IMF wants all tax exemptions, subsidies gone in next budget

The International Monetary Fund (IMF) has advised Bangladesh to withdraw all forms of tax exemptions, covering income tax, value-added tax (VAT), and customs duties, starting from the next national budget (FY2026-27).

Alongside ending tax exemptions, the IMF has also pressed for the reduction of supplementary duties imposed at the import stage.

The recommendation was raised during discussions at the Annual and Spring Meetings of the International Monetary Fund and the World Bank Group held in Washington, DC, sources at the National Board of Revenue (NBR) said.

Infographic: TBS

A senior NBR official, speaking on condition of anonymity, told The Business Standard, "At the ongoing meetings, the IMF asked that all types of tax expenditure be withdrawn."

Another Bangladeshi representative in Washington said the IMF was urging the government to withdraw a large share of tax exemptions in the upcoming budget.

An official from the Bangladeshi delegation attending the IMF board meetings told TBS, requesting anonymity, that the lender had taken a positive stance on Bangladesh's request for additional budget support to help meet rising fuel import costs.

However, the size of the potential new loan and its conditions have yet to be finalised.

The official said the Bangladeshi delegation, led by Finance Minister Amir Khosru Mahmud Chowdhury, held separate meetings with IMF officials seeking the release of about $1.53 billion by June, including overdue instalments under the existing loan programme as well as fresh financing.

"During the discussions, the IMF maintained a firm position on implementing two key conditions of the main loan agreement," the official said.

"The conditions include cancelling all tax exemptions alongside tariff rationalisation, and withdrawing energy subsidies for gas and electricity while bringing low-income groups under social safety net programmes. If these conditions are implemented, the IMF is ready to release the funds within the current fiscal year," the official added.

The official added that the IMF also reiterated its call for Bangladesh to move towards a fully market-based exchange rate.

Officials from the Bangladesh Bank told the IMF that the country intends to gradually move towards a fully market-driven exchange rate in order to maintain economic stability.

The meetings, which began on 13 April, are scheduled to conclude on 18 April. Senior officials from the finance ministry are attending alongside NBR chairman Abdur Rahman Khan.

Wide range of exemptions currently in place

The government currently provides VAT, tax and import duty exemptions on most agricultural and food products. Some goods also enjoy partial exemptions.

Essential services such as education and healthcare also benefit from tax relief. Exemptions are also available for certain essential sectors, including fuel and electricity.

In addition, to encourage investment and job creation, the government offers income tax, VAT and customs duty exemptions for investors in export processing zones, economic zones and hi-tech parks. Export-oriented industries also receive tax incentives.

Remittances are fully exempt from tax to encourage overseas earnings. Bangladesh received more than $30 billion in remittances in the 2024-25 fiscal year, while export earnings stood at nearly $50 billion.

Tax exemptions – defined as the difference between standard tax or VAT rates and the amount actually collected due to concessions – represent a large fiscal cost.

According to the latest data from the NBR, tax exemptions in income tax, VAT, and customs duties amounted to about Tk2.66 lakh crore in the 2022-23 fiscal year. In comparison, total government revenue collection in that year stood at Tk3.25 lakh crore.

In 2022, during the tenure of the Awami League government, Bangladesh secured a $4.7 billion loan programme from the IMF. Of this amount, roughly $3 billion has already been disbursed in instalments.

However, the lender later suspended further disbursements toward the end of the interim government's tenure, citing slow progress in implementing reform measures under the programme.

Negotiations over the release of remaining funds resumed after a new government led by the BNP took office.

Experts warn against abrupt withdrawal

Economists say that while reducing tax exemptions is necessary, eliminating them entirely may not be feasible in the short term.

They warn that withdrawing exemptions across the board in line with IMF recommendations could increase tax burdens in several sectors. This could affect both wealthy and low-income groups directly and indirectly, potentially fuelling inflation.

Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said removing all exemptions within a year would not be reasonable.

He warned that such a move could undermine the confidence of both local and foreign investors in government policy.

"The government should plan to withdraw these benefits through sunset clauses, which the NBR has already begun implementing," he said. "However, the entire exemption framework should first be reviewed before decisions are made."

Mustafizur noted that some sectors have enjoyed tax exemptions and incentives for more than 50 years.

"In some cases, individuals or groups have obtained exemptions through influence. These should not continue indefinitely," he said, adding that exemptions should be streamlined by lowering tax or VAT rates.

Towfiqul Islam Khan, an additional director at CPD, said the government needs stronger fiscal discipline and should align incentives with the country's graduation plan from the UN's least developed country status.

"Tax exemptions should be reduced gradually and according to a clear plan, particularly in sectors such as poultry, fisheries, agriculture and remittances," he said. "The principle should be simple – those who earn should pay tax."

Risks of abrupt policy shifts

Snehasish Barua, managing director of SMAC Advisory Limited, warned that an abrupt withdrawal of tax exemptions could trigger economic shocks.

"The sudden withdrawal of tax exemptions risks triggering an acute macroeconomic shock. Such an abrupt policy shift could destabilise capital markets, cripple RMG export competitiveness and fuel immediate cost-push inflation," he told The Business Standard.

"Moreover, it threatens to deter foreign direct investment, stifle the burgeoning digital economy and spark widespread corporate compliance crises."

He added that investors allocate capital based on established statutory frameworks and that removing incentives without a transition period could erode trust in fiscal policy.

"To navigate this necessary reform, a phased and predictable transition is vital. The government must rigorously audit all active tax exemptions to guarantee they deliver tangible strategic value," he said. "Moving forward, every tax expenditure must be tied to specific, measurable criteria, undergo stringent annual reviews and be bound by a mandatory sunset clause."

Govt signals shift in approach

While indicating a move away from the blanket tax exemptions granted by previous governments, the new administration has said it plans to introduce performance-based incentives.

Speaking to reporters after a meeting at the NBR on 29 March, the prime minister's adviser on finance and planning, Rashed Al Mahmud Titumir, said, "The target would be met by accelerating economic activity through higher investment and employment, alongside structural and policy reforms; curbing tax evasion and fraud; and shifting from blanket tax exemptions and rebates to performance-based incentives."

According to NBR data, VAT exemptions currently apply to several products and raw materials under 53 different categories, most of which involve agricultural and food items.

Nine essential services related to basic needs – including social welfare, cultural activities, financial services, transport services and certain personal services – are also fully exempt from VAT. 

The standard VAT rate currently stands at 15%.

Under the third schedule of the VAT law, reduced VAT rates are applied at different stages of production and supply for several goods.

At the import stage, many goods and services face substantial supplementary duties, in some cases reaching as high as 500%.

Experts say such high supplementary duties create uneven competition in the market and increase costs for consumers. The IMF has also urged Bangladesh to reduce these duties and make the tariff structure more rational.