Source tax non-compliance costs govt nearly Tk1 lakh crore per annum: Study
This situation has created a dual problem – compliant businesses end up with effective tax rates that are double the official rate or higher, while a large segment of businesses remains entirely outside the tax net.
Due to compliance gaps in source tax (tax deducted at source – TDS) collections, the government is losing out on nearly Tk1 lakh crore annually, a study by the Business Initiative Leading Development (Build) has found.
According to the study, the National Board of Revenue (NBR) collects TDS from various entities as advance income tax. However, many businesses fail to submit annual tax returns, while the government does not refund excess deductions. As a result, the effective tax collected falls far short of the potential.
This situation has created a dual problem – compliant businesses end up with effective tax rates that are double the official rate or higher, while a large segment of businesses remains entirely outside the tax net.
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We know that in some cases businesses pay more than their actual liability and face cash flow problems because refunds are not available or are indefinitely delayed.
Build's calculations show that in 2023, the government collected Tk72,605 crore in TDS across 57 sectors. Based on the companies' average gross profit, however, the estimated tax collection should have been Tk171,327 crore. In other words, the government received Tk98,378 crore less than the potential.
Because many firms do not file returns at the end of the year, no further taxes are collected beyond the deducted TDS. Meanwhile, as a large portion of TDS is treated as minimum tax without refunds, sectors such as cement, steel, ready-made garments, retail, and wholesale are disproportionately burdened.
As a result, despite the declared corporate tax rate of 27.5%, some industries are facing effective tax rates of 54% or higher.
The findings were presented today (17 September) at a dialogue on "Policy Reform Requirements for Non-Adjustable TDS" organised by Build at the Dhaka Chamber of Commerce and Industry (DCCI) auditorium.
A Build official told The Business Standard after the event, "TDS is deducted under 57 different heads from hundreds of thousands of entities. Yet, only about 27,000 firms actually file returns at year-end."
He added, "Our calculations show an average gross profit of 26.67%. At current rates, this should yield Tk1,71,327 crore in tax. Instead, only a little over Tk72,000 crore is realised."
The study found that if refunds were properly disbursed and actual liabilities enforced, government revenue could rise by at least 1% of GDP.
Due to the absence of refunds, some firms are suffering unbearable burdens. For instance, Crown Cement's effective tax rate jumped to 83.61% in the first quarter of FY25, while Heidelberg Cement's TTI reached 174% of profit, resulting in a net post-tax loss.
Speaking at the event, Shadab Ahmed Khan, Managing Director of Coca-Cola Bangladesh, said, "Over the last four years, taxes on carbonated beverages have risen from 42% to 54%, putting our operations at serious risk. The lack of consistent tax policy is driving foreign investment away."
NBR Chairman Abdur Rahman Khan, attending as the chief guest, acknowledged the grievances. "We know that in some cases businesses pay more than their actual liability and face cash flow problems because refunds are not available or are indefinitely delayed," he said.
"This is not what the system was intended to achieve. Our objective is to expand the tax net and ensure fairness, not to overburden compliant firms."
Defending the rationale for TDS, he explained that it was introduced to secure early income tax collection and reduce evasion risks. More than 80% of income tax revenue now comes from TDS and withholding, providing stable flows to the state exchequer.
The chairman assured that the NBR is open to reforms and will review cases where TDS exceeds actual profit-based liabilities. "Policy simplification and rationalisation are necessary. We will explore automation so refunds or adjustments can be processed within a clear timeframe," he added.
Businesses and economists at the event called for urgent reforms to Bangladesh's non-adjustable TDS regime, widely referred to as the minimum tax, arguing it has imposed excessive burdens, distorted competition, strained cash flows, and discouraged compliance.
Chairing the dialogue, Build Chairperson Abul Kasem Khan said the lack of a refund culture is forcing compliant firms into crises while non-compliant businesses flourish. "In some cases, effective tax rates are as high as 45–48% due to non-adjustable deductions. This is neither fair nor sustainable," he warned. "Unless refunds are automated and policies simplified, Bangladesh's tax-to-GDP ratio will remain among the world's lowest."
DCCI President Taskeen Ahmed stressed that sectoral total tax incidence (TTI) analysis should guide reforms. He said some industries bear disproportionately high burdens that undermine competitiveness. A simplified structure, automated TDS reporting, and a functioning refund policy would ensure fairness while safeguarding revenue.
From the SME sector, Ali Zaman, President of the SME Owners' Association, said entrepreneurs are willing to pay taxes, but the current system is unjust.
"When deductions are made forcefully without options for adjustment or refund, many small businesses feel discouraged from remaining in the formal economy," he said.
