Tax Expenditure (TE) analysis is an important tool for strengthening fiscal transparency and supporting evidence‑based tax policy. By identifying and quantifying revenue forgone from preferential tax provisions, TE assessment helps governments gauge the scale of implicit public spending delivered through the tax system and its consistency with policy objectives.
In this context, Bangladesh has published its first assessment of Value‑Added Tax Expenditures (VATEs). Prepared by the VAT Wing of the National Board of Revenue (NBR), the report represents a significant milestone in the country’s TE assessment-related efforts. Specifically, it complements earlier work on Income Tax Expenditures (ITEs) in Financial Years (FYs) 2021-22 and 2022-23 – carried out by the Income Tax Wing of the NBR – hence marking an expansion of Bangladeshi TE assessment towards indirect taxation.
The report finds that Bangladesh’s VAT is weakened by widespread exemptions and reduced rates, which resulted in VATEs equivalent to 3.26 percent of GDP (about BDT 1.3 trillion) in FY 2021-22 (exceeding VAT revenue collections). Most of these VATEs are policy-driven, embedded in the main VAT law (“First Schedule”) and mainly related to food and beverage supplies. Another result of the report is that many VATEs are poorly targeted, often benefiting higher‑income households.
A key implication of the report for sound tax policymaking is the scope to boost both revenue and equity via the potential reconsideration of those VATEs that are the most poorly targeted (e.g., processed meats). Finally, the report underscores the need to institutionalize TE assessments. Regular stock-taking, measurement, publication, and review of Bangladeshi VATEs would help ensure they remain justified and effective over time.
Bangladesh’s first VATE reporting exercise offers several valuable lessons for other countries:
- Build upon existing reporting experience:
The VATE report, while a first for indirect TEs, leverages institutional experience gained from producing a TE report for direct taxes. This sequencing illustrates the benefits of a gradual approach to TE assessment, allowing analytical capacity and internal processes to develop over time while progressively expanding tax-specific coverage.
- Work through (and despite) data constraints:
A key challenge during the VATE report compilation process was the lack of electronic VAT return data. In response, the analysis relied on available data from two vintages of the Household Income and Expenditure Survey produced by the Bangladesh Bureau of Statistics (BBS) and drawing on methodological work supported by the World Bank.
Bangladesh’s experience shows that, although administrative data remain the preferred basis for TE assessment, alternative data sources can be used to produce equally meaningful and useful TE cost estimates. At the same time, the above highlights the importance of continued progress in tax administration digitalization to support and improve future VATE reporting rounds.
- Strengthen institutional arrangements:
TE reporting in Bangladesh reflects the institutional structure of the NBR, where responsibilities for direct and indirect taxes are divided across three Wings: i) Income Tax; ii) Customs; and iii) VAT. As a result, TE reporting in the country has, to date, taken the form of two separate reports: one for direct (income) and one for indirect (VAT) taxes.
Importantly, preparation of the VATE report brought together staff from different duty stations and seniority levels into a dedicated “Tax Expenditure Analysis Group”, supporting cross‑divisional collaboration and internal capacity development. The process also benefited from cooperation with other public institutions, notably the Ministry of Finance (MoF) and BBS, as well as from international partners, including the International Monetary Fund and the Australian High Commission in Bangladesh.
- Look to the future:
The publication of Bangladesh’s first VATE report represents an important step toward greater fiscal transparency. As with other first‑time reports, its principal value lies in establishing a foundation for further refinement. Over time, Bangladesh may strengthen the integration of TE assessment into budget processes and move toward TE evaluation, analyzing the costs and benefits of VAT and/or other tax concessions with a view to reinforcing the overall function of its tax system.
To strengthen the robustness and policy relevance of VATE analysis, the NBR plans to take several steps in the context of upcoming report editions. First, the NBR is expected to make the online filing of VAT returns mandatory starting from July 2026 via an amendment of the “Value-Added Tax and Supplementary Duty Act, 2012”. Second, alignment of VATE reporting with and issuance of VAT invoices through digital platforms (e-invoicing) will be pursued under the NBR’s broader revenue mobilization initiatives, particularly through the World Bank-funded Strengthening Domestic Revenue Mobilization component of the Strengthening Institutions for Transparency and Accountability Project. In addition to reducing data gaps and improving compliance tracking, accelerating the transition to fully electronic VAT returns would significantly enhance the accuracy, timeliness, and granularity of upcoming VATE cost estimates. Third, the Tax Expenditure Analysis Group is currently in the process of establishing a standardized and consolidated TE reporting framework, ensuring consistency in the methods, conventions, and periodic publications of TE reports across all covered taxes.
Such endeavors can be supported via country peer-to-peer interaction at the regional and international levels. For instance, the series of Regional Workshops on TEs co-organized by the Addis Tax Initiative, the Council on Economic Policies, and the German Institute of Development and Sustainability – in which Bangladesh has participated in the past – as well as the follow-up Community of Practice on Tax Expenditures can help further bolster the country’s work in this field.