Bangladesh to depend heavily on indirect tax in new fiscal year too

Since the introduction of VAT in 1991, all consecutive governments have relied heavily on indirect taxes to generate revenues

Zafar AhmedSenior
Published : 28 May 2023, 07:21 PM
Updated : 28 May 2023, 07:21 PM

Under pressure to reform tax collection by the International Monetary Fund, the Bangladesh government will likely rely on indirect tax to generate the bulk of revenue in the next fiscal year, which economists and analysts believe will only help widen income and wealth inequality.

Meanwhile, policymakers insist that the government has already made quite a few reforms to increase its direct tax collection, and the ongoing process will yield more revenue from the direct tax in the upcoming fiscal year.

Since the introduction of value-added tax, or VAT, in 1991, all consecutive governments have relied heavily on indirect taxes to generate revenue as the National Board of Revenue, or NBR, has hardly ever reached the targets for direct tax collection in the annual budget.

This year, the Sheikh Hasina-led administration is under severe pressure as one of the conditions by the global lender for extending credit of $4.7 billion was a complete reform of the tax collection system, particularly direct taxes.

An NBR official, who wished not to be named as he was not authorised to share information, told that the board plans to collect Tk 4.3 trillion in tax revenue in the next fiscal year. The target is to collect at least 64 percent of it from indirect taxes, which are VAT and customs.

According to NBR data, in the last fiscal year, nearly Tk 3.02 trillion in tax revenue was collected, of which about 65-67 per cent was derived from indirect taxes.

The target is 67 per cent of the total revenue in the ongoing fiscal year.

However, Planning Minister MA Mannan conceded that they still have much to do to overhaul the direct tax collection process. Still, he insisted that his government was on the right track.

"We depended on VAT and customs for revenue generation for a long time. I admit that to reduce inequality, we need to focus more on direct tax collection, which is why the government has adopted several measures to increase the ratio of direct tax collection. The ratio may not look significant in the next budget. Still, I can confirm that you will see significant changes in the ratio in national budgets in the foreseeable future," he said.

Information collected ahead of the national budget proposal, likely to be announced on Jun 1 by Finance Minister AHM Mustafa Kamal at the parliament, indicates that NBR indeed proposed increasing the direct tax collection ratio.

In this fiscal year, the target ratio has direct tax collection accounting for 33 per cent or Tk 1.22 trillion of the total target for the following year. According to information gathered from NBR sources, the board proposed to set the target ratio at 36 per cent or Tk 1.54 trillion of the total target.


The Tk 4.3 trillion target for next fiscal year's revenue collection is only 16.2 per cent more than the ongoing fiscal's target.

The target is also a mere 8.6 per cent of the total gross domestic product, a 0.3 per cent increase from the previous year's target. IMF's condition for extending the $4.7 billion credit was to hit a 0.5 per cent increase in the tax-GDP ratio yearly.

Defending the move, another NBR official, who sought anonymity, said people in the country have already been struggling with the soaring cost-of-living situation and inflation. The government does not want to pile on the pressure by pushing the IMF's agenda, at least not in the next fiscal year.

"The government is paying heed to what the people are suggesting to reduce the income and wealth inequality, and that's why the proposed target for direct tax collection has increased," he said.


Dr Mustafizur Rahman, the distinguished fellow of the Centre for Policy Dialogue, said neighbouring India had progressed because they could generate at least half of the total revenue collection target from direct tax.

"Developed countries achieve at least 70-80 percent of the total revenue target from direct tax while India, our neighbour, does at least 50 per cent. Unless we push to increase the target from the current state, the income and wealth inequality, with the added pressure of inflation and the cost-of-living situation, will only widen."

The seasoned economist suggested digitalising the whole taxation system and making it accessible to the public to curb corruption.

Dr Selim Raihan, a professor of economics at Dhaka University and the Executive Director of the South Asian Network on Economic Modelling or SANEM, does not believe the target set for the next fiscal year for revenue generation will significantly impact the tax-GDP ratio.

"About one-third of revenue is collected from income tax, VAT and the customs sector. To increase revenue in proportion to GDP, emphasis must be placed on direct tax collection," he added.

According to the latest NBR data, of 8.8 million tax identification numbers, or TIN holders, only 3.2 million have submitted their returns by this year's deadline. This means at least 5.4 million TIN holders evaded paying any tax altogether.

Compared to India, Pakistan, Sri Lanka and Nepal's tax-GDP ratio data, Dr Raihan said Bangladesh's ratio is the lowest among our neighbours.

Highlighting this data, Dr Raihan proposed that since the number of rich people in the country is increasing, an argument should be made to collect wealth tax from these rich people.

"Our revenue collection can reach a respectable level if concerted measures are adopted to increase overall revenue collection."

[Writing in English by Adil Mahmood]