The study -- Tax expenditures in Bangldesh: An introductory analysis-- by the BB's Policy Analysis Unit also said the 'tax-holiday' provided to induce foreign direct investment (FDI) is widely misused and its opportunity cost is higher than its stated objectives.

In the financial year 2005 (FY05), Tk 9,345 crore of tax was exempted, which was 31.3 percent of the total revenue earning and 2.5 percent of GDP, according to figures from the National Board of Revenue (NBR) cited in the study.

Tax exemptions in India and Pakistan make up 4.5 percent and 0.4 percent of their GDP, the study said.

"Income from a few welfare organisations operating with profit-driven motive" should be looked into because they enjoy exemptions on salaries of foreign technicians, it stressed.

"A large number of foreign technicians are now working in Bangladesh, and many companies fraudulently use this measure," the report noted.

"Exemption of income from poultry, fisheries, livestock, horticulture, etc. requires further consideration as there has been widespread misuse of this provision.

"It seems that these provisions do not serve any socio-economic goal; rather they violate the principle of equity and encourage corruption-based activities," the study said.

Stating that tax holiday is provided to promote investment and attract FDI, the study observes, "The tax holiday facility has been misused widely and the opportunity cost of the incentive has been high compared to the objective for which it has been introduced."

"It is also argued that it violates the principle of equity and free flow of resources among alternative uses," the study stated, concluding, " The tax holiday facility may be withdrawn as suggested by the Revenue Reform Commission."

NBR sources said many businessmen and politicians misuse the tax-holiday for evading taxes, falsely citing income from agriculture and fisheries sectors that enjoy this facility to induce investment.

The study suggested the current system be replaced by the existing "accelerated depreciation allowances" or, a "reduced tax rate with a lower rate in earlier years", which would increase gradually.

The study also found tax exemptions are the highest in Value Added Tax (VAT) in terms of revenue loss and as percentage of revenue earning, and suggested a review of VAT to reduce exemptions. In this regard, it cited as examples commercial educational and training institutions, commercial renters, and income of brokers at the stock market.

For direct taxation, exemption is the highest in agriculture (15 percent), fisheries and forest (12 percent), and public services and labour and employment (5 percent), the study found.

Of the Tk 9,345 crore tax exemptions, Tk 1,028 crore is in the 'direct taxes' category, while indirect taxes account for Tk 8,317 crore. Of the indirect taxes, VAT exemption totals Tk 7,687 crore and customs duty Tk 365 crore.

The study recommended "organisational reinvention" of the tax administration, expanding the tax base in categories such as income tax and VAT as well as setting an operational definition and methodology for 'tax exemption'.

The World Bank and the International Monetary Fund (IMF) are currently pressuring the government to reduce tax exemptions to boost revenue earnings.