Financial sector reform and its aftermath

After the political turnaround of July–August 2024, the entire year of 2025 can be described as a year of conceptual and structural reform. Even if not a year of actual implementation, it was certainly a year of study, reflection, and formulation of ideas. Across most sectors—constitutional reform, elections, anti-corruption, law enforcement, public administration, local government, capital markets, and others—efforts were underway to prepare reform reports and build consensus.

However, when it came to reform practice, the financial sector—especially banking, the capital market, and revenue mobilisation—appeared to receive the "short end of the stick." Although a White Paper was unveiled at the beginning of the year, there were no visible efforts to translate its contents into action. 

Yet the core focus of the White Paper was the dissection of the recently absconded development narrative and the prescription for repairing and treating a financial sector that had fallen into a deep abyss. The fate of the White Paper seems destined to resemble that of a doctor arriving only after the patient had died.

Although the authors of the White Paper, echoing the youthful vigour of Sukanta's morning verse, struck a hopeful tone about clearing the debris from Bangladesh's socio-economic courtyard, 2025 is now departing with a sense of regret—as if promises were not kept. It is easy to infer that financial sector reform did not gain sufficient traction. Where swift action was expected, the elephantine pace of reform failed to meet those expectations.

Against a backdrop of exploitation, deprivation, inequality, rampant plunder, and unrestrained corruption—and following a mass uprising born of protest—financial sector reform did not proceed through any revolutionary measures. Even knowing it was not easy, those currently holding the reins have cautiously embarked on a classical economic path, attempting to do something over time. Thieves will steal—that is inevitable—but signs of vigilance on the part of the householder are hardly visible.

It is true that capital flight has declined, remittances have gradually increased, the dollar's volatility has somewhat stabilised, there have been no major natural disasters demanding extraordinary expenditure, and spending on mega projects has been curtailed. Despite no tangible improvement in governance or accountability, it is being claimed that the economy in 2025 has remained relatively healthy. 

But soaring inflation and relentless price hikes are pushing the livelihoods of ordinary people to the brink of an economic ICU. A private sector starved of investment continues to fuel rising unemployment. Instead of advancing towards resilience and coordination, efforts are falling behind.

If there is unearned money, it will inevitably be laundered. If one calculates how much of the reported remittance inflow actually consists of expatriate workers' earnings versus illicitly siphoned funds returning with a 2.5% incentive, the true level of remittance inflow becomes clearer. 

Even if remittances arrive and reserves rise, when imports of raw materials and capital machinery decline, production is disrupted and exports fall, making it difficult to balance the balance of payments, isn't it? If the dollar price is pushed sky-high and then artificially frozen, what happens to investment and trade must be examined; too much time is being spent on experimentation.

One of the most discussed reform issues in the financial sector in 2025 was revenue reform. To advise the government on customs and tax policy reform, revenue management and administration, institutional capacity building, integrity, good governance, citizen engagement, and stakeholder participation at the National Board of Revenue (NBR)—which collects about 87% of the state's total revenue—a five-member advisory committee was formed in October 2024 by the interim government that followed the July 2024 mass uprising.

Although reform areas were specified, the official order did not clearly articulate why and for what purpose reform of the NBR's specified areas was necessary. Even though the advisory committee was formed hastily and without adequate time or emphasis, its objectives were considered similar to those of other reform commissions established to realise the dream of a modern Bangladesh after the mass uprising.

Despite the NBR's immense importance as the primary provider of revenue essential for rapid socio-economic development—and despite vast untapped potential for revenue collection—it has been unable to deliver due to the lack of necessary reform and modernisation. As a result, the tax-to-GDP ratio hovers at only 7–8% instead of the expected 15–16%. Moreover, the absence of reform has caused Bangladesh's tax system to become increasingly dependent on indirect taxes rather than direct taxes.

The system is dominated by internationally unacceptable, investment- and consumer-unfriendly features: high and inconsistent tax and tariff structures, extensive exemptions, various para-tariffs, distorted taxes, cascading taxes, and large gaps between statutory and effective tax incidence. Relevant laws, rules, procedures, and revenue management systems are complex, archaic, and largely manual. Comprehensive, integrated automation and digitalisation—capable of internal and inter-agency data flow, voluntary compliance, and effective enforcement—has not been achieved.

Despite the NBR's immense importance as the primary provider of revenue essential for rapid socio-economic development—and despite vast untapped potential for revenue collection—it has been unable to deliver due to the lack of necessary reform and modernisation. As a result, the tax-to-GDP ratio hovers at only 7–8% instead of the expected 15–16%. Moreover, the absence of reform has caused Bangladesh's tax system to become increasingly dependent on indirect taxes rather than direct taxes

As a result, compliance costs are high, the tax net is narrow, voluntary compliance rates are very low, revenue growth is weak, investment in industry and trade is sluggish, irregularities and discretionary abuses are widespread, and export diversification remains limited. Corruption, capital flight, harassment, tax evasion, and widening economic and social inequality are severely undermining good governance, growth, and social justice.

The government, stakeholders, civil society, consumers, international development partners, researchers, and the media are all more or less aware of these problems and limitations. Discussions, criticisms, and mutual blame have continued for years. At various times, scattered and uncoordinated measures were taken—mostly driven by donor conditions and stakeholder pressure rather than genuine political will. These efforts failed to address the root causes, instead allowing problems to grow more complex and more harmful to revenue, investment, consumer interests, and fairness. Experts believe that the absence of a systematic, diagnostic, and best-practice-based review has led the revenue administration into this complex situation.

Against this backdrop, the advisory committee conducted a systematic, diagnostic, and internationally benchmarked study of the NBR and has already submitted a comprehensive report to the government. The key recommendations can be summarised as follows:

1. Implementation of the proposed reforms within a time-bound (next 3–4 years), well-funded plan, with strong political commitment, stakeholder participation, and professional, competent leadership.
2. Reform of customs, VAT, income tax, and corporate tax policies by eliminating para-tariffs and distorted taxes (such as arbitrary withholding taxes, turnover taxes, minimum taxes, advance taxes, supplementary duties, and cascading taxes), reducing reliance on indirect taxes, and shifting toward progressive direct taxation. This requires separating tax policy formulation from tax administration and developing a research-based, professional tax policy wing.
3. Overhauling laws, rules, and procedures to make them business-, investment-, revenue-, and compliance-friendly, cost-effective, and evasion-resistant.
4. Expanding the tax net by simplifying laws and procedures and developing a fully integrated, real-time, digital revenue management system linking all relevant financial and revenue institutions.
5. Modernising organisational structures and human resources of customs and tax administrations in line with international best practices, including recruitment, training, accountability, transparency, performance management, and integrity.
6. Ensuring comprehensive, modern tax services, including simplified dispute resolution mechanisms, to raise taxpayer awareness and voluntary compliance.
7. Strengthening democratic accountability, good governance, and transparency in public spending to foster a culture of voluntary tax compliance. 
8. Tax policy should justifiably be separated from tax administration. Under the current structure, the NBR is responsible for policy formulation and administration. Tax policy formulation and implementation are vested in the same institution (the NBR), leading to suboptimal policy and increasingly inefficient, harassment-prone administration. Policy functions are split between the three wings of the NBR, limiting opportunities for coordinated policy changes. Tax policy has been driven primarily by revenue targets, with limited incentive to support structural reforms. Creation of a separate unit for coordinated tax policy within the MoF would allow for a more comprehensive reform program to coordinate reductions in trade-based taxes with reforms to mobilise additional income tax, consumption taxes, and non-tax revenue. Recognising this, the government has passed legislation separating revenue policy from administration by creating two divisions. Work is underway to define their mandates and restructure organisations, after which both divisions will become operational.

Bangladesh's customs and tax system remains backwards by international standards—highly dependent on indirect taxes and inequitable in both incidence and impact. It is considered a major obstacle to investment. Experts believe that internationally aligned revenue policy and administration can play a crucial role in improving the investment climate. In line with the spirit of the July 2024 anti-discrimination movement, the goal has been set to reform the NBR into a modern, internationally standard institution capable of supporting a just, non-discriminatory society.

Illustration: TBS

Currently, about 80% of the revenue collected by the NBR consists of indirect taxes, which fuel inflation and disproportionately burden low- and middle-income groups rather than the wealthy. This limits revenue growth while increasing dependence on distorted tax measures and accelerates economic inequality. Hence, reform is necessary to gradually shift from indirect taxes to a direct-tax-based system aligned with best practices.

Bangladesh's tax base and tax net are extremely narrow. According to the IMF, more than half of GDP is exempt from taxation. Recent statistics suggest there are about 6.3 million permanent economic units in the country. Even assuming 80–85% fall below VAT thresholds, around one million should be VAT-registered—yet only about 600,000 are registered, and less than half submit actual returns. 

Similarly, although an estimated 40 million individuals are eligible for income tax, only slightly over 10 million are registered, and just around 4.5 million file returns—mostly government and corporate employees. Of roughly 280,000 companies, fewer than 100,000 are within the tax net. Overall compliance averages only about 50%.

The NBR's institutional capacity remains severely inadequate, largely because tax systems have not been effectively and integratively automated. The three tax regimes still operate in silos with minimal data sharing, making it impossible to see a taxpayer's complete profile. This enables evasion, collusion, discretionary abuse, and harassment. Taxpayer services are insufficient, and dispute resolution mechanisms—though legally provided—remain ineffective due to reluctance on both sides.

 Dr Muhammad Abdul Mazid is a Former Secretary, former Chairman of the National Board of Revenue, and Member of the Revenue Sector Reform Advisory Committee