The Challenges of Bangladesh’s VAT Compliance Project
Bangladesh’s ambitious journey to modernize its VAT compliance through electronic fiscal devices (EFDs) has faced significant setbacks. Despite initial enthusiasm and substantial investment, the project has failed to achieve its intended results. An analysis of recent developments provides crucial lessons for governments undertaking projects of national interest.
A Promising Start with High Expectations
The project began with an agreement between the National Board of Revenue (NBR) and Genex Infosys, as reported by The Business Standard in November 2022. The deal, valued at BDT 4 billion, was expected to install 60,000 EFDs in Dhaka and Chattogram by the end of FY 2024, promising to boost revenue collection by at least 200% (Source: The Business Standard).
This public-private partnership aimed to modernize VAT compliance, reduce evasion, and create a transparent ecosystem. The NBR envisioned EFDs automating VAT compliance, ensuring real-time reporting and data sharing between businesses and the tax authority.
Execution Challenges and Growing Concerns
As the implementation progressed, cracks in the strategy began to emerge. By July 2023, reports from The Daily Star revealed that the deployment of EFDs had not met expectations. Businesses faced compatibility issues, and many struggled with the rigid requirements of the devices. The government-mandated solution failed to accommodate diverse business needs, creating resistance from taxpayers who found the devices impractical or incompatible with their operations (Source: The Daily Star).
Moreover, taxpayers expressed concerns over being tied to a single service provider, which limited their ability to select solutions that better fit their businesses. This led to low adoption rates and growing frustration among both businesses and the NBR.
A Shift in Strategy: Searching for Alternatives
In 2024, The Business Standard reported that the NBR was exploring alternatives to the failing VAT machine strategy. Despite deploying significant resources, the rigid, centralized approach had not delivered the expected increase in revenue collection. This has prompted the NBR to reconsider its reliance on a single private entity to manage a project of national interest (Source: The Business Standard).
Lessons Learned: A Need for Government Control and Flexibility
This failure highlights a critical lesson: projects of national interest should never be fully outsourced to private entities. Entrusting the entire ecosystem to a single provider creates dependency, limits flexibility, and risks project failure if the provider cannot deliver.
The International Monetary Fund (IMF) has consistently advised governments to procure Commercial Off-The-Shelf (COTS) solutions that allow tax authorities to maintain control over the backend system. This approach enables governments to oversee data, ensure transparency, and adapt the system to meet evolving needs. Meanwhile, taxpayers should have the freedom to choose their devices or software solutions that align with their unique business requirements.
One Size Does Not Fit All
The rigid “one shoe fits all” approach was a fundamental flaw in Bangladesh’s VAT project. Businesses vary significantly in size, technology capabilities, and operational needs. Forcing all taxpayers to adopt the same devices stifled flexibility and limited the project’s reach.
Instead, a hybrid approach that allows taxpayers to integrate their existing systems into the government’s backend solution could have been more effective. Such a model ensures compliance while fostering innovation and efficiency within the private sector.
The Way Forward
Bangladesh’s experience offers a roadmap for other nations planning similar projects:
- Government Control: Tax authorities must maintain control of core systems to ensure accountability and flexibility.
- Taxpayer Choice: Businesses should have the freedom to adopt solutions that suit their needs while complying with government standards.
- Collaboration, Not Dependency: Public-private partnerships should supplement government capabilities, not replace them entirely.
- Flexibility and Scalability: Systems must accommodate diverse businesses and be scalable to adapt to changing needs.
By embracing these principles, governments can avoid costly failures and create a sustainable framework for tax modernization.
Conclusion
Bangladesh’s VAT monitoring project underscores the importance of thoughtful planning and execution in national interest initiatives. Governments must balance innovation with practicality, ensuring systems are inclusive, flexible, and scalable. As nations look to modernize tax administration, the lessons from Bangladesh serve as a critical reminder: modernization must empower, not burden, stakeholders.
Let us hope that future initiatives in Bangladesh and beyond will incorporate these lessons to build systems that truly work for everyone.
