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Betting big on public pockets

  • Published at 02:04 am June 2nd, 2017
  • Last updated at 02:07 am June 2nd, 2017
Betting big on public pockets
In what he predicted to be his best budget yet, Finance Minister AMA Muhith bet big on public pockets to not just finance pensions and salaries, but also to build bridges and power stations and even finance ailing government banks. Muhith unveiled his 11th budget with yet another huge outlay of over Tk4 lakh crore, riding on an ambitious 31% rise in revenues mostly going to schools, infrastructure and mega projects.

Amid continued growth and cool inflation, the government appears willing to risk it on the public rather than trying to raise funds from the rich and affluent.

On the face of it, the budget is a bold pro-growth document, keeping corporate and income taxes low, and continuing with the government’s emphasis on funding and completing big-ticket infrastructure projects that are meant to upgrade the economy. iiiiiiiiiiiiiiiiiiiiiiii The government hopes to foot the bill by taxing consumption. The risk is that the long-debated uniform VAT – despite its more than a thousand exemptions – could dampen the desire to spend. That would work against the budget’s strategy. The other concern also hinges on perception. The government plans to raise money by floating up to Tk30,000cr in savings certificates. An increase in excise duties on bank savings accounts combined with the imposition of a flat 15% VAT on a raft of products, especially what might be called aspirational spending, could slow down consumption and divert money towards savings instruments. It would be for the first time in many years that revenue collection targets from direct income tax had fallen compared to VAT. Capture2 While direct taxes were projected to be almost similar to VAT in the outgoing fiscal year, raising a hope that the country would for the first time see direct taxes raising more money than VAT, the coming budget will see 36.8% of the revenues coming from VAT and only 34.3% coming from direct taxes. The finance minister said: “In order to mobilise revenue, in this budget, we have emphasised the need to increase tax compliance without increasing tax rate.” Muhith went on to talk about enabling the tax administration, online service centre and better compliance – all of it geared towards raising VAT collection of Tk 91,344, not direct income tax. However, with much of the economy still remaining informal, strengthening VAT can only go so far. And a shortfall would almost invariably lead to cutting down on development projects that would then fail to create jobs and boost consumption. Capture3 Effectively the last budget for this Awami League government, its total outlay increased by 26%, slightly reducing dependence on loans as the 84-year-old former bureaucrat presented the country with its 46th budget. Similar to previous years, implementation will remain a challenge, especially since the government would appreciate as much political mileage as possible with just six months of tenure after this budget ends, something that the finance minister already hinted at during pre-budget meetings. The budget remains in line with the Awami League’s traditionally generous outlays for both agriculture and social safety nets. But it’s heavy reliance on VAT collections and public borrowing has arguably exposed the government to some risk. Although the social safety net has increased, as Muhith had indicated beforehand, the raft of measures hiking prices of commodities and services – many of them essential – appear to have caught the imagination of much of the middle class. Capture222 Flat VAT The uniform VAT of 15% has come into effect after all. And it is here to stay for three years. Muhith said: “The revenue administration is fully prepared to implement the Value Added Tax and Supplementary Duty Act 2012 from the July 1, 2017.” He said VAT will be applicable at a single rate of 15% but also raised exemption ceiling as had been recommended by businessmen. There is a large number of items kept outside the purview of the flat VAT. Prices up The finance minister proposed wide ranging fiscal measures that would raise the prices of many an imported item to encourage local industry and manufacturers. The finance minister’s measures, however, will also tax fast food consumption, credit card usage, English-medium education and real estate development, to name just a few. Tobacco Tobacco produce as well as cigarettes, bidis (which has led to protests) and vaping will become more expensive according to Muhith’s proposals. Besides the 25% export tax on tobacco produce, the finance minister proposed 2.5% surcharge on tobacco products including gul, zarda and e-cigarettes. Vaping, or the use of e-cigarettes, described by the finance minister in his speech as a habit cultivated by the children of wealthy families, will also be slapped with a 100% supplementary duty and a 25% customs duty. The finance minister’s reasoning for these measures was that these products were injurious to health, and the government and society incur additional medical costs due to consumption of these tobacco items.