VAT exemptions to go, sparing poorest 40%

Highlights:

• Government plans removing most VAT exemptions, except for poorest groups
• Proposal discussed at April meeting addressing economic stabilisation priorities
• Experts warn targeting bottom 40% exemptions difficult to enforce
• IMF and World Bank pushing Bangladesh to reduce tax exemptions
• VAT largest revenue source; exemptions cause major revenue losses
• Poverty rising; reforms risk increasing costs for consumers

The government plans to withdraw existing VAT exemptions on most goods and services, sparing only those used by low-income groups and people living below the poverty line, a move experts said will be difficult to implement and could widen the tax net, raise effective rates, and push up consumer costs.

The proposal was discussed at an 8 April meeting on macroeconomic challenges amid current global and domestic conditions. The meeting, attended by senior officials from the National Board of Revenue, including its chairman, outlined reform priorities for the new government to stabilise the economy.

A senior official who attended the meeting told TBS that a new plan was discussed to withdraw all VAT exemptions, except those benefiting the bottom 40% of the population. According to Bangladesh Bureau of Statistics data, the bottom 40% accounts for roughly 6.8 crore people. 

Although NBR has yet to specify affected sectors, officials said the move could strip exemptions from goods and services, including internet services, furniture, jewellery, English-medium schools, home appliances, electronics, mobile phones, computer goods, and parts of trading and manufacturing.

On the other hand, existing exemptions may be retained for essential food items such as rice and pulses, agricultural products, and basic services including education and healthcare, they added.

However, experts warned that limiting exemptions only to the bottom 40% may prove difficult in practice, as wealthier groups could still benefit from the same provisions. They argued that it would be challenging to ensure that VAT exemptions are strictly targeted at lower-income groups without clear segregation mechanisms.

Meanwhile, finance officials said that during the recent Annual and Spring Meetings of the International Monetary Fund and the World Bank Group held in Washington, DC, the IMF pressured Bangladesh to withdraw all forms of tax exemptions starting from the next budget.

Infograph: TBS

To be gradually implemented: NBR chair

A senior NBR official who attended the 8 April meeting, speaking to TBS on condition of anonymity, said, "We have received this plan from the finance ministry and are now assessing how feasible it is to implement."

"It may not be possible to implement it fully in the next fiscal year. It can be introduced gradually," he added, noting that some preparatory work would be required.

But, he declined to specify which sectors might see exemptions withdrawn in the upcoming budget.

Another NBR official noted that the proposal to limit exemptions to the bottom 40% was initially suggested by the World Bank and later incorporated into the finance ministry's plan.

When contacted, NBR Chairman Abdur Rahman Khan acknowledged that Bangladesh has a long list of tax exemptions. However, regarding the proposed reforms, he said, "It is not yet time to comment. We will sit on these issues in May and then decide what can be done."

Meanwhile, the meeting also discussed a plan to introduce a "proof of submission of VAT return" (PSVR) system, similar to the requirement of showing proof of income tax return submission when availing certain services, with the aim of increasing VAT collection.

In addition, authorities are considering making online submission of tax and VAT returns mandatory, alongside introducing a unique taxpayer identification number to monitor tax, VAT and customs activities – meaning unifying the existing TIN and BIN.

Heavy reliance on VAT

The government mainly collects revenue from three sources – income tax, VAT and import duties – with VAT being the single largest contributor.

According to NBR data, VAT accounts for 38% of total revenue. In FY25, the government collected about Tk3.71 lakh crore in revenue, of which more than Tk1.41 lakh crore came from VAT.

However, various NBR estimates show that nearly an equivalent amount of revenue is foregone each year due to tax exemptions.

In FY23, the government collected Tk3.25 lakh crore in revenue but granted around Tk2.75 lakh crore in exemptions. VAT accounted for the largest share of these, at about Tk1.25 lakh crore.

Bangladesh's standard VAT rate is 15%, with any lower effective rate treated as an exemption.

Currently, hundreds of goods and services are fully exempt under 53 categories, including food and agricultural production and marketing.

Exemptions also apply to nine essential services, 11 social welfare services, seven cultural services, four financial services, five transport-related services, and 12 other personal and miscellaneous services.

Beyond full exemptions, reduced VAT rates apply to various goods and services listed in the VAT and Supplementary Duty Act's Third Schedule, including internet services, furniture, jewellery, English-medium schools, home appliances, electronics, mobile phones, computer goods and certain trading and manufacturing activities.

Additional exemptions are provided through statutory regulatory orders (SROs), including for production in export processing zones (EPZs), economic zones and hi-tech parks. At the same time, VAT relief is also provided in several areas, including on raw materials, to promote exports.

Poverty concerns

Meanwhile, according to the BBS, the country's population stands at around 17 crore, with the bottom 40% accounting for roughly 6.8 crore people.

While there is no clear data on the income range of this group, a World Bank report titled "Bangladesh Development Update", released on 8 April, said national poverty is projected to rise for a third consecutive year, from 18.7% in 2022 to 21.4% in 2025. This was due to limited job creation, weak labour income growth, and elevated inflation, which reduced the poverty-reducing impact of growth.

The World Bank's June 2025 update of the international poverty line to $3 per person per day (using 2021 purchasing power parities) led to a significant upward revision of global poverty estimates.

The April report stated that before the conflict in the Middle East, around 17 lakh people were expected to rise out of poverty this year. That figure has now been sharply revised down to just 5 lakh due to the ongoing crisis.

At the $3 international poverty line, an additional 14 lakh people are now projected to have fallen into poverty over the same period, it added.

"A recovery projected for 2026 is now at risk – the Middle East conflict is expected to push a further 12 lakh people below the poverty line, offsetting much of the anticipated improvement."

Experts divided on feasibility

Experts remain divided over how effective the proposed reforms would be.

Farid Uddin, a former member of the NBR's VAT Policy Wing, said targeting VAT exemptions to the bottom 40% would be difficult in practice.

"It is hard to provide such benefits exclusively to this group," he said, adding that the government should instead focus on reducing VAT evasion and implementing a fully automated system. "In that case, VAT collection would increase significantly."

He noted that the government currently fails to collect around 71% of potential VAT due to evasion. Addressing this would require integration among relevant stakeholders, formalisation of the economy and broader reforms.

But Masrur Reaz, chairman of Policy Exchange Bangladesh, believes the plan could be implemented successfully if designed carefully.

He said authorities should first map which sectors would most benefit the bottom 40%, such as agriculture, food, education, healthcare and transport.

He also suggested maintaining VAT exemptions for small trading businesses up to a certain turnover threshold, a provision that already exists to some extent.

Some experts argue that, instead of offering VAT exemptions, the government could collect VAT more efficiently and provide targeted subsidies or cash transfers to lower-income groups.

What is the global experience?

Although VAT is often considered a regressive tax, according to Tax Foundation Europe, it is widely used globally. More than 170 countries impose VAT on goods and services, including all major European economies.

Some European Union countries have higher VAT rates than Bangladesh, with rates in the EU typically ranging from 15% to 27%, compared with Bangladesh's standard rate of 15%.

In 2022, VAT accounted for 55% of the EU's total taxes on production and imports.

The tax-to-GDP ratio varied significantly between EU countries. In 2022, the highest shares of taxes and social contributions as a percentage of GDP were recorded in France (48.0%), Belgium (45.6%) and Austria (43.6%).

To minimise economic distortions, EU countries levy reduced rates and exempt certain goods and services from the VAT to promote equity, as lower-income households tend to spend a larger share of their incomes on food and public transportation. 

Other reasons for reduced VAT rates include encouraging the consumption of "merit goods" such as books, promoting local tourism and clean power. 

Across Africa, Asia and Latin America, VAT exemptions commonly apply to basic food, medicine, healthcare and education to ease the burden on poorer populations.

However, since wealthier groups also consume these goods and services, they benefit from such exemptions as well.

According to a December 2021 report by TaxDev (Tax and Development), an international research programme focused on improving tax policy in developing countries, low- and middle-income countries (LMICs), like high-income nations, offer reduced VAT rates and exemptions on certain goods and services. 

These measures are often driven by distributional concerns and are aimed at items that account for a larger share of poorer households' spending.