Staff Reporter :
Bangladesh’s increasing income inequality is largely driven by a tax structure heavily reliant on indirect taxes, according to the latest fiscal analysis released by the Ministry of Finance.
The Medium-Term Macroeconomic Policy Statement (MTMPS) for FY26 calls for urgent reforms aimed at boosting the share of direct taxes in the nation’s revenue portfolio.
The report reveals that in FY24, indirect taxes-mainly value-added tax (VATz) and supplementary duties (SD)-accounted for 3.86 percent of GDP, while income taxes contributed only 2.26 percent. Since VAT and SD are levied on consumers regardless of their income levels, these taxes disproportionately affect lower-income groups, exacerbating wealth disparities.
This trend is reflected in Bangladesh’s Gini coefficient, a key measure of income inequality, which rose to a record high of 0.499 in 2022, up from 0.482 in 2016, indicating a widening gap between rich and poor.
More than two-thirds of total tax revenue is collected through indirect taxes by the National Board of Revenue (NBR), highlighting
a structural imbalance that experts warn is neither equitable nor sustainable.
Dr Mohammad Abu Eusuf, professor of development studies at the University of Dhaka, stressed the importance of increasing income tax collection while reducing reliance on VAT and SD. “Tax reform must prioritise fairness and equity,” he said.
The report also underscores the challenges posed by Bangladesh’s sizeable informal economy, which remains outside formal tax oversight, resulting in significant revenue losses. Formalising these sectors and improving tax compliance are seen as crucial steps to broaden the tax base and strengthen public finances.
A key recommendation of the MTMPS is to expand the direct tax base by increasing the number of registered taxpayers and advancing tax system automation. While progress has been made in digitising VAT and income tax processes, the government is urged to accelerate these efforts. The full online submission of tax returns is considered essential to curb evasion and enhance administrative efficiency.
The report points to a persistent disconnect between GDP growth and tax revenue collection. From FY13 to FY24, Bangladesh’s average revenue buoyancy-a measure of tax revenue responsiveness to economic growth-stood at 0.83, indicating that tax revenues have consistently lagged behind economic expansion.
Towfiqul Islam Khan, senior fellow at the Centre for Policy Dialogue, noted, “When the tax burden falls predominantly on consumers, the poorest bear the greatest strain. It is imperative to tackle tax evasion and integrate data systems across agencies to improve accountability and compliance.”
The effective VAT rate remains significantly below the standard 15 percent-just 3.7 percent in FY24-pointing to substantial untapped revenue potential.
To address this, the government has introduced reforms such as mandatory e-filing, enforcement of standard VAT rates, and the removal of exemptions.
Looking forward, the government forecasts tax revenue growth of 10.4 percent annually, aiming to reach Tk 697,000 crore by FY28, contingent on successful implementation of these reforms.
