An Analysis of the VAT Structure in Bangladesh: The Tax Justice Perspective

Abstract

Value added tax (VAT) accounts for 39% of tax revenue in Bangladesh, yet overall revenue mobilization has fallen to 6.6% of GDP (the lowest in South Asia) while inequality continues to rise. This study assesses Bangladesh’s VAT structure through the lens of tax justice using a mixed-methods approach (business survey, n = 359; key informant interviews; secondary data). Simulation results indicate that reducing the standard VAT rate from 15% to 10% could be revenue-neutral if the VAT gap is reduced by 8.5% under an optimistic elasticity scenario ( ε = −3.5); however, under more realistic elasticity assumptions ( ε = −0.5 to −1.5), the required reduction ranges from 10.6% to 11.7%, underscoring the need for complementary compliance-enhancing measures. Regression and propensity score matching analyses reveal that VAT training significantly improves compliance, with an average treatment effect of 0.535 standard deviations ( p < .01), while government incentives and inspection frequency also positively influence compliance behaviour. To improve fairness and revenue performance, we recommend consolidating the eight slabs into a simplified three‑tier structure (standard, reduced, zero), with a long‑term goal of two tiers; removing exemptions for non‑essential services; mandating electronic fiscal devices nationwide; and redirecting VAT revenue toward targeted transfers for low‑income households. JEL Codes: D63, H22, H25, H26, O23