Raising tax-GDP ratio, withdrawing exemptions tough now

Almost all of the IMF's tax reform proposals, given as a condition for getting $4.7 billion in loans, are crucial.

Proposals for formulating a risk management unit in the customs and VAT departments, developing a medium-term revenue strategy, strengthening of information sharing system among the customs, tax, and VAT departments in auditing activities, automating tax administration, increasing tax collection at source, enacting modern customs and laws, automating income tax, increasing the tax base, reforming revenue administration, increasing tax-GDP ratio, and reducing tax exemptions are not new. We have long been talking about these reforms.

This time, the biggest condition that the IMF has given with respect to the revenue sector is that an additional tax to the tune of 0.5% of the gross domestic product (GDP) should be collected in the next financial year. In the fiscals 2023-24 and 2024-25, customs and tax collection should be increased at the rate of 0.5% of the GDP. And in the fiscal 2025-26, the tax-to-GDP ratio should increase by 7.7%.

Bangladesh has to decide on a strategy to increase tax collection. The IMF has promised technical assistance in this regard.

According to the Ministry of Finance, Bangladesh's tax-GDP ratio currently stands at 9.3%. A few years back, it was more than 10%. The tax-GDP ratio has declined due to the rapid growth in GDP on the back of various mega projects of the government and tax holidays in various sectors. Bangladesh will not be able to get out of these two situations very easily.

As it is in the development phase, Bangladesh has to take up more new projects that will increase the size of its GDP. But, growth in tax collection will not be possible at the same rate.

Amid the global economic slowdown caused by the Russia-Ukraine war, the tax holiday benefits given to various sectors may not be withdrawn. Tariff rates will also gradually decrease due to import tariff rationalisation after the country's graduation from the LDC status as per WTO terms.

Another challenge ahead of the government in the current financial year is the ensuing national elections. At this time, the government will not decide to tax people at a higher rate or withdraw all benefits. As a result, full implementation of the IMF conditions concerning the tax-GDP ratio and tax exemptions will not be possible at this time.

Dr Muhammad Abdul Mazid, former chairman of NBR, shared his take on the IMF reform conditions as he spoke with TBS Senior Reporter Abbas Uddin Noyon.