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Who is this budget for?

  • Published at 07:46 pm June 3rd, 2017
Who is this budget for?

“No taxation without representation” is the key principle on the imposition of any tax upon citizens -- and is the guiding principle of Bangladesh at present.

The absence of an effective opposition has given scope to the treasury bench to give priority on political mileage in the proposed budget of Tk4,00,266 crore for fiscal year 2017-18, targeting the upcoming parliamentary election.

One of the catchier economic indicators, GDP growth, has been projected to rise to 7.4% in the next fiscal year with great aspiration, but specific measures to ensure an investment-friendly environment were absent in the proposed budget.

The proposed reduced corporate tax may increase the potential capital, but investment of that capital depends not only on the tax rate, but also the trust of investors. Moreover, another engine of growth, RMG exports, is facing severe structural problems, including the volatility of exchange rates and the risk of protectionism by the US, a major export destination.

To fight climate change, Tk100cr was allocated to the BCCTF, while also implementing the “Inclusive Budgeting and Financing for Climate Resilience” along with the 1% corporate tax rebate for green RMGs.

VAT woes

The proposed imposition of a 15% VAT on consumable goods would also affect GDP growth by lowering overall public spending or consumption. That’s why there is credible doubt over the “manufacturing” of GDP growth.

In the proposed budget, it has been claimed that due to the sharp rise of the retail price of gasoline and other energy-related products, CPI inflation in developed countries is likely to rise to 2% in 2017 compared to 0.8%.

There is also the possibility of increasing short-term and long-term interest rates worldwide due to upward pressure on inflation, growth of aggregate demand, and the adoption of contractionary monetary policies by the US.

It is surprising that in the proposed budget, the government has planned to inject tax-payer money worth Tk2,000cr for loss-making state banks to meet their enormous capital shortfalls.

As long as the unabated graft of tax-payer money from public banks and the alarming rise of project expenditures remain dismal, more and more loans for infrastructure will be embezzled and the potential of productive investment would be lukewarm.

Due to poor income tax collection, the overall tax-GDP ratio stands at only around 9%, one of the lowest in the world

Embezzling incentives

The budget deficit is projected to be 28%, or over Tk1.12 lakh crore of the total budget or 5% of the GDP.

That ambitious plan doesn’t reflect the implementation capacity of the government. Moreover, half of the foreign finance will come from institutional lenders, but the rest will come from non-conventional sources, which is always expensive if it comes as supplier credit for the projects, since the economic returns would be weaker.

Domestic sources will provide Tk60,352cr, of which 47% (Tk 28,203cr) will come from the banking sector and the remaining Tk32,149cr from savings certificates and other non-banking sources.

This will create immense pressure on tax revenue collection and bigger bank borrowing, of course.

Furthermore, the government is set to increase its subsidy expenditure by 17.30% from the current year to Tk 27,954cr in fiscal 2017-18, mainly to supply rice at low prices to the poor. However, given the nature of local government representatives, proper targeting is not ensured, and hoarding is still a problem, so that entire amount stands to be pocketed by party loyalists.

Due to poor income tax collection, the overall tax-GDP ratio stands at only around 9%, one of the lowest in the world. While the laundering of taxable income from both legal and illegal sources are increasing significantly.

Bridging the gap

Though millionaires dodging taxes is the norm, to enhance income tax collection, the government is yet to consider bringing them into the tax net. To reduce such gaps, overt dependency on indirect tax and imposition of supplementary duty on small bank deposits is inequitable, and completely anti-poor, to say the least.

Currently, VAT rates ranging from 1.5% to 10% are applicable to more than 80 products. With the 15% flat VAT, especially on electricity, paper, biscuits, fashion houses, furniture, etc the disposable income of the middle class will be squeezed further, adversely impacting their quality of life.

Moreover, since 80% of the suppliers of local fashion houses are weavers who don’t have VAT registration and usually don’t keep records, they will not be able to claim rebate from NBR.

It is important to note that, in the proposed budget, the agriculture subsidy was revised downwards, while thousands of Haor area farmers are drowning with the “Dadon/Mahajan” loans.

On the other hand, in the name of public order and security, the government has significantly increased allocation to law enforcement, by Tk2,125cr, or 10.25%, more than the revised budget of 2016-17.

Last but not the least, allocation for communication infrastructure development has seen a sharp rise of 42.55% or over Tk47,500cr.

Indeed, the proposed budget has not been able to place the obvious economic and governance reforms needed to curb the overall breakdown of our financial sectors, especially the ceaseless looting from the banking sector as well as the share market.

It does nothing to regain the trust of investors and boost both foreign as well domestic investment.

M Zakir Hossain Khan is a climate finance governance analyst.