A Hindrance to Bangladesh’s Economic Growth
Bangladesh faces a critical challenge: only 2% of its population submits tax returns each year. This persistent issue hampers government revenue, escalates corporate tax rates, and discourages investment. Here’s why the tax return submission rate is so low and the impact it has on the economy.
It’s a rare occurrence for a middle-income country to experience such low tax return submission rates year after year, but this is the reality in Bangladesh, where only 2% of the population files tax returns annually.
As of last month, just 39.86 lakh taxpayers—including companies—out of approximately 1.14 crore TIN holders filed returns, according to data from the National Board of Revenue (NBR). This means that only 35% of TIN holders have submitted their returns, and only 2% of the population has complied, leaving direct tax income woefully low.
Because of this, the government increasingly pressures existing taxpayers, raising tax rates in sectors where collection is easier. This leads to higher corporate tax rates, discouraging entrepreneurship and encouraging tax evasion. The government also attempts to compensate by increasing income from indirect taxes, which are levied on all citizens, regardless of income. Despite this, tax revenues remain insufficient, forcing the government to rely on bank loans and foreign borrowing to fund its development projects.
Why the Low Submission Rate?
Despite Bangladesh reaching lower-middle-income status in 2015 and aspiring to graduate to upper-middle-income status by 2032, the low tax return submission rate remains a pressing issue. One major cause is tax evasion, as individuals find ways to bypass tax regulations, even with strict laws in place.
The income tax law provides for stringent measures, such as disconnecting utilities for non-payers and taxing even non-taxable income if returns are not filed on time. However, despite these strict provisions, the rate of compliance remains low, and enforcement seems ineffective.
Key Reasons for Low Submission Rates
Several factors contribute to this challenge:
Lack of Awareness: Many people, especially in rural areas, are unaware of their tax obligations, and the filing process is often perceived as tedious and time-consuming.
Weak Enforcement: Despite the legal obligations, weak enforcement allows many to avoid filing without facing penalties.
Informal Economy: A large portion of the population participates in the informal economy and does not feel compelled to file tax returns.
Lack of Trust: A lack of trust in how tax revenues are used further discourages compliance, with taxpayers feeling that their contributions do not benefit the public.
While e-filing has grown significantly—up 175% to 14.31 lakh submissions this fiscal year—compliance remains low overall. Many people obtain a TIN for specific services but do not file returns, with some using it for land transfers or migration purposes. Additionally, there are many inactive companies that obtained TINs but later became dormant.
Impact of Low Direct Tax Collection
Low tax return submissions result in significantly low tax collection relative to GDP, creating revenue shortfalls that deepen economic inefficiencies and hinder effective tax administration. Despite Bangladesh’s rapid economic growth in recent years, the country still has one of the lowest tax-to-GDP ratios in the world.
The failure of many registered taxpayers to file returns leads to substantial lost revenue, affecting the government’s ability to invest in essential sectors like infrastructure, healthcare, and education. For example, between July and January, NBR collected Tk 195,860 crore, a mere 2.96% increase year-on-year. To meet its target, the revenue collection needs to grow by 28% in the remaining months, which seems unlikely given the current economic slowdown.
This revenue shortfall is often offset by increasing VAT and other indirect taxes, which disproportionately burden lower-income groups. Additionally, non-compliance by many taxpayers shifts the tax burden onto a smaller group, risking long-term compliance issues.
What Can Be Done to Raise Direct Tax Collection?
To address the challenges of low tax return submissions, the NBR must take urgent measures, including:
Expanding Awareness Campaigns: Educating taxpayers on their obligations and the importance of filing returns.
Simplifying the Filing Process: Making tax filing more user-friendly, especially through digital platforms.
Stricter Enforcement: Imposing penalties for non-compliance and providing incentives for timely submissions.
Formalizing the Informal Economy: Encouraging businesses in the informal sector to formalize through regulatory reforms and tax incentives.
Enhancing Transparency: Providing clear reports on revenue collection and its utilization to rebuild public trust.
By implementing these measures, the government can build a stronger tax culture, improve compliance, and ensure that taxpayers see tangible benefits from their contributions.
