Exemption cuts or tax relief: Which path will NBR choose ahead of next budget?

Highlights:

• IMF urges Bangladesh to cut exemptions and adopt uniform VAT
• Government seeks investment growth despite fiscal pressure
• Economists warn uniform VAT may raise prices and fuel inflation
• Business groups demand lower taxes and simpler tax system
• Budget likely to widen tax net while trimming some exemptions

Expectations and uncertainty are growing over the first budget of the new BNP-led government for the fiscal 2026-27. Taking office amid a fragile macroeconomic situation marked by heavy domestic and foreign debt, high inflation, and weak revenue collection, the administration has also added new spending commitments such as the Family Card and Farmer's Card schemes.

A further challenge has come from global oil shocks linked to the conflict in the Middle East, forcing the government to raise subsidy spending. With mounting expenditure pressures, the key question is where the money will come from.

In the first nine months of the current fiscal 2025-26, from July to March, the National Board of Revenue's (NBR) collection fell around Tk98,000 crore short of the government target although receipts were 11% higher than in the same period of the previous fiscal year.

However, past data show that average annual growth has exceeded 14%.

While missing revenue targets is nothing new, each year the gap between targets and actual collection has widened. Economists fear the shortfall could grow substantially further by the end of the fiscal year.

The weak performance reflects both a slowdown in economic activity and the added impact of the Middle East crisis, which has disrupted supplies of fuel and raw materials while pushing up prices.

Economists say the sluggish economic environment is likely to continue next year, limiting prospects for strong revenue growth through conventional means.

Against that backdrop, the International Monetary Fund (IMF), at its latest meeting with Bangladeshi officials in Washington, urged the government to withdraw all forms of tax exemptions and implement a standard VAT rate across sectors. The lender has also pressed for the withdrawal of government subsidies.

At the same time, the government says its priority is to increase investment and employment.

Last month, prime minister's Finance and Planning Adviser Rashed Al Mahmud Titumir told the media that fiscal policy would be shaped to promote investment and job creation.

To support that goal, economists and businesses say tax incentives for employment-generating investment should be retained alongside the removal of existing barriers to doing business.

They also argue that distortions in the tax system should be addressed, including mandatory minimum tax even when no income is earned and customs valuations set above actual import prices.

That would also require a more efficient and business-friendly tax administration.

However, such reforms carry risks. Revenue receipts could decline in the first one or two years, making the NBR reluctant to move quickly.

On the other hand, if a uniform VAT rate is imposed across all sectors, prices of goods and services such as education, healthcare, agriculture and food products could rise, adding to inflationary pressure.

Meanwhile, as in previous years, business groups are seeking tax relief for their own sectors. They are also broadly demanding digitisation of the tax system and a simpler, harassment-free payment process.

Business groups press for relief

In several rounds of meetings beginning on 31 March, the NBR has held consultations with nearly 100 business organisations. Meetings with about 40 more groups are scheduled in the coming days.

Major business bodies have already placed their proposals.

The Dhaka Chamber of Commerce and Industry (DCCI) called for widening the tax net, lowering tax rates, simplifying the tax structure, and introducing business-friendly policies supported by automation.

It also proposed reform of the existing VAT system, protection for local industry and manufacturing, and simplification of import duties and tariffs.

The chamber proposed raising the tax-free income threshold for individual taxpayers from Tk3.75 lakh to Tk5 lakh. It also suggested cutting the corporate tax rate for non-listed companies in the 27.5% bracket by 2.5 percentage points to 25%.

To identify new taxpayers, the DCCI proposed central API integration of databases, including National ID, banking, trade licences, utility providers, land registry offices, BRTA and mobile financial service operators.

It also recommended lower tax rates for some sectors, a simpler refund system, reduced source tax on bank interest, gradual abolition of surcharge on net assets, and withdrawal of minimum tax based on turnover.

On VAT, it proposed scrapping Advance Tax, simplifying VAT and customs refunds, and introducing a national mobile application for VAT collection.

The Bangladesh Chamber of Industries urged the government to frame tax policy while considering reciprocal tariffs imposed by the United States, losses caused by the recent Middle East war, and the impact of Bangladesh's LDC graduation.

It also called for reform of the tax system in line with global best practices, greater automation and AI adoption, stable prices and supply of essential goods and raw materials, and rational tax rates for small and medium enterprises (SMEs).

The chamber further proposed shifting gradually from dependence on indirect taxation toward greater reliance on direct taxes.

The Foreign Investors Chamber of Commerce and Industry, meanwhile, demanded easier business procedures, abolition of the mandatory minimum tax system, taxation only where income exists, and a predictable tax regime.

Other business associations have also sought sector-specific tax reductions.

Challenges ahead for government

Dr Masrur Reaz, economist and public policy expert and former senior economist of the World Bank Group, told The Business Standard that the large shortfall in just nine months suggested the government's already difficult fiscal position would face further strain.

"The economy will remain slow next year as well; as a result, revenue collection will not increase in that manner," he said.

He warned that development expenditure, which should now be gradually increased, could be constrained.

"On the other hand, if the government becomes more dependent on bank loans to meet the budget deficit, it will be difficult to increase investment and employment as it will hinder the private sector's access to loans," Reaz further said.

Professor Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue, also said the government faced a difficult period ahead.

He described plans to again set a revenue target of Tk6 lakh crore next fiscal year – while struggling to collect Tk4 lakh crore this year – as highly ambitious.

Which path will the government take?

Masrur Reaz said indiscriminate withdrawal of tax exemptions under IMF pressure would hurt low and middle-income groups and could create public discontent, which may not be politically favourable for the new government.

"A good negotiation must be done with the organisation [IMF] that exemptions must be reduced, but in a phased way. Through skilled negotiation, the IMF must be convinced of how this can be done over the next two or three years," he added.

He also suggested withdrawing exemptions and subsidies first in areas where the public impact would be limited.

Prof Mustafizur Rahman similarly said the government should renegotiate with the IMF on broader tax reform targets.

Meanwhile, NBR Chairman Abdur Rahman Khan, during a meeting, told business representatives that rather than simply reducing tax rates, the revenue authority would focus on easing business operations and removing barriers to trade and investment.

Officials familiar with the discussions said the upcoming budget is likely to include measures to widen the tax and VAT net and reduce exemptions in several sectors. However, the prospect of indiscriminately withdrawing all exemptions remains low.