Higher tax rate for high-income people planned in FY25

To increase tax revenue collected from high-income individuals, the National Board of Revenue (NBR) is contemplating a return to the pre-covid maximum rate of 30%, a move, which is expected to add an extra Tk10,000 crore to the state coffers.

The highest rate of individual income tax was lowered from 30% to 25% in the fiscal year 2020-21 (FY21) to give people and the economy some relief from the pandemic shocks. 

The Income Tax Department of the NBR is working on the proposal of a 5-percentage point increase of the top marginal income tax rate for the upcoming FY25 budget to be unveiled in June, said revenue officials on condition of anonymity.

Currently, the NBR collects individual income tax under five brackets. 

Beyond the tax-free income threshold of Tk3.5 lakh, rates are structured as follows: 5% on income up to Tk4.5 lakh, 10% on income up to Tk7.5 lakh, 15% on income up to Tk11.5 lakh, 20% on income up to Tk16.5 lakh and 25% on any income exceeding Tk16.5 lakh mark.

A senior NBR official, seeking anonymity, told TBS, "We are thinking about raising the rate for the top bracket, which was reduced when the pandemic hit the country in 2020." He, however, did not disclose the specific rate.

Experts hoped that the move might bring some positive outcome, but cautioned that influential groups, especially those who pay substantial taxes and are capable of influencing NBR policies, might oppose this proposal. 

Before the pandemic, in FY20, the highest tax bracket for individual taxpayers was 30%, while the lowest was 10%. 

In response to income challenges brought about by the pandemic, the government opted to reduce both the lowest and highest tax brackets by five percentage points in FY21, providing relief for taxpayers.

"Talks are ongoing to revert the top income tax bracket to its pre-Covid level," said another NBR official.

According to NBR data, in the first eight months (July-Feb) of FY24, Tk72,311 crore was collected as income tax and travel tax. The collection target for the entire fiscal is around Tk1,46,000 crore.

In FY23, the NBR collected over Tk1,13,000 crore as income tax and travel tax against a target of Tk1,22,100 crore.

As per the terms of IMF's $4.7 billion loan package, the NBR is pledge-bound to raise the tax-GDP ratio by 0.5 percentage points in the current fiscal year. An earlier projection of local think tank Policy Research Institute (PRI) suggests the revenue board will have to collect an additional Tk2.34 lakh crore to push up Bangladesh's tax-GDP ratio from 7.8% to 9.5% by June 2026. Giving a break up, the think tank calculates, to reach the target, the NBR has to earn Tk4.10 lakh crore as tax revenues in FY24, Tk4.84 lakh crore in FY25 and Tk5.80 lakh crore in FY26. 

Nearly 40% of NBR's revenues comes from individual and corporate income taxes. 

The PRI believes the target, though challenging, is achievable if policy reforms are carried out within the time frame agreed upon with the IMF, whose review missions are routinely visiting revenue and finance officials to take stock of the implementation status of agreed reforms.

Both optimism and caution  

However, like the tax-GDP ratio, Bangladesh's highest tax rate on individual income is lower than most countries. It is 42.7% in India, 35% in Pakistan and Sri Lanka. The highest cap in Singapore is 22%, though rich countries have higher rate caps, such as 37% in the USA and 45% in the UK.

Experts have varied perspectives on the NBR's plan. Former NBR member Dr Syed Md Aminul Karim welcomed the NBR's plan to raise the tax rate for high earners.

The NBR increased the top tax bracket from 25% to 30% in FY12. Aminul Karim was in charge of tax policy at that time.

He told TBS, "The rate hike would be a very positive move. The tax system should be progressive, rather than regressive. If the rate in the upper slab is increased, those who have more income have to pay more tax, which is logical."

A field-level officer of a tax zone in Dhaka also termed this move as logical as it would not hurt the lower-income taxpayer group.

However, Dr Ahsan H Mansur, executive director of the Policy Research Institute, said tax rates were already high in Bangladesh so it was unreasonable to further burden individual taxpayers. 

"While the International Monetary Fund (IMF) advocates for increased tax collection, it favours raising the minimum rate rather than the higher tax brackets," he added.

Dr Muhammad Abdul Mazid, former chairman of the NBR, also opposed the idea of solely increasing tax rates for existing taxpayers without simultaneously expanding the taxpayer base.

He said, "The NBR is not achieving the anticipated growth in revenue from new taxpayers. It is unreasonable to burden existing taxpayers further. Such a move could deter individuals from entering the tax net."

Currently, the country has over one crore Tax Identification Number (TIN) holders. Last year, around 36 lakhs of them submitted returns, although some filed zero returns, exempt from tax liability.

Taxpayers are allowed to deduct certain expenses from their income, including medical treatment and house rent, up to a maximum of Tk4.5 lakh or one-third of total income, whichever is lower. Additionally, taxpayers receive tax rebates on government-approved investments.

Could a 5% hike yield an extra Tk10,000cr?

Former NBR member Aminul Karim said, "When we raised the rate from 25% to 30% in FY12, our projections indicated an additional tax revenue of approximately Tk5,000 crore. Now, it is estimated to be at least Tk10,000 crore."

The precise number of taxpayers in the highest bracket, or those subjected to the 25% rate, remains unconfirmed. 

NBR sources indicated a figure of around 17 lakh for FY22, yet confirmation was not received from the relevant department of the NBR.

Exact figures regarding the portion of total tax collected from individual taxpayers were not available either.

Nonetheless, the NBR's annual report for FY20 suggests that nearly 40% of the tax revenue originates from the non-company sector which includes various forms of firms and sectors beyond individual taxpayers.

Power play

Stakeholders anticipate significant resistance from influential groups, particularly those who pay substantial taxes and can sway NBR policies, against the imposition of additional taxes.

A senior official from a field-level tax office, speaking on condition of anonymity, voiced doubts regarding whether the NBR's initiative would ultimately materialise as a budget proposal, or if it would face resistance from influential quarters in the end.

Former NBR member Syed Md Aminul Karim also foresees potential pressure from these quarters.