Tax policy reform for private sector employees in FY27 budget

Bangladesh’s tax system has traditionally been based on the principle of progressive taxation—an equitable framework where higher-income individuals contribute proportionately more, enabling the state to finance public welfare.

However, the moral and practical legitimacy of this structure depends on a fundamental condition: taxpayers must receive minimum guarantees of public services, safety, and dignity in return.

Unfortunately, many private sector employees in Bangladesh feel that this reciprocal relationship is weakening, leading to declining trust in the tax system.

Private sector employees are among the primary drivers of Bangladesh’s economic growth. From manufacturing, commerce, banking, telecommunications, and technology to multinational corporations and small and medium enterprises (SMEs), their labour, skills, and integrity sustain productivity, generate employment, and maintain economic momentum.

Despite their significant contribution, the existing tax structure does not adequately reflect their financial realities. This imbalance is not only an economic concern but also a broader social and ethical issue.

Under the Income Tax Ordinance of 1984, private employees were entitled to tax-free allowances for housing, medical, and transportation expenses. At that time, maximum allowable deductions included Tk 300,000 for house rent, Tk 120,000 for medical expenses, Tk 30,000 for transport, and a combined maximum ceiling of Tk 450,000.

The Tax Act 2023 replaced this framework with a revised limit: tax-free expenditure up to one-third of total salary income or a maximum of Tk 450,000, whichever is lower. While this appeared to modernize the structure, it did not meaningfully adjust for the dramatic rise in living costs over the past decade.

In the FY 2025-26 budget, the maximum tax-free income threshold was increased marginally from Tk 450,000 to Tk 500,000. However, the condition of “Tk 500,000 or one-third of total income, whichever is lower” remained unchanged.

As a result, the practical tax burden on most private employees has not significantly decreased. This stagnation is particularly concerning in the context of persistent inflation, recently recorded at 8.29 percent, alongside escalating housing rents, medical costs, education expenses, and essential commodity prices.

Wage growth, meanwhile, has remained relatively stagnant, and job security in the private sector remains uncertain.

A significant structural imbalance exists between government and private employees. Government officials typically receive tax-free housing or housing benefits, official vehicles, comprehensive medical facilities, educational support, and various allowances and benefits.

In contrast, private sector employees—despite living in the same cities and facing identical market prices—must bear these expenses independently and from after-tax income. This creates a dual financial burden: rising living costs coupled with increasing tax deductions.

A large proportion of regular taxpayers in Bangladesh contribute through tax deducted at source (TDS), meaning taxes are automatically withheld from their salaries. Private sector employees constitute a significant share of this group.

They have limited scope for tax evasion and bear a predictable and unavoidable tax burden. In contrast, a considerable segment of potential taxpayers remains outside the tax net. Instead of expanding the base, policy adjustments have often increased pressure on existing compliant taxpayers.

The Finance Ordinance for FY 2025-26, in many cases, effectively raised the tax burden on regular taxpayers by 10–25 percent. Consequently, since July 2025, many employees have experienced lower take-home pay solely due to increased tax deductions—a policy paradox that risks discouraging compliance.

Bangladesh’s tax-to-GDP ratio remains relatively low compared to its population size. Rather than overburdening existing taxpayers, long-term sustainability requires expanding the tax base.

Excessive pressure may lead to dissatisfaction, tax resistance, and even the migration of skilled professionals—an emerging concern as many young and mid-career professionals consider opportunities abroad.

It is necessary to bring realistic reforms for private sector taxpayers in the coming budget for FY 2026–27. This will provide relief to taxpayers on the one hand, while on the other hand, it will greatly reduce the disparity between the government and the private sector.

The following proposals may be considered and implemented:

• Increase the minimum tax-free income threshold to Tk 600,000.
• Reduce the maximum individual tax rate from 30% to 20%.
• Allow tax-free house rent expenditure up to Tk 480,000 per annum.
• Allow tax-free medical expenditure up to Tk 300,000 per annum.
• Allow tax-free transport expenditure up to Tk 120,000 per annum.
• Permit tax-free expenditure up to 10% of basic salary, or a maximum of Tk 200,000 annually, for children’s education and parental support.
• Declare benefits received under group insurance policies as tax-free.
• Recognize Zakat contributions made to funds established under the Zakat Fund Management Act 2023 as tax-deductible or tax-exempt.
• Allocate 10 percent of total tax paid by private sector employees to a government-managed pension scheme, refundable as a monthly pension after the age of 60.
• Recognize income from the Workers’ Welfare Fund as tax-free.

Under this framework, up to Tk 1,100,000 per annum—or one-third of total income, whichever is lower—could be treated as tax-free expenditure. Combined with a Tk 600,000 basic tax-free threshold and a reduced maximum rate of 20%, this approach would foster a relationship of mutual respect and trust between taxpayers and the National Board of Revenue (NBR).

While implementing these reforms may lead to a modest short-term reduction in revenue, the long-term impact could be positive if accompanied by expansion of the tax base.

When taxpayers feel respected and treated equitably, voluntary compliance increases. Existing taxpayers may encourage others to enter the tax system, broadening revenue collection sustainably.

Furthermore, enhancing transparency, simplifying compliance procedures, and ensuring accountability within the tax administration would strengthen trust.

A user-friendly and efficient tax system can significantly accelerate the inclusion of new taxpayers and reduce evasion. A state earns respect when its citizens perceive themselves not merely as “sources of revenue,” but as entitled partners in national development. Tax compliance should be associated with dignity and civic pride, not fear or compulsion.

To build a “New Bangladesh,” infrastructural development must be accompanied by humane tax reforms and equitable policy design. If taxpayers feel systematically disadvantaged, trust will erode.

Conversely, if policy reflects economic realities and demonstrates fairness, a sustainable tax culture will emerge—one built on mutual responsibility, accountability, and respect.

The time has come to reform discriminatory structures and adopt a just, inclusive, and forward-looking tax policy for private sector employees in the budget 2026-2027.

The writer is a financial sector analyst. He can be reached at faysal.aqc@gmail.com