The International Monetary Fund has set a prior condition for introducing a full 15 percent statutory VAT rate on 213 products before placing the $645 million loan proposal for the fourth tranche to its executive board.

The loan proposal could be placed in the IMF board meeting in the second week of March.

In keeping with the prior action, the National Board of Revenue this month hiked the value-added tax on nearly 100 goods and services but later excluded some of the goods amid severe criticism.

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VAT hike to minimally impact goods prices

The IMF has asked for a VAT rate hike on nearly double the number of goods and services that the NBR had initially increased, Finance Adviser Salehuddin Ahmed told The Daily Star on Monday.

"When I exempted some products from the latest VAT hike measure, they [IMF] asked me what have you done? Then I told the IMF that we have some political imperatives -- we cannot take measures by considering only the economic side. People's perception has to be considered too."

The IMF then came around, he said, adding that the schedule for the loan approval has not been deferred.

The staff mission informed during negotiations that the loan proposal will be placed in its board meeting in March.

The IMF is likely to focus more on Bangladesh's dismal revenue mobilisation by making the remaining fund disbursement under a $4.7 billion loan conditional on meeting the tax collection target.

Until now, the tax collection target has not been a Quantitative Performance Criteria (QPC), mandatory benchmarks the country must meet to unlock instalments under the loan programme.

The IMF staff mission on their last visit to Dhaka indicated that they would make tax collection target a QPC, The Daily Star has learnt from finance ministry officials involved with the negotiations.

The staff mission was in Dhaka last month to assess the country's performance before the release of the fourth tranche of the loan.

"Bangladesh's low tax-to-GDP ratio calls for urgent tax reforms to establish a fairer, more transparent system and sustainably increase revenue, focusing on rationalising exemptions, improving compliance and separating tax policy from administration," said the staff mission after the visit.

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Raising VAT and shrinking social protection are unwise moves

The IMF's emphasis on ramping up tax collection comes after recommendations for measures to boost revenue were not reflected in the budget for fiscal 2024-25.

As per the IMF's estimates, the tax measures will bump up Bangladesh's tax-to-GDP ratio by 0.5 percentage points this fiscal year.

Bangladesh failed to meet the tax revenue collection targets so far under the programme, which started in January 2023.`