Fixing Bangladesh's VAT cash squeeze without reversing reform

A sovereign rating is not a verdict on how rich a country is but a judgement about the reliability of its promises. When Moody’s moved Bangladesh’s outlook to stable from negative on September 15 this year, affirming the B2 rating, it was not declaring the economy comfortable. The improved outlook means the pressures behind the negative outlook of November 2024 have eased. That is the difference between a country the market watches for the next accident and one it is prepared to believe.

The reasons it gave read like a recovery: a post-election government with a mandate strong enough to carry reform; reserves rebuilt to about $32.9 billion from $21.4 billion at the end of 2024; a more flexible exchange rate; record remittances; and growth back to 4.1 percent with 4.3 percent projected this year. A stable outlook lowers the premium that foreign banks charge to confirm our letters of credit and narrows the spread on offshore borrowing. It also lifts the discount applied to every investment decision about Bangladesh. It is the price at which the world lends us its confidence, and that price has just fallen.

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Moody’s has also marked out the next frontier. It has described Bangladesh as having one of the narrowest revenue bases among the sovereigns it rates, with interest payments swallowing close to 30 percent of revenue and named stronger revenue mobilisation and better institutional effectiveness as the conditions for an upgrade. What will be judged now is how reliably the treasury collects what the law already says it is owed, and that is the lens through which the argument over the VAT calendar deserves to be read.

The FY2026-27 budget made quarterly VAT returns the default. It cut the deposits required to contest a tax demand to a fraction of their former level, at a time when more than 33,000 pending cases were tying up an estimated Tk 1.10 lakh crore of business capital. As an accountant, I have watched clients wait years on an appeal with much of the disputed sum locked away, so that figure is not abstract to me. And it published a five-year corporate tax roadmap holding rates steady till FY2030-31, giving investors a horizon longer than a single budget speech. Each measure lowers the cost of being compliant relative to the cost of staying informal. This is the only strategy that has ever widened a revenue base in an economy like ours, and precisely the institutional effectiveness the agencies say they are watching for.

Then the war came. No finance ministry budgets for a maritime chokepoint closing; the reform was designed for calm weather and launched into a storm. With the Strait of Hormuz disrupted, Bangladesh has been buying spot LNG at prices that are close to triple the pre-war rates, and the finance ministry’s estimate for this year’s LNG subsidy has climbed to Tk 40,000 crore, against Tk 14,500 crore last year.

VAT collections in the first two months of the current fiscal year came to Tk 17,663 crore, against Tk 22,628 crore a year earlier. A fall of just over a fifth. The rate did not change; the clock did. Quarterly filing was always going to cost the treasury something in its first year, and in an ordinary year that was a price worth paying. Money that once reached the treasury within weeks may now sit in a company’s account for a quarter, and by my reckoning something in the region of Tk 20,000 crore of public money is resting in private hands for a season. Economists call this a float, and whoever holds one is being lent money at zero interest by whoever is waiting for it. A revenue base that shrinks by a fifth when the calendar changes will be called narrow. One that keeps its monthly heartbeat while the paperwork is simplified will be called resilient.

India lets firms with turnover up to five crore rupees file quarterly while paying monthly through a pre-filled challan set at 35 percent of the previous quarter’s tax. Britain has kept quarterly returns for almost everyone but has, since 1993, required its largest VAT payers to make payments on account within the quarter. A similar path may be open here without disturbing the spirit of the budget.

The quarterly return could remain the default for every registered business, so the relief promised to small and medium enterprises stands. The largest remitters, above a threshold the National Board of Revenue (NBR) can set from its own data, could be asked for a monthly payment on account, pre-filled by the system in a manner similar to India’s, with the balance settled at the quarter’s end. The breathing space that buys could then be used to complete the digital invoicing the NBR has candidly admitted it has not yet built. This would be convergence with global practice, not a reversal, honouring both the predictability business was promised and the monitoring the revenue authority needs.

The government has spent a year earning back the markets’ trust, and a rating agency has now backed it in writing. Trust of that kind has to be serviced with a calendar that lets the state collect what it is owed at the tempo at which it must spend it, while keeping every commitment made to business. The finance minister has built the reform. If the next review is to move the rating itself rather than the outlook, the case will be won in the plumbing beneath it.

Ashfaq Zaman is founder of Dhaka Forum and a strategic international affairs expert.

Views expressed in this article are the author's own. 

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