Overcoming tax reform challenges in Bangladesh

Thu Oct 3, 2024 11:00 AM Last update on: Thu Oct 3, 2024 11:00 AM

FILE ILLUSTRATION: BIPLOB CHAKROBORTY

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FILE ILLUSTRATION: BIPLOB CHAKROBORTY

Bangladesh, a country with a tax-to-GDP ratio as low as 7.5 percent—one of the lowest in the world—is unable to invest adequately in critical social sectors such as health, education, and social protection. Low revenue from taxes hinders economic growth and perpetuates cycles of poverty and inequality. Most of the challenges in addressing tax reforms have become more significant in the context of the changed political landscape in Bangladesh after the July-August mass uprising.

Reforming Bangladesh’s tax system faces strong political economic challenges. While there is a need to reform policies, laws, and regulations related to taxation, equally important is the undertaking of organizational reform of the National Board of Revenue (NBR), especially separating its policy formulation and implementation roles. Resistance by vested interests and political patronage of corrupt business people evading taxes have tended to delay much-needed reforms.

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In this regard, efforts to digitize tax administration remains minimal, which constrains revenue collection. Effective digital tools could streamline taxation processes, reduce errors, and increase efficiency. However, due to the absence of a strong digital infrastructure and slow adoption, revenue leakage increases, hindering the optimization of tax collection mechanisms.

As Bangladesh prepares for LDC graduation, there needs to be a progressive tariff rationalization by adjusting trade policy in a way that it balances revenue generation and global competitiveness. Revenue losses from reduced tariffs must be compensated through improvement in direct tax measures. A progressive tax system should be adopted to ensure wealthy individuals and businesses pay a fair share of the burden, thereby reducing income inequality and widening the tax base.

The heavy reliance on indirect taxes, such as VAT and customs duty, for instance, makes the current tax structure regressive and less effective in drawing income from higher-income individuals and businesses. Tax structure reform should increase reliance on progressive direct taxes, which would make the system not only fairer but also more efficient. A well-balanced tax structure would better capture income and wealth, with less reliance on regressive taxes that disproportionately impact lower-income individuals.

Addressing income inequality calls for a reform of direct taxes. Revision of wealth tax, institution of inheritance tax, and a widening of the tax net to bring higher-income groups within its ambition are required. In this way, direct tax reforms can create a fairer system where a greater share of income from wealthier sections of society falls within the revenue net.

Current tax exemption practices are neither evidence-based nor time-bound, leading to revenue leakages. Rationalizing such exemptions based on effectiveness analysis and consistency with overall fiscal objectives would simplify the tax code and reduce distortions, enhancing transparency—a realistic way to improve revenue collection.

Tax compliance is relatively low in Bangladesh, while tax evasion and avoidance are high. These issues partly result from weak enforcement and limited audit capacity. Therefore, strengthening audit capabilities and implementing stringent measures against evasion are needed to ensure greater compliance with taxpayers’ obligations.

The lack of confidence among taxpayers erodes voluntary compliance. And so, services provided to taxpayers need to be improved by adopting better digital infrastructure and increasing transparency. Indeed, effective taxpayer services, clear communication, and support can help foster trust. Moreover, inefficiency and corruption in tax administration must also be eliminated to improve voluntary compliance.

Governance issues in tax administration and corruption undermine efforts to improve revenue collection. The prevalence of bribery and inefficiency lead to a loss of confidence in the tax system and, consequently, compliance. Addressing these issues requires serious anti-corruption measures supported by transparent practices and a commitment to good governance.

The presence of a large informal sector has kept the tax base narrow in Bangladesh. What is needed is a gradual formalization of the informal sector to bring more entities into the tax net. Simplifying compliance procedures for SMEs and informal businesses can increase their participation in the formal economy.

The gig economy and digital workplaces are fast-growing sectors that make an important contribution to employment and earnings of foreign exchange. Specialized tax strategies are needed to ensure fair taxation without discouraging growth. Policies should incorporate these emerging sectors into the tax system while providing incentives for their development.

Market-based land prices at the time of registration ensure that the revenues from local government sources are higher. Accurate valuation in line with market conditions will improve revenue collection and strengthen local government finances. Transparency in land pricing and equity will help prevent corruption and ensure people-oriented development.

Bangladesh’s tax administration faces inefficiencies due to limited resources, outdated technology, and insufficient training. Modernizing technology, increasing resources, and enhancing the training of tax officials are essential to streamline tax collection and enforcement. A well-resourced and technologically advanced tax administration will face fewer challenges in dealing with complex taxation issues and ensuring compliance.

Tax policy and administration are heavily influenced by political factors. The main reason for potential resistance to reforms, such as increasing tax rates or expanding the base, is the belief that these measures would be unpopular with key business interests. Overcoming political opposition requires finding a balance between reform objectives and political realities to effect necessary changes with minimal adverse reactions.

Outdated or unclear tax laws and regulations create uncertainty and inefficiencies. Regularly updating tax laws to reflect current economic conditions and international best practices can enhance clarity and effectiveness. Clear and up-to-date regulations will reduce uncertainty for taxpayers and improve overall tax administration.

Bangladesh’s tax system is at a pivotal point, with significant challenges and opportunities for reform. Addressing the low tax-to-GDP ratio, overcoming political and administrative hurdles, and implementing revenue strategic reforms are essential for enhancing generation and supporting sustainable development. By focusing on direct tax reforms, rationalizing exemptions, improving taxpayer services, and modernizing tax administration, Bangladesh can build a more equitable and efficient tax system. These efforts will support economic growth and ensure that essential social sectors receive the investment needed to drive long-term prosperity.

Dr. Selim Raihan is professor at the Department of Economics in the University of Dhaka and executive director of South Asian Network on Economic Modeling (SANEM). He can be reached at (email protected).

Views expressed in this article are the author’s own.

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