Powerful lobbies, elites and corporate interests thwart tax reforms

A complex political economy that sees powerful lobbies, political elites and corporate interests oppose changes to the status quo has limited the mobilisation of domestic resources by slowing the pace of planned reforms, according to the white paper on the state of the economy.
Although multiple documents have outlined various tax reforms and emphasised the need for the digitalisation of government services, these reforms have never been fully implemented.
Among the most pressing issues has been low tax collection, which the paper said was driven by weak governance, widespread corruption, and a lack of trust in how tax revenue is used.
According to the paper, it is worth noting that the 7th Five Year Plan had set a target of raising the revenue-GDP ratio from 10.9 percent to 16 percent by the end of the plan period.
However, the paper added it is abundantly evident that “corruption, especially in tax administration, leads to widespread tax evasion and poor compliance”.
“The informal and discretionary tax system benefits these groups, making reform difficult,” it said, adding that the so-called push for digitalisation has stalled for the same reasons.
It stated that the 1991 VAT reform’s success stands in contrast to subsequent failures, emphasising the necessity of substantial political backing, technical planning, and stakeholder ownership in order to accomplish significant tax reforms.
The half-hearted automation of the National Board of Revenue’s (NBR) tax collection system is a major barrier to effective revenue generation, deepening inefficiencies and fostering a climate of non-compliance, the white paper pointed out.
Although the NBR has implemented certain automated tax filing and payment systems, these initiatives are dispersed and not entirely integrated with other pertinent and vital organisations, including the Ministry of Finance, the Registrar of Joint Stock Companies, the Bangladesh Bank, and others, the paper alleged.
Because of this fragmented strategy, the NBR is unable to obtain up-to-date information on individuals and companies, which makes it more difficult to effectively track revenue, monitor corporate operations and stop tax evasion.
If the NBR does not have a comprehensive picture of a taxpayer’s financial transactions across several industries, it is exposed to fraud, false declarations, and underreporting, the paper added.
Additionally, weak local governance and limited fiscal decentralisation hinder public service delivery, discouraging citizens from paying taxes, it said.
While the 1991 VAT reform succeeded, subsequent attempts, such as customs duties reform and VAT expansions, faced opposition and were poorly implemented, it added.
According to the paper, efforts like the 2011 Tax Modernisation Plan and 2012 VAT Law failed to modernise the tax system, which is outdated and ineffective in generating sufficient revenue.
The paper also pointed out that personal income tax yields, which account for only 1 percent of the GDP, are still low although per capita income is rising. It attributed this to poor compliance, a disproportionate number of exemptions, and ineffective administration in the personal income tax system.
It also said tax evasion is common, especially among high earners, driven by corruption, political connections and informal deals with tax collectors.
Difficult filing requirements, such as being asked to provide wealth statements, further discourage compliance.
The paper estimated that tax evasion is widespread, aided by political connections and informal settlements with tax officials.
As for corporate taxation, the white paper said the system is complex, with varying rates across sectors, and high rates in sectors such as tobacco and telecommunications, discouraging investment.
The problems at the NBR begin at the top, with efficient administration and governance of the revenue authority being seriously hampered by the current procedure to choose the chairman, the white paper committee said.
The NBR Order 1973, which stipulated that the NBR chairman would be chosen from one of the NBR members, was the reference point.
However, an ordinance was passed in 1979 that allowed the NBR chairman to be selected from the administration cadre.
These appointments created problems as such individuals could not properly grasp nor adequately address the complexities of the NBR’s operations.
Additionally, the tenure of the NBR chairman is structured in such a way that it encourages short-term objectives over long-term, sustainable reforms, the white paper added.
“For tax reform to succeed, it’s not just about policy; it is also about overcoming political and bureaucratic resistance and addressing corruption,” it said.
Bangladesh’s tax collection woes reflect a deeper issue: reforming the system means dismantling decades of political influence and a culture of favouritism.
“The way forward to greater domestic resource mobilisation lies in better governance and stronger institutions,” the paper added.