The deficit for the coming fiscal year has been set at Tk 2.57 trillion. Tax exemptions over this period are nearly Tk 1.63 trillion
Published : 12 Jun 2024, 04:33 AM
Although the Bangladesh government has agreed to many of the International Monetary Fund's conditions under its loan agreement, it has not yet acted on eliminating tax exemptions to boost revenue and reduce the widening budget deficit.
The finance minister's budget for the 2024-25 fiscal year entails a Tk 2.57 trillion deficit, while tax exemptions granted by the National Board of Revenue total nearly Tk 1.62 trillion. Little surprise that the NBR is struggling to meet its tax collection targets.
In the budget speech, the finance minister noted that tax exemptions could add up to Tk 1.5 trillion at the end of the current fiscal year. However, the Bangladesh Economic Review 2023-24 conducted by the Ministry of Finance says that the tax exemption at the end of the current financial year will be Tk 1.78 trillion.
If subsidies are added to this, the number reaches Tk 2.89 trillion, according to the review.
This means that the amount spent on subsidies and passed over in taxes is greater than the proposed budget deficit for the upcoming fiscal year.
Economists say that the capacity of the NBR should be increased along with increasing the tax collection target. In addition, exemptions should gradually be withdrawn from the sectors which have benefited from them for a long time.
The scope of these exemptions is driving up the size of the deficit. To fill the deficit, the government has to borrow. That borrowing puts huge pressure on the government to pay interest on that loan in subsequent years.
Finance Minister Abul Hassan Mahmood Ali presented a budget for the coming fiscal year with an outlay of Tk 7.97 trillion. The revenue collection target from domestic sources has been fixed at Tk 5.41 trillion. This means Bangladesh will run up a deficit of Tk 2.57 trillion.
Bangladesh has one of the lowest tax-to-GDP ratios in the world. Currently, the tax revenue is about 8 percent of the gross domestic product or GDP. The Policy Research Institute think tank believes it should be pushed up to 15 percent.
Due to low tax revenue, Bangladesh collects high rates of import and supplementary duties.
Economists argue that this discourages investment. As investment is tepid, this stifles employment, which further dampens tax revenue.
Finance Minister Mahmood Ali spoke of reducing tax exemptions at various levels in the proposed budget to increase revenue. He said, “However, there is a likelihood of decreased income from import duty because of graduation from the LDC status, signing free or preferential trade agreements with various nations and organisations and compliance of conditions of WTO.
In this context, Income Tax and VAT (Value Added Tax) will be the main sources of financing.”
The Awami League government says it wants to reach the status of an upper middle-income country by 2031 and become a smart, prosperous and developed country by 2041. There seems little likelihood of this happening if the tax-to-GDP ratio does not rise.
The budget signals that Bangladesh has plans to reduce the deficit and phase out tax exemptions to raise revenue.
The maximum income tax on individuals has been raised from 25 percent to 30 percent.
WHAT IS A TAX EXEMPTION?
The Finance Department of the Ministry of Finance labels 'tax exemptions' as 'tax expenditure'.
“’Direct Tax Expenditure’ means rebates, exemptions, tax at a reduced rate and exclusion of income from computation of total taxable income,” the finance minister’s budget speech said.
“It is a type of tax subsidy. That is, if this subsidy was collected as tax, it would be added to the total tax collected and the amount of tax would increase. The total subsidy will also be included in the total subsidy along with other subsidies from the government
HOW MUCH IS EXEMPTED ANNUALLY?
The finance minister’s budget speech gave an idea of how much tax revenue is exempted annually.
According to data from the NBR, the total estimated amount of ‘direct expenditure’ was nearly Tk 1.29 trillion in the 2020-21 fiscal year, about Tk 1.16 trillion in the 2021-22 fiscal year – of which Tk 719.54 billion was at the company level and Tk 436.62 billion was at the natural person level.
Overall, the exemptions were 2.91 percent of the total GDP for the 2021-22 fiscal year, compared to 3.56 percent in the previous fiscal year.
The projected tax exemptions for 2023-24 stood at nearly Tk 1.49 trillion.
Former NBR official Shams Uddin, who led the preparation of the Direct Tax Expenditure report, told bdnews24.com, "The entirety of salaries paid to government and private sector workers is not taxed. If it was collected, the amount of revenue would have gone up.”
In Bangladesh, the tax-free income limit is Tk 350,000 per year. Apart from this the government also exempts tax from 50 percent of the basic salary or Tk 25,000 per month, or Tk 300,000 – whichever is less; a maximum of Tk 28,500 for housing costs for government workers; a maximum of 10 percent of salary or Tk 60,000 for medical expenses, and Tk 3,000 per month – or Tk 36,000 per year – on travel expenses.
According to this, the maximum tax exemption for employees is Tk 788,000.
In fiscal year 2021-22, Tk 23.72 billion was provided as export cash subsidy, Tk 2.84 billion for education, Tk 24.14 billion for dividends, and Tk 10.08 billion in the IT and software sector.
Another Tk 25.82 billion was discounted for poultry and fisheries, Tk 43.69 billion for the garments and textiles sector, Tk 40.22 billion for economic zones and hi-tech, Tk 76.11 billion for power and energy, Tk 117.09 billion for remittances, Tk 111.34 billion in microcredit, and Tk 121.23 billion in share capital gain.
The finance minister has partially withdrawn the exemptions on capital gains in the budget for the coming fiscal year. The finance minister has proposed a 15 percent tax rate if the profit is Tk 5 million at the individual level. However, it is not possible to say how much money will be added to the government’s coffers in this way as the stock market fell in response to the proposal.
Shams Uddin said, “Government officials have been given exemptions for allowances, airfares and entertainment tax. Some sectors and industries also have tax holidays. No tax is taken from them. These tax holidays are given to grow new sectors or to give special benefits.''
The direct tax expenditure report was prepared by combining the exemptions from the existing tax structure and the potential tax revenue collected, he said.
'NOT ALL TAX EXEMPTIONS SHOULD GO'
Taufiqul Islam Khan, a senior researcher at the Centre for Policy Dialogue or CPD, is against the complete removal of all tax exemptions.
"Every country in the world has a tax-free income limit. Why will the government put a tax on remittance? The income does not come from this country. These people are already paying their taxes abroad," he told bdnews24.com.
When asked how the government can increase its income, Taufiqul said: "Some sectors of the corporate organisations have been getting exemptions for years. The amount is high, and it should be withdrawn gradually."
While stating that the garment sector, private power generation plants, agriculture sector, corporate organisations, and export-focused industries leverage maximum tax exemptions, he emphasised, "The agriculture sector has been kept tax-free to benefit the farmers. A farmer doesn't earn much. But now, corporations are taking advantage of the tax exemption by investing in agriculture. Tax exemption should not be given to these corporations. It should be withdrawn."
"The budget should give out directives. An ongoing tax exemption cannot be lifted suddenly. The traders will need time to plan. They should be informed about the tax exemption amount beforehand."
NBR MISSES REVENUE TARGET
The government had set a target of collecting Tk 4.8 trillion from domestic sources in the financial year 2023-24. Of this, the NBR was tasked with collecting Tk 4.3 trillion.
However, the budget was revised, apprehending that it would be impossible to collect this amount.
Extrapolating the taxes collected in the first 10 months of the fiscal year, the 15.61 percent revenue growth is still insufficient to meet the growth target put forward in the revised budget for 2023-24 fiscal year.
To meet the revised target, the government needed to collect Tk 341.66 billion in revenue every month, but it was able to collect Tk 290 billion per month on an average.
NBR Chairman Abu Hena Md Rahmatul Muneem fears that it may not be possible to collect this sum.
While speaking at a seminar on May 19, Muneem said, "Every year, the NBR is given higher targets, which are impossible to achieve."
"The tax collection process should be digitised and automated. Investing in this sector can increase the tax collection by Tk 100 for every Tk 0.22."
"STOP EXEMPTIONS AND RATIONALISE"
Zahid Hussain, the former lead economist at the World Bank's Dhaka office, told http://bdnews24.com: "The IMF has asked the government to stop tax leakage as one of its conditions for the loan. They want the government to minimise the tax expenditure. This is actually tax exemption."
"This means that the NBR is exempting the tax it was supposed to collect. However, the government said it has continued providing tax exemptions to increase revenue. But this always leaves a scope for corruption. They liaise with traders to decide the exemption rates."
Executive Director of CPD Fahmida Khatun told http://bdnews24.com, "One of the major problems in the economy is the increasing circulation of domestic resources. Revenues need to be increased against the GDP, which is not the case. So, the budget deficit is also increasing. The more the deficit increases, the more the government's debt rises."
According to Fahmida, people should be held accountable for tax evasion. "Tax breaks must be stopped. Rationalisation is needed here."
SHIFTING POWER FROM NBR TO PARLIAMENT
Bangladesh received its first instalment from the International Monetary Fund in February last year.
After the first tranche of the money was used up, the lender introduced new terms and conditions in its loan programme.
According to its reports, the IMF will evaluate the reforms to Bangladesh's financial sector in the loan programme in two categories.
One is the structural reforms of the financial sector, and the other is the achievement of targets set against various indicators on a day-to-day basis.
Although there has been some progress in the majority of the structural reforms, Bangladesh's foreign exchange management and revenue sectors are still not showing promising results.
Meeting the foreign exchange reserve and revenue collection targets set by the IMF was also an obstacle to getting the first and second loan instalments.
The IMF has also asked the government to minimise exemptions at all levels of income tax, VAT, and import duties in the reforms.
After the second tranche of the money was cleared, it was recommended that the NBR shift its power of tax expenditure to parliament.
Hussain said, "People are paying taxes. They have the right to know if a tax exemption exists for a special group or class. If the power is given to parliament, transparency and accountability will increase."
According to Muhammad Abdul Mazid, a former NBR chairman, revenue collection cannot be increased without addressing the complexity of various economic sectors.
"It is not even in the hands of the NBR. The VAT Act took more than a century to be implemented. The government needs to be decisive so that the collection capacity can be increased," he added.
[Writing in English by Ruhshabah Tabassum Huda]