Every year around this time, there is a lot of talk surrounding the national budget. And while every year we say that particular year's budget is of extra importance, this budget for fiscal year 2023-2024 is indeed of the utmost importance given the current situation globally as well as locally.
With external factors such as international trade blocks between super powers, the ongoing Russia-Ukraine war, and the rising global inflation, we are certainly feeling the effects of these events. And our upcoming budget will surely reflect a lot of these. To strengthen the position of Bangladesh in the global competitiveness index, I believe it is important to give special priority to reducing the cost of doing business, developing the country's infrastructure, protecting investment, increasing the capacity of ports, ensuring a balanced investment-supportive currency and customs management, reducing all types of transportation costs including shipping costs, electricity, fuel, etc.
In order to create a more business-friendly budget, one that will help Bangladesh's economy to thrive further, we need to pay special attention to the following issues in the preparation of the National Budget for the next financial year 2023-24
Rational protection of tariffs to investment, domestic industries and services, and CMSMEs
Continuation of domestic production including diversification of exports on a competitive basis with exemptions or bond facilities in particular sectors
Export market expansion and diversification
Keeping commodity prices and supply stable
Expanding the tax net by modernizing tax policies, tax systems, and management
Increase in revenue collection, ie tax to GDP ratio by increasing voluntary tax compliance rate
Reducing economic inequality by increasing income and employment
Human resource development, technical and work-oriented education, and increased labour productivity.
With the National Budget for the year 2023-2024 coming up, there are a number areas that we think should be taken into consideration for the next budget.
Considering the global and national crisis, to facilitate growth in production and exports, the provision of tax-free subsidized supply of electricity, water, gas, etc to all concerned export and local manufacturing industrial sectors is crucial. Additionally, keeping all administrative services payable in all productive sectors including land purchase, construction, and utility bills for industrial and service sectors should be completely free of indirect taxes. This will help the industries to grow and generate higher revenue.
In terms of ensuring higher tax collection, increasing the tax net is essential both at the industry level as well as individual level. We must ensure that all entities falling under the taxable slabs pay their taxes regularly. Taxpayer numbers should be increased, and tax exemption would need to be removed. Tax policy could further be reviewed to make more friendly so that it encourages taxpayers to pay taxes.
In addition to the above, for industries, regular modernization and automation of digital facilities related to Customs Management System -- Documents Verification System through Digital Integration with Key Regulators and Facilitators, Customs Valuation Management Module, Modern Risk Management Module, Litigation Module, Auction Module -- etc will speed up clearance of goods and reduce false declarations, harassment, duty loopholes, corruption.
For businesses, to expedite customs clearance, clearance of goods and payment of all types of duties and taxes, expeditious implementation of National Single Window (NSW) activities with online process can be helpful. Additionally, creating the Trade Facilitation Department of the National Board of Revenue by separating revenue collection and revenue policy functions might support the businesses.
Now, if we move on to the industry level, the major industries that have growth potential in the country are garment and textiles, electronics, ICT and business services, food and beverages, agriculture, leather and leather goods, and pharmaceutical. The country has a fairly young population -- median age 27.6 (roughly 9% younger than the median age globally) – with more than 65% of the population between 15 and 64, and just 5% aged 65 and older. Bangladesh is passing through a multi-decade demographic dividend phase, where the working population will continue to exceed the dependent population. Bangladesh is one of the fastest growing economies in the world with a growing per capita income.
Banking industry
Bangladesh is aspiring to reach upper-middle-income status by 2031. At this point of time, the financial sector's performance will be the key determinant of the country's future economic development as it will face substantial pressure to scale up the investment that will be needed. This ambition cannot be achieved through financing sourced from the public sector alone. Private sector financing, from both domestic and foreign sources, will play a critical role in increasing the per capita GDP.
The central bank is carefully rolling out the monetary policy to curb inflation. A number of appreciable measures have already been taken to protect the dollar reserve and ensure adequate liquidity in the banks. The high load of default loans and irregularities evident in disbursing credit needs to be reduced by strengthening corporate governance, improving regulatory enforcement and ensuring transparency. This will significantly help to increase the confidence of investors and customers.
The industry players are already playing a crucial role in creating a cashless society by aggressively introducing the mobile financial services; still, more needs to be done to capture the money circulating in the informal sector. If money from the informal sector can be included, credit supply capacity of the sector can be significantly improved.
Undoubtedly, the financial sector has a lot to do, but to keep them thriving in the bad hour the existing tax rate can be reconsidered, especially for the listed companies. It is worthwhile to mention here, for other than banking companies, the corporate tax rates have been reduced by 7.5%, however the corporate tax rate for the banking companies have not been reconsidered in the last 3 years. Also, 1% of loan loss provision, that is the funds set aside by a bank to cover bad loans, may be considered as an allowable expenditure which is currently not allowed and is subject to taxation.
ICT industry
The ICT sector has contributed 1.28% to the country's GDP while creating more than 300,000 jobs. IT-ITES industry has good potential to emerge as the third engine of the country's economy, after RMG and remittance. The country's IT sector may be valued at around $30 billion by 2031. Overall, in 2022, Bangladesh IT firms have greatly expanded their global footprint, crossing $1.4bn in annual exports.
The existing tax benefit for the Information and Communication Technology-enabled services is scheduled to expire in June, 2024. The existing VAT rate of 5% for the sector is scheduled to expire on June 30, 2023. ICT industries need the facility until 2030 for achieving the export target of $5bn and keeping the domestic ICT sector competitive. Amid global inflation, to keep the sector thriving and competitive, import duties on computer equipment and essentials like printer, toner and cartridge needs to be reduced.
Food and beverage industry
The growth of the food and beverage industry is inevitable owing to the rapid urbanization coupled with the rising disposable income of the people. The food and beverages sector accounts for 1.1% of Bangladesh's GDP and has doubled in size since 2012. According to the Bangladesh Investment Development Authority (BIDA), the domestic market size of packaged food was worth about Tk5.2bn in 2018. It is forecasted to reach Tk7.3bn in 2023.
In the packaged food market, edible oils, dairy products, and snacks dominate the sales in terms of value. These products are expected to see a growth in sales steadily by around 6% per annum till 2023, according to the BIDA. The beverage industry is growing at a rate of 20% every year and the sales growth rate in this sector is around 10% to 12%.
Again, the biggest limiting factor to sustainable growth is excessive taxation. In addition to corporate and business taxes, the beverage industry pays supplementary duty (SD) and VAT together at the combined rate of 43.75% for CSDs.
In Bangladesh, similar comparable products have much lower SD rate; for instance, ice cream is at 5%, juice and fruit drinks at 10%. On the other hand, bakery products such as biscuits, cake, and bread are VAT exempted. Whereas carbonated soft drinks have a SD rate of 25%.
Apart from SD impact, there is imposition of excessive duty rates on the items like Customs Duty (CD) on beverage concentrate, Customs Duty (CD) and Regulatory Duty (RD) on the importation of refined sugar, Regulatory duty (RD) on the importation of Carbon Dioxide (CO2), resulting in higher tax incidence which has decreased the level of production, resulting in lower consumption -- ultimately declining collection of the government revenue from this industry.
The industry could yield much better, if issues like lack of raw of materials, lack of sophisticated machinery and manpower, and tax burden could be addressed. In the fiscal year 2021-22, approximately Tk1,500 crore was deposited in the government exchequer as revenue from the food and beverage sector and to further facilitate this industry, policy makers should reconsider the heavy burden of direct and indirect tax. The direct and the indirect taxes are resulting in higher prices for consumers ultimately transpiring threat to food security.
Textile and garments
The ready-made garment (RMG) industry is a mainstay of the economic success story of Bangladesh. The RMG sector accounts for more than 84% of Bangladesh's exports. The key challenge of the apparel sector now is holding on to the competitiveness amid global higher inflation, a hike of the prices of yarn, chemicals, fuels, gas, and electricity, and a spike in container freight costs.
The industry players should focus further to diversify customer countries and move to more complex products and value-added services. The companies in the RMG industry are struggling with higher tax deducted at source as this is contributing to the shortage of working capital. The sub-contractors who operate smaller factories are struggling with higher tax deducted at source.
Although VAT on sub-contracting has been withdrawn last year, TDS on sub-contracting is yet to be rationalized, although export and deemed export industry enjoys a reduced tax rate. In the case of inadmissible expense, the companies need to pay tax at regular rate, as a result in some cases the effective tax rate is exceeding the reduced tax rate. The 10% tax imposed on the cash incentive as well as 20% tax on the fee against funds secured from Export Development Fund can be reconsidered by the authority.
To smoothen working capital management, back-to-back letter of credit can be introduced for companies that do not have bonded warehouse facilities.
Real estate and infrastructure
The real estate sector is considered as an important driver of economic growth and stability as this sector has enormous multiplier effects through linkage industries like cement, rod, brick, sand, ceramic, paint, etc. The aggregated contribution of the housing and linkage industries is known to be around 12%. Also, in terms of employment generation, it is having immense potential.
However, because of historical variance between mouza rate and market price, a large amount of legitimate money is getting illegal because highly valued land is shown at a much lower price. The authority should consider a provision of 10% income tax on the difference between mouza rate and market price for introducing the legitimate money into the tax net.
We are aware that, inter-ministerial committees are currently working to execute land registration at market price. Once this comes into implementation, then definitely the National Board of Revenue can reconsider the existing taxes and duties collected during property buy/sell.
Currently, property registration is subject to a stamp duty of 1.5%, registration fee of 1%, local government tax of 3% and value-added tax (VAT) of 1 to 15% respectively, depending on the area. In addition to this, keeping in mind that a shelter is one of the basic necessities, hence to make a home more affordable, there is also scope to re-consider the existing tax rates in secondary property market.
Industries want to be an active participant in the trajectory of the economic growth of the country. The rationalization of taxes and duty structure can promote an increase in industry growth and benefit various segments of the industry's supply chain, which includes local suppliers of goods and services, distributors, and thousands of retailers, hotels, departmental stores, and restaurants, who earn a large share of their revenue from these products.
To boost the economic development of the country further, the government should facilitate a more enabling environment for industries to grow and contribute to Bangladesh's economy. A more stable policy environment in the country can generate more direct and indirect investments, adding value in the country.
Snehasish Barua is a fellow chartered accountant. Email: [email protected].
