Improving Tax Compliance in Bangladesh: A Study of Value-Added Tax (VAT)

In recent years, tax compliance has come to the centre of both academic and policy discourse for several reasons. In the first place, tax-GDP ratio in Bangladesh is very low (10.6%) when compared with her South Asian neighbours. This is mainly because of poor compliance rate in both income tax and value-added tax (VAT). Therefore, improving VAT compliance will increase Bangladesh’s tax-GDP ratio. Secondly, consumption taxes are the largest source of revenue in middle-income countries and in less developed countries (Salanie 2011). In Bangladesh, VAT contributes more than 50 per cent of total tax revenue. Thirdly, available evidence shows that VAT productivity2 in Bangladesh is lower than the average level of low-income countries. If Bangladesh could increase its VAT productivity by 0.12 percent of GDP to the average level of other low income countries, then all else being equal, VAT could increase government revenue by 1.8 per cent of GDP (IMF 2011). Fourthly, raising VAT productivity requires improving taxpayers’ compliance. For improving VAT compliance, we need to reform VAT law as well as VAT administration. Fifthly, the Sixth Five Year Plan (FY 2011 – FY 2015) of Bangladesh projects an increase in the revenue to GDP ratio by 3.7 percentage points to 14.6 per cent of GDP by FY 2015 (Planning Commission, 2011). Sixthly, the Modernization Plan (2011-2016) of the National Board of Revenue (NBR) aims at increasing tax-GDP ratio from the existing 10.6 per cent to 13 per cent of GDP by June 2016 (NBR 2011).In recent years, tax compliance has come to the centre of both academic and policy discourse for several reasons. In the first place, tax-GDP ratio in Bangladesh is very low (10.6%) when compared with her South Asian neighbours. This is mainly because of poor compliance rate in both income tax and value-added tax (VAT). Therefore, improving VAT compliance will increase Bangladesh’s tax-GDP ratio.