Bangladesh is planning to gradually phase out value-added tax (VAT) exemptions and introduce a single VAT rate by 2030, with the current standard rate set at 15%, subject to exceptions for essential items, health, education, and transport.
The National Board of Revenue (NBR) proposed the phased withdrawal during recent negotiations in Washington with the technical committee of the International Monetary Fund (IMF) as part of talks for a fresh loan programme, NBR officials confirmed.
A high-level IMF mission is expected to visit Dhaka in November to evaluate Bangladesh's overall financial and economic conditions, alongside revenue reform proposals.
Currently, over 500 goods and services, including electrical and electronic items, computers, metro rail services, restaurants, sanitary napkins, and diapers, enjoy either reduced VAT rates ranging from 2% to 10%, or full exemptions under statutory regulatory orders (SROs).
Under the proposed reform, many of these concessions would be gradually withdrawn, bringing the affected items under the standard 15% rate.
"The IMF wants to know how Bangladesh plans to raise revenue and phase out tax exemptions. We have proposed gradually withdrawing VAT exemptions and introducing a single rate by 2030, with some exceptions," a senior VAT official told The Business Standard.
"We shared a tentative timeline and a list of targeted items during several meetings last week," the official added.
Another official involved in drafting the proposal noted that while the IMF advocated for the total elimination of all VAT exemptions, the government insisted on retaining concessions for essential commodities, healthcare, and education, given the country's prevailing economic pressures.
Under its $4.7 billion loan programme approved in January 2023, Bangladesh committed to reforms in revenue, banking, and energy, but has fallen behind on several key conditions.
Can the gov do it?
Economists remain sceptical, pointing to a history of unfulfilled commitments.
Zahid Hussain, former lead economist at the World Bank's Dhaka office, questioned the credibility of the proposal. "What assurance does the IMF have that the government will fulfil its commitments this time?" he said.
"If the government proposes implementing these plans by 2030, the IMF's new programme will likely expire long before then. The IMF will want specific, actionable commitments and explanations regarding what can be implemented within the programme's operational timeline," Zahid added.
He noted that total tax exemptions stand at roughly 6.8% of GDP, whereas actual tax revenue collection sits at just 6.4%. "The government must clearly quantify the expected revenue gains from withdrawing these exemptions."
Hundreds of products face price hikes
Reduced VAT rates currently apply to over 500 goods and services under three separate schedules of the VAT law and various SROs. Moving to a uniform 15% rate would inevitably push up costs for a vast array of daily goods and services.
NBR officials indicated that reduced rates for electrical items, home appliances, computer accessories, ocean-going shipping, metro rail, steel, aluminium, restaurants, non-branded clothing, sanitary napkins, and diapers – which currently range between 7.5% and 10% – will not be extended beyond their current validity periods of June 2028 and June 2030. The 10% concession for locally manufactured lifts, valid until 2030, will also be allowed to expire.
Furthermore, the revenue authorities plan to abolish package-based VAT rates for small and medium businesses nationwide, replacing them with the standard rate. Reduced VAT rates on gas and electricity supplies are also under review, though no decision has been taken yet.
Protected sectors
To shield vulnerable populations, VAT exemptions are set to remain for agricultural products and key inputs, alongside essential food items such as rice, lentils, edible oil, salt, and chillies. Public transport, basic education, healthcare, and vital medical supplies are also expected to retain exemptions.
Businesses may oppose the move
When the government attempted to introduce a uniform 15% VAT rate in 2015, it faced strong opposition from businesses and was forced to retreat. Zahid Hussain believes a renewed attempt to implement the same rate could trigger similar resistance.
Fazlul Hoque, administrator of the Federation of Bangladesh Chambers of Commerce and Industry, told TBS, "A single VAT rate is possible, but the problem lies with the VAT rate itself. If the VAT rate is reduced and a uniform rate is introduced, there should be no major problem."
The NBR's latest report shows VAT revenue forgone through exemptions and concessions exceeded Tk1.29 lakh crore in FY23, equivalent to 3.3% of GDP, surpassing actual collection of Tk1.25 lakh crore.