Increased indirect tax hurts poverty reduction in Bangladesh: Study

Two-thirds of the government's revenue comes from indirect taxes such as Value Added Tax (VAT) and import duties, which put financial strain on both the poor and wealthy, contributing to the country's stagnant poverty rate and rising wealth gap.

According to a study conducted by the Research and Policy Integration for Development (RAPID), each one percentage point increase in the indirect tax burden leads to a 0.42% rise in poverty.

Indirect tax burden on households below poverty line increased from 2% in 2000 to 7% in 2016," said the study presented at a Dhaka hotel on Saturday (2 March). The burden was less for those above the poverty line.

Responding to government data showing a declining poverty rate, RAPID Chairman Mohammad Abdur Razzaque said if indirect taxes were lower, poverty reduction would occur more rapidly. "In simpler terms, the increased indirect tax has slowed down the expected rate of poverty reduction."

He was referring to the Household Income and Expenditure Survey (HIES), which indicates that poverty in Bangladesh has decreased by more than half over the last two decades and is now below 20%.

Income tax, or direct tax, is imposed on individuals' earnings. Currently, individuals earning an annual income of Tk3.5 lakh annually or less are exempt from income tax, meaning those below the poverty line do not pay this tax.

On the other hand, taxes on imported goods or VAT levied on goods sold in the local market are paid by the buyer. This includes poor individuals who also pay VAT when purchasing goods. Additionally, taxes on imports contribute to higher product prices, further burdening consumers.

Recommendations

The study said the government should embark on a phased tax reform initiative spanning 10-15 years, prioritising broadening the tax base and modernising tax administration.

It suggested a shift from traditional enforcement to more user-friendly and automated technology to enhance tax compliance.

Besides, the government should also invest in advanced systems for tax notification and reminders as automating the process enhances efficiency and reduces errors, said the study report.

It also said, "Adopting a service-providing attitude in tax administration can foster voluntary compliance. The focus should be on educating and assisting taxpayers rather than relying solely on enforcement measures."

Efforts to boost direct tax

The National Board of Revenue (NBR) has been trying various ways to increase direct tax. Several initiatives have been taken to increase the tax payer in the last budget as well.

A senior NBR official told The Business Standard, "Due to our initiatives, the number of taxpayers has crossed one crore. Besides, the tax return submission this year may be 40 lakh."

Muhammad Abdul Mazid, former chairman of the NBR, told TBS that there is no alternative to automation of NBR to increase direct taxes. Besides, a taxpayer-friendly environment should also be created.

"There is a need for effective automation in collection of not only direct taxes but also indirect taxes," he added.