Fixing our corporate tax system is overdue

The latest OECD report exposing a major fault line in Bangladesh’s taxation system should serve as a wake-up call for policymakers to undertake long-overdue tax reforms. The data compiled in the report rightly identifies the key reasons behind the country's weak corporate tax collection compared to its peer economies. Years of generous tax exemptions granted to selected sectors and entities, weak enforcement of tax laws, and the failure to bring millions of small and informal businesses under the tax net have collectively produced this disappointing outcome.

Per the data, the country’s corporate income tax revenue amounts to only 1.5-1.8 percent of its GDP, roughly half the level recorded in many comparable economies. The ratio is even lower than that of several small economies in Latin America and the Caribbean. Such a low contribution of corporate income tax to government revenue has forced the state to rely increasingly on VAT, customs duties, and borrowing. Ultimately, the burden of this revenue structure falls disproportionately on ordinary citizens.

Tap here to add The Daily Star as a trusted source

Economists and business leaders interviewed by this daily attributed the weak corporate tax performance to poor tax administration, widespread underreporting of income, inadequate auditing, and the country's vast informal economy, which accounts for nearly two-thirds of all businesses. The scale of tax concessions is particularly alarming. In FY2022-23, tax exemptions and reduced tax rates together amounted to 69 percent of the total direct tax collected. Companies in the power, RMG, export processing zone, and electronics sectors alone received tax exemptions worth Tk 73,989 crore that year.

The OECD findings also note that, despite the weak collection performance, corporate income tax still accounts for about one quarter of Bangladesh's total tax revenue, compared to an average of 19.5 percent in the Asia-Pacific region and 11.9 percent among OECD countries. This apparent contradiction reflects the country's narrow tax base, where a relatively small number of compliant businesses shoulder a disproportionate share of the tax burden. Many observers argue that high corporate tax rates further discourage compliance and encourage tax evasion. For years, the reform agenda supported by the International Monetary Fund, as well as recommendations from economists and business leaders, has emphasised phasing out unnecessary tax exemptions, broadening the tax base, and rationalising corporate tax rates.

Poor corporate tax collection has consequences that extend well beyond the revenue system. It places an unfair burden on compliant businesses, increases dependency on indirect taxes that disproportionately affect lower- and middle-income households, and deprives the government of resources needed to finance essential public services. The NBR’s reform agenda should therefore become a priority for the new government. The tax administration must be strengthened to bring unregistered businesses into the formal tax system, improve tax audits, and enhance enforcement and collection efficiency. At the same time, the practice of granting generous tax exemptions to favoured sectors and businesses should be brought to an end at the earliest opportunity.