Major Policy Reforms & Their Impact

Introduction

There have been some policy discussions about the tax law in Bangladesh, although not very effective. The income tax legislation dates to the Income Tax Ordinance 1984, and was promulgated under the military rule. According to the 1984 Ordinance, there are seven forms of income on which tax is levied: salaries, interest on securities, income from house or property, agricultural income, income from business or profession, capital gains, and income from other sources (Income Tax Manual Part-1, 2009).

Major Policy Reforms & Their Impact

A number of efforts were made to strengthen revenue mobilization and improve the tax structure. In 1991, Bangladesh embarked on a major tax reform through the introduction of the VAT system (Barkat, 2010). Simultaneously, there was a significant reduction in import tariffs. Prior to these reforms, trade-based taxes dominated the tax structure in Bangladesh, with customs duties alone accounting for about a third of tax revenue during the first two decades of the country’s independence. Following the introduction of VAT in 1991, the share of VAT revenue increased substantially to reach 29% in 2014, while the share of customs duties declined to 10.8% (Rahman & Khan, 2015). This shift was aimed at creating a more balanced tax revenue system.

Even though the base of the VAT system has been expanded, numerous distortions were also introduced for reasons of political expediency. These distortions have included exemptions and concessions that have limited the efficiency of the VAT system. Because of these problems, the VAT system underperformed considerably in terms of revenue generation compared with its potential. It is evident that a narrow tax base, widespread exemptions, and administrative inefficiencies are the main factors behind the low tax-to-GDP ratio in Bangladesh compared to neighboring countries (Ahmed, 2017). This also implies that the tax reforms of the last decades did not bring about significant changes in Bangladesh’s tax efficiency.

Recent Developments

In recent years, much simplification and rationalization have been introduced to reform the taxation system. Tax assessments were made less complicated, and an attempt to attract more taxpayers into the tax net was made. The automation of tax collection was begun, and compliance with the standards and systems introduced by the World Customs Organization (WCO) has increased. The practice of honoring taxpayers and recognizing their contribution received institutional shape in the National Board of Revenue (NBR).

In the case of legislative reforms, the new Value Added Tax and Supplementary Duty Act of 2012 was enacted and became effective from July 2016. A draft Direct Tax Code was posted on the government’s website, and steps will be taken to get it passed by Parliament by next year (Hossain, 2016). There are plans for a comprehensive reduction in the rate of Import and Supplementary Duty in the budget for the 2016-17 financial year, which will eventually shift the burden of revenue collection to Individual and Corporate Tax along with Value Added Tax (VAT). These ongoing reforms indicate a commitment to modernizing the tax system, although challenges remain in implementation and compliance.

Conclusion

In summary, while there have been efforts to reform the tax system in Bangladesh, significant challenges remain. The changes implemented have not yet fully realized their potential in terms of revenue generation and efficiency. Continued focus on broadening the tax base, reducing exemptions, and enhancing administrative capabilities will be critical for future improvements.

References

• Ahmed, S. (2017). Tax reforms in Bangladesh: An analysis of performance and challenges. Journal of South Asian Development, 12(2), 145-162.
• Barkat, A. (2010). Tax policy and tax reforms in Bangladesh: An overview. Dhaka: Unnayan Onneshan.
• Hossain, M. (2016). The evolution of Bangladesh’s tax system. Asian Development Review, 33(1), 89-112.
• Income Tax Manual Part-1. (2009). Government of Bangladesh.
• Rahman, M., & Khan, T. (2015). VAT and its impact on the economy of Bangladesh. Bangladesh Economic Review, 33(3), 44-58.