IMF presses for raising Tk57,000cr more in taxes or face loan delay

Infographic: TBS

Following the National Board of Revenue's (NBR) unexpected tax hike in January – estimated to generate Tk12,000 crore across various goods and services – the International Monetary Fund (IMF) is now pushing for even more. The IMF wants Bangladesh to raise an additional Tk57,000 crore in the next fiscal year by reducing exemptions and further increasing taxes. Without this, securing the fourth loan instalment – already delayed since March – as well as the upcoming fifth tranche, remains uncertain, according to NBR officials.

While the IMF has informally communicated its demands, it is expected to formalise them when a delegation arrives in Dhaka on 6 April.

For the NBR, meeting this target presents a formidable challenge. Officials argue that extracting such a substantial sum solely through cutting tax exemptions and raising existing rates is nearly impossible – especially at a time when Bangladesh's economy is grappling with sluggish growth, weak demand, persistent inflation, struggling manufacturing, and sluggish job creation.

Challenges mount as IMF pressures for meeting revenue target

"The shock from January's tax hike has yet to be fully absorbed, and scrapping all tax exemptions outright is simply not feasible," a senior NBR official told The Business Standard, speaking on condition of anonymity.

Experts argue that agreeing to the IMF's stringent loan conditions may not have been the right decision.

"If the government tries to meet the IMF's revenue targets, maintaining economic stability will be difficult. In reality, generating such a large sum purely by raising taxes or reducing exemptions is impractical," said former NBR chairman Muhammad Abdul Mazid.

He pointed out that several countries have faced economic crises after following IMF-imposed conditions and urged Bangladesh to build its economy based on its own capacity.

"The IMF and World Bank's recommendations should not come at the cost of dismantling our economic structure, nor should we become dependent on them," he added.

As part of the $4.7 billion loan agreement signed in early 2023, the IMF set over 30 reform conditions, including raising the revenue-to-GDP ratio by 0.5% annually. However, Bangladesh has yet to meet this target.

Despite the VAT-tax hike in January, revenue collection still falls short. Furthermore, disagreements over certain central bank policy requirements have delayed the disbursement of the fourth loan instalment.

Bangladesh expects to receive two instalments in June. Ahead of that, an IMF delegation will visit Dhaka to assess the country's economic reform progress. Sources indicate that the delegation will meet with the finance adviser on 6 April, followed by discussions with NBR officials the next day.

Revenue collection struggles to meet targets

In FY23, the NBR collected Tk3.82 lakh crore, marking over 15% growth. However, in the first eight months of the current fiscal year (July-February), revenue collection stood at Tk2.18 lakh crore, with growth dropping below 2%.

The initial revenue target for FY25 was set at Tk4.8 lakh crore but was later revised down to Tk4.63 lakh crore.

An NBR official noted that the agency has never generated Tk57,000 crore in a single fiscal year solely through tax hikes.

Reducing tax exemptions: A limited solution

The NBR has not conducted a formal study on how much additional revenue could be generated by cutting tax exemptions. But officials estimate that, at most, it would bring in Tk10,000 crore.

According to NBR data, tax exemptions in income tax, VAT, and import duties amount to approximately Tk2.73 lakh crore. But why would reducing these exemptions yield such limited revenue?

A senior NBR official, requesting not to be named, explained that given Bangladesh's economic landscape, certain exemptions cannot be removed.

Exemptions benefiting specific individuals or institutions – mostly in income tax – could be scrapped, but doing so does not guarantee an equivalent increase in revenue.

For instance, the government grants around Tk4,000 crore in tax exemptions to the fisheries sector annually. Many businesses take advantage of reduced tax rates by reporting income under this category. "If this exemption is withdrawn, reported income in the sector will decline sharply, resulting in minimal actual tax collection," he said.

The IMF is advocating not only for a reduction in exemptions but also for new or increased taxes in certain sectors. However, higher taxes do not always translate into higher revenue.

For example, despite two tax hikes for tobacco in the past nine months, actual revenue collection has fallen below half the projected amount due to declining sales.

Similarly, removing tax-free facilities on remittances could discourage inflows, affecting foreign exchange reserves and adding pressure on the economy.

Rather than simply increasing tax rates, the official suggested enhancing operational efficiency. "Boosting revenue collection requires reducing tax evasion, expanding the tax net, and leveraging automation to improve compliance," he said.

Debate over reform implementation

Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office, disagreed with the NBR's stance, stating: "A lack of willingness among NBR officials is a major obstacle to necessary reforms."

When the IMF imposed a condition in early 2023 to increase the tax-to-GDP ratio by 1.7% over three years (2024-2026), it stood at 8.3%. By now, the IMF projected it should have reached 8.8%. However, the actual figure is significantly lower.

During a pre-budget discussion in March, NBR Chairman Abdur Rahman Khan revealed that the current tax-to-GDP ratio is just 7.1%.

In FY24, the NBR fell short of its revenue target by Tk13,000 crore. Officials attribute the ongoing shortfall to political transitions, which have negatively impacted revenue collection this fiscal year.

On 16 March, the Centre for Policy Dialogue (CPD) projected that the shortfall could reach Tk1,05,000 crore, raising fears of a further decline in the tax-to-GDP ratio.

Concerns over loan disbursement

While the IMF's reform plans for the NBR have largely been implemented, the government has yet to meet some major conditions. Likewise, the Bangladesh Bank has fulfilled most targets, but key issues remain unresolved – including the failure to introduce a unified VAT rate, achieve revenue collection targets, allow a fully market-driven exchange rate, and cut government subsidies.

Of these, the IMF is particularly concerned about the revenue shortfall and the lack of a market-based exchange rate. As a result, the lender has already delayed the release of a loan instalment.

Dr Zahid Hussain warned that these issues could jeopardise the disbursement of the next instalment of the IMF loan.

"If the IMF holds back, institutions like the World Bank and the Asian Development Bank may also reconsider their budget support," he cautioned.