Major Policy Reforms & Their Impact

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).

A number of efforts were made to strengthen the revenue mobilization and improve the tax structure. In 1991 Bangladesh embarked on a major tax reform through the introduction of the VAT system. Simultaneously there was a significant reduction of 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%. Even though the base of the VAT system has been expanded, numerous distortions were also introduced for reasons of political expediency. 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 the neighboring countries. This also implies that the tax reforms of the last decades did not bring about significant changes in Bangladesh’s tax efficiency.

In recent years much simplification and rationalization has been introduced to reform the taxation system. Tax assessments were made less complicated and an attempt of attracting more taxpayers into the tax net was made. The automation of tax collection was begun, and compliance with the standards and systems introduced by WCO has increased. The practice of honoring the taxpayers and recognizing their contribution received institutional shape in the NBR. In the case of legislative reforms, the new Value Added Tax and Supplementary Duty Act of 2012 were enacted and will be 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. There are plans for a comprehensive/maximum 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).