Expanding the tax base through capital market tax incentives

Every year, before preparing the national budget, the National Board of Revenue (NBR) focuses on two primary objectives: increasing tax revenue and expanding the tax base.

Traditionally, their principal approach has been to raise tax rates, under the assumption that higher rates will naturally lead to higher collections. However, this strategy has not consistently delivered the expected outcomes.

Over the past three to four years, various stakeholders and capital market intermediaries have consistently recommended widening the tax rate gap between listed and non-listed private companies.

The aim is to encourage more companies to go public, thereby increasing transparency, compliance, and ultimately tax revenue.

Historically, the gap in corporate tax rates between listed and non-listed companies stood at 10%. 

However, it was reduced to just 2.5% in the budget preceding the last fiscal year. This small differential made it difficult for intermediaries to persuade well-performing private companies to list on the Dhaka and Chittagong stock exchanges.

To address this, the most recent budget increased the gap to 5%. While this is a positive step, I believe it remains insufficient to effectively incentivise private companies to go public.

Importantly, offering reduced tax rates to listed companies has been shown to indirectly increase the government's total tax revenue. This is due to enhanced financial transparency, better compliance, and increased reporting of taxable income.

To support this argument, I have compiled real-world data from nine companies across various sectors that listed on the stock exchanges over the past decade. The table below demonstrates a significant increase in tax payments post-listing, despite a lower tax rate for listed companies.

Infograph: TBS

Key Observations:

• Nine out of 10 companies showed a significant increase in tax contributions post-listing.
• Despite enjoying tax incentives, listed companies contributed substantially more in absolute tax volume.
• The increase in transparency and accountability, driven by compliance with securities regulations, led to more accurate financial disclosures and better audit standards.
• Indirect tax contributions (VAT, Supplementary Duty, etc) likely also increased due to improved reporting.

Recommendations:

• Widen the tax rate gap between listed and non-listed companies to at least 10%, restoring it to previous levels to incentivise more IPOs.
• Consider industry-specific tax holidays or exemptions (for 3–5 years) for emerging or priority sectors to boost stock market participation.
• Introduce non-fiscal incentives, such as streamlined regulatory processes or reduced listing fees, to complement tax benefits.
• Promote capital market education and awareness among SMEs and family-owned businesses to increase listing readiness.

Tax incentives for listed companies should be viewed not as a loss in revenue but as a strategic investment in long-term revenue growth. Encouraging more companies to list leads to improved corporate governance, greater transparency, and significantly higher tax compliance. A dynamic and inclusive capital market, supported by appropriate fiscal policies, can serve as a powerful tool for both economic development and revenue expansion.

Data source: Annual reports of mentioned companies