Bangladesh’s economy is currently going through a transformative phase. As we move steadily towards LDC graduation, new challenges are becoming increasingly visible. Maintaining growth is important, but at the same time, enhancing revenue collection capacity and making the revenue system more efficient, transparent, and sustainable has become equally important. In this context, the importance of the VAT (Value Added Tax) system is undeniable.

From my experience, I can say that although Bangladesh’s VAT system is full of potential, its current structure is not fully effective. Legal complexities, lack of clarity in definitions, and administrative limitations—these three issues are limiting the effectiveness of the VAT system. Keeping this reality in mind, we, from the Center for Strategic and Economic Research (CSER), have prepared a proposal for the Budget 2026–2027, focusing on fundamental VAT reforms.

If we look at the current VAT law, the first thing that stands out is its complexity. In many cases, the law is structured in a way that does not align with real business practices. For example, the definition of “economic activity” is overly broad and largely theoretical. In practice, it does not play a significant role in tax determination; rather, it creates confusion.

In my view, VAT is a transaction-based tax. The core concept should be “supply”—that is, the actual exchange of goods or services. Therefore, we have proposed removing such unnecessary and complex definitions and building a simple, supply-based structure. This will make the law easier to understand and more effective in implementation.

In this context, we have also recommended completely removing the definition of “economic activity,” which would support the development of a practical and supply-based VAT structure.**

Another major issue in the VAT system is the lack of clarity in definitions. In reality, we often see different interpretations of the same concept, which creates complications in tax assessment. Without clear definitions of key terms like “money,” “import,” and “electronic services,” the entire tax system becomes weak.

From this perspective, we have proposed including gift vouchers within the definition of “money,” so that they are not incorrectly treated as goods or services. Similarly, it is necessary to include services within the definition of “import,” as today’s global economy is increasingly digital and service-oriented.

In addition, we have proposed bringing all scattered definitions of “electronic services” into a single unified framework. This will ensure consistency within the law and make tax administration easier.

Alongside these, we have proposed introducing clear definitions of “audit” and “investigation,” removing “tax benefit” and other redundant or duplicate definitions, and refining the definition of “input” by eliminating confusing elements. These changes will significantly reduce interpretational ambiguity in the VAT law.**

The effectiveness of the VAT system largely depends on the simplicity of tax calculation. However, in practice, determining tax from VAT-inclusive prices is often complicated for businesses. As a result, errors, delays, and even unintentional non-compliance occur.

From CSER, we have proposed a standardized and simple formula that will allow businesses to calculate tax easily. I believe that the simpler the calculation process becomes, the higher the voluntary compliance will be, and the lower the pressure on tax administration.

In this regard, we have also proposed simplifying the “tax fraction” formula to make VAT-inclusive calculations more practical, accurate, and user-friendly.**

A major limitation of Bangladesh’s revenue system is that many businesses are still outside the VAT net. This not only leads to revenue loss but also creates an uneven competitive environment where compliant businesses are disadvantaged.

In our proposal, we have recommended bringing businesses above a certain turnover threshold under the VAT system. At the same time, we have suggested providing temporary incentives to encourage unregistered businesses to come into the system.

More specifically, we have proposed that individually owned businesses with an annual turnover exceeding BDT 3 crore should be mandatorily brought under the VAT net. This will play a significant role in expanding the tax base and increasing revenue.**

I believe that enforcement alone is not enough; trust among businesses must also be built. If they feel that the system is supportive, they will voluntarily come under it.

In today’s world, no tax system can function effectively without digital technology. The widespread use of Mobile Financial Services (MFS) in Bangladesh has created a major opportunity.

We have proposed introducing a system where VAT can be directly deposited into government accounts through MFS. This will simplify the collection process, increase transparency, and reduce corruption and evasion. In my view, digitalization is a systemic transformation that can make the entire tax system more modern and efficient.

Additionally, we have highlighted an important issue in international services—clearly defining services provided to non-resident entities as “export of service.” This will support foreign currency earnings and promote the growth of the service sector.

Applying the same rules across all sectors often creates problems. For example, determining actual value addition in the insurance sector is complex and differs from general goods or services. Therefore, we have proposed improving the adjustment mechanism so that VAT is applied only on actual value addition. Similarly, to ensure tax collection in international services, we have proposed appointing VAT agents for non-resident entities. Considering such sector-specific realities will make the VAT system more effective and acceptable.

In this context, we have also proposed restructuring the “increasing adjustment” mechanism to make VAT calculations more logical, accurate, and traceable.

From my experience, excessive complexity and rigidity slow down business activities and often encourage non-compliance. On the other hand, excessive flexibility leads to revenue loss. Therefore, a balanced approach is needed, where both revenue collection and business growth are equally prioritized. In our CSER proposal, we have tried to maintain this balance—where the law is simple, implementation is transparent, and the business environment is supportive.

Overall, our proposals aim to achieve three key objectives: simplification of the law, clarity in definitions, and improvement in administrative efficiency—paving the way for a modern and business-friendly VAT system.

This is the right time to reform Bangladesh’s VAT system. If we can utilize this opportunity, it will not only increase revenue but also help build a strong, transparent, and sustainable economic structure. I firmly believe that if these reforms proposed by CSER are implemented, the VAT system will become more effective and will play a significant role in the country’s overall economic development. What is needed now is the vision of policymakers and effective implementation.

Sakif Shamim
Chairman, Center for Strategic & Economic Research (CSER)
Managing Director, Labaid Cancer Hospital & Super Speciality Centre