What good is revenue target without tools to meet it?

The ruling BNP government has presented its first full budget recently and predictably it is larger than those that came before it. The immediate reaction from economists, bankers and business leaders has been mixed, with praise for the budget's political balancing act accompanied with serious doubts about whether its revenue target is achievable at all. Such scepticism is understandable given that the target is to be met by a revenue authority that has struggled to meet even its own revised projections in recent years. Still, a government sets its revenue target with a sense of how much economic activity it expects to bring within the tax net, and that figure also indicates how confidently it assesses the productive capacity of the economy it governs. An ambitious target expresses confidence while a missed one exposes its limits. This budget, unfortunately, seems destined to expose those limits rather than vindicate confidence, because the tax proposals within the Finance Bill 2026 appear to contain within themselves the conditions for their own failure. 

Finance Minister Amir Khasru Mahmud Chowdhury has set the National Board of Revenue a collection target of Tk 6.04 trillion for the next fiscal year, as part of an overall revenue goal of Tk 6.95 trillion. That would require the NBR to raise more than 50 per cent above its likely collection in the outgoing fiscal year which is a stretch by any measure. Yet the size of that target is not the budget's most serious problem. More concerning is the gutting of collection mechanisms that income tax department has long relied on to secure revenue from taxpayers whose declared income often bears little resemblance to their actual earnings.

For years, minimum tax and the final tax liability provisions functioned as safeguards against chronic underreporting of income and profits. Businesses frequently objected to these measures and some of those objections were valid as well. But their concerns would carry far greater weight in a fully formalised economy where incomes and transactions are comprehensively documented and readily verifiable. Bangladesh is not such an economy. It remains heavily informal and cash driven, making tax evasion and underreporting persistent features of economic life. Minimum tax and final tax liability were not ideal instruments, but they emerged as practical responses to administrative limitations and a culture of weak compliance. Given the repeated revenue shortfalls of recent years, including the likely failure to meet even the revised target in the outgoing fiscal year, retaining these mechanisms would have been the more prudent course. Instead, the proposed reforms have dismantled these two effective tools available to tax authorities at precisely the moment the government is counting on an unprecedented surge in tax collection.

The damage flows from the replacement of Section 163 of the Income Tax Act, and its implications would surely ripple across the entire system. Let's consider the interest earned on savings certificates which previously constituted a final tax liability. A taxpayer earning Tk 300,000 in annual interest pays Tk 30,000 in tax at source. Under the proposed regime, however, because that income falls below the tax-free threshold, the entire amount becomes refundable. Replicated across millions of small savers who hold savings certificates, this would translate into a substantial and recurring revenue loss. The same logic applies to land transactions where withholding tax has historically generated a significant share of income tax revenue. Once that withholding ceases to function as a minimum liability, a large portion becomes refundable, particularly for sellers whose taxable income falls below the threshold. The implications may be even greater for contractors and subcontractors engaged in public works. For years, many have calculated their tax liability backwards from the withholding deducted at source, structured their declared profit accordingly and filed returns. Removing that floor fundamentally changes this structure. With tax administration having a hard time checking actual revenues and profits, there exists very little to stop them from reporting small profits or even losses in order to claim back taxes already paid at source.

Taken together, these changes weakened what worked so far without putting anything comparably effective in its place. Tax policy was supposed to be calibrated to prevailing economic realities, but the proposed reforms assumed a level of compliance that Bangladesh simply does not possess. There is also the matter of what expanded refund eligibility does to the tax administration. The refund system has been known as a breeding ground for collusion between taxpayers and corrupt revenue officers, and flooding it with fresh opportunities for refund claim will not improve that record. The impending loss of revenue from the policy changes is entirely predictable and the government has no excuse for not having seen it coming.

What the Finance Bill offers in return, as a gesture towards expanding the tax net, is the new Section 130(A), which brings retail traders under the umbrella of advance income tax collected at source. Policymakers clearly introduced this provision to bring a massive, historically untaxed segment of the economy into the tax net. Under this mechanism, wholesalers and distributors are required to deduct 0.2 per cent at source when supplying goods to retailers, which effectively deputises them as tax deducting authorities. The problem, however, is that there is no mechanism to verify whether they actually follow through with this requirement. Wholesalers and distributors are not among the class of entities required to submit quarterly withholding returns, meaning the tax office has no reliable way to trace whether any deduction was made at the point of sale. As for the retailers who are supposed to have their taxes deducted, many will simply underreport their purchases so they can minimise their declared turnover and tax liability.

Nobody disputes that Bangladesh needs meaningful tax reform. But reform that discards the instruments which kept revenue collection afloat before building anything to replace them is not improvement. It is a self-inflicted wound, the full cost of which will become visible at the end of the next tax return submission season.

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