The recent Value Added Tax (VAT) hike in Bangladesh has sparked heated debate, reflecting worries from businesses, consumers, and authorities alike. The decision is a striking example of this imbalance, threatening economic inequality and restricting consumerism in a country where a large proportion of the population already struggles to make ends meet. Although VAT is an important revenue-generating tool that allows governments to support public goods and services, applying it without consideration for socio-economic reality can disproportionately impact those who can least afford it. While the government claims that the change is necessary to improve revenue collection, critics are concerned about its impact on inflation, purchasing power, and economic growth.
In early January 2025, the National Board of Revenue (NBR) implemented major increases in VAT and extra charges on approximately 100 goods and services. VAT on air-conditioned restaurant bills was slated to jump from 5% to 15%, directly increasing the cost of dining out. Similarly, cinema tickets and similar entertainment services saw a VAT hike from 10% to 15%. VAT rates on items such as cookies, cakes, pickles, and tomato sauce increased to 15%.
Furthermore, mobile phone and internet services saw an additional duty increase from 20% to 23%, resulting in a cumulative tax burden of more than 42.45% for consumers. Air travel has also become more expensive due to increasing excise levies on prices. This decision aims to boost the nation's tax-to-GDP ratio but has raised considerable concerns among consumers and industry players, especially given the current inflationary pressures.
However, the government's rationale for raising VAT rates is understandable … in theory. With the national budget under pressure from rising expenses and declining foreign aid, increasing revenue is essential. Proponents of the raise argue that it is a vital step toward increasing domestic income mobilization, which remains low when compared to regional counterparts. Bangladesh's tax-to-GDP ratio is roughly 9%, much lower than the global average of 15%. Without strong revenue streams, the government will have difficulty supporting key infrastructure projects, social safety nets, and debt servicing.
However, the reliance on indirect taxes such as VAT disproportionately affects low- and middle-income people. Unlike direct taxes, which target income and wealth, VAT applies universally to goods and services, resulting in poorer residents paying a higher proportion of their income than wealthy persons do.
Basically, Bangladesh's economy, which is dominated by agriculture, SMEs, and labour-intensive sectors, is primarily dependent on domestic consumption. Increasing VAT could discourage consumption, stifling growth in important industries like retail, food, and manufacturing. Small businesses, which are already fragile due to inflation and post-pandemic recovery issues, may struggle to absorb additional costs or pass them on to customers. Furthermore, increased VAT on necessary products may worsen inflation, which was at 10.89% in December 2024. This immediately impacts low- and middle-income households, reducing their purchasing power.
Moreover, the timing of this hike raises concerns. Inflation has been progressively increasing, owing to global supply chain disruptions and local currency devaluation. Food, fuel, and healthcare are already expensive. Raising VAT exacerbates the cost-of-living dilemma, plunging vulnerable communities deeper into poverty and limiting their access to essential goods. Citizens, who are already struggling with rising power bills and stagnant earnings, see the VAT increase as yet another blow.
Achieving a balance between revenue generation and economic well-being demands a comprehensive approach that carefully considers the needs of both the state and its citizens. While the government's goal of improving the tax-to-GDP ratio is understandable, the timing and scope of the VAT rises raises concerns. Implementing such steps amid existing inflationary pressures may inadvertently reduce consumer spending and stifle economic growth. A more balanced approach, including stakeholder engagements and gradual deployments, could achieve fiscal objectives without causing undue pain for consumers and businesses. For instance, exempting essential products and services from VAT or instituting a progressive tax structure will ensure that the wealthiest pay a fairer part of the tax burden.
Furthermore, improving tax compliance and combating evasion among major firms could result in enormous income without disproportionately affecting ordinary citizens. Essential commodities and services used primarily by low-income people should be exempt from higher VAT rates. It is heartening to see the government understanding this and rolling back some of the more egregious VAT hikes, this shows that the administration is indeed willing to listen to reason.
Overall, public trust in fiscal policy is based on its perceived fairness and efficacy. The success of such policies often depends on whether they are seen as fair and just. Without equity-focused measures, the VAT increase risks alienating the people it aims to support. This alienation might lead to reduced compliance and even public dissent, or may create doubt on the government's ability to manage the economy effectively.
Ultimately, taxation is not just about numbers -- it reflects the social contract between a government and its people. In contrast, the VAT hike in Bangladesh in its current form threatens to break that contract. Although enhancing revenue through tax reforms is essential for Bangladesh's development, it is imperative to balance these initiatives with the economic realities faced by its citizens. Collaborative policy-making that considers the perspectives of all stakeholders will be crucial in navigating this complex economic landscape. By and large, striking a balance between revenue generation and economic stability is essential to ensure that the benefits outweigh the costs.
Bithe Rani Aich is Research Associate, Bangladesh Institute of Governance and Management.