Bangladesh's decision to increase VAT and supplementary duties on a wide range of goods and services is a measure tied to the IMF’s $4.7 billion loan programme, aimed at bolstering the country’s tax-to-GDP ratio and stabilising foreign exchange reserves.
However, this policy arrives at a critical time, when households are already burdened by inflation and reduced purchasing power.
These tax measures will likely intensify the economic pressure on low-income and mass populations, exacerbating existing vulnerabilities.
Inflation in Bangladesh has remained persistently high, with recent data indicating a year-on-year rate exceeding 9% for most of 2024, driven by rising food and energy prices.
For low-income families, who allocate a significant portion of their income to basic needs, this surge in prices has already curtailed their ability to maintain minimum consumption standards.
Essential goods and services, such as powdered milk, biscuits, juice, fruit, soap, and medicines, are now subject to a uniform VAT rate of 15%, marking a sharp increase from the existing rates of 5% and 7.5%.
This hike will directly translate into higher prices, forcing many households to make difficult choices about their expenditures.
Nutritional outcomes are expected to deteriorate as families cut back on essential food items, while access to healthcare may decline due to the increased cost of medicines.
Services such as mobile phone calls and internet usage, which have become indispensable for communication, education, and small-scale businesses, will also become less affordable.
For low-income individuals relying on these services to improve their livelihoods, this increase represents a setback, potentially widening the digital divide.
Similarly, the rise in VAT for non-air-conditioned hotels and restaurants will impact access to affordable food options, particularly for daily wage earners and informal sector workers who depend on such establishments.
The extension of turnover taxes to businesses with annual revenues as low as Tk30 lakh will impose additional financial strain on small enterprises.
Businesses, already grappling with reduced demand and rising costs, are likely to pass on the burden to consumers.
The resulting price increases will further erode the purchasing power of mass populations, deepening the economic challenges faced by households.
Middle-income families, who form a significant part of the domestic consumer base, will also feel the impact, with discretionary spending on goods and services, such as dining out and air travel, expected to decline.
The broader economic implications are concerning.
Reduced domestic demand will affect sectors reliant on consumer spending, potentially leading to job losses and slower economic recovery.
The increased tax burden on small and medium enterprises (SMEs) risks undermining their competitiveness, further stalling growth in this vital segment of the economy.
Inflationary pressures will likely intensify as higher VAT rates and supplementary duties at the import stage cascade through the supply chain, raising the overall cost of living.
The regressive nature of VAT, which disproportionately affects lower-income groups, is a key concern.
As these groups spend a larger share of their income on consumption, they will bear the brunt of the tax increases, while wealthier segments of the population remain comparatively insulated.
This could widen economic inequality at a time when social cohesion is critical for navigating economic challenges.
The increase in excise duties on air tickets will significantly raise travel costs, with domestic flights seeing a hike from Tk500 to Tk700 and international flights experiencing increases ranging from Tk200 to Tk1,000 depending on the destination.
While VAT remains unchanged, the higher excise duties will disproportionately impact budget-conscious travellers, including migrant workers and families who depend on affordable air travel.
These additional charges are likely to reduce travel frequency, particularly for low-income groups, while potentially affecting passenger volumes and revenue in the aviation sector.
The added costs risk making air travel less accessible for many, particularly low-income groups.
The government’s reliance on indirect taxation to meet IMF conditions reflects the urgency of addressing fiscal deficits and forex reserves. However, it also underscores the need for a more equitable approach to revenue generation.
Without mitigating measures, such as targeted subsidies or exemptions for essential goods, the impact of these tax increases could push more families below the poverty line.
Expanding social safety nets and considering progressive taxation on luxury goods or higher corporate taxes could offer alternatives that achieve fiscal targets without unduly burdening vulnerable populations.
The timing of this policy, amidst high inflation and an interim government, raises concerns about public discontent and potential unrest.
While the measures are designed to stabilise the economy in the long term, their immediate effect on household budgets and consumer confidence may prove counterproductive.
The need for a balanced approach, combining fiscal discipline with social protection, has never been more urgent.
