Govt to Slash VAT Exemptions; Move Set to Hike Prices for Middle Class

The government is planning a major overhaul of the tax system by withdrawing Value Added Tax (VAT) exemptions on most goods and services, sparing only those used by the bottom 40% of the population.

The move, discussed during a high-level meeting on April 8, follows pressure from the IMF and World Bank to broaden the tax net. Officials indicate that while essentials like rice, pulses, and basic healthcare will remain exempt, a wide range of services including internet, mobile phones, electronics, and English-medium schooling could see significant price hikes as reduced VAT rates are scrapped.

Currently, the National Board of Revenue (NBR) loses nearly as much revenue to exemptions as it collects. In FY23, while Tk3.25 lakh crore was collected, Tk2.75 lakh crore was granted in tax breaks.

Experts warn that targeting exemptions specifically for the 6.8 crore people living in the bottom 40% income bracket will be a "nightmare" to implement. Wealthier consumers often purchase the same goods, making it difficult to segregate benefits. Former NBR officials suggest the government should focus on stopping the 71% of VAT evasion through automation rather than raising effective rates on consumers.

The NBR is also considering a "Proof of Submission of VAT Return" (PSVR) system and unifying TIN and BIN numbers to better monitor taxpayer activities.