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Uneven distribution of tax burden on low-income professionals

Published : Saturday, 15 March, 2025 at 12:00 AM  Count : 407
Md Mominur Rahman
In Bangladesh, the Tax Deducted at Source (TDS) system is designed to ensure timely tax collection and prevent evasion. However, for many low-income professionals-especially freelancers, consultants, researchers, trainers, and small business owners-this system has become an unnecessary financial burden. Despite earning less than the taxable income threshold, they often find themselves subjected to automatic tax deductions on their income, forcing them to go through a complex and bureaucratic refund process. The reality is that our current tax system, instead of supporting low-income individuals, unfairly penalizes them with a cash flow crisis and administrative hurdles.

Take, for example, a young-mantrainer who earns Tk 300,000 from a regular job and Tk 20,000 for remuneration from mentoring or consultation in addition to the regular work. Since his total yearly income (Tk 320,000) is below the tax-free threshold (Tk 350,000 for general taxpayers), he technically does not owe any income tax.However, under the current tax rules, consultancy fees are subject to a 10% TDS deduction, meaning Tk 2,000 is withheld at the source. While this amount might seem small, for someone managing a tight budget, every taka counts.

More importantly, this deduction is unnecessary, as the individual's total income does not even reach the taxable level. Yet, to get this money back, they must navigate an arduous refund process that few fully understand. Thus, it creates inequitable distribution of tax burden among the lower-income professionals that contradict the purpose of Income Tax Act 2023 that is ensuring equitable distribution of the tax burden among different income groups.

In theory, the National Board of Revenue (NBR) allows taxpayers to claim a refund if their TDS deductions exceed their actual tax liability. However, in practice, the process is far from user-friendly. Individuals must first file an annual tax return, attach supporting documents (such as bank statements and TIN verification), and formally request a refund from the tax authority. Then comes the long waiting period-often several months-before the refund is processed.

For many low-income earners, this bureaucratic hurdle is simply not worth the effort, and they abandon their refund claims altogether. In some cases, individuals are unaware that they are even eligible for a refund. The result? The government ends up collecting tax from those who should not be paying it in the first place, while those affected lose money that could have been used for essential expenses. This not only creates an unfair taxation system but also discourages individuals from participating in formal economic activities.

Bangladesh is not alone in using TDS as a tax collection tool, but many countries have more efficient systems to protect low-income earners. In India, for instance, individuals can apply for a TDS exemption certificate in advance if they expect their income to be below the taxable limit. This prevents unnecessary deductions altogether. In Malaysia, small earners are given the option of automatic refunds within a specified timeframe, ensuring they do not have to fight through excessive paperwork.

Bangladesh, on the other hand, offers no such pre-exemption mechanism, leaving low-income professionals at the mercy of an inefficient refund system. This is not just a policy gap-it is a fundamental issue of fairness. The system should not assume that everyone earning consultancy or freelance income is above the taxable threshold. Instead, it should have safeguards to ensure those who do not owe taxes are not forced to pay them upfront.

To address this issue, Bangladesh must reform its TDS refund mechanism and introduce preventive measures to ensure fair taxation. Firstly, the government should introduce a TDS Exemption Certificate for individuals earning below Tk 350,000. This certificate, issued by the National Board of Revenue (NBR), would allow eligible taxpayers to submit it to employers or clients, preventing unnecessary deductions at the source. Secondly, the refund process should be simplified by implementing an automated system where excess TDS is credited back to taxpayers without requiring extensive paperwork. This would reduce administrative burdens and encourage compliance.

Thirdly, increasing awareness among taxpayers is crucial, as many individuals are unaware of their eligibility for refunds. The NBR should launch targeted public awareness campaigns to educate taxpayers about their rights and the refund process, ensuring that more people can reclaim their rightful earnings. Lastly, the government should set a legally mandated maximum refund timeline, such as processing refunds within 30 days. Currently, the long and uncertain waiting periods discourage taxpayers from claiming refunds, leaving them at a financial disadvantage. By implementing these reforms, Bangladesh can create a fairer and more efficient tax system that does not place unnecessary burdens on low-income earners.

The goal of taxation should be to ensure fairness and economic efficiency, not to burden those who can least afford it. The current TDS system in Bangladesh, while effective in preventing tax evasion, unintentionally punishes low-income earners by withholding their money and making refunds difficult to claim. The government must rethink its approach and implement policies that allow small earners to keep what is rightfully theirs without unnecessary financial strain. A just tax system does not take money from those who should not be paying tax-it ensures that every citizen is taxed according to their ability to pay.

If Bangladesh truly aims to promote financial inclusion and formal economic participation, reforming the TDS refund system is a necessary step forward. Taxation should be fair, transparent, and efficient-not a source of hardship for those already struggling to make ends meet.

The writer is Assistant Professor, Bangladesh Institute of Governance and Management (BIGM) and Associate Editor at BIGM Journal of Policy Analysis



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