Tax reform panel urges single VAT rate, shift towards direct taxes

A national task force on tax reforms has recommended that the government introduce a single rate of value-added tax (VAT), doing away with multiple rates of the indirect tax paid by final consumers.

The panel also suggested increasing the focus on the collection of direct taxes and reducing reliance on indirect taxes, which account for around 70 percent of total tax receipts.

The task force, formed by the interim government in October last year, proposed raising the share of direct taxes to half of the total tax collection, according to a statement issued by the Chief Adviser’s Office (CAO) today.

The statement was issued after the 11-member national task force, led by Zaidi Sattar, chairman of the Policy Research Institute of Bangladesh (PRI), handed over its report to Chief Adviser Prof Muhammad Yunus at state guest house Jamuna.

Responding to The Daily Star over the phone, Sattar said the current multiple VAT rates are very inefficient. “This is why our VAT collection is not growing fast.”

“You have to move towards a single rate. Until then, two rates may stay. One is the standard rate and the other is a low rate for essential products,” he said.

The present VAT receipts are nearly 2.8 percent, and collection will be doubled if the VAT rate is reduced to a single rate, added the chief of the task force.

The interim administration formed the panel to identify ways to boost domestic resource mobilisation and strengthen the country’s tax-to-GDP ratio, which is one of the lowest in the world.

The task force report, titled “Tax Policy for Development: A Reform Agenda for Restructuring the Tax System,” termed Bangladesh’s tax system “unnecessarily complex, inefficient, and excessively dependent on indirect taxes”.

Bangladesh’s current tax structure is plagued by various limitations.

The report identifies a total of 55 policy issues and recommends fundamental and structural reforms of the tax system to ensure long-term economic development.

Of these, the task force has highlighted seven priority policy issues and suggested short-term and long-term measures to raise Bangladesh’s revenue-GDP ratio from 10 percent to 12 percent by 2030, and to 15 percent-20 percent by 2035.

The report proposed automation and digitalisation, artificial intelligence-based risk analysis, a simple tax structure, restructuring of incentives, risk-based audits, and a strategic shift from trade taxes towards domestic taxes.

On the modernisation of the customs structure, it suggests equalising effective protection for exports and import-substitute products.

The report said there is no need for a separate valuation database for clearing goods and recommended the implementation of post-clearance audits instead of audits at the port.

The report said that to accelerate and sustain Bangladesh’s economic progress as a developing nation, increasing the government’s own revenue income is essential.

The tax system is the most critical component in this regard. However, Bangladesh’s current tax structure is plagued by various limitations.

After receiving the report, the chief adviser said the interim government has very little time.

“If these policies are implemented, the sectors and methods of revenue collection will become clearer, and it will bring a major policy change to the country’s economic development and revenue management,” he said.

On the report, Finance Adviser Salehuddin Ahmed said it would serve as a guideline.

“Over the last decade, our revenue collection methods have become extremely complex. It is difficult to expand the scope of revenue collection without reforming these processes,” said Zaidi Sattar.

“If these are reformed quickly, it will have a far-reaching positive impact on the economy.”