Bangladesh's tax crisis: What needs to change for a better future
The reform of Bangladesh’s taxation system is crucial to unlocking the country’s potential for economic growth. As Bangladesh looks to transition to a developing nation by 2026, an overhaul of the current system is essential to meet the growing demands for public investment
The July revolution opens a new door of aspiration for Bangladesh's development journey. The country stands at a critical moment in its economic progress, striving to leave behind its Least Developed Country (LDC) status and transition to a developing nation by 2026. This journey brings with it new aspirations but also challenges, including the urgent need to reform the country's taxation system. With a tax-to-GDP ratio of just 8-9%, one of the lowest in the world, Bangladesh struggles to generate sufficient revenue to fund vital public services such as education, healthcare, and infrastructure. Addressing these systemic issues is essential to unlocking the nation's development potential.
A persistent problem
Bangladesh's tax system reflects a combination of institutional inefficiencies, structural austerity, and policy gaps. The country's over-reliance on indirect taxes like VAT creates a regressive system where the impoverished pay a disproportionate share of their income compared to the affluent. Currently, only a very small number of eligible taxpayers in Bangladesh file returns. In 2024, while 10.2 million taxpayer identification numbers (TINs) were issued, only 4.3 million individuals submitted returns in 2023-24. Addressing this gap is critical for Bangladesh to boost its revenue and ensure efficiency.
Keep updated, follow The Business Standard's Google news channel
Lessons from home and abroad
Reforming Bangladesh's taxation system requires drawing lessons from successful models worldwide. For instance, Rwanda's implementation of a simplified tax regime for small and medium enterprises (SMEs) has significantly broadened its tax base. Similarly, Brazil's innovative digital tools have streamlined tax collection, reducing evasion and improving transparency.
India's incorporation of technology and digitalisation into its tax system has streamlined processes and improved compliance. The introduction of the Goods and Services Tax (GST) unified a fragmented tax regime, making it easier for businesses to comply. Bangladesh's National Board of Revenue (NBR) could similarly leverage digital tools to modernise its systems and minimise loopholes.
Nepal has demonstrated the power of community involvement in tax collection. By decentralising tax responsibilities to local governments, Nepal has fostered greater accountability and built trust between citizens and the state. For Bangladesh, empowering municipalities to engage with taxpayers—especially in urban areas where the informal economy dominates—could improve compliance rates. Programmes tailored to specific localities, combined with education campaigns, would be particularly important in cities like Dhaka and Chattogram.
A roadmap for Bangladesh
Reforming Bangladesh's taxation system requires bold measures that prioritise equity, efficiency, and trust.
1. Expanding the tax net
Broadening the income tax net is crucial. The Policy Research Institute (PRI) suggests that if all eligible individuals in Bangladesh paid their lawful taxes, income tax revenue could rise to 3.1% of GDP from the current 1%. Geographic targeting—starting with urban centres and growth hubs—could help identify new taxpayers. For instance, a focused campaign in Dhaka and Chattogram could bring thousands of informal businesses into the tax fold.
2. Strengthening direct taxation
Increasing the share of direct taxes from the current 35% to 70% of total revenue, as targeted by the NBR, will require significant policy shifts. This year, the government ordered that all government taxpayers should submit their tax returns online, bringing more transparency to the tax collection policy. The government needs to include more formal and informal institutions and encourage them to submit returns online.
3. Enhancing taxpayer services
Simplifying tax filing procedures and increasing transparency can improve compliance. Following the lead of other countries, Bangladesh should expand its e-filing systems and introduce mobile applications to cater to individual taxpayers. Additionally, automated reminders and clear guidelines can reduce confusion and promote timely submissions.
4. Modernising the NBR
Building the capacity of the NBR is essential. This includes investing in training for tax officials, adopting automated audit systems, and enhancing data analysis capabilities to identify discrepancies and improve enforcement. It will also help to reduce corruption in the tax collection process. Sri Lanka's use of centralised audits has shown how such systems can build taxpayer confidence while ensuring compliance.
5. Building public trust
Tax reforms cannot succeed without public support. Citizens must see tangible benefits from their contributions. Publishing annual reports on how tax revenue is utilised—similar to practices in Nepal—can build transparency and trust. Moreover, engaging civil society and the private sector in policy discussions can foster a sense of shared responsibility.
A long way to go
Bangladesh's aspirations to become a developing country hinge on its ability to generate adequate revenue for public investments. The challenges are significant, but the opportunities are immense. By learning from regional neighbours and tailoring solutions to our unique context, Bangladesh can create a fairer, more efficient taxation system.
A new Bangladesh needs structural reforms with courage, commitment, and collaboration across all sectors. The time to act is now—not just for today's economic needs but for the brighter future that beckons.
Lecturer, Department of Development Studies, Bangladesh University of Professionals
