Bangladesh to transition to 15% VAT regime Higher rate offset by rebates, easing overall tax burden

Bangladesh is moving toward a broader 15-percent value-added tax (VAT) regime, a shift that has raised concerns over the higher headline rate but is partly offset by rebate provisions designed to lower the effective tax burden.

Officials describe the change as a paradigm shift, as recent fiscal policies are phasing out fragmented VAT rates on imports and purchases of industrial raw materials in favor of a unified standard rate.

According to officials at the National Board of Revenue’s (NBR) VAT wing, the transition has become more pronounced over the past two years following policy measures aimed at bringing more businesses under the standard 15-percent VAT framework. Under this system, firms can claim input-tax rebates, which ultimately reduce their actual tax incidence.

At present, Bangladesh applies multiple reduced VAT rates—10, 7.5, 5, 4.5, 4, 2.4, 2 and 1.5 percent. However, budgets for the past two fiscal years have introduced incentives that make these lower rates less attractive, effectively encouraging businesses to opt for the 15-percent rate with rebate eligibility.

A senior VAT official said that on January 9, 2025, and again in the current fiscal year’s budget, the NBR upgraded 120 items—spanning both manufacturing and services—to the standard 15-percent rate from earlier reduced rates.

“Only 45 items remain under reduced VAT rates, and these too are on a roadmap to be brought under the standard rate within the next two to three years,” the official told The Financial Express.

“We are not forcing businesses to adopt the higher rate. They will naturally choose it to lower their actual VAT burden through rebate claims,” he added.

The NBR has already noted positive outcomes. For example, the increase in trading VAT to 7.5 percent in the current fiscal year has prompted many businesses to shift to the 15-percent rate, as failing to do so would raise their overall tax burden above the standard rate due to non-rebatable inputs. Several sectors, including construction companies and superstores, have already exited reduced VAT regimes.

Dr Md Abdur Rouf, chairman of the International VAT Training Institute, said that proper use of input-tax credits can bring the effective VAT burden down to between 3 and 5 percent. He argued that maintaining a 15-percent standard rate is consistent with the government’s heavy reliance on VAT revenue, though businesses often favor reduced rates because of lower compliance costs.

However, Dr Rouf cautioned against converting all reduced VAT rates to the standard rate at once, noting that Bangladesh’s diverse socioeconomic and business landscape makes a gradual approach necessary.

Addressing concerns over whether 15 percent is too high, he pointed out that global VAT rates vary widely—from as low as 3 percent in French Polynesia to as high as 27 percent in Hungary—while the global average is around 18 percent. Of 142 countries, 70 apply reduced VAT rates alongside higher standard rates, including several European nations with a 20-percent standard rate and a 5-percent reduced tier.

LafargeHolcim Bangladesh CEO Md Iqbal Chowdhury said reduced VAT rates remain essential for certain sectors that source raw materials from informal markets where VAT collection is impractical. He suggested that the government develop a dedicated VAT roadmap for SMEs while bringing large businesses involved in imports and industrial production under the 15-percent rate.

“Moving too quickly could hurt the financial system, as many small traders lack the capacity to maintain the accounting records required to claim rebates,” he said.

Zinnia Tanzina Huq, chief financial officer and finance director of Unilever Bangladesh Limited, noted that under the VAT and Supplementary Duty Act 2012, Unilever’s products are subject to the standard 15-percent VAT, as they are not listed under reduced-rate schedules. Paying the standard rate is therefore necessary to comply with the law and remain eligible for input-tax rebates.

Mr Chowdhury, who is also vice-president of the Foreign Chamber of Commerce and Industry (FICCI), cautioned that excessively high VAT rates can encourage evasion, urging the government to proceed carefully and rationally in expanding the standard VAT regime.