Tax reforms vital as shortfall hits Tk 59,000 crore: PRI

Despite steady economic growth, Bangladesh’s tax system continues to underperform, with average annual revenue shortfalls reaching nearly Tk 59,000 crore over the past five years, according to the Policy Research Institute (PRI) of Bangladesh.

“Persistent shortfalls reached approximately 20 percent of the revised budget target, while tax revenue growth collapsed from 21 percent to just 2.2 percent,” the thinktank said, pointing to what it described as a “structural weakness in tax effort.”

PRI Research Director Bazlul Haque Khondker made the remarks during a presentation on the need to rationalise the supplementary duty (SD) and value-added tax (VAT) structure at the organisation’s office in Dhaka today.

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He said low VAT productivity, despite relatively higher buoyancy, reflects deeper structural issues, including a narrow tax base and policy distortions.

The current system, he added, indicates significant untapped tax capacity.

He suggested that comprehensive base expansion and reforms could substantially improve revenue mobilisation.

Bangladesh has set an ambitious target to raise its tax-to-GDP ratio to around 15 percent by fiscal year 2034-35 (FY35), up from the current 6.7 percent.

To reach an interim target of 10.9 percent by FY30, the country will need to sustain an average annual revenue growth of about 17 percent over the five years from FY25.

According to PRI, achieving these targets will require a fundamental shift in tax policy rather than incremental adjustments.

“Reaching a 15 percent tax-to-GDP ratio will demand structural reform, not just base expansion or rate hikes,” the presentation noted.

According to the thinktank, Bangladesh’s tax structure is also expected to evolve, with direct taxes projected to grow faster than indirect taxes. It projects that direct tax revenue will expand at an average rate of 22 percent, compared to 12.9 percent for indirect taxes between FY25 and FY35.

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Even so, indirect taxes, particularly VAT and SD, will continue to play a significant role, accounting for around 45 percent of total tax revenue by FY35.

PRI stressed that reforms must prioritise building a broader-based and properly structured VAT system, while gradually reducing reliance on supplementary duties.

“Simply raising SD rates on existing products will not close the revenue gap,” said Khondker, warning that excessively high rates risk triggering adverse behavioural responses, in line with the Laffer Curve effect, where higher taxes can ultimately lead to lower revenue collection.

Speaking as the chief guest at the event, Zakir Ahmed Khan, chairman of Palli Karma-Sahayak Foundation (PKSF), said Bangladesh’s tax potential could rise significantly with stronger enforcement and reduced leakages.

The proper implementation of existing laws could boost revenue by 30-40 percent, he estimated.

He further estimated that improving compliance alone could help the country reach a 15 percent tax-to-GDP ratio without raising rates, but cautioned against turning enforcement into “tax terrorism,” stressing the need for trust and voluntary compliance.

Khan also called for separating tax policy from administration within the National Board of Revenue (NBR) to improve efficiency and accountability, adding that stronger reforms and better analysis are key to unlocking revenue potential.