Speakers in a discussion highlighted that excessive reliance on indirect taxes, such as Value Added Tax (VAT) and Advance Income Tax (AIT), to finance the national budget is significantly driving up inflation and slowing down investment growth in Bangladesh.
They voiced the concern at a roundtable discussion titled ‘Over-reliance on Indirect Taxes: Multifaceted Impacts on the Economy,’ organized by the platform 'Voice for Reform' at the BDBL Bhaban in the capital's Kawran Bazar on Monday.
Snehasish Barua (FCA), Director of SMAC Advisory Services, presented the keynote paper at the event, which was moderated by Fahim Mashroor, co-coordinator of Voice for Reform.
The roundtable brought together prominent economists, former National Board of Revenue (NBR) officials, business leaders, consumer rights advocates, and journalists.
In his keynote presentation, Snehasish Barua highlighted that the government’s reliance on indirect taxes over direct taxes has grown disproportionately in recent years.
"While indirect taxes account for less than 50 percent of the total tax revenue in neighboring India, it stands at nearly 80 percent in Bangladesh—the highest in Asia," Barua said, attributing this to the NBR's failure to collect direct taxes like personal income tax. As a result, the authorities are opting for the easier route of indirect taxation.
Barua argued that while Advance Income Tax (AIT) is theoretically a direct tax, it functions practically as an indirect tax.
He pointed out that a 5 percent advance tax is often levied alongside VAT and customs duties on the import of goods and raw materials. Because this advance tax is imposed at multiple stages, it creates a system of double taxation that directly inflates commodity prices.
He strongly linked recent inflationary pressures to VAT and AIT and proposed transitioning from the current uniform VAT rate to a multi-tiered VAT structure, as in other countries.
Participating in the discussion, former NBR Member Mohammad Farid Uddin asserted that the VAT rate should not exceed 10 percent under any circumstances.
He noted that a task force formed during the interim government's tenure had proposed a maximum VAT rate of 10 percent, alongside other crucial recommendations that have unfortunately been sidelined. "Digitalization will yield no results unless the VAT, customs, and income tax systems are fully integrated," Farid Uddin added.
Dr. Masrur Reiaz, Chairman of the Policy Exchange of Bangladesh, stressed the need for coordination in the government’s revenue management. "We cannot just focus on increasing revenue collection; we must also ensure the quality of public spending," he said. He further cautioned that spending Tk 35,000 crore on a new government pay-scale during the current economic crisis would be a flawed decision.
Speakers at the event unanimously agreed that the over-reliance on indirect taxes not only fuels inflation but also escalates the 'cost of doing business,' which ultimately discourages investment. They emphasized that reducing dependency on indirect taxes is imperative to curbing inflation and boosting investment.
On behalf of Voice for Reform, moderator Fahim Mashroor placed a set of specific reform proposals to be considered in the upcoming national budget. These are reducing the standard VAT rate to 7.5 percent, imposing a VAT rate of 25 percent or higher strictly on luxury goods, assessing the Advance Income Tax (AIT) on businesses to ensure that the total advance tax collected does not exceed their applicable corporate tax liability, withdrawing AIT on the import of essential food commodities, abolishing the 20 percent supplementary duty on mobile talk-time, and expanding the tax net to increase the share of direct tax in the national budget to 40 percent.
The roundtable was also addressed, among others, by Dr. M Abu Eusuf, Professor of Dhaka University and Executive Director of RAPID; Imran Hasan, Secretary General of the Bangladesh Restaurant Owners Association; Dr. Rushad Faridi, Assistant Professor of Dhaka University; Sayed Ahmed Khan, former Head of Tax at Unilever Bangladesh; Dr. Abdul Rouf, founder President of VAT Forum; and Daulat Akhter Mala, President of the Economic Reporters Forum (ERF).