Bangladesh’s tax-to-GDP ratio has stayed low for years, which limits the country’s ability to invest in roads, healthcare, schools, and other public services. While most discussions focus on big corporations and wealthy individuals, the majority of tax avoiders are actually small shop owners and micro-entrepreneurs, like the grocer in the alley, the clothing trader in a bazaar, or the electronics stall in a district town. These people are not hiding wealth offshore or taking advantage of loopholes. They are ordinary citizens trying to work within a system that does not suit their needs.
For many of these traders, the problem with filing income tax is not that they are unwilling, but that they lack the ability. The forms are complicated, the language is technical, and the process often means hiring a tax consultant, which many cannot afford. VAT compliance is even harder. Mushak forms, digital submissions, record-keeping, and audits all require a level of paperwork and organisation that small businesses just do not have.
As a result, most small traders do not take part in the system at all. They stay outside the tax net, not because they do not want to contribute, but because the system puts up barriers they cannot overcome.
Small traders are a big part of Bangladesh’s business activity. The informal sector is thought to make up more than a third of the country’s GDP and employs most of the workforce. Still, this large part of the economy pays very little in formal taxes.
The reason is clear: the system was not made for them.
A VAT system that relies on detailed paperwork might work for big factories and corporate retailers, but it does not work for a small shop with just one cashier. In the same way, income tax systems that depend on itemized expenses and audited profits may suit professionals, but they do not fit the daily cash sales, low literacy, and limited record-keeping of small traders.
This gap between how policies are designed and how the economy works leads to more informality, mistrust, and people not following the rules.
Many developing countries have faced the same problems. The ways they solved them can teach us a lot.
India’s GST Composition Scheme lets small traders with low sales pay a simple, flat tax with almost no paperwork. Pakistan, Brazil, Indonesia, and Kenya have also set up similar easy tax and VAT systems. The results have been the same: more people paying taxes, less harassment, better voluntary compliance, and more trust between citizens and the government.
Bangladesh can adopt a similar approach—one that recognises the limitations but also the potential of small.
A Simplified Tax Model: One practical solution is a two-part system with a flat income tax and a simple, turnover-based VAT.
A flat income tax could depend on the size of the shop, the type of business, and where it is located. For example, a small neighbourhood shop might pay Tk 5,000 a year, a medium trader Tk 10,000, and a larger outlet Tk 20,000 or more. This would remove the need for tax returns, accountants, or complicated paperwork. It is simple, predictable, and fair.
A simplified VAT could be a small percentage of estimated or self-declared turnover, maybe between 1 and 3 per cent. This would get rid of the need for detailed Mushak forms and replace them with a system that small traders can actually handle.
Offering digital payment incentives, like small discounts for paying taxes online, could help more people comply and create a digital record that builds trust and cuts down on corruption.
Simplifying the system also means enforcing the rules fairly. Many small traders are afraid of tax officials, not because they want to cheat, but because inspections can be unpredictable and depend too much on personal judgment. A simpler system should go hand in hand with clear, open, and fair enforcement. Penalties should be consistent, not harsh, and the risk of corruption should be kept as low as possible.
The goal is not to scare people, but to move from fear to fairness. People should take part in the tax system because it is manageable, not because they feel threatened.
Challenges: No reform is perfect, and policymakers need to watch out for possible misuse. One clear risk is that larger businesses might try to split their operations into smaller units to qualify for the lower flat-rate taxes intended for microenterprises. To keep the system fair, this kind of manipulation should face clear, fair, and consistent consequences. These could include large financial penalties, license revocation, and, if the misrepresentation is obvious and repeated, even the closure of the business. Consistent enforcement, not random action, is key to making sure the system is not abused and that real small traders are protected from those trying to take advantage.
End note: Bangladesh’s small traders are not avoiding taxes. They are hardworking people trying to work within a system that does not fit their reality. Giving them a simple, fair way to join the tax system is both right and necessary for the economy. A simpler tax and VAT system respects their challenges and helps them play a part in the country’s future.
If Bangladesh wants a tax system that is modern, fair, and caring, reform should start where the need is greatest: with the millions of small businesses that are the heart of our economy.
Masud.lafarge@gmail.com
© 2026 - All Rights with The Financial Express
