It is a true fact that the tax-to-GDP ratio is one of the lowest in Bangladesh, and for this, taxpayers are always blamed for not paying tax accordingly; thus, those who pay tax have to pay additional taxes.
I can remember one of the renowned business entrepreneurs once said that he pays tax for himself and pays for those who do not pay taxes, so what will happen in the result is that the tax-GDP ratio will increase by pressurising those who are paying tax regularly.
Bangladesh's tax policy architecture follows a familiar pattern. Immediately after the announcement of the national budget, the government highlights its positive features, while the public and business community often welcome the proposed measures, particularly the exemptions and incentives offered to selected sectors, such as duty exemption of solar power equipment, raw materials of pharmaceutical products, increasing tax-exempt slabs, as well as abolishing the minimum tax, commitments to facilitate instant tax refunds, etc for the year 2026.
However, a closer and more detailed examination often reveals a different picture. Behind the seemingly favourable announcements, changes in tax rates, exemptions, thresholds and other provisions can increase the effective tax burden on businesses and consumers.
What initially appears to be a generous and business-friendly budget may, in reality, conceal a series of fiscal sleights of hand—where the overall impact of the policy becomes apparent only after the fine print is examined, creating illusions among taxpayers.
The National Board of Revenue increased the tax-free income threshold from Tk3.5 lakh to Tk3.75 lakh – a commendable step intended to provide relief to individual taxpayers. On the other hand, the tax structure tells a different story.
A fairer tax policy must look beyond income-tax thresholds and headline exemptions to assess the overall tax burden across different income groups, particularly the impact of indirect taxes on the poor and economically vulnerable.
The first taxable income band was expanded from Tk1 lakh to Tk3 lakh; however, the tax rate was doubled from 5% to 10%. Under the proposed framework, taxpayers earning more than Tk 375,000 annually will be taxed as follows: 10% on the first Tk 300,000 above the tax-free threshold; 15% on the next Tk 400,000; 20% on the following Tk 500,000; 25% on the next Tk 2 million; and 30% on all remaining income.
Consequently, taxpayers whose annual income falls within this band may face a higher tax liability than the headline increase in the tax-free threshold would suggest.
For a middle-income individual earning approximately TK89,000 per month, the resulting increase in annual income tax could be as much as TK26,250, depending on the applicable tax slabs and other provisions. This illustrates how a policy that appears to offer tax relief can simultaneously increase the burden on taxpayers through changes in tax rates and income bands.
The key concern, therefore, is not merely the increase in the tax-free threshold, but the combined effect of the threshold, taxable income bands and applicable rates. A proper assessment of tax policy must consider the net impact on taxpayers rather than the headline figures alone.
The famous economist Arthur Laffer and the broader literature on progressive taxation and inflation termed it fiscal drag and bracket creep. Fiscal drag occurs when inflation and nominal income growth push taxpayers into higher tax brackets or increase their tax liabilities, even when their real purchasing power has not improved. Say a taxpayer receives a salary increase to compensate for rising living costs. Their nominal income rises, but the increase does not necessarily improve their standard of living.
If tax thresholds and income bands do not adjust sufficiently to inflation, a larger portion of their income may become taxable. The result is that the taxpayer can pay more tax without becoming economically better off, which is commonly known as bracket creep, and has been in practice in Bangladesh.
Another similar example is the reduction of the investment exemption from 15% of the earlier year to 10%; while the investment exemption amount is Tk 7.5 lakhs, which was Tk10 lakh earlier. Besides, investment in Sanchaypatro is now double-taxed; once tax is deducted at source, and again it will be added to the total income and will be taxed, thus increasing the total tax burden.
Minimum Tax of TK5000, meaning if a taxpayer has a taxable amount at lower than TK5000, he will have to pay TK5000 as tax, which was different in the tax policy of last year. For deferred tax return submission after December, additional tax will need to be paid. If the tax is paid by September, a 5% tax benefit will be given.
On top of it, two significant tax policy issues in the fiscal framework are the reform of the minimum tax regime and the introduction of a mechanism for instant refund of excess tax deducted or collected at source.
Both measures have the potential to improve tax fairness, particularly for middle-income earners, salaried employees and taxpayers whose final tax liability is lower than the amount collected in advance. However, the effectiveness of these reforms, if assessed against their actual implementation, is not helpful for taxpayers.
The ability to claim a refund of excess tax is an important step towards ensuring that taxpayers pay only what they legally owe. However, a refund entitlement is not equivalent to an instant refund. If taxpayers have to wait for verification, administrative approval, and bank transfers, the excess amount remains unavailable for their immediate needs. The resulting liquidity cost is particularly significant for middle-income households, which often have limited financial reserves.
The reform of minimum tax provisions is equally important because a minimum tax can require taxpayers to pay an amount that exceeds their liability under the regular tax calculation. The continued application of a minimum payment requirement, where applicable, can limit the relief received by taxpayers whose ordinary tax liability is lower than that of the minimum tax.
The central policy question is therefore whether the FY2026–27 reforms reduce the actual economic burden on taxpayers. If the government announces refund facilities but taxpayers cannot recover excess payments promptly, or if minimum payment requirements continue to exceed their calculated liability, the intended relief may remain incomplete.
Adam Smith, in The Wealth of Nations (1776), described that citizens should contribute to public expenditure according to their respective abilities. This principle underpins the idea that taxation should reflect a taxpayer's capacity to bear the burden.
Alfred Marshall and the subsequent development of public finance economics analysed the theory of tax incidence. Tax incidence examines who ultimately bears the economic burden of a tax, which may differ from the person or business legally responsible for paying it.
For example, VAT may be collected by businesses, but consumers often bear some or all of its economic cost through prices. Similarly, a tax deducted at source may be collected from a taxpayer before their final annual liability is established. The legal form of the tax does not, by itself, determine the ultimate economic burden.
Bangladesh should evaluate personal taxation alongside the incidence of VAT and other consumption taxes, rather than assessing direct income tax in isolation. The government has targeted increasing direct taxes and gradually reducing indirect taxes; however, these have not been realised in practice.
Taxes can alter consumption, saving, investment, and work decisions. Administrative complexity and compliance costs can create further burdens. These costs are not always captured by the amount of tax recorded in the government revenue statistics.
Interestingly, in Bangladesh, even people living on very modest incomes contribute to government revenue through VAT and other indirect taxes. Consider a low-income woman who earns her livelihood by providing domestic services to households and receives TK20,000 per month, amounting to TK240,000 annually.
Although her income falls below the applicable personal income-tax threshold, she continues to pay taxes indirectly through the goods and services she consumes.
A significant portion of her income goes towards essential items such as rice, fish, cooking oil and soap. While some of these products may be exempt from VAT, the prices consumers pay are also influenced by transportation costs, fuel prices and other indirect costs throughout the supply chain, some of which may themselves include taxes.
Moreover, her financial burden extends far beyond food. She must also pay for house rent, electricity, gas and water, public transport, clothing and footwear, medicines and healthcare, mobile phone and internet services, education and other necessities. Many of these expenditures may include VAT or other indirect taxes, depending on the applicable provisions.
This raises an important question of tax equity: should a tax system be considered progressive simply because it exempts low-income individuals from personal income tax, when those same individuals continue to bear the burden of indirect taxation on their essential consumption.
Since low-income households spend a larger proportion of their earnings on basic necessities, consumption taxes can impose a relatively heavier burden on them than on higher-income households.
A fairer tax policy must look beyond income-tax thresholds and headline exemptions to assess the overall tax burden across different income groups, particularly the impact of indirect taxes on the poor and economically vulnerable.
The government indeed has little alternative but to increase the tax-to-GDP ratio to strengthen domestic resource mobilisation. However, creating an illusion of tax relief while the actual tax burden increases may widen the trust gap between taxpayers and policymakers.
This could undermine taxpayer confidence and encourage greater tendencies towards tax avoidance. At the same time, taxpayers have a legitimate right to know how their tax contributions are spent and how public expenditure translates into tangible improvements in their welfare.
A fair and transparent tax system must therefore go hand in hand with accountable public spending, ensuring that taxpayers not only fulfil their obligations but also see the benefits of their contributions.
Ferdaus Ara Begum, CEO, BUILD-a Public Private Dialogue Platform, works for private sector development.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.