Why Bangladesh must reform its tax structure

Illustration: TBS

The tax-to-GDP ratio of Bangladesh has remained stagnant at 7.5% for several years, while Asia-Pacific countries have a tax-to-GDP ratio of about 19.3%, African countries 15.6%, and Latin American and Caribbean countries 21.5%, according to the OECD Report on Revenue Statistics in Asia and the Pacific 2024. 

Domestic resource mobilisation is one of the primary requirements for a sustainable macroeconomic situation in Bangladesh. 

The tax structure heavily relies on indirect taxes, with 34% coming from direct taxes and 66% from indirect taxes. In 2017-18, direct tax contributed 36%, while indirect tax contributed 64%. 

Over the years, the contribution of direct tax to revenue generation has decreased. In the post-LDC era, Bangladesh must reduce its dependency on indirect taxes and ensure no discrimination between local and foreign businesses. High supplementary duties at the import stage and the imposition of other duties and charges (ODC) will need to be rationalised.

Low tax net and compliance issues

The number of TIN holders has increased in recent years, reaching 1,20,89,075 as of April 22, 2024. Despite this, return submission remains far from the target, standing at only 59%. Similarly, while the number of registered companies under the RJSC was approximately 2.88 lakh as of December 2023, only 24,381 companies—just 8.45%—submitted their tax returns.

TIN registration is mandatory for accessing several public services and licenses, such as trade licenses, travel permits, and memberships in trade organisations. However, many individuals and businesses obtain TINs solely to meet these requirements and subsequently neglect their annual tax return obligations. 

A key reason for the limited expansion of the tax net is the absence of a fully automated financial transaction system. This allows individuals and businesses to conceal their actual income and operate informally for extended periods. While various initiatives have been introduced to improve tax compliance, their implementation has remained piecemeal, with limited tangible impact.

Structural issues also contribute to low tax return compliance. A significant portion—63% of total income tax revenue—comes from Tax Deduction at Source (TDS). When withholding tax is factored in, this figure rises to 83%, with 58% classified as a minimum tax deemed final under Clause 163 of the Income Tax Act 2023. 

Additionally, tax refunds are neither automatic nor prompt, deterring taxpayers from compliance. In contrast, countries like Singapore offer swift refund mechanisms, where excess TDS can be claimed through tax returns and processed within three to four weeks. India has also introduced an electronic refund system that links taxpayers' bank accounts with the Income Tax Department's e-filing portal, ensuring direct and timely reimbursements.

Tax Deduction at Source (TDS) and refund challenges

Refund processing time can be significantly reduced with electronic tax return filing (e-filing). If a return is free from errors and the taxpayer's details are accurate, refunds can be processed within 7 to 15 days. 

However, Bangladesh lacks a clear tax refund policy, making refunds uncertain. 

Additionally, 31% of TDS is non-refundable under 111 TDS heads, while 69% is technically refundable but rarely processed. 

As a result, there is an estimated investment loss of Tk81,605 crore, employment loss of approximately 3.6 lakh jobs, and working capital loss of around Tk14,000 crore. These factors contribute to a higher corporate tax burden, discouraging taxpayers—particularly small service providers, businesses, contractors, and suppliers—from filing returns.

A similar issue exists with VAT compliance. Around 60% of VAT is deducted at source (VDS) and accounted for under reduced rates, spread across 10 different categories, including exempted, 0%, 1.5%, 4%, 5%, 7.5%, 10%, 12%, and 15%. 

However, tax credit is not available for these truncated VAT rates, creating additional financial strain on businesses. A streamlined approach—lowering the single VAT rate from 15% to 10% while ensuring tax credit availability—could alleviate this burden.

Furthermore, conducting a tax gap analysis remains challenging due to the lack of a clear tax policy. Each year, Bangladesh faces a significant budget deficit, with estimated tax expenditures often exceeding revenue generation. A striking example is the FY2021-22 tax expenditure, which amounted to Tk1,02,337 crore—higher than the total direct tax collection for that year.

Policy gaps 

The private sector has long advocated for the separation of tax policy and tax administration. In response, the government is now planning to establish independent wings for policymaking and tax collection. 

An advisory committee is also expected to be formed, comprising experienced tax, VAT, and customs officials, alongside private sector representatives to ensure a neutral perspective. This committee will serve as a permanent and influential body with members from industry, SMEs, academia, and the private sector. These reforms may also discourage the issuance of SROs during interim periods, which often lead to policy inconsistencies and favour certain groups.

A fully digital tax system, including automatic return submissions, TDS refunds, VAT calculations, and customs tax assessments, could introduce greater efficiency. Like other countries, Bangladesh could benefit from launching e-invoicing and integrating all ASYCUDA (Automated System for Customs Data) modules, bringing further discipline to tax administration.

Reforms are also needed in the imposition of supplementary duties. Currently, the NBR imposes VAT and supplementary duty (SD) on various products as a revenue-raising measure, often without sufficient consultation with the private sector. The recent imposition of VAT on 100 products is a prime example. However, as a signatory to the Trade Facilitation Agreement, Bangladesh is obligated to consult stakeholders before introducing such taxes.

Tax policy should prioritise direct tax collection, reducing excessive reliance on indirect taxes to ease the burden on consumers and address inequality. The abolition of the minimum tax provision (Section 163 of the ITA 2023) could provide relief to businesses and encourage a shift towards a fairer tax system. End-to-end digitisation must also be ensured, and the discretionary powers of NBR officials—particularly at the field level—must be subjected to stricter accountability. Separating tax collection from policy formulation could help establish better control in this regard.

Additionally, the discriminatory taxation policies between local and multinational companies must be rationalised in light of Bangladesh's upcoming LDC graduation and transition to a middle-income country. After graduation, customs tariffs and tax rates will need to be reviewed, particularly the WTO-MFN rate of 14.7%, to ensure economic competitiveness.

Tariff rationalisation and WTO commitments

The NBR conducted a study on tariff rationalisation, with BUILD as a key participant. Bangladesh's tariff commitments under the WTO (LXX) cover 955 HS lines in the HS2012 version—763 under agricultural products and 192 under non-agricultural products. 

The study group, following the Customs Act 1969 for FY2021-22, identified six HS lines where customs duties (CD) exceeded the bound rate, which was subsequently addressed in the FY2022-23 budget. However, there remain 60 HS lines where the combined CD and Supplementary Duty (SD) exceed the bound rate.

Under WTO guidelines, CD and SD are classified as Ordinary Customs Duties (OCD), while Regulatory Duty (RD), Advance Income Tax (AIT), and Advance Tax (AT) are categorised as Other Duties & Charges (ODC) under GATT Article II(b). 

RD may be imposed at a rate of 2.5%, and CD up to the bound level declared by Bangladesh during its pre-Uruguay Round submission—essentially an import license fee of 2.5%. However, SD on certain imported products was not accounted for in the ODC column. 

As a result, the sum of Bangladesh's tariff binding rate and ODCs may exceed the total duty imposed on several products, which must be reduced within the next two budget cycles. A detailed study is urgently needed to outline necessary reforms in the indirect tax system.

Supplementary Duty, ranging from 3% to 35%, was imposed on 1,275 products, generating Tk10,042 crore in revenue for FY2022-23. Meanwhile, revenue collection from Regulatory Duties on 3,543 items stood at Tk4,739 crore in the same fiscal year. 

To ensure trade neutrality, these taxes should be withdrawn at the import stage. Future tax revenue targets must consider these issues, placing equal focus on indirect tax policy alongside direct tax policy. 

Additionally, the withdrawal of minimum or tariff values should be prioritised, allowing the Customs Valuation Rules 2000 to determine customs tax assessments. The reform process has already begun.

A mixed-duty approach for essential imported goods can be implemented under the Customs Act in compliance with WTO regulations. A thorough assessment is needed to determine which sectors require continued protection and which do not. Reducing reliance on indirect taxes is essential for maintaining competitiveness, and achieving this requires transparent, automated, and internationally aligned policies.

While significant progress has been made, much work remains. The current reforms initiated by the government are critical, and collaboration between the public and private sectors will be key to successfully navigating Bangladesh's LDC graduation challenges.

Ferdaus Ara Begum. Sketch: TBS

Ferdaus Ara Begum is the CEO of BUILD, a public-private dialogue platform that works 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.