The hidden cost of taxing e-commerce

Governments raise taxes because they need money. That part is straightforward. What's less obvious is how certain taxes — like the newly proposed VAT hike on e-commerce in Bangladesh — may actually cost more than they earn.

Tripling VAT from 5% to 15% on e-commerce isn't just a number change — it's a signal. It tells founders and investors: don't bother. Don't bother investing in a sector already starved for resources, operating in an economy with shrinking purchasing power and virtually no access to risk capital. Don't bother believing this ecosystem will be treated as anything other than a cash cow — before it's even had a chance to grow.

Bangladesh lacks adequate infrastructure. We all know this. That's precisely why e-commerce matters. It allows trade and distribution without requiring thousands of kilometers of new roads. Every delivery bike serving 50 customers means 50 fewer people clogging the streets. Done right, e-commerce could reduce pressure on urban infrastructure by 20% or more. That's not a hypothetical benefit — it's a proven efficiency already being realized in countries like China and Indonesia.

But instead of building a framework to encourage this shift, we're penalizing the few trying to make it happen.

The tax gain from this policy? Negligible. At best, it's a rounding error in the national budget. But the cost is real. It creates structural inequality between online and offline players. Brick-and-mortar shops don't face the same enforcement rigor. So the incidence of this tax falls disproportionately on formal, online businesses — those already operating on razor-thin margins or outright losses. What does that mean in practice? It means startups pay the tax out of their runway. Out of investor money. Out of the founder's stamina.

This isn't how ecosystems are built.

E-commerce adoption doesn't happen magically. Countries that got it right invested heavily — $70 to $200 per capita in digital logistics, payments, and fulfillment systems. Bangladesh has invested less than $3 per capita. And instead of helping us close the gap, this policy widens it.

This isn't about avoiding tax. It's about understanding sequence. You don't tax the sapling — you water it. Only when it becomes a tree do you start collecting fruit. Bangladesh has yet to produce a meaningful tech breakthrough — but it could. That chance still exists. What's missing isn't talent or ambition. It's air to breathe.

And more importantly, this is about recognizing that tax policy is not just an accounting function. It's a strategic lever — one too important to be left to revenue authorities alone. A nation decides what it wants to grow, and builds a tax structure to support that growth. If we want a digital economy, we have to design for it — not tax it into submission before it begins.

Waseem Alim is the co-founder & CEO of e-commerce platform Chaldal