How can Bangladesh increase domestic revenues for development?
The journey to raise domestic revenues is challenging, but it is one that Bangladesh needs to undertake to secure sufficient resources to invest in its people and their future
Bangladesh stands at a critical juncture in its development journey.
Following decades of sustained growth and poverty reduction, growth has slowed, and its demographic dividends present only a narrow window of opportunity to transition to an upper-middle-income economy by the next decade.
The country's very low domestic revenue collection poses a significant challenge.
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Bangladesh's tax-to-GDP ratio was just 6.7% of GDP in FY25, which is less than half of the 15% considered the minimum necessary to finance essential development needs.
Such low revenues can significantly lower the country's development trajectory by limiting investments in education, health and infrastructure. Bangladesh needs to generate more domestic revenue for its economy to grow, diversify and create jobs.
What explains the low domestic revenues in Bangladesh? Tax rates in Bangladesh are comparable to, and in some cases higher than, peer countries. The real problem lies in a complex and distortionary tax system characterised by multiple tax rates and large and regressive exemptions on VAT and income taxes.
Worryingly, tax exemptions are estimated to be nearly as large as the actual tax collection. Such distortions result in significant leakage of revenues, opportunities for corruption and a relatively low share of individuals and businesses paying taxes.
Also, Bangladesh's heavy reliance on trade-related taxes discourages trade — a key driver of economic growth — through high tariffs and supplementary duties that create an anti-exports bias.
A roadmap to increase domestic revenue mobilisation
Bangladesh urgently needs bold and comprehensive tax reforms, combining policy reforms with institutional restructuring and capacity building.
The priorities for tax policy reforms are to rationalise tax exemptions; reform the VAT and income tax to make them more efficient and effective; and reduce tariffs to promote trade and investments.
These policy reforms need to be complemented by institutional transformation of the National Board of Revenue (NBR) to separate tax policymaking and tax administration, and expansion of digital automation of tax administration.
An immediate priority is to rationalise tax exemptions and incentives. The government's Tax Expenditure Policy and Management Framework (2025) aims to rationalise tax exemptions, but the new policy would need to be fully and consistently implemented and enforced to have an impact.
In accordance with the policy, the administrative issuance of tax exemptions (through statutory regulatory orders) should be discontinued and replaced by parliamentary approvals; tax exemptions should be assessed for cost versus benefits; and annual tax expenditure reports should be published for enhanced transparency. The tax expenditure reports would need to identify tax exemptions that should be phased out.
Bangladesh needs urgent reform of its VAT system. Multiple VAT rates should be consolidated into a single VAT rate, with allowance for only a few well-targeted exemptions that help benefit the poor. It would also need to roll out a functioning and comprehensive input credit system and refund process to prevent double taxation so that a business pays taxes only on the value it adds.
Corporate income tax could be consolidated into a single, competitive rate, with few exceptions. This would address the current wide dispersion of the corporate tax rates (20% to 45%).
Similarly, the tax rates on capital income could be made more consistent. Personal income tax could be made more progressive by adjusting the marginal tax schedule and removing allowances and exemptions.
In the medium to long term, property tax can be an important new source of revenue by adopting a transparent market-based valuation process and investing in local administrative capabilities to strengthen enforcement.
Reducing tariffs and supplemental duties in phases is important for trade and economic growth. Bangladesh issued the National Tariff Policy (2023) to modernise its trade promotion framework and reduce its anti-export bias by providing a framework for reducing trade barriers.
The government will need to implement this policy by reducing tariffs, para-tariffs (supplementary duties), and non-tariff barriers. A phased approach to these reductions could provide a more fiscally manageable path; simulations indicate that a gradual reduction is expected to have a moderate impact on revenues.
Reduction of tariffs and non-tariff barriers could be complemented by reforms of trade facilitation and the investment climate to strengthen the country's international competitiveness.
The institutional restructuring of NBR is a unique opportunity to fundamentally transform the country's revenue system. The separation of tax policymaking and administration would address overlapping roles and conflicts of interest and incentivise long-term revenue planning.
Urgent next steps include the issuance of the gazette notifications to formally establish the Revenue Policy and Revenue Management Divisions and the appointment of separate secretaries to head the two divisions.
The government would also need to recruit new staff with diverse skills and experience and develop the organisational structure, functions, and processes for the two new divisions, with an emphasis on an integrity framework that includes a code of conduct, internal audits, and anti-corruption mechanisms.
Expansion of digital automation is central to transforming tax administration. End-to-end automation of an integrated tax administration system is essential to boost compliance, efficiency, and accountability.
Automation reduces face-to-face interactions, thereby limiting opportunities for corruption. Adopting a unified and unique taxpayer identification number for every tax payer would also enhance the efficiency of tax administration.
The journey to raise domestic revenues is challenging, but it is one that Bangladesh needs to undertake to secure sufficient resources to invest in its people and their future.
Jean Pesme is the World Bank Division Director for Bangladesh and Bhutan.
This article, part of the #BangladeshRising Blog Series, has been published under special arrangement with the World Bank.
