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In a bid to meet the International Monetary Fund’s (IMF) revenue targets, Bangladesh has implemented sweeping value-added tax (VAT) and supplementary duty (SD) hikes on more than 100 essential products.
The government justifies these measures as essential for economic stability and securing future IMF support. Critics, however, warn that these policies risk backfiring, stifling consumption, deterring investment, and prompting businesses to engage in tax evasion—all of which could undermine the revenue goals they aim to achieve.
IMF’s Revenue Push: The Need vs. The Consequences
The government has set an ambitious target of generating Tk 4.6 lakh crore in revenue for the current fiscal year, in line with IMF recommendations. Central to this strategy are efforts to expand the VAT base and increase tax collection from both businesses and consumers. The rationale is clear: higher taxes will increase government revenue, enabling increased spending on infrastructure, public services, and debt repayment.
Yet, imposing tax hikes, however, during a period of high inflation could have unintended consequences. Higher taxes generally raise the cost of living, which in turn can reduce consumer spending—a key driver of economic growth. As demand falters, businesses may experience declining revenues, which could result in a reduction in tax contributions over time. These risks counteracting the very goal of increasing revenue.
Dr. Zahid Hussain, former chief economist at the World Bank’s Dhaka office, questioned the government’s approach to negotiations with the IMF. “The Finance Division’s responsibility was to negotiate, but they didn’t do it properly,” Hussain told media. He also questioned the wisdom of accepting the IMF’s demands at a time when the economy was already under strain, suggesting that more caution should have been exercised in the implementation of these tax increases.
A Blow to Consumption and Business Confidence
The VAT increase will inevitably raise prices on consumer goods. Since household consumption is a significant component of GDP, this could dampen overall economic activity. Essential goods, many of which are now subject to the VAT increase, are price-sensitive, and reduced demand could have a profound impact on the broader economy.
Furthermore, businesses, particularly those in low-margin sectors, will face higher operational costs. As costs increase, businesses may hesitate to invest or expand, stifling economic growth and job creation. The sudden imposition of these tax hikes has also eroded business confidence, with firms expressing concerns about an unstable policy environment. For many, this policy signals unpredictability, making long-term investment decisions more difficult.
Trade economist Dr. Zaidi Sattar, Chairman and Chief Executive of the Policy Research Institute of Bangladesh (PRI) argued that raising taxes in such an uncertain environment is counterproductive. “Revenue will not increase; protectionism will. The strategy of raising tax rates to boost revenue has never worked,” he said. “To increase revenue, you must expand the tax base and encourage economic activity.”
Moreover, Dr. Hussain highlighted the risks of tax evasion. He emphasized that increasing taxes often drives businesses into informal operations, where compliance is minimal. “If the government had taken stronger steps to control wasteful spending, we could have reduced the deficit without resorting to tax hikes,” he noted. His comments underline a central issue with the current approach: increasing taxes without addressing inefficiencies in public spending may do more harm than good.
The Employment Impact: A Chain Reaction
Sectors reliant on high-volume, low-margin sales, such as small retail, FMCG, and tobacco, are particularly vulnerable to the tax hikes. If rising costs force companies to scale back operations, the resulting job losses will compound the negative impact on household income, reducing consumption and further depressing tax revenue. In sheer volume of impact, the tobacco industry will be among the hardest hit. The tax hike on cigarettes is expected to disrupt the livelihoods of approximately 4.4 million people across the supply chain, including farmers, retailers, and distributors. With rising costs and declining demand, many in these sectors face economic uncertainty, threatening their earnings and job stability.
This weakens government spending, as declining revenues force policymakers to cut budgets or take on more debt. As a result, the fiscal deficit could widen, compounding the economic difficulties.
A Weakened Export Sector and a Widening Trade Deficit
Bangladesh’s economy depends heavily on exports, particularly in the ready-made garment (RMG) sector. Higher domestic costs—due to more expensive fuel, transportation, and raw materials—could make Bangladeshi products less competitive on the global stage. If exports decline while imports rise due to increased demand for foreign alternatives, the trade deficit will widen, placing additional strain on the country’s foreign currency reserves.
Dr. Sattar warned of the inflationary pressure exacerbated by a devalued currency: “The value of every import has increased by 40% due to currency devaluation. If you impose higher VAT and duties on top of that, it only deepens inflationary pressures.” Bangladesh’s experience in the 1990s suggests a different path: “We significantly reduced tariffs then, and revenue collection increased. The overall economy expanded as a result,” Dr. Sattar explained.
Political Pushback and Alternative Proposals
The IMF-backed tax hikes have prompted significant political pushback, particularly from major political parties, including the Bangladesh Nationalist Party (BNP), which has put forward an alternative proposal. The BNP has outlined 12 measures to increase revenue without raising VAT or taxes, in direct response to the government’s decision to hike VAT and supplementary duties on over 100 goods and services. The BNP has called for an immediate reversal of these tax hikes, arguing that such moves will place undue strain on the public. Instead, the party advocates for reducing unnecessary government spending, particularly by halting corruption-riddled mega projects, especially in the energy sector, where vast sums have been allocated to unproductive power plants.
The BNP’s proposals include broadening the tax base, improving tax compliance, raising income tax rates for higher earners, and cracking down on black money and embezzled funds. The party also calls for reforms to combat corruption in the tax administration and to better allocate unused funds across sectors. Additionally, BNP urges the government to make more effective use of foreign aid and IMF support, ensuring that large corporations and influential individuals no longer exploit loopholes to avoid taxes.
A Smarter Path Forward?
While the interim government is undoubtedly in need of increased revenue, the current tax hikes may do more harm than good. The IMF-backed strategy, which focuses primarily on expanding VAT and other taxes, risks stalling economic growth and deepening public discontent. Instead of relying on higher taxes that burden consumers and businesses, a more effective approach would be to expand the tax net by bringing more businesses and individuals into the formal economy. Strengthening enforcement, simplifying compliance, and incentivizing small enterprises to register could significantly boost revenue without overburdening existing taxpayers.
A more balanced strategy—one that focuses on progressive taxation, reducing inefficiencies, and curbing wasteful government spending—could achieve the same fiscal goals without the economic fallout. As Dr. Hussain and other critics suggest, the focus should be on sustainable revenue generation rather than short-term fixes that may prove counterproductive in the long run.
Messenger/Moklesur/Tushar
