Background

According to recent estimates by groups such the World Bank, IMF and ADB, GDP growth rate in Bangladesh has stalled – and currently at a disappointing 4%, and fiscal space has naturally been squeezed. And this is as much a political tale as it is anything else – a tale of wilful mismanagement over the years that has brought Bangladesh to where it is today.

Over the past five years, Bangladesh’s tax-to-GDP ratio has been stuck at under 10% and the latest estimates for 2024 place them below 8%. This is far below even the 15% tax-to-GDP ratio that is considered an acceptable threshold for developing country governments to provide basic public services. For context, India’s tax-to-GDP ratio is about 17%, Vietnam’s is 19%, and South Africa’s is over 26%. Bangladesh’s tax base remains narrow.

Compliance is low, particularly direct taxes. Bangladesh’s failure to collect taxes from the urban informal sector, despite it being a major part of the economy, was flagged over a decade ago by researchers. The former Chairman of National Board of Revenue (NBR) is on record saying that less than one-third of potentially eligible taxpayers in the country pay taxes. Only 3% of citizens file income tax returns.

The inefficiency of the tax system has also been attributed to the lack of a comprehensive taxpayer database and limited risk-based audits, which are weaknesses that undermine voluntary compliance and give rise to arbitrary enforcement. At the same time, corporate tax evasion is all too common. This reflects poor enforcement and widespread discretion (and not of the right kind). Crony capitalism of the kind that had led to utter mismanagement of banks and mounting non-performing-loans is directly related to these kinds of economic management policies.

Hobbled by blatant political interference, deal-making, and internal turf wars, the NBR has repeatedly failed to deliver. An Advisory Committee had been formed to propose reforms in the National Board of Revenue (NBR) – this committee submitted an interim report in January 2025. The committee’s recommendations went beyond just institutional restructuring. Their report outlined wholesale changes to modernise tax laws, reduce arbitrary exemptions, and bring clarity and predictability to the tax system. These steps are necessary if Bangladesh is to attract investment and improve compliance. The dual role of the Secretary to the Internal Resources Division (IRD) serving as the NBR Chair was identified as a key institutional weakness – a sign of political capture.

Tax reform is political

Separating tax policy from tax administration is a step in the right direction. International best practice suggests this is important to avoid conflict of interest between making the rules (policy) and enforcing them (administration). The policy entity should also be responsible for assessing broader economic impacts and developing tax policy while the tax administration focuses on improving efficiency and professionalisation of operations. But structural reforms only deliver when accompanied by political will, institutional capacity, and public buy-in.

This highlights the importance of tackling the intractable political economy of tax in Bangladesh. In a system where politics is transactional, and accountability mechanisms absent or flawed there is hardly any incentive to take on powerful lobbies in the economy. And there is already serious resistance from within. NBR officials went on strike and demanded repealing the ordinance (through which this reform was introduced), publicly disclosing the advisory committee’s report on NBR reforms, and ensuring that any changes are inclusive and sustainable – all of which are fair demands.

The Centre for Policy Dialogue (CPD), a leading Bangladeshi think-tank, also has raised significant concerns regarding the government’s handling of the National Board of Revenue (NBR) reform. According to Professor Mustafizur Rahman, the abrupt and non-transparent approach to restructuring the NBR has eroded trust among stakeholders and triggered unrest within the revenue administration. The lack of inclusive dialogue and disregard for the advisory committee’s recommendations have been particularly problematic, leading to resistance from NBR officials and undermining the reform’s legitimacy.

The bigger picture of reforms in Bangladesh

Now, with Bangladesh navigating a tricky political transition, the politics of tax reform is even more difficult. The IMF package and the conditions it comes with can only push things so far – it does not answer the hard questions of who will implement these reforms and whether, if the interim government pushes reforms forward, it will be able to do so with the credibility that is needed.

The NBR reform is unfolding in the context of a deeply muddled reform landscape in Bangladesh. Since assuming office in August 2024, the Muhammad Yunus-led interim government established a flurry of reform commissions – six at first, and now standing at nearly a dozen – tasked with proposing structural changes across multiple areas such as the constitution, elections, judiciary, law and order, public administration, women’s affairs, etc. The expansive scope of these commissions, coupled with overlapping mandates and ambitious proposals have lent themselves to a chaotic reform landscape.

The commissions have proposed a slew of new institutions, a surfeit of policy blueprints and institutional roadmaps, but offer little clarity on priorities or sequencing. Even allies of the interim government have expressed concern that Yunus and his team are swamped, making the cardinal mistake of failing to focus scarce political and human capital on tackling a narrow set of priorities identified for urgent action.

As the clock ticks, Yunus and his team is no doubt thinking about legacy – evident from the rumours floating around about his resignation. If there is one area that can unlock the fiscal space that Bangladesh desperately needs to stabilise the country, to fund the changes demanded by those who took to the streets, and to revive the heady optimism about the progress Bangladesh and Bangladeshis were making, it is tax. The logic is inescapable: no revenue, no reform. No reform, no Bangladesh 2.0. And without that, no real legacy to speak of.

Outlining an approach to tax reform

The move to split the NBR into separate policy and administration wings mirrored the broader pattern – hasty, opaque, and divorced from stakeholder consultation. Proponents of splitting the NBR will face a lot of competition to stay on the agenda, for resources and for the political capital required to execute this plan.

This is the political economy of reform in Bangladesh today: a government with limited time, an ever-expanding list of priorities, and dwindling capital to implement even the most sensible of changes. If Yunus is serious about leaving behind a meaningful legacy, he will need to deliver on a few hard reforms – and tax reform must be at the centre of that recalibration.

The lessons from ASI’s work building transparent, fair, and efficient revenue systems in several developing countries across Asia and Africa offer the following key pointers for a broad-based tax reform agenda for Bangladesh:

• Context matters: Tailoring reforms to the local economic, political, and institutional context is critical. Reforms should be implemented gradually, but with early quick wins prioritised in order to build momentum and public trust. It is important to start with a comprehensive diagnostics exercise that is validated with a broad set of stakeholders. Effective stakeholder engagement is a critical enabler of reform. Reforms designed and implemented with input from taxpayers, businesses and civil society tend to enjoy greater legitimacy and compliance.
• Transparency builds trust: Open communication about tax policy and its benefits increases voluntary compliance. For reforms to be effective, they must be transparent and consider the interests of all stakeholders. The Government of Bangladesh must build coalitions for reform and this seems like an opportunity missed. The temporary suspension of protests by NBR officials came only after the government agreed to initiate dialogue. The government must now use this moment to build trust, and create a coalition for reform.
• Prudent use of technology: NBR should expand on pilot initiatives that have shown that relatively low-cost reforms such as digitised notices, reminders, and taxpayer education have disproportionately positive effects on compliance, especially among small businesses. One of the most consistently effective strategies from around the world has been the introduction of automated platforms for tax filing, payment, and compliance monitoring which not only improve efficiency but also reduce opportunities for corruption and enhance transparency.
• Effective change management within the NBR: Once there is high-level political buy-in, achieving behaviour change within the NBR is the determining factor. Training tax officials, improving institutional structures, and embedding technical advisors within government agencies have been effective for sustaining reforms. Such efforts help create a professional, motivated workforce capable of implementing and maintaining complex reforms.
• An effective public communications campaign: Eliminating tax exemptions and initiating measures to overturn the currently regressive tax regime will build citizen confidence. It is vital that the NBR links the drive to increase tax collections to specific, visible service delivery improvements in the country.

Rebuilding the social contract

The interim government in Bangladesh faces a host of challenges. The politics has been hard. An area where it has achieved a degree of success is in stabilising the economy through improved macro-economic management, and by beginning to eliminate the culture of corruption and cronyism that pervades its banking systems and business practices.  Turning now to tax with the same technocratic focus, ambition and energy as the IG deployed to the banking sector would help cement the IG’s reputation.

The country stands at a crossroads, facing fiscal stress, external scrutiny, and internal opposition. In this moment, the government has to actively manage the politics of reform. That means engaging the tax bureaucracy, not alienating it. It means bringing in tax professionals and civil society as part of the process. And that means communicating transparently to citizens why paying taxes is a civic duty and shoring up the government’s credibility as being worthy of the citizen’s trust.

Suvojit Chattopadhyay
Head of Africa

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The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Adam Smith International.