Political economy analysis of tax reforms



A country’s tax system has two key elements: tax policy and tax administration. Political economy analysis is essential for understanding the factors responsible for facilitating and hindering tax reforms in tax policy and administration in a country and for taking reform measures.


Article 83 of the Constitution of Bangladesh provides that no tax shall be levied or collected except by or under the authority of an act of Parliament. This shows that taxation is a political phenomenon in Bangladesh.

The political economy of tax reforms must be understood in the broader context of governance in Bangladesh. Important recent research has focused on the ‘Bangladesh Paradox’, with continued economic growth despite governance challenges, including a high level of corruption as evidenced by various governance indicators.

The continuing weakness of the existing tax system is the product of well-established rules, norms and informal networks that have served the broader interests of several political, business and bureaucratic elites (political settlement). This political settlement ensured predictably low tax rates and a strategic distribution of economic rents despite the existence of pervasive corruption, discretion and informality.

For example, the low price of cigarettes reflects this political settlement. Cigarette makers are trying to convince policymakers and bureaucrats to keep cigarette prices and taxes low under the unfounded pretext of the illicit cigarette trade.

Despite some tax reform plans, there is little incentive on the part of political leaders and businessmen for tax reforms as they reap significant benefits from the favorable tax treatment (tax exemptions) granted to them.

Many MPs have significant business interests, which leads to conflicts of interest. Conflicts of interest give rise to corruption by making compromised decisions in an official capacity for personal gain. The National Revenue Council (NBR) is responsible for both tax policy formulation and tax administration, which gives rise to conflicts of interest.

The VAT reform is one example.

The political economy of taxation in Bangladesh is reflected in the seven-year delay in implementing the 2012 VAT and Sustainable Development Act due to political and electoral considerations.

Unlike the original VAT law of 2012 with a single VAT rate and few tax exemptions, the amended VAT law, implemented in 2019, featured multiple rates (7) and generalized tax exemptions. The most basic criticism is that too many VAT rates can lead to revenue leakage and serious economic distortions. The available evidence shows that the performance of VAT has not improved compared to other taxes since the implementation of the new law in July 2019.

The current Income Tax Ordinance, 1984, is obsolete to adapt to changing time requirements. Thus, a new income tax code is needed to put in place an efficient and modern income tax system.

We also see it in the tax administration. Due to the lack of substantial automation, the BNR has largely maintained an obsolete control system, which has allowed tax officials to retain significant discretion and therefore opportunities for collusion with or extracting taxpayers. taxpayers.

For example, the power to issue statutory regulatory orders (SROs), bypassing Parliament, is an expression of the discretionary power of the NBR. At the heart of the current arrangements is an apparent contradiction: the system promises low and predictable tax rates to major business players through collusion and corruption, while also providing wide latitude and opportunities to seek out annuity to certain fiscal agents and political actors.

The fundamental inefficiency of the tax system has been exacerbated by a high degree of administrative fragmentation. While there has been a trend in low-income countries towards greater integration between administrative units, the NBR remains divided into three highly autonomous tax branches: income tax, VAT and customs.

The relative lack of data sharing between tax offices severely undermines the administration and opens up space for collusion, arbitrariness and abuse, while fragmentation also creates additional costs for taxpayers. The end result of these weaknesses is a tax system characterized by extremely high degrees of informality, wide discretion and the regular negotiation of tax obligations.

Overall, the BNR itself has proven to be the most resistant to tax reforms. As NBR officials have significant discretion, this opens the door to systemic corruption that is organized and sanctioned at all levels of the administration. As such, some officials in the council are strongly opposed to any reform program that would reduce their discretion, including through increased transparency.

For example, the BNR outlined the main lines of the Modernization Plan covering tax policy and tax administration during the period 2011-2016. It was tabled in Parliament. However, with the retirement of the then president, little reform action was taken. Thus, the strength of bureaucratic resistance is consistent with patterns elsewhere in the public service.


With the exception of income tax and VAT registration, other tax processes are mostly manual. The outbreak of the Covid-19 pandemic underscored the need and provided the opportunity for full automation of essential income tax and VAT functions.


Tax reforms must be local. Reforms must belong to the Minister of Finance with the active support of the BNR and the strong support of the Prime Minister’s office.

The BNR can develop a five-year tax reform plan covering several themes.

The first problem may include the rationalization of corporate tax rates. While India and Pakistan have two corporate tax rates, we have six. The time has come to revise the structure of corporate tax rates to achieve the twin goals of lowering the cost of doing business and increasing government revenues.

Second, the tax net can be widened by emphasizing withholding taxes, reducing tax exemptions and linking different services to the tax system. Third, the digitalization of the tax system is essential to improve tax compliance.

Fourth, the tax administration must be strengthened to combat tax evasion and improve tax governance. Fifth, tax policy can be separated from tax administration. The Internal Resources Division of the Ministry of Finance should be responsible for tax policy development, while the tax administration should remain the responsibility of the BNR.

Tax reforms should be properly reflected in the government’s annual performance agreement. The Standing Parliamentary Committee of the Ministry of Finance must monitor the progress of reforms, and the media can report to the public.

Development partners can engage in the automation of key functional areas of income tax with particular emphasis on integrating tax system automation into the existing VAT reform strategy. Income tax and VAT should use the same platform and share information transparently to create synergy.

Development partners can also help BNR revert to the original 2012 VAT law to the extent possible by consolidating various differential rates and revenue-based regimes into a unified structure.

The author is a former president of the National Revenue Council. He can be contacted at [email protected]

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