World Bank pushes for sweeping tax reforms before releasing $500m loan

Highlights:

• Bangladesh must implement key fiscal reforms by May to unlock the loan
• Required reforms are 
• Separation of tax policy and admin 
• Formation of a Tax Policy Unit 
• Appointment of a full-time NBR chairman
• Revocation of NBR's authority to grant tax exemptions 
• End arbitrary SRO issuance
• Introduce sunset clauses on tax exemptions
• Ensure independence of Office of Comptroller and Auditor General
• Strengthen the Bureau of Bangladesh Statistics

The World Bank has urged Bangladesh to accelerate key reforms — including the separation of tax policy and administration, as well as fundamental changes to tax exemption rules — to secure a $500 million budget support loan by May this year.

In a letter sent to the finance ministry on 11 February, seen by TBS, the WB outlined mandatory conditions for the loan. These include establishing a Tax Policy Unit (TPU) under the Internal Resources Division, appointing a full-time chairman for the National Board of Revenue (NBR), and revoking the NBR's authority to grant tax exemptions.

Beyond these, the WB conditions also call for an end to the arbitrary issuance of Statutory Regulatory Orders (SROs) for tax exemptions, the introduction of sunset clauses to set expiration dates on exemptions, periodic impact evaluations, and the annual publication of a tax expenditure analysis report.

But the reforms don't stop at tax policy. The World Bank has also pushed for broader governance and financial transparency measures, including ensuring the independence of the Office of the Comptroller and Auditor General (OCAG) and strengthening the Bureau of Bangladesh Statistics.

Martin Raiser, vice president of the WB for the South Asia Region, has discussed these issues with Finance Adviser Salehuddin Ahmed and with the top officials of the NBR this week.

Earlier, Bangladesh sought $1 billion in budget support from the WB this fiscal year and already received $500 million, with another $500 million pending upon completion of the above prior actions.

"Good progress overall but decision and implementation are needed on the prior actions," reads the WB letter.

Why tax policy and admin should operate independently

The WB said this separation is needed to ensure a clear distinction between tax policymaking and administration to improve efficiency, transparency, and accountability. And, to do that the government has to amend the National Board of Revenue (NBR) Order 1972.

Also, the separation is necessary to remove NBR's authority to formulate tax policy (direct and indirect taxes) and to restrict NBR's role in tax administration, including income tax, VAT, and customs regulations.

The WB also wants to establish a Tax Policy Unit (TPU) within the Internal Resources Division and staff it with experts who can analyse and design tax policies based on data and evidence.

Though the government is preparing the roadmap, the WB wants Bangladesh to finalise it for the separation of functions as soon as possible after getting approval from the interim government's Advisory Council.

Many countries – from American to European and Asian – have successfully separated tax policy and tax administration to improve efficiency, transparency, and governance. 

Among South Asian nations, only Pakistan has taken clear steps to separate tax policy and administration. India, Sri Lanka, and Nepal have partial separation, but tax administration bodies still hold policy influence.

Appoint a full-time chairman for NBR

It is necessary to ensure that the chairman is independent of the secretary overseeing the tax policy unit to prevent conflicts of interest, according to WB.

Create a revenue coordination committee

The WB also suggested forming a revenue coordination committee chaired by the minister of finance. Other members of the committee may be included from the NBR, Internal Resources Division, Finance Division and the Ministry of Commerce.

Tax expenditure policy framework

Bangladesh needs this framework to increase transparency and efficiency in granting tax exemptions and incentives and to ensure all tax expenditures are properly evaluated and monitored.

The WB wants Bangladesh to take action for issuing a tax expenditure governance framework that includes: Clearly defined rules for granting and discontinuing tax exemptions, ending NBR's authority to issue tax exemptions, stopping the use of SROs to provide tax exemptions arbitrarily, introducing sunset clauses (expiration dates) for all tax exemptions, conducting periodic evaluations of tax exemptions to assess their impact and mandating the annual publication of a tax expenditure analysis report.

However, the Bank said Bangladesh is yet to begin drafting the policy framework.

Audit independence to enhance transparency

The WB said Bangladesh needs to strengthen public sector accountability and financial transparency by ensuring the independence of the Office of the Comptroller and Auditor General (OCAG). However, it required actions to enact an Audit Act to ensure the financial, administrative, and operational independence of OCAG.

The WB said a draft Audit Act has been prepared, but its approval and implementation need to be expedited.