Proceedings of the AABEA Biennial Convention, October 12th, 2002, Washington DC, USA

Review of the Tax System in Bangladesh

A Prerequisite for Industrial Growth
T. A. M. Nurul Basher*
E-mail: nurul-basher@betelco.com

Abstract - This paper has been written to highlight the
sustainable industrial growth problems being faced by the
entrepreneurs in Bangladesh. There are multifarious problems for
Industrial growth in Bangladesh but the major bottleneck is the
adverse tax system. There exists no consideration for industrial
raw materials import in so far as application of duties and taxes
compared to those of finished consumer goods. The net result is
increase in production cost which in turn makes the product non-
competitive. So as not to create an extra burden on industrial
productions, the government needs to remove duties and taxes
from imported raw materials as in many Middle Eastern
countries and Thailand. The government implicitly accepts the
adverse effects of the improper taxes on our industrial growth
and has tried partially to alleviate some of these impediments by
creating Export Processing Zones and Bonded Ware Houses; this
paper explores the benefits doing away with these high import
duties altogether. It also looks at the paybacks to the economy
from industrial growth. Finally, the expansion of the income tax
umbrella is considered and in particular its effects on growing a
greater sense of national civic duty and its impact on the voting
patterns of the electorate. [1]
to this, the average per-capita income of developed countries
range around or exceed US$ 26,000 per year. While it is
unthinkable to raise the income of a Bangladeshi to a level
comparable to those of people in developed nations, one should
make continued efforts towards attaining a minimum level of life
sustenance that could be termed as economic solvency.
Bangladesh covers an area of about 56,000 square miles most part
of which is agricultural land. Although it has attained self-
sufficiency in food it still has vast areas where there are scopes for
production of adequate food and other agricultural items with
export potential. However, whatever possible expansion it makes
in agriculture it is not possible to reduce the unemployment to a
reasonably acceptable level. Hence, Bangladesh needs to explore
other avenues of job creation.

I - INTRODUCTION

Bangladesh has been independent for about 54 years. It gained

independence first from the British Rule in 1947 and then again
for the second time in 1971 from the Pakistani Military Junta.
Since 1947 till date our population has increased from some 50
million to 130 million. In the mean time it has faced several
famines, floods and cyclones, not to mention other kinds of
losses. The economic situation has worsened day by day.
Political independence failed to lead this country to the desired
goal of economic independence. Throughout these long years
extending more than half a century, Bangladesh has definitely
made some serious mistakes that have resulted in its fiscal failure.
However this paper is not intended to be a matter of criticism of
the past failures, but rather a suggestion is being presented here
through which Bangladesh might find a way to engage its vast
population in productive employment.

Figure 1 shows that even ten years ago, almost half of the country
had a population density of between 1500 to 2000 people per
square mile. With an annual growth rate of approximately 2%
and therefore producing an additional 2.7 million people per
year, Bangladesh now has a population of about 130 million. The
per-capita income is somewhat like US$ 350 per year. Compared

* Bengal Telecommunications and Electric Corp. Pvt. Ltd. (BETELCO) Figure 1: A 1991 population density map of Bangladesh
19 Kakrail Road, Dhaka - 1000, Bangladesh.

© 2002 BETELCO. All Rights Reserved.

 Proceedings of the AABEA Biennial Convention, October 12th, 2002, Washington DC, USA

One way is to get a sizable part of our population to immigrate to 9. Miscellaneous (Mandatory bribe/bakshish to customs
countries which are sparsely populated. But given the practical and port officials)
scenario of strict immigration laws of other countries which have
abundant land in their possession with scanty human habitation, Since the customs duty varies from 5% to 37.5% of the value of
one has to look for the only other alternative. And that is the goods, the percentage of taxes paid at the port of entry varies
industrialization. It is possible to reduce unemployment level by anywhere from 30% to 80% of the total taxes due on an imported
creating jobs in the industrial sectors. item depending on its type and the tariff structure. This is shown
in Figure 2.
Therefore emphasis has to be placed on how Bangladesh can
grow its industries so that it can engage its large unemployed
population in a massive scale. In fact this matter should have
been given due attention right from the start of the first political
independence in 1947. Even though it is quite late by now, after
54 years Bangladeshis still should come to realize that massive
industrial participation is of paramount importance for their
country’s economic survival.

II – IMPEDIMENTS TO INDUSTRIALIZATION

If one seeks to identify the impediments to achieving the goal of

industrialization, the following could be considered as the major
bottlenecks:
Figure 2: Import taxes as a percentage of the total taxes paid on an
1. Adverse Tax System imported item
2. Inadequate Infrastructure
3. Inadequate Power Supply And again after production is completed there is VAT on the
4. Inadequate Telecom facilities finished goods as well as regular annual income tax.
5. Improper Law and Order Situation
6. High Illiteracy Rates In addition, there are also various types of “Mastaan (gangster)
Taxes”, ranging anywhere from religious Mastaans to political
Most of the above subjects have been dealt with in numerous ones, and they all have their eyes focused specifically on the
writings by many intelligent thinkers. However this paper will industrialists. The Government needs to deal with this last kind
deal primarily with the “Adverse Tax System.” of taxation through improvement of the law and order situation.

When it comes to manufacturing certain finished goods, the first Reverting back to the topic of taxes at the point of entry, the fact
thing one needs to estimate is the cost of production. First comes is that one has to pay import taxes ranging anywhere between
the cost of raw materials, then the others i.e. cost of labor, utilities, 30% to 80%. By paying such high taxes, how can it be conceived
bank interest, amortization, overhead etc. Bangladesh being by any sane person that the final product would be competitive?
mostly an agro-based country, industrial raw materials are almost Although one may not achieve the same quality, one must always
not available domestically. Therefore one is left with little or no think that one’s product must be comparatively cheaper in the
option but to import raw materials for any and all kinds of global market; lesser in quality but cheaper in price would still
industry one wishes to set up. An industrialist would definitely capture a reasonable size of the market. Having one of the
look around all over the globe as to where s/he can obtain the cheapest labor forces in the world available in Bangladesh, its
cheapest and the best quality raw materials. product should be one of the cheapest in the world, if not the
cheapest. But in practice this is not the case. Bangladesh has
almost no product for sale in the world market except Ready
III – OVERBEARING BURDEN OF TAXES Made Garments (RMG). Why is this so? The reason is the high
taxes on raw materials. And because of these high taxes there has
However an insurmountable barrier an industrialist finds is been negligible growth in the industrial sector in the last 54 years.
nowhere else than at the doorstep of Bangladesh when his/her
goods are at the port of entry. These are subject to various types In support of the above theory the case of the RMG industry can
of taxes: be cited as an example. This industry was nonexistent in
Bangladesh. The only way this industry could be established and
1. PSI (Pre-shipment Inspection charge 1% of C&F value) flourish to the level where it is now, being the number one export
2. Customs Duty earning item, was due to the introduction of the “bonded ware
3. Value Added Tax (VAT) assessed on duty paid value house system”. In other words fabrics are being imported (as the
4. License Fee raw materials for RMGs) without payment of any duty, tax or
5. Advance Income Tax VAT. As a result, Bangladeshi RMGs have become highly
6. Surcharges competitive in the world market. So one can conclude that
7. Port Charges Bangladesh has recognized the fact that duties and taxes imposed
8. Clearance Charges by Clearing Agent

© 2002 BETELCO. All Rights Reserved.

 Proceedings of the AABEA Biennial Convention, October 12th, 2002, Washington DC, USA
at the port of entry is an unnecessary burden on its RMG
industry, and therefore these have been eliminated.
IV – EXPORT PROCESSING ZONES
AND THE
NEED TO ELIMINATE TAXES FROM RAW MARTERIALS
Let us consider the cases of establishment of Export Processing
Zones (EPZ). The Bangladesh Government is now planning to
open EPZ’s in almost all the greater districts, with a view to
attract foreign investors.
The salient principle of these EPZs again is to import raw
materials without duties and taxes. In other words, the
Government is convinced (recognizes) that imposition of taxes
and duties at the point of import is a burden on industries and
they are gradually removing these albeit in a rather piecemeal
fashion.
Then the question arises why in this piecemeal manner? Why not
let the entire country be treated as an EPZ, by eliminating the
need to pay taxes on the imported industrial raw materials.
However, the Government may impose VAT on the goods to be
sold within Bangladesh as consumer items and no tax imposed
on goods to be sold out side. If this scheme is implemented, the
growth of industries will be exponential.
The strongest argument against this scheme is that Bangladesh
Government will loose a huge amount of its revenue to the extent
that it will not be able to run itself. But this argument is not
tenable in practice. Let us revisit the RMG’s case: can we say that
because the Government is not receiving any revenue from the
import of RMG fabrics, they are loosing revenue from the RMG
sector? The answer is a definite, resounding no!
Many Middle Eastern countries and Thailand have no taxes on
imported raw materials. Thailand’s industrial growth started
from the early 1980’s and following the implementation of tax
liberalization policies they have been extremely successful. An
indicator of this success is the fact that their electricity
consumption is some 30,000 Megawatts for a population of 60
million compared to only 3,000 Megawatts for a population of 130
million in the case of Bangladesh. The policies they follow are
listed below:
1. Exemption of import duty and VAT on machineries,
components and materials etc., imported for factory
construction.
2. Exemption of import duty and VAT on raw materials.
3. Exemption of export duty and VAT on exported goods.
4. Exemption or refund of duties and VAT for local goods
utilized for production
IV – PAYBACK TO THE ECONOMY FROM
INDUSTRIAL GROWTH
Let us now consider how the Bangladesh RMG industry has
contributed to its national economy. The following come to mind
immediately:
1. Provided jobs for labor force directly related to the
industry.
2. Provided jobs to related/support industries.
© 2002 BETELCO. All Rights Reserved.
3. Opened up demands for fabrics thereby opening doors
for development of textile industries.
4. Created a consumer market by the day-to-day demand
of RMG laborers, who otherwise were living a very poor
life and consuming very little – many were vagrants.
5. Provided direct income tax revenue to the Government
by the industrialists themselves and their higher-grade
employees. This income tax earning was not previously
available.
6. Provided VAT through sale of consumer goods. All
these additional consumptions did not exist before.
7. RMGs themselves became consumers of service
industries like electricity, gas, water and telephones thus
prompting growth in these utility sectors.
It’s not difficult to calculate to what magnitude the income and
taxes being generated will multiply just by lowering the
government revenue only at one point – namely import duties
and taxes. Given this scenario can one not imagine that one can
do wonders to the Bangladeshi economy provided the right steps
are taken?
By mass producing RMGs and growing this industry in last
several years Bangladeshis have definitely developed their own
technical, manufacturing and sales expertise in this sector. They
have no reason to think that their national talents are limited
within the realm of the RMG industry only. Indeed they can
grow many other production sectors for consumer goods as well,
such as engineering goods for the original equipment
manufacturers (OEMs), once the products are made cheaper. This
way not only can they drive out many imported items from their
domestic consumer markets (which is quite large at US$130
million), but also they can penetrate into the foreign markets
quite easily. The Bangladesh Government will not be required to
assist the entrepreneurs to sell their goods outside. The
industrialists themselves will be able to locate their own market.
In a nutshell, the economy of the country will jump up to a
reasonably high level whence it shall not have to ponder over
finding ways and means for poverty alleviation. Simply put,
Bangladeshis will no longer be poor. The government will be
happy about the revenue they receive through direct income tax
and VAT on consumer goods.
V – EXPANSION OF THE INCOME TAX UMBRELLA
AND THE CIVIC RESPONSIBILITIES OF THE ELECTORATE
As this paper is intended to suggest tax review, which does not
only cover areas of tax removal, it also suggests the expansion of
the horizon of income tax.
The income tax umbrella should be broadened. As of now the tax
ceiling is Tk. 75,000 per year – lowered from Tk. 1,00,000 per year
very recently. This should be brought down even further to Tk.
36,000 per year. The tax may be set quite low, but the number of
taxpayers would increase, thereby increasing the total volume of
revenue income. And again once the industrial growth is there,
through import tax liberalization, the number of citizens engaged
in productive jobs will increase many folds thereby increasing the
number of taxpayers. It is well known that in developed countries
 Proceedings of the AABEA Biennial Convention, October 12th, 2002, Washington DC, USA
the income tax an employee pays is about 30% of his/her total
annual income.
There is another aspect of increasing the number of taxpayers.
This will change the voting patterns in our national elections. As
the situation prevails, most of our citizens do not pay direct
income tax and therefore they do not feel very responsible at the
time of voting. The result is that we get undesirable elements as
our political leaders. Once people start to pay direct income
taxes, they will think twice before voting any candidate into
power. It will always come into the consideration of the voter as
to what this candidate is going to do with the taxpayer’s money.
As a result we can expect a responsible government being elected
by a responsible electorate.
IV - CONCLUSION
The article recommends revision and total elimination of existing
duties and taxes from imported raw materials, so that
government does not create an extra burden on industrial
productions. An established example of this success has been
through the Ready Made Garments industries where all import
duties and taxes are exempted from fabrics and associated
materials required for RMG manufacturing (Bonded Warehouse
system). Another example is the establishment of Export
Processing Zones (EPZ) where raw materials are again exempt
from duties and taxes. Therefore it is quite understandable that
government accepts the fact that to make our industrial product
competitive in the world market the raw materials must be duty
and tax-free. The article thus argued as to why the entire country
should not be treated as an EPZ where finished products can be
taxed for the local market while abolishing taxes from goods
destined for the export market as in many other countries such as
Thailand.
The Government should not run itself mostly on revenues from
import duties, rather the tax umbrella should be widened to
increase personal income tax. This would be possible only if the
citizens are allowed to have reasonable income from which they
are capable of paying the tax - by opening doors to job
opportunities through industrial expansion.
T. A. M. Nurul Basher was born in Borishal,
Bangladesh in January, 1941. He graduated
in 1964 with a degree in Electrical
Engineering from the Bangladesh University
of Engineering and Technology (BUET).
He started his engineering career in 1965 as
an Assistant Engineer at Meher Industries of
Dhaka, Bangladesh. Following that Mr.
Basher joined the Bangladesh Telegraph and Telephone Board
(BTTB) in 1966 where he worked for 11 years. There he also
became the first microwave engineer in Bangladesh. After the
war of liberation in 1972, he restored the entire country’s
microwave network single handedly and was responsible for its
© 2002 BETELCO. All Rights Reserved.
complete design. Before leaving the BTTB in 1977, Mr. Basher
was the Director of Microwave.
In late 1977 he moved to Riyadh, Saudi Arabia where he worked
as the Chief Engineer at Beta Corporation from 1978 up-to 1983.
Following that he was the Director of Engineering at MOSECO
Telecom from 1983 to 1985. In 1985 he founded Marwan Al-
Rashid International Contracting Establishment and served as its
General Manager until 1994. In 1989, he successfully lobbied the
Saudi Arabian Government to send an electronic telex exchange,
valued at US$ 15 million, to the Bangladesh Government as a gift.
He is the founder and the Managing Director of Bengal
Telecommunication and Electric Corporation (Pvt.) Ltd. -
BETELCO. This company began its operations from Riyadh in
1986 and relocated its headquarters to Dhaka in 1994; the Saudi
Arabian operation is still on-going. Currently BETELCO has two
branches of activities: telecommunication and electrical power.
The telecommunication division is primarily involved in
contracting for telecom projects in both Bangladesh and abroad.
The electrical division is focused on manufacturing a variety of
products for the power distribution market including the PDB,
DESA, REB as well as a long list of private clients for the
Bangladeshi market. Mr. Bashar is also a founding member of the
transformer manufacturers association in Bangladesh.
Mr. Basher’s other activities, in line with his inner craving for
social responsibility, include: establishment of a middle school in
Borishal, setting up a bookstore in Dhaka, pilot projects in
fisheries farming and real estate development in collaboration
with and benefiting those living in the rural areas of Borishal. As
a lifetime member of Human Rights Bureau, he has also served as
a general election observer in Bangladesh.
He has published numerous papers and articles about
Bangladesh on such diverse topics as democracy and election,
student politics, water and soil management for flood control as
well as issues concerning natural gas export.