Breaking the Sub-8 Percent Tax/GDP Trap: A Revenue Mobilization Plan for Bangladesh

Diagnosis

Bangladesh raises too little tax to fund the state it needs. The tax/GDP ratio is stuck below 8 percent (World Bank put it at 7.64 percent as of 2021), and the trend is not improving: the curated record notes the National Board of Revenue (NBR) collected 6.56 percent in FY25 and that the ratio is declining. This is the lowest in South Asia.

This matters now because a structurally low and falling revenue base starves every other priority: debt service crowds out development spending, the government leans on borrowing and one-off measures, and any external shock forces abrupt cuts rather than planned adjustment. Unlike most policy problems, this one compounds. A ratio that is both low and declining means the state's fiscal capacity is eroding in real terms even before population and service demands are counted. The classification of this issue as Tier 1, structural, and regime-level reflects that it cannot be fixed by a single budget; it requires changing how revenue is administered, not just adjusting rates.

Recommended actions

1. Separate tax policy from tax administration inside NBR. Owner: Ministry of Finance (MoF), executed through the Internal Resources Division (IRD) which oversees NBR. Mechanism: a statutory split creating a dedicated policy wing (setting rates and exemptions) and an enforcement wing (collection, audit, arrears), removing the conflict where the same body sets and collects revenue. Observable signal: published organizational restructuring of NBR and a separate policy-wing revenue forecast presented with the budget.
2. Broaden the direct-tax base by attacking the exemption stock. Owner: MoF, with the IRD/NBR policy wing. Mechanism: an annual tax-expenditure statement laid before Parliament alongside the budget, with a legislated sunset on discretionary exemptions and SROs (statutory regulatory orders) unless re-justified. Observable signal: a falling count of active SRO exemptions and a rising number of registered, return-filing taxpayers year on year.
3. Make VAT collection enforceable, not negotiable. Owner: NBR VAT wing under IRD. Mechanism: mandatory electronic fiscal devices and digital invoicing for large and medium retailers, tied to input-credit eligibility so compliance is self-enforcing. Observable signal: VAT receipts growing faster than nominal GDP and a rising share of transactions captured electronically.
4. Close the financial-sector and capital-market leakage. Owner: MoF coordinating with Bangladesh Bank and the Bangladesh Securities and Exchange Commission (BSEC). Mechanism: automatic third-party data sharing (bank interest, dividend, and securities records) into NBR's taxpayer system so income visible to regulators is matched against filed returns. Observable signal: a measurable rise in assessed tax from cross-matched financial income.
5. Anchor a medium-term revenue target in the macro framework. Owner: General Economics Division (GED) with MoF. Mechanism: a binding revenue-mobilization path written into the medium-term macroeconomic framework and the plan document, against which NBR is held accountable. Observable signal: the tax/GDP ratio first stabilizing, then rising above the sub-8 percent ceiling.

Sequencing (first 12 months)

Start with the NBR policy-administration split (Action 1) and the tax-expenditure statement (Action 2), because both are legislative or institutional moves that can begin in the next budget cycle without new IT systems. The exemption statement is the highest-leverage first step: it makes the revenue forgone to SROs visible, which is the precondition for cutting it. In parallel, mandate digital invoicing for large taxpayers (Action 3), where compliance capacity already exists. These unlock Actions 4 and 5: once NBR has a clean enforcement wing and digital transaction data, financial-sector data sharing and a credible medium-term target become enforceable rather than aspirational.

Risks and constraints

The binding constraint is political: exemptions and discretionary SROs are valuable to organized constituencies, and removing them concentrates losses while spreading gains. The administration split also threatens entrenched roles inside NBR. Fiscally, the constraint is timing. Enforcement-led revenue gains arrive with a lag, so the first year may show effort without a visible ratio improvement, tempting reversal. There is also capacity risk: digital invoicing and data-matching require systems and staff that must be funded from the very revenue base the reform is meant to grow.

Bottom line

Bangladesh's tax/GDP ratio is the lowest in South Asia and still falling (6.56 percent in FY25 per NBR), an eroding fiscal base that no single budget can fix. The MoF should lead a structural reform centered on splitting NBR policy from administration, ending discretionary exemptions, and enforcing VAT digitally, sequenced so visible base-broadening comes first and enforcement compounds behind it.