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VAT pressure to increase in next FY raising inflation concerns

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Despite the government’s initiative to formulate a contractionary budget in the upcoming fiscal year to control inflation, the finance ministry plans to generate around 51% more revenue from value added tax (VAT) and supplementary duties than the target of the revised budget of the current fiscal year, a measure stakeholders say could increase inflation, negating the government’s intention.

According to the finance ministry’s draft budget documents for FY25, the revenue collection target of the National Board of Revenue (NBR) is Tk4,76,500 crore including Tk2,40,000 crore from VAT and supplementary duties on goods and services.

According to stakeholders, VAT rates may increase in various sectors and be imposed in new sectors to collect additional revenue in FY25.

The National Bureau of Revenue (NBR) has already taken the initiative to impose VAT on metro rail ticket prices. Additionally, the concessions that the local industry has been enjoying on VAT may be reduced in the next financial year, they say.

Consequently, if the production cost of the product increases, the price of the product will also increase and that will be passed on to the consumer, they added.

Muhammad Abdul Mazid, former chairman of the NBR, told the news reporter, “Everyone knows that if VAT and supplementary duties increase, consumers inevitably bear the burden.”

The Consumer Association of Bangladesh (CAB) has expressed concern over the Finance Ministry’s plan to increase VAT amid the current high inflation in the country.

If VAT is increased again, it will be unbearable for low-income people, CAB officials told the news reporter.

The NBR set a revenue target of Tk2,24,540 crore in VAT and supplementary duties in the original budget for the current fiscal year. At the end of last January, the collection from this sector was Tk1,03,283 crore. In the revised budget, the target was fixed at Tk1,58,066 crore.

According to a finance ministry document, revenue collection from VAT and supplementary duty in the last financial year, 2022-23, amounted to Tk1,70,757 crore, compared to Tk1,58,181 crore in the previous financial year.

Meanwhile, the target revenue collection from taxes on income and profit in the budget for the next financial year is Tk1,75,000 crore. It was Tk1,53,260 crore in the original budget for the current financial year, which has been reduced to Tk1,45,865 crore in the revised budget.

On the other hand, the budget for the next fiscal year has set a target of revenue collection from customs duty at Tk54,500 crore, which is about 42% lower than the target in the revised budget of the current fiscal year.

Taming inflation could be challenging

The inflation rate is projected to be maintained at 6.5% in the next fiscal year’s budget. To achieve this, the government may focus on debt control, boosting domestic agricultural production, and expanding the coverage of social safety nets, stakeholders say.

Inflation was projected to remain at the same rate in the budget of the current financial year, however, it hovered at nearly 10% throughout the year.

Although inflation was targeted to be maintained at 7.5% in the revised budget of the current financial year, policymakers expressed doubts about achieving this target. The wariness was expressed by those present at the Fiscal Coordination Council meeting on Thursday chaired by Finance Minister Abul Hassan Mahmood Ali.

Economists are advocating for increasing income tax collection to mitigate income inequality, yet the target for this sector remains relatively unchanged. Around a 17% growth is estimated in taxes on income and profits compared to the revised budget target.

Officials from the CAB also said they have long been requesting the NBR to raise income tax.

“We have been demanding that the NBR should increase the income tax. But the NBR is not listening to us,” SM Nazer Hossain, vice president of the CAB, told the news reporter.

“People are already facing high inflation for the last two years, which has reduced their real income. In addition, the government has collected additional money as VAT on many daily essential products. If additional VAT is imposed now, it will be unbearable for low-income people,” he added.

IMF’s prescription

In line with the International Monetary Fund (IMF) target, the NBR aims to collect VAT of around Tk1,70,000 crore next year, which is Tk26,100 crore higher than the target for the current year.

The NBR has also submitted an outline to the agency regarding how this money will be collected. NBR sources said that the NBR sent a report on this to the IMF last week.

According to the report, “It is assumed that regular measures as taken by VAT offices may engender 11.6% revenue growth which will amount to Tk16,700 crore. Rest of the amount, that is, Tk9,400 core will be collected ‘taking additional’ measures.”

The VAT department hopes it may collect Tk7,500 crore in additional VAT, of which Tk3,450 crore will be collected by restructuring cigarette taxation. Proper implementation of the electronic fiscal device system in the trading stage is expected to generate an additional Tk950 crore from this sector.

The IMF has been suggesting reducing long-standing tax exemptions in Bangladesh.

According to the NBR, new taxes will be levied on certain sectors next year by removing or reducing exemptions. Along with this, an increase of Tk5,000 crore will be realised by reducing the compliance gap.

“We have already sent an outline to the IMF for the next financial year based on the VAT collection target given to us by the agency,” a senior official of the department concerned at the NBR told the news reporter on condition of anonymity.

Decline in imports and slow project implementation may impact revenue

In the report sent to the IMF, the NBR said that if the current trend of import slowdown continues and the government projects are slow in implementation, the target of additional revenue collection may not be achieved.

The NBR report reads, “About 40% of total VAT revenue comes from the manufacturing sector. VAT in the manufacturing sector is mostly dependent on imported raw materials whereas revenue from the trade sector is dependent on import of consumable items as well as production of goods. In this year, imports showed a negative trend which means if the trend continues revenue collection may slow down.”

“So stability in the import of raw materials and consumable items, lessening of the existing UDS crisis, adequate supply of fuel to continue production are the prerequisite for achieving projected revenue.”

The report also said, “VAT revenue collected against procurement by government projects and other agencies is about 10% of total vat revenue. This year this sector is expected to see a decline in revenue as many companies and the government have already curtailed their budget.”

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Container rate surge enters longest stretch since the pandemic

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The spot rate for shipping goods in containers to Europe from Asia rose for a ninth straight week, the longest stretch of rising prices since the pandemic disrupted global supply chains in 2021.

The rate for a 40-foot container to Genoa, Italy, from China hit $7,029 over the past week, the highest level since September 2022, according to the Drewry World Container Index released Thursday. The cost to Rotterdam increased to $6,867. Both rates have essentially doubled since April.

For the busy trade route from Shanghai to Los Angeles, the rate rose for a seventh straight week, to $6,441.

While not all freight is moving at such elevated prices, the spot market for containers reflects the supply of available space on ships and the demand from importers. That balance has tightened during the past six months as vessels avoid the Red Sea, where Houthi rebels have attacked commercial traffic, including a bulk commodity carrier that sunk earlier this week.

Most container lines are taking the longer route around southern Africa, creating disruptions similar to those two or three years ago. Ryan Petersen, founder and chief executive officer of Flexport Inc., said “we’re right back almost to where we were during the peak Covid situation.” He’s seeing spot rates even higher than the numbers Drewry just reported.

“Right now, if you want to ship a container from China to here in the UK it will cost you about $10,000 unless you have a contract,” Petersen said during a Bloomberg Television interview in London on Thursday. “And by the way, most of those contracts that were signed at lower prices are not being honoured and they’re adding surcharges to them.”

Petersen said it’s hard to predict how long shipping prices will keep climbing, noting that carriers spent some of their record-high profits made during the pandemic on new vessels that are entering service through 2026, which should help ease the latest capacity crunch.

But he also said uncertainty about delivery reliability later this year is worrying some companies and motivating them to order now rather than wait. Among the threats is a dockworker strike at ports along the US East and Gulf coasts, which Petersen said might send container rates above their pandemic highs if cargo bound for those gateways is significantly disrupted.

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Why $12.2b export proceeds pending abroad in 9 months of FY24?

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When the country is in dire need of dollars amid a fast erosion of its foreign exchange reserves, $12.2 billion of its total export proceeds remained pending abroad in the first nine months of the fiscal 2023-24 – taking the gap between export receipts and shipment value to a historic high.

Bangladesh Bank data shows that export shipment value, as reported by the Export Promotion Bureau (EPB), was $40.8 billion in July-March of FY24. However, export receipts through the banking channel were $28.6 billion. The gap of $12.2 billion was reflected in trade credit, a component of the financial account of the country’s balance of payment statement.

The widening gap between export realisations and shipment value has put pressure on the country’s financial account, as it is reflected in trade credit. The deficit in the financial account reached a record high of $9.2 billion in July-March, compared to $2.9 billion in the same period of the previous fiscal year, according to central bank data.

Earlier in the FY23, export receipts fell short of the value of shipments by $12 billion, a historic high, raising concerns among the Bangladesh Bank. However, this figure may be even higher by the end of FY24 if the current trend continues.

When contacted, a senior executive of the Bangladesh Bank, involved in preparing the balance of payment statement, explained the rising trade gap, saying that they found a significant mismatch between the EPB-reported export data and the realisation of export proceeds.

The central bank is now working to find out whether export proceeds are not coming home or if there is a problem with the shipment value reported by the EPB, he said.

He added that if any mismatch is identified in accounting between the shipment and realisation values of exports, it will ease the pressure on the financial account.

When asked for an official comment on this matter, Bangladesh Bank Spokesperson Md Mezbaul Haque did not respond.

At present, trade credit reflects the highest negative value among all components of the financial account statement. Trade credit became negative $12.24 billion from July-March of FY24, compared to only $3.96 billion in the corresponding period of the previous year.

Central bank data shows that trade credit has turned significantly negative from positive since last fiscal year, with a widening gap between export shipment and realised value.

In the FY22, trade credit was a positive $311 million, and the financial account had a surplus of $16.6 billion.

Though the unrealised export value is rising, bankers have been experiencing a general trend in export repatriation.

When speaking to the news reporter, a senior executive of a private commercial bank said that the export repatriation trend is normal in his bank. He emphasised, “If exporters do not repatriate their proceeds, how will they run their factories?”

While common factors such as time lag and export bill discounts can account for mismatches between shipment and realised values, a senior executive at the Bangladesh Bank noted that the recent trend of unrealised export proceeds is unusually high.

The mismatch between export shipment and realised value has been notably pronounced over the last two years since FY22, following Bangladesh Bank’s decision to devalue the taka amidst a rising dollar crisis.

In the FY22, unrealised export proceeds reached $8.4 billion, with export receipts lagging 16% behind the shipment value of $52 billion, as disclosed by Bangladesh Bank data in the publication titled “Export Receipts of Goods and Services.”

Central bank data demonstrated that unrealised export proceeds ranged from 10% to 12% of the export shipment value between FY07 and FY21, with figures varying from $1 billion to $5 billion.

Responding to queries regarding the escalating value of unrealised exports during a monetary policy announcement event in June last year, Bangladesh Bank Governor Abdur Rouf Talukder explained that some exporters were deliberately delaying the repatriation of export proceeds to capitalise on currency devaluation.

He mentioned that exporters were permitted to retain export proceeds in their Export Retention Quota (ERQ) account, with a six-month time lag existing between shipment and receipt.

However, he expressed optimism that the Bangladesh Bank’s issuance of a circular to deter gains from devaluation would contribute to reducing the unrealised export value.

Earlier in March last year, the central bank issued a circular stating that exporters would be paid based on the dollar rate on the 120th day of export shipment, even if the proceeds came later. However, this circular seems to have had no impact on export repatriation.

Later, in another circular issued on 20 May, the Bangladesh Bank revised that policy, allowing exporters to receive the dollar rate on the day of encashing export proceeds. As a result, exporters will have an opportunity to receive the current dollar rate even if they encash the export proceeds after the 120th day.

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Dhaka, New Delhi Forge Vision for Digital and Green Partnership: PM Sheikh Hasina

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Prime Minister Sheikh Hasina announced today (June 22) that Bangladesh and India have agreed on a shared vision for a digital and green partnership aimed at ensuring a sustainable future for both nations.

In a joint statement before the media following her meeting with Indian Prime Minister Narendra Modi at Hyderabad House in New Delhi, Hasina said, “Both countries endorsed the ‘Vision Statement’ to guide us toward a peaceful and prosperous future. We agreed to have a shared vision for ‘Digital Partnership’ and ‘Green Partnership for a Sustainable Future.'”

The bilateral discussions covered a broad range of topics, including water sharing from common rivers, security, and trade. Hasina emphasized the importance of India as Bangladesh’s major neighbor, trusted friend, and regional partner, highlighting the deep historical ties since Bangladesh’s War of Liberation in 1971.

“Our relations with India are ever-growing at a fast pace,” Hasina noted. “Today, our two sides had very productive meetings where we discussed politics and security, trade and connectivity, the sharing of water from common rivers, power and energy, and regional and multilateral cooperation, among other issues of mutual interest.”

The Prime Minister added, “We agreed to collaborate with each other for the betterment of our people and countries.” She outlined a future course of action aimed at ensuring a smart Bangladesh by 2041 and a Viksit Bharat (Developed India) by 2047.

Hasina mentioned that several Memoranda of Understanding (MoUs) were concluded and renewed, with announcements made for future collaboration. She noted that recent years have seen sustained high-level engagements between the two countries, including visits by the Indian president and prime minister to Bangladesh in 2021 to celebrate significant milestones in Bangladesh’s history.

Reflecting on her own diplomatic engagements, Hasina recalled her last bilateral visit to India in September 2022 and her attendance at the G20 Summit in New Delhi in September 2023 as the leader of ‘Guest Country’ Bangladesh. “I am now visiting New Delhi for an unprecedented second time in the same month, June 2024,” she remarked.

Earlier this month, on June 9, Hasina attended the swearing-in ceremony of Prime Minister Narendra Modi and his new cabinet alongside other world leaders, further underscoring the close engagement between the two nations.

During her current visit, Hasina will also meet with the Vice President and the President of India. She expressed optimism that these meetings will provide deeper insights into enhancing bilateral cooperation.

“This is my first bilateral visit to any country after Bangladesh’s 12th Parliamentary Elections and the formation of the new government in January 2024,” Hasina noted, thanking the Indian government for their warm hospitality.

In her concluding remarks, Hasina paid homage to the Indian heroes who sacrificed their lives during Bangladesh’s War of Liberation in 1971, expressing gratitude for India’s contribution to Bangladesh’s independence. She also extended an invitation to Prime Minister Modi to visit Bangladesh at his earliest convenience.

 

 

 

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