This Selected Issues paper reviews Bangladesh’s recent growth experience and per capita income. The paper identifies several key impediments to growth, namely: poor governance; restrictive trade and regulatory regimes; and inadequate investment in human capital and physical infrastructure. The paper makes the case that the medium-term fiscal strategy should be centered on boosting the revenue performance of the National Board of Revenue (NBR) by reorganizing it along functional lines, adopting a system of self-assessment, establishing a risk-based auditing system, and introducing a unique taxpayer identification number.


This Selected Issues paper reviews Bangladesh’s recent growth experience and per capita income. The paper identifies several key impediments to growth, namely: poor governance; restrictive trade and regulatory regimes; and inadequate investment in human capital and physical infrastructure. The paper makes the case that the medium-term fiscal strategy should be centered on boosting the revenue performance of the National Board of Revenue (NBR) by reorganizing it along functional lines, adopting a system of self-assessment, establishing a risk-based auditing system, and introducing a unique taxpayer identification number.

IV. Key Medium-Term Fiscal Challenges20

60. Bangladesh’s economic performance and social indicators strengthened during the 1990s, due mainly to reform measures adopted early in the decade. Real GDP growth accelerated to an average of about 5 percent, from 4 percent in the 1980s, and inflation was moderate. Fiscal policy was cautious, with public debt contained at around 50 percent of GDP. However, structural fiscal problems have kept revenue and public expenditure below the path needed for faster reduction in poverty. Total revenue stagnated well below 10 percent of GDP during the 1990s, and barely exceeded this threshold in the early 2000s, putting Bangladesh among the countries with the lowest total revenue-to-GDP ratio. Such a low level of revenue has severely constrained expenditure. Total spending is also among the lowest in the world, fluctuating in the range of 11–15 percent of GDP in the last decade, with ADP averaging about 5.5 percent of GDP.

61. In view of the exceptionally low revenue mobilization and the pressing need to step up development spending, Bangladesh is facing major medium-term fiscal challenges. To address these challenges, the medium-term fiscal strategy should be centered on boosting revenue performance and reorienting expenditure to better support growth and the MDGs, while, at the same time, protecting fiscal sustainability. This paper discusses the main challenges in the areas of revenue (Section A) and expenditure (Section B). Section C summarizes the main conclusions of the paper.

A. Key Challenges in Tax Administration and Policy

Near-term revenue issues and priorities

62. Efforts toward addressing tax administration and policy issues bear directly on economic governance, which requires strong political commitment in support of the NBR. A good start has been made to address major weaknesses in tax administration and policy. In particular, the large taxpayer unit (LTU) for income tax and the Central Intelligence Cell (CIC) started operation in late 2003, followed by the LTU for VAT in late 2004. To improve the compliance of taxpayers, a system of universal self-assessment for LTU income taxpayers has been introduced, together with higher penalties for late and nonfiling. At the same time, the audit program is being strengthened and expanded. The tax base has also been broadened through inclusion of more services in the VAT net.

63. Steps have also been taken in the FY05 budget to start reducing and rationalizing import tariffs and supplementary duties. For customs duties, a three-tier structure, with a maximum rate of 25 percent was introduced. For supplementary duties, the number of rates has been reduced from seven to three, and the maximum normal rate reduced to 30 percent; higher rates have been maintained for luxuries and special items (automobiles, and arms and ammunition). In the area of customs administration, the use of information technology has increased efficiency and transparency. Assessment and clearance of goods are now undertaken through the Automated System for Customs Data (ASYCUDA++) computer system. At the same time, the valuation of goods and the post-clearance audit are being improved, with the gradual introduction of risk-based checking process and audit.

64. The near-term priorities should be to ensure the effectiveness of the LTU system and to further modernize the customs administration. On the LTU, particular attention should be given to improving the operations of the income tax and VAT LTUs. To this end, with World bank and DFID assistance, the audit functions need to be revamped through (i) development of an information sharing system between the CIC and the LTU’s audit wing; (ii) adequate staffing with sufficiently skilled audit officers; (iii) implementation of training program; and (iv) conducting joint audits for large taxpayers of the LTU system. To further increase audit effectiveness, an independent member audit position in the NBR, reporting directly to the chairman, would be created. The tax collection enforcement wing also need to be strengthened through adequate staffing and training, as well as improvement in arrears monitoring system and collection procedures, including expediting disposal of court cases. Finally, consideration should be given to developing an appropriate incentive system to promote good performance and penalize inappropriate behavior of tax officials.

65. Customs operations should be further modernized with a view to detect undervaluation of imports and improve customs collections. To this end, key actions would include (i) strengthen the customs valuation process and the post-clearance audit; (ii) introduce more comprehensive audits; (iii) ensure adequate training of inspectors; and (iv) develop an anti-smuggling program. Further steps are also needed to minimize abuses of the special bonded warehouses and the duty drawback scheme.

Medium-term revenue issues and priorities

NBR modernization

66. On tax administration, the focus will be on the NBR modernization plan, assisted by the World Bank under the Development Support Credit. International experience suggests that most revenue boards have been moving away from a tax-type structure, which is still operating in Bangladesh. Such a structure presents serious weaknesses, including duplication of functions, uncoordinated audit and collection actions, poor taxpayer services, and inconsistent priorities between taxes. Following FAD and World Bank technical assistance, the authorities are working on a medium-term strategy to modernize the NBR, with a view to fundamentally improve governance. Supported by a new human resource policy21 and an information technology strategy, the NBR modernization plan should include the following components: (i) reorganization of the NBR along functional lines to permit clear lines of accountability; (ii) adoption of a true self-assessment system to reduce discretion of tax officials; (iii) establishment of a risk-based auditing system supported by third-party information; and (iv) introduction of a unique taxpayer identification number (TIN).

Functional organization

67. A move to a functional structure is key to transforming the NBR into a modern and efficient administration. International evidence suggests that the functional organization offers a number of advantages. First, it improves taxpayer services by providing a single point of access for taxpayers. This enables taxpayers to easily understand their rights and obligations, thus improving compliance. Second, the functional model also improves productivity through greater cohesiveness and synergies among the internal functions. For example, comprehensive multi-tax audits can be carried out, leading to cost reduction. Similarly, enforcement operations can be conducted for all taxes owed by the same taxpayer.

68. Complete implementation of a functional structure should be viewed as a long-term project that needs to be steered by a dedicated management team. More importantly, a long-term commitment from the government at the highest level is critical to the sustainability of the modernization process. As a first step, a functional organization should be introduced in the LTUs where modern structures, processes, and technology can be trialed easily. It could be followed by the centralization of the audit and collection functions at the NBR level under newly created member positions, as well as independent units for human resources and information technology policies.


69. Self-assessment is a key foundation of modern tax administrations. Under a self-assessment system, taxpayers should determine, report, and pay their own tax liabilities, based on the premise that they are best placed to know their tax liabilities. This will allow tax administrations to devote their limited resources to countering tax evasion. International experience shows that a number of prerequisites should be in place for the successful implementation of a self-assessment system. These include: (i) simple tax laws and procedures to reduce compliance costs; (ii) efficient and accessible taxpayer service to assist taxpayers to meet their obligations; (iii) effective audit and collection enforcement that detect promptly taxpayers that fail to comply with tax laws; (iv) strong but fair penalty systems to signal that tax fraud will be prosecuted to the fullest extent of the law; and (v) access to independent review of decisions to protect taxpayers’ rights.

70. Most of these preconditions are not currently met in Bangladesh22. With DFID technical assistance, steps have been taken to redraft tax laws (e.g., income tax law), but further actions are needed to simplify tax laws and procedures and reduce compliance costs. In the meantime, efforts have been made to develop taxpayer services in the LTU system, but the capabilities of this unit should be beefed up through training. The audit and collection functions need to be revamped, first in the LTU system as outlined in the near-term priorities. The penalty system for noncompliance was stiffened in 2004, and early evidence points to improved compliance as a result of this change. Taxpayers have access to independent review of tax decisions and can go to tax appellate tribunals to get redress for their grievances, but the process is regarded as ineffective.

71. Bangladesh’s Revenue Commission, established in 2003 with representatives of the government and private sectors, issued its report that proposes a true self-assessment be introduced for all tax returns. Given the status of the prerequisites for successful self-assessment system, it would be advisable to view a general introduction of self-assessment as a medium-term objective. As an interim step, a self-assessment system should be implemented and trialed in the LTU. Once sufficient experience has been gained and the basic preconditions have been put in place, a full self-assessment system at the NBR level should be considered.

Risk-based audit system

72. A self-assessment system needs to be supported by a strong risk-based auditing system. An effective audit program should contribute to better tax compliance by making taxpayers aware that not complying with tax laws will result in sanctions. Taxpayers’ perception of the probability of being audited strongly influences their degree of compliance. Since risk-based auditing does not seek to audit all taxpayers, scarce resources should be targeted at the taxpayers most likely to be evading their tax liabilities.

Unique taxpayer identification number

73. The introduction of a unique taxpayer identification number (TIN) is critical to the reform of tax administration and a prerequisite to a successful computerization of tax processes. Country experiences suggest that, without a unique TIN for all taxes, it would be difficult to have a single administration responsible for the enforcement of compliance with all tax laws. Both the income tax and VAT laws currently require the use of an identification number. However, in practice, a number of factors have compromised the identification system.

  • First, the income tax and VAT departments have developed their own identification systems independently,23 which complicates the cross-checking of taxpayers’ compliance.

  • Second, the lack of a systematic system to deregister both VAT and income tax registrants has complicated tax operations and reduced the relevance of the identifier for detecting noncompliant taxpayers.

  • Third, fraudulent acquisition of identifiers has contributed to tax avoidance. Moreover, the reliability of the business identification number (BIN) for VAT has also been compromised by the fact that each branch of an enterprise is required to have its own BIN.

In light of these weaknesses, consideration should be given to consolidating the two taxpayer identification numbers (BIN and TIN) at the early stage of the modernization plan.

Tax policy

74. The priorities should be to expand the tax base and rationalize the complex tax system. The tax system in Bangladesh entails relatively high tax rates and numerous exemptions. This system is prone to corruption and tax evasion and gives rise to economic distortions, especially through high trade taxes. Thus, the tax system needs to be rationalized and its efficiency improved. The emphasis over the medium term should be on: (i) widening the VAT and income tax bases, mainly by reducing exemptions and the scope of tax holidays; and (ii) further reducing and rationalizing import tariffs and supplementary duties, while identifying alternative revenue sources to protect revenue.

Widening the VAT and income tax bases

75. A fundamental review of tax exemptions should be undertaken, with a view to reducing them drastically. In particular, the tax base should be broadened by covering more product/services and eliminating numerous exemptions, as recommended by Bangladesh’s Revenue Commission Report (BRCR). On income tax, the most critical problem remains the erosion of the tax base through the tax holiday facility. As recommended by BRCR, tax holidays should be abolished and replaced by a simplified system of depreciation allowances24.

Reducing and rationalizing import tariffs and supplementary duties

76. Building on the steps taken in the FY05 budget, the process of reduction and rationalization of customs duties should continue, with the pace of reform dictated by progress in strengthening and broadening the domestic tax base, so that revenue is protected. Priority should be given to the reduction of multiplicity of levies. As pointed out by BRCR, there are currently as many as 9 separate levies at the customs, which lead to the lack of clarity, simplicity, and transparency. While it is beyond the scope of this study to provide specific tax policy advice, consideration should be given to BRCR’s various proposals for dealing with each of these levies25. It would also be useful to first consolidate the supplementary duties into statutory duty regime and then reduce them gradually.

B. Key Challenges in Expenditure Management and Policy

77. The key issues in expenditure management and policy include inefficiency in and weak monitoring of the ADP, insufficient spending on maintenance, and structural weaknesses in employment and wage policies. In light of these issues, reform priorities should focus on improving the prioritization and efficiency of current spending and ADP, as well as reforming the civil service.

ADP—Main issues and policy options

Main issues

78. The government’s PRSP stresses that efficient implementation of the ADP is key to achieving faster poverty reduction. Numerous World Bank’s studies and the government-appointed Expenditure Review Commission conclude that there is considerable scope for improving the selection, prioritization, and implementation of ADP projects, which average 5.5 percent of GDP a year. The main weaknesses are summarized in the World Bank’s Public Expenditure Review (2003, p. 16): “The ADP includes a significant number of projects with a questionable rationale, low priority for public investment, or doubtful viability or equity. Questionable projects regularly find their way into the ADP mainly because of the weaknesses in the system of project management: (i) insufficient scrutiny of projects; (ii) weak capacity in project selection, design, and implementation; (iii) overly long periods for project implementation; and (iv) the political imperative of satisfying numerous demands through an excessive number of small projects.”

79. Deficiencies in the procurement procedures26 have also undermined the ADP’s effectiveness and led to low absorption rates of external concessional financing. As pointed out by the 2003 fiscal ROSC for Bangladesh, in recent years ADP projects in transport, shipping, and telecommunications have been increasingly financed through suppliers’ credit obtained on nontransparent terms that circumvent competitive bidding processes. Moreover, procurement processing is too prolonged, often due to interferences by interest groups and lack of knowledge and skills at the working level.

Policy options

80. The government has started to tackle these weaknesses. Efforts have been made to strengthen project selection and execution in the line ministries. With AsDB’s assistance, steps have been taken to streamline the project approval process, with a view to reducing project start-up delays. AsDB noted that greater attention to project implementation is yielding results, as evidenced by the fact that all 2004 ADB loans have become effective by early 2005. To enhance transparency and efficiency in project implementation, new procurement regulations were introduced in 2003, and a new procurement law is being finalized, with the World Bank’s assistance under the DSC. Moreover, a medium-term budget framework is being established in four key line ministries to ensure that pro-growth and pro-poor spending is given priority.

81. Despite these recent efforts, more needs to be done if Bangladesh is to sustain growth and reduce poverty. In the area of project selection, there is a need to improve investment planning and budgeting by adopting a medium-term expenditure framework and well-established criteria for evaluating public investments, and by integrating revenue and development budgets. Priority should be given to “core” projects that have the greatest impact on poverty reduction and contribute the most to social welfare. The recurrent cost implications of new investment should be incorporated in investment decisions. As regards project implementation, more improvement is needed in a number of areas. There is a need to strengthen mechanisms for monitoring project execution and ex post evaluations. This could help draw lessons from any implementation problems to ascertain the scope for cost-savings in future projects. With the introduction of new procurement guidelines, there is also an urgent need to train personnel involved in the procurement process and strengthen procurement management in line ministries and executing agencies.

Government employment and pay—issues and policy options

Main issues 27

82. The wage bill claims a relatively high share of the consolidated budget. The estimated wage bill for all employees supported by the consolidated budget in FY04 amounts to about 24 percent of central government spending, compared to an average of 15 percent for South Asia and 20 percent for countries with PRGF-supported programs. However, at about 4 percent of GDP, the government wage bill is below the average for South Asia (4.6 percent) and countries with PRGF-supported programs (4.8 percent).

83. The structure of the salary scale is not conducive to attracting and retaining skilled personnel. First, Bangladesh’s civil service has a deeply entrenched tradition of incremental pay increases based on the length of service. This has undermined the development of a high-quality and accountable senior civil service. Second, average compensation for officers has fallen in real terms (ranging from 2 to 34 percent depending on the grade levels) since the last pay award in 1997. In addition, average wages for skilled government personnel are well below than of their counterparts in the private sector. Third, the structure of the pay scale has deteriorated continuously and the existing pay scale has become more compressed. The compression ratio (defined as the ratio of the highest to lowest grade wage) is currently at 6.4. International experience suggests that a ratio lower than 12 indicates an overly compressed wage scale.

Policy options

84. It is important that the authorities soon adopt a plan to reform the civil service with World Bank assistance. Reform of government employment and pay would help improve efficiency while containing the growth in the wage bill. Government employment should be rationalized through a comprehensive review of the size, function, and staffing of all government agencies.

85. The reform in the government pay scale should adhere to four basic principles.

  • First, the pay scale needs to be decompressed gradually to facilitate the recruitment and retention of skilled personnel. In reforming the pay structure, the government needs to be mindful of the impact of the decompression on the average wage and the wage bill.

  • Second, to the extent possible, appropriate private sector wage comparators should be used in setting public wages for highly skilled personnel. However, such an exercise must take into account all aspects of compensation (including in-kind and nonmonetary benefits) and the greater job security in the public sector. International evidence suggests that public sector wage could fall to about 80-90 percent of the private sector average and still be competitive.

  • Third, it would be advisable to gradually merge all in-kind benefits and allowances into the pay scale before reforming the pay structure. This measure would improve budgetary transparency and decision making, while contributing to fairness in government compensation across sectors. Moreover, it would broaden the income and social security tax base.

  • Fourth, the government should establish a tighter link between pay and performance, to provide incentive to workers for improving efficiency and productivity. Wage policy should be based on transparent rules, such as minimum time-in-grade requirements and objective criteria for promotion. Moreover, salary increases should be tied to a system of performance evaluation, and any incremental pay increase based on the length of service should be avoided.

C. Conclusion

86. While the fiscal stance has been broadly prudent over the past decade, the pace of structural fiscal reform has been disappointing. Weak governance has permeated most aspects of public resource management. As a result, Bangladesh is facing major fiscal challenges of strengthening revenue mobilization, improving ADP management, and reforming the civil service. In the area of revenue mobilization, the short-term priority is to ensure the effectiveness of the LTU system, while the medium-term focus should be on modernizing the NBR, expanding the tax base, and simplifying the complex tax system. Major and sustained effort will be required to increase the efficacy of ADP through better project selection and effective mechanisms to ensure transparency and accountability. Reforming the civil service is critical to progress in all other reform fronts. All these challenges need to be addressed in a timely manner if the country is to meet the MDGs by 2015, while preserving fiscal sustainability. Technical assistance in key areas would also be critical to help building capacity in carrying out the needed reforms (Table 1).

Table 1.

Bangladesh: Fiscal Reform Priorities

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Source: Fund staff’s assessment.


  • Bangladesh, 2004, Final Report of the Revenue Commission (Dhaka).

  • International Monetary Fund, 2003, Report on the Observance of Standards and Codes—Fiscal Transparency Module (Washington, D.C.).

  • World Bank, 2003, Bangladesh—Public Expenditure Review (Washington, D.C.).

  • World Bank, 2000, Country Financial Accountability Assessment (Washington, D.C.).

  • World Bank, 1999, Country Procurement Assessment (Washington, D.C.).


Prepared by Bernardin Akitoby (FAD).


The main elements of the human resource policy could include a new recruitment policy, a new wage policy, a training plan, and an anti-corruption strategy.


Ideally, all the prerequisites for self-assessment should be addressed in parallel. However, given the technical capacity constraints at the NBR, priority should be given to developing effective and accessible taxpayer service, as well as strengthening audit and collection operations.


The identifier is called taxpayer identification number for income tax, and business identification number for VAT.


It is expected that the existing tax holiday facility will be allowed to lapse at end-June 2005 and will be replaced by a more rational system for investment incentives.


The Bangladesh Revenue Commission Report recommends that there should be only four types of levies at the customs point. These include (i) customs duty, (ii) value added tax, (iii) supplementary duty, and (iv) WTO prescribed anti-dumping duty, countervailing duty, or safeguard duty.


Procurement issues are discussed in the World Bank’s Country Financial Accountability Assessment (World Bank, 2000) and the Country Procurement Assessment Report (World Bank, 1999).


An analysis of government employment is not possible because of data deficiencies.