Is VAT a regressive burden on the poor?

30 December 2022

AN increased dependence on indirect taxes, including value-added tax (VAT), and an absence of efforts to increase revenue collection from income and profits, which are direct taxes, has overburdened the low-income poor for over the past decade. Such a proposition, also evident in tax measures in the budget for the fiscal year 2023, is also said to have added to a growing income inequality. This depicts a picture that VAT has become the most productive "milch cow" of the government for tax receipts and National Board of Revenue (NBR) is bent on gradually expanding the scope of VAT-able products, services and merchants to "milk" this further in the days ahead.   
Citing a study report, a national newspaper on Thursday reported that the low-income people are feeling the full brunt of the burden of indirect tax as they pay 7.3 per cent of their household income in value-added tax, whereas high-income people spend 1.02 per cent. The report also observed that the income shares of the poorest 5 per cent of the households declined from an already paltry 1.03 per cent in the 1990s to just 0.23 per cent in 2016, while the same share for the richest 5 per cent increased from around 17 per cent to 30 per cent. Despite a significant growth in per capita income, the income inequality has risen in recent years. Direct tax is instrumental in tackling rising inequality, as it mostly targets citizens and businesses with higher incomes.
 Economists blamed the weak enforcement of policy for the unwanted situation that forced the government to rely on the easy way option of indirect taxes heavily and overburden the majority of people with VAT and supplementary duty. The failure to tax the wealthy section of the society also forced the government to increase its dependency on bank borrowing and seek alternative sources of funds. Rich people consume a lower share of their income for subsistence than do the poor who often consume all their income just to survive, since VAT is essentially a consumption tax in the end. In November 2021, the London-based Tax Justice Network reported that Bangladesh will be losing more than $144 million in taxes each year because of corporate tax abuse and offshore tax evasion.
 We call for developing a roadmap and action plan of policy measures, relying more on direct taxes and stepping up tax governance to seize the growing income inequality. As Bangladesh was at a juncture where capitalising on the direct tax potential could lead to massive gains, ensuring sustainable LDC graduation and timely attainment of sustainable development goals.

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