Govt shies away from VAT, excise duty hike plans as election looms

In the face of severe backlash, Finance Minister AMA Muhith has backtracked on his decisions to impose 15 percent uniform VAT and raise excise duty on bank accounts with smaller balance to feed the huge expenditure of the next fiscal year.

Protests by businesses had been there; the opposition parties raised voice following public concern after Muhith presented the proposed budget in parliament on June 1.

Ruling MPs, and even ministers, who passed the budget before placement in parliament, later joined the critics.

Unshaken by the criticism, the finance minister was determined to implement the new VAT law from July 1. He had planned to collect Tk 912.54 billion, or around a fourth of the Tk 4.266 trillion budget, from VAT.

Muhith, who has made record nine consecutive budgets, however, relented when Prime Minister Sheikh Hasina advised him to retain the existing multiple-rate VAT system for next two fiscal years. What remains to be seen is how the government will offset the loss of potential income from VAT.

The finance minister also revised excise duty on bank accounts.

For the new fiscal year starting Jul 1, he announced Tk 150 duty on bank accounts with balance between Tk 100,000 and Tk 500,000, going back on his original proposal for Tk 800 in the budget.

It means the Tk 500 existing rate of excise duty for the same slab will come to an end in the outgoing fiscal year.

The twin measures endorsed in parliament on Wednesday are expected to appease the critics of the government ahead of the next election less than two years away.

In addition to these, in his most generous giveaway, Muhith has reduced corporate tax for export-focused garment makers to 12 percent from 20 percent now. That is the biggest reduction in corporate tax for any sector in the new budget.

In his original proposal in parliament on Jun 1, Muhith proposed to cut the corporate tax rate to 15 percent, but that did not make influential business leaders happy.

For green factories, corporate tax is even less -- 10 percent, down from 14 percent he had originally proposed in the new budget.

The only disappointment to the garment industry is tax at source that was hiked back to 1 percent from 0.7 percent.

The garment industry leaders have not yet reacted to the changes brought in the budget.

VAT fix for vote

It was clear in ruling Awami League leaders' speeches that they wanted Muhith to make a budget that can draw votes.

"It can be said that the finance minister has made an anti-election budget," is what Awami League Joint General Secretary Mahbub-Ul Alam Hanif said about the proposed budget.

Lawmaker Kazi Firoz Rashid, who sits on the Jatiya Party's policymaking presidium, described the budget as a ‘joke’.

He asked if it was logical for the government to impose 15 percent VAT on people and expect votes from them. “Do you think people are stupid?"

Prime Minister Hasina took note of the points raised by the critics. During Wednesday's budget discussion in parliament, she said the VAT rates will remain unchanged because there were debates on the issue.

Hasina said businesspeople are not agreeing with the proposal. "So please make it that way, for the next two years. Please keep the VAT collection system as it is now," Hasina said advising Muhith to reverse his proposal.

Later, placing the finance bill for 2017-18 fiscal year, the finance minister proposed to delay the full implementation of the new VAT law.

"Our government will take various steps like it did in implementing the 2012 VAT law gradually in past four years," he said.

The MPs passed the finance bill with the changes he proposed.

The tenure of the current parliament finishes by the end of next year, which means the new VAT law is not coming into effect in the current term of the Awami League government.

Discussions concerning the new VAT law have been under way since 2009.

The government wanted to implement the Value Added Tax and Supplementary Duty Act of 2012 from July 1 last year but scrapped the plan following intense protests by the trade bodies.

The rates of package VAT, which is retained now again, were raised instead.

Since the plan was shelved last year, the finance minister had been saying the law would be implemented from July 1 this year.

In parliament on Wednesday, Hasina spoke about the history of the law to remind the critics in her party that the Awami League passed it in its previous term. “It was made in 1991. A draft was made in 2008 for a revision.

“We passed the law in 2012 after discussing it with all. Now everyone has forgotten that we passed the law,” she said.

The prime minister also emphasised paying taxes properly. "VAT or tax, whatever we are paying, will be used to develop the country. If we do not pay the taxes, we will have to beg."

"We don't want to pay our expenses with grants. We want to stand on our own feet. And we are making the budgets keeping that issue in mind," she said.

"...I will ask you again to pay taxes. You will be stuck in your own trap if you don't do this," she warned against tax evasion.

'Appeasement' of low-income tier

Through Wednesday's changes, Muhith visibly responded to the criticism of his fellow parliamentarians and tried to appease the lower middle-income group.

The changes include Tk 150 excise duty for bank accounts with deposit exceeding Tk 100,000 but less than Tk 500,000, which is even less than the last fiscal provision.

In the original budget proposal, the finance minister raised the duty from existing Tk 500 to Tk 800 for the above deposit bracket as he termed the people with Tk 100,000 deposit 'wealthy.'

Muhith, however, kept the proposals for bank accounts with a balance of Tk 1 million and above unchanged.

Those with Tk 1 million to Tk 10 million will be charged Tk 2,500 instead of current Tk 1,500.

Accounts that have deposits between Tk 10 million and Tk 50 million will be charged Tk 12,000 instead of Tk 7,500. The excise duty on accounts holding over Tk 50 million will be raised to Tk 25,000 from Tk 15,000 now.

The change in VAT law plan will help small businesses to pay their VAT under the existing system as they complained the proposed system was complicated.

They had claimed the government was levying the new VAT system without providing small businesses sufficient training about how to deal with the new tax.

Muhith, however, wants to bring more small businesses under tax and VAT bracket as, according to him, only 25,000 to 26,000 businesses out of 800,000 registered for VAT payment now.

Like other critics, the Consumers Association of Bangladesh had also said the 15 percent VAT would have pushed prices of commodities much higher.