As Bangladesh looks to rebuild itself after the political upheaval, the prospect of reform looms large. The transition into a new era presents a rare opportunity to reassess political priorities and the economic framework underpinning the country’s growth. 

The tax system, long seen as an obstacle for local businesses and foreign investors alike, is one of the most pressing areas for overhaul. With an overcomplicated patchwork of regulations and a reliance on outdated exemptions, the existing structure has been criticized for stifling innovation and hindering investment. 

There is growing momentum for change that could create a more business-friendly environment. The National Board of Revenue (NBR) has already formed a task force to tackle this issue head-on, streamlining tax laws to align them more with the needs of modern businesses. 

However, any conversation about corporate tax reform in Bangladesh must go beyond the high-profile sectors that typically dominate public discourse. While foreign investment and large multinational companies often take center stage, the need for tax reforms addressing the unique challenges of ICT startups and SMEs/MSMEs has become more pressing. 

An outdated and overly complex tax system continues to constrain the ICT sector. This complexity is even more detrimental for small and medium-sized enterprises (SMEs) across sectors, hindering their growth and competitiveness. 

The tax framework’s frequent amendments further create uncertainty, particularly in the ICT sector, where rapid innovation requires clear and consistent policies. 

One of the most significant challenges is dual taxation, where startups are taxed on corporate profits and dividends. This creates an additional burden on businesses that are focused more on scaling than immediate profits. This tax burden, in turn, limits their ability to reinvest in growth, innovation, and product development. 

For many SMEs and ICT businesses, the tax system is not just an administrative hurdle but a significant deterrent to investment. Despite the government’s efforts to alleviate these challenges, such as tax exemptions under the National ICT Policy and the introduction of presumptive tax schemes for smaller businesses, the tax system remains far too complex for many firms to navigate. In fact, 57% of SMEs in Bangladesh still operate informally, primarily due to the complexity of tax laws and lack of clear guidance. 

Additionally, the digital adoption gap remains a significant challenge, with only 30% of SMEs using digital accounting systems, compared to 70% of larger enterprises. This slow adoption of digital tools only deepens the compliance difficulties, making it even harder for SMEs and startups to benefit from existing reforms. 

For Corporate Income Tax (CIT), VAT, and other mandatory contributions, SMEs face challenges due to limited resources, less access to professional tax advisory services, and a lack of streamlined processes. Compared to large enterprises, SMEs experience higher relative costs in terms of both time and money to meet tax compliance requirements. The complex tax system and lack of digital integration exacerbate the challenges for smaller businesses, often discouraging formalization.

Bangladesh’s corporate tax rates are notably higher than those of comparable economies, reaching up to 45% for certain sectors. These elevated tax rates present significant challenges for SMEs. 

Startups and ICT businesses, on the other hand, are getting some good news. Notably, the Finance Act 2024 introduced a 100% tax exemption for income derived from specified IT-enabled services from July 1, 2024, to June 30, 2027, contingent upon timely income tax return filings. 

Startups’ turnover tax has been reduced from 0.6% to 0.1%, and loss carryforward provisions have been extended up to nine years. While these initiatives offer some relief, industry stakeholders argue that they do not comprehensively address the systemic issues ICT startups face. Trade bodies, including the Bangladesh Association of Software and Information Services (BASIS), have advocated for extending tax exemptions until 2031.

Bangladesh’s tax framework includes provisions on transfer pricing, thin capitalization, and presumptive tax rates, which require significant reforms in addition to high corporate tax rates. 

Transfer pricing regulations, introduced in 2012, aim to curb profit shifting by multinational companies. However, enforcement has been limited, with the NBR only recently commencing its first transfer pricing audits. The National Board of Revenue (NBR) has initiated transfer pricing audits to address profit shifting by multinational corporations and prevent the erosion of the tax base. 

Systemic corruption within the NBR often undermines these efforts, particularly in auditing processes. Instances of bribery and collusion between tax officials and businesses have been reported, leading to inconsistent enforcement of tax laws and enabling tax evasion. 

Thin capitalization rules, designed to prevent excessive debt financing used to minimize tax liabilities, are either inadequately enforced or lack clarity, allowing firms to exploit these gaps. Presumptive tax rates intended to simplify tax compliance for small businesses often fail to reflect actual income levels, leading to either overtaxation or underreporting. These issues contribute to a tax system that is both complex and inefficient, deterring compliance and hindering revenue collection.

Tax avoidance evasion remains a significant challenge in Bangladesh; the country loses approximately $355 million annually due to corporate profit shifting and individual tax evasion. Despite having higher corporate tax rates than similar economies, Bangladesh’s tax revenue as a percentage of GDP is lower, indicating inefficiencies in tax collection. Reports cite tax avoidance for 5 and 25 percent of tax losses and evasion for 15-80 percent of unrealized tax collection. 

Reform policies have predominantly focused on addressing corruption within institutions. However, within the NBR, efforts have been limited to reassigning commissioners without conducting thorough investigations or removing corrupt officials. 

Implementing comprehensive reforms to enhance tax compliance and revenue collection is imperative. These reforms include reducing corporate tax rates to competitive levels, strengthening enforcement of transfer pricing and thin capitalization rules, and conducting thorough investigations to root out corruption within the NBR.

The tax system presents significant challenges for SMEs and ICT startups due to its complexity and high compliance costs. These burdens often deter small businesses from entering the formal economy. 

The government should consider implementing a simplified tax regime tailored specifically for SMEs and startups. For example, the United Kingdom’s ‘Making Tax Digital’ initiative has streamlined tax processes for small businesses, reducing administrative burdens and enhancing compliance. 

Adjusting tax rates and enhancing tax collection mechanisms are important to curb tax avoidance and evasion. While reducing corporate tax rates can stimulate business growth, the primary focus should be strengthening tax administration and compliance to ensure sustainable revenue generation and a business-friendly tax regime. 

Simplifying and standardizing corporate tax rates for Small and Medium Enterprises (SMEs) and startups across various sectors can significantly reduce compliance burdens and foster a more business-friendly environment. A unified tax rate for these entities would ease tax obligations and encourage formalization. 

We must shift from a heavy reliance on indirect taxes, such as VAT and customs duties, which disproportionately affect lower-income individuals, towards a more progressive tax structure emphasizing direct taxes.

Modernizing audit processes by adopting advanced technologies is essential to curb audit fraud and enhance tax compliance. Data analytics and artificial intelligence can help effectively identify discrepancies and fraudulent activities. 

For example, India’s Goods and Services Tax Network (GSTN) utilizes data analytics to detect tax evasion, increasing compliance and revenue collection. 

With talks of finally enacting the Ombudsman law ongoing, establishing an independent Tax Ombudsman Office is a pivotal step toward improving transparency and accountability within the tax system. This office will be an impartial mediator between taxpayers and the National Board of Revenue (NBR), addressing grievances and ensuring fair treatment. Similar initiatives have proven effective in other countries; for instance, Nigeria’s proposed Office of the Tax Ombudsman aims to enhance transparency and accountability in its tax system.

To sum it up, we need reforms that are not merely administrative adjustments but crucial steps toward sustainable economic growth and a business-friendly Bangladesh. 

The author is a senior research officer at icddr, b’s health systems and population sciences division.