Beyond lofty targets: The structural roots of Bangladesh’s tax mobilisation crisis

Long-term revenue mobilisation in Bangladesh remains low compared with international and peer countries, constraining essential public investment and contributing to fiscal vulnerability.

Among the structural drivers of weak collection are: (i) policy gaps, and (ii) administrative and compliance gaps (incomplete automation, fragmented registries, and weak compliance management). Addressing these could unlock substantial revenue potential but would require politically credible sequencing and strengthened institutional capacity within the relevant organisations.

At a recent seminar organised by BUILD on Tax Deducted at Source (TDS) and Minimum Tax, and the impact of non-adjustable taxes on business, the Chairman of the NBR noted that while tax collection has increased in absolute terms, the tax-to-GDP ratio has been declining for more than a decade. 

He recalled that the ratio once stood at 12%, but current estimates put it at around 6.6%. Referring to policy targets, he questioned how political leaders' commitments—such as allocating 5% of GDP to the health sector—could be realised with such a limited tax base.

Despite the falling tax-to-GDP ratio, ambitious and unrealistic targets were set in the 8th FYP (12.3% by FY25) and the Perspective Plan 2041 (17–17.4% by FY2031; 21–21.9% by FY2041). Acknowledging this underperformance, the NBR's Mid- and Long-Term Revenue Strategy (MLTRS) has revised its goals, setting an intermediate target from a baseline of 7.3% in FY2023 to 10% by FY2032 and 10.5% by FY2034–35.

The MLTRS outlines a comprehensive programme of reforms covering automation, tax-gap analysis, rationalising tax expenditures, broadening the base, and taxing the digital economy. Its targets include raising the return filing rate to 60% by 2030 and achieving full VAT return coverage for registered taxpayers by the same year. Institutional capacity building at the NBR, and transparent, accountable implementation of the MLTRS, are essential to improving tax mobilisation.

Yet compliance in both income tax and corporate tax remains very low. Only around 3–3.5 million people submit income tax returns out of approximately ten million tax identification number holders, while just 24,381 companies or institutions out of 288,000 filed returns in the last fiscal year. This situation underscores the urgent need to expand the tax net.

The burden is concentrated among a narrow group of compliant taxpayers. About one-third of income tax revenue is collected from the Large Taxpayers Unit (LTU), which includes major mobile phone operators, tobacco companies, private banks, large corporations, and high-earning individuals. Bangladesh currently collects only two-thirds of the projected amount in personal income tax and less than 60% of the expected revenue from corporate taxes—placing it among the worst-performing middle-income countries in this regard.

One of the key reasons for the low tax-to-GDP ratio is the high Effective Tax Rate (ETR), which in many cases is almost double the officially announced Corporate Income Tax (CIT). A CPD study (FY2022–23) covering 103 profitable companies revealed that in some sectors, entrepreneurs face effective tax rates of up to 73%, raising serious concerns about equity and competitiveness.

A BUILD study further showed that in cases of 50% imports plus 50% local supply, the total tax incidence (TTI) was 52.5%. For 100% imported raw materials, TTI rose to 67.5%, while for a fully local supply, the burden was somewhat lower, at 37.5%. However, since Bangladeshi industries rely heavily on imported raw materials, they are disproportionately affected by high advance taxes—most of which are not adjustable and are treated as minimum tax. Even the adjustable portion is rarely refunded, due to procedural complexity. 

The Finance Ordinance 2025 introduced amendments to section 163 on minimum tax. In its second paragraph, it states that products under section 120 of the ITA 2023—except those from sectors such as cement, steel, ferroalloy, milk products, ceramics, carbonated beverages, and pesticides—where taxes have already been paid at the import stage for raw materials, will not be considered for minimum tax.  

These sectors are vital contributors to revenue generation, yet they remain deprived of refunds for AIT paid at import. Allowing the minimum tax to be made adjustable in these cases would enhance competitiveness. The refund procedure also needs to be simplified from an administrative perspective. 

The heavy tax burden on the private sector is evident in several cases. For example, Crown Cement reported an effective tax rate of 83.61% in Q1 FY25 due to non-adjustable taxes. Heidelberg Cement faced an even more extreme situation, with a TTI equivalent to 174% of profit, leading to a net loss after tax. 

In the steel and metals sector, excess source tax on imported raw materials combined with fixed per-ton taxes and turnover tax has raised production costs and squeezed margins. The garment sector also suffers: in one case, a factory faced Tk40 lakh in source tax against an actual liability of Tk3 lakh, leaving Tk37 lakh locked with no refund.

The beverage sector illustrates how policy inconsistency on minimum tax and Supplementary Duty (SD) undermines growth. A study found that minimum tax and SD together pushed TTI in the sector from 42% to 54% over five years. 

SD alone doubled, from 15% in 2021 to 30% in 2024—the highest in the region. Minimum income tax also jumped from 0.6% to 3%, a fivefold rise in a single year. The sector's revenue fell by more than 20% year-on-year due to this higher tax burden, while foreign direct investment (FDI) has been negatively affected.

Similarly, the 1% non-adjustable source tax on export value has reduced working capital and squeezed margins. Retail and wholesale trade face a 1% minimum tax on turnover alongside a 27.5% CIT, further undermining competitiveness. High tax incidence is fuelling a vicious cycle of lower national productivity and encouraging informality.

In FY23, TDS accounted for about 87.4% of total income tax (Tk93,271.43 crore of Tk1,06,722.41 crore), including withholding tax. The number of TDS sub-heads has grown from 107 in 2020 to 111 today. However, refunds remain negligible, falling from 0.35% to 0.24% of total TDS collected. The highest refund rate was in FY2019, at 3.02% of that year's TDS collection. Increasingly, TDS is becoming a final discharge of tax obligations due to changes in law.

Comparisons with India, Vietnam, Sri Lanka, Malaysia, and Peru highlight Bangladesh's shortcomings: the absence of a robust automated refund system and significant deviation from international best practices, which prioritise electronic refunds within a stipulated timeframe to encourage compliance and reduce litigation. Integrated e-filing and automation are essential to addressing the TDS issue.

To reduce the high tax incidence, the NBR's policies on arbitrary gross profit rates for 82 items, allowable and non-allowable expenses, and rebates must be revisited within a clear timeframe. A unified form should be introduced for all types of income tax refunds, including TDS (as per sections 214 and 226 of ITA 2023). A board-prescribed process must also be developed and circulated based on refund entitlement provisions in the upcoming ITA 2023 rules.

The NBR has stated that a refund form exists under rule 36 of the ITO 1984, but as this rule is not referenced in any SRO, it is not used. The new ITA 2023 rules should therefore explicitly cover refund adjustability within the same tax assessment year.

Following international best practice, TDS should be adjusted within a fixed timeframe—ideally within the same income year. The NBR has also indicated that an automated TDS system will be launched in the coming months. Full automation and digitisation must be implemented to make TDS processing instant and time-bound, as automation is the cornerstone of modernising Bangladesh's taxation system.

Ferdaus Ara Begum is the CEO of BUILD, while Dr  Wasel Sadat and Md Nurruzzaman work as researchers at BUILD—a public-private dialogue platform working for private sector development.  

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.