Bangladesh: Instead of uniform VAT, Dhaka should look to India’s GST regime

When governments run short of money, they often reach for the tax that is easiest to collect instead of the one that is fairest. In Bangladesh, that instinct is visible again in the renewed push for a uniform 15% value-added tax across sectors and the possible return of package VAT for small businesses.

Officials argue that a simplified, broader VAT will raise revenue, reduce distortions and stabilise the budget. But for ordinary Bangladeshis, a uniform VAT is unlikely to bring genuine financial respite. It may do the opposite, raising the cost of living while leaving the deeper weakness of the economy untouched.

VAT is charged when people buy goods and services. For long, Bangladesh’s tax structure has leaned heavily on indirect taxation.

In recent fiscal years, VAT and supplementary duty together have accounted for roughly one-third to two-fifths of National Board of Revenue collections, equivalent to about $11 billion to $14 billion annually depending on exchange rates and total receipts, while income tax has usually contributed around one-third, or roughly $9 billion to $12 billion.

In several years, VAT alone has outpaced income tax as the single largest source of tax revenue, with standalone VAT receipts often estimated in the $8 billion to $10 billion range.

The Daily Star newspaper recently noted that VAT dominance is squeezing consumers while income tax lags badly behind. Regardless of income, everyone pays equally for the same taxed item.

For low-income families, who spend nearly all their earnings on necessities, VAT consumes a far larger share of disposable income than it does for affluent households who can save, invest or shift consumption.

This is why economists say consumption taxes are regressive unless they are designed with exemptions, zero-ratings or compensating transfers.

Regressive taxation structure

Bangladesh’s history with VAT should inspire caution. The 2012 VAT law aimed for a modern system centered on a standard rate and stronger administration. Analysts say that the problem was also weak enforcement, fragmented administration and the influence of powerful interest groups. Raising the nominal burden on consumers without fixing these issues merely repeats the cycle of ambitious tax that is uneven collection in practice.

Bangladesh’s wealthier citizens and larger firms can rearrange taxable income, such as by underreporting income, using informal channels or parking their wealth in assets like land. Salaried middle-class workers usually have tax deducted at source. The poor cannot hide consumption.

When the state compensates for that leakage by taxing consumption more aggressively, inequality widens because top incomes escape fuller taxation, and because everyone pays more at the point of purchase.

The Center for Policy Dialogue, a top Bangladeshi think-tank, has put the broader issue starkly. Bangladesh’s low tax-to-GDP ratio is driving inequality and weak public spending. The tax-to-GDP ratio measures state capacity.

Bangladesh’s tax-to-GDP ratio has hovered around 7.5% to 8.5% in recent years depending on methodology – among the lowest in South Asia and well below the double-digit levels typically needed to finance expanding middle-income public services.

By comparison, India’s tax-to-GDP ratio, combining central and state taxes, has been around 17%-18%. Pakistan has generally ranged near 9%-10%, Sri Lanka after recent reforms has climbed toward 11%-13%, Vietnam has often exceeded 18%, and Malaysia has stayed near 11%-12% despite not relying solely on VAT-style taxation.

That means fewer resources for quality public schools, hospitals, transport systems, urban services, climate resilience and social protection. It also means more reliance on borrowing, inflationary financing pressures or stopgap levies. A country cannot sustainably become a high-quality economy in a low-revenue state.

Bangladesh spends a smaller share of GDP on public health and education than many peer countries, and the revenue constraint is a central reason why.

Bangladesh often tries to solve a revenue shortfall by extracting more from the already visible base: imports and consumers. But the invisible base – under-taxed wealth, land gains, professional incomes, segments of the informal economy – remains too lightly touched.

A uniform VAT risks confusing symptoms with cure. If revenue collection is weak, the answer is better administration, data, broader direct taxation and fewer politically negotiated loopholes.

Even the National Board of Revenue’s recurring concern over weak VAT collection from field offices suggests that enforcement and governance problems cannot be solved merely by announcing a new rate structure.

Learning from the next doors

There is a useful contrast next door in India. India’s Goods and Services Tax, introduced in 2017, was initially criticised for complexity, compliance burdens and too many slabs. But rather than cling to a rigid single-rate doctrine, Indian policymakers have repeatedly adjusted the system.

In the past year, finance officials trimmed rates on selected goods and services, reviewing slab mergers and easing burdens on smaller businesses, while protecting essentials. India continues to have multiple slabs — zero, 5%, 12%, 18% and 28%, with additional cesses on some luxury or sin goods.

Essentials are often treated differently from discretionary or luxury consumption. It is imperfect, but reflects a basic truth Bangladesh should heed: fairness sometimes requires differentiation.

India’s GST has also become a major revenue engine. Monthly GST collections have repeatedly crossed $18 billion and on stronger months have exceeded $24 billion, demonstrating how a broad consumption tax can generate substantial revenue when backed by digital invoicing, e-way bills, invoice matching and stronger compliance systems.

Yet India’s wider fiscal model does not depend on GST alone. Direct taxes – especially corporate and personal income taxes – have also surged, with annual direct-tax collections now worth well over $200 billion. That balance between consumption taxes and taxes on income is precisely what Bangladesh still lacks.

Every modern economy uses some form of consumption tax. Vietnam combines VAT with strong export growth and rising income tax capacity. Malaysia replaced GST with SST after political backlash over living costs, then continued debating broader tax reform.

Sri Lanka, under fiscal crisis, raised VAT sharply but also had to widen direct taxes and improve enforcement under IMF-backed restructuring. Pakistan repeatedly increases sales taxes yet still struggles with narrow income tax compliance.

VAT can raise money but it cannot by itself build a fair state. Properly designed, it can be stable, broad-based and less distortive than cascading sales taxes. But it must sit inside a balanced fiscal architecture.

That means exempting or zero-rating essential goods where feasible, refunding low-income households through transfers, simplifying filing for small firms, and pairing VAT with robust progressive taxation of income, property and capital gains.

Bangladesh’s policymakers should ask a harder questions than how to impose 15% uniformly. For instance, why does so much economic activity still escape the direct tax net. Why are property valuations outdated or weakly taxed? Why are many professionals under-assessed?

Why do some large interests negotiate special treatment while compliant taxpayers shoulder the load? Why does enforcement remain inconsistent? Why is digitised data matching between banks, land records, customs and income tax still insufficient?

The political cost

There is also a political economic danger in overusing VAT. If governments can reliably raise money through consumption, pressure to reform elite taxation declines. When citizens experience higher prices before they experience better services, resentment can spread quickly.

That risk is especially acute in Bangladesh, where inflation has already squeezed real incomes and where many citizens believe powerful groups enjoy exemptions, amnesties or weak enforcement.

Citizens are more willing to pay taxes when they see that it is fair: the rich contribute generously, the middle class is respected and public services improve. Extractive taxation, instead, leads to decreasing compliance and growing informality. Governments then respond with more legal enforcement and penalties, creating a vicious cycle of mistrust.

For Bangladesh, the warning is clear. A revenue strategy built too heavily on VAT may fill treasury gaps in the short term while emptying political goodwill in the long term. Durable state capacity must be built on by being fair to citizens.

Faisal Mahmud is a Dhaka-based journalist and analyst. He was the former Minister (Press) of Bangladesh High Commission in New Delhi.