Bangladesh's tax-to-GDP ratio remains among the lowest in Asia, stuck at around 8-9 percent. This persistent weakness limits the state's capacity to invest in infrastructure, education, healthcare, energy and social protection. Public debate often focuses on taxing the wealthy or closing loopholes for large corporations. Yet an overlooked but critical challenge lies elsewhere: the vast number of small shop owners, traders and micro-entrepreneurs who remain outside the tax net.

For millions of small businesses across Bangladesh, from neighbourhood grocers to clothing retailers and roadside vendors, tax compliance is not just a financial burden but an administrative one. Filing an income tax return often requires professional help. VAT compliance is even more daunting. Record keeping, digital submissions and documentation standards make VAT practically inaccessible to the typical small trader operating with minimal staff and modest turnover. Unsurprisingly, most simply avoid the system altogether.

Yet these small enterprises account for a large share of the economy. The informal sector contributes more than one-third of GDP and employs the majority of the labour force. A tax system that fails to include this segment will always struggle to raise adequate revenue. This is compounded by the reality that Bangladesh's revenue administration lacks the manpower and technological capacity to monitor or audit millions of micro businesses. Expecting universal compliance under the current framework is unrealistic. Any workable tax policy must align with administrative capacity.

A practical solution, used successfully by many countries, is a flat rate, simplified tax and VAT regime for small businesses. Such systems sharply reduce compliance costs and encourage voluntary participation. India's GST Composition Scheme, which allows small businesses to pay a low fixed percentage of turnover with minimal paperwork, brought millions of traders into the formal tax base. Similar models in Indonesia, Pakistan, Turkey, Brazil and Kenya show that simplified taxation broadens the tax net far more effectively than complex, documentation-heavy systems.

A simplified model for Bangladesh could work in three parts. First, a fixed annual income tax could be set by shop size, turnover category or location. Second, a fixed VAT amount could be determined using the same criteria, removing the need for complex Mushak forms. Third, optional digital payment incentives could encourage early or consistent compliance.

Such a system would remove the need for accountants, reduce the fear of audits and make paying tax almost as simple as paying a utility bill. Even modest payments from millions of small traders would meaningfully expand national revenue. More importantly, a simplified self-reporting system would ease pressure on the revenue authority, lowering the need for additional manpower and reducing scope for arbitrary enforcement.

Simplification, however, must be matched with fair but firm enforcement. Once the state offers an easy way to comply, persistent evasion cannot be ignored. Strict penalties are needed to prevent large firms from splitting into smaller units to qualify for lower rates. Penalties must be clear and predictable, avoiding arbitrary actions that push businesses deeper underground. Balance matters. Heavy-handed enforcement fuels fear and corruption, while transparent enforcement supports long-term behavioural change. Policymakers should also resist the temptation to gradually raise flat tax rates.

Bangladesh does not need a perfect tax system. It needs a practical, inclusive and administratively simple one. A low burden flat rate tax scheme for small traders is among the most achievable reforms available. It is fair, efficient and better suited to the structure of the economy than the current one-size-fits-all model.

If Bangladesh is serious about sustainable development, stronger public services and lower reliance on debt, expanding the tax base is essential. Simplifying taxation for small traders may be the single most effective step towards that goal. A tax system people can understand and afford is one they are far more likely to join.

The writer is chairman of Unilever Consumer Care Ltd