What alternatives could the government have explored instead of raising customs duties and taxes?

Faced with negative revenue growth, the government has raised customs duties and taxes on over a hundred products, a move experts warn will worsen inflation

In the throes of economic instability, the interim government has opted to raise customs duties and taxes in a bid to boost revenue collection and comply with the terms of an International Monetary Fund, or IMF, loan.

This decision, implemented mid-fiscal year, has sparked debate over whether alternative strategies could have addressed the crisis without exacerbating inflation.

The measures, announced late Thursday through two ordinances, introduced higher value-added tax, or VAT, supplementary duties, and excise taxes on over 100 goods and services across import, production, and supply stages. The National Board of Revenue, or NBR, promptly issued instructions to enforce the new tax regime, making the hikes effective immediately.

The result has been an immediate spike in prices for affected goods and services, further straining households grappling with surging inflation.

When the initiative to raise VAT was first floated, the NBR insisted it would not stoke inflation, a claim echoed by Finance Advisor Salehuddin Ahmed.

However, before becoming an advisor to the interim government, he had previously criticised the NBR’s tax collection strategies.

Meanwhile, Zahid Hossain, a former chief economist at the World Bank’s Dhaka office, dismissed the NBR’s assertion as “akin to calling night day.”

Speaking bluntly, he accused the finance ministry of failing to adequately negotiate with the IMF during this period of intense inflationary pressure.

“The ministry’s role is to secure terms that align with the nation’s economic realities,” said Zahid, while questioning the timing of this decision.

HOW DID THE PRESSURE INCREASE?

Months of political turmoil and economic uncertainty have compounded Bangladesh's challenges in meeting critical revenue collection targets, putting additional strain on the government’s fiscal outlook.

The widespread protests that disrupted business and commerce throughout July, coupled with the breakdown in law and order following the power transition in August, have continued to weigh heavily on revenue collection. Even five months later, the effects of this instability remain evident, hindering the country’s financial recovery.

The NBR reported negative growth in its collections during the first quarter of the fiscal year, a troubling trend that has shown little sign of reversal. Despite efforts to stabilise the economy, the revenue shortfall has persisted for four consecutive months, underscoring the far-reaching economic consequences of the political upheaval.

Between July and November, NBR revenue collections fell by 2.62 percent compared to the same period last year. This stands in stark contrast to the 14.27 percent growth recorded during the same period the previous year. The decline worsened in November alone, with collections falling 8.95 percent compared to November 2024.

Adding to the strain are the stringent conditions set by the IMF for the disbursement of the next tranche of its loan programme. The government’s inability to meet the IMF’s benchmarks in the previous fiscal year has only heightened the pressure on this year’s revenue targets.

Under the terms of the loan agreement, the NBR is required to raise tax collection as a share of gross domestic product, or GDP, by 0.5 percentage points in the 2023-24 fiscal year, another 0.5 percentage points in 2024-25, and 0.7 percentage points in 2025-26. These ambitious targets add another layer of urgency to an already challenging economic situation.

In early December, a 10-member delegation from the IMF arrived in Dhaka to assess Bangladesh’s progress in meeting the terms of a $4.7 billion loan programme. The review was critical for unlocking the fourth installment of the loan.

During discussions with the visiting IMF team, the NBR requested a relaxation of the original conditions, proposing instead to raise the tax-to-GDP ratio by 0.4 percentage points for the current fiscal year.

While the IMF accepted this revised target, the NBR’s failure to meet the 2023-24 fiscal year’s conditions prompted the financial agency to impose an additional requirement—a further increase of 0.2 percentage points in the 2024-25 fiscal year.

In the previous fiscal year, the Income Tax and Customs Divisions—excluding the Value Added Tax (VAT) Division—failed to meet the revenue collection targets set under the IMF’s conditions. This shortfall became a focal point during the IMF delegation’s earlier review visit, with officials facing pointed questions about the missed benchmarks.

The Income Tax Division had been tasked with collecting Tk 1.37 trillion for the 2023-24 fiscal year but fell short, managing to collect only Tk 1.25 trillion.

NBR member (income tax policy) AKM Badiul Alam said, “The 0.5 percentage points that the IMF is asking for is an increase over the target of the last fiscal year; not based on what we were able to collect. This has increased the pressure.”

Officials from the Income Tax, Customs, and VAT wings disclosed that they presented the IMF with a detailed plan to meet the ambitious target. The strategy involves distributing the additional Tk 120 billion burden across divisions, with Tk 20 billion expected from the Income Tax Division, another Tk 20 billion from customs, and Tk 80 billion from the VAT Division.

WHAT ELSE COULD HAVE BEEN DONE?

In a recent statement, economist Zahid explained why the government chose to follow the old path instead of addressing issues like money laundering, increasing capacity, and reducing tax evasion, irregularities, and corruption.

He said, "The reality is that an additional Tk 120 billion must be raised by June."

Hossain pointed out that the outcomes of long-term reforms would not yield immediate results, necessitating the current approach.

"Even if income tax rates are raised mid-year, collections won’t increase significantly since taxes are based on the previous fiscal year's income," he added.

"Therefore, the government opted for the easier route of raising customs duties."

Zahid also raised a critical question regarding the timing of the decision, stating: "The question is whether the timing is right. Negotiations with the IMF could have been pursued without implementing these measures during a period of high inflation. I believe our officials were weak in this regard."

He further explained that while the IMF insists on reducing the budget deficit by increasing revenue collection, he believes the deficit could also be lowered by cutting expenditures.

"They did not consider the option of reducing spending. In this context, negotiations could have been approached differently, where we would have agreed to increase some revenue while eliminating wasteful projects from the Annual Development Programme," he argued.

Zahid believes the situation could have been managed more effectively by targeting an additional Tk 40 billion in tax revenue from cigarettes and eliminating unnecessary projects.

He noted that, considering the health risks, the decision to impose taxes on cigarettes while also taxing essential medicines created a "conflicting" scenario.

In response to these concerns, Salehuddin stated: "The price of medicines will not increase due to VAT. The reason for the price increase is different."

He further added that if Tk 1 is spent on producing medicines, they are "sold for Tk 4”.

NBR Chairman Md Abdur Rahman Khan defended the VAT increase, claiming that it was not an increase in VAT, but rather a process of "rationalisation”.

Meanwhile, former president of the Dhaka Chamber of Commerce and Industry (DCCI) Rizwan Rahman questioned the necessity of raising revenue under IMF pressure by Tk 120 billion.

He said, "The government claims that this measure will increase its income, but they are not increasing their income—they are increasing my expenses."

When asked how this issue could have been addressed, he told bdnews24.com: "The country has been floating in the sea of development for so long; now it can be solved by reducing expenses. Businessmen don’t need bridges, roads, or culverts. They want proper electricity and gas."

He added, "You (the government) provide electricity and gas, and we will move our products as needed. Reduce the cost of these projects. Cut the ADP budget to Tk 2 trillion."

Criticising the VAT increase instead of focusing on cost-cutting measures, Rizwan raised pointed questions - "Why does a government official need a house worth Tk 420 million? Why does the Chief Secretary need 37 employees? Why does the Cabinet Secretary need two swimming pools?"

He continued, "I am a third-generation businessman. I don't even have a swimming pool at home."

He highlighted the disparities between the public and private sectors, saying: "In the post-Covid period, many employees in the private sector have had their salaries reduced or have been fired. Some have been working for the same salary year after year. There is no opportunity to protest. Where will they go? The situation is the same everywhere."

Rizwan asserted that it is possible to reduce the government’s expenditure by 30 percent at the moment.

He further argued that government employees were unable to negotiate with the IMF because they would not agree to reduce their benefits.

He remarked, "Bangladesh's biggest weakness is in bargaining."

Supporting the idea of reducing government operating costs, Mohammad Abdur Razzaque, chairman of Research and Policy Integration for Development, or RAPID, shared his views.

He told bdnews24.com, "What countries around the world facing such crises do is reduce their operating costs. In some countries, it is reduced by 25 to 30 percent."

Razzak pointed out that some governments even sell their buildings to reduce costs, opting for rented offices instead.

"But there is a force in Bangladesh that is preventing it from reducing operating costs," he said.

At the same time, Razzaque, former head of international trade policy at the Commonwealth Secretariat, also identified the inability to "negotiate" with the IMF as a significant "weakness”.

He explained, "I think the government needs revenue immediately. It’s true that there is pressure from the IMF, and it’s also true that the country needs revenue."

Razzaque highlighted the financial strain, noting: "Repayment of loans taken for development activities and paying interest accounts for 30 percent of revenue collection. Revenue collection in the current fiscal year is low. In the past, it could have been managed with loans. Now, it is not possible to manage it by borrowing again because the contractionary policy is in place. More interest on bank loans will have to be paid."

In such a situation, he believes the government had few options to increase revenue quickly, even if inflationary pressures were mounting.

He explained, "The alternative was to increase the tax net. But it was not possible to collect this money very quickly. Wealth tax could have been imposed, but it is needed right now.”

When asked why the government chose to raise customs duties and taxes instead of reducing tax evasion or pursuing reforms, Razzaque responded that revenue reform is not achievable without strong political commitment.

"This is also a part of reform," he said, adding that earlier, VAT was reduced, and exemptions were granted. "Now reform is being done."

He emphasised the importance of timing, saying: "But timing is a factor. Not everything is being thought out. It should have been decided not to give dearness allowance at this time. It could have waited. The operating budget could have been reduced. There were many areas where we could have made a difference."

INFLATION WILL “INCREASE”

For over two years, the average citizen has faced relentless inflationary pressures, with everyday essentials growing increasingly unaffordable. Despite repeated hikes in interest rates aimed at curbing inflation, tangible relief has been elusive, particularly for consumers who struggle with rising prices in the market for basic goods.

The government's recent move to increase VAT and customs duties on a variety of goods has intensified these economic challenges. Items like biscuits, medicines, imported fruits, fruit juices, soaps, clothing, sweets, certain tissues, and services like motor vehicle repairs and LP gas have all seen price hikes. Additionally, cigarettes have been subjected to another round of tax increases.

The supplementary duty on mobile phone SIM cards has also risen, from 20 percent to 23 percent, while for the first time, a 10 percent supplementary duty has been imposed on internet services. These new tax measures reflect the government's continued strategy to address fiscal imbalances but have added to the growing cost of living for ordinary people.

According to the NBR, none of the goods subjected to recent duty and tax increases are considered essential. The government has reiterated this stance, with the financial advisor echoing the claim that exemptions have been provided at the import stage for various products, including rice, oil, and sugar, as part of efforts to control inflation and boost supply in the market.

However, the effects of these measures have not been reflected in the country's inflation statistics. Despite these interventions, Bangladesh ended 2024 with double-digit inflation, although there was a slight decrease in December compared to November.

In December 2024, the overall inflation rate rose by 10.89 percent compared to the same month the previous year. In contrast, December 2023 had seen a slightly lower inflation rate of 9.41 percent. While there was a modest dip in inflation for December, the average inflation for the entire year (January-December) remained firmly in double digits.

In 2024, overall inflation stood at 10.34 percent, up from 9.48 percent in 2023.

Economist Zahid has commented on the recent increases in VAT and customs duties, particularly on medicines and mobile talk time, noting that these measures will have a ripple effect across all levels of the country.

He explained, "Even if food inflation does not increase, it will trigger non-food inflation, which has been on the decline in recent months."

Inflation in both the food and non-food sectors showed a slight decrease in December, the final month of the year. However, the inflation rate in the food sector remains stubbornly high, hovering near 13 percent.

Inflation in the food sector dropped to 12.92 percent in December, down from 13.80 percent in November. Meanwhile, inflation in the non-food sector also saw a slight decline, from 9.39 percent in November to 9.26 percent in December.

Zahidalso expressed concerns about the decision to impose a 15 percent VAT on all products sold above 3 million and the potential impact of increased turnover taxes on food inflation.

He argued, "We could have walked a different path."

He then emphasised the need for a unified or single-rate VAT system to curb tax evasion and suggested that the current timing is not ideal, especially amid rising inflation.

"The 'timing' is not right at this time of inflation," he stated.

WHAT DO THOSE INVOLVED IN THESE SECTORS HAVE TO SAY?

Abdul Muktadir, the chairman of Incepta Pharmaceuticals, argues that the issue of increasing VAT is not "legal”.

He said, "There is a rule for increasing VAT. Currently, when we are supplying from production to wholesale, we pay 15 percent ready VAT. Then, when products are sold at retail, a profit margin of 16 percent is added. If VAT were to be applied, it should be charged at 15 percent."

"But the government cannot charge VAT from 200,000 institutions. As a result, the government has instructed us to deduct Tk 2.40 VAT on this margin, which we pay in advance. Now, if we are asked to pay Tk 3 out of the Tk 16 margin, the VAT rate effectively increases to 18.75 percent."

Muktadir also addressed claims that the pharmaceutical sector is thriving, stating: "And it's not true that this sector is doing well. We haven't increased the prices of many medicines in the last 30 years. In the meantime, the value of the dollar has increased. Fuel costs have risen. Salaries have gone up. The cost of all ingredients has increased. We are somehow surviving by selling at a price lower than the cost."

However, he refrained from commenting on whether the price of medicines will rise following the increase in VAT.