Inflation, taxation, and the silent pay cut

To observe the quiet erosion of a middle-class paycheck in Bangladesh, one need not look for explicit corporate salary cuts. Instead, the mechanics of the fiscal year 2026-27 budget achieve the same result by stealth.

Despite the fall of the previous autocratic regime and widespread expectations for an economic framework tailored to modern macroeconomic realities, the latest budget adheres strictly to an archaic script.

It penalises the formal private sector through an aggressive combination of fiscal drag, structural tax hikes, and persistent inflation, all driven by state spending and structurally deficient revenue generation.

For the National Board of Revenue (NBR), salaried corporate employees represent the most accessible source of revenue. Because income tax is withheld at source by employers, this demographic lacks the structural avenues for tax avoidance available to informal traders or large corporations.

Under the newly enacted 2026-27 framework, this vulnerability is actively exploited. The previous progressive tax structure exempted the first 350,000 taka of income, applied a gentle entry rate of 5 per cent on the next 100,000 taka, and scaled upwards in manageable increments.

The new regime removes the 5 per cent buffer entirely, pushing taxpayers immediately into a 10 per cent bracket after an adjusted 375,000 taka threshold. For an individual with a taxable income of 600,000 taka, this structural revision translates to an immediate increase in their net tax liability of approximately 12.5 per cent.

Compounding this direct rate hike is the phenomenon of bracket creep. By leaving the nominal tax-free threshold rigid during periods of high inflation, the state effectively raises taxes without needing to legislatively adjust the top marginal rates. 

In 2020, the tax exemption threshold stood at 300,000 taka. Over the subsequent six years, cumulative inflation has exceeded 30 per cent, severely diminishing the real purchasing power of that sum. 

To maintain economic neutrality, the threshold should have risen to at least 600,000 taka. Because it did not, individuals receiving nominal, inflation-adjusted cost-of-living raises find themselves pushed into higher tax brackets. 

They are penalised with elevated tax bills despite experiencing zero gain—and often a net loss—in their real, inflation-adjusted income.

Dismantling of fiscal incentives 

Simultaneously, the state has systematically dismantled the fiscal incentives designed to encourage middle-class savings and domestic investment. 

The investment rebate has been scaled down from 15 per cent of eligible investments to 10 per cent, while the absolute cap on the maximum rebate has been reduced from 1,000,000 taka to 750,000 taka. 

For an individual investing 1,000,000 taka, this adjustment imposes an additional fiscal penalty of 50,000 taka. The long-term policy contradiction is stark: a capital-starved economy is disincentivizing the very domestic investment it requires to stabilise.

A similar logic governs the treatment of savings certificates, a traditional refuge for risk-averse savers and retirees. Under Section 163 of the Finance Act 2026, the advance tax on profit withdrawals has doubled from 5 per cent to 10 per cent. 

Furthermore, these returns are no longer treated as final tax settlements; they are now aggregated into total income and taxed under standard progressive slabs. While official narratives claim these changes are minor procedural shifts, the practical impact falls heavily on pensioners. 

Lacking alternative revenue streams, these individuals must navigate the bureaucratic hurdle of filing formal tax returns simply to reclaim excess withholdings, a task that remains prohibitively complex for many.

This aggressive revenue extraction is made more unpalatable by the legal bifurcation of the workforce. The tax code establishes two distinct classes of citizens based purely on employer type. 

Government employees enjoy significant structural advantages: their housing allowances, medical benefits, and festival bonuses remain largely non-taxable. Conversely, private sector workers face taxation on nearly all comparable benefits. 

Even the interest earned on provident funds is taxed for private employees, whereas the state provident fund system remains fully exempt. This asymmetric application violates the principle of horizontal equity, which dictates that individuals with identical economic capacity should face identical fiscal obligations.

Macroeconomic stress 

These tax adjustments occur against a grim macroeconomic backdrop. While regional peers have managed to tame post-pandemic price volatility—with inflation hovering around 3 per cent in India, 4 per cent in Pakistan, and near zero in Sri Lanka—Bangladesh has maintained an annual inflation rate near 10 per cent for several consecutive years. 

In response to flat corporate earnings, many private firms have frozen nominal wages for two concurrent cycles. Consequently, real private sector incomes have contracted by an estimated 15 to 20 per cent over the past three years. 

This contraction is an unintended subsidy to a bloated public sector: while the NBR met just 55 per cent of its revenue target over a recent nine-month period, public spending continues to expand to cover civil service wage increases and state pension liabilities.

A corrective framework requires a return to structural simplicity and regional parity. In terms of absolute relief, regional neighbors offer significantly larger fiscal buffers to their citizens: India provides substantial relief through integrated rebates, while Pakistan and Sri Lanka maintain tax-free thresholds that reflect their lower inflationary environments. 

Bangladesh must widen its tax bands to prevent fiscal drag from eating into basic consumption. A rationalised structure would preserve a tax-free threshold of 500,000 taka, introduce a soft 5 per cent entry slab for the next 100,000 taka, and scale gradually upward through 10, 15, 20, and 25 per cent bands, reserving the maximum 30 per cent rate exclusively for ultra-high earners making above 51 million taka.

To restore equity, the exemption for basic employment benefits should rise to 600,000 taka, the investment rebate should return to 15 per cent, and the asymmetric tax exemptions separating public and private employees must be abolished. 

Finally, the minimum tax threshold should be adjusted downward to 3,000 taka, and all tax brackets must be indexed annually to inflation to eliminate bracket creep permanently.

Tax compliance relies on the perception of institutional fairness. The consistent volume of inward foreign remittances proves that the domestic population is willing to support the broader economy. 

If the state implements an easily understood, equitable tax structure, it will drive long-term compliance and improve total revenue collections. Without these reforms, the formal private sector employee will continue to face an unsustainable economic reality: an inflating cost of living, a heavier tax burden, and a net reduction in disposable income. 

Salaries are not dropping on paper, but the net result remains identical to an overnight pay cut.

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Subail Bin Alam is a columnist on sustainable development