We must create an equitable tax system
In Bangladesh, nearly 70 percent of total tax revenue comes from indirect taxes, meaning whether one is a rickshaw puller or a corporate executive, they need to pay the same rate of value-added tax (VAT) on essential goods. Consequently, the less financially privileged contribute a larger share of their income to the state than the wealthy.
For years, the gap between the ultra-rich and the working class has widened, fuelled, in part, by a tax system that rewards wealth accumulation while punishing spending. It is a well-documented fact that countries that rely heavily on indirect taxation tend to have higher income inequality, and Bangladesh is no exception. The reliance on VAT, excise duties, and other consumption-based levies disproportionately affects lower-income groups, keeping them locked in a cycle of financial insecurity. Meanwhile, a significant portion of high-net-worth individuals remain outside the formal tax net, either due to loopholes or sheer administrative inefficiency.
For all latest news, follow The Daily Star's Google News channel. Broadening the tax base is not about extracting more from those who are already struggling; rather, it's about ensuring that those who can contribute more do so. The informal sector, which comprises nearly 85 percent of Bangladesh's workforce, remains largely untapped in terms of direct taxation. It is because the system was never designed with them in mind. Small traders, street vendors, and gig workers are often wary of formalising their businesses due to bureaucratic red tape and fears of arbitrary harassment from tax officials. However, there are models in countries like Indonesia and Mexico, where simplified tax regimes for small enterprises have resulted in higher voluntary compliance and increased revenue collection without undue burden. For example, Indonesia introduced a fixed income tax on micro, small, and medium enterprises (MSMEs) at a flat rate of 0.5 percent of turnover, significantly reducing compliance burdens while increasing participation. Similarly, Mexico has boosted tax compliance among small enterprises through the Régimen de Incorporación Fiscal (RIF), integrating informal businesses into the tax system with lower rates initially and simplified filing.
This transition, however, cannot happen without modernisation. Tax administration in Bangladesh still largely relies on outdated mechanisms that invite inefficiency and corruption. In an era where digital financial transactions have skyrocketed, it is almost comical that tax filings and compliance checks remain heavily paper-based. The National Board of Revenue (NBR) made attempts to digitise certain processes, but these efforts remain fragmented and inadequate. India's introduction of the Goods and Services Tax (GST) demonstrated that digitisation, when done correctly, can significantly reduce tax evasion and increase revenue without raising tax rates. Bangladesh needs a similar push; one that is not limited to urban corporations but extends to small businesses, rural entrepreneurs, and even individual professionals. For instance, adopting a flat tax rate or turnover tax could make the process less daunting for small entrepreneurs who may lack the resources to navigate complex tax regulations. Furthermore, fostering partnerships with intermediaries can help bridge the gap between the government and informal workers, promoting awareness of tax obligations while providing essential support.
However, the political will to reform tax structures has always been met with resistance from vested interests. Beneficiaries of the status quo, whether powerful business groups or political elites, will always argue that reforming the tax code would stifle investment or place an unfair burden on businesses. However, no country has achieved sustainable development without ensuring that the wealthiest contribute their fair share. Even in the United States, the Tax Reform Act of 1986 eliminated many loopholes and ensured higher earners paid a fairer share, leading to increased compliance and economic growth. Similarly, the Earned Income Tax Credit (EITC) in the US has demonstrated how tax structures can promote both equity and economic participation. In the Caribbean, the introduction of VAT has shown potential for boosting revenues, yet its effectiveness is hindered by complex design features and inadequate administration reforms. By simplifying the VAT structure and ensuring broad-based application with limited exemptions, countries could enhance revenue generation while promoting fairness within the tax system. Such changes will improve fiscal health and encourage investment and economic growth, as businesses are less encumbered by a convoluted regulatory framework.
A key factor in ensuring tax compliance is trust. No one would willingly pay taxes if they believe that their money is being misused. In countries where tax revenue is transparently managed, compliance is significantly higher. Improving taxpayer services is crucial to ensuring this trust. One of the primary measures involves simplifying the tax regime to create a more user-friendly environment for taxpayers. A simplified tax structure not only minimises loopholes that companies exploit but also makes it easier for firms to comply with tax regulations. Additionally, implementing a rules-based regime with minimal ministerial discretion can enhance transparency and consistency in tax administration, hence reducing opportunities for profit shifting and tax avoidance schemes.
Furthermore, investing in technology is crucial because leveraging advancements in data analytics can improve the government's ability to monitor compliance effectively. This could include automating filing processes and providing online platforms where taxpayers can easily access information and submit their taxes. Clear communication about the purpose of taxes, along with how they contribute to national development, can foster a sense of civic responsibility and encourage greater voluntary compliance from corporations.
Moreover, promoting a culture of accountability within tax administration is vital. Training tax officials to engage positively with taxpayers and address grievances promptly can significantly reduce harassment issues. Participatory budgeting models, where communities have a say in how local tax revenues are spent, have worked wonders in places like Porto Alegre, Brazil, where citizens directly influence municipal spending, and Quezon City, Philippines, where participatory processes improved local tax collection and service delivery. If Bangladesh wants its citizens to comply voluntarily, it needs to foster trust by demonstrating that tax money is being used effectively, whether through improved healthcare, better infrastructure, or more accessible education.
Loopholes and exemptions further complicate matters. Large corporations often exploit tax holidays, incentives, and strategic accounting to minimise their contributions. While some incentives are necessary to attract investment, the excessive use of tax breaks means that multinational corporations contribute far less to Bangladesh's economy than they should.
For too long, discussions on tax reform in Bangladesh have been trapped in theoretical debates and political grandstanding. Without immediate action, we risk deepening economic divides and stalling our progress towards becoming a middle-income country. This is not just about revenue but about fairness, sustainability, and ensuring that the economic burdens of the future do not continue to fall on those who can least afford them. If we want a Bangladesh that thrives, then it is time to stop treating taxation as a mere administrative function and start seeing it for what it truly is: the foundation of an equitable society.
Mamun Rashid is an economic analyst and chairman at Financial Excellence Ltd.
Views expressed in this article are the author's own.
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