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ABSTRACT
A growing body of literature considers taxation as a powerful tool for governance and state building. Despite broad supports from historical data, it lacks systematic, case-specific research especially in developing countries. This paper contributes to this critical gap; it investigates the governance of VAT around issues of transparency, accountability, and participation. It shows how various stakeholders in Bangladesh situations have subverted, corrupted, and toned down the VAT to suit their specific interests. Consequently, tax compliance covenant that is at the heart of governance dividend thesis has remained largely elusive. The Bangladesh experience offers useful lessons for other developing countries.
Notes
1. While the average tax-GDP ratio in high-income countries is 37% and in low-income countries is 14%, the tax-GDP ratio in Bangladesh was 9.45% in 2012–13 (National Board of Revenue (NBR), Citation2014).
2. The VAT has enjoyed worldwide popularity as reflected in its adoption in more than 150 countries. It also accounts for 20% of the tax revenue, globally (James, Citation2015).
3. For example, Everest-Phillips (Citation2010) identified a set of principles believed to be critical for a tax to play state-building roles. These include political inclusiveness, accountability, and transparency, perceived fairness in tax system and an effective tax administration.
4. Initially, a simplified VAT was introduced. As tax base was gradually expanded, a range of adaptations was introduced resulting in proliferation of exemptions and discretions.
5. The VAT productivity in Bangladesh (0.22) is lower than the average of low-income countries (0.34) and is the lowest among South Asian nations (Ahmed, Citation2013).
6. This is nothing unique to Bangladesh. Evidence shows that tax avoidance and tax evasion are common features of tax system, especially in developing countries (Alm, Citation2012).