How to Fix the Biggest Problem in Income Taxation?

Income taxation is essential for funding public services, but it’s often criticized for being unfair, complex, and outdated. One of the most significant problems is the widening gap between the actual tax burdens of the rich and the poor.

While salaried workers face automatic deductions, many high earners use loopholes to reduce their taxable income. This imbalance creates public frustration and weakens trust in the tax system. Addressing this issue isn’t just about raising rates—it’s about making taxation smarter, simpler, and more equitable.

In this blog, we’ll explore how to fix the biggest problem in income taxation and what solutions can create a fairer system for all.

Basic Tax Avoidance: What You Need to Know?

Tax avoidance in Bangladesh involves legally minimizing tax liability through strategic financial planning, such as utilizing deductions, exemptions, and tax-efficient investments. The country’s tax system allows for legitimate methods, such as investing in tax-free bonds, claiming business expense deductions, and utilizing tax holidays for specific industries (e.g., IT, export-oriented sectors).

However, aggressive schemes (e.g., underreporting income or misusing loopholes) may attract scrutiny from the National Board of Revenue (NBR). Compliance with tax laws, proper documentation, and professional advice are crucial to avoid penalties or legal issues.

Below are some highlighting points you must know:

Legal Methods:

In Bangladesh, taxpayers can legally minimize their tax burden by investing in tax-free instruments, such as government bonds and savings certificates; claiming allowable business deductions (e.g., operational expenses); and taking advantage of sector-specific tax holidays, particularly in the IT and export industries.

Personal Tax Planning:

Individuals can reduce their taxable income through tax rebates (up to 15%) for investments in approved funds (e.g., life insurance, pension schemes) and exemptions on specific allowances, including medical, transport, and housing expenses.

Corporate Strategies:

Businesses can optimize their tax liability by utilizing accelerated depreciation for machinery, complying with transfer pricing rules for multinational operations, and leveraging tax incentives for priority sectors such as agro-processing and renewable energy.

Compliance & Risks:

While tax avoidance is legal, aggressive tactics (e.g., fake invoices or unreported income) may trigger audits or penalties from the National Board of Revenue (NBR). Ethical considerations also play a role in balancing tax savings with corporate responsibility.

Professional Help:

PayrollBangladesh professional chartered accountant (CA) or tax advisor to ensure compliance with Bangladesh’s tax laws while maximizing legitimate savings opportunities.

How to Fix the Biggest Problem in Income Taxation

Bangladesh faces a critical challenge in making its income taxation system more equitable, transparent, and efficient. With a narrow tax base, high levels of informality, and widespread non-compliance, the current system struggles to fund development goals.

Addressing these systemic flaws requires intelligent reforms that close loopholes, enhance taxpayer services, and effectively leverage technology. Much like businesses use financial analysts to navigate complexity, the National Board of Revenue (NBR) must adopt data-driven, citizen-friendly strategies.

Below are the key solutions to overcome Bangladesh’s biggest income taxation challenges:

1. Widening the Tax Base

Bangladesh’s tax-to-GDP ratio remains one of the lowest in South Asia. To expand the base:

• Bring freelancers, gig workers, and small traders into the formal net.
• Offer tax registration incentives for micro and small businesses.
• Monitor rental and digital income through integrated banking and mobile data.

2. Enhancing Voluntary Compliance

Fear, complexity, and distrust hinder tax filing in Bangladesh. Encouraging compliance involves:

• Launching awareness campaigns in rural and urban markets.
• Simplifying tax return forms and providing multilingual help services.
• Offering mobile-friendly digital filing options for the masses.

3. Digitizing Tax Infrastructure

Manual systems are slow, prone to errors, and susceptible to corruption. Bangladesh must:

• Integrate bank accounts, NID, and business records into a real-time data system.
• Utilize AI to flag income anomalies and automatically fill out returns for salaried individuals.
• Launch taxpayer dashboards with filing history, dues, and refunds.

4. Reforming Progressive Taxation

The current tax slabs often burden the middle class while the wealthy exploit loopholes. Bangladesh can:

• Introduce higher marginal rates on ultra-high-net-worth individuals.
• Remove exemptions that disproportionately benefit corporate elites.
• Explore taxing capital gains and inherited assets fairly and equitably.

5. Curbing Tax Evasion and Corruption

Illicit financial flows and underreported income are common challenges. Effective solutions include:

• Mandating digital invoices for large purchases and real estate transactions.
• Cross-verifying income declarations with mobile banking, TIN, and VAT records.
• Creating a whistleblower protection framework with financial rewards.

6. Providing Targeted Relief for Low-Income Groups

Fair taxation isn’t only about revenue—it’s about protection. Bangladesh can:

• Increase minimum taxable income thresholds to protect people with low incomes.
• Provide tax credits or direct rebates for low-earning women and youth.
• Allow simplified presumptive tax options for small roadside businesses.

7. Coordinating with Financial Institutions

Banks, mobile operators, and fintech companies hold valuable data. Tax reform should:

• Require the sharing of annual income data by legal data privacy norms.
• Encourage automatic tax deductions for service-based professionals.
• Utilize digital KYC verification to connect taxpayers with their financial records.

8. Strengthening Institutional Capacity and Trust

NBR’s operational efficiency affects every stage of taxation. It must:

• Train officers in ethics, digital tools, and service-oriented behavior.
• Reward honest officials and transparently penalize those who commit misconduct.
• Publish annual taxpayer reports showing revenue use and development outcomes.

Personal Benefits of Paying Income Tax

Paying income tax is a fundamental duty that supports a country’s growth and stability. Though often seen as a burden, it plays a critical role in maintaining government functions and public welfare.

Understanding the personal impact of tax contributions encourages responsible citizenship and promotes trust between taxpayers and authorities. This shared responsibility ensures sustainable development and the well-being of society as a whole, fostering a stronger community.

Look below at the paying benefits:

1. Access to quality healthcare services.
2. Improved public education facilities.
3. Better roads and transportation networks.
4. Social security support during hardships.
5. Enhanced national security and safety.
6. Legal protection against penalties.
7. Eligibility for government subsidies and loans.
8. Builds trust in public institutions.

Income Tax Tables for Bangladesh Residents in 2026

Finishing Word

Fixing the biggest problem in income taxation—whether it’s fairness, efficiency, or compliance—requires a multi-layered approach rooted in policy reform, technology, and public trust. Simplifying tax codes, improving digital infrastructure, and promoting transparency can ease taxpayer burdens while enhancing revenue collection.

When citizens feel confident that tax systems are just and purposeful, compliance naturally improves. Governments must engage in ongoing evaluation and collaboration with economic experts. A balanced, adaptive tax system is not just achievable—it’s essential for sustainable growth.

Frequently Asked Questions

What is the biggest problem in income taxation?

The biggest problem is often the complexity and inefficiency of the tax system. Complicated rules discourage compliance, increase loopholes, and create inequality in tax burdens across income levels and sectors.

Are current tax slabs fair to all income levels?

Many believe current slabs disproportionately burden middle-income earners. Progressive restructuring can ensure that higher earners contribute more, while low-income earners remain protected from financial strain.

Can simplified tax codes reduce evasion?

Yes, simpler tax codes are easier to understand and follow. Reducing complexity minimizes loopholes and excuses for non-compliance, encouraging more people and businesses to report income properly.

How do tax incentives affect fairness?

While tax incentives can promote growth, poorly designed ones create inequality. They often benefit high-income individuals or specific industries, leaving others to bear more of the tax burden.