As Bangladesh prepares its next national budget under growing scrutiny from the IMF and World Bank, policy-makers face a defining choice: Rely on the politically-convenient but economically damaging path of raising taxes on existing taxpayers, or pursue the more sustainable strategy of preventing evasion, broadening compliance, and expanding the tax base.
Bangladesh’s persistently low tax-to-GDP ratio remains one of its most pressing fiscal weaknesses. Revenue mobilization is undeniably essential if the country is to finance development priorities, strengthen public institutions, and reduce dependence on debt.
But higher revenue does not automatically require higher tax rates. In fact, in the current economic climate, increasing tax burdens on already hard-pressed businesses and consumers may do more harm than good.
Investment growth has remained subdued for an extended period. High inflation, elevated borrowing costs, exchange-rate pressures, and foreign currency liquidity constraints have already increased the cost of doing business.
In such a fragile environment, inconsistent tax policies further undermine business confidence.
Although corporate tax rates have gradually been reduced on paper, the effective tax burden on many businesses often exceeds 40% once source taxes, import duties, advance taxes, and compliance costs are added.
This gap between announced reform and economic reality discourages investment far more than headline tax rates suggest.
Any move to increase turnover taxes or transaction-based taxes would likely deepen this challenge.
For many SMEs, distributors, and trading businesses operating on razor-thin margins, profitability is already under severe pressure.
In several sectors, even securing a 1% net profit margin is a struggle. Tax policies that ignore these commercial realities risk weakening entrepreneurship, reducing expansion, and ultimately shrinking the very tax base the government hopes to enlarge.
A weak tax culture cannot be repaired by higher tax rates alone. Public finance theory consistently shows that moderate, predictable, and equitable taxation encourages voluntary compliance and often generates stronger long-term revenue than punitive systems.
The same principle applies to VAT (value added tax). A 15% VAT regime places significant pressure on both consumers and businesses, especially in inflationary conditions.
Rather than overburdening a narrow segment of taxpayers, policy-makers should focus on lower, rationalized rates applied across a broader base.
The deeper problem within Bangladesh’s tax system is structural inefficiency.
While more than 10 million citizens hold tax identification numbers (TINs), less than half file returns, and an even smaller section pays meaningful taxes.
This reflects not only enforcement weakness but also low public trust. When policy disproportionately pressures compliant taxpayers while large segments remain outside the system, tax morale inevitably declines.
Simplifying compliance procedures, integrating TIN with National ID systems, digitizing tax monitoring, and introducing symbolic minimum taxes for new entrants could significantly expand the formal tax net.
Better data integration would also create room for more equitable tax treatment, including adjusting final liabilities according to income slabs after advance income taxes deducted from savings instruments or fixed deposits.
At the same time, the government must address long-standing inconsistencies in the tax framework.
Tax exemptions, conditional benefits, excessive documentation requirements, and administrative inefficiencies have created a system that is often confusing, uneven, and vulnerable to abuse. Revenue policy should reward transparency and productivity -- not complexity.
The export sector, already facing recent declines, also requires urgent tax rationalization.
Reducing source taxes and lowering duties on industrial raw materials can help preserve international competitiveness at a time when Bangladesh can ill afford export stagnation.
Revenue must grow, but not by suffocating investment or exports.
Tax justice must also extend beyond corporate policy into everyday social realities.
High duties on essential products such as sanitary napkins, baby diapers, and other socially important goods disproportionately burden households while generating limited fiscal benefit.
Rationalizing such taxes would not only improve affordability but also demonstrate that fiscal policy can serve broader developmental goals.
Meanwhile, untapped sectors offer substantial opportunity.
Commercial agriculture, segments of the informal economy, growth centres across the country, and newly emerging wealth-generating activities remain under-taxed relative to their potential.
Expanding the tax net into these areas would be economically wiser than repeatedly burdening existing formal-sector taxpayers.
Ultimately, trust is the cornerstone of an effective tax system. Citizens are far more willing to comply when they believe tax collection is fair, administration is efficient, and public spending is transparent.
Without stronger accountability and visible improvements in expenditure quality, tax expansion efforts will continue to face resistance.
Bangladesh’s revenue challenge is real, but solving it through higher taxes on an already burdened formal economy would be shortsighted.
The greater opportunity lies in reducing evasion, modernizing administration, and bringing more individuals and sectors into a transparent, rules-based system.
This year’s budget should not simply be about meeting revenue targets. It should be about redefining the country’s fiscal philosophy.
Bangladesh does not need more punitive taxation -- it needs smarter taxation.
The path forward is clear: Raise compliance, not rates.
Mamun Rashid is an economic analyst and Chairman at Financial Excellence Limited.
