Policy flaws lead to over Tk1 lakh crore VAT shortfall, World Bank finds

Bangladesh heavily relies on indirect taxes for tax revenue, with Value Added Tax (VAT) as a significant contributor. However, a VAT gap analysis conducted for FY19 by the World Bank reveals substantial potential for revenue collection if policy and compliance issues are addressed.

The analysis defines the VAT gap as the difference between potential and actual VAT revenue. In FY19, this gap was estimated at over Tk2 lakh crore, more than double the actual VAT revenue. Policy choices are primarily responsible for this gap, accounting for a policy gap of Tk1.30 lakh crore.

These findings were disclosed in the World Bank's "Bangladesh Development Update" report, released on Tuesday.

The report, with a particular focus on strengthening domestic resource mobilisation, underscores the need to address policy and compliance shortcomings.

A sectoral breakdown highlights manufacturing and agriculture as major contributors to the policy gap. While exemptions and reduced rates aim to safeguard the interests of the poor, their effectiveness in Bangladesh remains uncertain.

Comparative analysis with other countries suggests that Bangladesh's compliance gap is relatively significant. Only about one-third of tax identification holders pay income taxes, resulting in considerably lower revenue from direct taxes compared to similar nations.

The WB also said Bangladesh's performance in generating income tax revenue relative to GDP, especially in corporate income taxes, falls short. The report states that addressing these challenges is imperative to bolster revenue collection and achieve fiscal stability.