Let's Get Real on Taxes

Bangladesh’s renewed push to raise its tax-to-GDP ratio has returned to the policy spotlight under the country’s newly elected government. After years of institutional drift, fiscal strain, and declining public confidence in revenue administration, the urgency is understandable.

Public debt servicing costs are rising, foreign financing is tightening, and demands for social spending, climate adaptation, infrastructure, and jobs are growing. No government aspiring to sustain economic growth can indefinitely operate with one of the world’s lowest tax collection rates.

The recent debate, shaped in part by Dr. Zaidi Sattar’s Task Force on restructuring the tax system, which reported in late January 2026 during the interim administration, deserves credit for reframing the issue. The core diagnosis remains largely correct today. Bangladesh does not merely suffer from low taxation. It suffers from a structurally weak, uneven, and politically distorted tax system.

Yet the transition from an interim administration to an elected government substantially changes the context.

The challenge is no longer simply to design ideal reforms on paper. It is now about whether an elected leadership, answerable to voters, businesses, bureaucratic interests, and coalition pressures, can implement reforms gradually, credibly, and without triggering economic or political backlash.

That distinction matters.

Calls to raise the tax-to-GDP ratio to 15 or 20% by 2035 may sound appealing in donor presentations and policy seminars, but realism matters more than aspiration. Bangladesh currently collects only about 6.8 to 7.3% of GDP in taxes, the lowest level not just in South Asia but across Asia. Even the government’s near-term plan is modest, aiming for roughly 9.2% next fiscal year.

Doubling the ratio within a decade would require not only administrative modernization but also a transformation of state capacity, institutional credibility, and political culture. Revenue systems do not improve because economists draft elegant roadmaps.

They improve when citizens believe taxation is fair, when businesses trust that enforcement is predictable, and when governments show that public money is spent competently rather than captured through corruption or patronage.

This is where the current political environment differs sharply from the interim government period.

An unelected administration can propose sweeping reforms with relative insulation from electoral consequences, whereas an elected government cannot. Every VAT adjustment, every removal of exemptions, and every attempt to expand direct taxation immediately collides with organized interest groups, inflationary pressures, and voter sentiment.

That does not make reform impossible, but it does require sequencing, coalition-building, and political judgment rather than technocratic maximalism.

The proposed shift from indirect taxes to direct taxation remains economically sensible. Bangladesh continues to rely heavily on VAT, import duties, and consumption taxes, while wealthier asset-owning groups often remain undertaxed. Direct taxes account for only about 2.5% of GDP, and the Task Force proposed shifting the indirect-to-direct balance from roughly 70:30 to 50:50.

Salaried employees and formal businesses shoulder a disproportionate share of the visible burden, while large pools of wealth in land, real estate, informal commerce, and politically connected sectors remain lightly taxed or untouched.

Correcting this imbalance is necessary both economically and morally. A modern state cannot sustainably finance itself by taxing consumption while large concentrations of wealth remain outside the tax net. Yet expanding direct taxation is politically delicate.

The danger is that enforcement ends up focusing on already compliant taxpayers simply because they are easier to monitor. Bangladesh has long suffered from a “streetlight effect” in taxation. Authorities repeatedly target the visible formal sector, while much larger informal and politically protected incomes go unscrutinized.

The answer, therefore, lies not in aggressive audit campaigns or arbitrary enforcement drives, but in building information-based compliance systems. Property records, banking transactions, vehicle registrations, land ownership databases, digital payment trails, and professional licensing should be gradually integrated into a modernized revenue architecture. Technology matters, but only if it reduces discretion rather than creating new opportunities for rent extraction.

This is equally true for customs reform. Bangladesh’s dependence on trade taxes is economically distorting and outdated for a country seeking deeper export diversification. Its average import tax rate, near 28%, is among the highest in the world and creates a strong anti-export bias. Reducing this reliance would improve competitiveness, but trade taxes also remain one of the easiest sources of revenue in weak administrative environments. Removing them too quickly, without first strengthening domestic tax capacity, could widen fiscal deficits.

The political economy of VAT reform is even more sensitive under an elected government facing inflationary pressures and declining household purchasing power. Economists often speak casually about rationalizing exemptions and broadening the VAT base, but these measures translate into higher living costs for ordinary citizens.

Bangladesh already faces persistent public anxiety over food prices, healthcare costs, energy tariffs, and urban living expenses. Any attempt to aggressively remove exemptions, now estimated at 5 to 6% of GDP, without compensatory social protection would risk deepening economic frustration at precisely the wrong political moment.

In other words, tax reform cannot be separated from welfare policy. If the government seeks to broaden consumption taxation, it must, at the same time, strengthen targeted safety nets, cash transfers, food support, and healthcare affordability. Its new Family Card and Farmer Card schemes point in that direction. Otherwise, fiscal reform risks becoming socially regressive, even if its macroeconomic logic appears sound.

There is also an uncomfortable reality often ignored in fiscal debates. Taxation depends heavily on trust in the government. Citizens are more willing to comply when they view public institutions as competent, fair, and accountable. In Bangladesh, skepticism toward state institutions remains substantial.

Businesses complain of harassment and of being forced into negotiated settlements, while ordinary citizens see wasteful spending, banking scandals, and elite impunity. Under such conditions, calls for higher taxation naturally meet resistance.

This is why the elected government’s greatest challenge is not technical reform but restoring fiscal legitimacy.

The irony is that Bangladesh does not necessarily lack the capacity to tax. It lacks administrative coherence and the political will to consistently confront entrenched interests. Large exemptions, preferential treatment, under-assessed property values, illicit financial flows, and informal wealth accumulation all narrow the effective tax base.

Many of these distortions persist because influential groups benefit from them. The recent fate of the plan to split the NBR into separate policy and administrative bodies is a warning. After the May 2025 ordinance, revenue officials went on strike for nearly six weeks, and the reform stalled. Reform, in short, is less a matter of economics than of political courage.

None of this means Bangladesh should abandon its tax ambitions. Quite the opposite. A stronger revenue base is essential if the country hopes to finance industrial upgrading, climate resilience, urban infrastructure, education, and healthcare without excessive reliance on external borrowing.

But successful reform will likely be less dramatic than the task force blueprints suggest. Progress may come through gradual institutional strengthening, steady formalization, digital transparency, improved compliance systems, and selective broadening of the tax base, rather than through a sweeping overnight transformation.

The elected government now has an opportunity that the interim administration lacked. It has democratic legitimacy and a large parliamentary majority. If used wisely, that mandate can help build public consensus for fairer taxation and better governance. But legitimacy is not permanent.

It depends on whether reforms are perceived as equitable and whether citizens see visible improvements in public services alongside higher revenue.

Ultimately, taxation is not simply about extracting more money from society. It is about defining the relationship between the state and its citizens. Countries do not become middle-income merely because they collect more taxes. They succeed when taxation strengthens the social contract rather than weakens it.

That is the real test Bangladesh faces.

Dr. Mohammed A Rab is currently a free lunch consultant on Financial Risk Management, Quantitative Risk Modeling and Enterprise Risk Management.