Picture a mid-sized garment accessories supplier in Narsingdi. The owner, let’s call her Sultana, runs a compliant business: Maintained accounts, timely VAT filings, and withholding taxes diligently deducted from every transaction.
Last fiscal year, her business barely broke even as rising input costs consumed her margins. Yet, despite posting near-zero profit, she received an advance income tax demand calculated on her gross turnover. The tax was real but the profit was not.
Meanwhile, an unregistered competitor two streets away, operating entirely in cash, paid nothing, effortlessly undercutting her prices. In Bangladesh’s revenue ecosystem, compliance has become a severe competitive disadvantage. This is not an isolated story. It is the structural logic of our fiscal framework.
This policy misalignment remains a key challenge for the 13th Parliament as the national budget for FY2026-27 is being presented. A fiscal plan that fails to address these structural issues will reinforce an unsustainable status quo: A system that suffocates honest enterprise while letting the informal economy run wild.
Why the math doesn't add up
Sultana’s dilemma is the predictable consequence of an overwhelming macro crisis: Bangladesh’s tax-to-GDP ratio has slid to 6.8%, ranking among the lowest for any economy of comparable size globally. This sits at less than half of the 15% minimum benchmark the World Bank Group mandates for stable developing growth.
Curiously, this deficit persists despite punitive statutory rates: A 27.5% corporate tax on non-listed firms, a 30% top-tier personal income tax coupled with an unusually high “wealth surcharge” on assets gained through tax-paid income, and a standard 15% VAT.
The systemic failure is that this fiscal weight falls exclusively on formal, compliant businesses, while an informal economy holding 84% of the workforcecontributes virtually nothing.
With National Board of Revenue (NBR) data showing that nearly two-thirds of registered taxpayers skip filing completely, only one in 40 Bangladeshis actively supports the exchequer.
This lopsided architecture exposes a deep institutional disconnect. Out of a population exceeding 170 million, the NBR often points to its expanding database of issued TINs as a metric of progress, yet registration rarely translates to revenue as the majority hold these credentials solely to secure bank loans or register property, leaving them entirely detached from active compliance.
This creates a vast wilderness of "ghost taxpayers." Consequently, the immense fiscal burden falls almost entirely on a microscopic sliver of formal, compliant businesses and individuals.
The NBR responds to this not by hunting for tax evaders or formalizing the underground economy, but by aggressively tightening the audit squeeze on the visible few already caught in its net.
The minimum tax and VAT traps
The compliance tools deployed by the state have an increasingly predatory logic. Foremost among them is a draconian minimum tax regime that targets gross receipts, from raw imports to daily turnover, rather than actual corporate profitability.
When an unexpected macro shock forces a company into a loss, the exchequer refuses to adjust; the tax must still be paid. Under current fiscal policy, even verified loss-making firms remain legally trapped by a flat 1% tax on their total turnover.
For a small or mid-sized business pushing a Tk 20 crore turnover on thin survival margins, this absolute charge can easily exceed its entire net earnings for the year, effectively transforming an income tax into a penalty on existence.
This operational challenge is further compounded by a fragmented Value Added Tax (VAT) system. Although the standard rate is 15%, the administrative framework is splintered into eight different tiers: Featuring reduced brackets at 1.5%, 2%, 2.4%, 4.5%, 5%, 7.5%, and 10% depending on the specific product or service category.
The critical policy flaw is that only businesses paying the full 15% baseline rate are legally permitted to claim input tax credits, all others cannot. This creates a harsh compliance penalty on smaller enterprises, forcing them to absorb the full brunt of operational costs without any offsetting relief.
Meanwhile, for larger companies operating under the standard 15% rate who routinely overpay their obligations, the bureaucratic rebate process is so prolonged and susceptible to informal pressure that many owners often write off their legitimate claims.
The good news is that the government is finally transitioning into uniform 15% VAT regime amid some concerns, but the provision for rebate is meant for reducing the overall tax incidence.
Unpredictable policies, rising shortfalls
Then come supplementary duties, ranging from 5% to 65.5%, applied through arbitrary Statutory Regulatory Orders (SROs) with minimal notice.
For example, the interim government abruptly adjusted VAT and supplementary duties on dozens of raw materials and consumer goods during its mid-fiscal year tenure, only to partially roll back several changes within weeks following intense pressure from local business chambers.
That predictable sequence: Sudden imposition, public outcry, and erratic withdrawal is not structural reform. It is the revenue system at its most volatile. No foreign investor can build a credible five-year financial model into an emerging market where key fiscal liabilities can shift within a fortnight due to executive whim.
The mathematical reality of this system paints a bleak picture. In FY25, the NBR collected Tk 3.71 lakh crore against a revised target of Tk 4.64 lakh crore, racking up a record Tk 92,625 crore shortfall. Fast forward to the current cycle, and the revenue deficit has already breached over 100,000 crore in the first 10 months of FY26, outstripping the total previous year's shortfall.
To chase the remaining part of the annual target, the tax authority would need an unprecedented final-quarter sprint that local analysts dismiss as pure fantasy. Consequently, the government has resorted to aggressive borrowing.
By exceeding its full-year bank borrowing projection before the final quarter even hit, the state is aggressively crowding out private enterprise. This cycle forces interest rates upward, starves private industries of capital, and fuels supply-side inflation -- the ultimate penalty for a failing tax system.
The FDI reality check
The foreign direct investment (FDI) numbers expose what the tax regime costs the economy in concrete terms. Net FDI fell to a five-year low of $1.27 billion in 2024, and even that bleak figure flatters the reality: Nearly 73% of inflows came from existing companies reinvesting trapped earnings because of strict repatriation barriers, not from new entrants choosing Bangladesh over its competitors.
The tax structure is a central reason investors stay away. Foreign companies face a 27.5% corporate rate compounded by a non-refundable minimum turnover tax levied on gross receipts regardless of profitability.
Furthermore, disallowed expense rules that tax genuine business costs as additional income penalizing investors even in their loss-making years. The Asian Development Bank has noted that NBR's conduct directly impacts every major investment decision.
This leaves Bangladesh at a severe competitive disadvantage. In 2024, Bangladesh attracted just 0.33% of GDP in FDI, against Vietnam's 4.2% and India's 0.7% -- countries that have built predictable tax frameworks to anchor global capital.
FICCI has stated plainly that both tax revenue and FDI would likely increase if the tax environment were made more conducive.
Every year that reform is deferred is a year Vietnam and India extend a lead that becomes harder to close.
How other countries fixed their problem
Emerging economies confronting this same combination of a narrow base, hostile auditing environments, and permanent shortfalls have consistently found a sustainable path forward. They realize that survival relies on expanding the tax-net wider through automation, rather than continuously multiplying demands on the visible few who have nowhere left to hide.
Georgia, in the years following its 2003 Rose Revolution, was collecting barely 14-15% of GDP in central tax revenues with an economy running substantially off the books.
The reformist government collapsed multiple convoluted taxes down to just a handful of core rates, introduced a flat corporate profits tax of 15%, and rapidly automated all tax administration to eliminate human discretion at every contact point.
By streamlining the administrative architecture and modernizing its refund structures, revenue from VAT alone grewfrom 8.5% of GDP in 2005 to about 11.5% by 2009, helping the country's total tax-to-GDP ratio more than double to 25%.
When compliance was made easy and excess gatekeeping was systematically removed, the revenue base expanded on its own.
Estonia abolished corporate income tax on retained and reinvested profits. Tax applies only when profits leave the company as dividends, meaning a business can grow, hire, and reinvest with no annual corporate tax on earnings kept inside the firm.
Estonia has topped global tax competitiveness rankings for over a decade as a result. The principle is directly relevant: Taxing growth discourages it, while taxing gross receipts when a business is losing money is simply indefensible.
Rwanda used digital e-invoicing and third-party data integration to raise its tax-to-GDP ratio without raising rates. The Rwanda Revenue Authority linked its system to electronic billing machines across the retail and services sector, creating a real-time audit trail that made under-reporting both visible and costly. Technology, rather than predatory enforcement, is what draws informal economic activity into the formal revenue stream.
New Zealand offers the clearest model for VAT reform. The country operates a single Goods and Services Tax of 15% with virtually no exemptions and no reduced tiers. Every business, regardless of size or sector, operates under identical rules, and returns are filed online in minutes.
New Zealand consistently ranks among the world’s easiest and most competitive places to pay taxes, not because rates are low, but because the rules are uniform and the process demands almost no effort to navigate.
Path to a natural compliance
The foundations for reform in Bangladesh are already taking shape. Driven by an IMF-backed mandate, the proposed ‘Revenue Policy’ and ‘Revenue Management’ framework aims to dismantle the NBR’s single-board configuration.
By pursuing a distinct policy division alongside an independent management division, the administration is attempting the exact structural split modeled after global principles of governance that successful reformers like Georgia and New Zealand used to curb bureaucratic overreach. Combined with ongoing rollouts of automated tax credit software and mandatory online filing, these steps intentionally mirror Rwanda’s real-time digital compliance model.
This administrative shift acknowledges a global reality: When a single agency drafts the rules it is tasked to enforce, both functions break down. Separating policy from enforcement is an overdue prerequisite for economic survival.
Structural change only matters if policy content evolves too. To widen the tax net and avert severe budget shortfalls without over-burdening a small compliant group, the newly proposed policy architecture must dismantle self-defeating barriers.
It must abolish the minimum tax on gross receipts for loss-making firms, unify the VAT into a single tier backed by an automated credit mechanism, end erratic mid-year duty revisions by executive order, and mandate digital invoicing across the formal sector.
By utilizing existing data lines from mobile banking, financial services, and import declarations, Bangladesh can draw the informal economy into the tax fold seamlessly. Overhauling these rules will radically improve the ease of doing business and restore investor predictability, making the country a magnetic hub for FDI.
Crucially, annual budget expansions must be pegged to realistic domestic tax collection capacity rather than an over-reliance on local and foreign borrowing; a functional revenue system must work to meet, not outpace, the actual aspirations of the nation.
The goal is simple: Transform tax compliance into a natural, straightforward choice rather than an administrative penalty. This transition has always been critical, but has now become an urgent necessity as a fragile domestic economy prepares for its upcoming LDC graduation timeline.
Dr Sabbir Ahmad is an engineering and corporate leader with extensive global experience in digital connectivity, energy infrastructure, and sustainable development. He can be reached at sabbir@ieee.org.