Rationalising SD, VAT key for fairness, less distortion: PRI

The Policy Research Institute of Bangladesh (PRI) organised the closed-door event titled “Rationalising Supplementary Duty and VAT in Bangladesh: Evidence, Challenges, and Reform Pathways.”

Research Director at PRI Dr Bazlul Haque Khondker and Principal at The M Group Hafiz Choudhury made the keynote presentation, outlining global good practices and reform priorities for Bangladesh’s selective taxes – particularly supplementary duty (SD) – within the VAT framework.

They said modern tax systems rely on clearly defined objectives and consistent application, arguing that selective taxes should primarily address negative externalities such as health or environmental harm rather than serve as general revenue tools or trade policy instruments. 

The presentation highlighted that good tax policy should follow core principles, including neutrality, efficiency, certainty and simplicity, as well as fairness and flexibility.

It also noted that VAT should function as the main revenue-raising instrument with ideally a single rate, while income tax ensures progressivity and selective taxes address harmful consumption. 

According to the presenters, supplementary duties and excise-type taxes should be designed to internalise external costs and must be based on transparent structures, preferably using specific rates rather than ad-valorem systems.

They warned against using these taxes as secondary VAT, trade taxes or primary revenue sources, saying such practices create distortions and undermine policy goals. 

PRI also emphasised that tax structures should reflect the degree of harm caused by different products and be calibrated to maintain market stability, while avoiding abrupt changes that may trigger price shocks or encourage illicit trade. 

The keynote noted that the VAT and Supplementary Duty Act, 2012 still carries legacy design features, and reforms should aim to simplify the system and align it with global best practices, recommended single-stage taxation at production or import stage to reduce cascading effects and administrative complexity. 

The presentation also suggested introducing a “release from bond” approach and an Authorised Economic Operator (AEO) regime to reduce tax evasion and improve compliance. “A separate Excise Act would be ideal, though amendments to the existing 2012 law could also deliver improvements.”

To strengthen enforcement, the speakers recommended digital “track and trace” systems combined with physical monitoring to curb illicit trade and improve transparency across supply chains. 

The dialogue highlighted international practices for taxing specific goods. These include specific rates per litre of alcohol, per stick of combustible tobacco, per unit of smokeless tobacco, per millilitre of nicotine, and per litre of fuel depending on type. 

For food and beverages, taxation, if applied should be based on sugar content, while telecom and mobile money taxes can be structured as flat rates per transaction. “Such approaches enhance clarity, reduce manipulation, and align tax burdens with policy objectives.”

The keynote also proposed base-broadening measures to strengthen revenue without increasing distortionary rates. These include taxation of smoke-free nicotine products and restructuring food and beverage supplementary duties to apply consistent risk-adjusted taxation across sugary manufactured products.

It noted that staged rate reductions combined with base broadening could increase revenue while improving compliance. Gradual adjustments were recommended to avoid price shocks, with a medium-term transition toward a fully specific tax system. 

The dialogue emphasised improved enforcement to reduce illicit trade, including risk-based customs resource allocation and tighter regulatory controls for ingredients and raw materials used by licensed manufacturers. 

Digital supply chain monitoring, customs single window systems, and compliance programmes such as “know your supplier” and “know your customer” were also recommended to enhance transparency and reduce tax leakage. 

Regional coordination was another key theme, with the presentation suggesting alignment of tax rates on similar goods with neighbouring countries such as India and Myanmar. It also proposed exploring regional cooperation mechanisms, including potential agreements under BIMSTEC or broader tax administration cooperation platforms.

The presenters outlined several guiding principles for reform, including ensuring consistent taxation of similar goods, creating a level playing field for market participants, and aligning tax burdens with the degree of harm associated with products. 

They also stressed the need for detailed modelling before structural changes, revenue protection through base broadening, and alignment with global good practices, particularly eliminating cascading effects within the tax system. 

Participants at the closed-door session discussed the implications of rationalising supplementary duty and VAT structures for investment, competitiveness and consumer welfare, highlighting that a predictable and transparent tax regime is essential for long-term fiscal sustainability and economic growth.

PRI said the dialogue is part of its ongoing efforts to promote evidence-based policymaking and support reforms aimed at improving efficiency and fairness in Bangladesh’s tax system, reports UNB.