Increasing tax rates doesn't always boost revenue: Experts

Increasing tax rates alone does not necessarily lead to higher revenue collection, experts emphasised during a roundtable discussion on Monday (27 January). 

They highlighted the fact that while nominal tax rates are low, the effective tax burden in Bangladesh is disproportionately high, going up to 45% and, in some cases, exceeding 80%.

"We have seen in the past that revenue collection increased not by raising the tax rate but by reducing it," said Moinul Khan, chairman of the Bangladesh Trade and Tariff Commission and a former member of the VAT wing of the National Board of Revenue (NBR), at the event, titled National Board of Revenue Reforms.

"At one time, after reducing the tax rate for hotels and restaurants to 5%, revenue collection increased by 40%. Similarly, after lowering the VAT rate for sweet shops to 7.5%, collection increased," he added. The round table was organised by the Institute of Chartered Accountants of Bangladesh and the Economic Reporters' Forum (ERF) in the capital.

Khan underscored the point that self-compliance should be prioritised over rate hikes, noting, "Revenue collection does not always increase by increasing the rate. Rather, it can also increase by reducing the rate."

The discussion also addressed the government's recent decision to raise VAT rates on nearly 100 goods and services without prior consultation, which has sparked widespread public concern.

Masrur Reaz, chairman of Policy Exchange Bangladesh, said, "In recent years, the country has undertaken many unnecessary projects with very high expenditures. A project worth Tk5 has been undertaken for Tk25. This pressure has been transferred to the revenue board to collect additional revenue. Until this undue pressure on the NBR decreases, sudden increases in tax rates will persist."

"We need effective reforms in revenue collection and public expenditure strategy," he added.

The economist also criticised the country's current tax regime, stating, "Our tax justice system has collapsed." 

"Tax neutrality, certainty, effectiveness, flexibility and justice – all the parameters set by the OECD (Organisation for Economic Co-operation and Development) have been distorted," he added.

Former ICAB president Mohammad Humayun Kabir criticised the huge revenue target in the last budget, saying, "When the country's economy was going through difficult times and businesses were constantly struggling to open letters of credit (LCs), how could you set such a huge revenue target? It's ridiculous."

The government set a revenue target of Tk4.8 lakh crore for the fiscal year 2024-25, which was over 32% higher than the actual collection of the previous fiscal year, according to NBR sources.

Experts highlighted several distortions in the current tax regime, including the imposition of a minimum tax at the advance level even for businesses incurring losses, advance tax at the import stage and the setting of minimum tariff values at the import stage, which are not aligned with international standards.

They urged the revenue board reform committee to address these issues.

Towfiqul Islam Khan, research director at the Centre for Policy Dialogue (CPD), called for a clear pathway to ensure discipline in revenue management and public expenditure. 

He posed the question, "Without confidence being restored among local investors, why would foreign investors come to Bangladesh to invest?"

"Ours and Vietnam's tax rates (on paper) are almost the same, so why are investors choosing to go there instead of coming to Bangladesh? This is something we need to identify," he added.

Farid Uddin, a former NBR member, said, "A holistic revenue management reform will require political commitment. Unfortunately, there has been no such commitment from previous governments."

Maria Howlader, president of ICAB, called for a predictable tax policy, saying, "Businesses plan on the basis of existing policy, but sudden changes within six months discourage foreign direct investment."

Md Hafizur Rahman, administrator of the Federation of Bangladesh Chambers of Commerce and Industry, said, "The NBR should focus not only on revenue collection but also on formulating policies for trade facilitation, which the authority is only now beginning to realise."

Muhammad Abdul Mazid, a member of the NBR reform committee and former NBR chairman, said, "The NBR needs to be empowered. Keep in mind that the committee has submitted a recommendation for the separation of policy formulation from its implementation."

"Those working in the policy division – what are their qualifications? This needs to be verified," he added.

ERF President Doulot Akter Mala stressed the need to reduce the VAT rate from the existing 15% to 10%, considering the country's current economic situation.

Shubhashish Bose, chief executive officer of ICAB, moderated the programme, while members of the NBR reform committee, Nasiruddin Ahmed and Md Aminur Rahman, also spoke among others.