VAT dominance squeezes consumers as income tax lags

• VAT now largest source of revenue
• Indirect taxes increase consumer burden
• Economists urge shift toward direct taxes
• Balanced system could reduce poverty rates

Over the past two decades, Bangladesh's tax structure has shifted sharply, with value-added tax (VAT) emerging as the largest source of government revenue. The change has increased the burden on consumers, as VAT is an indirect tax that applies equally to everyone, regardless of income.

VAT is charged at every stage of production and sale, and consumers always bear the final cost. Families end up paying more for everyday items such as edible oil, biscuits, soap, detergents, medicines, LP gas, and clothes.

Data from the National Board of Revenue (NBR) shows that in FY01, VAT accounted for 27.11 percent of total tax receipts, income tax for 19.44 percent, and import tariffs for 53.45 percent. By FY25, VAT had risen to 38.15 percent, income tax to 34.8 percent, while import tariffs had fallen to 27.05 percent.

VAT became dominant in FY11, surpassing import tariffs for the first time, as customs revenue declined under trade liberalisation.

Introduced in 1991, VAT has increasingly shifted the tax burden onto consumers, made government revenue more sensitive to inflation, and added compliance pressures for small and medium businesses.

Economists say that as import duties have declined, the government has relied more heavily on VAT, placing extra strain on households already facing high living costs.

"VAT is inherently regressive; everyone pays the same rate regardless of income," said Prof Abu Eusuf, executive director of Research and Policy Integration for Development.

"The growing dependence on indirect taxes, without a similar rise in direct taxes, is putting an unfair burden on low- and middle-income people. While advanced economies rely mainly on direct taxes, Bangladesh's pattern is reversed," he added.

Prof Eusuf also said that the government favours VAT because it is easier to administer. "Efforts to identify potential taxpayers or integrate databases have not yet produced visible results," he added.

As Bangladesh approaches LDC graduation in November 2026, declining tariff revenues are expected to push the government to rely even more on VAT.

NBR Chairman Abdur Rahman acknowledged this reliance. "No advanced economy depends heavily on trade-based taxes, and Bangladesh must gradually shift toward domestic revenue sources," he said yesterday while observing VAT Day at the NBR headquarters in Dhaka's Agargaon.

"Despite the potential of income tax, there are significant leakages. In the long run, most revenue should come from income tax, followed by VAT, while customs duties should play only a minimal role. With LDC graduation, this shift will become unavoidable," he added.

CALLS FOR A MORE BALANCED TAX SYSTEM

A new OHCHR study suggests that a more balanced tax system could reduce poverty and improve fairness. If direct taxes were increased and reliance on VAT reduced, the national poverty rate could drop from 18.7 percent to 17.7 percent, with the poorest households seeing poverty fall from 37.2 percent to 33.2 percent. The study also finds that this shift would slightly reduce income inequality.

Towfiqul Islam Khan, additional research director of the Centre for Policy Dialogue (CPD), said, "From the perspective of welfare and economic justice, those with greater ability should pay more. So, direct taxes should take priority. If VAT's share remains high, it simply means we're not collecting income or property taxes properly."

He added, "Tax evasion happens in both direct and indirect taxes. Even within indirect taxes, a major problem is that consumers pay, but the money does not reach the exchequer. Our direct tax collection is not working properly. Eliminating tax evasion should be the number one priority."

Finance Adviser Salehuddin Ahmed also raised concerns over VAT evasion, saying the tax often does not reach the government even though consumers pay it. "It is an unfortunate and persistent weakness in the VAT system," he said at a seminar marking VAT Day.

He stressed that the VAT system must be simple and free from manipulation. "If you or I pay VAT, it must reach the government exchequer," Ahmed said.

Highlighting consumer behaviour, he added, "If a business says it will not charge VAT, people accept it. This mentality must change. Taxpayers should be assured that they will receive services in return for what they pay."

He also pointed to examples abroad, saying, "In some countries, the tax-to-GDP ratio is 26 percent. Why do people pay? Because they are convinced the money will not be siphoned abroad and will be used properly. From the government's side, we must guarantee service delivery."

Towfiqul Islam Khan of CPD said an important question is whether the taxes collected actually reach people through public services. "If people receive public services, then the burden of taxes does not feel so heavy. If I received services, it would feel lighter," he said.

He cited Scandinavian countries, where both the tax-to-GDP ratio and tax rates are very high. "But because their social protection and public services are strong, the state plays a big role and provides quality services," he added.