Government loses nearly one trillion rupees annually due to tax non-compliance, according to a study.
The National Board of Revenue (NBR) in Bangladesh is under pressure to reform its non-adjustable Tax Deducted at Source (TDS) regime, as businesses and economists call for changes to address excessive burdens, distorted competition, and compliance issues.
At a recent dialogue organised by Business Initiative Leading Development (Build) at the Dhaka Chamber of Commerce and Industry (DCCI) auditorium, concerns were raised about the current TDS system. DCCI President Taskeen Ahmed emphasised the need for sectoral total tax incidence (TTI) analysis to guide reforms.
The discussion followed a study by Build that revealed compliance gaps in TDS collections, resulting in an annual loss of approximately Tk1 lakh crore for the government. The study also highlighted that the government collected Tk72,605 crore in TDS across 57 sectors in 2023, but the estimated tax collection should have been Tk171,327 crore, resulting in a shortfall of Tk98,378 crore.
One of the key issues is the treatment of a large portion of TDS as minimum tax without refunds, disproportionately burdening sectors such as cement, steel, ready-made garments, retail, and wholesale. This burden has been felt acutely by businesses like Coca-Cola Bangladesh, whose operations are at risk due to a rise in taxes on carbonated beverages from 42% to 54% over the last four years.
Similarly, businesses like Crown Cement and Heidelberg Cement are facing effective tax rates of 83.61% and 174% of profit, respectively, resulting in a net post-tax loss for Heidelberg Cement. This situation, where compliant businesses have effective tax rates that are double the official rate or higher, while a large segment of businesses remains outside the tax net, is a cause for concern.
Addressing these issues, NBR Chairman Abdur Rahman Khan has assured that the NBR will review cases where TDS exceeds actual profit-based liabilities and is open to reforms. He also acknowledged that some businesses pay more than their actual tax liability and face cash flow problems due to delayed refunds.
To ensure fairness and safeguard revenue, the DCCI President Taskeen Ahmed suggested a simplified structure, automated TDS reporting, and a functioning refund policy. Ali Zaman, President of the SME Owners' Association, also stated that the current system is unjust and discourages small businesses from remaining in the formal economy due to forced deductions without adjustment or refund options.
The NBR collects more than 80% of income tax revenue from TDS and withholding, providing stable flows to the state exchequer. However, the non-submission of returns and non-refund of excess TDS has resulted in the effective tax collected falling short of the potential. Build's calculations suggest that if refunds were properly disbursed and actual liabilities enforced, government revenue could rise by at least 1% of GDP.
The study on compliance gaps in tax withholding management, conducted by the German Federal Ministry of Finance (Bundesministerium der Finanzen), recommended regulatory adjustments to reduce bureaucratic burdens and improve compliance efficiency to minimize state revenue losses. These recommendations provide a roadmap for the NBR to address the issues highlighted at the dialogue and move towards a fairer and more efficient TDS system.
