Are we looking in the wrong place?

Each year, as Bangladesh prepares its national budget, a familiar policy narrative resurfaces: the need to increase the Tax-GDP ratio, reduce reliance on external borrowing, and strengthen domestic revenue mobilisation.

While these objectives are valid, an important question often goes unaddressed: are we correctly identifying where the real gap lies?

More importantly, has the concept of Tax-GDP been communicated in a way that enables citizens-the very taxpayers-to meaningfully engage with it? Without broader understanding and participation, even well-designed fiscal policies may fall short of their intended outcomes.

At its core, the Tax-GDP ratio measures how much tax a government collects relative to the total economic output of a country. For instance, if a country produces goods and services worth 100 units and collects 10 units in tax, its Tax-GDP ratio is 10 per cent.

Globally, developing economies typically maintain a Tax-GDP ratio of around 15 per cent or more, while developed economies often exceed 25-30 per cent. Bangladesh, however, continues to remain significantly below these benchmarks, with the ratio hovering around 9 per cent.

But improving this ratio is not simply a matter of increasing tax rates. A more realistic and sustainable approach requires understanding the structure of the economy, the extent of informality, and the capacity of institutions responsible for tax collection.

BEYOND TAX RATES: Public discourse frequently assumes that increasing tax rates will lead to higher revenue. In practice, however, sustainable revenue growth depends on three key factors: (a) expanding the tax base, (b) simplifying compliance, and (3) improving transparency and documentation. 

In essence, the challenge is not to tax more, but to bring more of the existing economy into the formal tax system.

THREE STRUCTURAL GAPS: Bangladesh's Tax-GDP challenge can be better understood through three persistent gaps. 

First, the identification gap. A large number of businesses operate without being formally recognised as taxpayers. While economic activity exists, it is not always captured within the tax system.

Second, the transaction gap. Economic transactions are increasingly visible-through banking channels, mobile financial services, and digital payments-yet many of these transactions are not effectively tracked for tax purposes.

Third, the asset gap.  Assets such as shops, rental properties, and commercial holdings are visible in the real economy but are often not fully reflected in income tax records.

Together, these gaps create a disconnect where economic activity contributes to GDP but remains partially invisible to the tax system.

A PRACTICAL ILLUSTRATION: Consider rural Bangladesh. There are approximately 4,500 Union Parishads, each overseeing several local markets. If each Union has four to five markets, and each market hosts around 100 small businesses, the total number of such entities could reasonably reach between 2 to 2.5 million.

However, a significant proportion of these businesses: do not have Electronic Tax Identification Numbers (E-TIN), do not submit regular tax returns, operate under manually issued trade licences, and are not consistently tracked during licence renewal. 

Now, assume conservatively that 50 per cent of these entities remain outside the tax net which means the number is around one million businesses. If each of these contributes only the minimum tax of Tk 3,000 annually, the potential additional revenue would amount to Tk 30 billion per year.

 Now, the government's revenue target currently stands at around Tk 5.6 trillion, with a Tax-GDP ratio of approximately 9 per cent.

An additional Tk 30 billion may appear modest in comparison. However, it represents a measurable improvement achieved without introducing any new tax.

More importantly, it demonstrates a critical policy direction-revenue can be increased by improving system coverage rather than increasing tax burden.

ANOTHER OVERLOOKED OPPORTUNITY: According to data from the Registrar of Joint Stock Companies (RJSC), thousands of companies are registered in Bangladesh, many of which are currently dormant.

If even a portion of these entities were brought under regular audit and compliance frameworks, additional revenue could be generated through audit-related services, tax deductions at source, and value-added tax.

This again highlights the presence of untapped revenue within the existing system.

THE CORE ISSUE IS INTEGRATION, NOT ABSENCE: The challenge Bangladesh faces is not the absence of systems, but their lack of integration. It is because systems operate in isolation, data remains fragmented and the economy is not fully visible. 

As a result, a substantial portion of income-generating activity does not translate into effective tax collection.

It is often assumed that citizens are not paying taxes. But the reality may be more nuanced: people are earning-but the system is not fully recognising them.

CONCLUSION: The most significant opportunity to improve Bangladesh's Tax-GDP ratio does not lie in introducing new taxes. It lies in closing existing gaps. The real question, therefore, is not whether taxes should be increased, but whether the existing economic base is being fully captured. We are not under-taxed; we are under-documented.

The writer is Fellow Chartered Accountant. He also serves as CFO in a business conglomerate.
biplobkb@gmail.com