The International Monetary Fund (IMF) has recommended that the government recalibrate personal income tax slabs in the Finance Act 2025 to rationalise tax expenditure.
It also recommended repealing allowances and reductions, abolishing tax benefits on capital gains for the share market, remittances, zero-coupon bonds and investment rebates on bonds.
In a report submitted to the National Board of Revenue (NBR) on Thursday after a ten-day discussion from March 4, the tax policy mission of IMF's Fiscal Affairs Department, comprising David William Baar, Arbind Modi and David Robert Wentworth, also recommended withdrawing the depletion allowance provided for mining and petroleum extraction and phasing out tax benefits on IT-enabled services.
They recommended a phased withdrawal of tax exemptions, with a schedule of June 2024 for information technology and June 2025 for manufacturing and industrial undertakings.
Suggesting a short-term recalibration of personal income tax, the pool of tax experts recommended reducing employment and investment allowances and eliminating exclusions from income related to passive investment income.
The report recommended abolishing the general employment income deduction of Tk 4,50,000 or one-third of employment income (whichever is higher) and the exemption for allowances paid to government employees.
"Restructure the personal income tax slabs by increasing the zero-rate threshold to Tk 5,00,000 from Tk 3,50,000 and abolishing the lower rate of 5.0 per cent," the report said.
A marginal rate of 10 per cent would apply to income between Tk 500,000 and Tk 8,00,000, according to the IMF.
The IMF also recommended that the NBR evaluate corporate tax rates now and rationalise them in 2026 or 2027. The report said the NBR should evaluate depreciation allowances and allowances to ensure accelerated cost recovery for investment in durable assets.
It suggested that the tax authorities consider allowing business losses to be carried forward for at least ten years.
The IMF team requested an evaluation of reliefs provided in the law and the introduction of legislative amendments to implement those that remain relevant, effective, economically efficient and equitable.
"Evaluate pension and provident fund contributions, provident fund investment income and pension benefits to ensure that the income is taxed once, and only once," the IMF report said.
The best practice is not to tax contributions or pension fund investment income while taxing pension benefits themselves at the standard personal income tax rates and slabs.
The IMF suggested abolishing the exemption for pensions received from the government and pension funds, as well as the exemption of Tk 25 million for gratuities received from the government.
"Immediately eliminate the legislative authority for discretionary tax expenditure in the Finance Act-2024 and improve reporting," the IMF tax experts suggested.
The team recommended against granting any new exemptions and repealing existing waivers by July 2027 under a section that allows tax authorities to grant exemptions to any person or class of persons.
It suggested amending a provision by July 2024 to prohibit providing tax exemptions to businesses undergoing regulatory changes.
The Finance Act 2024 should mandate electronic filing and tax payment for tax years commencing after 30 June 2024 for all large companies and any corporate taxpayer receiving tax incentives.
Companies would not be eligible to claim tax benefits, including exclusions, lower rates, or tax holidays, unless they submit electronic tax returns and pay taxes online.
The IMF team agreed to extend support for developing e-filing systems for corporate taxpayers.
"A tax expenditure is not necessarily a bad policy tool. Offering assistance through the tax code can sometimes have distinct advantages over direct spending measures," the IMF report, titled 'Bangladesh: Income Tax Expenditure', handed to the NBR on Thursday, acknowledged.
However, the team recommended taking necessary measures and adopting a strategic approach to prepare Bangladesh for its role as a global economy by 2026.
The report notes that preferential treatment of domestic businesses is incompatible with World Trade Organization (WTO) trade agreements.
"International best practice will increase the competitiveness of both import-substituting and export-oriented businesses, and help attract foreign direct investment," it said.
The report suggested migrating to e-filing and payment in phases, starting with the Finance Act 2024 for all large companies. A second phase in 2026 or 2027 could include all legal persons and individual taxpayers, with conditions attached to availing tax incentives.
The mission conducted a multi-day workshop with NBR officials on microsimulation modelling to accurately analyse income tax.
"The NBR cannot build an income tax microsimulation model without first developing an electronic database of corporate and individual tax returns," the report said.
It recommended that the NBR improve tax data for better administration and policy analysis.
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