Middle class faces a quiet tax squeeze

The personal income tax structure proposed under the Finance Bill 2026 has been presented as a progressive reform, offering relief to lower-income earners while helping the government mobilise much-needed revenue. On the surface, the increase in the tax-free income threshold appears taxpayer-friendly. A closer examination, however, reveals a more complicated reality. While the threshold has been raised from Tk 350,000 to Tk 375,000, this benefit is largely offset by two significant changes: the abolition of the introductory 5 percent tax slab and the reduction of the investment tax rebate from 15 percent to 10 percent. As a result, many taxpayers expecting relief may instead face a higher tax liability.

The higher threshold will provide genuine relief to lower-income earners. Individuals earning around Tk 40,000 to Tk 50,000 a month may see little change and, in some cases, may fall outside the tax net altogether. Against rising living costs, such relief is timely and necessary. The concern begins further up the income ladder. The greatest impact appears to fall on those earning between Tk 70,000 and Tk 100,000 a month, largely salaried employees with limited opportunities for tax planning and virtually no ability to conceal income. The reported 49 percent increase in tax liability for someone earning Tk 74,000 a month is particularly concerning. While the exact figure may vary, the broader trend is clear: middle-income taxpayers face a disproportionate rise in burden.

Comparative calculations suggest taxpayers earning between Tk 9 lakh and Tk 18 lakh annually may experience the steepest increases. In several brackets, tax liability could rise by more than 25 percent, and in some cases exceed 50 percent compared with the previous fiscal year. Unlike business owners or high-net-worth individuals, salaried professionals have little room to optimise their tax position. Their incomes are fully documented, taxes are deducted at source, and compliance is non-discretionary. Any increase in tax liability therefore directly reduces disposable income. These taxpayers are among the country’s most compliant taxpayers. Yet Bangladesh continues to have one of the lowest tax-to-GDP ratios in the region. The deeper problem is the narrow tax base: a relatively small group of compliant taxpayers shoulders a disproportionate share of direct tax collection, while large parts of the economy remain outside effective taxation.

Rather than broadening the base, the proposed structure risks increasing reliance on an already overburdened group. Middle-income households are already under pressure from inflation. Although nominal incomes have increased, purchasing power has not kept pace. For many households, salary increases have merely offset part of that erosion. Additional taxation risks reducing consumption, weakening savings and undermining financial resilience. Economists describe this as “bracket creep”: when tax thresholds fail to keep pace with inflation, taxpayers face higher effective tax burdens without any real increase in income. The consequences extend beyond individual taxpayers. When disposable income declines, consumer demand weakens. When savings fall, investment capacity shrinks. Over time, this can slow economic activity and weaken household confidence. Supporters argue that the government needs more revenue for infrastructure, social protection and public services. That argument is valid. However, sustainable revenue mobilisation cannot rely on repeatedly increasing the burden on a narrow group of compliant taxpayers. It requires broadening the tax base, strengthening enforcement, curbing evasion and bringing untaxed sectors into the formal economy.

The Finance Bill 2026 offers relief at the lower end of the income spectrum, but it may impose a heavier burden on Bangladesh’s emerging middle class. The abolition of the 5 percent introductory slab, reduced investment rebates and limited inflation adjustment together create a quiet but meaningful tax squeeze. A more sustainable approach would focus on expanding the tax net, strengthening enforcement and modernising tax administration.

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