Bangladesh’s economy faces a significant challenge with its low tax collection compared to the size of the economy, placing it only marginally above countries like Yemen and Sudan in terms of tax-GDP ratio. The country’s tax revenue in FY2024-25 was below seven percent, highlighting the urgent need to enhance tax collection for the establishment of a welfare-driven state. The critical question remains on the approach to boosting tax revenue: should it be through indirect taxes like VAT and customs duties paid by the general populace or through direct taxes targeting the income and profits of affluent individuals? Will the focus be on reducing tax evasion among the wealthy or extracting more from existing taxpayers?
The focus on addressing Bangladesh’s revenue challenges, as outlined in the BNP’s election manifesto, emphasizes a shift from a primarily technical issue to a structural problem within the political economy. The party has committed to reforming this system by broadening the revenue base through fairer, more inclusive, and technology-enabled income tax and VAT systems. It aims to bring high-income earners, professionals, business owners, and property holders into the tax net while combating tax evasion through digital tools, information sharing, and risk-based audits.
Examining the alignment of these promises with the tax framework of the proposed FY2026-27 budget reveals notable changes. The new budget suggests reducing source taxes on approximately 60 essential commodities, including rice, wheat, flour, edible oil, sugar, fish, meat, onion, and ginger. The existing source tax rates of five percent, two percent, and one percent would be lowered to 0.5 percent, potentially alleviating the tax burden during import and distribution stages. If these reductions translate to lower retail prices, they could aid in easing inflation.
Although this initiative is laudable, the overall impact on public tax burden necessitates a broader assessment of the tax structure, particularly the balance between direct and indirect taxation. This ratio is pivotal in determining who shoulders government expenditure and who reaps the benefits. Direct taxes target individuals with higher financial capacity, whereas indirect taxes like VAT and duties are levied across the board, irrespective of income levels. A tax system heavily reliant on ordinary citizens for revenue tends to exacerbate inequality, emphasizing the importance of bolstering direct taxation, especially on affluent segments of society.
The key concern revolves around whether the tax concessions introduced in the FY2027 budget alter this fundamental taxation structure. If the reliance on indirect taxes persists, these concessions may offer temporary relief but fail to address the underlying issue of ordinary citizens bearing the primary tax burden.
As per the BNP government’s budget proposal, the National Board of Revenue (NBR) aims to collect Tk 604,000 crore in revenue, with Tk 219,835 crore originating from direct taxes on income, profits, and capital owned by affluent individuals. In contrast, Tk 384,165 crore will be derived from indirect taxes such as VAT, supplementary duties, and import duties. This breakdown indicates that only 36.4 percent of the revenue target stems from direct taxes, while 63.6 percent relies on indirect taxes paid by the public. Comparatively, the shares of direct and indirect taxes in the revised FY2026 budget were 36.2 percent and 63.8 percent, respectively. In FY2025, these figures stood at 34.44 percent and 65.56 percent.
The data underscores a persistent trend of heavy dependence on indirect taxes in the new budget, despite positive allocations for health, education, and social welfare. The budget lacks substantial structural changes to address inequality through the tax system, with measures primarily focused on extracting additional revenue from existing taxpayers rather than broadening the tax base or curbing tax evasion among the affluent.
Several proposed measures within the budget might disproportionately burden lower and middle-income taxpayers. For instance, while the tax-free income threshold has been raised by Tk 25,000, the elimination of the initial five percent tax bracket in favor of a 10 percent rate could escalate the tax burden for existing taxpayers, particularly affecting lower-income groups. Reductions in tax rebates for investments could further strain taxpayers, with the proposed changes diminishing tax relief for investment categories such as savings certificates, deposit pension schemes (DPS), and life insurance premiums.
Moreover, the budget introduces increased taxes on returns from savings certificates, impacting middle-class households and pensioners who heavily rely on these investments. The withholding tax on savings certificates has been revised to 10 percent for all investments, eliminating the previous arrangement where the withholding tax served as the final tax liability. This alteration means that income from savings certificates will now be subject to individual tax slabs, potentially reducing net returns for middle-class families and pensioners.
The overall trend indicates a shift away from the commitment to bring high-income individuals and businesses under the tax net, with the burden increasingly falling on existing taxpayers. Measures like the advance tax on small retailers, aimed at broadening the tax base, could inadvertently raise costs for ordinary consumers, exacerbating
