In the midst of the ongoing fiscal year, the government unexpectedly decided to raise the Value Added Tax (VAT) on over 100 goods and services and ceased the distribution of Trading Corporation of Bangladesh (TCB) products via trucks.
This sudden move has provoked strong backlash from various quarters, including political parties, economists, and consumers, all of whom have severely criticized the government’s decision.
While the interim government has not officially explained its rationale, economists and analysts suggest that the measure aims to address a significant revenue shortfall and secure an additional $1 billion loan from the International Monetary Fund (IMF).
In January 2023, the IMF approved a $4.7 billion loan for Bangladesh, of which three tranches have already been disbursed. The organization has announced plans to release the fourth tranche. However, reports indicate that the interim government has sought an additional $1 billion from the IMF.
Analysts contend that the government’s limited negotiating ability during discussions with the IMF, coupled with the prevailing high inflation environment, compelled it to adopt this approach of increasing VAT and taxes.
Economist Dr. Mustafizur Rahman remarked that the IMF's conditions require the government to improve the tax-to-GDP ratio. However, years of failure to achieve this target seem to have driven the government toward what he called an “easy way out.”
Professor MM Akash, an economist, expressed surprise at the unanimity among government officials on increasing VAT and taxes, especially given the economic challenges faced by citizens.
On January 2, Economic Advisor Salehuddin Ahmed addressed concerns about the VAT hikes, stating that the increases would have minimal impact on commodity prices. He also noted that duties on essential goods had been reduced to “zero.”
What Has Become More Expensive?
On January 9, the government issued two ordinances that raised duties and taxes on over 100 goods and services. The increases targeted VAT, supplementary duties, and excise duties at the import, production, and supply levels.
After the National Board of Revenue’s (NBR) VAT department released guidelines on Friday, the new ordinances were implemented immediately.
These VAT hikes are expected to increase costs in numerous sectors, including mobile phone usage, internet services, clothing, restaurant food, medicines, sweets, fruit juices, and LPG gas.
Afsana Begum, a resident of Mirpur’s Kazi Para, expressed frustration over the rising costs of goods. She noted that medicine prices have been steadily increasing over the past three years and wondered how much higher they could go.
Aminul Islam, who works in a private factory in Ashulia, shared a similar sentiment. He recalled that in January, a bowl of halim at a Farmgate restaurant cost 80 Taka, but just last Friday, the same dish was priced at 130 Taka. “Does it really need to increase further?” he asked.
The Dhaka Chamber of Commerce and Industry (DCCI) voiced concern over the hike, warning that it would raise production costs, increase product prices, exacerbate inflation, and reduce job opportunities.
What Could Have Been Done Differently?
The IMF has mandated that the government raise revenue collection by 0.5% of GDP this year, a target the government has failed to meet.
Revenue collection was further hindered by the economic slowdown during the July-August political movements, raising concerns about how the situation could be improved.
Official data shows that revenue collection in the first four months of the fiscal year dropped by 1% compared to the same period last year. From July to October, the NBR collected 1,01,281 crore BDT, which is 31,000 crore BDT short of the target.
Despite the current challenges, the loan agreement with the IMF requires the government to increase tax collection as a percentage of GDP by 0.7 percentage points by the 2025-26 fiscal year.
Dr. Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), observed that the government failed to meet the revenue collection and tax-to-GDP ratio conditions during the disbursement of the IMF loan’s first three tranches.
He noted that the government’s request for an additional $1 billion has prompted the IMF to exert more pressure, resulting in the VAT hikes.
When asked about alternatives, Dr. Rahman suggested that increasing direct taxes and addressing tax evasion could have alleviated the burden on ordinary citizens.
He emphasized the need to ensure compliance among TIN (Tax Identification Number) holders and expand the tax net to include eligible taxpayers currently outside it. These measures, however, have not been prioritized.
Although the government has implemented some expense reductions and cutbacks in development plans, the increased duties and taxes have already caused, or are expected to cause, price hikes for many goods, worsening inflationary pressures.
Professor MM Akash argued that instead of imposing widespread VAT and duty hikes, the government could have introduced property taxes, which would have reduced the pressure on the general public.
For instance, taxes could have been reassessed on multiple houses or vehicles, and tax slabs could have been based on the extent of assets. Additionally, confiscated or frozen assets of corrupt individuals could have been utilized.
He explained that such measures would have reduced inequality, strengthened anti-corruption efforts, and avoided further inflationary pressure. However, as an interim government, it lacks the capacity to implement long-term plans, exacerbating public dissatisfaction.
Professor Akash recommended that the interim government focus on reforms to provide relief to citizens and transition power to an elected government.
Meanwhile, several political parties, including the BNP, have strongly criticized the recent VAT and tax hikes introduced through the ordinances.