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Bangladesh is exploring a way to increase revenue collection
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Bangladesh is exploring a way to increase revenue collection

Using real GDP and real income growth rates from FY12 to FY23, the analysis found an average income growth of 0.90, which falls below one

UNB

November 2, 2024, 11:55 a.m

Last modified: 02 November 2024, 11:59 am

NBR office in Dhaka. File photo: Collected

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NBR office in Dhaka. File photo: Collected

NBR office in Dhaka. File photo: Collected

Bangladesh has significant potential to mobilize revenue collection, as highlighted by a recent official assessment of revenue buoyancy, a measure of how tax revenues respond to economic growth.

Revenue elasticity, the responsiveness of revenue to gross domestic product (GDP), is an essential metric for measuring the performance of a revenue system and forecasting revenue growth.

A buoyancy ratio greater than one indicates that tax revenues are growing faster than GDP, while a ratio less than one suggests slower growth.

Using real GDP and real income growth rates from FY12 to FY23, the analysis found an average income growth of 0.90, which falls below one.

This lower score highlights scope for improvement in revenue mobilization in Bangladesh, according to the finance ministry paper.

The official review also noted that the effective tax rate can serve as another measure of revenue performance. For example, the effective rate of VAT can be obtained by comparing it with real sector consumption data.

An analysis shows that the effective VAT rate has increased in recent years, reaching 7.1% in FY23. However, this remains well below the standard 15% VAT rate applicable to most products in Bangladesh.

Bangladesh’s revenue collection still lags behind comparable economies.

In 2022, the public revenue-to-GDP ratio was 23.1% in Nepal, 19.8% in India and 14.8% in Lao PDR, while the ratio in Bangladesh was only 8.9%.

There is broad consensus that there is a positive correlation between levels of economic development and revenue collection.

To achieve the country’s development goals, the finance ministry has called for major reforms to increase the effectiveness, efficiency, transparency and fairness of the tax administration system.

The paper also emphasizes reviewing tax breaks to ensure that these benefits support the wider economy and do not disproportionately favor wealthier people at the expense of low-income groups, thus undermining the redistributive objectives of tax policy.

There is also significant room for improvement in filing tax returns; in FY22, only 33.3% of TIN holders filed tax returns, a figure that is significantly higher in peer countries.

The Ministry of Finance outlined several modern reform strategies to strengthen revenue mobilization.

These include expanding the tax base, adopting a modern property tax system, introducing environmental and carbon taxes, simplifying tax collection, fully automating the processes of filing and paying taxes, and minimizing direct interactions between tax collectors and taxpayers.

Other strategies include making audits more selective, productive and criteria-based, as well as separating fiscal policy from tax collection.

The government has made progress in this direction, with an increased share of income tax and VAT in total revenue.

However, there is still a need to reduce reliance on indirect taxes and focus more on direct taxes.

The actual share of direct taxes in total revenue was 32.3% in FY21, which increased slightly to 32.7% in FY23.

To support revenue growth, the government will continue efforts to broaden the tax base, shift reliance from commercial taxes to direct taxes, and further accelerate direct tax growth in the coming years.