VAT and SD hike: Is it necessary fiscal measure or a burden on people?
Arnab Ashraf | Source : Daily Observer, 20 January 2025
The Anti-Discrimination Reform Council (ADRC) of the Federation of Bangladesh Chambers of Commerce and Industries (FBCCI) has urged the interim government to reverse its decision to increase VAT (Value Added Tax) and SD (Supplementary Duty) on approximately 100 products. In a press conference held on January 14 at the National Press Club-Dhaka, ADRC Convener Zakir Hossain Nayan described the tax hikes as a "suicidal decision" and a breach of the spirit of the July Revolution.
Also, the ADRC expressed concerns over the lack of consultation with stakeholders and criticized the regressive nature of the tax policy, which aims at meeting the revenue targets set by the IMF. The National Board of Revenue plans to generate 63% of the Tk4.80 lakh crore revenue target for the 2024-25 fiscal year through these indirect taxes. The ADRC emphasized that such measures will disproportionately impact the public, urging the government to reconsider its approach.
The sudden hike in the VAT-SD has struck in the heart of the daily struggling millions of citizens. For many, already enduring the strain of rising inflation, stagnant wages, and an unpredictable economic landscape and job uncertainty, the latest increase in these indirect taxes represents the fatal blow in a series of challenges that have made life increasingly unaffordable.
The hike, which came into effect on January 9, 2025, affects over 100 goods and services essential to daily life. From food items like biscuits, cakes, and sauces to services like mobile phones and internet access, no corner of the economy is left untouched.
The VAT and SD hikes came at a time when the open market and family card programmes are already struggling. Following the political shift after the July-August last year mass uprising, these measures are now severely impacting consumers, mostly those with low and fixed incomes. Development experts warn while such steps may provide short-term relief for the government these will ultimately backfire on the national economy. An interim government should not resort to such measures to cover rising expenses or mitigate financial crises in companies and banks. These actions contradict the principles of a democratic economy, which should prioritize peace and stability in a society free from coercion.
Businessmen in FBCCI and other trade advocacy bodies said, for ordinary Bangladeshis, these taxes are not merely figures on a ledger; they represent the rising costs of basic necessities. While the country's fiscal health is under strain and the poor are grappling with repercussions of the deep economic instability, the new VAT and SD hikes are not only a financial burden but also a sign of an economic system that increasingly seems indifferent to the suffering of its people.
Are these hikes truly necessary to shore up the country's finances, or are they simply another chapter in a long history of taxation policies that disproportionately harm the people while leaving the wealthiest and most powerful untouched? For those who have to bear the brunt of these hikes, the impact is immediate and severe. This is a tax system that, for too long, has placed the heaviest burden on those least able to carry it.
VAT and SD are significant contributors to national revenue in many countries, including Bangladesh. VAT, an indirect tax levied on goods and services, is one of the most important sources of government revenue. In fact, it has become a cornerstone of fiscal policy worldwide. Over 4 billion people, or 75% of the world's population, live in countries that rely on VAT system, raising trillions of dollars annually.
Yet, VAT remains a contentious tax. While it serves as a key revenue generator, it is often considered regressive, disproportionately impacting lower- and middle-income families who spend a larger portion of their income on consumptions. In Bangladesh, where a significant percentage of the population lives paycheck to paycheck, the VAT has become an economic burden on those least able to bear it.
“The sudden hike in the VAT-SD has struck in the heart of the daily struggling millions of citizens. For many, already enduring the strain of rising inflation, stagnant wages, and an unpredictable economic landscape and job uncertainty, the latest increase in these indirect taxes represents the fatal blow in a series of challenges that have made life increasingly unaffordable. The hike, which came into effect on January 9, 2025, affects over 100 goods and services essential to daily life. From food items like biscuits, cakes, and sauces to services like mobile phones and internet access, no corner of the economy is left untouched”
The increase in SD on non-essential items, such as luxury items, tobacco, alcohol, and fruits like grapes and apples, has sparked frustration, especially among lower-income families. The timing of this tax increase is closely tied to Bangladesh's fiscal relationship with the International Monetary Fund (IMF). As part of a $4.7 billion loan agreement, the government has committed to a series of economic reforms, including the rationalization of tax exemptions and the enhancement of VAT compliance.
As the IMF's guidance aims at strengthening the country's fiscal position, these reforms come at a high cost to common people. The IMF's advice to raise VAT and reduce exemptions is framed as a necessary step to prevent further economic decline. Yet, for the common people, these measures are seen as a harsh burden that will only increase their financial woes. The increase in indirect taxes, mostly on essential goods and services, does little to address the underlying structural issues of the economy, such as widespread corruption, inefficiencies in tax collection, and the deep-rooted economic inequalities that plague the nation.
The government's heavy reliance on indirect taxes like VAT is indicative of a broader failure to address the systemic issues that perpetuate inequality. By targeting the poor and middle class with increased taxes, it has missed the opportunity to implement reforms that would bring about a more equitable economic system. Rather than taxing those who are already struggling to survive, the government should focus on increasing direct taxes on the wealthiest individuals and large corporations, who currently benefit from tax evasion loopholes.
The issue of VAT and SD in Bangladesh cannot be discussed without acknowledging the long history of political manipulation and corruption surrounding these taxes. Both the Awami League (AL) and Bangladesh Nationalist Party (BNP) have been accused of using VAT and SD hikes to enrich themselves and their allies at the expense of ordinary citizens. For decades, VAT and SD have been manipulated through complex schemes, including international trading invoices and Pre-Shipment Inspection (PSI) programmes, which have been used to launder money and plunder public funds.
These practices have led many to view the recent VAT and SD hikes with suspicion. The public's trust in the interim government has been eroded by years of political deceit, and the latest tax increases have only further deepened that distrust. There is a growing perception that the government is using VAT and SD schemes to fund its own luxurious lifestyle, including smart cars, lavish accommodations, and other perks. For the people, this feels like a betrayal, as they are forced to bear the brunt of the taxes while the political elite continue to profit.
While the VAT and SD hikes may be seen as necessary to address Bangladesh's immediate fiscal challenges, they are not a sustainable solution to the country's long time deeper economic problems. If the government is serious about achieving long-term fiscal stability, it must focus on comprehensive economic reforms that address the root causes of the country's financial struggles.
Instead of burdening the common people with VAT, SD hikes, the government must work to improve tax collection efficiency and reduce corruption. It must focus on tackling the systemic issues that prevent effective policy implementation, such as widespread corruption and inefficiencies in public administration.
In the meantime, structural reforms in key sectors like education, healthcare, and infrastructure are essential to creating a more stable and prosperous economy. By investing in these areas, the government can improve the quality of life for ordinary citizens and lay the foundation for more equitable economic growth.
By building a more efficient, fair, and transparent tax system, Bangladesh can reduce its reliance on regressive taxes like VAT. The people of Bangladesh cannot continue to bear the weight of a tax system that leaves them behind while enriching the political elite. In order to build a fairer, more sustainable economy, the government must prioritize reforms that create opportunities for all, not just the wealthy few. Until such reforms are implemented, the burden of VAT and SD hikes will continue to fall hardest on those who can least afford it.