Bangladesh collected only 30 per cent of its potential Value Added Tax (VAT) revenue in 2023, despite an average VAT rate of 18 per cent, according to Organisation for Economic Co-operation and Development’s (OECD) Revenue Statistics in Asia and the Pacific 2026 report. The country’s tax-to-GDP ratio stood at 6.7 per cent in 2024, the lowest in the Asia-Pacific region.
While the average VAT rate in Bangladesh generally ranges between 15 and 18 per cent, depending on sectors, VAT collection lags significantly behind many Asian countries with similar rates. OECD uses VAT Revenue Ratio (VRR) to measure collection efficiency, where a ratio of 1 indicates 100 per cent collection of potential revenue. Bangladesh’s ratio was 0.3 or 30 per cent in 2023. By comparison, Azerbaijan’s ratio was 0.6 and Georgia’s 0.75, both with a similar average VAT rate of 18 per cent. The Cook Islands recorded a ratio of 1.08 or 108 per cent with a 15 per cent standard VAT rate.
Bangladesh’s tax-to-GDP ratio is also lower than its South Asian neighbours. India, Pakistan and Sri Lanka exceeded 12 per cent, Bhutan exceeded 13 per cent, and Nepal exceeded 16 per cent. The average for OECD countries was 34.1 per cent.
Tax experts attribute the low collection to multiple VAT rates, weak enforcement, a large informal economy, and tax exemptions aimed at reducing the cost of living. Tax expert Snehasish Barua told TIMES that Bangladesh has multiple VAT rates, including 2, 3, 4, 7.5 and 10 per cent.
He identified two primary reasons for low collection. First, a large informal economy: many economic activities remain outside the VAT net, and cash-driven transactions are difficult to trace. Many businesses do not collect VAT, while others collect it but do not file returns, meaning the revenue never reaches the government treasury. Even among those who file, actual rates are often underreported. Second, the government grants extensive VAT exemptions, including in the electricity sector, to ease the burden on lower-income groups, which reduces overall revenue.
A recent World Bank report also cited tax exemptions as a key weakness in revenue collection. Citing government data, World Bank estimated the financial value of all tax exemptions in the 2021-22 fiscal year (FY) at 6.9 per cent of GDP, including exemptions on income tax, VAT and customs.
According to National Board of Revenue (NBR) data, total revenue collection from customs, VAT and income tax in FY 2025-26 was Tk4,15,473 crore against a target of Tk5,03,000 crore, leaving a shortfall of about Tk87,527 crore. VAT, the largest source of revenue, yielded Tk1,57,734 crore against a target of nearly Tk1,86,000 crore.
International reports indicate that a large portion of the economy relies on informal transactions. Unless the tax administration brings actual data on small businesses, the service sector and cash transactions under its purview, revenue will not grow proportionally with economic activity. World Bank emphasises expanding the tax base, reducing unnecessary exemptions and improving tax administration, including online returns, digital invoices, risk-based audits and data integration, rather than simply raising VAT rates.
The issue of increasing revenue and improving the tax-to-GDP ratio has also been prioritised under International Monetary Fund (IMF) loan programme. To achieve this, initiatives have been taken to reform the NBR and separate tax policy formulation from revenue collection administration.
M Helal Ahmed Jony, research fellow at research organisation Change Initiative, told TIMES that although the standard VAT rate is 15 per cent, low revenue collection relative to the size of the economy stems from limited tax coverage, extensive exemptions and the informal economy. He said raising tax rates alone would not solve the problem. Instead, the tax system must be simplified, the tax net expanded, and voluntary compliance encouraged. He added that the tax burden must not fall disproportionately on low-income earners.
