Indirect taxes burden low-income people, widen income disparity: Study

The government's excessive reliance on indirect taxes is disproportionately burdening low-income individuals, a study conducted by the WAVE Foundation has found.

The study, titled "Progressive Taxation in Bangladesh: Why and How?" – carried out as part of the "Promoting Citizens Participation for Progressive Taxation Project," implemented by the WAVE Foundation in collaboration with Christian Aid – highlights the fact that indirect taxes, particularly value-added tax (VAT), take away a larger portion of income from the poor compared to the better-off sections of society.

For instance, a person earning Tk200 per day is subjected to the same 15% VAT rate as someone earning Tk2,000-3,000 per day when purchasing the same products. This regressive taxation system exacerbates income inequality in society, the report says.

Analysing the role of the rich and the poor in the national budget, the study reveals that only 1% of the total population in the country falls into the rich category. The targeted income tax collection for the fiscal year 2022-23 was Tk120,990 crore, accounting for 17.83% of the total budget. However, only 33% of Tax Identification Number (TIN) holders paid income tax during that period.

In contrast, the extremely poor, comprising 18.7% of the population, contribute significantly to the national budget through indirect taxes. The targeted tax collection by the National Board of Revenue (NBR) for the fiscal year 2022-23 was Tk370,000 crore, accounting for 54.6% of the total budget.

Thus, even though they do not pay income tax, the majority of the country's population, including the poor, bear the highest tax burden through VAT, product import tax, supplementary duty and other indirect taxes.

The study further identifies bureaucratic complications, harassment and inefficiencies within the tax system as deterrents for those who want to pay direct taxes. Such concerns contribute to reduced revenue collection and subsequent budget deficits, it says, adding that consequently, the provision of essential services in education, health, and social security becomes inadequate.

WAVE Foundation organised an exchange of views meeting with journalists in the capital's Segunbagicha on Thursday to discuss these findings.

Khandaker Tahsin Ashrafi, project officer of the Promoting Citizens Participation for Progressive Taxation Project, presented detailed information on the issues highlighted in the study. The research was led by Mohammad Tareq, a professor of Accounting and Information Systems at Dhaka University.

Tahsin Ashrafi emphasised the necessity of establishing tax fairness and a progressive tax system in Bangladesh. He called for strengthening the revenue collection system, implementing progressive tax policies, reducing social inequality, and allocating additional funds to service activities through appropriate taxation of the wealthy and capable members of society.

At the meeting, speakers proposed several measures, including raising the tax-GDP ratio, reducing tax exemptions, improving accessibility to tax information through the NBR Data Centre, and increasing tax rates on investment income and assets such as property, wealth and inheritance.