space for the increased investments required for economic growth, and will therefore contribute to the growth objectives beyond the current CAS period.

12. Following the rationale and approach proposed in the CAS, the Program identifies reform areas where potential impact on growth and poverty reduction is substantial and the strong interest in results by the government is already secured. The VIP is one of the cornerstones of the Bangladesh medium-term development strategy, and has strong support at the top of government particularly as it is in the IMF’s Extended Credit Facility program. The Bank Group including the International Finance Corporation (IFC) has had a long-standing engagement in revenue administration in Bangladesh, supported by analytical work and technical assistance programs, which helps in determining appropriate judgments about the feasibility of reforms and the incentives of key stakeholders, and thereby improves the likelihood of successful outcomes.

13. The rationale for using the Program for Results (PforR) instrument is that:

(a) the PforR supports improvements in the design of the overall program and in the use of the program's systems. The Bank’s assessment of the quality of the Program, including the results framework, expenditure framework, and supporting systems, is satisfactory and the Program systems meet OP9.00 requirements. Although the PforR operation will support specific interventions, the Bank’s contribution is anticipated to foster improvements in terms of effectiveness and efficiency in the overall program over the next 5-6 years. The ongoing policy dialogue with the government and the Bank Group’s proactive support during preparation is already improving the quality of the design of the overall VIP, the linkages with the Tax Modernization Plan, and improvement in the use of the countries’ own systems. Several measures to strengthen these systems during implementation have been incorporated in the design of the Program and the DLIs. (b) It focuses on the achievement of program results: the government is keen on using a results-based approach to ensure the achievement of the key improvements under the Program, and has asked for Bank support in setting up robust results chains to ensure the key results are achieved, and in disseminating the basics of a results-based culture in the tax administration. The government is already very familiar with Bank investment-financing instruments that disburse on the achievement of results. The PforR has strengthened the focus on results, and what can realistically be achieved in the next 5-6 years; while at the same time recognizing the ambition of the program and limited technical capacity and institutional constraints of the National Board of Revenue. This is particularly critical in tax administration projects where large and complex IT systems are developed and the implementation effort tends to be focused on inputs. The results-based approach will contribute to focusing the reform effort on the results to be achieved and provide flexibility during implementation to address the political economy challenges that may emerge. Through use of Disbursement-Linked Indicators (DLIs) targeted specifically at government actions and results, the Ministry of Finance will make multiple annual development budget commitments to ensure that results are achieved, and in turn to trigger International Development Association (IDA) credit disbursements and replenishments of the budget. Besides financial incentives, the PforR instrument and the underpinning institutional arrangements also have the potential to influence the way the NBR operates and distil a result-based culture within the administration. The Economic Relations

16

Division (ERD), Finance Division and the NBR of the Ministry of Finance have fully endorsed the results-based disbursement approach. (c) It supports the gradual adoption of a results-based management in the public administration. The Government of the People’s Republic of Bangladesh (GoB) recognizes the importance of focusing on results and wants to use this operation (as a demonstration effect), to support its ambition to develop and implement performance-based management throughout government as put forward in the Sixth Five Year Plan- which itself includes a results framework. The involvement of the ERD in the program will strengthen the potential for the results-based approach used in the VAT program to be replicated elsewhere where the Bank is supporting administrative reforms. (d) The PforR helps to strengthen longer-term institutional capacity under the program. The government’s program is not just about getting the right inputs and technology in place (which could be addressed with an investment operation) but about addressing the enormous institutional challenges which require financing to support the results-focus in order to align the institutional incentives with the bigger picture—higher tax revenues and greater transparency. With support from the Bank, the government has developed key capacity building actions, necessary to achieve the program's objectives (and not just to undertake the investments required) over the next 5-6 years. In discussions with the government on how to refine its program, the team has been able to draw on the significant Bank resources on the areas of results-based management and tax administration. Such technical advice and support will continue during the operation's implementation, complementing support provided by other development partners. (e) The use of PforR and its focus on results make it easier to coordinate between development partners and the government. The PforR has provided a platform to reinforce the importance of the VAT Implementation Plan for the macroeconomic stability program by aligning the action results under the initial years of the Program with the milestones in the IMF’s Extended Credit Facility. A strengthened donor harmonization agenda has been put in place during the preparation of the PforR. This provides an emerging institutional mechanism (the Tax Donor Group, chaired by the IMF) and a venue for development partners to start to harmonize their projects (including to other parts of NBR) around the broader program, the Tax Modernization Plan. (f) This approach provides assurance that the Bank’s financing is used appropriately and that the Program’s environmental and social impacts are adequately addressed. The Bank has assessed the Program’s fiduciary and environmental and social management systems and termed them satisfactory. It has also agreed a fiduciary action plan with the government to provide assurance that the loan proceeds are used for Program expenditures, and that these expenditures are managed with due economy and efficiency. The Program does not include any activities with potentially significant and irreversible impacts on the environment or affected people and does not include high-risk activities. The Program does include expenditures for high value IT contracts, but the estimated value of the highest contract (at US$ 18 million-including price and physical contingencies) is below the PforR IT procurement threshold of US$20 million. While there are substantial risks involved, especially fiduciary risks and country risks; this is nonetheless a high reward program that has incorporated a range of risk mitigating measures. The strategic relevance of the program is extremely high and is likely to remain so over the medium term.

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II. PROGRAM DESCRIPTION

A. Program Scope

14. This operation will support the government’s VAT Improvement Program (2014-2018) that aims to improve revenue mobilization and transparency in the VAT administration. The program is national in scope: the new VAT Law to be introduced in July 2015, if properly implemented and effectively administered, could increase the tax yield, broaden the tax base and contribute towards establishing a modern and service-oriented VAT administration. The Program goes beyond the introduction of new tax administration software, as it supports the restructuring of the VAT wing and the reengineering of key business process, and strengthens reporting to the public on performance and complaints handling and greater transparency of the administration. The total expenditure for the program between 2013/14 and 2019/20 is US$ 73 million, of which US$ 60 million is to be financed by the PforR operation, see Table 3.

Table 3: Program Financing Summary, US$ Million

Source Amount % of Total

Government 13 18

IDA 60 82

Total Program Financing 73 100

15. The VAT Improvement Program (“the Program”) prioritizes strengthening the administration of the value added tax (VAT) with an emphasis on modern business processes and IT systems and greater transparency. The Program supports the modernization of the VAT tax system, while harmonizing with other initiatives under the Tax Modernization Plan which impact NBR as a whole. The expected results are: (a) staying on track with the rapid and ambitious VAT implementation plan endorsed by the Minister of Finance in 2013, which includes introducing business process changes; undertaking a complex ICT procurement and deployment; and undergoing training, change management and communications activities; (b) broadening the tax base and increasing the number of active (registered and filing) VAT tax-payers; (c) employing a greater use of technology to improve the efficiency of the administration and lower the costs for the taxpayer by offering on-line services to register, file and pay taxes; and (d) greater transparency of the VAT wing and compliance with the RTI legislation, including disclosure of specific performance and service delivery indicators. The benefits of the VIP are expected in terms of improved services to taxpayers, reduced administrative costs for taxpayers and lower compliance costs, resulting in greater revenues. The main program results scope and activities are summarized in Table 4.

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Table 4: Program Results, Scope and Activities

Objectives and Results Activities to be supported Scope


Objective: To improve revenue mobilization and transparency in the VAT administration.

Key result: Increased VAT revenues.

Greater transparency

Intermediate results: VAT implementation plan stays on track; number of registered and active VAT taxpayers increases year-on-year; number of VAT stop-filers decreases; value of VAT e-payments increases; extent of e-services coverage (on-line filing and paying) increases; time taken to process and issue VAT refunds falls; taxpayer satisfaction increases, increased disclosure of performance information under the RTI Act.

• Automation and modernization of VAT core functional areas: registration, return processing, tax payment, taxpayer accounting and tax refund, tax audit, revenue arrears management, taxpayer services, and dispute resolution.

• Develop and deploy an Integrated VAT Management System, and establish a data center, a centralized processing center and a contact center.

• Institutional strengthening and capacity building program to enable staff to utilize the new integrated VAT system and business processes.

• Program administration, change management communications and a comprehensive taxpayer education program.

• Regular dissemination of performance data and maintaining compliance with RTI legislation.

National level.

NBR VAT Wing HQ and all the Commissioners and field offices.

16. The VAT Improvement Program will be implemented by the NBR as part of their Tax Modernization Plan. The VIP will be harmonized with other initiatives under the Tax Modernization Plan such as the parallel automation in the income tax wing, the development of an e-payment service portal for all tax types and the use of a single tax identification number for income tax and VAT taxpayers. The main governance improvements supported by the VAT Improvement Program are the efficiency improvements from reorganization and modernization, and the development of new e-services which will allow taxpayers to access services on-line. The use of a central processing center and a contact center (or call center) will not only improve efficiency through economies of scale, but will also provide taxpayers with alternative options to dealing face to face with local tax officials which has been known to result in collusion and situations where lower revenues are reported and paid.

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17. While the VAT Improvement Program envisages a strong focus on the introduction of customized commercial off-the-shelf (COTS) tax administration software; the DLI’s encompass the whole VAT reform program and the end results of the introduction and use of the software system, rather than the purchase of the system as an end in itself. While the procurement of the COTS system is a key activity under the program it is only one step towards the end result. Since the ultimate goal is to enhance revenue mobilization capacity and transparency; the DLIs include key outputs in the results chain—such as the increase in the number of registered active taxpayers; the extent of on-line filing, the proportion of large taxpayers who are paying on-line; and the extent to which key performance information is placed in the public domain. There are currently around fifty thousand registered VAT taxpayers, of which an estimated thirty five thousand are regularly filing and paying VAT. The actual baseline of active taxpayers will be established once the new system is installed and the new Law is in place, since there will be changes to the requirements for registration. A minimum of an additional 35,000 active taxpayers (over the existing 35,000) are anticipated under the Program. The end of program target (depending on the success of the initial campaign for registration) is estimated to be between 85,000 and 200,000 active registered taxpayers. While the program supports the VAT implementation primarily, the Program Action Plan addresses the need to support gradual harmonization of reform processes in the VAT wing and in particular the ICT deployment in the other tax wings (income tax and customs) of the NBR. The program should continue to be supportive of the longer-term revenue mobilization efforts envisaged under the Tax Modernization Plan. To facilitate the harmonization process, the Bank and the IFC are continuing to provide additional technical assistance through a long-term adviser to the Chairman of the NBR.

18. While a large amount of the required information under the RTI Act is already available to the public, the program supports the full implementation of the RTI Act, and strengthening proactive disclosure elements. Both the NBR website and VAT webpage fulfill around three quarters of the proactive disclosure requirements under the RTI Act, 2009 and associated rules and regulations. This assessment is comparable with the scores received by the Ministry of Finance’s website and is considered an overall high score. However, information on two categories under the rules including “subsidies” (or exemptions) and the contact details of a designated officer under the Act need to be strengthened for full compliance. Furthermore, the RTI rules encourage an expansion of proactively disclosed materials. The new information systems being introduced under the program provide an opportunity for NBR to be at the forefront of implementing the government’s policy on transparency. The program encompasses new levels of transparency through additional regular reporting on the tax revenue collection and the processing and contact center performance and taxpayer satisfaction results.

19. There are several development partners supporting the modernization efforts of the NBR, and the coordination efforts are supported by a development partner group which was established in 2013 and is chaired by the IMF resident representative. This has helped to improve harmonization between the different tax-related initiatives and has the active participation of the Asian Development Bank, the United Kingdom’s Department for International Development (DFID), IMF and the World Bank Group (IDA and IFC). The VAT reforms are central to the IMF’s Extended Credit Facility (ECF) program; and the Fund is able to use prior actions to keep the momentum for the reform on track. In addition, technical support is provided by the Fiscal Affairs Department, IMF for the development of the VAT Implementation Plan and there is an IMF-financed resident adviser in the VAT wing supporting the project

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director (as well as short term advisers on specific aspects such as the rules and regulations). The ADB is supporting income tax automation and DFID has on-going support to the Large Taxpayer Unit. The IFC has also supported the development of taxpayer e-services through the investment climate trust fund. This operation has been prepared in close coordination with these development partners. Through the donor harmonization efforts the development partners are aligning with the Tax Modernization Plan, which is proceeding gradually, for revenue mobilization results.

20. Beneficiaries of the VIP are taxpayers who will benefit from improved taxpayer services (particularly the ability to register, file and pay on line, which will lower the costs of compliance) as well as from greater transparency and the establishment of a contact center which will handle grievances. In addition, the management and staff of the VAT Wing at NBR will also benefit substantially from capacity building and training activities to improve tax management. Improvements in VAT revenue mobilization are expected to increase Bangladesh revenues and fiscal space by 1 percentage point of GDP by the end of the program, which provides for potential benefits in the form of increased public investments.

B. Program Development Objective

21. The Program Development Objective (PDO) is to improve revenue mobilization and transparency in the VAT administration.

C. Program Key Results and Disbursement Linked Indicators

22. The high-level outcomes or key results of the program are:

• Increased VAT revenues

• Greater transparency

23. The indicators that have been selected to measure success in achieving the PDO are:

• PDO Indicator 1: VAT revenues collected as a percentage of GDP

• PDO Indicator 2: Compliance with RTI legislation

24. The government has indicated it will request an advance of 25 percent of the operation ($15 million) as an advance on the achievement of results in years 1 and 2. The disbursement amounts have been determined on the basis of the agreed program results and their contribution to the overall objectives during the course of the program period, and are described in Annex 3. The key outcomes to be achieved are: (a) the VAT implementation plan stays on track including an ambitious reorganization and automation of the VAT administration; (b) there is an increase in the number of active registered VAT taxpayers; (c) there is an increase in the number of tax payers filing taxes using on-line services; (d) there is an increase in the proportion of large VAT taxpayers paying on-line; (e) there is a greater transparency in the VAT administration through the proactive disclosure of performance data and implementation of the Right to Information Act, 2009 and (f) there are strengthened fiduciary practices.

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25. Six indicators from the results framework have been selected as Disbursement-Linked Indicators in order to incentivize the achievement of critical intermediate results of the VIP. During the initial phases, the first two DLIs are focused on the process results that are consistent with the VAT implementation plan and those results that are also supported and monitored under the IMF program. This ensures that the Program is in the first two years fully aligned with results to be achieved as per the timetable of the ECF milestones. In years 3-6, once the VAT Law, 2012 will come into effect and the management information system is in place and can give reliable data, the DLIs will become more output focused. Three of the DLIs are focused on output results, such as increased number of active registered taxpayers, increased number of taxpayers filing on-line, and a greater percentage of VAT large taxpayers paying on-line. The fifth DLI supports the output indicator of greater transparency with a number of annual performance reports or survey results to be put in the public domain each year. The sixth DLI provides an incentive for best practice in financial management and procurement processes, consistent with the risks and associated mitigating measures identified in the Integrated Fiduciary Systems Assessment (IFSA). The six DLIs are described below and provided in Annex 3:

• VAT Implementation Plan stays on track. The VAT Implementation Plan has been endorsed by the Minister of Finance. This DLI is intended to disburse against specific annual results, which have been selected to be aligned with the milestones and benchmarks5 that are supported under the IMF program. The selections of the annual results in this DLI are aligned to the IMF’s ECF program and timetable. Given the complexity of the program, the weak capacity of the implementing agency and the lack of a reliable database on outputs, the process indicator is necessary to ensure that the VAT implementation plan remains on track, and that the new VAT Law comes into effect on Jul 1, 2015. The milestones are also focused on the key procurements that need to be undertaken ensuring that these are managed well and undertaken quickly.

• New registered active VAT taxpayers. With the introduction of a new VAT there will be a communications drive to raise awareness and VAT field office staff will launch a campaign to visit businesses to increase the number of registered tax filers (this is also a DLI). With the new administrative system, VAT staff will be able to identify stop-filers and initiate reminders and proactive visits to keep filers active (monitoring the number of stop filers is in the results framework but will not be a separate DLI).

• Number of tax payers who file on-line. With the development of new electronic access for tax payers, the program will see new opportunities for filing taxes on-line. This should reduce compliance costs for taxpayers and ease the processing of taxes at the central processing center.

• Percentage of large taxpayers who pay on-line. With the development of new electronic access for tax payers, the program will see new opportunities for paying taxes on-line. An increase in the total number and proportion of Large VAT taxpayers who use e-payment options is also anticipated.

5 Keeping the VAT implementation plan on track relates to several specific milestones as follows: Year 1 = COTS and Project Management Consultancy vendors selected; Year 2 = registration commences for new VAT and vendors for data center, contact center and other IT infrastructure selected Year 3 = process first VAT returns and payments; Year 4 = audit staff trained and process first VAT refunds.

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• Greater transparency. Information will be placed in the public domain on performance of (a) actual tax collected annually, (b) annual contact center and processing center performance reports, including number of calls handled successfully and number of taxpayer accounts managed annually; and (c) the disclosure of the results from the periodic taxpayer satisfaction surveys.

• Improved fiduciary environment. Several key procurement and financial management processes were selected to encourage excellent performance in the use of (a) electronic government procurement (e-GP) for national procurements; (b) timely submission of fund utilization reports quarterly, and (c) resolution of all significant audit objections within 6 months.

Table 5: Disbursement Linked Indicators Summary No. DLI US$ million

1 VAT Implementation Plan stays on track 33

2 Number of new registered active VAT taxpayers 7

3 Number of taxpayers who file on-line 6

4 Percentage of VAT Large Taxpayers who pay on-line 6

5 Greater transparency through proactive disclosure 3

6 Improved fiduciary environment 5

Total Amount 60

D. Key Capacity Building and System Strengthening Activities

26. The PforR operation focuses on improving key systems for the administration of the value added tax (VAT). In order to support the government teams responsible for implementing the new systems, international and local consultancy support will be called upon to provide technical support to the policy makers responsible for implementation. Having access to appropriate technical support will be required since implementing the program includes undertaking several tasks which are new to the implementing agency such as: reviewing and revising government business processes; procuring ICT hardware and software; developing contracts for private sector-run support centers; raising awareness on the objectives of the programs and guiding devolved staff at sub-national or field offices (also called circle offices) on how to use the information from new systems to improve monitoring; and disclosing information to the public on service standards and performance.

27. The Program Action Plan includes several core capacity building and risk mitigation activities to strengthen the capacity of the implementing agency, NBR, and the use of core systems. In addition a comprehensive capacity building plan has been developed (see Annex 8). The main activities will include: developing a comprehensive training and capacity building program, preparing a training package and a manual, and developing administrative procedures for VAT core business processes, e.g. registration and payment processing, collection and non-filing enforcement, taxpayer services, and audit and appeal system procedures. These training and capacity building activities will be supported by an internationally-hired Project Management Consultancy tasked with supporting the VAT

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implementation team in undertaking all program activities. All NBR VAT Wing staff will receive training and support to enable them to undertake their new roles and duties given the changes to the law and rules affecting the NBR VAT Wing organizational structure, and the new administrative processes and information technology that will be put in place. Additionally, it will include capacity building activities aimed at enhancing the analytical capacity of the VAT staff wing specifically on tax compliance gap measurement and analysis, and a medium-term capacity building agenda to strengthen the management team is under development. As the NBR is integrating the service approach in its core business processes, a taxpayer satisfaction survey will also be conducted periodically, and the results used to inform the on-going institutional reforms.

28. The ERD in the Ministry of Finance will assume a supporting role and assume the responsibility for hiring a third party contractor for independently verifying the results of the Program. In addition, the main program being implemented by the NBR, the ERD will play a role in providing technical assistance support to the NBR, and other agencies involved in supporting the success of the program such as the Anti-Corruption Commission and the monitoring and evaluation division of the Ministry of Planning. The capacity of these two institutions to report and monitor the program activities is to be supported through the technical assistance activities managed by ERD. The ERD too, will require additional capacity to develop the implementation plan for the program’s verification protocol.

III. PROGRAM IMPLEMENTATION

A. Institutional and Implementation Arrangements

29. The Program is to be implemented by the VAT Wing of the National Board of Revenue. The VIP will be spearheaded by the VAT implementation team led by the Project Director who will be the Project Director and is the NBR Board Member for VAT policy from the VAT Wing. The Project Director reports to the Program Steering Committee, which is chaired by the Chairman of NBR. The 15-member implementation team includes in addition to the Project Director, two deputy project directors and a government accountant who is seconded from the accounting cadre to the implementation team to bolster the team’s capacity to report on program expenditures. The team will be responsible for overseeing program implementation, and overall program coordination and management.

30. The ERD will provide overall program coordination with the World Bank, and have principal responsibility for engaging the independent verification entity. The ERD Office within the Ministry of Finance is responsible for coordinating development partner financed programs. The ERD has appointed a Project Director (responsible for World Bank projects) and a small unit to oversee the implementation of the Program. The ERD will provide guidance to the implementing agency on the PforR modalities as the Program is implemented, and will provide support to resolve potential issues related to the release of funds by the Ministry of Finance, as well as overall harmonization. During preparation the Cabinet Division received a small Project Preparation Advance (PPA) to develop a multi-agency governance program which during preparation was limited to the VIP. The Advance was also used to hire consultants to help the potential implementing agencies strengthen their programs and was used to support the

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NBR to finalize the VAT improvement program documentation that was approved by the Executive Committee, National Economic Council on October 8, 2013.6

31. The oversight of the VIP is through a Program Steering Committee headed by the Chairman, NBR and a Program Implementation Committee. The Program Steering Committee has the overall responsibility to provide guidance on, and oversight of, the VIP. The oversight of the VIP will be strengthened using the following mechanisms: (a) a Program Implementation Unit within the team with responsibility for overall management and coordination and reporting, including financial reporting; (b) bi-annual implementation reviews (program progress reports will be prepared as per an agreed reporting template) of the VIP; (c) bi-annual independent, third party verification of DLIs hired by the ERD; and (d) IMF reports produced during IMF technical and program supervision missions.

32. The Program will be implemented in coordination with other initiatives funded by development partners in this area, and will use the donor harmonization architecture. The development partners who are providing technical assistance and financial support including ADB, DFID, IFC, IMF and World Bank.

B. Results Monitoring and Evaluation

33. The NBR is responsible for the overall results monitoring and ERD is responsible for the overall coordination and reporting to the World Bank on the program result framework and DLIs. The NBR is responsible for monitoring the results in the results framework, many of which will use data from the newly installed administration system. In NBR, the VAT wing will be responsible for monitoring the results framework indicators. Technical assistance will be provided in the first year to ensure that there is a monitoring framework in place, and a strategy for establishing baselines if the administrative system is not operational in good time. The ERD is responsible for ensuring timely reporting to the Bank against the results framework. The ERD will also develop its capacity for monitoring and development of results frameworks, as well as that of other relevant agencies (such as the monitoring and evaluation directorate in the Ministry of Planning) so that results monitoring and evaluation capacity is strengthened across government; and lessons learned for developing other results-based lending operations, so that ERD will have the potential to support the development of results-based operations.

34. The introduction of information systems in the implementing agency will provide the database from which the data for most of the indicators in the results framework can be derived. Since the development of management systems is central to the operation, many of the results indicators will be produced by these new systems once deployed. System-generated reports from headquarters will be able to identify for example: the number of tax payers; the percentage of taxpayers using electronic services as well as the volume of taxes collected electronically.

6 The final program design concentrated on one implementing agency: the VAT Improvement program managed by the National Board of Revenue, and the rationale for the role of Cabinet Division as a coordinating body was removed. The Advance was also used to develop the program design and verification protocols and to support other ministries which were considering developing a results-based e-services and e-governance program which had been considered for inclusion in the Program earlier.

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C. Disbursement Arrangements and Verification Protocols

35. The ERD will contract an independent third party auditor for the verification of DLI results for years 2-6 of the VIP. In the case of the first year, in order to facilitate timely verification of results, using a terms of reference agreed with the ERD and NBR, the World Bank will hire an independent verification agent to verify the process indicators related to the procurement of the COTS and the project management consultancy. The NBR will be responsible for preparing the monitoring reports twice a year on progress against results. The ERD will be responsible for contracting the required third party agent who will undertake verification and submit reports simultaneously to the World Bank, the NBR and ERD and neither party (the Bank or the GoB) can modify such reports except for factual errors. The Terms of Reference and the procurement process for engaging the independent third party will be agreed with the Bank. For disbursement purposes, the Bank will then review the verification reports and retains the right to make the final decision as to whether DLIs have been achieved or not.

IV. ASSESSMENT SUMMARY

A. Technical (Including Program Economic Evaluation)

36. By supporting NBR’s ability to implement the new VAT, the Program will contribute to the government’s core economic goal of raising revenues for sustained increases in public investments. The VIP is will modernize the VAT Wing of the NBR in time to implement the new VAT regime from July 2015 thus maximizing the potential revenue improvements. The Program includes reorganizing the VAT Wing along functional lines to centralize the tax file processing functions and improve economies of scale. The processing and contact functions will be contracted out to private sector service providers to strengthen efficiency gains, and the field office staff functions will be reoriented to ensuring compliance and following-up on tax audits. The Program focuses on the need for the end results and the monitoring and evaluation framework is results-focused on the benefits arising from lower costs of compliance, greater access to on-line services, as well as improvements in the administration through reorganization and automation. With a strong focus on institutional strengthening and capacity building and an investment in change management and communications, the risks the program are being managed.

37. The VIP is considered to be technically sound. The program supports the new VAT regime introduced from 2015 to become a robust source of revenue, and should raise the VAT tax to GDP ratio by a minimum of one percentage point by the end of the program. The program also supports the enhanced transparency of the agency in line with the governance objectives of the national development plan. The Program is strongly supported by the coordination with the IMF program and strengthened by technical assistance provided by the IMF and the IFC as parallel financing. Refer to Annex 4 for additional information on the technical assessment of the program.

38. The economic analysis of the program is positive under several scenarios of benefits arising from administrative cost savings and reduced costs of compliance for the taxpayer. The VAT Implementation plan has a high internal rate of return under several scenarios used to quantify the benefits of the VIP. The benefits are quantified based on the reduction in

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administrative cost of collecting VAT taxes (between 10 and 30 percent) and the reduction in the compliance cost (between 1 and 2 percent of VAT revenues) to tax payers. The compliance cost savings drive the economic benefits, and based on international experience a compliance cost savings of around 2 percent of tax revenues can typically arise from domestic administrative reforms; in addition a 30 percent administrative cost saving adds to the estimated benefits. Based on a 30 percent VAT administrative cost saving and a compliance cost reduction of 2 percent of VAT tax revenues, the real economic Net Present Value at 10 percent discount rate amounts to some US$430 million.7 Under a low-case scenario with assumptions of a 10 percent VAT administrative cost saving and a 1 percent of VAT revenues compliance cost saving, the Net Present Value is still positive at a 10 percent discount rate.

B. Fiduciary

39. In accordance with the World Bank’s Operation Policy 9.0 an Integrated Fiduciary Systems Assessment (IFSA) was carried out to determine whether the fiduciary systems pertaining to the Program provide reasonable assurances that the Program funds will be used for their intended purpose. The IFSA comprised an assessment of the fiduciary risks relating to: (a) procurement; (b) financial management; and (c) governance (including fraud and corruption risks) and covers the main implementing agency (the VAT Wing of NBR) which account for 95 percent of the Bank-supported Program financing over the next six years. An additional 5 percent of funds will be spent through the ERD as the coordinating agency and also the agency responsible for hiring third party contractors for independent verification of results. For disbursement purposes, the Bank retains the right to make the final decision whether DLIs have been achieved or not. The conclusion of the IFSA is that the overall fiduciary risk is high, but with the proposed risk mitigating measures, including implementation of the actions in the Program Action Plan, the systems are adequate to support Program implementation and to achieve the desired results. See Annex 5 for the assessment summary.

Program Financing and Expenditure Framework

40. Funding for the Program will be provided through the government’s annual development budget and the Program funds will flow through the treasury system. The program expenditure framework amounts to US$70 million for the NBR to implement the program and US$3 million for the verification activities, monitoring and reporting activities, and capacity building activities associated with strengthening government systems to deliver the VIP, including technical capacity support for the Anti-Corruption Commission (ACC) to be coordinated by the ERD over FY 2013-18. The IDA resources for the Program under the proposed operation will be $60 million, and the government resources are US$13 million (see Table 6). The Program will not exceed any procurement thresholds or include any PforR excluded activities (see Bank’s Operational Policy 9.0 for the Program for Results operations).

7 See World Bank note: Estimating Economic Benefits for Revenue Administration Projects, 2007 which finds a 30 percent administrative cost saving and a 2 percent of revenues compliance cost saving is typical of revenue administration projects.

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Table 6: Expenditure Framework US$ million 2012/3-2018/19 2012/

13 2013/

14 2014/ 15 2015/ 16 2016/

17 2017/

18 2018/

19 Total

VAT Wing, NBR 6.00 44.34 11.35 4.32 3.81 69.82

ERD and ACC

0.95 0.50 0.50 0.50 0.50 2.95

PPA 0.05 0.05

TOTAL 0.05 6.00 45.29 11.85 4.82 4.31 0.50 72.82

Financial Management

41. Over the last two decades, Bangladesh’s public financial management policies and institutions have gone through a series of reforms, and substantial progress has been made on a number of public financial management areas. Development partners have supported three consecutive technical assistance programs in this area over the past sixteen years. Some development partners have moved towards direct budgetary support and similar forms of funding and have supported the strengthening of governments own PFM systems accordingly. Despite good progress, the overall financial management system for planning, budget execution and oversight remains regulation driven, process intensive and manual based. Overall, the internal audit and control environment remains weak. Challenges exist with respect to developing adequate financial management professional capacity, improving fiscal transparency and enhancing access to financial information, and implementation of credible sanctions when transgressions occur. There has been significant progress in undertaking the backlog of audits, but the parliamentary oversight and follow-up to audit findings is very limited.

42. Based on the fiduciary system assessment, the two key financial management risks for the Program are:

a) A delay in the fund release by the Ministry of Finance (MoF), may affect the ability of NBR to deliver the program results within the agreed timeframe. There is also the risk that NBR may not be able to provide the fund utilization reports in accordance with the fund release requirements of the MoF in a timely manner. The funds release risk is mitigated to some extent as NBR is an entity reporting to one of the three divisions of the Ministry of Finance and therefore fund release processes will all be handled internally within the MoF. The risk will also be mitigated by including a finance staff member deputed from the Comptroller General of Accounts in the VAT implementation team to manage the fund utilization reporting, as well as other financial management aspects. Delay in the compilation of information on actual expenditures is considered another potential fiduciary risk.

b) A delay in the program annual audit is possible given the capacity constraints in OCAG. There is some concern that the program could lose priority (compared to development partner financed projects) in the annual FAPAD audit process as IDA funds will be channeled through the consolidated fund of the government.

43. In addition, NBR has some public financial management weaknesses that are common across the government. First, the internal audit function is not well established in Bangladesh. Second, audit committees have either not been established or do not function well. Third, there is no asset management tracking system or practice; which given the fixed assets to be procured under the Program is a concern. A range of mitigating measures to ensure that these functions are operationalized has been included in the Program Action Plan, capacity building

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action plan; and a DLI-leveraged action to incentivise the fiduciary (including procurement) risk mitigation measures to be undertaken.

Procurement

44. There is a sound legal and regulatory framework for public procurement that was established during 2006-2008. The legal and regulatory framework for the Program is governed by the Public Procurement Act, 2006 and Public Procurement Rules, 2008. These are generally found to be sound and consistent with good public procurement principles. For example, in line with the provisions of the Act and the Rules, the Central Procurement Technical Unit (CPTU) has issued standard bidding documents, and request for proposals (RFPs) for goods, works and services. These standard bidding documents contain required internationally accepted provisions. The Program implementing agency is already using these standard documents for government funded procurements.

45. The Program’s ICT procurements are at risk and an appropriate set of mitigating activities have been put in place. As there are no GoB ICT-specific bidding documents, and technical expertise for such procurement is low in NBR, several measures are being taken to mitigate against a poor procurement process and outcome. Mitigating measures that have been agreed with the NBR include the adoption of ICT-specific bidding documents which follow international best practice, the use of technical experts to help write the technical specifications and the inclusion of independent, international and local expertize in the tender evaluation committees.8 In particular, the high value IT contract for the procurement of the COTS has already adopted these measures during the procurement process. The estimated budget for the information technology systems tender is below PforR procurement threshold for IT of US$20 million. For this procurement additional measures, including agreeing with IDA the terms of reference for the evaluation committee have been put in place.9

Governance

46. There are several procurement risks practiced in Bangladesh that may also apply to VIP. There are several practices that have occurred in procurement processes in other sectors such as the use of agents to lobby bid evaluation committees, collusion among bidding firms, no due processes to safeguard the integrity of bidding documents prior to and during the evaluation, fraudulent claims of experience, unauthorized swapping of key staff named in bids for staff without equivalent experience, and use of low quality components. Appropriate risk mitigating measures have been proposed and adopted, and these will need on-going monitoring and

8 Four out of seven representatives are independent of the agency. Of these, two international experts (one technical, one procurement) will be on the committee.

9 The bidding document of the COTS has been written with the strong support of technical advisory inputs provided by a technical team from international consultants. Second, the bidding documents were based on the World Bank’s own ICT bidding documents with the necessary customization to be compliant with the Public Procurement Rules. Third the tender evaluation committee comprises four independent members: in addition to the representatives from the Bangladesh University of Engineering and Technology and the Bangladesh Computer Center, two independent international experts were appointed; one an international tax administration systems specialist, and one an international ICT procurement specialist. Fourth, the DLI for the “VAT implementation plan on track” specifies that the procurement process will follow agreed measures (described in Annex 5) in order for the DLI to have been considered met; other disbursements under this DLI will not be triggered unless this is the case. Finally, this is a high value, and as such highly scrutinized procurement. Since issuing the bidding document was also a benchmark of the IMF Extended Credit Facility and the successful completion of this process is also a structural benchmark central to the IMF program, there will be incredibly high stakes attached to ensuring that this procurement is carried out properly.

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reporting. Non-procurement related fraud and corruption risks may emanate from the manual systems in use to file and pay VAT, until e-filing and e-payment are used to provide alternatives to taxpayers to avoid these practices, and which are incentivized as part of the design of the VIP.

47. More generally, the prevalence and public perception of corruption in Bangladesh is high. The current government has stated that anti-corruption is a key agenda for improved governance. Nonetheless Transparency International’s Corruption Perception Index indicates that there is a broad perception that corruption is a problem in Bangladesh, the latest ranking (2012) ranked Bangladesh 144th of 176 countries surveyed by Transparency International. 48. There is an Anti-Corruption Commission (ACC), tasked as the primary anti-corruption agency in Bangladesh, which faces institutional and operational challenges. Bangladesh has anti-corruption, anti-money laundering and mutual legal assistance legislation in place, and ratified the United Nations Convention Against Corruption in 2007.10 Bangladesh established the ACC by an Act of Parliament in 2004. The ACC is endowed with significant formal independence in investigating and prosecuting corruption. The ACC records indicate a high level of investigative activity: there were 1,520 active investigative cases in 2012 and 1,100 in 2013. The ACC receives around 10,000 complaints each year. The ACC brought over two thousand cases to trial in 2012 and 2013 and obtained 42 and 67 convictions respectively. The ACC is also the designated investigation organization of money laundering crimes under the Prevention of Money Laundering Act, 2012. 49. The judicial system in Bangladesh suffers from a significant lack of resources and is handicapped by a backlog of cases. The enforcement of anti-corruption laws and penalties is perceived to be weak or ineffective. As noted above the conviction rates are relatively low at between 2-3 percent of cases brought to trial by ACC. Bangladesh’s criminal justice system lacks a career prosecution service and all prosecutors are hired externally on a contract basis on the basis of their qualifications. This context, combined with the obvious political challenges for fighting corruption, contribute to the high fiduciary risk profile of the Program. 50. The Government of Bangladesh is committed to abide by the Bank’s PforR Anti-Corruption Guidelines. Under the Program's legal documents, the ERD and NBR are formally committed to the obligations under the Anti-Corruption Guidelines for PforR. The government has agreed to implement the Program in accordance with the Guidelines as follows: a) Debarment list of firms and individuals: Companies and individuals debarred by the Bank and CPTU will be posted and updated regularly on the CPTU, the ERD and the NBR websites (using a link to the regularly updated information available on the World Bank’s external website). This will include the list of temporarily suspended firms and individuals. The bidding documents for the COTS procurement for NBR stated that the tender will comply with

10 In June 2012, Bangladesh completed its first United Nations Convention Against Corruption peer review process, which covered chapters III (Criminalization and Law Enforcement) and IV (International Cooperation). The next ‘peer review’ of the UNCAC process for Bangladesh focuses on Chapters II (Preventive Measures) and V (Asset Recovery). The review will be undertaken in 2014/15. In June 2012 ACC and the Ministry of Law requested assistance from the German Agency for International Cooperation to prepare this up-coming review, and improve compliance with Chapters II and V. As part of this program the World Bank is supporting with a technical assistance program to support the use of anti-money laundering tools to combat corruption and bolster the recovering of stolen assets.

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the World Bank’s Anti-Corruption Guidelines on the procurement bidding documents, and other bidding documents will include the same references.

b) Sharing information on fraud and corruption allegations and investigations with the Bank: The ERD has agreed to report any credible and material fraud-and-corruption allegations regarding the Program as part of the overall program reporting requirements to the Bank every 6 months, and will bring all sources of information together (collected quarterly using a standard template) into one report from the Anti-Corruption Commission, the National Board of Revenue and the Office of the Comptroller and Auditor General. The Bank will inform the ERD about similar allegations that it receives. The ERD has also agreed that any allegation of fraud and corruption will be investigated as per existing law and persons or entities debarred or suspended by the Bank will not be awarded any contract under the Program during the debarment or suspension period.

c) Investigation of fraud and corruption allegations: For the Program, fraud and corruption complaints may be channeled through audit reports of OCAG, complaints made to the NBR or Internal Resources Division as well as to the ACC, and from the procurement complaints system being developed.

d) Under the Bangladesh Civil Servants’ Conduct Rules of 1979 and Disciplinary and Appeal Rules of 1985 for civil servants the primary responsibility for investigation of corruption is with the departmental inquiry committee in each ministry. The law also permits the Anti-Corruption Commission (ACC) to investigate corruption allegations that it chooses to.

51. The Bank’s right to investigate allegations regarding the Program's activities and expenditures, and the related access to needed persons, information, and documents will be observed in accordance with the standard arrangements and the Bank can initiate an investigation at any point it considers necessary. The ERD, NBR and the Bank have agreed, depending upon the nature of fraud and corruption, to pursue a range of remedies within an agreed time frame. 52. For the Program, given the range of possible types of fraud and corruption risk, all agree it would be important to clarify roles and responsibilities over the intake, monitoring, hand-off, and disposition of fraud and corruption complaints. To both assist in the roll-out of the VIP, and to build program management capacity in NBR (including management of procurement risks), an international management consultant firm with experience in helping national agencies roll-out VAT modernization programs is being hired. The bid evaluation committee overseeing procurement of this contract will screen closely for experience and will require the winning bidder to obtain prior approval from the Project Director, VAT Wing and IDA before key staff identified in the bid submitted can be changed during the contract’s execution. 53. Other governance and accountability strengthening mechanisms include: (a) the OCAG’s annual audit, where the detection of fraud and corruption and holding the ministry or department accountable is part of the audit process and even ad-hoc concerns will be communicated to ERD; (b) the fact that there is a Right to Information Act, which requires any public entity to proactively disclose information of general interest and requires government agencies to appoint a Designated Officer to respond to requests for information within a specified time, or face a tribunal and possible fine; (c) the procurement grievance redress system, which records and responds to complaints relating to a specific sector; and (d) the requirement for the DLI verification to be undertaken by an independent entity on contract to the ERD.

31

54. Based on the IFSA the overall fiduciary risk for the Program is high. The Program will address fiduciary risks and other capacity gaps in various ways. The government has agreed to undertake a set of capacity building actions to train the relevant staff in procurement and audit functions. These are summarized in Annex 8. The measures will complement a number of other interventions and reforms supported by the government, IDA and other development partners such as those being implemented by the on-going public financial management and public procurement projects. The government commitment to implement all the actions has been confirmed. Implementation of the actions which are to address both fiduciary risk and improve capacity will be systematically monitored by the Bank, NBR and the ERD during implementation support missions. Actions taken to strengthen the fiduciary environment and address the key fiduciary risks identified are included as a DLI of US$5 million over the course of the program. All measures proposed will need to have been achieved for the DLI to be achieved.

C. Environmental and Social Effects

55. An environmental and social management system assessment (ESSA) was conducted at the Program level in order to review the existing systems for environmental and social management and assess their performance. The Assessment concludes that there are adequate policy, institutional, and legal provisions to ensure that the Program’s social and environmental effects are positive. The Bank has agreed with the government on specific actions to strengthen the environmental and social management systems to ensure positive benefits, and these have been incorporated into the Program Action Plan (see Annex 8).

56. The Program is expected to have negligible environmental benefits, risks and impacts. The Program, poses no risk to the environment as a result of planned Program activities. Activities planned under the proposed Program will not include any physical interventions such as new construction, rehabilitation or renovation works. Only office refurbishment is included in the program. Hence, the program activities are environmentally benign and will not cause any negative environmental effects, any loss or conversion of natural habitats, any changes in land or resource use, or any environmental pollution.

57. The Program will however generate electronic waste at the end of the expiry of ICT equipment. This impact can be mitigated through safe disposal of the equipment such as computer hardware, mobile phone, memory cards, flash drives, printer, toner, charger, battery etc. The government already has a policy for the safe disposal of this equipment, and it is being implemented satisfactorily. Staff will undergo training to support the successful implementation of the policy in the program. The environmental risk rating is low.

58. The findings of the ESSA suggest that the overall social impact of the Program is likely to be positive. The Program will benefit the management and staff of the VAT Wing and the VAT taxpayers from improved tax services; particularly the ability to register, file and pay on line. The nature of investment for automation of systems to improve taxation systems will not lead to any social risk, but care must be taken so that citizens can access the new electronic services. The program will strengthen the existing complaints handling mechanism at NBR,

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support the use of a contact center to handle grievances and develop an on-line system that complements the system of contact point for complaint management.

D. Integrated Risk Assessment Summary

1. Integrated Risk Assessment Summary

Table 7: Integrated Risk Assessment Summary Risk Rating

Technical Substantial

Fiduciary High

Environmental and Social Low

Disbursement Linked Indicator Medium

Overall Risk Substantial

2. Risk Rating Explanation

59. The technical risks are considered “substantial” as the VIP is technically complex. The program envisions rolling out sophisticated IT systems and conducting business process reengineering and functional reorganization in the VAT administration. The capacity of NBR to undertake such reform is limited, and this will be the first case of such a large modernization program. There is a shortage of personnel in the VAT Wing to lead and implement the Program, and despite the proposed mitigation measures (such as a specified number of staff to be included in the VAT implementation team, an IMF-resident tax advisor at NBR for the first year, close supervision from the field-based Bank team, technical inputs from an international project management consultancy, and coordinated support provided by other development partners) the technical risk remains “Substantial”.

60. The fiduciary risks are considered “high.” The overall financial management system for planning, budget execution and oversight is weak with key risks arising as a result of the lack of a developed internal control environment in Bangladesh and the low capacity to manage complex, high-value IT procurements. Furthermore, while there is an ACC, prosecution rates are low. Appropriate mitigation actions for the fiduciary risks, especially the procurement related risks have been identified to minimize the likelihood of the risk occurring and these are described further in Annex 7.

61. Other risks have been assessed as “medium” or “low” as shown in Table 7. Additional risks may arise from the potential for resistance to the introduction of the new VAT law and administrative system from the private sector (external stakeholders) and the staff, especially field office staff (internal stakeholders). These risks are mitigated by a sizeable communications and taxpayer outreach campaign and an internal communications and change management plan which are described in the VAT Implementation Plan and budgeted for in the program expenditure framework.

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E. Program Action Plan

62. The program action plan and capacity building plan are provided in Annex 8. The technical assessment, IFSA and ESSA were used to develop the program action plan and capacity building plan to strengthen the systemic weaknesses. The Plan requires the taxpayer satisfaction surveys to be undertaken; the baselines for several of the DLIs to be established on time and the independent verification entity to be hired in the first year. On the fiduciary side, the composition and terms of reference for the bid evaluation committee for the COTS procurement needs to include appropriate risk mitigating measures; and the fixed asset tracking software needs to be implemented. The electronic waste management training will need to be undertaken, and the contact center established to handle grievances. During the program the Capacity Building Plan for NBR will also be implemented.

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Annex 1: Detailed Program Description

1. The National Board of Revenue (NBR) Tax Modernization Plan is a five year plan from 2011 to 2016. The NBR has developed an aggressive and comprehensive organizational renewal program that seeks to put in place an efficient, effective, fair and responsive tax regime which is benchmarked against international best practice. The envisaged reform program covers all the three taxes i.e. Income Tax, VAT and Customs. The reform will review and modernize both, the tax policy (tax laws and statutory rules) and the tax administration (business process, organizational design, human resources management, taxpayer services etc.).


2. The VAT Improvement Program will have four components including: (a) operational modernization; (b) an Integrated VAT Management System; (c) institutional strengthening and capacity building; and (d) program management, including program coordination and administration and change management, and a comprehensive taxpayer communication and education program and greater transparency.

3. Component 1: Operational Modernization of the VAT Wing of NBR. This component aims to enable the NBR to ensure a high level of voluntary compliance with the VAT system. Streamlining and simplification of processes and the establishment of a service system responding efficiently to taxpayer needs will reduce the compliance burden for taxpayers. Activities under this component will increase the ability of the tax administration to detect tax evasion and collect the full amount of taxes due. Introducing new functional business processes in the VAT Wing will also increase transparency and reduce the discretion of tax officials. This component will contribute to facilitating the registration process and improving the reliability of information in the tax register. Furthermore, it will promote new electronic systems for registration, filing and tax payments, which can reduce both administration and compliance costs. It will also improve the capacity of the tax administration to verify tax refund requests aiming at reducing one of the major risk areas for tax fraud. This component will also cover arrears management, which is an important part of a compliance management system. This component will cover core VAT functional areas: (i) registration, return processing, tax payments, taxpayer accounting and tax refunds; (ii) tax audit; (iii) collection and enforcement; (iv) tax appeal; and (v) taxpayer services. The main activities will include but not limited to:

Registration a. formulate a plan for conducting the initial registration of VAT taxpayers ; b. formulate a plan to develop an analysis of taxpayer population and dependent estimates

report and a third party quality review phase; c. carry out the re-registration and harmonize the existing Business Identification Number

(BIN) with the new TIN to establish a clean database of existing VAT payers; d. introduce and strengthen electronic registration; e. develop new procedures for taxpayer registration and e-registration, including for dealing

with inactive and non-registered taxpayers; f. develop high level business process model and description for registration;

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g. design registration application form, procedures and notification of registration notice; and

h. develop operational manual of registration. Return Processing and Payment Accounting

a. introduce and strengthen e-filing and e-payment; b. develop new procedures for filing and payment (including e-payment and e-registration),

and account management; c. develop high level business process model and description for return and payment

processing; d. develop operational manual of return processing and payment accounting; e. design return form; and f. issue first VAT return and payment.

Tax Refund

a. establish a centralized refund management driven by risk-based systems; b. develop new procedures for refund management; and c. develop operational manual of refund management.

Audit and Investigation

a. Improve the audit planning process; b. provide an automated system using risk analysis based on all available internal and

external data; c. develop audit manuals including for industry specific audits; d. develop new procedures and techniques for desk and field audits including computerized

audits; e. develop operational manual of audit and investigation; and f. develop high level business process model and description for audit.

Collection Enforcement

a. develop a comprehensive collection enforcement procedures manual; b. improve collection and late/non-filer management; c. develop high level business process model and description for collection and late/non-

filer management; d. develop filing and payment procedures and procedures related to prompt control of stop-

filers and no payers; and e. improve techniques and procedures for recovery of tax arrears.

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Tax Appeals a. review and improve appeal process mechanisms; b. develop a program to deal with tax audits and introduce a centralized appeals case

information management system; c. develop new procedures; d. develop high level business process model and description for appeals; and e. prepare an operational manual of appeals.

Taxpayer Services

• develop high level business process model and description for taxpayer services; and

• develop users and procedure manuals and forms for taxpayer services.

4. Component 2: Introduction of an Integrated VAT Management System. The NBR decided that each of the three tax types develops separate application software, rather than an integrated revenue management system for all taxes. In March 4th, 2013, a decision was taken by the MoF for purchasing a configurable web-based Commercial off the Shelf (COTS) VAT administration system, instead of developing it in-house. Supporting the long term agenda of harmonization and avoiding further enhancement of silos, the VAT and Income Tax applications would share a common database platform “oracle.” The same platform along with the new unique TIN as the single identifier for all taxpayers would facilitate integration and harmonization between wings at the database level, subsequently “systems will talk to each other.” The system will be based on a centralized platform to which all VAT tax offices as well as Call, Data and Processing Centers will have access. The Invitation for Tender, which has been written with strong support of technical advisory inputs provided by a technical team from the World Bank, IMF and IFC, clearly stipulates the requirement from the potential vendors to use “oracle.” The COTS IT package, which is already advertised and evaluated and awaiting approval, is estimated to be below the US$20 million ceiling for IT procurements under the PforR operational policies. There are several options that will be considered in the event that the actual value of the tender exceeds the threshold, such as (a) negotiating with the winning technical bid to remove any non-core requirements for the system; and (b) requesting an exception to the threshold. The tender is already underway with a view to signing a contract before end June 2014. The system will need to be implemented in stages commencing in January 2015 for registration modules and to be fully operational, including audit modules, by December 2015.

5. Component 2 provides for procurement and implementation of the Integrated VAT Management system based on COTS software and associated consulting services to support modernized tax administration operations in the NBR. The main sub-components and respective activities are:

6. Sub-component 2.1: Integrated VAT Management System. The integrated VAT Management System-COTS must support VAT, turnover tax (for taxpayers below the VAT thresholds, excise tax (a tax on bank transactions and airline tickets), and a VAT Withholding tax (VAT remitted directly to the NBR by an agent rather than being paid to the sellers of VAT goods). It should support all core functional areas of the VAT administration including: case management; risk management, which would enable the most effective actions to take to resolve

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taxpayer compliance issues. The risk management engine should be used in a number of enforcement and compliance functions and generates risk profiles for taxpayers and for segments of taxpayer population; registration function; return processing; revenue accounting; revenue management; taxpayer current accounting; refunds and credit adjustments; enforcement including non-filing, debt management, audit, dispute to assessments; taxpayer inquiry, document certification and management. The system should use a browser based interface for all user access to its operational functions (i.e. tax officials using the system, taxpayers accessing it via the portal). The user interface will be in Bangla and where feasible English. System interfaces shall be implemented such that each of the systems can be independently upgraded and/or replaced without changes to the other system or to the core ICT architecture at NBR. The system should also support a common external face to taxpayers where they can register, file and pay.

7. The main activities will include, but not be limited to: develop functional specifications for VAT tax administration software; prepare and issue an invitation for tender for the VAT tax administration software; associated consulting services for tender selection process; vendor configure/customize system; develop data migration strategy; system test phase registration module; implement registration module; system test phase returns, payment, and refund processing, taxpayer and revenue account; implement returns, payment, and refund processing, taxpayer and revenue account modules; implement arrears and non- filling enforcement modules; system test phase audit module; implement audit module.

8. Sub-component 2.2: Establishing a Data Center. A Central Data Center is a specialized facility that stores taxpayer data and house the servers on which various software applications run to allow the data to be assessed. This unit will be the central repository for all of electronic records of each VAT taxpayers. Taxpayer data stored at this center include registration, payment and VAT return information. The unit will have the responsibility for archiving data, system maintenance activities, and ensuring business disaster procedures are in place.

9. The main activities will include, but not be limited to: implement selected Data Center Supplier, and make the Data Center operational.

10. Sub-component 2.3: Establishing a Centralized Processing Center. This unit will handle the increased number of electronic and paper submissions. It will enhance efficiency gains in processing; provide much greater flexibility in meeting seasonal demands, support upwards scalability as more forms are filed electronically and increase the control and security over the receipts and processing of key administrative documents. The Center will be organized into units based on the following functions, including: (a) receiving, keying, and processing scanned and faxed tax returns and registration applications; (b) resolving errors; (c) reconciling and adjusting liability and payment posting on taxpayer account; and (d) reconciling Treasury tax receipts against payment posting on taxpayer accounts.

11. The main activities will include, but not be limited to: develop and process center functional specifications; prepare and issue Processing Center request for tender; tender selection process; processing center established and begins to process registration forms.

12. Sub-component 2.4: Establishing a Contact center: Modern compliance management uses a combination of taxpayer service and compliance enforcement strategies to promote a high level of voluntary compliance. This subcomponent aims to establish the service related elements of the compliance management strategy and will contribute to reducing compliance costs for

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taxpayers. The Contact center will be responsible for responding to taxpayers’ queries (the center will receive queries by phone, letter or e-mail) on the status of their accounts and the application of the law; get taxpayers feedback; gather taxpayers complaints, set them to responsible officers in the concerned department for addressing grievances, and disclose them to the public. With the introduction of the new VAT law, the center will be an essential vehicle for handling the expected significant increase in taxpayer demand for advice and assistance on the new VAT legislation.

13. The main activities will include, but not be limited to: develop contact center functional specifications; prepare and issue Contact Center request for tender; tender selection process; establish Contact Center and make it operational.

14. Sub-component 2.5. Establish a Data Network to enable VAT staff to have access to the IT tax administration system through the computer terminal. The main activities will include but not limited to: develop functional specifications for data network; prepare and issue RFP; tender selection process; install data network, and ensure it is operational.

15. Sub-component 2.6. Desktop hardware and software and local and data center servers. The main activities will include but not limited to: develop functional specifications for desktop hardware and software and local and data center; prepare and issue RFP; tender selection process; install desktop hardware and software, and ensure it is operational.

16. Component 3: Institutional Strengthening and Capacity Building. This component consists of VAT wing reorganization along function lines and staff training to enable staff to utilize the new integrated VAT system and business processes. All NBR VAT Wing staff will be provided with adequate training and support to enable them to undertake their roles given the changes to the law and rules to the NBR VAT Wing organizational structure, as a result of the administrative processes and information technology that will be put in place as part of the Program.

17. The main activities will include, but not be limited to: review all the current VAT statutory regulatory orders, standing rules, and general order, and draft accordingly new administrative procedures to ensure consistency with the new law; calculate number of taxpayers and expected workloads under the new VAT law; determine broad approach to processing expected workload; design new organizational structure for the VAT Wing along functional lines-high level design and detailed design of the organizational structure; estimate staff numbers and requirements by function and level; develop an accommodation strategy and plan for the ongoing operation of the VAT; develop a staffing plan to ensure adequate sequencing of hiring and training of both transfers and new hires as well as clarify the roles and responsibilities between the existing staff and new hires; develop a comprehensive timetable for the organizational arrangements of the VAT Wing; develop a comprehensive training and capacity building program (specifying when course materials, training rooms and trainers will be needed and align them to the training timetable); delivery of a number of specialized technical training programs for all VAT core business processes, e.g. registration, return processing, tax payments, taxpayer accounting and tax refunds; tax audit; collection and enforcement; and dispute resolution; induction and managerial training targeting managers at all levels, aiming to improve their capacities to manage and fulfill the role of change agent. The training program will go beyond core business processes and deliver training on critical areas such as good performance, meritocracy, ethical behaviors, customer support culture, communication and other soft skills.

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The training program will also include the staff of the processing center, and Contact center. The program will also include capacity building activities aiming at enhancing the analytical capacity of the VAT staff wing on tax gap modeling and analysis. Considering the fact that, VAT gap analysis and modeling is a complex exercise which requires adequate capacity, the program team will be supported from external consultancy upon request. As the NBR is integrating the service approach in its core business processes, a taxpayer satisfaction survey will also be conducted.

18. Component 4: Program Management. This component consists of two parts. Part One addresses the challenge of properly managing the implementation of the program and supports expert advice on program management, IT, procurement, Financial Management and disbursement. Part Two supports a change management and a comprehensive taxpayer communication and education program to build internal and external support for the reform.

19. Sub-component 4.1: Program coordination and administration. Tax administration modernization reform is a complex undertaking that requires significant expertise both in program management and in technical content. To ensure effective implementation of components, all activities will need to be carefully planned and coordinated to ensure optimal effectiveness. Likewise, timely and efficient overall program management expertise and procurement experience will be required to ensure effective and transparent program implementation. Additionally, establishing monitoring and evaluation mechanism and reporting on results and achievement of objectives will be critical. This program will provide advisory services to the VAT Wing staff, as well as for oversight and review of the IT component and subcomponents, and the necessary office infrastructure to assist the Program Implementation Unit in implementing all aspects of the program. Additionally, the VAT implementation team will be supported by a Program Management Consultancy Firm, which will mitigate the skills and knowledge gap in business transformation and the definition of business requirements within the implementation team.

20. The main activities will include, but not be limited to: providing consultancy advisors for program implementation, monitoring and evaluation, financial management, and procurement; providing workstations, office equipment and vehicles for the VAT implementation team.

21. Sub-Component 4.2: Change management and a comprehensive taxpayer communication and education program. Bangladesh is characterized by low tax morale, unfamiliarity with the overall tax reform process, and resistance to change. Establishing an Integrated VAT Management System will dramatically change the way in which the tax administration of Bangladesh conducts its management and operations, as well as the way it relates to taxpayers and other stakeholders. Support for the reform process from staff, external stakeholders, and the public at large is essential for the program to be able to implement the changes envisaged and achieve the results expected. Consequently, it is critical to develop and implement a robust behavioral change communication strategy along with a public education campaign. This communication and public education campaign, using multiple communication channels including new media (social media, mobile) and mass media, should take a two-pronged approach: (i) firstly, behavioral change communication to promote compliance, electronic registration, etc.; and (ii) advocacy to sustain the policy dialogue. Generating broad-based consensus and a continued policy dialogue through a creative communication program will help to continue the reform efforts irrespective of the political situation.

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22. The main activities under the change management will include but not limited to: develop and implement an appropriate staff communication and change management strategy for managing organizational change at all levels of the tax administration particularly VAT Wing; staff consultation and engagement activities; design and deliver training on change management;

• The main activities under the taxpayer communication and education program will include but not limited to: develop and implement a comprehensive taxpayer education program and communication campaign to raise awareness and inform the VAT stakeholders and public at large about the VAT reform and potential impact of proposed changes; organize regular consultations, workshops, and presentations to the private sector, which is unfamiliar with and opposes the overall tax reform process; public information campaign by using government TV and other media advertisements; advertise requirements to register for VAT, bookkeeping requirements and invoicing regulation, and issue registration packs (guide and forms) to expected registrants; provide advisory services to initial registrants; draft explanatory materials; registration guide to support the registration process, general guidance booklet to explain the VAT in details; draft a set of technical guidelines to provide assistance to taxpayers in how to apply the new VAT Law and rules to specific business situations and in relation to specific industries; industry specific pamphlets, briefings for targeted taxpayers to inform them on the expected impact of the VAT.

• The component will also include increased transparency. The activities will include a review of the compliance of the VAT Wing with the proactive disclosure rules of the Right to Information Act, 2009 and the preparation and implementation plan to reach full compliance. The VAT Wing will also increase the proactive disclosure of performance information including but not limited to (a) regular disclosure of VAT tax collection; (b) results of tax payer satisfaction surveys; (c) contact center information on handling calls and dealing with complaints.

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Annex 2: Results Framework Matrix

Table 8: Results Framework

Results Indicators

DL

I

Unit of measure

Baseline 2012-13

Target Values Frequency

Source Data Collection

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

PDO Indicator. VAT Tax-GDP Ratio /1

% 3.7 3.7 3.7 4.1 4.3 4.4 4.7 Annual NBR IMF

NBR

Compliance with the availability of information listed in the RTI rules and regulations

% 75 80 90 100 Every two years

NBR NBR

Intermediate Results Indicator 1: VAT Implementation Plan on Track /2

√ Process VAT Implementation Plan approved by Minister of Finance

1.1.1

Contract signed with COTS vendor

1.1.2

At least 40,000 taxpayers are registered in the COTS system by June 2015

1.1.3

At least 50,000 VAT returns are processed per month

1.1.4

At least 500 audit staff trained on COTS audit modules

1.1.5

At least 60,000 VAT returns are processed by per month

1.1.6

At least 60,000 VAT returns are processed per month

Bi-annual

NBR/ IMF progress reports

NBR

1.2.1

Contract signed with Project Management Consultancy

1.2.2

Contracts signed for datacenter contact center, processing center and IT

1.2.3

At least 50,000 VAT payments are processed per month

1.2.4

At least 80 percent of refunds processed within 3 months.

1.2.5


1.2.6


Bi-annual

NBR/

IMF progress reports

NBR

42

Results Indicators

DL

I

Unit of measure

Baseline 2012-13




infrastructure

by VAT Wing

Intermediate Results Indicator 2: New registered active VAT taxpayers

√ Number Baseline established for number of VAT active taxpayers

Baseline +15,000

Baseline + 30,000

Baseline +30,000

Bi-annual

NBR's automated registration system

NBR

Intermediate Results Indicator 3: Value of VAT e-payments

BDT millions

(real)

Baseline established for value of VAT e-payment

Baseline + 10 percent



Annual NBR's automated payment system

NBR

Intermediate Results Indicator 4: Reduced VAT stop filers

Number Baseline established for number of VAT stop filers

Baseline - 10 percent


Baseline -20 percent

Annual NBR's automated data center

NBR

Intermediate Results Indicator 5: Taxpayers file

Number Baseline established for number

Baseline + 4,000

Baseline + 10,000

Baseline + 10,000

Bi-annual

NBR's automated

NBR

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Results Indicators

DL

I

Unit of measure

Baseline 2012-13




on-line of VAT active on-line filers

filing system

Intermediate Results Indicator 6: VAT Large Taxpayers who pay on-line

√ % of LTU organizati

ons

Baseline established for % of LTU VAT active taxpayer

10 percent of LTU taxpayers



Bi-annual

NBR's automated payment system

NBR

Intermediate Results Indicator 7: Average time to process and issue tax refunds

Days Baseline established for time to process tax refunds




Annual NBR's automated refund system

NBR

Intermediate Results Indicator 8: “Hit rate” of tax audits –percentage of tax audits resulting in additional tax assessments (in a year)

% Baseline established for % of tax audits resulting in additional assessments




Annual NBR's automated risk-based audit system

NBR

Intermediate Results Indicator 9:

US$/

BDT

Baseline established for



Baseline -15 percent

Annual NBR's system

NBR

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Results Indicators

DL

I

Unit of measure

Baseline 2012-13




Lower taxpayer costs for complying with VAT

compliance costs.

Intermediate results Indicator 10. Greater transparency

√ Process Tax collected disclosed

Tax collected disclosed

Taxpayer satisfaction survey disclosed


Processing and Contact center performance disclosed




Tax collected disclosed Processing and Contact center performance

disclosed




Annual NBR NBR, ERD

Intermediate results Indicator 11. Greater taxpayer satisfaction with services /3

% satisfied or higher

tbc June 2014

[Contact center set up]

50 69 75 Annual IFC,

Contact center

IFC

NBR

Intermediate Results Indicator 12. Improved fiduciary management

√ Process 6.1 25 percent of NCB contracts are done through e-

50 percent of NCB contracts are done through e-GP

75 percent of NCB contracts are done through




Annual NBR, OCAGCPTU

ERD, NBR

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Results Indicators

DL

I

Unit of measure

Baseline 2012-13




GP

Submit quarterly fund utilization report to Finance Division and complete fund release processes after each quarter.

All significant audit objections resolved in 6 months


e-GP


Submit quarterly fund utilization report to Finance Division and complete fund release processes

after each quarter.







Notes: 1/ VAT does not include turnover tax. Targets based on IMF projections years 1-3 and NBR projections years 4-6. The target increase should be achievable as a result of administrative improvements. It will also be affected by (a) the policy changes introduced under the new Law and (b) the general economic conditions. The monitoring and evaluation plan will include the development of methodology to disaggregate these effects on the measurement of the PDO indicator. 2/ All international procurements above US$2 million to be done in accordance with the Program Action Plan procurement actions. 3/ Year 3 target derived from 2013 taxpayer perception and compliance cost survey results indicator on “Overall Efficiency of NBR staff”

4/ active means registered and filing.

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Annex 3: Disbursement Linked Indicators, Disbursement Arrangements and Verification Protocols

Table 9: Disbursement-Linked Indicator Matrix (US$ Millions)

Total Financin

g Allocated

to DLI

As % of Total

Financing Amount

DLI Baseline

Indicative timeline for DLI achievement

Year 1 2013/14

Year 2 2014/15

Year 3 2015/16

Year 4 2016/17

Year 5 2017/18

Year 6 2018/19

DLI 1.1: VAT Implementation Plan on Track

VAT Implementation Plan approved by Minister of Finance

1.1.1 Vendor signed a contract providing a COTS VAT administration software.

1.1.2 At least 40,000 taxpayers active VAT taxpayers are registered in the COTS VAT database

1.1.3 At least 50,000 monthly VAT returns are processed by VAT Wing per month

1.1.4 At least 500 audit staff trained on COTS audit modules

Allocated amount

16.5 28

7 4 4.5 1 0 0

DLI 1.2 VAT Implementation Plan approved by Minister of Finance

1.2.1 Project Management Consultants signed a contract with vendor

1.2.2 The following administrative support contracts signed: (a) data center, (b) contact center, (c) processing center and (d) other IT infrastructure.

1.2.3 At least 50,000 VAT payments are processed per month by VAT Wing for 6 consecutive months

1.2.4 At least 80 percent of refunds processed and disposed of by VAT administration within 3 months.

Allocated amount:

16.5 28

5 6 4.5 1 0 0

DLI 2: Number of registered active VAT

2.1 Baseline established

2.2 Baseline + 15,000

Baseline + 30,000

Baseline + 30,000

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Total Financin

g Allocated

to DLI

As % of Total

Financing Amount

DLI Baseline


Year 1 2013/14

Year 2 2014/15

Year 3 2015/16

Year 4 2016/17

Year 5 2017/18

Year 6 2018/19

taxpayers (thousands)

for number of VAT active taxpayers under new Law

Allocated amount: 7 12

1 3 3 0

DLI 3: Number of taxpayers who filed on-line

3.1 Baseline established for number of VAT active taxpayers who file on line under new Law

3.2 Baseline + 4,000

Baseline + 10,000

Baseline + 10,000


1 2 3 0

DLI 4: Percent of VAT Large Taxpayer Unit taxpayers who paid on-line

4.1 Baseline established for percentage of Large Taxpayer Unit VAT taxpayers who pay on line

4.2 20 percent of Large Taxpayers pay on line

50 percent of large Taxpayers pay on line

50 percent of large Taxpayers pay on line


1 2 3 0

48

Total Financin

g Allocated

to DLI

As % of Total

Financing Amount

DLI Baseline


Year 1 2013/14

Year 2 2014/15

Year 3 2015/16

Year 4 2016/17

Year 5 2017/18

Year 6 2018/19

DLI 5- Greater transparency

Tax collection disclosed Baseline taxpayer satisfaction disclosed

Tax collection disclosed Taxpayer satisfaction disclosed

Tax collection disclosed Contact center and Processing center performance disclosed

Tax collection disclosed

Taxpayer satisfaction disclosed Contact center and Processing center Contact center performance disclosed

Tax collection disclosed Contact center and Processing center Contact center performance disclosed

Tax collection disclosed

Taxpayer satisfaction disclosed Contact center and Processing center Contact center performance disclosed


0.5 0.5 0.5 0.5 0.5 0.5

DLI 6- Fiduciary Actions

6.1

At least 25 percent of Program NCB contracts are done through e-GP

Submit quarterly fund utilization report to Finance Division and complete fund


All significant audit objections resolved in 6 months.





Submit quarterly fund utilization





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Total Financin

g Allocated

to DLI

As % of Total

Financing Amount

DLI Baseline


Year 1 2013/14

Year 2 2014/15

Year 3 2015/16

Year 4 2016/17

Year 5 2017/18

Year 6 2018/19

release processes after each quarter.

Submit quarterly fund utilization reports to Finance Division and complete fund release processes after each quarter.


reports to Finance Division and complete fund release processes after each quarter.




1 1 1 1 1 0

Total Financing Allocated:

60 100

13.5 11.5 13.5 10.5 10.5 0.5

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Table 10: DLI Verification Protocol Table # Disbursement

Linked Indicator

Definition/ Description of achievement

Scalability of Disbursements (Yes/No)

Protocol to evaluate achievement of the DLI and data/result verification

Data source/agency

Verification Entity

Procedure

1 VAT Implementation Plan is on track

Annual plan is on track (agreed milestones achieved)

No NBR prepares bi-annual reports and submits to the ERD and Third Party Verification Entity

Private firm or individuals

World Bank hires third party contractor who reviews and verifies reports for the verification of 1.1.1 and 1.2.1. ERD hires third party contractor who reviews and verifies reports for all other indicators. Third Party submits its draft verification report to the NBR, ERD and the World Bank simultaneously and neither party is allowed to modify the report apart from correcting factual errors. World Bank seeks comments from IMF and IFC.

2 Number of new registered active VAT taxpayers

Once new VAT is open for registration; registered VAT taxpayers that file returns.

Yes NBR prepares reports and submits to the World Bank and ERD and Third Party Verification Entity

Private firm ERD hires third party contractor who reviews and verifies reports. Third Party submits its draft verification report to the, NBR, ERD and the World Bank simultaneously and neither party is allowed to modify the report apart from correcting factual errors. World Bank reviews and makes recommendation to Country Director.

3 Number of taxpayers who file on-line

Number of registered VAT taxpayers who file returns on line

Yes NBR prepares reports and submits to the World Bank and ERD and Third Party Verification Entity

Private firm ERD hires third party contractor who reviews and verifies reports. Third Party submits its draft verification report to the, NBR, ERD and the World Bank simultaneously and neither party is allowed to modify the report apart from correcting factual errors. World Bank reviews and makes recommendation to Country Director.

4 Percentage of large taxpayers who pay on-line

Percentage of registered VAT taxpayers in the Large Taxpayer category who pay VAT on line

Yes NBR prepares reports and submits to the World Bank and ERD and/or Third Party Verification

Private firm ERD hires third party contractor who reviews and verifies reports. Third Party submits its report to the, NBR, ERD and the World Bank simultaneously and neither party is allowed to modify the report apart from correcting factual errors. World Bank reviews and makes recommendation to Country Director.

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# Disbursement Linked Indicator

Definition/ Description of achievement

Scalability of Disbursements (Yes/No)

Protocol to evaluate achievement of the DLI and data/result verification

Data source/agency

Verification Entity

Procedure

Entity 5 Increased

transparency Review of compliance against Proactive Disclosure Rules and additional disclosures on website

No NBR prepares reports and submits to the World Bank and ERD and/or Third Party Verification Entity


6 Fiduciary measures completed

All measures agreed to in PAP for fiduciary measures have been undertaken in implementing agency

No NBR prepares reports and submits to the World Bank and ERD and/or Third Party Verification Entity


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Table 11: Bank Disbursement Table

# DLI Bank financing allocated to the DLI(US$ million)

Of which Financing

available for

Deadline for DLI Achievement

Minimum DLI value to be achieved to trigger disbursements of Bank Financing

Maximum DLI value(s) expected to be achieved for Bank disbursements purposes

Determination of Financing Amount to be disbursed against achieved and verified DLI value(s)1 Prior

results Advan

ces

1 VAT Implementation Plan on Track

33.0 15 Dec 2018 Pass/fail. All actions will be determined on whether or not they have been achieved before disbursement.

2 New registered active VAT taxpayers increases (thousands)

7.0 Dec 2018 Year 3 Pass/fail for the establishment of the baseline and a US$ 1 million disbursement

Year 4-6 Linear. New registered active VAT taxpayers over the baseline are disbursed per every additional 5,000 taxpayers in years 3-5 of the program up to a total disbursement of US$ 7 million

3 Number of taxpayers who file on-line

6.0 Dec 2019 Year 3 Pass/fail for the establishment of the baseline and a US$ 1 million disbursement.

Year 4-6 Linear. New registered active taxpayers who file online over the baseline, are disbursed per every 2,000 new online tax filers up to

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Of which Financing

available for





results Advan

ces

a total of US$5 million

4 Percent of LTU taxpayers who pay on-line

6.0 Dec 2019 Year 3 Pass/fail for the establishment of the baseline and a US$ 1 million disbursement.

Years 4-6 Linear. A disbursement of US$ 1 million peer each 10 percent share of large taxpayers paying on line up to a total of US$ 5 million

5 Greater transparency

3.0

Dec 2019 Linear. Year 1-6 US$ 500,000 annually for disclosing two or more of:

the annual tax collected by circle office each quarter.

disclosing the taxpayer satisfaction survey results (every other year).

disclosing the annual data center, contact center and processing center performance report (years 4-6 only). Up to a combined total of US$ 3 million

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Of which Financing

available for





results Advan

ces

6 Fiduciary measures implemented

5.0 Dec 2019 Pass/fail. All fiduciary measures must be achieved in a given year for disbursement.

Total Disbursements

60.0

1 If the DLI is linear this means that the financing is scalable and a greater/lesser disbursement will be triggered by a greater/lesser result.

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Annex 4: Summary Technical Assessment

Strategic Relevance

1. Low revenue mobilization capacity stands out as one of the main development challenges in Bangladesh, making the VAT Improvement Program (VIP) extremely strategic and relevant. The level of tax collection in Bangladesh was 10.4 percent of GDP in 2012, which showed an improvement in receipts: during 2004-2009 tax collection averaged 8.3 percent of GDP. Nonetheless, Bangladesh is performing below other countries at a similar level of development. There are only four countries classified as low income that perform below Bangladesh.11 Furthermore, Bangladesh was not able to sustain the recently improved tax collections, particularly in VAT, in the first half of 2013. This places Bangladesh at a distinct disadvantage over the medium term in terms of managing fiscal policy and having sufficient resources for infrastructure investments; and improving service delivery. At this level, tax revenue provides an insufficient base of domestic revenue for Bangladesh to finance the investment in human and physical infrastructure required to alleviate poverty levels and propel Bangladesh to middle income country status by 2021, as is envisioned in the country’s development strategy.

2. Bangladesh’s relatively low tax to GDP ratio is primarily due to inherent weaknesses in the tax system. The main problems relate to: (a) an inefficient tax administration due to a “type of tax” organizational structure, poor management, weak human resources and lack of skilled staff and adequate supporting systems, excessive scope for discretionary behavior, and poor physical infrastructure; (b) a narrow tax base due to the informal structure of the economy (there are around three million and seven hundred registered income taxpayers of which only half file tax returns; and just thirty-five thousand registered businesses that are paying VAT); (c) a skewed tax structure, with indirect taxes contributing the largest share; (d) a complex and non-transparent tax system; and (e) corruption and tax evasion.

3. Improved domestic revenue mobilization has importance for better governance as well as revenue generation. Well designed and implemented tax systems encourage good governance and accountability; promote inclusiveness and social justice; and can be a tool for improving distribution of income and wealth. A governance-focused tax reform agenda and a service-delivery oriented tax system have the potential to strengthen the state-society relationship and contribute to development though the following linkages: (a) citizens comply with taxes in exchange for the state’s provision of effective services, rule of law, and accountability; (b) taxation can lead to the expansion of responsiveness and accountability through proactive participation of citizens, civil society, business associations in the tax reform agenda; and (c) improvements in the revenue base can provide the fiscal space for improvements in governance and management of the public sector.

4. The low revenue mobilization reflects weaknesses embedded in the tax policy, as well as the administration. In 2010, the estimated tax effort index12 in Bangladesh was 0.41 meaning only 41 percent of potential revenues were collected, significantly below the median level of an index of 0.78 for low-income countries.13 This low tax effort is largely explained by the

11 These are Afghanistan (tax-to-GDP ratio of 6.7 percent), Myanmar (tax-to GDP ratio of 3.2 percent), Central African Republic (tax-to GDP ratio of 6.2 percent) and Ethiopia (tax-to-GDP ratio of 8.1 percent).

12Tax effort index is the ratio of actual revenues to potential. 13 IMF Paper “Revenue Mobilization in Developing Countries”, March 2011.

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significant amount of tax revenue foregone due to preferential tax treatment given to specific taxpayer groups, to investment expenditures or their returns, through targeted tax deductions, credits, tax exclusions or exemptions. An assessment by the NBR in 2007 estimated that foregone revenue could be as much as 2.5 percent of GDP.14 When granted arbitrarily, tax deductions and exemptions etc. restricts the tax base, reduces revenues, and impacts equity and causes concern with respect to accountability.

Technical Soundness

5. In response to these challenges, the National Board of Revenue (NBR) put forward a comprehensive Tax Modernization Plan (2011-2016) that was endorsed by Parliament in June 2011. The Plan recognized the critical need to increase tax revenue and achieve by FY 2016 the national development plan’s medium-term revenue target of a tax-to-GDP ratio of 12.2 percent. To address the tax policy and administration reform needs, the Tax Modernization Plan outlines nine strategic areas dealing with: tax policy reform; business process reform; automation of tax processes; redefining the status and regulatory power of NBR; restructuring NBR according to function and size; strategic communication and outreach; enforcement improvement program; human resource program; and infrastructure development program. Some progress has been made to implement the Plan, but the initial progress has been slow.

6. The NBR faces management, organizational and capacity constraints, that by default “enable” tax fraud and tax avoidance activities to take place. The NBR is responsible for the collection of about 81 percent of total revenues and is one of the largest government agencies in the country. The NBR is administratively situated under the Internal Resource Division (IRD), one of the four divisions, of the MoF.15 Each Division is headed by a Secretary, and the IRD Secretary is the ex-officio Chairman of NBR. The NBR is organized along three administrative “type of tax” Wings: Income Tax, VAT and Customs, which historically have operated independently of each other in administrative silos. There are two distinct cadres of officials, one for the VAT and customs and the other to the income tax wing, with divergent career and promotion prospects. Each of the wings is supported by field offices, which operate with significant autonomy and minimal oversight of their performance from headquarters. Management procedures and core business processes are cumbersome; largely manual-based or using stand-alone IT systems and entail frequent face-to-face contact with taxpayers, which can create scope for discretionary behavior from the tax officials. The silo-based administration also limits the extent of efficiency gains to those that can be had within Wings, and also limits the current sharing of information that would be helpful to raise compliance.

7. As a centerpiece of the government’s tax policy reform program, a new VAT Law was passed by the National Parliament in November 2012, and envisaged to enter into effect on July 2015. (A new Income Tax code is also being drafted with IFC and IMF technical assistance, but the timetable for this is unclear). The Cabinet and the Parliament’s Standing Committee on Finance drafted the VAT Law through extensive consultations with stakeholders and careful review in order to ensure consistency with the NBR tax modernization plan and medium-term revenue targets. Under the three-year Extended Credit Facility (ECF) arrangements approved by

14 NBR and IMF, 2007. 15 The main responsibility of the NBR is to mobilize domestic resources through collection of import duties and taxes, VAT and

income tax for the government. NBR is also responsible for formulation and continuous re-appraisal of tax-policies and tax-laws in Bangladesh.

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the International Monetary Fund’s Executive Board in April 2012, substantial technical assistance was provide from the IMF in legal drafting and consultative process. Approval of the VAT Law in November 2012 was a prior action under the ECF and submission of the Law to Parliament was a June 2012, benchmark. The new VAT Law brings in a modern VAT and significantly reduces the list of exemptions.

8. Revised VAT rules and regulations are currently in draft and are now subject to review and consultation with stakeholders. Promulgation of the rules is on track to be in place by the end of the fiscal year. The secondary legislation is critical in order to provide NBR with the adequate powers and autonomy required to enforce the new VAT. The IMF has provided technical assistance in drafting the VAT rules and regulations. A first draft of the rules has been released for public consultation, and a series of about 20 seminars nationwide are planned in 2014. The approval date for the VAT rules and regulations envisaged under the original plan (December 2013, prior action) will be rescheduled in order to provide for an extended period of review and consultation with stakeholders.

9. Notwithstanding the Tax Modernization Plan’s approval by the Parliament, some aspects of the tax administration reform do not yet have strong support and ownership across the senior management of NBR. During the past two years of policy dialogue the NBR senior management (derived from individual Wings in most cases) have expressed strong reservations about several aspects of the Plan; such as: (a) restructuring according to function and size and doing-away with the tax by type administration; (b) separating tax policy from tax collection and making this independent of implementation and enforcement, and (c) developing an integrated approach to automation, such as implementing a single software solution for the administration of income tax and VAT. The extent of change envisaged in the Plan will require a significant institutional reform that will require not only a large investment in change management but a much longer timeframe than the 2011-16 Plan allowed for. In practice, a more step-wise approach to the organizational restructuring and integrated automation is being undertaken in a gradual but nonetheless progressive manner.

10. While there is an overall and high-level commitment to stay on the path of the Tax Modernization Plan, several challenges remain, especially in terms of the administrative integration aspects, bringing the two tax cadres to work more closely, and the short time that the Chairman of NBR is typically appointed for (a one year appointment plus possible extension). There are also likely to be vested interests in the status quo, and managing an institutional reform that involves significant staff in decentralized offices adds to the challenge. The more practical reform momentum underway is that each Wing is reorganizing and improving business processes and introducing automation first; and will also consider aspects of harmonizing across NBR, especially systems harmonization at the same time; but leaving aspects of full integration for a future step.

11. There are several development partners supporting the NBR through technical assistance programs. A tax development partner group (chaired by the IMF resident representative) was convened in February 2013 to begin to align this support around the Tax Modernization Plan. The IFC is providing technical assistance to the NBR through the Bangladesh Investment Climate Facility financed by DFID and the European Commission; and this has achieved several results: the Tax Modernization Plan itself, as well as on-line income tax registration system. The VAT reforms are central to the IMF’s Extended Credit Facility (ECF) program; and the Fund is able to use prior actions to keep the momentum for the reform on track. In addition, technical

58

support was provided by the Fiscal Affairs Department, IMF in the development of the VAT Implementation Plan, and there is an IMF- resident adviser in the VAT project implementation team supporting the Project Director (as well as short term advisers on specific aspects such as the rules and regulations). The Asian Development Bank has an investment project to support the modernization of the Income Tax Wing; and this project will provide new administrative software for income tax; support on-line filing and automation of processing income tax returns, and the introduction of a data center, contact center, and processing center for income taxpayers. DFID has also been supporting NBR through technical assistance to the large taxpayer unit in income tax. The harmonization group established by the development partners should continue to strengthen coordination and collaboration for current and future endeavors in order to harmonize their current efforts with the longer term vision of the Tax Modernization Plan.

12. Additionally, automation of NBR operations is being implemented in the absence of a single NBR Information Technology Strategy. While a draft strategy exists it is yet to be formally adopted. In addition to the stand-alone projects supporting IT initiatives financed by development partners there are also several initiatives financed by the government. Thus, there are high risks of automating in silos and entrenching NBR fragmentation. In 2010, the IFC provided technical support to draft a single ICT strategy, but this was not formally adopted by the NBR nor is it being implemented. Many separate automation projects have emerged to automate specific functions. Some of these provide for all tax types, such as the application developed for e-payments, while some are for single taxes, such as the income tax registration, but could be extended to other tax types. In customs, automation has proceeded much faster and a COTS system has been implemented.

13. Recently, the NBR has taken several steps towards integration and harmonization across the tax types, and the formation of a Technology Working Group has been convened with representatives from all Wings. Critical decisions on the IT procurements will also aid harmonization. For example, the decision to procure a COTS solution in VAT will require reorganization along functional lines in that Wing. International experience would indicate that the change of business process in line with a functional approach is much more likely to proceed successfully, with the purchase of a COTS system than with a bespoke system. Thus a COTS approach has been approved for the VAT automation. The VAT and Income Tax Wings while they have separate processes for acquiring administration software have agreed to use the same database platform.

14. Even with separate administrative systems in the different wings, integration can proceed by identifying operational areas that can be consolidated. The Chairman of NBR agreed in October 2013 to introduce a unique Taxpayer Identification Number (TIN) to be used as the single identifier for all taxpayers (across tax types). Other initiatives such as shared data centers, contact centers, and processing centers along with an integrated data warehouse, are all initiatives that are under discussion as both income tax and VAT undergoing reforms in tandem. Additionally, the recently established Technology Working Group would play a critical role in developing a long term technology harmonization strategy and establishing common approaches to ICT matters across the wings.

15. The VAT Improvement program seeks to enable the new VAT to become a robust source of revenue, it is a critical milestone in the government’s Economic Program supported by a three year Extended Credit Facility from the IMF, and has high-level commitment from the Ministry of Finance. The primary focus of the program is to prepare the VAT Wing to be able to

59

administer the new VAT from July 2015. The government is committed to reforming the VAT administration and its committed financial contribution of US$12.89 million is predictable and guaranteed with the government approval of the Development Project Proposal (DPP) on “Value Added Tax and Supplementary Duty Act, 2012 Implementation Project” popularly known as “VAT on-line”. The Bank will continue to support the GoB in achieving the long-term goal of modernization and harmonization which goes beyond the timeframe of Program completion.

16. The VAT program also supports the government’s broader tax reform agenda as a component of the Tax Modernization Plan. The program supports several activities to: move towards a modern VAT tax administration based on the assumptions of a full self-assessment system; restructure the VAT Wing along functional lines; establish an Integrated VAT Management System centered on highly automated business processes; increase the take-up ratio of electronic services; improve communication with taxpayers; improve risk identification; and reduce the need for face-to-face contact with taxpayers; provide institutional strengthening and capacity building.

17. The program is supporting modernization of the VAT system in order to break out of the low revenue-low capital spending equilibrium that has constrained Bangladeshi growth for many years, and to enable the new VAT to become a robust source of revenue. As set forth below, Bangladesh generates substantially less VAT revenues in relation to the GDP than many other countries, both low and middle income. In terms of VAT productivity, for each point of the standard VAT rate, Bangladesh generates only 0.22 percent of GDP in revenue compared to 0.34 percent of GDP in other low income countries. The government economic program seeks to increase tax revenues from 10.4 percent of GDP in FY2012 to 12.2 percent of GDP by FY2016. If Bangladesh could raise its VAT productivity by 0.12 percent of GDP to the average level of other low income countries, then all else equal, VAT could increase government revenues by 1.8 percent of GDP. The introduction of a broad-based and well administered VAT can contribute substantially to achieving this objective.

Table 12: VAT Indicators for Bangladesh and Comparator Country Groups Country Standard VAT Rate VAT Revenue (%

of GDP) VAT Productivity16

Bangladesh 15.0 3.3 0.22 Low Income Countries 16.4 5.5 0.34 Lower Middle Income Countries

17.4 6.6 0.38

Upper Middle Income Countries

17.3 6.6 0.38

High Income Countries 17.1 6.7 0.39 Source: IMF staff calculations. Notes: Data for Bangladesh is for FY2009, the averages for the country groups are for 2005.

18. The introduction of the new VAT system will not only increase revenues, but can also have a positive impact on economic efficiency. Poor revenue performance is due to many shortcomings and loopholes in the previous law. The first VAT Act was enacted in 1991, and

16 VAT productivity is defined as the ratio of VAT revenue to GDP divided by the standard VAT rate. As such it equals the amount of VAT revenue as a proportion of GDP that is generated by each point in the standard VAT rate.

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functioned more as an extended turnover-excise tax system than a true VAT. The law has been amended, appended and modified on different occasions resulting in many distortions. By taxing different sectors at different effective rates, the tax distorts production and consumption choices, and has been harmful to economic growth. Tax liability under the earlier Act is based on highly reduced and arbitrarily negotiated approved values that are currently embedded in the tariff schedules for manufactured goods; and truncated bases for the services and the trading sectors. The long list of exempted goods and services that are provided under the current law, further erode the tax base. There are also many burdensome features in the existing law, such as the requirement for taxpayers to receive price approvals from tax officers, the requirement to deposit VAT in the government treasury in advance of purchasing supplies, and the necessity to attach to the VAT return copies of individual VAT invoices and payment confirmation.

19. The new VAT Law addresses many shortcomings and loopholes in the previous law. The new law will enter into effect on July 1st, 2015. It represents the most significant change to Bangladesh’s tax system in many years, and was guided by four overarching goals: (i) to substantially increase the amount of government revenue that is available to pay for important public sector investments and priority social expenditures; (ii) to significantly facilitate the operations of businesses by making it easier and cheaper to comply with VAT laws; (iii) to considerably enhance the NBR’s capacity to identify and deal with non-complaint taxpayers; and (iv) to provide the basis for a modern, disciplined, and service-oriented VAT administration.

20. The new VAT Law if properly implemented and effectively administered would increase tax revenues by broadening the tax base. The revenue increase will be generated not by raising the VAT rate, which remains unchanged at 15 percent (the VAT threshold remains unchanged too at BDT 8 million), but instead by broadening the tax base. Under the new Law, all economic sectors will be brought within the scope of the VAT under which tax will be paid on the basis of actual transaction values instead of reduced and arbitrary negotiated approved values that are currently embedded in the tariff schedule (for manufacturing goods) and truncated bases (for services and the trading sector) under the existing law. In addition, the VAT base will be further expanded by substantially reducing the long list of exempt goods and services that are provided under the current law. An assessment by the NBR estimated that revenue foregone due to various types of tax expenditure could be as much as 2.5 percent of GDP in 2005, of which VAT accounts for about 2.07 percent of GDP17. According to IMF forecasts, it is expected an increase of the VAT yield from 3.7 percent in 2012 to 4.7 percent of GDP by the end of the program.

21. The new VAT presents an opportunity for addressing shortcomings in tax administration. Revenue performance is further exacerbated by weakness in the tax administration. The VAT imposes substantial burden on taxpayers who are required to register and account separately for each of their manufacturing sites, maintain elaborate records, and physically visit the tax office in order to file their tax return and comply with their obligations. According to the most recent business survey, revenue administration performance is perceived as one of the most important constraints to investment and growth in Bangladesh. Taxpayer compliance cost is high as demonstrated by the Doing Business indicators. For the typical firm according to the Doing Business exercise, the total time spent preparing and paying taxes in Bangladesh was 302 hours in 2012.

17 NBR and IMF (2007).

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22. The VAT administration is organized geographically and seriously understaffed. The headquarters office is supported by the field offices, including 254 local circle offices throughout Bangladesh, which report to 84 divisional offices reporting to 12 regional Commission Offices (“commissionerates”). Understaffing and difficulty in filling approved positions-with an average vacancy ratio of about 71 percent, is a real issue in the NBR VAT Wing. As set forth below, there are 1,176 tax administration officials out of 4,005 approved positions in the VAT Commission Offices. The VAT Wing HQ with only twelve tax administration officials out of 24 approved positions is also insufficiently staffed and empowered to adequately direct and control the large number of field offices, which operate with significant autonomy and minimal effective oversight of their performance from headquarters (see Table 13 below).

Table 13: VAT Staff Positions and Vacancies, 2012

Approved Positions Filled Positions Vacant Positions %

VAT Wing Headquarters 24 12 50 VAT Commission Offices 4,005 1,176 70

Total 4,029 1,188 71 Source: NBR

23. Currently, both field office and headquarter staff are not organized into units based on tax administration functions. In the field office, staff is assigned a range of taxpayers for whom they perform a broad range of functions, which is inherently inefficient and subject to collusion. This form of organization is one of the biggest weaknesses in Bangladesh’s VAT administration as it does not allow for specialization among tax officers, nor centralization of routine functions (e.g. processing tax returns and payments, telephone-based assistance), which are critical for achieving efficiency in administration. The performance of core business areas is weak as demonstrated by: an inaccurate taxpayer registry, low filing and payment rates, low audit productivity and coverage, limited almost inexistent take up ratio of electronic services, etc. .

24. The current VAT administrative model is characterized by low level of automation and outdated processes which is detrimental to tax collection and efficiency of the administration. The current structure supports a full administrative assessment approach which involves pre-assessment checking of virtually all tax declarations and significant personal interaction with taxpayers through a distributed network of field offices. NBR has very limited IT capacity. A range of electronic services (e-filing, e-payment gateway, e-audit, contact centers) provided to taxpayers is under development. E-services are still very limited but with their planned expansion, this would enable tax payers to manage their tax filing and paying responsibilities without face to face interaction with a tax official.

25. Introduction of the new VAT law would catalyze improvements in tax administration by introducing self-assessment and spurring implementation of functionally organized VAT administration. The introduction of a full self-assessment system would minimize direct intervention in the assessment process by tax officials and direct far more efforts to targeted risk-based compliance controls. According to the high-level design of the organizational structure endorsed by the NBR’s Chairman, the VAT Wing will move towards streamlined and function based organization, which is anchored by a strong headquarter that sets policy and provides program direction and guidance to the field offices. To carry out these functions, the HQ functional responsibilities will be organized into a more logical groupings with dedicated unit

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established for each major function, e.g. Member VAT Policy, Member Operations and Information Technology; and Member Audit and Intelligence.

26. The network of field offices will be strengthened and their responsibilities clarified. Two different organizational set-ups would be established aiming at focusing the new organizational arrangements on the most-revenue productive commission Offices-where the changes can be expected to have the biggest impact and more easily be managed and minimize disruptions to other commission offices. Since the vast majority of economic activity in Bangladesh is concentrated in the capital Dhaka, and the corridor between it and the port city of Chittagong, in these locations the Commission Office with be responsible for all aspects of VAT administration, including VAT registration and taxpayer services, audit, and collection enforcement. Consequently, the commission offices in these locations will be reorganized by establishing functional units for registration and taxpayer services, audit, and collection enforcement, and other services. The Division will also be organized along functions lines, however together with Circle offices they will be responsible for administering the turnover tax only and will have no role in the VAT.

27. In all other locations, VAT administration will be a shared responsibility between the Commission and the Division Offices, while the turnover tax will be a shared responsibility between the Divisions and Circle offices. In these locations, the commission office will be responsible for the more complex VAT administration tasks and will be reorganized along functions lines e.g. registration and taxpayer services, audit, and collection enforcement. The division offices will be organized into two units-registration taxpayer services and audit and enforcement. Regarding the VAT administration, the division offices will perform the routine administrative operations such as provide a walk up counter service to accept VAT and turnover tax forms and forward them to the processing center; answer taxpayer’s queries on the turnover tax and when possible the VAT; advisory visits to taxpayers’ premises to explain their obligations under the VAT law and how to comply with these obligations; conduct less complex and less risky VAT audits, etc. A comprehensive timetable for the organizational arrangements of the VAT Wing will be developed under the program.

28. To address understaffing at both the HQ and field offices more than 500 new staff will be recruited and assigned to the VAT Wing. Staffing needs and assignment will be done using a three step workload methodology18 to ensure that a sufficient number of staff is assigned to the field offices, and that staff is allocated in appropriate proportions to each tax administration function. It is expected that the largest portion of new staff will be allocated to the more revenue productive Commissions in Dhaka and Chittagong. A staffing plan will be developed to ensure adequate sequencing of hiring and training of both transfers and new hires; clarify the roles and responsibilities between the existing staff and new hires.

29. Introduction of the new VAT law would be accompanied by the modernization of the core business processes. Core business processes would be streamlined, automated and brought in line with good international practices. Taxpayers will be given a substantial higher level of service and assistance to help them to better understand and comply with their obligations under

18 The three step workload methodology includes: (i) identify quantifiable measures of workload for each major task carried out by the various units; (ii) calculate the average amount of staff time that is required to complete each task; and (iii) set targets for amount of work to be completed within certain timeframes.

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the new law. At the same time, a higher degree of scrutiny and enforcement using modern-risk based methods would be applied towards those taxpayers who fail to comply with their obligations under the new VAT law.

30. Improved business processes built on effective IT systems, are critical. Automation will play an essential role in improving VAT administration. As a result, the NBR will establish a new integrated VAT Management system, based on Commercial-off-the-shelf (COTS) along with three new organizational units, including: (i) a Processing Center to process tax returns and other taxpayer documentation; (ii) a Data Center where the technology system reside and taxpayers’ record will be stored; and (iii) a Contact center to respond to taxpayers’ queries (the center will receive queries by phone, letter or e-mail) about the tax law, the status of their accounts, get taxpayers feedback; gather taxpayers complaints, set them to responsible officers in the concerned department for addressing grievances, and disclose them to the public. The Integrated VAT Management System will be a stand-alone application and capable of integration with other NBR information systems. The system will be run on a centralized platform to which all tax offices as well as the Call and Processing Centers will have access. While the systems and data are run on this central platform, access must be available to staff in various locations of the VAT Wing. Therefore a data network as well as basic tools (desktop, laptop, servers, printers, routers, generators, etc.) will be provided to ensure safe and secure connectivity between this centralized platform in the central Data Center and the VAT HQ, commissions, division and circle offices. A range of electronic services will be provided to taxpayers (e-registration, e-filing and e-payment), support tools to tax officials and reporting capabilities to the managers.

31. Ideally, the VAT should be implemented in a functional organizational structure where integration and data sharing could be better managed and the IT system less costly and efficiently utilized. However, the conditions for pursuing such good practice seem not to be there for quite a while in Bangladesh for the following reasons: (a) the entrenched cadre system (typical of the South Asia region) that divides the tax administration into income tax and VAT and customs officials, thus limiting integration and even harmonization across these two parts of the tax administration; (b) the urgent time frame required to implement the new VAT law; (c) the on-going, separate administrative reforms and automation already underway in the income tax wing, supported by the Asian Development Bank; (d) the lack of a single vision for harmonizing the ICT systems under development. Consequently, pursuing such first best approach-implementing the VAT in a fully integrated functional organization structure, is not feasible at this stage as merging income and VAT wings cannot be done overnight and is expected to be strongly resisted. It is worth mentioning that even in revenue systems where domestic tax administration-responsible for administering the VAT and customs responsible to collect import VAT, are integrated and supposed to share information with tax administration in order for the latter to administer the VAT refund, the coordination is not warranted.

32. However, the momentum for the VAT Improvement Program exists and presents a window of opportunity for both the Bank and the NBR. The success of the VAT launch could provide impetus and political support for possible further organizational reforms in other parts of NBR at later stage. The VIP is a demand driven operation in the context that (i) the Government has already adopted a new modern VAT law following good practice and will have to implement it anyway by July 2015; (ii) the VAT Implementation Plan is aligned with and directly linked to the ECF program with continued IMF TA support (and there is an IMF resident advisor for VAT

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implementation) on furthering the regulation for the VAT administration; and (iii) importantly, the VAT and income tax wings have reached an agreement on several issues of harmonization such as using the same database platform for their respective administration software systems.

33. Additionally, the recently established ICT working group will be instrumental in carrying out a comprehensive assessment of long-term IT management/operations capacity of the VAT Wing, and based on it develop an adequate capacity building program considering the central role the IT will have in VAT modernization program results.

34. The VIP aims to widen the VAT tax base by enhancing voluntary compliance and reducing non-compliance. It will achieve its results though addressing shortcomings in the tax administration that have led to non-compliance, and through automation of the administration in time for the introduction of the new VAT. NBR faces significant obstacles to control and address non-compliance issues, including non-registration, non-filing, under-reporting and non-payment. Achievement of short-term results or outputs, which are a pre-requisite for medium to longer term results achievement, would require significant reform efforts on the following fronts:

35. Closing the Taxpayer Registration Gap which is made up of individuals or enterprises that should be registered as taxpayers but are not. The taxpayer register is the bedrock of a tax administration, and lack of accuracy and reliability of the taxpayer register will in turn produce deficiencies in both the collection and enforcement process, and subsequently increases administrative and compliance costs. It is imperative for the tax administration to know its client base, and a unique Taxpayer Identification Number (TIN) be assigned to taxpayers in order to ensure a correct identification in the taxpayer register (preferably a unique number that is issued for income tax, VAT and other taxes where appropriate). Implementation of a unique taxpayer identifier across all tax-types as opposed to multiple TINs is generally considered a good practice.

36. In Bangladesh, the true size of the VAT taxpayer base is not known. Management notes that the taxpayer registry contains about 755,000 businesses, with a VAT population of over 430,000 businesses. In reality a large proportion of these businesses are inactive.

37. The existing taxpayer registration process is manual and suffers from many defects including representation errors, duplicate numbers, incomplete database and inconvenience of a decentralized registration procedure. Consequently, the current VAT, income and turnover tax registers are out of date and do not provide an accurate estimate of the expected number of taxpayers. Furthermore, the new VAT law stipulates some changes in the registration rules, including: (i) every business required to be registered shall have one single registration for all of its operations, including branch operations; (ii) BIN to be a unique number which no longer contain any identifier or changeable attribution e.g. digits that link the taxpayer to a particular geographical VAT office will be removed; and (iii) in addition to the general registration of businesses, NBR will maintain a record of all businesses identified as a "withholding entity" and will require all VAT consultants to apply for a license.

38. An accurate estimate of the expected number of VAT registrants is an essential prerequisite for making key assumptions in a number of development areas and a key indicator of the success of basic enforcement activities. The estimated number of VAT population is critical in determining the scale of operations and developing VAT strategies and plans. The estimated number of VAT population will influence the forecasts of the number of each transaction type, estimates of the number of staff required in each role, organization design

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criteria, staffing numbers, accommodations requirements, training demands, and sizing for the outsourcing of return and payment processing and taxpayer contact center activities. These estimates then form the basis for the IT technical specifications for data center size, network design and procurement, hardware and software procurement, and database sizing.

39. Consequently, a targeted VAT re-registration exercise supported by a comprehensive taxpayer education and communication program will be undertaken so that the forecast of the number of VAT population is as accurate as possible. An agreement was recently reached with the Chairman of NBR to use the new TIN as the single identifier for all tax payers. An effort is currently underway to associate existing BINs with the new TINs in an attempt to establish a "clean" database of existing VAT payers. The use of the TIN for VAT payers will first be employed by Customs hopefully early in 2014. As a result, there should be no delay in the use of the TIN for VAT payers in the new system.

40. The VAT re-registration will benefit from and build on the on-line income tax TIN registration initiative. This was launched on July 2013, and supported by the Bangladesh Investment Climate Fund. Under this new system, tax registration numbers will be issued on-line after validating taxpayer information on-real time basis with the National ID database and Registrar of the Joint Stock Companies (RJSC) database for individuals and businesses respectively. The e-Registration solution includes a digitally signed registration document issued to the taxpayer and an e-Service authentication solution to permit secure electronic services.

41. There is also a need to close the filing gap-the gap between those registered and who should file tax; and those who actually file taxes. Accurate date is currently not available, but filing compliance is extraordinary low, with a total of only 62,000 VAT returns filed by the 430,000 VAT taxpayers. In order to reduce the number of non-filers or stop-filers, modern tax administrations have established a centralized processing center and provided for e-filing systems; so that the tax forms can be filed electronically and sent directly to a central processing center. Non filing will be automatically identified for each tax period at the processing center. The computer system will track which taxpayers are expected to file returns and by which date. If a return is not received on time, the system will generate an electronic list of late filers for the period, which will be automatically allocated to the relevant commission office. Basic risk profiling will be used to prioritize the assignment of cases, e.g. persistent non-filers will be allocated a higher priority and consistent follow up actions will be applied.

42. Making self-reporting and filing easier is important to close the filing gap; as this reduces the costs for both the taxpayers and the administration. When filing on-line, taxpayers spend less time preparing their returns, which results in significant reduction in taxpayers’ compliance costs; and removes the face to face interaction at local offices which is often associated with misreporting for mutual benefit. Encouraging taxpayers to submit returns electronically under the program, should also significantly reduce administration costs, since a central processing center will have some economies of scale compared to processing at a large number of local offices.

43. The program supports the reduction in the payment gap; which arises when taxpayers who file returns, or are audited, do not meet their outstanding tax liabilities on time. Accurate date is missing, but the paying compliance is extremely low, with a total of 50,000 registered businesses paying VAT. The progress in reducing the magnitude of this gap typically requires

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coordination across two different units in a tax administration: payment processing and arrears collection. To facilitate the smooth payment of tax liabilities, taxpayers will be encouraged through the program to make their tax payment through electronic means. Additionally, establishment of a data center that stores taxpayer data (registration, payment and reconciliation between the payment credited to the taxpayers’ accounts and the tax actually deposited in the treasury) will contribute towards reduction of this gap.

44. To reduce the reporting gap requires strengthening of two core business areas, namely audit and tax appeals. The reporting gap arises when registered taxpayers file their returns, and even though they make timely payment of the obligations calculated in their returns, but under-report their tax liabilities. Under the existing system no national audit program targets have been set, and no standard audit case selection criteria are used. Therefore each office determines its own audit program along with the number of audits to be conducted and cases to be selected, and usually this is based on the local knowledge rather than risk-based criteria. The audit coverage of 0.034 percent in FY2008/09 is extremely low compared to international standards for effective audit program coverage of 25-30 percent of taxpayers each year. The additional assessment resulting from conducted audits is also low.

45. The program supports the audit function by establishing a fully risk-based automated system which will be used to improve the process of identifying audit-cases based on risk criteria. Audits are a key tool used by tax administrations to increase compliance by: (a) detecting and redressing individual cases of non-compliance; (b) promoting voluntary compliance by increasing the probability of detection and penalties for non-compliant taxpayers; and (c) gathering information on both the health of the tax system and the evasion techniques used by taxpayers. The establishment of independent appeal mechanisms and the availability of alternative dispute resolution mechanisms to resolve taxpayers’ complains are also required for a fair application of the tax system. An Alternative Dispute Resolution Mechanism was launched to reduce the stock of foregone taxes in dispute, and rolled out to all jurisdictions in July 2012, with a number of taxpayers already availing this mechanism.

46. The Customs Wing will play a critical role in the effective introduction of the VAT. The importers are liable to pay the VAT on taxable imports and supplementary duty on imported dutiable goods, with the VAT and duty being collected in the same way as customs duties. The VAT will be calculated on the value of the goods as determined for the collection of customs duty under the Customs Act, including any amount of customs duty, supplementary duty or other tax payable on the import. Exports of goods and certain specified services will be zero-rated for VAT purposes. The customs’ trader register for importers and exporters in the Customs Wing’s IT system will be updated to link Customs taxpayers with the VAT taxpayers through the new TIN. Consequently, the VAT and Customs Wings will coordinate to ensure that the customs register will be kept up-to-date to reflect any change in the VAT register.

47. Customs data will be a crucial element in the success of the VAT audit program. Hence, establishment of coordination arrangements between the Customs and VAT Wings is paramount. Much of the VAT collected by customs will subsequently be claimed as input tax credits on VAT returns filed with the VAT Wing. The VAT staff will rely on customs documentation for the purposes of verifying the accuracy of reported import and export transactions. For the VAT audit function access to up-to-date import and export data is a basic requirement. Consequently,

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the program envisages establishment of coordination arrangements between the VAT and Customs Wing to ensure exchange of information on a regular basis.

48. Transforming the organization in this way will be a complex and sensitive undertaking, consequently, a strong change management program is needed. As with any change, particularly in the case of tax policy and tax administration reforms, which are technically demanding, politically contentious, and require careful and sustained implementation over time, it is paramount to design and implement a change management program throughout the project life and beyond. Hence, the program will support activities aimed at developing and implementing appropriate strategies for managing organizational change at all levels of VAT Wing, including a robust behavioral change communication strategy to explain the rationale and potential impact of proposed changes to all managers and staff. Additionally, training on change management will be designed and delivered.

49. A comprehensive taxpayer education and communication program is also needed. The behavioral change communication strategy and the public education campaign, using multiple communication channels including new media (social media, mobile) and mass media, should take a two-pronged approach: (i) behavioral change communication to promote compliance, electronic registration, etc.; and (ii) advocacy to sustain the policy dialogue. Generating broad-based consensus and a continued policy dialogue through a creative communication program will help to continue the reform efforts irrespective of the political situation.

50. Hence, the program will use and provide a variety of instruments, including: develop and implement a comprehensive taxpayer education program and communication campaign to raise awareness and inform the VAT stakeholders and public at large about the VAT reform and potential impact of proposed changes; organize regular consultations, workshops, and presentations to the private sector, which is unfamiliar with and opposes the overall tax reform process; public information campaign by using government TV and other media advertisements; advertise requirements to register for VAT, bookkeeping requirements and invoicing regulation, and issue registration packs (guide and forms) to expected registrants; provide advisory services to initial registrants; draft explanatory materials; registration guide to support the registration process, general guidance booklet to explain the VAT in details; draft a set of technical guidelines to provide assistance to taxpayers in how to apply the new VAT Law and rules to specific business situations and in relation to specific industries; industry specific pamphlets, briefings for targeted taxpayers to inform them on the expected impact of the VAT.

51. An institutional strengthening and capacity building program is included in the design of the program. A comprehensive and continuous institutional strengthening and capacity building program is needed to enable staff to apply the new VAT law, use the new technology and carry out their work using the new administrative processes. The training program should be tailored to specific groups of staff based on what they need to do their job and deliver on their mandate. Enhancing the analytical capacity of the NBR to carry out tax gap analysis and modeling and revenue forecasting should also be included in the training program.

52. Continuous commitment to tax reform will be needed to implement such a complex tax modernization plan; and in the near-term the benchmark in the IMF program should reduce the risk that the resolve will diminish over time or under a different leadership or administration. NBR has already moved ahead on several activities, including: (a) establishing a high level

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Program Steering Committee chaired by the Chairman and comprised of ten members was established to ensure high level drive and manage critical issues that affect implementation; and a Program Implementation Committee, chaired by the Member (VAT: Enforcement and IT) of NBR and consisting of eight officers not below the rank of Deputy Secretary/Deputy Chief from key agencies was also established; (b) a decision was taken by the Minister of Finance for purchasing a Commercial off the Shelf (COTS) software (in March 2013); (c) finalizing the cost estimates for the VAT Implementation Plan; (d) drawing fully upon the support of an IMF-appointed resident VAT Advisor for facilitating the implementation of the Plan; (e) establishing a Technology Harmonization Working Group to develop a long-term technology harmonization strategy and identify and establish common approaches to matters across all wings; and (f) deciding to harmonize the tax identification numbers across tax types. The GoB approved the Development Project Proposal (DPP) on “Value Added Tax and Supplementary Duty Act 2012, 2012 Implementation Project” popularly known as “VAT On-line” at the highest levels in October 2013. Despite these developments, continuous commitment to the reform is needed to maintain the momentum and move forward such a complex reform.

53. An Implementation Plan for the VAT was drafted with IMF assistance, and approved by the Minister of Finance on March 4th, 2013. The plan, which was recently revised and endorsed by the Chairman (March 2013) will be implemented in a step-by-step manner over three carefully sequenced phases. Each of the phases includes various streams of activities that are intended to create a new and fundamentally improved VAT administration. The timely delivery of the plan is dependent on the achievement of the milestones. Annex 1 of the Technical Assessment provides the detailed VAT Implementation Plan (revised).

Institutional Arrangements

54. The Government of Bangladesh, through the MoF, will be the Recipient for the credit. The Program is to be implemented by the National Board of Revenue and the ERD.

55. The ERD will provide guidance to the implementing agency as the Program is implemented, and will provide technical assistance and administrative support to resolve potential issues, including those related to the release of funds by the Ministry of Finance. The ERD will also be responsible for reporting to IDA on the program results and DLIs.

56. A high level Program Steering Committee will be responsible for ensuring high level drive and for managing critical issues that affects project implementation. The Committee consisting of ten members will be co-chaired by NBR’s Chairman, who is also the Secretary of the Internal Resource Division, with Member (VAT Policy) as the member-secretary of the Committee. The Committee will meet at least quarterly to review the reform progress unless there is a need to convene immediate meetings. A Program Implementation Committee chaired by the NBR Board Member for VAT Enforcement and IT and consisting of eight officers not below the rank of Deputy Secretary/Deputy Chief from key agencies was also established. The Program Implementation Committee will be responsible for overseeing program activities, monitoring procurement, and taking action as needed to ensure successful implementation of the program.

57. A Program Implementation Unit has been established by the NBR. It will be headed by the NBR Board Member for VAT Policy as the Project Director, and it will consist of two Deputy

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Project Directors, one accountant officer, office assistant-computer operator and supporting staff. The Project Director reports to the Program Steering Committee. The Unit will be responsible for overseeing program implementation, and overall program coordination and management.

58. The institutional and implementation arrangement for the VIP is explained in Figure 3 of the technical assessment.

59. The program will be implemented in coordination with other initiatives funded by development partners and will use the pre-existing donor harmonization architecture. The implementation team has access to an IMF resident adviser and a series of short term IMF advisory inputs. The IFC Bangladesh Investment Climate Fund is also providing targeted technical assistance in key areas.

Box 1: Lessons Learned from World Bank Tax Projects

Successful administrative reform requires sustained political will as much as technical

capacity. A sound reform strategy, technical understanding and adequate human resources are essential, of course, but so too is political commitment—from the highest levels and over substantial periods of time—to overcome resistance (not least from the revenue administration itself), ensure effective application of the laws, assure funding, and drive through complementary legal and tax policy changes. Where this has been present (in Peru, Ecuador, Guatemala, Georgia, and Rwanda, for instance), progress can be substantial; where it is not, it will be minimal. This important lesson we have learnt not only from the tax administration reform projects, but from all bank operations.

A medium to long-term strategic vision, owned by the tax agency, is needed to carry out a comprehensive reform and build the required capacity. The program is supporting the government’s broader tax reform agenda as articulated in the Tax Modernization Plan 2011-2016. This important lesson we have learnt not only from the tax administration reform projects, but from all bank operations.

Tax policy and other legal reforms must be identified and prepared in advance of the project implementation if the expected increases in tax administration effectiveness and tax collection are to be achieved. In case tax policy reforms are not introduced in a timely and effective way, mitigating measures must be in place along with the needed political and institutional commitment to carry them out. Tax policy and other legal changes need to be taken in parallel with institutional capacity development to achieve full benefits from planned reforms. Indeed, the program is supporting the implementation of the new VAT law approved by the Parliament in November 2012 and envisaged to be introduced in July 2015. (Pakistan: Tax Administration Reform Project).

The need for concrete and visible senior management support. The extremely complex process of modernizing any tax administration requires strong, committed leadership, convinced fully of the need to modernize, enthusiastically championing the reform process. The program design has reflected this important lesson, and senior management of the NBR is involved and committed to reform. A Program Steering Committee and Program Implementation Committee consisting of senior management of key organizations have already been established. (Indonesia and Vietnam tax administration reform projects).

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Computerization is a support tool and should not be the driving force in the reform process.

The program has been designed acknowledging that the reorganization and modernization of business processes and the strengthening of management and planning as well as capacity building of the tax officials are the core elements of improving tax administration efficiency. As part of the project monitoring system, it is important to ensure that when new IT applications are introduced in the field: (a) they are field tested, (b) adequate training in new business processes is provided to users, (c) adopting the new procedures is identified in strategic plans, and (d) rewards or recognition of staff for adopting new processes are in place. This lesson learnt has impacted the design of many tax administration reform projects with ICT component. More specifically, Argentina, Brazil, Colombia, Ecuador, Mexico, Indonesia, Vietnam, Pakistan, Croatia, Bulgaria and Romania tax projects.

A broad and continued policy dialogue on tax reform is needed in parallel to increase the likelihood of success for the newly implemented revenue administration reforms. Supervision of projects can quickly get bogged down in the minutiae of implementation issues, diverting attention from a broader policy dialogue on fundamental tax reform that is critical to ensure that project outcomes are converted into sustainable results (Pakistan: Tax Administration Reform Project, Colombia, and the Philippines).

Substantial enhancement of tax administration effectiveness requires fundamental organizational change. Revenue administration reforms entail the implementation of substantial organizational reforms with the potential to disrupt operations at field formations and inflame staff’s stiff resistance to change. Extensive consultations with stakeholders using a bottom-up participatory process, constructive dialogue and adequate risk mitigation measures at the outset are needed. Reorganization action plans need to be phased-in carefully over a realistic period, while adequate safeguards and ongoing monitoring need to be actively undertaken through an effective communications and outreach program in order to facilitate stakeholders buy-in and to address perceived or real inequalities among staff. Indeed the program envisages for a change management and a comprehensive taxpayer communication and education program; mitigation measures for critical steps which are on the critical path of implementation; monitoring and reporting progress twice a year. (Pakistan and Vietnam projects).

Efforts to control the potential for corrupt behavior by tax officials requires a comprehensive strategy aimed at reducing the motive and opportunity for corruption, and providing incentives for integrity to take hold. (Vietnam: Tax Administration Modernization Project).

Stand-alone investment loans may not be the most appropriate instrument for supporting major tax reform. Effective support of high-risk/high-return investment such as fundamental tax reform requires an array of Bank’s instruments suited to tackle capacity building, tax policy, legislative reforms and political economy analysis towards specific and long term maturing development objectives. Flexible and results-oriented lending instruments supporting a tax reform strategy with sensible sequencing of actions, greater recognition of political economy factors and the governance context, robust TA support, and continued policy dialogue, are best suited to bring sustained development objective results compared to the traditional, stand-alone investment lending approach. (Pakistan: Tax Administration Reform Project).

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Key Features of modern tax administration Modern tax administrations are moving towards:

Function or “hybrid” based organization as opposed to type-of-tax organization. In practice, most tax administration‘s organizational structures are a mix of the different features and characteristics of models available, which is called ―the “hybrid” model. In this regard, while most tax administration‘s organizational structures are based on the functional model, the majority of them have established a Large Taxpayer Unit (LTU) and some residues of a type-of-tax oriented tax administration have survived in many of them (e.g. excise taxes administered by customs in countries where customs have been merged with tax administration‘s operations).

Improved corporate governance including streamlining the organizational structure and strengthening the role of HQ in designing programs and providing strategic guidance. The large office network is anchored in the old way of doing business, and is associated with many disadvantages. The function based management model means that the role of headquarters cuts across normal, vertical lines of authority in the organization. Hence, HQ’s role in designing programs and providing strategic guidance to operational levels should be strengthened.

A client oriented approach which seeks to reach an adequate balance between taxpayer service and compliance enforcement. There is a link between taxpayer services and compliance, and it should be visible to taxpayers in all dealings with the tax administration. In modern and client oriented tax administrations, service approach is integrated into the core tax programs aiming at making all contact between the tax administration and taxpayers as simple and efficient as possible. Under this model, for example, it is considered a good practice to establish contact centers and a move towards larger and more centralized service centers to ensure delivery of consistent, high quality service that enables specialization (e.g., by taxpayer segment or tax type and procedure).

Self- assessment as opposed to administrative assessment. This reflects a move towards (i) more comprehensive and targeted approach to providing help and assistance to taxpayers; (ii) systematic verification of reported tax liabilities through risk-based desk and field audits; and (iii) computerized matching of income reports.

Dedicated processing centers (e.g. for processing of tax returns and payments). Under this approach, dedicated process-oriented centers have been established to deal with massive processes that apply to all taxpayers segments of taxpayers or type of tax, e.g. tax return processing, primary checks to all tax returns, and basic information services.

Economic Justification

60. The economic analysis was undertaken on the basis of a quantification of two main benefits of the Program: a reduction in the administrative costs and a fall in the cost of compliance; and comparing the discounted stream of these benefits with the discounted costs associated with the program (6 years) and in the medium term for a total of 10 years. Since the revenue improvements themselves will arise as a result of both the policy and administrative improvements, which is difficult to entangle, this approach was considered more appropriate.

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(i) Reduction in Administrative Costs of Collecting the VAT Tax

61. The modernization of the tax administration should lead to lower costs per amount of revenue raised. This arises from streamlining and re-organizing the VAT Wing along functional lines, the training of tax officials, the greater taxpayer compliance that results from the lower costs associated with filing and paying (especially with on-line services), taxpayer education and communication campaigns, the establishment of a processing data center with higher economies of scale in processing larger numbers of taxpayer accounts, and the establishment of a contact centers to improve accuracy of filing, plus the simplification of core business processes along standard international lines and the automation of those processes. Additionally, administering the new VAT law with fewer exemptions, easier procedures and rules to comply with, should also reduce the administrative costs. The NBR tax administration collection costs as a proportion of the VAT revenues is estimated to be 1.75 percent of total VAT revenues (without the program) and the VAT administration costs are estimated to be 0.54 percent of VAT revenues. 19

(ii) Reduction in Compliance Costs for the Taxpayers. 62. The compliance cost for taxpayers has been subject of many studies showing that these costs tend to be larger than the cost of administering the tax itself.20 Therefore the greater economic benefits can arise in lowering the compliance costs. These costs include the costs incurred by taxpayers in meeting the requirements that they need to abide by under the tax law and revenue authorities, over and above the actual payment of tax. These are costs which would disappear if the tax was abolished.21 More specifically, in addition to the fiscal burden of tax on business (their actual tax payments), the compliance burden is the real cost to businesses in terms of staff costs (time spent on tax compliance multiplied by the relevant wage rate or salary) and other expenses (e.g., buying tax software, hiring a tax specialist on an as-needed basis, driving to the tax office, and even paying bribes to tax officials.). Estimates of the compliance costs vary greatly by study, tax considered and by country, however several generalizations are valid:

• Tax compliance costs can be extremely regressive, a relatively minor burden for large businesses but extremely onerous for small firms. The World Bank Group has carried out a number of tax compliance cost surveys for businesses in developing countries in Africa, Asia, Latin America and the Middle East. While there has long been plenty of evidence of regressivity in tax compliance costs in the developed world, the Bank has documented extremely regressive patterns in the developing world, with small businesses incurring tax compliance costs of up to 15 percent or more of turnover.

• A large share of the compliance cost relates to wage costs for in house and outside advisors (working time spent by accountants and other staff on calculating taxes, preparing all reports, providing explanations to tax authorities, trips to tax offices, or outsourcing to tax preparers on retainer or fee-for-service basis);

19 Tax administration collection costs include three categories, administrative, salaries, and IT costs. 20 Chris Evans, “Studying the Studies: An Overview of recent research into taxation operating cost”, eJournal of Tax Research,

Atax, The University of New South Wales, Volume 1, Number 1, 2003, pp. 64-92. 21 This is the definition of the taxpayer compliance costs. Sandford, C. 1995. Tax compliance costs measurement and policy.

Bath, England: Fiscal Publications.

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• All studies suggest compliance costs are highly significant for the main central government taxes such as Personal Income Tax, Corporate Income Tax and consumption taxes including VAT. Compliance costs are typically anywhere between 2 percent and 10 percent of the revenue of these taxes, and up to 2.5 percent of GDP. Compliance costs are typically a multiple of the administrative costs.

• Compliance costs can be reduced by simplifying the tax system and making it more stable and predictable, by enhancing the accountability of tax officials, improving taxpayer services and increasing the take up ratio of electronic services (e-filing, e-registration, e-payment gateway, etc.) by increasing transparency and by establishing support centers (contact center), streamlining and modernizing the organization of the VAT collection, and automating core business processes.

63. There are potentially other benefits, which are difficult to measure. These include: (a) broadening the VAT tax base by facilitating compliance and reducing non-compliance; (b) increasing taxpayer satisfaction with services provided by the NBR; (c) reducing the distortion impact on the economy of the VAT system due to a more effective enforcement of the new VAT law (in addition to a more sophisticated information system on taxpayer accounts the number of exempted goods have been substantially reduced under the new VAT law; the new VAT will apply to all sectors, etc. making it easier to enforce); (d) improving the investment climate as a result of establishing a predictable, efficient, and enforceable VAT regime; (e) enhancing efficiency and performance of the NBR; (f) improving governance of the NBR by broadening and strengthening the accountability mechanisms to key stakeholders; increasing transparency of decision making and operations; improving the interaction and cooperation of the NBR with the private sector; improving compliance with laws and regulations in force; and (g) improving governance elsewhere in NBR as a demonstration of establishing a “good” VAT administration.

64. The economic analysis is based on the following assumptions of program related benefits, which have been calculated based on assessments from the benefits of tax administration modernization projects.22

• Tax administration costs fall by 30 percent over the program period, and materialize at the end of the program;

• Taxpayer compliance costs fall by 2 percent of tax revenue at the end of the program period.

65. The results of the economic analysis indicate that the program is economically desirable. Two scenarios demonstrate that with a reduction in compliance costs of 2 percent of VAT revenues, and either a thirty percent administrative cost saving at the level of NBR administration; or at only the VAT administration, the net present value is positive. The economic Internal Rate of Return (IRR) is 85 percent and the real economic Net Present Value at a 10 percent discount rate amounts to more than US$516 million for NBR administrative cost reductions. The Internal Rate of Return is 78 percent and the Net Present Value US$ 434 million for VAT administration cost reductions. Furthermore, since it is the compliance cost savings assumption that drives benefits, a sensitivity analysis was also undertaken. The Net Present Value is still positive under alternative assumptions of a low-case scenario with compliance cost

22 See World Bank: The Economic Benefits of Revenue Administration Projects, 2007

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savings of only 1 percent of VAT revenues and administrative cost reductions of only 10 percent of the VAT administrative costs.

66. The World Bank Group’s comparative advantage in addressing tax administration modernization reforms lies in several areas: First, the Bank has knowledge and expertise gained globally and customized locally, including experience in South Asia. It has continually expanded and upgraded repository of best practice in development combining global implementation experience, research and learning, as well as the ability to mobilize and connect global knowledge and customize it to local conditions. Second, the Bank is working together with other donors and international organizations and leveraging its relationship with IFC in particular. Third, the Bank has global presence and engagement in all developing regions. It has a global, local and cross-sectoral presence with the experience gained from working with public and private sector actors. The Bank also has a permanent in-country presence in Bangladesh and has mobilized additional technical assistance grant resources to support the tax administration modernization reforms.

67. Furthermore, IDA and IFC have been involved historically in supporting Bangladesh’s tax modernization reform program through the Economic Management and Technical Assistance Program and the analytical work on Public Expenditure and Institutional Review, 2010. The World Bank Group has extensive analytical and technical expertise in taxation, and has become one of the main providers of assistance for tax administration modernization reforms in developing countries, with an increasing number of lending and non-lending operations.23 The Bank’s wide experience and close engagement with many client countries on continuing and long-term projects of comprehensive tax reform give it a unique experience base and perspective from which to contribute to tax reform agenda. Lessons learned from previous operations have been analyzed and incorporated in the design of the Program. The NBR will benefit from this experience in the further development and implementation of its reform plan.

Expenditure Framework

68. The program expenditure framework amounts to US$70 million for the VAT Improvement Program and US$3 million for the verification activities of the ERD over FY 2013-18. IDA resources for the Program under the proposed operation will be $60 million. In October 2013, the GoB approved the placement of the VAT modernization program in the Annual Development Program (ADP) budget, making it eligible to receive funds from both domestic budgetary and donor sources. This approval shows government’s commitment to reform tax administration and its financial contribution of US$13 million is predictable and guaranteed. In case the DLI is not achieved, and hence the disbursement for the IDA funds not triggered, the Government of Bangladesh will provide the funds needed to carry out the activities as outlined in the program.

69. The proposed amount of program financing is adequate to ensure maintenance of financial sustainability, which is essential for the alignment of the GoB policy objectives, selected priorities and intended program objectives. Program funding will be included in the NBR annual budget and all funding (regardless of the source) will flow through distinct budget

23 Currently, there are around 97 World Bank Group tax administration modernization reform projects (including active and pipeline), which target more than 60 countries and 6 regions.

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line items. Program funds will be used to cover recurrent expenditures and development expenditures (individual and firm consultancies and goods) related to program activities. The Finance Department of the NBR will track and report the source of funds in its budget (as required by law and financial management rules).

70. The Government of Bangladesh’s contribution of US$13 million is estimated to be approximately 13.0 percent of the NBR’s total budget for the period 2014-2017. The budget of the Internal Resource Division (IRD) for 2012-2013 is BDT 11,830 million or equivalent to US$ 148 million of which BDT 5,540 million or equivalent to US$ 69.25 million allocated to the NBR. According to the medium term expenditure framework (2013-2017), the IRD budget will increase by 44 percent to reach the level of BDT 17,064 million or equivalent to US$213.3 million in 2017. The NBR budget is expected to increase to BDT 7,970 million or equivalent to US$99.62 million by 2017.

Results Framework and Monitoring and Evaluation

Results Framework

71. The results framework provided in Annex 1 shows the intermediate results and the indicators which are consistent with the results chain leading to the objective of improved revenue mobilization and transparency, consistent with the technical assessment. The results are attributable to (a) automation of processes, the Integrated VAT Management System being introduced by the program, and (b) the administration of the new VAT law. The results of the VAT program are as follows:

• The VAT Implementation Plan remains on track. This is the only process indicator, which given the complexity of the program and the NBR needs to recognize its importance, and therefore it is key to track its result and progress as they will lead to other results down the results chain. The program will need to remain on track if the new VAT will be introduced on time and with immediate use of the automated administrative system. The VAT Implementation Plan has already been endorsed by the Minister of Finance. The milestones in the process indicators under the Program are aligned to the benchmarks under the IMF program. The plan includes targets for all aspects that will be required for the successful implementation of the program. Achievement of all milestones and targets would constitute successful implementation of the plan; thereby “VAT implementation remains on track.” Targets are broken down into six phases; and are key triggers as DLIs under the program:

Phase 1 plan (FY13/14) includes: (i) tax administration Commercial-off-the-shelf (COTS) selected through agreed procurement processes; and (ii) program management consultancy firm selected through agreed procurement process. Two important clarifications: (i) vendor/PMCF selected will be considered when the vendor/firm sings the contract; and (ii) regarding the COTS the procurement processes should follow these measures in order for the DLI to be considered met. First, the invitation for Tender should be written with support of technical advisory inputs provided by a technical team from the IDA, IMF and IFC. Second, the bidding documents should be based on IDAs own ICT bidding documents. Third, the tender Evaluation Committee should consist of four

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independent members: in addition to the representatives from the Bangladesh University of Engineering and Technology and the Bangladesh Computer Center, two independent international experts should be nominated, one on international tax administration system specialist and one on international ICT procurement specialist.

Phase 2 plan (FY14/15) includes: (i) at least 40,000 taxpayers are registered in the COTS system by June 2015; and (ii) contracts signed for a) data center, b) contact center, c) processing center, d) other IT infrastructure (network and hardware) (selected through agreed procurement process).

Phase 3 plan (FY15/16) includes: (i) at least 50,000 VAT returns are processed by the VAT Wing per month; and (ii) at least 50,000 VAT payments are processed by the VAT Wing per month.

Phase 4 plan (FY16/17) includes: (i) at least 500 audit staff trained on COTS audit modules; (ii) at least 80 percent of refunds processed within 3 months.

Phase 5 plan (FY17/18) includes: (i) at least 60,000 VAT returns are processed by VAT Wing per month; (ii) at least 80 percent of refunds processed within 2 months.

Phase 6 plan (FY18/19) includes: (i) at least 60,000 VAT returns are processed by VAT Wing per month; (ii) at least 80 percent of refunds processed within 2 months.

• There is an increase in the number of new registered active VAT taxpayers; and a reduction in stop filers. This indicator is usually affected by two factors that work in opposite directions: on one hand, the number of registrants may be reduced in case the new VAT law raises registration threshold; and on the other hand is supposed to rise as a result of implementing the new strategy to detect non registration. As the new VAT law stipulates no change in the registration threshold of BDT 8 million, the indicator will be affected only by the second factor. Introduction of the new VAT system will be accompanied with a comprehensive taxpayer communication and education program in order to raise awareness and inform the VAT taxpayers and public at large about the VAT reform and potential impact of the proposed change. Furthermore, tax officials will conduct registration checks and visit businesses to increase the number of registered tax filers. Hence, it is expected an increase in the number of new registered active taxpayers seen against the baseline to be established during the mid-term review, corresponding to the implementation of the new VAT law. With the new VAT administrative system, and establishment of the processing center, non-filing will be automatically identified for each tax period and consistent follow up actions will be applied. Basic risk-profiling will be used to prioritize the assignment of non-filer cases, i.e. persistent non-filers may be allocated a higher priority to reduce non-filers. Altogether, they would contribute towards a reduction in stop filers.

• Value of new VAT e-payments increases and coverage of e-services widens. Introduction of the integrated VAT management system based on COTS would play a

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central role in the modernization of VAT Wing, since it will allow for the standardization of procedures and provision of electronic services, leading to: less room for discretionary errors; a reduction in processing time; and improvements in the quality, reliability and accuracy of information. With the development of new electronic services, i.e. e-filing and e-payment, an increase in the proportion of VAT taxpayers who use e-filing is anticipated. An increase in both the proportion of VAT taxpayers who pay on-line (with a focus on the Large Taxpayer Unit taxpayers) and the amount of e-payment is also anticipated. Regarding e-payment, it is anticipated an increase in both the percentage of Large Taxpayers who pay on-line and the amount of e-payment. The importance of eservices for achieving the results in terms of greater revenues, and lower compliance costs, is reflected in the selection of the DLIs.

• There is a decrease in the average time to process and issue tax refunds. VAT refunds will be managed and monitored centrally by the new processing center in order to capture and identify all VAT refunds. Refund management would be driven by automated risk-based system which will apply appropriate risk parameters for refund processing. With the new automated risk-based system, the time to process and issue refunds should diminish. The statutory time to do this is provided for in the law of 3 months.

• There will be an increase in the “hit rate” of tax audits-percentage of tax audits resulting in additional tax assessments (in a specific period of time). The new VAT will provide for an effective audit program to ensure that non-compliance is detected and corrected. The VAT audit program will be delivered through a national VAT plan which would aim at expanding the coverage, i.e. increase in the number of taxpayers who are subject to audit; selecting audit cases using a fully risk-based automated system; improving audit methods by increasing the number of auditors, and enhancing management system for monitoring audit results. Consequently, an increase in “hit rate” of tax audits is anticipated.

• Increase in taxpayer satisfaction with services provided by the tax administration (collected through structured survey conducted by an independent firm). Under the existing VAT system taxpayers claim that tax officials currently have “excessive discretionary power which leads to arbitrariness, or at least a perception of such. Moreover the cost of complying with tax obligations is high due to heavy reliance on manual procedures and administrative assessment. The greater ability for taxpayers to a) understand their obligations under a simplified new tax; b) benefit from improvements in the quality and range of services provided i.e. file, register and pay on line; and c) enhanced transparency and accountability of tax administration, likely to lead to increased taxpayer satisfaction.

• Reduction in taxpayer cost for complying with the VAT.

• Fiduciary actions as per the Program Action Plan to mitigate the fiduciary risk.

• Greater transparency: The preparation and timely release of key performance indicators of the tax administration is important as it provides for greater transparency for stakeholders and allows for detailed scrutiny of results and plans. Lack of transparency affects taxpayers’ trust in tax administration and negatively affects compliance. It also

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affects government legitimacy and the social contract. Introduction of the new VAT system is expected to enhance the transparency of the VAT administration. Several reports have been agreed for proactive disclosure by the NBR. They are (i) Contact center number of calls, time taken to handle calls, type of complaints and satisfaction with the contact center, to be disclosed to the public annually; and (ii) Amount of VAT tax collected by the commissionerates disclosed to the public annually, and (iii) the VAT Wing Taxpayer satisfaction survey results to be disclosed every other year. The contact center will also carry out a survey every other year in which citizens are specifically requested to respond to their satisfaction with the level of transparency of the VAT administration. The VAT wing will also adopt a proactive disclosure policy and ensure compliance with the Right to Information Act, 2009.

Monitoring and Evaluation

72. The Program will require special monitoring arrangements for indicators related to the milestones in the development of and then the pace of deployment of the new Integrated VAT Management System. Since the development of management systems is at the heart of this operation, many of the results indicators will be produced by these new systems once deployed. System-generated reports from headquarters will be able to identify for example: the number of tax payers; the percentage of taxpayers using electronic services as well as the volume of taxes collected electronically.

73. The ERD is responsible for overall reporting to the World Bank on the program results and performance of the results framework and DLIs. The NBR will be responsible for monitoring the results and preparing monitoring reports on progress against results once a year covering a period of one calendar semester; and delivering these reports to the World Bank within one month. In the first year it has been agreed that the World Bank will hire the third party verification entity and a terms of reference has been agreed. The ERD is responsible for hiring the independent verification entity and ensuring the twice-yearly verification of the disbursement linked indicators from year 2 to the end of the program and reports are delivered to the Bank, NBR and ERD simultaneously. The NBR will monitor the DLIs and furnish all necessary information to the independent verification entity. Twice a year is recommended for the DLIs so that there can be close and timely observation of whether there is a slowing of the pace of the reform, and since the plan is complex and fast-paced to allow for slippage within a fiscal year, but still achieve the disbursements. The ERD will contract an independent third party auditor for the verification of all DLI results prior to disbursement. The Terms of Reference and the procurement process for engaging the independent third party will be agreed with the Bank. The independent third party auditor reports will be commissioned by the ERD and the reports will be shared with the World Bank, the ERD, the NBR and the Economic Relations Division of the Ministry of Finance simultaneously, and neither the Bank nor the Government can modify such reports except for factual errors. For disbursement purposes, the Bank will then review the reports and retains the right to make the final decision whether DLIs have been achieved or not.

74. The ERD will also support the third party in developing and implementing the verification protocols for the DLIs. The program envisages building capacity of the ERD for this new function. This in turn will have then the potential to further develop a results-based focus to performance management in the public sector, as per its mandate.

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Annex 5. Summary Fiduciary Systems Assessment

1. In accordance with the Bank’s operational policy 9.0 an Integrated Fiduciary Systems Assessment (IFSA) was carried out to determine whether the fiduciary systems pertaining to the Program provide reasonable assurances that the Program funds will be used for their intended purpose. The IFSA comprised an assessment of the fiduciary risks relating to: (a) procurement; (b) financial management; and (c) governance (including fraud and corruption risks) of the implementing agency (the VAT Wing of NBR) which account for 95 percent of the Bank-supported Program financing over the next five years. An additional 5 percent of funds will be spent through the ERD as the coordinating agency and the agency responsible for hiring the third party entity for independent verification and reporting to the World Bank. For disbursement purposes, the Bank retains the right to make the final decision whether DLIs have been achieved or not. The conclusion of the IFSA is that the overall fiduciary framework is “high” risk, but with risk mitigating measures, it is adequate to support Program implementation and to achieve the desired results.

2. Funding for the Program will be provided through the government’s annual development budget and the Program funds will flow through the treasury system. The program expenditure framework estimates a total program expenditure of US$73 million over FY2014-18. IDA resources for the Program under the proposed operation will be US$60 million.

Budgeting and Planning

3. The PforR Bank operation will provide financial support through the government’s development budget that will be accounted towards the VAT Improvement Program and identified as IDA financed (as opposed to government or sector program financing which will be accounted for separately). The total budget for the Program over the next five years has already been approved, and will be presented in the government’s development budget (the Annual Development Plan) at the time of the 2013/14 supplementary budget. The VAT program was already approved by the Prime Minister-chaired project approval committee.24 The expenditure framework for the program is shown in Table 14 below.

24 The Development Project proposal/proforma (DPP) on Value Added Tax and Supplementary Duty Act, 2012 Implementation Project; known as VAT On-line was approved in October 2013.

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Table 14: Expenditure Framework, Consolidated Program Expenditures, US$ millions 2012/3-2019/20 Classification Sub-

category 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Total

GoB Capital Furniture 2.79 2.79

IT hardware

0.17 0.17

Vehicles 0.18 0.01 0.01 0.01 0.01 0.24

Goods and Services

Goods 0.00 4.20 0.70 0.26 0.26 5.43

Office Refurbish-ment

3.09 3.09

Contingency Price 0.01 0.82 0.06 0.02 0.02 0.94

Physical 0.00 0.21 0.01 0.01 0.01 0.23

Subtotal 0.21 11.29 0.79 0.30 0.30 12.89

IDA Capital Furniture 0.00 0.00

generators 1.67 1.67

IT hardware

3.97 2.32 0.75 0.33 7.38

IT software 2.70 13.31 2.93 0.05 18.98

Goods and Services

Consulting 0.57 2.29 1.14 4.00

Other goods

0.91 0.10 1.01

IT services 1.50 3.65 2.86 2.86 2.86 13.71

Training 0.50 4.25 0.25 5.00

Contingency Price 0.42 2.40 0.77 0.29 0.25 4.14

physical 0.11 0.60 0.19 0.07 0.06 1.04

Subtotal 5.80 33.05 10.56 4.01 3.50 56.93

NBR expenditures 6.00 44.34 11.35 4.32 3.81 69.82

ERD and ACC 0.95 0.50 0.50 0.50 0.50 0.00 2.95

Cabinet Division PPA 0.05 0.05

Total 0.05 6.00 45.29 11.85 4.82 4.31 0.50 0.00 72.

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4. The government has a well-defined budget approval process; which is based on a development budget and a separate revenue budget. As yet there is no integrated budgeting process. The revenue and the development budgets both include capital and recurrent expenditures. The development budget typically includes development projects; both those financed by the government and also those financed by the government; which are typically seen as expenditure programs with a finite financing term, and which constitute either technical assistance; or capital investments. There is a medium term fiscal framework that is currently developed in the context of the IMF program. There is also a medium term budget framework which has been rolled out to line Ministries which sets a 5-year ceiling on the revenue-budget; and this has now been institutionalized in all 60 line ministries. There is no medium-term framework brought together for the development budget; but development projects are typically approved for multiple years. The development program has therefore been treated in the budget much like a development project. It is clear that during the course of the program implementation, the on-going revenue costs associated with the programs will need to be included in the recurrent costs of the revenue budget.

5. The VAT Wing of the NBR does not have much experience in budgeting and planning of development programs. This needs to be mitigated against with strong support from the Bank team, as well as mitigated against by the technical assistance support already being provided to the VAT by the IFC and the IMF resident advisers.

Budget Execution

6. While delayed fund releases from treasury are possible if the spending Ministry/Agency is unable to send their accounts statements and utilization reports to the Finance Division on time; there is typically no such delay occurring for the implementing agencies. The release of resources to the implementing agencies through the government budget is typically on time in the first two quarters of the fiscal year. However, since line Ministries need to send accounts statements and fund utilization reports to the Finance Division of the Ministry of Finance by the 15th and 30th of every month, this can lead to delays in fund releases, if the submission is not timely. However, delay in release of funds is not anticipated for the VAT wing of NBR; since NBR is an integral part of the Ministry of Finance. Typically, development programs and projects have faced delays in implementation in part due to fund release issues; part reporting requirements to financiers and also due to procurement procedures for capital investments, which is generally a more typical category of expenditures in the development budget.

7. To mitigate against the risk that funding for this program is unpredictable, the Project Director of the Program Implementation Unit in NBR will capture actual expenditure data on a systematic and regular basis in close coordination with the concerned Chief Accounts Officer (CAO) and will be responsible for reporting in accordance with the fund release requirements of the Ministry of Finance and the program as a whole. This will enable the Project Director to prepare timely and accurate fund utilization reports. An additional staff from the office of Comptroller General of Accounts will be recruited in the VAT implementation team who will maintain close liaison with the MOF for ensuring that fund release processes are handled in a timely manner in conformity with the requirement of the government and that meet the timeline for fund disbursement arrangement of the program.

8. Flow of Funds: IDA funds will be disbursed in accordance with the agreed disbursement arrangements to the Treasury Single Account maintained with the Central Bank. The

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government should allocate sufficient funds to VAT program account and ERD account. The funds in VAT program account and ERD account will be used to support program activities to be implemented by NBR and ERD. The Project Directors in NBR and ERD are responsible for operation of the two accounts.

9. Internal Controls and Internal Audit: Internal audit function is very nascent in Bangladesh; a separate cadre of internal auditors does not exist. There are internal audit cells in line ministries which conduct routine transaction and compliance testing but they do not employ modern internal audit techniques and methodology. The internal audit follow-up process is also not tracked, monitored nor acted upon by senior management.

10. Financial procedures, rules and regulations are generally well defined and issued through executive orders. Other forms of internal controls include “compliance with general financial rules and treasury rules” during pre-audit processes, in other words at the point of payment. Since the passage of the Public Money and Budget Management Act in 2009, two rules relating to the Act have been prepared: (i) Financial Reporting under the Medium-term Budget Framework, outlining the responsibilities of chief accounts officers in line ministries and (ii) Constitution of Budget Management Wings in all line ministries and divisions to prepare and implement the Medium-term Budget Frameworks.

11. A strategy and manual for internal audit has been developed under the public financial management reform program, which is awaiting government approval. The draft strategy recognizes the need to the separate internal audit function from the existing expenditure control wing, and considers three options: a large scale modernization project for all line ministries, developing internal auditors in a group of ministries, or developing internal auditors in the Finance Division. In the case of NBR, the expenditure control wing of the Ministry of Finance will conduct periodic internal audits. The key findings of the internal audit together with management actions will be shared with the Bank within one month from the conclusion of each internal audit.

12. Accounting and Reporting: Delays in compiling information on actual expenditures is considered another weak area which may constrain NBR’s ability to monitor and report on the progress of the program and to intervene and facilitate trouble shooting. The availability of information on program expenditure is critical for the following purposes: (a) preparation of the fund utilization report when requesting fund release from the Ministry of Finance (b) completion and verification of the fiduciary action in DLI6 and (iii) to undertake the annual audit. This would be addressed by requiring that the Project Director in NBR provide regular reports to the Internal Resources Division, certifying that the financial information is adequate and correct. The Project Director will work with the CAO and Accountant in the VAT implementation team well ahead of reports becoming due for ensuring that there is no delay encountered as far as reporting of program expenditure is concerned.

13. Fixed Assets Management: There is no system for managing the fixed assets typically procured as “capital” expenditures. Some ‘stores management’ regulations are in place, specifying the process for recording some fixed assets, but there is no systematic approach to the reporting of capital expenditures or understanding of the recording, handling, disposal, accounting treatment and overall management of fixed assets. Regulations such as those in the Ministry of Finance’s Internal Control Manual stipulate that asset registers are to be established and maintained but those are not followed in practice and no auditing of assets is undertaken

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across the government. Purchasing Rules do not identify assets and all purchase information is held in Stock Registers since this is compulsory under the Purchasing Rules, but assets are not identified as such. Such clerical records are unsuitable for use with a modern asset management system which requires on-line access to accurate and up-to-date information on assets.

14. Use of a large number of fixed assets in the Program is a definite risk area as a large number of products like air conditioners, servers, generators for the NBR components of the Program are planned to be procured. It is proposed, and agreed that a fixed asset tracking software should be included in the program scope for the VAT Wing so that NBR is able to track where the assets have been installed. Program Action Plan includes this as capacity building activity which will be implemented within 1 year of program effectiveness.

15. Program Audit and follow up Mechanism: The annual audit of the program requires standardization in the country system. Three potential risk areas include (i) involvement of three audit directorates for audit of the program because of expenditure category and use of treasury system; (ii) the program may be treated as a fully GoB funded project and lose priority in the annual audit process since funds will be channeled through the Treasury Single Accunt of the government; and (iii) poor follow up of audit findings.

The risk mitigation and capacity building measures include:

a. As this PforR operation will fully use country systems, the audit of the program will be

carried out by the Comptroller and Auditor General (OCAG). The OCAG is considered independent of the executive and accepted by the Bank as an independent auditor for Bank funded projects.

b. An agreement has been reached that the OCAG will entrust the responsibility for single

program audit to Foreign Aided Project Audit Directorate (FAPAD). A Terms of Reference, covering both financial and program performance including major procurement will be agreed upon within 4 months of effectiveness of the program. The VAT implementation team in consultation with FAPAD will prepare the Terms of Reference and share a copy with the Bank.

c. Within 4 months of program effectiveness, IRD of NBR will constitute and operationalize the audit Committee which will be responsible for follow up of audit objections and to facilitate resolution of significant observations.

d. Program audit will cover both parts of the program implemented by NBR and ERD. The auditor will be required to express an opinion on the program financial statement in accordance with international standards of auditing and submit the report within six months of the end of the fiscal year. In addition, the auditor is required to provide a detailed management letter containing auditor observations of the internal controls and compliance with financial covenants in the Financing Agreement.

e. The OCAG will nominate a group of auditors who will be trained on specific features of the

program and will be responsible for audit throughout the program implementation.

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f. Audit reports will be shared with the Bank and NBR and ERD within six months of the end of the fiscal year. The Bank will communicate to the Recipient on the reported significant financial irregularities in the audit report within 15 days of the receipt of the audit report. The IRD will coordinate with NBR for audit follow up and ensure that remedies are implemented within an agreed time frame. ERD and NBR will communicate directly with the Bank in respect of audit follow up issues. Significant audit findings should be resolved before commencement of the next annual audit. The resolution of significant audit findings within 6 months of receiving the audit report will result in the achievement of DLI 6.

g. The annual audit will take into account the DLI verification report for ensuring that program expenditure supports the findings with respect to the results and confirms funds were spent for the purpose intended.

16. Parliamentary Oversight: The Parliament or legislature’s oversight of public accounts in the form of ‘ex-post’ scrutiny is carried out through a review of the audit reports on the executive branch. The review is carried out mainly by the Public Accounts Committee (PAC). Previously a large backlog of audit reports awaiting review by the PAC had built up. However, over the years, there has been substantive progress in PAC’s hearings on OCAG reports. PAC’s review of audit reports has, as a result, become fairly up to date. Thus, statutory parliamentary oversight of the audit findings of the Program is not expected to be an area of major concern.

17. Based on the fiduciary context and assessment, the overall fiduciary risk for the Program is high. The program will address fiduciary risks and other capacity gaps in various ways. The government has agreed to undertake a set of actions summarized in Table 15 in order to improve program execution and achieve program results. The government commitment to implement all the actions has been confirmed. Implementation of the actions which are to address both fiduciary risk and improve capacity will be systematically monitored by the Bank and the ERD during implementation support missions.

Procurement

18. There is a sound legal and regulatory framework for public procurement. The legal and regulatory framework for the Program is governed by the Public Procurement Act, 2006 and Public Procurement Rules, 2008. These are generally found to be sound and consistent with good public procurement principles. For example, in line with the provisions of the Act and the Rules, the Central Procurement Technical Unit (CPTU) has issued standard bidding documents, and request for proposals (RFPs) for goods, works and services. These standard bidding documents contain all required internationally accepted provisions. All three Program implementing agencies are already using these standard documents for government funded procurements.

19. The procurement of ICT equipment does not require the use of specific bidding documents, unlike many international and national public procurement agencies that have seen the need to provide these. The CPTU has not issued any standard or sample bidding documents specific to ICT procurements. However, the Public Procurement Rules allow for specific documents to be used for specialist procurements. As a mitigating measure to manage modified risks involved with the large ICT procurement (especially the large software procurement under the NBR VAT program); it has been agreed that VAT Wing will use custom ICT bidding documents; which are consistent with the best international practice for ICT procurements. The

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bidding document of the COTS has been written with the strong support of technical advisory inputs provided by a technical team from international consultants. Furthermore, as a condition under the DLI 1 (VAT implementation stays on track) the high value procurement processes have been agreed with the Bank; including the terms of reference of the bid evaluation committee. For all high value IT procurements, four out of seven representatives of the bid evaluation committee will be independent of the agency; two of which will come from local institutions (the Bangladesh University of Engineering and technology and the Bangladesh Computer Center) and two international experts. Bid evaluation committees for the other procurements will have at least five members with two experts from outside the procuring entity, who have a proven track record and experience in procurement. Depending on the type of procurement such experts will be either from public offices and/or from professional bodies, or individuals of known probity. Individual consultants and/or representatives of consulting firms may participate as members of the bid evaluation committees.

20. Procurement Processing, e-Procurement and Approval Process: The Government issued in October 2004 the Public Procurement Processing and Approval Process for streamlining all public procurements covered under the Public Procurement Regulations, 2003. The Process was subsequently embodied in Public Procurement Rules, 2008 and it specifies procurement processing and approving entities with respective time-lines for different types and magnitudes of procurement. Section 65 of the Public Procurement Act and Rule 128 of the Rules contain the provisions for e-Government Procurement.

21. NBR’s weaknesses with regard to procurement are the following:

a) Lack of trained procurement staff: NBR does not have a separate procuring unit, and does not have procurement-trained personnel to conduct its procurement operations. It procured ICT products on a small number of occasions in the past with long intervals between one instance and another. The ICT equipment belonged to the higher technological levels of their time, and those were procured for special-purpose use in tariff and tax administration.

b) Inadequate capacity to prepare technical specification for IT product and to certify that

the supplied IT products are as per agreed technical specifications: All the above procurements took place under donor funded projects, and there were inputs from IT consultants while preparing the specifications. However in certain instances the procured goods could not be put to use and the reason for failure was generally attributed at the time to the lack of capacity in NBR or its related agencies to commission and/or operate the system.

c) Inadequate capacity to manage complex high value IT procurement: Proposed program

has one complex high value IT system procurement (COTS Procurement). NBR has no experience to manage such complex procurement; it has limited capacity to procure and implement high value complex IT procurements.

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22. Given the shortfall in in-house capacity and in past performance of the implementing agency, there is a high procurement risk to the program. To enhance the capacity following actions have been agreed with NBR:

a. Form a procurement core team (minimum three people) in NBR to conduct procurements under this subprogram. The core team members will receive procurement certification training arranged by Central Procurement Technical Unit (CPTU).

b. Prepare or review the technical specifications for IT procurements by a qualified international IT technical expert

c. Form seven member bid evaluation committees for high value IT procurements with two international experts, one expert from the Bangladesh Computer Council and one expert from the Bangladesh University of Engineering and Technology.

d. Use electronic government procurement (e-GP) for submission of tender electronically. e. Provide report on key procurement performance indicator using national procurement

monitoring system named PROMIS developed and maintained by CPTU f. Establish a system for handling complaints and a database for recording, monitoring and

follow up on all procurement complaints.

23. Other procurement mitigation measures are part of DLI 1 and DLI 6.

24. Compliance with all of the fiduciary risks mitigating aspects will be leveraged by a separate DLI of US$5 million. All measures proposed will need to have been achieved for the DLI 6 to be triggered.

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Table 15: Summary of Fiduciary Actions to be Undertaken Actions

Linked to DLI

Timeframe Responsibility Verification

Form a 7 member tender evaluation committee for IT procurements with at least one expert from the Bangladesh Computer Council and one from the Bangladesh University of Engineering and Technology and 2 international experts for high value procurements (more than US$ 2 million).

× Within 1 month of program

effectiveness

NBR Notification and independent verification of DLI 1.1 and 1.2 as “agreed procurement process”

Install a fixed asset tracking software to record, track and manage assets procured under the program in VAT Wing of NBR, and train staff in its use.

Within 1 year of program

effectiveness

NBR Action Plan. Procurement Process and Completion Plan submitted.

Provide report on key procurement performance indicator using national procurement monitoring system named PROMIS developed and maintained by CPTU.

Within 12 months of program

effectiveness

NBR Action Plan. Notification and independent verification

To facilitate reporting and monitoring of the disposition of Fraud and Corruption complaints, the ERD will collate all such complaints, and compile these into reports that will be provided to the Bank every six months, based on a format being agreed with the Bank.


effectiveness

NBR, ERD Action Plan. Notification and independent verification

DLI-linked Actions

Integrated VAT Tax Administration System (COTS) Software vendor selected by NBR through agreed procurement process. That is 4 independent members of the tender evaluation committee; 2 of which should be international experts; modified government tender documents for IT procurements and international competitive bidding with agreed Terms of Reference for the bid evaluation committee.**

DLI 1.1.1

Vendor’s for contact center, processing center and other internationally procured IT infrastructure under the program selected through agreed procurement process.

DLI 1.1

Project Management Consultancy vendor selected through agreed procurement process.

DLI 1.2

National e-GP system used for tendering of the national competitive bidding contracts under the program as follows: 1st Year at least 25%, 2nd year at least 50% and rest of the years at least 75%.

DLI 6

From year 2: Resolve all significant audit findings within 6 months. DLI 6

Prepare and submit quarterly fund utilization reports in the specified format to Finance Division and complete fund release processes after completion of each quarter.

DLI 6

Note: ** The NBR will prepare and officially issue a detailed Terms of Reference for the Bid Evaluation Committee. The Terms of Reference shall include the following provisions: (i) keeping the bids in safe custody at all times with access to Committee members only; (ii) conducting evaluation of bids by the Committee members themselves without delegating any task to junior or other staff under any circumstance; (iii) engaging all Committee members on a full-time basis at an isolated location (very similar to sequestering) until the evaluation is complete and the bid evaluation report is prepared, finalized, and signed; (iv) carrying of bids or copies of evaluation-related materials outside the specified office location (venue of evaluation) by any Committee member or any official will be strictly prohibited; (v) declaration of impartiality by each Committee member as per a prescribed format that will be attached to the Bid Evaluation Report; (vi) submission of the Bid Evaluation Report in a sealed envelope by the Chair of the Committee directly to the approving authority, without any tier in between.

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Governance

25. The prevalence and public perception of corruption in Bangladesh generally remains high. Transparency International’s Corruption Perception Index (CPI) 2013 of 177 countries ranked Bangladesh at 136th indicating a high level of perception of corruption. Some of the perception problems may also affect the Program and the procurement processes. In the case of the NBR there has been little high-level procurements undertaken, and here the concern is far more due to the capacity of the staff (a referred to in the section above).

26. The Anti-Corruption Commission (ACC) as the primary anti-corruption agency in Bangladesh remains institutionally and operationally challenged to operate under its mandate. Bangladesh has anti-corruption, anti-money laundering and mutual legal assistance legislation in place, and has also ratified the United Nations Convention Against Corruption in 2007.25 These laws are however still not meeting international standards and best practices, and need to be strengthened. Bangladesh established an ACC which is endowed with significant formal independence in investigating and prosecuting corruption; and has some financial independence with the recent ruling by the Minister of Finance and the Bangladesh Bank that the ACC could retain recovered stolen assets. Under the 2008 caretaker government, the ACC had played an active role in prosecuting cases against a large number of politicians and bureaucrats, including the leaders of the country’s main political parties. A proposed amendment to the Act was approved by the Parliament in November 2013, but was subsequently declared “illegal” and “unconstitutional” by the High Court in January 2014. (The amendment had included some changes which enhanced ACC’s standing and some of which weakened its independence, the most damaging change as assessed by Transparency International Bangladesh was the requirement that ACC needed to obtain approval from the executive before proceeding with presenting cases before the judiciary against high-level officials).

27. The ACC records indicate a high level of investigative activity. In 2012 it had 1,520 active investigative cases, had received close to 10,000 complaints, and opened inquiries in 1,013 of these, while referring 418 to the relevant line ministry/agency for further investigation, and launched a first investigative report on 521. Meanwhile, also in 2012, it issued 382 final reports, and had 2,016 cases under trial – 411 cases were “stayed” based on an order of the higher court; while it managed 42 convictions. There were 90 cases that resulted in acquittal. Its activities in 2013 increased slightly, as it gathered a marginally higher number of complaints, at 10,034, and lodged a higher number of first investigative reports, 550, as well as a higher number of final reports, 409. But ACC was managing a lower number of cases, compared to 2012, at 1,100. Even so, it pursued a higher number of cases at trial, at 2,380, achieved a higher number of convictions, 67, but saw a higher number of acquittals also, 116.

28. The judicial system in Bangladesh suffers from a significant lack of resources and is also handicapped by a backlog of cases. Enforcement of anti-corruption laws and penalties is perceived to be weak or ineffective.

25 In June 2012, Bangladesh completed its first UNCAC peer review process, which reviewed chapters III (Criminalization and Law Enforcement) and IV (International Cooperation). The next ‘peer review’ of the UNCAC process for Bangladesh focuses on Chapters II (Preventive Measures) and V (Asset Recovery). The review will be undertaken in 2014/15. In June 2012 ACC and the Ministry of Law requested assistance from the German Agency for International Cooperation (GIZ) to prepare this up-coming review, and improve compliance with Chapters II and V UNCAC. GIZ approached the World Bank to support this assistance because of its extensive experience of assisting countries with their efforts to combat money laundering and recovering the proceeds of corruption. As part of this program – which has been complemented by GIZ assistance on the other areas of the relevant UNCAC Chapters, the World Bank designed a NLTA to support use of anti-money laundering (AML) tools to combat corruption and bolster the recovering of stolen assets.

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29. The ACC does not have a dedicated prosecution unit even though section 33 of the ACC Act, 2004 states that the commission shall have its own prosecution unit. However, a panel has been formed by ACC consisting eminent lawyers of the country (on retention) who are required to serve ACC on a case-by-case basis. Bangladesh criminal justice system also lacks a career prosecution service. All prosecutors are hired externally on a contract basis on the basis of their qualifications. Engaging with prosecution services and therefore with the criminal justice system is in itself creates risk, and even more so in a context where there is a lack of strong, career based prosecution services, with operational independence. These issues, coupled with the political issues affecting the fight against corruption in Bangladesh, makes the risk profile of the program high.

30. The ACC is working towards preparing a 5-year Strategic Plan which would contain both a personnel and a training strategy; developing communications and advocacy strategy for corruption prevention and anti-money laundering. A Strategic Planning Working Group headed by the Chairman of the ACC has been recently established. A World Bank technical assistance program: “Building Capacity for Compliance with Anti-Corruption Standards using Anti-Money Laundering Tools” is currently assisting the ACC with developing a communications strategy on anti-corruption and anti-money laundering with a modality for its implementation under ACC’s 5-year strategic plan. The first phase of the work has led the ACC to commit and nominate five officials to work with the World Bank team in developing the communication strategy. The ACC is receiving technical assistance from the German Development Agency. The World Bank and the German Development Agency are working in close cooperation to support the ACC, and in particular to improve the ACC’s own record on transparency and improving its website.

31. Under the Program's legal documents, the ERD and NBR are formally committed to the obligations under the Anti-Corruption Guidelines for Program-for-Results operations (ACG). The government has agreed to implement the Program in accordance with the ACG as follows:

a) Debarment list of firms and individuals: Companies and individuals debarred by the Bank and Central Procurement Technical Unit (CPTU) will be posted and updated regularly on the CPTU and the ERD and NBR websites with a link to the current list available on the World Bank external website. This will include the list of temporarily suspended firms and individuals. The single large IT procurement for NBR (estimated to be over US $10 million) will state that the tender will comply with ACG on the procurement bidding documents. b) Sharing information on fraud and corruption allegations and investigations with the Bank: The ERD has agreed to report any credible and material fraud-and-corruption allegations regarding the Program as part of the overall program reporting requirements to the Bank, and will bring all sources of information together into one report from the Anti-Corruption Commission, the National Board of Revenue and the Comptroller and Auditor General. The Bank will inform the ERD about similar allegations that it receives. The ERD has also agreed that any allegation of fraud and corruption will be investigated as per existing law and persons or entities debarred or suspended by the Bank will not be awarded any contract under the Program during the debarment or suspension period. c) Investigation of fraud and corruption allegations: For the program, fraud and corruption complaints may be channeled through updated and current audit reports of CAG, complaints made to the Internal Resources Division as well as to the ACC, and from the procurement complaints system being developed.

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32. Under the Bangladesh Civil Servants Conduct Rules of 1979 and Disciplinary and Appeal Rules of 1985 for civil servants the primary responsibility for investigation of corruption is with the departmental inquiry committee that is operational in each ministry. The law also permits the Anti-Corruption Commission (ACC) to investigate corruption allegations that it chooses to.

33. The Bank’s right to investigate allegations regarding the Program's activities and expenditures, and the related access to needed persons, information, and documents will be observed, and the Bank will initiate investigation at any point it considers necessary. The ERD and the Bank have agreed, depending upon the nature of fraud and corruption, to pursue a range of remedies within an agreed time frame.

34. For the Program, given the range of possible types of fraud and corruption risk, all key agencies agree it would be important to clarify roles and responsibilities for the receipt, monitoring, and handling of fraud and corruption complaints until the issue is resolved. The agreed modalities are: ERD will write to the Office of the Comptroller and Auditor General, ACC and NBR on a quarterly basis to request them to share information against the agreed template on issues of fraud and corruption. The entities will respond within 10 business days to ERD. The ERD will deliver a report on fraud and corruption issues under the Program to the Bank every 6 months, not later than 31 December and 30 June annually. ERD will maintain a database of the information provided and will ensure that access to this database is restricted to authorized personnel only. ERD will use this database to formulate the reports provided to the Bank every 6 months.

35. To both assist in the roll-out of the VAT program, and to build program management capacity in NBR, an international management consultant firm with deep experience in helping national agencies roll-out VAT programs is being hired. The bid evaluation committee overseeing procurement of this contract will screen closely for such experience and will require the winning bidder to obtain prior approval from the Project Director, VAT Wing and the World Bank before key staff identified in the bid submitted can be changed during the contract’s execution. Technical assistance is also to be provided to the ACC to strengthen its capacity to manage case files and develop an electronic filing system.

36. Other governance and accountability mechanisms include: (a) the Comptroller and Auditor General’s annual audit, where the detection of fraud and corruption and holding the ministry or department accountable is part of the audit process; (b) the Right to Information Act, which requires any public entity to proactively disclose information of general interest and to respond to requests for information within a specified time, or face a judicial investigation and possible fine; (c) the procurement grievance redress system, which records and responds to complaints relating to a specific sector; and (d) the requirement for the DLI verification to be undertaken by an independent entity.

37. The conclusion of the Fiduciary System Assessment is that the systems to be put in place in the Program are expected to provide reasonable assurance that the financing proceeds will be used for their intended purposes, with due attention to the principles of economy, efficiency, transparency and accountability.

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Annex 6. Summary Environmental and Social Systems Assessment

1. World Bank staff and consultants conducted an Environmental and Social Systems Assessment (ESSA) for this Program, in line with requirements as stipulated in the operational policy 9.0 on Program for Results Financing. As per the guidelines, the ESSA was based on the scope and activities of the Program (summarized in Table 2) and the nature of the environmental and social context of implementation. The ESSA identifies the potential environmental and social effects of the Program and provides an assessment of the government’s capacity for effective environmental and social management and risk mitigation. Specific measures, if needed, to enhance environmental and social management capacity and performance are identified and as agreed with the government included in the Program. 2. The ESSA was carried out at the Program level and drew on the Bank’s, development partners’ and government’s existing knowledge, as well as on analysis carried out during the preparation of the PforR operation and a national consultation with civil society groups and representatives in 7 regional locations. The information necessary to conduct the ESSA was gathered from:

a. Communication with government agencies and relevant stakeholders; b. Assessments relating to other Bank activities (e.g., investment lending projects in the

health and education sectors, country studies); c. Assessments undertaken by other development agencies, or other relevant national,

regional, or sectoral assessments or analyses; d. Consultations held with the National Board of Revenue and the ERD; e. Discussions with Task Team Leaders of various Bank-funded projects; f. Review of the relevant literature and data.

Environmental Systems Assessment

3. The ESSA reviewed the existing regulations and policies, their legal and practical applicability at the program level as well as the institutional capacity, and the effectiveness of implementation in practice. The Bangladesh environmental laws and policies are adequate for both protection and conservation of resources, although enforcement capacity needs to be improved significantly. The assessment highlights that the Program may generate limited e-waste and there are comprehensive laws and policies for management of electronic waste in place. These are:

• The government’s Environment Conservation Rules, 1997 amended 2003, promulgated under the Environment Conservation Act, 1995 sets environmental quality standards, requirement for and procedures to obtain Environmental Clearance, and for IEE/EIA according to categories of industrial and other development interventions.

• An SRO was issued in 2006 (SRO No. 175-Act/2006 dated August 29, 2006) on collection and recycling of used/non-functional batteries for conservation of environment, improving environmental standard and control and prevention of environmental pollution. According to this amendment, no recycling of battery will be permitted without environmental clearance of DOE. It further restricts unsafe disposal of used batteries or any parts of used battery in open place, water bodies, waste bins etc. All used

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batteries must be sent to the DOE approved battery recycling industry at earliest convenience.

• Bangladesh Labor Act, 2006 recognizes occupational rights and safety of factory workers, sets safety standards for use of explosive and inflammable material, and other related services at work place.

• The national ICT policy sets regulatory standards to control dumping of ICT devices to prevent electronic waste. The policy establishes safe disposal and recycling mechanisms and encourages building plants for recycling old PCs and ICT accessories.

• An SRO of Bangladesh government was issued on disposal procedure on expired IT equipment. According to the SRO, average lifetime of ICT equipment is 6 years including the warranty period. After that this e-waste can be auctioned as per rule or donated to the other training institute or other agencies or disposed with the guidance of Bangladesh Computer Council under the relevant law

• Electrical and Electronic Waste (Management and Handling) Rules is under preparation to incorporate E-waste management issues and proper management of E-waste.

4. In terms of the environmental risks, the activities planned under the proposed Program do not include any physical interventions such as construction, rehabilitation or renovation works. Hence, these activities are environmentally benign and will not have any negative environmental effects or cause any loss or conversion of natural habitats, any changes in land or resource use, or any environmental pollution.

5. In light of this assessment, the planned Program activities pose no risk to the environment. Recommendations to improve environmental management in the context of the Program are summarized in the last section of this annex. Social Systems Assessment

6. The Program aims to improve the performance and transparency of tax management so that it leads to enhanced compliance and improved revenue mobilization. The social management assessment shows that the Program operates within an adequate legal and regulatory framework for addressing the types of social issues that are likely to emerge in the Program’s activities.

7. The legal and regulatory framework analyzed includes the National legal and policy framework of the National Board of Revenue Modernization Plan 2011-2016, the new VAT Law 2012, the National Integrity Strategy of 2009 endorsed by Cabinet in 2012, the Digital Bangladesh policy 2009 and the Right to Information Act, 2009. The ESSA finds the Program is consistent with the core principles of the Bank’s Operational Policy 9.0. There will be no land requirement and loss of access to natural resources as a result of program activities, and the program does not envisage any investment that will have any bearing on tribal peoples and other vulnerable groups. The program will support the acquisition of a new information technology system, based on commercial-off the shelf (COTS) software, which will support core VAT processes-Registration, e-filing of return, e-payment of VAT and supplementary duty, and electronic processing of returns. The nature of investment for automation of systems to improve taxation system will not lead to any social risk.

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8. The Program will benefit the management and staff of the VAT Wing at NBR and the VAT tax filers and taxpayers from improved tax services particularly the ability to register, file and pay on line. Weak capacity of service providers on usage of technology and behavior pattern is likely to have an impact on change processes. NBR has developed a human resource development strategy which includes effective communication and change management strategy. For the consumers different education and communication tools are prepared to inform taxpayers about the operational procedures under the new VAT regime.

9. The Program incorporates certain measures to mitigate these social risks. These are outlined in the ESSA and capacity building plan and include: the development of training for those required to adopt automated systems for regular business process and data collection’ sensitivity training for those responsible for disseminating the information and the development of a grievance redress mechanism under the ERD.

10. Overall risks associated with the program are “benign.” This rating is based on the fact that there is a change management plan envisioned under the program to face resistance of stakeholders to adopt the new tax management systems; and there is an agreed capacity building program. The establishment of a grievance redressal mechanism will be documented on NBR’s website and included in the terms of reference for the Contact Center.

Recommended Actions

11. Given that the Program activities are environmentally benign, the proposed actions to be undertaken by this Program are minimal. The one recommended action is to ensure adequate training of the ICT staff involved in the Program with the legal, policy and principles associated with sound e-waste management. Given the nature of the risks outlined, the ESSA proposes actions that are integrated into the Capacity Building Plan. Recommended capacity building actions are:

The program is designed to enhance transparency and accountability of tax management. In addition, following actions are proposed to strengthen the social management system:

• A change management plan will be developed that incentivizes the usage of technology for efficient management and training to NBR staff will be provided during the implementation of the program.

• The program will strengthen the existing system of contact point for complaint management. The complaints will be registered on-line on the web-portal of NBR. These complaints will be sent to responsible officers in the concerned department for addressing grievances within 15 days from the date of registration. In case, the complainant is not satisfied with the redressal, the complaint will be sent to the Joint Commissioner to be addressed within 15 days of receipt of the registered complaint. The contact point will be responsible for recoding ad tracking the complaint management system.

.

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Annex 7: Integrated Risk Assessment

BANGLADESH: VAT Improvement Program

1. PROGRAM RISKS 1.1 Technical Risk Rating: Substantial

Description: Functional specifications of the new integrated VAT administrative system may be far more complex and uncertain than envisioned and implementation of a complex IT system may encounter time delays and cost overruns.

Risk Management: International and local technical experts have been mobilized by the development partners (including IFC and IMF’s Fiscal Affairs Department) to assist in the development of the request for proposals for the integrated VAT administrative system to develop a well-developed requirements specification for the software vendor; and for a Program Management Consultancy firm to support the VAT implementation team and supplement their capacity to manage the vendor. The software vendor’s contract includes the requirement for the specification of hardware requirements. A technical team from World Bank, IMF and IFC has additionally provided advice on all aspects of the IT system, including the development of functional specifications and hardware requirements.

Resp: NBR Stage: Preparation Due Date : June, 2013

Status: Consultants hired

Description: Deficient power supply and Internet service erode user acceptance of new computerized systems and force frequent, complex and stressful return to paper-based processes. That said, several units in NBR have already launched new e-services and they have functioned well and were popular with taxpayers – such as the on-line registration for a Tax Identification Number and e-payment portal.

Risk Management: (i) a Service Level Agreement will be required from the provider of Internet connectivity services; (ii) adequate server capacity and power backup systems will be ensured to NBR and generators etc. are provided for in the program expenditure framework. These should be included in the terms of reference for the network and hardware and data center request for proposals.

Resp: NBR Stage: Implementation Due Date : Effectiveness

Status: Planned

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Description: Limited capacity to implement an ambitious VIP. The pressure to deliver on the complex computerization could shift the focus of the reform to the implementation of the system rather than other aspects such as the functional reorganization, transparency improvements and capacity building elements of the reform program which are also required for the results (in terms of higher revenues and transparency) to transpire.

Risk Management: The capacity of the program implementation team is to be assured by the minimum requirement of 15 project staff as specified in the PAP. The additional staffs required were recently hired and are in situ, and adequate staffing should remain throughout the program implementation (see the Capacity Building Plan). The terms of reference for the project management consultancy team will need to reflect the fact that managing the implementation of the IT system is only one aspect for program success. The already approved VIP lays down the proper sequencing of activities, resource requirements (financial and staffing) and technical advice, and the program provides for significant investments in training and capacity building programs. These other aspects are also emphasized in the results-based approach which are included in the results framework. Furthermore regular taxpayer satisfaction surveys will be undertaken to monitor the taxpayer’s support for, and benefits from the program and these are included in the PAP.

Resp: NBR Stage: Preparation/ Implementation

Due Date : Recurrent

Status: Staff in place, training plan under preparation

Description: Establishing a VAT-COTS as a stand-alone application could enhance silos in the tax administration.

Risk Management: to mitigate the risk of enhancing the silos and supporting the long term agenda of harmonization the following measures have been taken: (i) although VAT and Income Tax Wings are developing separate application software, they will share the same database platform “oracle.” This provision included in the VAT COTS Invitation to Tender document would facilitate integration between tax wings at the database level. (ii) The Chairman has approved the adoption of the use of the Taxpayer Identification Number as the single identifier for all taxpayers. (iii) Other initiatives such as shared data centers, contact centers, and processing centers, along with an integrated data warehouse, a common LTU are all integration initiatives that have already been

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discussed and will be on the agenda of both income and VAT tax wings. (iv)The recently established Technology Working Group is working on developing a long term Tax Harmonization Strategy, as well as identifying and establishing common approaches to IT matters across the wings, e.g. a common external face to taxpayers where they can register, file and pay. The adoption of the Technology Harmonization Strategy has been included in the Capacity Building Plan. A tax donor group was established in 2013 and is meeting on a bi-monthly basis to coordinate development partner support to the NBR modernization agenda to avoid entrenching silos.

Resp: NBR Stage: Preparation/ Implementation


Status: Working group established

1.2 Fiduciary Risk Rating: High

Description: NBR’s commitment to program implementation may erode if actual budget allocations and fund releases result in resource constraints.

Risk Management: Agreement with MoF to earmark 100% of funds for program implementation and to release in a timely manner the funds required for implementation. This shall be documented in the financing agreement. There is also agreement with the Finance Division and External Resources Division of the MoF to also utilize the request for a PforR fund advance of 25 percent for the purposes of achieving year 1 and 2 results. This will ensure sufficient resources are available to undertake the first year’s critical results – successful completion of the COTS vendor and PMC procurements.

Resp: NBR Stage: Preparation, Implementation

Due Date: Recurrent

Status: On-going

Description: Insufficient allocation of revenue budget to ensure long-term maintenance and

Risk Management: (i) There will need to be a provision by MoF of adequate revenue budget allocation for the technology maintenance and technical support as

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technical support of new technology and of high-skilled technical support team.

a condition of satisfactory rating of government commitment to program sustainability beyond the scope of the program, initially the technical support for the system is included in the RFP for the COTS system for the first 5 years after implementation; (ii) Institutionalization, including long-term funding mechanism, of a Software Development and support organization responsible for long-term improvement and support of open source application software developed under the program.

Resp: NBR Stage: Preparation, Implementation


Status: Initial technical support included in the program

Description: Information Technology Procurement plan is a very complex and ambitious one to be accomplished within the proposed timeline. Experience from other countries indicates that unexpected complexity, both technical and institutional/political, is likely to arise and can easily delay the IT package procurement.

Risk Management: To mitigate procurement and corruption risks related to the IT system, the RFP itself has been written with the strong support of technical advisory inputs provided by a technical team from the World Bank, IMF and the IFC. Second, the bidding documents were based on the World Bank’s own ICT bidding documents. Third the tender evaluation committee comprises four independent members: in addition to the representatives from Bangladesh University of Engineering and Technology and the Bangladesh Computer Center, two independent international experts have been nominated; one an international tax administration system specialist and one an international ICT procurement specialist. Fourth, the DLI for the “VAT implementation plan on track” specifies that the procurement process will follow these measures in order for the DLI to have been considered met; other disbursements under this DLI will not be triggered unless this is the case. Finally, this is a high value, and highly scrutinized procurement. Since the RFP being issued is also a benchmark of the IMF Extended Credit Facility and the successful completion of this process is central to the IMF program; there will be incredibly high stakes attached to ensuring that this procurement is carried out properly. All other RFPs for IT

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procurements will also be drafted with technical advisory support from the World Bank, IFC and IMF. Additionally, an experienced international procurement specialist will be hired to assist the NBR either individually or under the PMC to carry out the procurement plan. Finally within the technical assistance program of the ERD with a mandate to support “trouble shooting” this will include provision for technical expertise as required should any specific procurement challenges arise not already foreseen.

Resp: NBR, IDA Stage: Preparation, Implementation


Status: Evaluation committee included technical experts and submitted report

Description: There is a risk that the conditions for fund release may not be met to the satisfaction of MoF because NBR may not be able to provide fund utilization reports as required.

Risk Management: The risk is mitigated by the deputation of a financial management staff member to the project implementation unit with expertise to support the program manager to report in accordance with the fund release requirements of the Ministry of Finance and the program as a whole. The staff will maintain financial records, prepare reports to support fund release and send it to MoF. As per the PAP a focal person will also be in the ERD will maintain close liaison with the NBR for ensuring that fund release processes are handled in a timely manner and ensure that ERD can intervene to trouble-shoot if required in a fund release issue.

Resp: ERD, MoF, IDA

Stage: Preparation/ Implementation, Completion


Status:

Description: Delays in compilation of information on actual expenditure from NBR is considered

Risk Management: This would be mitigated by requiring that the program manager in NBR provide regular reports to their own line managers and copy to

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another potential area of FM risk which may constrain ERD’s ability to monitor and report on the progress of the program as a whole and intervene to facilitate trouble shooting

the ERD, certifying that the financial information they are receiving is adequate and correct. As per the PAP a focal person in the ERD will work with the program manager if required, well ahead of financial reports becoming due for ensuring that there is no delay encountered as far as reporting of program expenditure is concerned and to trouble-shoot in solving financial reporting requirements.

Resp: ERD, MoF, IDA



Status: On-going

Description: Annual audit of the program requires standardization in the country system. Three potential risk areas include (i) involvement of three audit directorates for audit of the Program because of expenditure category and use of treasury systems; (ii) the Program may lose priority in the annual audit process, since funds will be channeled through the consolidated fund of the government; and (iii) there may be poor follow up of audit findings.

Risk Management: i) The OCAG will entrust the responsibility for single program audit to the FAPAD. A Terms of Reference covering both financial and program performance including major procurement and audit methodology will be agreed with IDA before commencement of the program ii) the OCAG will nominate a group of auditors who will be trained on specific features of the program and will be responsible for audit throughout the program implementation period, iii) the audit report will be shared with the Bank within six months of the end of the fiscal year. The Bank will inform the respective ministries about reported financial irregularities in the audit report. The ERD will coordinate with the respective ministries for audit follow up and ensure that remedies are implemented within an agreed time frame, iv) Setting up of or activation of existing ministerial or departmental audit committees to follow up on audit issues and to facilitate timely action in respect of reported financial irregularities in the audit report. The audit committee in each implementing ministry will submit a summary of audit findings and management action to the Steering Committee or ERD for its onward sharing with the independent third party agency responsible for DLI verification.

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Resp: ERD Stage: Preparation/ Implementation, Completion


Status: Not yet prepared

Description:

i) Lack of procurement trained staff ii) Inadequate capacity to prepare technical specification for IT products and certify that the supplied IT products are as per agreed technical specifications iii) Inadequate capacity to manage complex high value IT procurement iv) No standard bidding document for complex IT procurement in national system. The Program include expenditures for high value IT contracts, but the estimated value of the contract (including price and physical contingencies) is below the threshold of US$20 million.

Risk Management:

i) Capacity Building for the implementing agency ii) Procurement monitoring: a computerized national procurement monitoring system named PROMIS will be used in implementing agency iii) The web based e-GP system will be used for the majority of national, competitive procurements.

iv) Bid evaluation committee- It is recommended that the Government will prepare a panel comprising of qualified persons including representatives from the Bangladesh Computer Council and the Bangladesh University of Engineering and Technology from whom external members of bid evaluation committees will be selected v) Preparation of specifications. It is recommended that (a) the procuring entities will involve two subject specialists – drawn either from the panel constituted from the bid evaluation committee or from a separate panel constituted for this purpose – in the process of preparing specifications for each contract

vi) Complaint handling mechanism: As per the Program Action Plan an internal system for handling procurement complaints and a database should be established for recording, monitoring and following up on all procurement complaints under the program in NBR.

Resp: ERD, MoF, IDA



Status: On-going

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Description: Unclear roles and responsibilities over the handling of complaints on fraud and corruption.

Risk Management: An improved process for filing of complaints is planned, including setting up a procurement-oriented complaints handling system, as well as overhauling the ACC website to standards set by Hong Kong SAR, China, Singapore and other internationally recognized sites. Given the possible range of fraud and corruption complaints from different areas to different institutions, the ERD will be responsible for collating complaints and issues concerning the Program from various sources (including the procurement complaints system, the ACC, audit reports and the Office of the Comptroller and Auditor-General). The ERD reports will include information regarding the status of the complaints, and those that remain unresolved will be kept in the reports until they are resolved. The reports will be shared with the Bank every 6 months, and is a key action under the Program Action Plan’s fiduciary actions. All key parties acknowledge that the Bank’s Anti-Corruption Guidelines, which are being made to bidders for major contracts to be undertaken under the Program. The Bank’s debarment list is also being applied during the procurement processes and the list will be updated regularly.

Resp: ERD, MoF, NBR,ACC, IDA

Stage: Implementation, Completion


Status: On-going

1.3 Environmental and Social Risks Rating Low

Description: The planned program activities are unlikely to be detrimental for the society and the environment. However, unplanned disposal of e-waste and lack of access to mobile phone network and internet will pose threat to the environment as well as the target population in the Program.

Risk Management: The Government will introduce complaint management system managed by the Contact Center and the program implementation team will undertake training on government policies associated with sound e-waste management system.

Resp: NBR

Stage: Implementation

Due Date: June 30,2015

Status: Included in TORS for contact center

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1.4 Disbursement-linked Indicator risks Rating: Medium

Description: Delays in achieving DLIs casts a bad light on implementing organizations, erodes commitment to the program objectives and raises tension with MoF from fiscal stress associated with delayed or non-disbursement of credit funds.

Risk Management: The proposed DLIs are not time-bound. That is, the Bank will disburse against achievement of results at any point during the implementation period. This provides flexibility and allows for any slipover. Also the Bank’s program end date (6 years) allows sufficient flexibility if results should slip into the next year of implementation.

Resp: ERD, IDA Stage: Preparation Due Date : Status: On-going

Description: Establishing baselines may be delayed if there is a delayed implementation of the IT system which is intended to be used to derive data for DLI’s in years 3-6.

Risk Management: The baseline measurement is included in the program action plan. Technical assistance will be sought from development partners, as well as included in the TORs for the project management consultancy team, to ensure there is a robust methodology used to establish baselines if the system-generated baseline is not available, as planned.

Resp: ERD, IDA Stage: Preparation Due Date : Status:On-going

OVERALL RISK RATING: Substantial

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Annex 8: Program Action Plan

Table 16: Program Action Plan Action description DLI Date Responsible

party Completion Measurement

Technical Carry out baseline measurement for: number of registered active VAT taxpayers; number of on-line e-filers; number of Large Taxpayer Unit on-line e-payments; as agreed with the Association.

× June 30 2016 NBR and IDA

Linked to DLIs 2, 3, and 4 TORs and/or methodology for determining the baseline is agreed with the Bank. Final report and data documenting measurement of baselines submitted.

Carry out independent taxpayer satisfaction survey.

× June 30, 2015 June 30, 2017 June 30, 2019

NBR and IFC

Survey data and final taxpayer satisfaction report submitted.

Hire the third party independent verification entity using a Terms of Reference and procurement process agreed with the Bank.

Within 6 months of

effectiveness

ERD Formal notification.

Fiduciary Form a 7 member bid evaluation committee for IT procurements with at least one expert from the Bangladesh Computer Council and one from the Bangladesh University of Engineering and Technology and 2 international experts for all internationally competitive IT procurements. The terms of reference for the tender evaluation committee to be agreed with the Bank.

× Within 1 month of program

effectiveness

NBR Formal notification of tender evaluation committee composition and agreed TORs. Verification of bid evaluation committee evaluation report and meeting minutes by independent verification entity. DLI 1.1.1 and 1.2.2 as “agreed procurement process”

Install a fixed asset tracking Within 1 year NBR Notification to the

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Action description DLI Date Responsible party

Completion Measurement

software to record, track and manage assets procured under the Program in VAT Wing of NBR, and train staff in its use.

of program effectiveness

Bank that software is being implemented.

Provide report on key procurement performance indicators using national procurement monitoring system named PROMIS developed and maintained by CPTU


effectiveness

NBR Notification and independent verification by third party verification entity.

To facilitate reporting and monitoring of the disposition of Fraud and Corruption complaints, the ERD will collate all such complaints, and compile these into reports that will be provided to the Bank every six months, based on a format agreed with the Bank. Appointment of a focal person within the ERD to trouble-shoot fund release, and program reporting issues including handling of complaints and serious financial irregularities. A Terms of Reference for the person will be agreed with the Bank.


effectiveness

NBR, ERD Notification and independent verification by third party verification entity.

Environmental and Social Electronic waste handling training undertaken by ICT and program implementation unit staff and proper record keeping of equipment purchased, reused and auctioned.

By June 2015 NBR Notification and independent verification by third party verification entity.

The contact center will be set up and will address complaints as per Annex 6. The complaints mechanism will be registered on-line on the web-portal of NBR.

By June 2015 NBR Web-portal operational, complaints tracked and quarterly reports submitted by third party verification entity.

In addition to the Program Action Plan, the NBR and ERD agreed to carry out a number of capacity building activities to mitigate against several of the risks identified in Annex 7 and to strengthen the implementation of the program and the results-based approach. These activities are shown in Table 17 below.

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Table 17: Capacity Building Plan

Action description Date Responsible party


Technical

Complete staffing of VAT Implementation team, ensure minimum of 15 staff working in the VAT Implementation Team for the duration of the program.

Within two months of

effectiveness.

Reviewed annually

NBR Allocation of staff to core posts in NBR who will work alongside the Project Management Consultancy staff.

Develop a change management plan for on-going training and sensitization.

Undertake change management training to sensitize at least 200 VAT tax officers on the introduction of the new VAT administration system; and the required behavioral changes when shifting to automated system.

By June 2015

NBR Notification and independent verification

Develop capacity building plan; training program, taxpayer outreach and communications plan (internal and external) and operational manuals for administrative processes – registration, processing, collection, non-filing, enforcement, taxpayer services and audit and grievance redressal and appeal procedures.

Develop a proactive disclosure and RTI compliance policy document endorsed by the Chairman, NBR, and subsequently implement the required changes to the

By December

2014

NBR Plans, Training Program, Manuals and Procedures submitted to the Bank. Proactive disclosure policy submitted to the Bank and implemented.

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website and office disclosures policy, and train officers in its use and application.

Carry out VAT compliance gap analysis and modeling to (a) establish a baseline for the VAT compliance gap and (b) support the project team as required.

Carry out study of disaggregated components of administrative and legal impacts on VAT revenue increases over the course of the program.

Carry out an estimate into the amount of revenue foregone due to exemptions and other treatments.

June 30, 2015

June 30, 2019

June 30, 2019

NBR and IDA

NBR and IDA

NBR and IDA

Report and data submitted.

Technology Harmonization Strategy Integration Plan produced by Technology Working Group, and approved by Chairman NBR, and implemented by VAT Wing.

By December

2014

NBR Plan submitted.

Fiduciary

Agree a standard terms of reference for the audit to be carried out by FAPAD.

A group of auditors to be identified and trained by the Bank in program audit.

Within 4 months of

effectiveness

NBR Terms of Reference submitted and independent verification

Reconstitute and operationalize the audit committee in IRD of the Ministry of Finance; which will be responsible for

Within 4 months of

NBR and Notification of Committee meetings and

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following up on significant audit irregularities and to facilitate the process to implement audit and other review recommendations.

program effectiveness

IRD Minutes; and independent verification

Form a procurement core team (minimum 3 people) in NBR to conduct procurements under this program. The core team members will undergo procurement certification training arranged by the Central Procurement Technical Unit (CPTU). Prepare a procurement training plan for procurement core team in staffs.


effectiveness

NBR and CPTU

Notification and attendance and certification records of CPTU, and independent verification. Procurement training plan submitted.

International technical expertise is used to prepare or review the technical specifications for all IT procurements.


effectiveness

NBR Notification and independent verification

Technical assistance capacity building program to be developed to strengthen ACC’s management of records and ability to keep and track cases electronically.


effectiveness

ACC and ERD

Notification and independent verification

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Annex 9: Implementation Support Plan

1. This annex describes how the Bank and other development partners will support implementation of the Program, with particular emphasis on: (a) reviewing implementation progress (including that of the Program Action Plan) and achievement of Program results and DLIs; (b) providing support for resolving emerging Program implementation issues and building institutional capacity; (c) monitoring the adequacy of systems performance and monitoring compliance with legal agreements; and (d) supporting the government in monitoring any changes in the risks. It includes an operation specific Strategy and Approach for Implementation Support, and an Implementation Support Plan.

2. The PforR Operation in Bangladesh will require considerable focused support from the World Bank Group team (IDA and IFC staff) particularly during the early stages. The main challenge will be to strengthen the capacity NBR to plan the program activities, conduct the related procurement processes (especially the IT procurements) and coordinate implementation; as well as liaising with the Income Tax Wing who will also be going through a similar modernization program to ensure the longer term objectives of harmonization remain on track. During the first twelve months, the IFC will continue to support the Program through the Bangladesh Investment Climate Trust Fund which will be used to provide technical assistance to NBR through local consultancy support for the capacity building, training needs and operational support. In addition, international tax systems experts will provide support to the VAT Implementation Team to prepare procurement documents and processes, to plan for Program activities and address the weaknesses identified during the detailed assessments. Finally, international experts will also be provided to support the Technology Working Group and the liaison with the Income Tax Wing and Customs automation and modernization programs.

3. Key to effective implementation support will be the sustained engagement on the ground. The fact that the World Bank South Asia public management unit is highly decentralized, with the task manager and the fiduciary teams based in Dhaka and the manager and other team members based in Delhi, will facilitate this engagement. The team will be backed by DC-based tax specialists with expertise from Latin America and Eastern Europe regions. In addition, the Dhaka IFC office has a dedicated staff engaged in the support of the NBR through the Trust Fund. Furthermore there is a close working relationship between the World Bank group and the IMF resident adviser. The first implementation mission will take place as soon as possible after effectiveness to provide direct feedback on the quality of Program plans and review progress made against the Program Action Plan actions. The first mission is therefore expected to include staff predominantly from the tax and fiduciary teams, as well as the team on the ground in charge of day-to-day implementation support. Subsequent missions may have a stronger emphasis on verification/M&E skills and technical implementation expertise.

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Table 18: Main focus of Implementation Support Time Focus Skills Needed Resource Estimate Partner Role

First twelve months

Support to implementing entities to initiate procurement processes and plan for Program activities, including PAP activities.

Technical skills in main Program areas and ability to work with clients.

Monthly discussions in Dhaka to review plans and progress. Team of 4-6 specialists.

Available to meet with Bank staff to discuss plans and progress.

12-48 months Quarterly discussions with implementing partners to review progress and plans for next cycle.

Technical skills in main Program areas and ability to work with clients

Quarterly discussions in Dhaka to review plans and progress. Team of 4-6 specialists.

Available to meet with Bank staff to discuss plans and progress and to provide monitoring data.

Other Independent verification of results.

Independent technical expertise.

One week mission. Team of 2-4 specialists.

Participating as observers.

Mid-term review

Assessment of progress made, establishment of baseline for key indicators, review targets for subsequent years.

Technical skills in main Program areas and operational and M&E skills.

One week mission. Team of 4-6 specialists.

Participating as observers.

Table 19: Task Team Skills Mix Requirements for Implementation Support Skills Needed Number of Staff Weeks Number of Trips Comments

Governance Advisor

Tax Specialist or Advisor

Tax Specialist

ICT Specialist

Procurement Specialist

FM Specialist

M&E Specialist

10

10

8

8

8

8

4

0

0

2

2

0

0

2

Field-based

Field-based

HQ based

HQ based

Field-based

Field-based

HQ based

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Table 20: Role of Partners in Program Implementation Institution/Country Role

IMF Resident Adviser to support the implementation of the VIP for the first 12 months. Peripatetic support for business process developments. Six-monthly Fiscal Affairs Division missions.

IFC Technical assistance program under the Bangladesh Investment Climate Fund. Local consultancy firm for technical assistance; and international long term adviser.

DFID Short-term consultancies for critical IT procurement processes.

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