The tax revenue-to-GDP ratio in Bangladesh is one of the lowest in the world (9.4% in 2017-18 ) and it is, in part, explained by low per capita income, very large informal sector and corruption. Though Bangladesh achieved significant progress in reduction of extreme poverty over the last few decades, 84.5% of the population still live under USD 5.5 per day per capita income (in PPP dollars) ; which means that all these people do not earn enough to be eligible to pay income tax. Low household income is probably explained by the fact that 86.2% of the employed population are engaged in informal employment . Informal sector also makes tax administration difficult and costly. Policy loopholes and administrative weaknesses create perfect opportunities for corruption and dishonest taxpayers take full advantage of these opportunities . Digitization of the tax system is often touted, and to some extent rightly, as an antidote to corruption, but digitization alone can’t solve this problem. Moreover, perceived corruption along with poor quality public services makes tax payment more of a legal obligation and takes social responsibility out of the equation.

Considering all these peculiarities, it is an uphill battle for the government to increase the tax-to-GDP ratio, which is essential to fund much needed investment in infrastructure, education and health. Heavy reliance on tax deducted at source, arbitrary disallowances, dependence on indirect taxes, taking more from the same (a tendency to slaughter the golden geese) and significant amount of tertiary tax legislation are some of the characteristics of our tax system; and these characteristics stem from the peculiarities just described and the necessity to find new sources of revenue. Some of these characteristics, however, do not go along with the principles of a good taxation system. Though reform of the entire taxation system seems necessary, it is easier said than done as we experienced before and after enactment of the VAT and SD Act 2012. Strong political commitment can probably help us overcome this situation.

Finance Act 2020 was enacted on 30 June 2020. The purpose of this document is to summarize and make sense of the key changes in income tax and VAT regulations made by the Finance Act 2020. We see a mixed bag of changes; some will benefit while others will hurt the taxpayers, but these changes are not likely to substantially improve compliance cost or tax liability of companies and hence are not expected to make significant contribution towards desired improvement in Bangladesh’s score/ranking on Ease of Doing Business.

Given the negative economic impact of Covid-19, FY 2020-21 is going to be a tough year for both taxpayers and the government and uncertainty seems to be the only certain thing in this time. Wish you all luck in this financial year!

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