ALTHOUGH Bangladesh is progressing towards becoming a middle-income country, it has not yet achieved the expected success in domestic revenue mobilisation. The tax-to-GDP ratio remains below 7 per cent, which is extremely low by global standards and a matter of serious concern for a developing economy. This reality indicates that the current tax system fails to bring a large number of potential taxpayers into the formal economy. Even after extending the deadline multiple times for the 2026 financial year, the number of income tax return filers has still not crossed five million. As a result, the government’s reliance on deficit financing to meet its expenditure needs continues to grow.
Over the few decades, Bangladesh’s budget deficit has increased steadily. As expenditure has risen much faster than revenue, the government has had to depend heavily on domestic sources to finance the deficit, primarily through borrowing via national savings certificates and from the banking sector. Although the overall deficit-to-gross domestic product ratio has been kept around 5 per cent, the absolute size of the deficit is exerting long-term pressure on the economy. At the same time, dependence on external borrowing is also gradually increasing, especially for the implementation of large infrastructure projects.
In this situation, excessive borrowing from the banking sector is creating a ‘crowding out’ risk, where the availability of credit for the private sector declines. This may lead to reduced investment and hinder the overall economic growth. If global shocks are added to this scenario, the situation could become even more complicated.
In the current geopolitical context, if the US-Israel war on Iran lingers, Bangladesh’s economy could face severe risks. A 40–50 per cent rise in prices of oil and liquefied natural gas would significantly increase the energy cost, raising production expenses and intensifying inflation. Simultaneously, higher import costs, disruptions in supply chains and increased maritime transport expenses would create pressure on the economy.
Bangladesh’s main export sector, the apparel industry, could be particularly affected in this scenario. Rising energy costs would increase production expenses, thereby reducing competitiveness on the international market. Delays and higher costs in importing raw materials could also slow down industrial production. On the other hand, if the nearly half a million Bangladeshi workers in the Middle East face security risks, remittances inflow could be negatively impacted, putting additional pressure on the foreign exchange reserves.
Amid such a proposition, a major challenge for the government is to implement its election promises. However, with the current limited fiscal space, fulfilling those commitments is difficult. This could further widen the budget deficit and increase dependence on deficit financing. In this reality, there is virtually no alternative for the government to increasing revenue collection.
The issue, however, is: how can revenue be increased? The conventional view suggests that increasing tax rates could be a way to boost revenue. In reality, excessively high tax rates often lead to increased tax evasion and drive taxpayers away from the formal economy. Bangladesh’s current tax structure is complex and, in many cases, not taxpayer-friendly, which discourages voluntary tax compliance.
The personal income tax structure follows a progressive slab-based system, with the highest tax rate reaching up to 30 per cent. For the 2025–2026 tax year, the tax-free income threshold for general taxpayers has been set at Tk 350,000. However, higher thresholds apply to certain groups — Tk 400,000 for women and senior citizens, Tk 475,000 for third-gender taxpayers and persons with disabilities and Tk 500,000 for gazetted freedom fighters injured in the war. The first Tk 350,000 of income is tax-free. Tax is then applied at 5 per cent to the next Tk 100,000, 10 per cent to the following Tk 400,000, 15 per cent to the next Tk 500,000 and 20 per cent to the subsequent Tk 500,000. After that, 25 per cent applies to the next Tk 2 million and the highest rate of 30 per cent applies to income exceeding Tk 3.85 million. This slab-based structure causes the tax burden to increase progressively with income.
Corporate tax rates, on the other hand, vary by sector. Listed companies start at around 20 per cent while banks and mobile operators face the highest rate of up to 45 per cent. The standard rate for value-added tax remains at 15 per cent.
High tax rates encourage tax evasion among the public, which is largely a psychological reality. In Bangladesh’s context, however, the problem is even more complex. In many cases, citizens must make illegal payments or ‘illegal tolls’ in addition to legitimate taxes. Widespread extortion and irregularities in society cause these additional costs to be passed on to prices of goods and services, effectively acting as an indirect tax that burdens everyone.
Moreover, even after paying taxes, people often have to incur additional personal expenses to access basic citizen services such as education, health care, security and legal assistance. As a result, tax payment appears to many as an unnecessary extra burden. On the other hand, illegal tolls, bribe, administrative harassment and the lack of a business-friendly environment abnormally increase the cost of doing business. In this context, bearing high tax rates while keeping businesses operational becomes extremely difficult for many entrepreneurs. Sustainable revenue growth cannot, therefore, be achieved without reforming tax policy and the institutional framework.
In this context, reducing tax rates and expanding the tax base could be an effective solution. For personal income, introducing a smooth and moderately progressive tax structure with rates such as 3 per cent, 5 per cent, 7.5 per cent, 10 per cent, 12.5 per cent and 15 per cent would make the system simple and acceptable. Similarly, corporate tax rates could be restructured in slabs ranging from 10 per cent to 30 per cent, which would improve the business environment and encourage greater investments.
International experience shows that taxpayers become willing to pay taxes when they perceive the tax system as fair, transparent and predictable. Excessive complexity and high tax rates create incentives for evasion. In contrast, a simple and moderate tax rate encourages voluntary compliance and ensures revenue growth in the long run.
In Bangladesh, a large number of professionals, freelancers, small entrepreneurs and service providers still remain outside the tax system. A reasonable and citizen-friendly tax structure can bring them into the formal economy. Additionally, incentives, recognition and awareness play crucial roles in encouraging taxpayers.
Honouring regular taxpayers with appreciation, special benefits or fast services and transparently showing the public how tax money is spent can create a positive attitude among them and motivate others to pay taxes. At the same time, increasing tax awareness is equally important. People need to understand that paying taxes is not merely an obligation, but the primary source of investment in development, infrastructure, education and health sectors. This will expand the tax base and ensure sustainable growth in revenue.
Another important aspect of tax reform is preventing tax evasion. Comparatively lower and realistic tax rates help reduce the tendency to avoid taxes. Alongside this, technology-driven tax administration, digital filing or e-returns and data-based monitoring can make tax collection far more effective.
However, evidence-based decision-making is extremely important in determining tax rates. There is a lack of sufficient research on setting tax rates or formulating policies. In this regard, the National Board of Revenue should strengthen its research activities and increase collaboration with universities and research institutions. Policy decisions based on data and analysis will make the tax system more effective and acceptable.
Bangladesh is advancing with the goal of becoming a middle-income country. Achieving this goal requires increased investment in infrastructure, health, education and social protection. However, to make the investments sustainable, it is essential to build a strong domestic revenue base. For this, establishing a modern, efficient and citizen-friendly tax system is indispensable.
The objective of tax reform should not, therefore, be limited to changing tax rates alone, but rather to building an integrated and inclusive tax system. By reducing tax rates and expanding the tax base, Bangladesh can create a robust revenue foundation that will ensure economic stability and enhance its capacity to withstand future global and domestic shocks. If tax payment can be established as a civic duty, it will not only increase revenue but also lay the foundation for a sustainable and equitable economic system.
Dr Syed Abdul Hamid is a professor at the Institute of Health Economics, University of Dhaka.
