Overcoming tax reform challenges

The Bangladesh Nationalist Party (BNP) has taken the helm of the country at a time when the economy is caught on the horns of a fiscal dilemma. On the one hand, the new government has a plethora of election pledges to keep in areas such as infrastructure development, social welfare, education and healthcare sectors. On the other hand, limitations in revenue generation could seriously constrain its spending capacity.

For example, the government's pledge to provide "Family Card" to all women across the country, disbursing Tk 2,500 monthly, would require a substantial amount of funding. If the government intends to finance this scheme without relying on high-interest or conditional foreign loans, it must mobilise significant amount of revenue. Conversely, if the government is forced to tighten its belt due to revenue deficit, some of the ambitious plans may have to be compromised.

Navigating this will require bold leadership to follow through on the deep structural reforms in the revenue department initiated by the previous administration. Chief among them is the separation of tax policy from tax administration, alongside comprehensive reforms to make the tax regime more efficient, equitable, transparent and simple.

For decades, the country's tax-to-GDP ratio has remained among the lowest in the world. Data from the World Bank show that in 2021 Bangladesh's Tax-to-GDP ratio stood at just 7.6 per cent. In contrast, India collected around 11-12 per cent of GDP in taxes, Vietnam more than 16 per cent. In more developed nations, specifically those within the Organisation for Economic Co-operation and Development (OECD), the tax-to-GDP ratio typically averages between 25 per cent and 30 per cent, providing them with the fiscal space to deliver better public services.

The size of Bangladesh's economy is growing, but revenue collection is not increasing at a pace commensurate with GDP growth. The latest data suggests that the tax-to-GDP ratio is declining, rather than improving. According to the Centre for Policy Dialogue (CPD), the ratio has fallen further to 6.6 per cent in FY2024-25, highlighting a widening gap between revenue target and achievement.

Successive governments have set ambitious targets for raising the tax-to-GDP ratio. However, the governments have always fallen short fulfilling the target. A research report by IDLC Finance Limited noted that in the FY2024 budget the tax-to-GDP target was fixed at 9.6 per cent. Meanwhile, under the $4.7 billion loan agreement with the International Monetary Fund (IMF), Bangladesh has committed to increasing the ratio by at least 0.5 percentage points in both FY2023-24 and FY2024-25. However, the ratio has been on a reverse gear, declining further. This underlines a bitter truth: revenue growth target will remain elusive without a comprehensive overhaul of the existing tax structure.

Widening the tax base, bringing informal businesses into the net, cracking down on evasion and ending unjustified exemptions are some crucial steps to boost revenue mobilisation. Currently, there are over 10 million TIN holders, but only about one-third file returns regularly. Many affluent individuals lead lavish lifestyles yet evade taxes by reporting little or no income on their income tax returns. To increase compliance, the NBR has made it mandatory to show proof of tax return submission when availing 45 services. But yet, tax evasion remains reportedly rampant among many professionals and businesses.

It is alleged that to evade taxes, businesses often maintain two sets of ledger books: one for the tax authorities showing minimal profits, and another for internal use recording actual earnings. This practice of underreporting income and overstating expenses is often facilitated by administrative weaknesses and, more nefariously, the collusion of corrupt officials who facilitate evasion in exchange for kickbacks. Such a system punishes genuine taxpayers, demotivating the honest while rewarding the tax dodger.

Addressing this does not mean simply raising tax rates, which often only further burdens those already in the system. Instead, the solution lies in expansion and digitization of tax collection. Nearly 40 per cent of the Bangladesh economy operates in the informal sector, largely untouched by the tax net. Small business owners often avoid the system not to evade tax, but out of a legitimate fear of complex paperwork and harassment by officials. A simplified tax regime, say, a flat one-percent VAT and a one-page return submitted via a mobile app for small enterprises could bring millions into the fold. The success stories of India and Indonesia prove that when the state makes tax submission process simple and hassle-free, people are more likely to comply.

Besides, in this digital era, technology must form the backbone of efforts to modernise tax collection. In the retail sector, absence of sales receipts creates opportunities for VAT evasion. Introducing mandatory e-invoicing, QR-coded receipts and integrated point-of-sale (POS) systems can ensure that each transaction is automatically recorded in a central database. Linking these systems to tax authority servers in real time would drastically reduce the scope for underreporting sales. Furthermore, the implementation of AI-based cross-checking could allow the NBR to match tax filings against electricity bills, bank transactions, and foreign travel records, a method that has seen great success in South Korea and Singapore.

Ultimately, the BNP's success in revitalising the economy depends on its ability to build a bridge of trust. If citizens believe their hard-earned money is merely lining the pockets of the corrupt, they will continue to hide it. If they see a transparent, technology-driven system where tax revenue clearly translates into better schools, safer roads and functional hospitals, they will participate willingly. So, for the new government, fixing the tax system is not just a fiscal necessity; this could be a stepping stone for a sustainable, development-oriented economy.

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