Freeing up disposable income and stimulating spending might help power growth in the economy, argues Tanvir A Mishuk
Published : 03 Feb 2025, 03:16 PM
India’s recent budget has introduced significant tax reforms aimed at alleviating the financial burden on the middle class. These measures are designed to increase disposable income, stimulate consumer spending, and foster economic growth. Bangladesh might find valuable lessons in adopting similar strategies to benefit its own middle-class population.
Three years ago, I approached Bangladesh’s then finance minister with a similar model, advocating for tax relief to empower the middle class and drive economic expansion. Unfortunately, I was unable to convince him at the time.
THE HIGHLIGHTS OF INDIA’S TAX REFORMS
In the 2025 budget, the Indian government implemented several noteworthy changes:
• Increased tax exemption limit: The income tax exemption threshold was raised from ₹700,000 to ₹1.2 million annually, ensuring that individuals earning up to ₹1.2 million (approximately $14,800) are not liable to pay any income tax.
• Standard deduction enhancement: A standard deduction of ₹75,000 was introduced, further reducing taxable income for salaried individuals.
• Revised tax slabs: The government restructured tax slabs to provide relief across various income brackets. For instance:
• Incomes up to ₹400,000 are now tax-exempt.
• ₹400,001 to ₹800,000 are taxed at 5 percent.
• ₹800,001 to ₹1.2 million at 10 percent.
• The highest slab of 30 percent applies to incomes above ₹2.4 million.
These reforms are estimated to benefit approximately 25-30 million taxpayers, allowing them to save about ₹100,000 annually. This increase in disposable income is expected to boost consumption in key sectors such as consumer goods, automobiles, and real estate.
POTENTIAL BENEFITS FOR BANGLADESH
Bangladesh has experienced commendable economic growth; however, its tax structure remains a challenge. The country’s tax-to-GDP ratio has stagnated below 8 percent, significantly lower than India’s 17.9 percent. This limited tax base restricts the government’s capacity to invest in public services and infrastructure.
Adopting tax relief measures similar to India’s could yield several advantages for Bangladesh:
1. Enhanced disposable income: Reducing income tax rates or increasing exemption thresholds would leave more money in the hands of the middle class, boosting consumer spending.
2. Encouragement of savings and investments: Tax incentives for savings instruments and investments could promote financial security among citizens.
3. Broadening the tax base: Simplifying the tax system and reducing rates might encourage greater compliance, thereby expanding the tax base.
4. Economic stimulus: Increased consumer spending can drive demand in various sectors, leading to business growth and job creation.
CHALLENGES AND CONSIDERATIONS
While tax reforms can offer substantial benefits, Bangladesh must approach them cautiously:
• Revenue implications: Tax cuts could lead to reduced government revenue in the short term. It’s essential to balance tax relief with fiscal responsibilities to ensure sustainable public spending.
• Inflationary pressures: An increase in disposable income might lead to higher demand for goods and services, potentially causing inflation. Effective monetary policies would be necessary to manage this risk.
• Administrative capacity: Implementing and managing new tax policies require a robust administrative framework. Investing in capacity building for tax authorities would be crucial.
India’s recent tax reforms offer a compelling case study in leveraging fiscal policy to stimulate economic growth and support the middle class. Bangladesh, aiming to strengthen its economy and uplift its middle-income population, could consider similar tax relief strategies. However, these policies must be tailored to Bangladesh’s unique economic context and implemented in a balanced and sustainable manner.
Three years ago, I attempted to introduce this vision to Bangladesh’s leadership, but it did not gain traction. Perhaps now, with India’s success as a model, there is a renewed opportunity.
[Tanvir A Mishuk is a founder and former CEO of NAGAD]