Bangladesh Seeks Strategies to Enhance Revenue Collection

A buoyancy coefficient greater than one indicates that tax revenues are growing faster than the economy, while a coefficient below one signals slower growth. An analysis of real GDP and revenue growth from FY12 to FY23 revealed an average revenue buoyancy of 0.90, indicating significant room for improvement.

This lower buoyancy score, noted in a Finance Ministry report, underscores the need for reforms to bolster revenue mobilization. The report also emphasizes the importance of the effective tax rate as a gauge of revenue performance. For instance, the effective VAT rate, which has recently risen to 7.1 percent in FY23, still falls short of the standard 15 percent applicable to most goods in the country.

Compared to its regional peers, Bangladesh's revenue collection remains inadequate. In 2022, the general government revenue-to-GDP ratio was 23.1 percent in Nepal, 19.8 percent in India, and 14.8 percent in Laos, while Bangladesh lagged at just 8.9 percent. This disparity highlights the correlation between economic development and effective revenue collection.

To meet its development goals, the Finance Ministry has called for comprehensive reforms aimed at improving the effectiveness, efficiency, transparency, and fairness of the tax administration system. The report suggests reevaluating tax exemptions to ensure they support economic growth without disproportionately benefiting wealthier individuals at the expense of lower-income groups.

Additionally, tax compliance remains a challenge; in FY22, only 33.3 percent of Tax Identification Number (TIN) holders submitted tax returns, a figure significantly lower than in comparable countries.

To address these issues, the Finance Ministry has proposed several modern reform strategies, including expanding the tax base, implementing a modern property tax system, introducing green and carbon taxes, streamlining tax collection processes, and fully automating tax filing and payments to minimize direct interactions between taxpayers and collectors.

Further strategies include refining audit processes to be more selective and criteria-based, and separating tax policy from tax collection to enhance effectiveness. While the government has made progress—evidenced by an increased share of income tax and VAT in total revenue—there is still a pressing need to reduce reliance on indirect taxes and bolster direct tax revenues.

As of FY21, direct taxes constituted 32.3 percent of total revenue, rising slightly to 32.7 percent by FY23. To sustain this growth trajectory, the government is committed to broadening the tax base, shifting reliance from trade taxes to direct taxes, and accelerating direct tax growth in the years ahead.