VAT goes to village: NBR eyes bringing small businesses under coverage

The National Board of Revenue is planning to expand the value-added tax (VAT) base to the grassroots, netting even small businesses at district, upazila, and village levels to boost overall revenues and raise the country’s low tax-to-GDP ratio.

The plan includes introducing a “token” VAT between Tk500 and Tk1,000 on trial basis for small businesses and making Business Identification Number (BIN) mandatory for bank accounts and trade licences, according to officials familiar with the initiative.

The plan, if approved by the finance minister and the prime minister, may be included in the budget for the 2026-27 fiscal year (FY27), they said.

Revenue officials said they are looking to explore revenue potentials at the grassroots where a large portion of economic activity remains outside the formal tax system.

“We have plans to extend VAT coverage down to the rural level,” a senior NBR official said on condition of anonymity. “Initially, a small fixed VAT could help smaller traders become accustomed to tax compliance,” he added.

Making BIN mandatory for bank accounts and trade licences could be an effective way to bring more businesses into the net, the official said.

During pre-budget talks NBR Chairman Abdur Rahman Khan also hinted at such measures — introducing a limited VAT for certain segments on a trial basis if necessary.

“To increase VAT collection, we need to both reduce exemptions and expand the base,” another NBR official said, referring to IMF’s condition for an ongoing loan package to raise tax-GDP ratio, which is among the lowest in the region.

Businesses and economists, while appreciating such initiatives to expand VAT network and include a vast untaxed economy into tax network, have warned that abrupt imposition of blanket VAT for all rural businesses could backfire.   

Fahmida Khatun, executive director of the Centre for Policy Dialogue, welcomed the initiative to broaden the VAT base but cautioned against increasing complexity or compliance costs.

“Collecting small amounts of VAT from small businesses is possible, but the government must ensure that the revenue actually reaches the state treasury and does not lead to additional informal payments,” she said.

Taskeen Ahmed, president of the Dhaka Chamber of Commerce and Industry, pointed out the regional imbalance in revenue collection. Dhaka and Chattogram together account for around 45% of the country’s economic activity, yet generate nearly 85% of total revenue.

“This indicates that a large portion of economic activity outside these areas remains untaxed,” he said. “However, expanding VAT coverage to the grassroots should be done gradually over four to five years to minimise risks and ensure sustainability.”

The proposed “token” VAT system has drawn comparisons with the previously scrapped package VAT regime, under which businesses paid a fixed amount based on estimated turnover.

Former NBR member Md Farid Uddin warned that the earlier system was abandoned due to widespread irregularities and collusion between field officials and businesses.

“If similar methods are reintroduced without strong safeguards, the same problems may resurface,” he said.

Revenue drastically fell short of target in March, driven by declines in import duties because of the Middle East war and slow economic activities. However, VAT and income tax revenues saw growth in March.

Nine months’ data show overall revenues, though marked 11% growth year-on-year, remained about Tk98,000 crore behind the target for the period. This fiscal year’s revenue target is Tk6.97 lakh crore and the NBR is set to face even a bigger target for the next year, prompting it to explore all possible ways to generate more revenues.

Rural economy expands, largely untaxed

The latest Economic Census 2024 by the Bangladesh Bureau of Statistics estimates the number of economic units in the country at 1.17 crore, up from 78 lakh in 2013. Over 99% of those units are cottage, micro and small businesses, with 74% operating in rural areas.

But the expansion of the rural economy is not reflected in the tax scene. According to NBR data, around 8 lakh businesses currently hold BINs, of which just over 5 lakh submit VAT returns. The NBR chairman believes that at least 1 crore businesses should ideally be brought under VAT registration.

Trade licences are issued by city corporations, municipalities, or union councils, but the revenue authority does not have any consolidated data about how much of those businesses are active. Similarly, while Bangladesh’s banking sector holds over 17 crore accounts, there is no clear data on how many are business or current accounts.

The lack of data has prompted the NBR to venture on new initiatives to explore the revenue potentials in the grassroots economic and business activities, officials said.  

Concerns over blanket enforcement

Business leaders and tax experts have cautioned against a blanket approach to VAT expansion, warning that it could backfire if not implemented carefully.

Abdul Wahed, former director of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) and president of the Chapainawabganj Chamber of Commerce and Industry, said making BIN mandatory for all small businesses could discourage them from renewing trade licences.

“If a fixed VAT system is introduced without proper oversight, it could also increase corruption at the field level.”

A former NBR member who worked on VAT policy echoed similar concerns, arguing that while expanding the VAT base is necessary, enforcement mechanisms must be realistic.

“Forcing all businesses to obtain VAT registration as a precondition for basic operations like banking or licensing could create unintended consequences,” he said.

“Past experience shows that VAT collection has been growing faster than income tax and customs duties. The focus should also remain on strengthening income tax collection.”