Why does revenue stay low despite reforms?

Most people who file income tax returns in Bangladesh do so with a sense of anxiety rather than confidence. They worry about audits, paperwork and arbitrary decisions even as they try to follow the rules. That unease is not irrational because for decades the country's tax system has combined weak enforcement with wide discretion. While leaving honest taxpayers feeling vulnerable, this has also produced one of the lowest tax-to-GDP ratios in the world. In recognition of this problem and the need to improve it, policymakers have spent the past several years rolling out legal, institutional and technological reforms, opening up a rare opportunity to rethink how income tax actually works.

A foundational step was the replacement of the decades-old ordinance with a new Income Tax Act in 2023, which sought to modernise legal framework to align with contemporary economic realities. This was followed by the gradual move to mandatory online return submission under a self-assessment system. Most individual taxpayers now file through a digital platform that has reduced paperwork and curtailed many of the informal interactions that once defined tax compliance. 

Digitalisation has also altered the way enforcement operates. Audit selection is now driven by centrally generated data rather than by the discretion of individual officers. Only those cases flagged by the system are called in for scrutiny which lowers the scope for arbitrary harassment and reduces compliance costs for those who try to stay within the rules. At the moment, the National Board of Revenue (NBR) is working to integrate information from the Central Depository Bangladesh Limited and banks so that data on capital market investments and interest income can be automatically reflected in tax returns, while digital Value Added Tax (VAT) filing is also on the way.

Yet this digital transition is not without significant gaps. The online platform does not allow the uploading of supporting documents at the time of filing even though salary figures and tax deducted at source of non-government employees remain outside the live data network. Taxpayers therefore have to declare key information in good faith while knowing that any later mismatch could trigger an audit and a demand to produce documents that the system itself never allowed them to submit in the first place. This also creates a deeper problem of enforceability. When taxpayers provide only minimal information about property in their online returns but later refuse to cooperate when verification is sought, tax officials are left without any reliable trail of information to trace their assets. Recording declarations without the supporting evidence clearly undermines the system's purpose instead of strengthening it.  

Institutional reform has also been placed on the agenda post-July 2024 when the government moved to split the National Board of Revenue into two separate bodies under the Ministry of Finance, one responsible for revenue policy and the other for revenue management. The proposal triggered resistance from a section of officials who feared loss of authority under the new structure. Although the protests were eventually quelled, practical establishment of the two new entities remains pending due to unfinished procedural formalities, although completion remains a priority ahead of upcoming elections. The logic behind the separation is nevertheless sound. When the same authority both writes tax rules and enforces them, the temptation to issue special exemptions and tailor-made regulatory orders is high. Placing policy making and implementation in different hands can reduce that risk. Still, a cleaner institutional architecture on its own is neither a panacea for corruption nor will it solve the deeper problem of weak revenue mobilisation. 

Each year the national budget grows larger and the revenue target for NBR rises with it, yet the gap between potential and actual collection persists. One major reason is the generous and often outdated web of tax exemptions. For example, the income tax exemption for software development, IT enabled services and related ICT activities was first introduced in July 2005 as a temporary stimulus but still in force today despite a very different economic reality. Two decades ago, the policy was justified by the hope that a dynamic domestic ICT industry would emerge, generating skills, innovation and globally competitive products. Regrettably, it has yielded scant evidence of success.

As of now, Bangladesh has not produced widely recognised homegrown ICT products or platforms that compete in international markets and most activity remains concentrated in importing and reselling hardware and software rather than creating original technology. Even limited domestic value addition has been scarce. This matters even more now that Bangladesh is set to graduate from the Least Developed Country category in November 2026, after which access to trade preferences will depend on stricter rules of origin that often require at least 50 per cent domestic value addition for non-apparel goods. A genuine ICT production base would have strengthened the country's position in that environment, but the tax break has mainly subsidised a trading business instead.

Similar scrutiny should apply to the deductibility of interest expenses from the taxable income of businesses, a rule that clearly favours debt over equity. Because interest payments reduce tax liability, companies are pushed towards borrowing even when it is neither necessary nor prudent. In an economy where banks are already weighed down by bad loans, this tax bias actively amplifies financial fragility rather than containing it. Highly indebted companies are more likely to fail during economic slowdowns while those financed with more equity can absorb shocks, making the current tax treatment of interest a risk to overall stability.

Emerging digital economies present another frontier for revenue mobilisation. Online businesses thrive with minimal formal oversight, often operating without physical premises and transacting via mobile wallets such as bKash, Nagad or cash-on-delivery. These channels evade routine scrutiny enabling significant concealment. As e-commerce expands, the revenue authority must adapt monitoring tools to capture these flows effectively.

None of this means that reform has stalled. Ongoing digital strides by the revenue body from online filings to mobile payments show a clear commitment to modernisation. However, complementing these with targeted reviews of unproductive incentives and enhanced oversight would only make tax system more effective, fair, and forward-looking than ever before.

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