VAT exemptions dropped 17% in 2022

The National Board of Revenue (NBR) exempted various goods and services from value-added tax (VAT) payments to the tune of Tk 129,570 crore in 2022 to give some relief to citizens and facilitate industrialisation, thereby accelerating economic growth.

In 2021, the figure was estimated at Tk 155,732 crore, according to the NBR's "Bangladesh VAT Expenditure Report 2023-24" published in June for the first time.

This means the exemption amount had dropped by 16.79 percent.

Had the exemptions not been in place, tax collections, and subsequently the tax to GDP ratio, would have increased, reducing the state's dependence on borrowing to finance expenses.

In FY23, Bangladesh's tax-GDP ratio was 7.30 percent, one of the lowest among comparable countries.

"We are trying to come out from the tax exemption culture gradually," said a senior NBR official yesterday.

The NBR official explained that VAT is applicable on all types of goods and services but the government provides the exemptions based on their necessity to ease pressure on consumers.

"The government is looking to identify sectors which have been enjoying the tax benefits for years on end and have almost achieved self-sufficiency."

Withdrawing their benefits will enhance revenue mobilisation and tax-GDP ratio, he said.

The tax authority took the initiative for the first time after International Monetary Fund (IMF) asked to calculate revenue expenditure as a part of conditions for a $4.7 billion loan.

The IMF also advised rationalisation of tax exemptions targeting Bangladesh's country status graduation from the list of least developed countries in November 2026.

"Definitely, this expenditure is a big reason for the low revenue collection," said Towfiqul Islam Khan, an economist and a senior research fellow at the Centre for Policy Dialogue.

"But we have to observe how the NBR has set its pace and priority to cut the existing exemption," he said.

He said there would always be some need to provide exemptions, particularly on the basis of strategic importance and distributional impact.

For example, essential commodities should be eligible as it directly impacts low-income people, he said.

"In those places, either the exemption should be gradually reduced or prevail permanently," he added.

However, the NBR official said they put high priority in ensuring the VAT exemption on agriculture products and other services which have a direct impact on general people's cost of living.

The study examined 699 items high in the list of consumer spending as per the 2022 Household Income and Expenditure Survey (HIES) data collected by the Bangladesh Bureau of Statistics.

The exemptions, also termed VAT expenditure, are granted in several ways, such as through schedules or lists of eligible goods and services, statutory regulatory orders or government announcements, subsidised rates and tax holidays.

Among those eligible are wages and salaries, house rent, financial services and spending on religious activities, healthcare and education services.

The food and beverage sector, including agricultural activities, was the largest beneficiary, receiving VAT exemptions equal to 2.25 percent of the then gross domestic product (GDP).

It was followed by the clothing and footwear sector (0.20 percent), housing and housing rent (0.04 percent), fuel and lighting (0.08 percent) and medical expenses (0.07 percent).

The education sector witnessed the lowest VAT exemptions benefit – a meagre 0.02 percent of the GDP.

The NBR should also devise a plan on reducing the exemptions as it will enable predictability for consumers as well as producers. "It is also relevant for domestic and global investors," said Khan.

He also urged for strengthen efforts to prevent VAT evasion and ensure good governance as there were many complaints of VAT not reach the government exchequer even after being paid by consumers.

The report identified room for improvements in VAT exemption reporting and put forward a set of recommendations.

The recommendations include redefining eligibility criteria, assessing the distributional impact and conducting periodic assessments and evaluations.

"However, the consistent decrease in net VAT revenue as a percentage of GDP is concerning, indicating the necessity for policy revisions," said the report.