The interim government has decided to increase Value Added Tax (VAT). Sources indicate that this decision is primarily driven by pressure from the International Monetary Fund (IMF) to amend the VAT and Supplementary Duty Act.
As a result, VAT on 43 types of goods and services, including ready-made garments, air-conditioned restaurants, sweets, biscuits, pickles, mosquito coils, tissue paper, and non-AC hotels, may increase to 15%.
This hike is expected to raise the prices of these goods and services, potentially increasing their cost even before the budget announcement.
Consequently, the purchasing power of the general public may decline, creating new challenges for businesses.
Economists and businesspeople have already started criticizing this decision, suggesting that revenue collection could have been improved by increasing direct taxes instead.
The draft of the “Value Added Tax and Supplementary Duty (Amendment) Ordinance, 2025” received preliminary approval during the Advisory Council meeting on Wednesday.
While the approval was officially announced, the specific changes to VAT were not disclosed.
However, the interim government’s financial adviser, Dr Salehuddin Ahmed, said that the VAT increase would not impact product prices because essential goods would have their duties reduced to zero.
At a press briefing following a meeting of the Cabinet Committee on Government Procurement on Thursday, he said: “Our key inflation indicators are rice and lentils. The items for which we are increasing taxes have minimal impact on inflation.”
When asked if the decision would burden the general public, he replied: “I don’t think it will cause hardship.”
On the other hand, business leaders argue that raising VAT at this time is a suicidal move.
Many in the business community believe that instead of increasing revenue, this decision might reduce it.
They point out that rising inflation has already made life difficult for the public. Increasing VAT on essential items like life-saving drugs, LPG, powdered milk, biscuits, pickles, tomato ketchup, juice, tissue paper, fruits, soap, detergent, sweets, and slippers would put additional pressure on people.
Business leaders across various sectors said that after the political upheaval triggered by student protests, businesses are still struggling to recover from losses. Under such circumstances, the VAT hike feels like a double blow.
Sources reveal that the IMF recently mandated a 15% VAT rate as part of its loan conditions.
After visiting Bangladesh in December to assess the ongoing $4.7 billion loan program, the IMF approved an additional $750 million.
However, it attached strict conditions, including increasing tax collection and creating separate policy-making institutions.
Economists believe this VAT increase is part of the effort to meet those conditions.
They warn that this measure might raise expenses for the middle and upper-middle classes and pose risks to the economy.
Dr Mashroor Riaz, executive director of the private research organization Policy Exchange, said that raising the VAT rate under current circumstances would undoubtedly exacerbate inflation.
He argued that such a decision, without thorough research and analysis, might fail to yield economic benefits and could create risks.
SM Nazrul Hossain, vice president of the Consumers Association of Bangladesh (CAB), emphasized that all the items facing VAT hikes, except cigarettes, are essential for daily living. If prices increase, living costs will rise, further aggravating inflation.
VAT as a revenue source
VAT is a major revenue stream for the government. Currently, 525,000 establishments are registered for VAT, but only 350,000 pay VAT regularly.
Many establishments remain outside the VAT net.
The National Board of Revenue (NBR) has also failed to install the required number of Electronic Fiscal Devices (EFDs) to boost VAT collection.
For the fiscal year 2024-25, the NBR's revenue target is Tk480,000 crore. By November, it had collected Tk127,000 crore against a target of Tk169,000 crore, leaving a shortfall of Tk42,000 crore.
The government is reportedly aiming to address this deficit by imposing new VAT measures.
Impact on goods and services
The VAT on air-conditioned restaurant bills, currently 5%, may rise to 15%. Similarly, VAT on ready-made garments, sweets, non-AC hotels, biscuits, pickles, mosquito coils, mattresses, transformers, and tissue paper is likely to increase from the current rate of 7.5% to 15%.
The government is also planning to impose a 15% VAT on the cost of obtaining a driving license card from the Bangladesh Road Transport Authority (BRTA).
Additionally, the supplementary duty on alcoholic beverages may increase from 20% to 30%. Businesses with an annual turnover of Tk30-50 lakh will now also face turnover taxes, whereas this was previously applicable only to turnovers between Tk50 lakh and Tk3 crore.
Import and service level tariffs
The government intends to raise supplementary duties on several goods and services, including fruit juices (from 20% to 30%), tobacco (from 60% to 100%), and betel nuts (from 30% to 45%).
Taxes on mobile phone usage, excise duties on travel, and airfare are also set to increase.
For example, excise duties on domestic air travel will rise from Tk500 to Tk700, while international travel to SAARC countries will see a hike from Tk500 to Tk700.
Travel beyond Saarc countries will incur higher excise duties, with Asia-bound trips rising to Tk2,500 and trips to Europe and America increasing from Tk3,000 to Tk4,000.
