Assignment

On
“ Taxation in Bangladesh ”
Course title: Economics of Public Sector
Course Code: ECON 305

Submitted to
Mala Rani Das
Lecturer
Department of Economics
Jahangirnagar University

Submitted by
Nadima Din
Class Roll: 447
Exam Roll: 170605
Department of Economics
Jahangirnagar University
 Taxation in Bangladesh

1. Introduction
The Government of any country has financed its expenditure and public debt by using
taxation, borrowing from the market and use of printed money. For the growth of the
economy of a country and to fund the public goods, taxation plays a vital role. It also
accomplishes some economic and social objectives like redistribution of income, price
stabilization and discouraging harmful consumption. So, taxation can be called the main
source of a country’s revenue. Here only the taxation in Bangladesh will be discussed briefly.

2. Definition
The term ‘tax’ has been derived from the French word ‘taxe’.The Latin word ‘taxare’ is
related to the term ‘tax’, which means ‘to charge’.1 The first known taxation took place in
Ancient Egypt around 3000–2800 BC2. It is a contribution exacted by the state.
A tax is a compulsory financial charge or payment levied on the persons or companies by a
governmental organization to meet the expenditure incurred on conferring common benefits
upon the people of a country. The legal definition and the economic definition of taxes differ
in some ways such that economists do not regard many transfers to governments as taxes.
Though an individual pay taxes to Government, he can not expect special type of service only
for him in return for the tax. Government spends the tax money for the general or common
benefits of all the people.

3. Classification of taxes
Taxes can be classified into two types.
I. Direct Tax,
II. Indirect Tax.
i. Direct Tax: The tax which is collected from the individuals who can bear the tax burden, is
called Direct Tax. It is usually said that a direct tax cannot be shifted by the taxpayer to
someone else. Corporate taxes, income taxes, annual wealth tax and transfer taxes are the
examples. In the case of direct tax, there is a direct contact between the tax payer and tax
levying public authority.
ii. Indirect Tax: The tax which is collected by mediators who transfer the taxes to the
government and also perform functions associated with filing tax returns, is called Indirect
Tax. Its burden can be shifted to others so that those who pay these taxes to the Government
do not bear the whole burden but pass it on wholly or partly to others. The customers have to
bear the final tax burden. Examples of indirect taxes are sales tax, value added tax (VAT),
taxes on any aspect of manufacturing or production, taxes on legal transactions, and customs
or import duties.

1
https://en.banglapedia.org/index.php/Taxation
2
https://en.wikipedia.org/wiki/Tax
Indirect taxes are two types-Specific tax and Ad-valorem tax. A specific tax on a commodity
is a tax per unit of the commodity, whatever its price is. On the other hand, an ad-valorem tax
is levied according to the value of the commodity.
According to another classification, Taxes are three types- Progressive, Proportional and
Regressive. In case of Proportional tax, the same rate of the tax is charged, whatever be the
magnitude of the base on which it is levied. Proportional tax is the rate which is fixed and not
the absolute amount of the tax. On the other hand, the rate of progressive tax increases as the
amount of the tax base (income, wealth or any other object) increases.

4. Purposes and Effects of Taxation

The four main purposes of taxation are-
I. Revenue: Taxes raise money to fund government spending and various public
expenditures.
II. Redistribution: Taxes transfer wealth from rich society to poor society.
III. Repricing: Taxes are imposed to reduce externalities.
IV. Representation: It implies that government imposes tax on citizens and they demand
accountability from government.
The purpose of taxation is to maintain the stability of the currency, express public policy
regarding the distribution of wealth, subsidizing certain industries or population groups or
isolating the costs of certain benefits, such as highways or social security.3
Effects of taxes can be divided into two fundamental categories:4
I. Taxes cause an income effect because they reduce purchasing power to taxpayers.
II. Taxes cause a substitution effect when taxation causes a substitution between taxed
goods and untaxed goods.

5. Taxation in Bangladesh
The taxation system of Bangladesh is inherited from its the British and Pakistani regimes.
That system was developed on the basis of generally accepted canons and there had been
efforts towards rationalizing the tax administration for optimizing revenue collection,
reducing tax evasion and preventing revenue leakage through system loss.
According to Article 152(1) of the Constitution of Bangladesh, taxation includes the
imposition of any tax, rate, duty or impost, whether general, local or special, and tax shall be
construed accordingly. Rate is a local tax imposed by local government on its residents or the
property owners of the locality, a duty is a tax levied on a commodity, and an impost is a tax
imposed for an entry into a country.
The tax structure in this country consists of both direct (income tax, gift tax, land
development tax, non-judicial stamp, registration, immovable property tax etc.) and indirect
(customs duty, excise duty, motor vehicle tax, narcotics and liquor duty, VAT, SD, foreign
travel tax, TT, electricity duty, advertisement tax, etc.) taxes.5But the principal taxes are-

3
 Beardsley, Ruml. "Taxes for Revenue are Obsolete" (PDF). American Affairs. VIII (1). Archived from the
original (PDF) on 14 March 2017.
4
https://en.wikipedia.org/wiki/Tax
5
https://en.banglapedia.org/index.php/Taxation
 I. Income Tax,
II. Value-Added Tax (VAT),
III. Customs Duty,
IV. Corporation Tax,
V. Supplementary Duty.6
These taxes will be discussed below in brief.

I. Income Tax:
The tax that governments impose on income or profits generated by businesses and
individuals within their jurisdiction. It is generally calculated as the product of tax rate
times the taxable income. ‘Taxable income’ is obtained through wages, self-
employment and from things like property selling. Income tax was introduced in the
history of Bangladesh by British Raj back to 1860 and it was then under the title of
Income Tax Act.7The method of calculating income tax will be discussed later.
II. Valued-Added Tax (VAT):
A value-added tax (VAT) is a type of tax that is imposed on the price of a product or
service at each stage of production, distribution or sale to the end customer and it is
assessed incrementally. It is not levied on savings or invested money. Some of the
countries introduces this tax as a Goodsand Services Tax (GST). The standard rate of
VAT is 15% levied on transaction value of most of the imports and supplies of goods
and services.8The method of calculating VAT will be discussed later.
III. Customs Duty:
Customs duty refers to the tax imposed on goods when they are exported or imported
across international border. The rates of customs duties are either specific or on ad-
valorem basis.9This Duty is maintained by Bangladesh Customs.
IV. Corporation Tax:
Corporation tax or company tax is a direct tax imposed by a jurisdiction on the
income or capital or corporations or analogous legal entities. This is also called
Corporate Tax. Bangladesh imposes corporate tax for unlisted companies to 32.5% in
2020.10
V. Supplementary Duty:
The duty that is imposed on luxurious goods, non-essential goods, socially not
encouraging goods etc. is called Supplementary Duty (SD). Under the Value Added
Tax and Supplementary Duty Act 2012, Supplementary duty shall be imposable and
payable on the import of goods, the supply of goods manufactured in Bangladesh and
the supply of services rendered in Bangladesh. This duty can not be imposed on goods
that is imported for export and is for home consumption.11

6. The Tax revenue summary of Bangladesh’2022

6
https://en.wikipedia.org/wiki/Taxation_in_Bangladesh
7
https://en.wikipedia.org/wiki/Taxation_in_Bangladesh
8
https://en.wikipedia.org/wiki/Taxation_in_Bangladesh
9
https://economictimes.indiatimes.com/definition/customs-duty?
utm_source=AMPusers&utm_medium=whatsappshare&utm_campaign=socialsharebutton&from=mdr
10
Staff Correspondent; bdnews24.com. "Bangladesh reduces tax for unlisted companies to 32.5% in new
budget". bdnews24.com. Retrieved 2020-07-26
11
https://taxpertbd.com/product/handbook-supplementary-duty-rates-bd/
The source of revenue collection in Bangladesh can be divided into three major categories:
I. NBR (National Board of Revenue) Revenue,
II. Non-NBR Revenue and
III. Non-tax Revenue.
In FY 2021-22, total target revenue is announced TK 3.89 trillion crore and revised revenue
of FY 2020-21 is TK 3.51 trillion crore, target growth is 10.7%. In this targeted total revenue,
contribution of NBR Revenue, Non-NBR Revenue and Non-tax Revenue are Tk. 3,30,000
crore, Tk. 16,000 crore and Tk. 43,000 crore respectively.12

Source: National Board of Revenue.

The National Board of Revenue (NBR) managed to collect Tk 2.56 trillion in the FY 2020-21
against Tk 2.18 trillion in the previous FY 2019-20. The NBR officials expected that the
amount would go up further in the final count as the Research and Statistics Wing of the
board has started compiling data from the field offices of income tax, customs and VAT.
However, the NBR missed the revised revenue collection target (Tk 3.01 trillion) by Tk 450
12
https://mof.gov.bd/sites/default/files/files/mof.portal.gov.bd/budget_mof/c5933641_4d17_484e_862f_111
0a964be33/ST_01_E.pdf
billion and the original target (Tk 3.30 trillion) by Tk 740 billion during the last FY. The
income tax wing collected Tk 850 billion, VAT wing Tk 940 billion, and customs wing Tk
770 billion during the period under review. In FY 21, the VAT collection target was Tk 1.10
trillion, followed by income tax Tk 970 billion and customs duty Tk 940 billion. VAT
collection from tobacco, cement, pharmaceuticals and mobile phone companies increased
significantly last year.

Share of Revenue FY 2021-2213

However, all of the three wings missed their revised target for last FY, but achieved
impressive growth over the corresponding period of previous FY. The tax collection in the
month of June witnessed a substantial growth as the officials made all-out efforts to offset the
financial crunch of the government amid the Covid-19 pandemic. In FY 2019-20, the revenue
collection had posted a negative growth for the first time since the independence. The
government has set the original target of revenue collection for the current FY equivalent to
that of the last fiscal for the first time, aiming to give some relief to the taxpayers affected by
the pandemic-induced lockdown. The new wave of the pandemic may pose another challenge
on the future growth in revenue collection unless the vaccination programme works
smoothly. To meet the future resource requirement, the government will have to reform the
current structure of NBR so that the tax collection doubles to keep it consistent with the GDP
growth.14

7. Tax-GDP ratio in Bangladesh

Despite positive economic growth in recent years, Bangladesh has one of the lowest tax-to-
GDP ratios (9.3 percent) in the South Asian region. It is 23.1 percent in Nepal, 16.8 percent
in India and 11.0 percent in Pakistan. 
Income tax is one of the major components of tax revenue. Besides income tax, there are two
other major sources of revenue-value added tax (VAT) and customs duty. The projection of
total revenue collection from income tax, VAT and customs duty for the year 2020-21 is
estimated to be Tk 378,000 crore, where the National Board of Revenue (NBR) will
contribute Tk 330,000 crore. Of that, Tk 103,945 crore will come from income, profit and
capital tax, while Tk 125,162 crore will be collected through VAT. Past record shows
13
https://cpd.org.bd/wp-content/uploads/2021/06/CPD-Budget-Analysis-FY2022.pdf
14
https://thefinancialexpress.com.bd/economy/bangladeshs-tax-revenue-posts-17pc-growth-1625452979
collection from VAT has always been higher than that of income tax- which puts a burden on
marginalized people through double taxation and as a result, inequality has worsened over the
years. At the same time, because of globalization, both custom and import-stage
supplementary duties are likely to decline in relative terms. Under the circumstances, the
government is set to enhance its revenue mobilization through income tax.
Unfortunately, in Bangladesh, a large number of individuals and firms are unregistered and
the vast majority of registered individuals and firms with taxable income are not interested in
paying taxes. According to a NBR study, about four crore people in the country have the
capacity to pay taxes, but the majority of them do not pay tax on their income. At present,
NBR has about 40 lakh registered taxpayers but only 22 lakhs submitted their tax returns in
FY 2018-19. The study also found that there are 213,505 companies registered with the
Registrar of Joint Stock Companies (RJSC), of which about 45,000 companies submitted tax
returns.
Tax evasion is a serious problem in Bangladesh- as companies with huge revenues also evade
taxes. In addition, businessmen who collect VAT from consumers evade tax through under-
reporting. Some of the multinational companies evade taxes through misuse of a mechanism,
known as "transfer pricing". Transfer price is the price at which divisions of a company
transact with each other for goods or services. It takes place when two related companies
such as a parent company and a subsidiary, or two subsidiaries controlled by a common
parent, engage in international trade with each other for goods and services. Sometimes,
related entities of a multinational firm show artificially high prices for an imported product or
service in an attempt to deflate profits and evade taxes. This practice is known as "transfer
miss-pricing". According to the Global Financial Integrity Report (GFI), Bangladesh lost a
staggering USD 7.53 billion on average between 2008-2017 to trade miss-invoicing during
foreign commerce with its 135 trading partners (The Daily Star, March 05, 2020).
Moreover, there are some businessmen, politicians and government officials, who instead of
paying taxes on their undisclosed income (legal or illegal), are taking their money and
investing in commercial ventures and properties abroad. According to the GFI report released
in January 2019, in 2015, USD 5.9 billion (about Tk 50,000 crore) was siphoned out of
Bangladesh and a total of USD 81.74 billion went out between the years 2006-2016. The
annual report of the Swiss National Bank titled "Banks in Switzerland 2019" showed that
money held by Bangladeshi nationals and entities stood at 603 million Swiss francs or Tk
5,427 crore in 2019. The amount was Tk 5,553 crore in 2018 and Tk 4,329 crore in 2017,
according to the report.
All these are affecting the economy- with disproportionate effects on the poor and
marginalized sections of the population. Only working on serious changes in the tax system
can give long-term results. Unfortunately, the NBR has neither enough manpower nor the
expertise to address tax evasion of such magnitude. It is difficult for taxmen to identify the
loopholes without having advance training on transfer pricing, money laundering, etc.
Therefore, the government should train tax officials to hone their skills and come up with
pro-people policy measures and create awareness on developing a culture of paying taxes.
Tax compliance depends on how the government perceives the social contract between itself
and the taxpayers. When citizens see that the services, they get from the government are less
than what they pay for, i.e., the social contract is not honored, they tend to reduce their tax
compliance by not paying income taxes. This results in serious inadequacy of government
funds for public utility services such as water supply, electricity, maintenance of roads and
highways, healthcare, security and so on. Therefore, there is a crucial need for the
government to make sure that this contract is honoured and public services are well provided
for. Also, a sizeable segment of people thinks that there is no level playing field when it
comes to paying taxes; only some people pay taxes every year, while others, despite having
taxable income, continue to evade them. Under current practices, the burden of tax lies on a
limited number of persons/companies with higher marginal income tax rates; and the bulk of
those paying income tax are salaried employees, whose companies are responsible for
making their tax payments. Around 85 percent of income tax revenue comes from tax
withheld at source. Another problem in our tax policy is the extensive use of tax exemptions,
incentives and special provisions, which limit revenue collection and make the effective tax
base much narrower than the standard tax regime. Generally, it is argued that widespread
exemption encourages tax evasion, erodes tax equity and creates distortions in the economy.
Various other tax breaks legally keep many more people off the tax rolls. Therefore,
withdrawal of all sorts of tax holidays and tax exemptions from all sectors can significantly
increase revenue.
The Eighth Five-Year Plan for fiscal year 2020-21 to fiscal year 2024-25 has set the target of
raising the tax-GDP ratio to 14.2 percent by 2025. Raising tax-GDP ratio from the current
dismal level of 9-10 percent to 14.2 percent of GDP will no doubt be challenging. But it is
possible if the government overhauls the entire taxation system. The main thrust of tax policy
reform is to boost up revenue mobilization by expanding the tax base. In this connection,
there are ample opportunities to increase tax revenue collection. Many economists argue that
considering our socio-economic culture, the present tax structure is not suitable to attract
enough people to pay taxes and as such the tax rate needs to be brought down to a level
where everybody with taxable income feels comfortable to pay income tax; the tax net would
then be wider. In economics, the Laffer Curve represents a relationship between government
revenue raised by taxation and all possible rates of taxation. The Laffer Curve postulates that
when tax rate on producer surplus approaches 100 percent, tax revenues may approach zero,
since economic agents would not be left with any incentive to produce. The higher is the tax
rate, the higher is the disincentive against tax compliance and greater the propensity to
generate black money. Thus, reducing tax rates, particularly the maximum marginal rates of
progressive taxes, can increase tax revenue in two ways. First, by increasing tax base and
second, by increasing compliance with the tax rules.
Finally, strong institutional reform is essential to enhance the efficiency and capacity of the
tax administration. Without an efficient and effective tax administration, it is almost
impossible to execute the policies that are intended to enhance the volume of revenue
collection to achieve the required tax-GDP ratio.15

8. Taxation for Freelancer

8.1 Taxation Law in Bangladesh
Before we dive into the details of the taxation law, the answer is no, freelancers in
Bangladesh don't need to provide tax against their income in Bangladesh as of right
now. But the situation is soon going to change and it's something that you should
prepare for.
The scope of taxation is huge and multidimensional. For relevancy, we will take into
consideration the individual income tax that is in place in Bangladesh. Bangladesh has
a no-tax threshold of up to 300,000 BDT and the minimum tax rate over the threshold
amount is 5% going all the way up to 25%.

15
https://www.thedailystar.net/opinion/news/why-tax-gdp-ratio-so-low-bangladesh-and-how-raise-it-1996653
8.2 State of Freelancing Earning
The individual taxation law doesn't apply to freelancers in Bangladesh. Diving into
the matter, we found two root causes. First, most of the freelance work in Bangladesh
happens through a middleman. That is, an established freelancer often outsources jobs
to the relatively inexperienced freelancers in the country from freelancing platforms.
There is often no proper official contract for this type of freelancing work. The jobs
are also not listed as the outsourcers aren't listed as an organization or a company. As
a result, it becomes difficult to trace these incomes and bring them under taxation.
The second issue has to do with job regularity. Of the 650,000 freelancers in
Bangladesh, some 200,000 of them gets the regular job. Even beyond that, only a
handful of established and successful freelancers earn a taxable amount. In addition to
that, the lack of a proper framework regarding freelancing has also been one of the
reasons behind the proper estimation of freelancers and their earnings in Bangladesh.
8.3 Taxation Law for Freelancers
In the income tax ordinance of 1984, it was clearly stated that if anyone who's a
Bangladeshi citizen provides service to a foreign organization or a person and
receives monetary compensation, a 10% income tax will be imposed on the said
earning. But according to the money law of 2018, anyone providing software or
online service to any foreign entity or individual will not have to pay any tax. This
applies to all the Information Technology Enabled Services or ITES. Almost all of the
freelancers of Bangladesh are ITES providers in different freelancing platforms.
However, that isn't the end of the problem. Due to the absence of PayPal, most of the
freelancers of Bangladesh are forced to take their payment in dollars to their bank
account through wire transfer. This is done through the Payoneer platform. However,
since the bank doesn't treat these transactions as service earnings from foreign
entities, a 10% source tax is applied to them. As a result, even though the government
has tax exemption in effect for the freelancers, the source tax still applies which
ultimately drives down the earning of the freelancers. The situation has been like this
for quite some time now but due to exponential growth in the sector, and the growing
surge of freelancers in the country, the government has decided to bring the
freelancers under taxation. However, the move isn't drastic and the entire sector will
have tax exemption till 2024. That is, the freelancers will not have to provide any tax
until 2024.
8.4 Future of Freelance Taxation
To make the process of listing freelancing easier as well as get proper certification,
the government has decided to introduce smart ID for freelancers. The smart ID
feature, which is the first of its kind in Bangladesh will enable the government not
only to track the earning but also bring all the freelancers into a single platform. The
government plans on various developmental opportunities for the freelancers as well
as skill generation to better compete in the international market. Another scope of the
ID is that from this year, the government would require freelancers to get a TIN
certification. A TIN certification enables the freelancers to be government enlisted as
well as legalize their earning. Even though the freelancers aren't required to pay tax
up until 2024, they will need to submit returns to the income tax division. A
comparative study found that the pay gap between freelancers depending on
experience and the service sector is very high. Some freelancers may earn more than a
million BDT in a single month whereas some can't manage 10,000 BDT even. The
case of high earners in Bangladesh is very low with the majority of the freelancers
earning less than 15,000 BDT per month on average. Since there isn't any proper
 framework regarding taxation rates for freelancers, it can be expected that the non-
taxable ceiling of income should be higher than the individual income tax ceiling in
existence.16

9. Tax Evasion and Avoidance

Tax Evasion means illegally hiding income or concealing the particulars of income or
concealing particular source of income or manipulation account so as to inflate expenditure
and other outgoings with a view to illegally reduce the burden of taxation. In this case, tax
liability is reduced or tax is not paid at all.
Tax Avoidance is the minimization of tax liability by the tax-payer or his agent by efficient
tax planning legally. The avoider is just smart taxpayer who exploits loopholes in the tax laws
and related laws to reduce tax liability.
9.1 Reasons for Tax Evasion and Avoidance: There are various reasons for tax evasion
and tax avoidance. In order to develop methods and instruments for fighting tax evasion
and avoidance, it is very much important to establish a broad understanding of the
different reasons underlying these problems. These factors can be summarized as
resulting from insufficiencies in the administration and collection of taxes as well as weak
capacity in auditing and monitoring tax payments which limit the possibility to detect and
prosecute violators. The reasons are-
1. Low level of (voluntary) tax compliance such as- low tax moral and high
compliance costs,
2. Low quality of the service in return for taxes,
3. Tax system and perception of fairness,
4. Low transparency and accountability of public institutions,
5. High level of corruption,
6. Lack of rule of law and weak fiscal jurisdiction,
7. Insufficiency in tax collection,
8. Weak enforcement of tax laws,
9. Weak capacity in detecting and prosecuting inappropriate tax practices17,
10. Lack of information,
11. Lack of knowledge18 etc.
Often, tax evasion and avoidance are by-products of deficient political, economic and
social governance in a country. Especially in these circumstances any ‘exit strategy’ away
from evasion and avoidance needs to be based on a profound analysis of the current
situation and the types of tax evasion and avoidance used predominantly.
9.2 Amount of Tax Evasion in FY 2020-21: A year-end assessment of the VAT Audit,
Investigation and Intelligence wing revealed the cases of collection of VAT by businesses
from their customers and default on payment of the same to state coffers. Tax intelligence
unearthed five times higher VAT evasions, year on year, in the last fiscal year (FY 2020-
21) despite pandemic-time exemptions. According to an official statement released by the
VAT Audit, Investigation and Intelligence wing of the NBR, the VAT intelligence
detected Tk 16.76 billion in unpaid value-added tax through conducting 233
16
https://unb.com.bd/category/Business/taxation-of-bangladeshi-freelancers-in-2021/71558
17
https://www.academia.edu/5307601/_TAX_EVASION_and_AVOIDANCE_-
_A_REAL_PROBLEM_FOR_BANGLADESH_
18
icmab.org.bd/wp-content/uploads/2019/12/8-Tax-Evasion-BANGLADESH.pdf
 investigations in FY 2020-21. The government has received Tk 1.43 billion from VAT
head, with penalty, through the search operation. Instant collection of evaded VAT also
grew 2.5 per cent last year. In FY 2019-20, the National Board of Revenue (NBR)
unearthed VAT evasion worth Tk 3.19 billion and collected penal VAT amounting to Tk
570 million.19
The absence of a participatory policy-making process, lack of research and reform of the tax
system, short-term oriented and politically motivated tax policies, loopholes, anomalies and
complexities of tax laws and policies are responsible for creating tax evasion. There is a
provision for investigating tax evasion, but the institutional weaknesses of the tax
administration, lack of professional support for tax officials and inappropriate behaviour of
tax officials have undermined the efficiency of the tax policy implementation process,
resulting in not addressing and combating tax evasion in an efficient manner. During the
compliance process, the absence of a tax culture among income earners, inadequate taxpayer
services, complexities and unfairness in tax assessment, the weak enforcement by and the
negative image of the tax department work as influential driving forces for tax law non-
compliance. The empirical findings also revealed that the corrupt nexus of self-interested
policy-makers, rent-seeking tax officials, selfish taxpayers, including business people,
professionals, self-employed persons, and their intermediaries and tax agents, facilitates tax
evasion.20

10. Taxation challenges for Bangladesh

Being a developed country, Bangladesh tax administration faces tremendous challenges in
mobilizing tax revenue. The challenges and problems of mobilizing taxation are multiple.
The revenue collection is still dominated by indirect taxes while direct tax plays the important
role. The current revenue from taxation challenges for Bangladesh is briefly discussed below:
I. Narrow Tax Base: Bangladesh has a very narrow tax base. The tax to GDP
ratio is 9.3 per cent in 2021 and that remains one of the lowest in the world.
The tax administration in Bangladesh is characterized by the dominance of
large informal sector that contributes to the poor tax base of the country (The
rate of informal economy in Bangladesh stood at 27.60% in 2015 (Medina and
Schneider, 2018). Agriculture sector virtually remains outside the tax net.
Tackling informal economy is very difficult on the part of the tax
administrations of developed countries. Very often tax administrations of
developed countries are considered poor and inefficient for numerous reasons.
Bangladesh tax administration has made remarkable progress in collecting the
revenue against the revenue collection target as set by the government. Reform
programs are ongoing with a number of projects on direct and indirect taxes. It
is expected that Bangladesh tax administration can build up its capacity to deal
with the challenge of informal economy by enlarging the tax base.
II. Taxing Digital Economy: The world economy is experiencing fast track
digitalization. Bangladesh is also giving importance on the digital economy.
Gradually Bangladesh is becoming a global market for digital outsourcing
(Zaman, 2019). The digital economy poses a broader challenge for the policy
makers in that it relates to nexus, data and characterization for direct tax
19
https://thefinancialexpress.com.bd/economy/bangladesh/vat-evasions-galore-despite-exemptions-
1628480805
20
Anu Muhammad, Who’s prospering on whose labor? http://alalodulal.org/2013/06/20/anu-muhammad-budget/
 purposes. It poses another major challenge of implementing Value Added Tax
(VAT) covering the transactions where goods, services and intangibles are
acquired by private consumers from offshore suppliers (OECD, 2015).Like
other countries, the tax authority of Bangladesh also has started to consider the
tax potential of the online sectors. In June 2018, the National Board of
Revenue (NBR) has introduced a 5 percent value added tax (VAT) on ride-
sharing service providers. Finance Act 2018 introduced the provision for tax to
be deducted at source under Section 52AA of the Income Tax Ordinance,
1984, on apps-based ride sharing services at the rate of 3%-4% based on the
base amount, by the ride sharing service provider. Although Bangladesh is
making gradual progress in its capacity building, but to tackle the serious issue
like taxation of digital economy will take time. It is expected that with
international cooperation Bangladesh will be able to build requisite capacity to
tackle the problems arising from digital economy taxation.
III. MNCs Tax Avoidance and International Tax Rules: Another big challenge
for Bangladesh tax administration is to combat the problem of tax avoidance
and evasion by the Multinational Corporations (MNCs) operating in
Bangladesh. The problem of tax avoidance by MNCs is a problem sans
frontier. The MNCs exploit the loopholes of the international taxation rules
and avoid huge amount of tax revenue to the detriment of the capacity of the
states to provide for public goods. For example, in 2009-2013, Amazon,
Google and Starbucks paid a combined total of only £57.7 million despite
revenues of nearly £32 billion over the same period. Only 0.18% of revenues
were paid in corporation tax (Connell, 2014). One of the means of tax
avoidance by the MNCs is the transfer pricing. Transfer pricing refers to non-
arm’s length international transactions between associated enterprises. This
has the effect of negatively impacting the revenue base. Though no data is
available, it can be anticipated that Bangladesh is also losing huge amount of
revenue due to transfer pricing by the two hindered MNCs operating in
Bangladesh. Keeping in mind the gravity of the problem, Bangladesh enacted
transfer pricing law in 2012 with effect from tax year 2014. The TP rules in
Bangladesh have been framed like the OECD and the UN TP guidelines. The
transfer pricing law in Bangladesh, inter alia, made rules to conduct transfer
pricing audit after the MNCs submit statement if international transactions.
But the fact remains that Bangladesh has not yet been able to go for audit due
to lack of capacity and logistics. In the meantime, the OECD is imparting
training to the officers of the tax department to build the capacity. The
National Board of Revenue (NBR) set up a separate transfer pricing cell to
deal with the transfer pricing cases
IV. Poor Third Party Tax Information Reporting System: Third party
information reporting (TPIR) is a tax enforcement tool that is widely used
by the tax administrations around the world. The present information regime is
narrow in scope and therefore the NBR retains the discretion to make a
decision whether return should be sent to that or not. The tax administration
should craft a comprehensive tax information regime so that voluntary
compliance can be ensured by encouraging formal economy in the country.
This remains a challenge for Bangladesh.
 V. Poor Tax Culture: To ensure sustainable development of a country’s tax
culture is vital (UNDP, 2008). Tax culture reflects the taxpaying mentality or
compliance mentality of taxpayers of a country. Tax culture is country specific
and it is developed over the years in a gives society and becomes blended with
the customs and habits of the people of the society. Bangladesh’s poor income
tax compliance indicates the country’s insufficient tax culture. The picture
becomes clear when one looks into the statistics of return and tax payments. It
is imperative that Bangladesh takes initiative to improve tax culture by
inciting patriotism among the citizens, by removing knowledge gap, removing
tax law complexities, removing corruption, encouraging formal economy and
by strengthening the enforcement measures of the tax laws.21

11. Some Initiatives Taken by Bangladesh Tax Administration

Bangladesh has graduated to the rank of middle-income earner country club. Bangladesh has
to go a long way in terms of revenue collection to achieve the sustainable development goals
(SDGs). Though tax administration in Bangladesh has not been able to expand the tax base to
a remarkable extent, it has not stopped in its endeavor. Bangladesh took some important
initiatives to augment the revenue collection and increase the tax to GDP ratio to the expected
level. Following is a brief account of some of the initiatives taken by the NBR to reform the
taxation system:
I. Introduction of New VAT Law: The purposes of the introduction of new
VAT are to replace the old age sales tax, mobilize more internal revenue, to
introduce a single flat rate covering a wide range of goods and services
production, and ensure equity by bringing transparency and accountability in
the taxation system of Bangladesh (Lalarukh and Chowdhury, 2013).
However, because of some inherent defects it its application, the old VAT Act
has been replaced by the VAT Act of 2012 which came into effect from 1 July
2019. It is expected that the new VAT Act would be able to collect more VAT
than its predecessor did.
II. The New Direct Code: The NBR has taken an initiative to modernize the
direct tax laws by adopting the new direct tax code. The Income Tax
Ordinance 1984 is considered complicated. To remove the complicacies and
make the income tax law at per with the international best practice, the NBR is
currently working on the introduction of a new income tax law. At the same
time to make user friendly the gift tax act and the travel tax act all will be
included within the new income tax law known as the Direct Tax Code. It is
expected that the new Code will be implemented soon.
III. Alternative Dispute Resolution System: The Finance Act, 2011 has
incorporated ADR provisions for dispute resolution in income tax, VAT and
customs. By ADR mechanism, the NBR and taxpayers can settle their
differences with the help and guidance of an umpire called facilitator. In the
field of income tax, the Finance Act 2011 inserted a new chapter XVIIIB
alternative dispute resolution. Section 152A to 152S deal with the detailed
provisions of alternative dispute resolution between the taxpayer and the

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 department. The ADR system is successfully running in the direct tax
administrations.

IV. BITAX Project: The BITEX project is an ongoing project in the field of
direct taxes set up to facilitate on line return submission by the taxpayers.
Provision is also there to make offline entries of the returns submitted
manually.
V. Expansion of Income Tax Department: The first ever expansion of the
income tax department was a success in terms of mobilizing direct taxes in the
country. Some new taxes zones were created and post of the required officers
and human resources were created. After that in 2003 Large Taxpayers Unit
(LTU) was set up to provide services to the large taxpayers who pay most of
the income tax in a year. The establishment of the LTU is considered as a
success in ensuring taxpayer friendly environment, facilitate smooth one stop
taxpayer service, reducing compliance cost and building a relationship of trust
and confidence between the taxpayer and the department among others.
Besides the LTU Income Tax, VAT LTU has been in operation in Bangladesh
that collects VAT from big 170 business organizations. However, in 2012
there was an expansion programme of the income tax department in which
some new taxes zones were created, new posts of officers and other human
resources were created. The expansion has been a success. The purpose of the
expansion was achieved evidenced by the contribution of the income tax to the
exchequer. A new expansion programmes is underway. To keep pace with the
growing economy and to expand the tax base at the base level of the
geographical locations of Bangladesh, the government of Bangladesh has
decided to go for another expansion of the income tax department. At the
same time, the same expansion programme is underway in the indirect tax
administrations of the NBR.22

12. Conclusion
Bangladesh has registered tremendous growth of economy and the collection of tax revenue
from direct and indirect revenue sources. But still now the tax collection in Bangladesh has
been below the level of most countries at a similar stage of economic and social development,
which indicates the relative weakness of the tax system in Bangladesh compared to other
countries in the region. The tax net is too narrow; the rates of tax avoidance and tax
exemption are high. With a poor tax net and lowest tax to GDP ratio Bangladesh is walking
ahead to achieve the SDGs through collection of much needed tax revenue. The present
revenue administration is very much aware of the problems that impede revenue collection.
The government is solving the problems sincerely. It is expected that the NBR would take
necessary initiative to make some necessary reforms in the field of domestic and international
taxation rules with a view to combating the problem of tax evasion and avoidance in the
country. The number of income-tax payers in Bangladesh is very low. The NBR should
ensure a taxpayer friendly environment to bring more people into the tax net. The law must
act against people who are evading taxes, so honest taxpayers do not feel treated unequally.
While bringing informal businesses into the tax net, it is important to ensure that new
taxpayers are treated without hassle. Strong political decisions need to be made to not allow

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the whitening of black money. To curb illicit financial flows, reforms are not enough. They
need to be acted upon. Focus on non-NBR sources and non-tax sources, as they have a
significant potential of revenue generation. Study and analyses the non-NBR and non-tax
sources to diversify and expand tax coverage. Efforts should also be made to make SoEs
more efficient and the auditing of the income of state-run and state supported commercial
enterprises should be done by different ministries.
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