Economy
VAT pressure to increase in next FY raising inflation concerns
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.”
The Bangladesh Bureau of Statistics (BBS) has projected that the country’s economy will grow at a rate of 5.82% in the current fiscal year (FY24), ending on June 30. This provisional estimate shows a slight increase from last fiscal year’s 5.78% growth. The figure aligns closely with forecasts by the International Monetary Fund (5.7%) and the World Bank (5.6%).
In terms of per capita income, there has been a modest rise to $2,784 in the current fiscal year from $2,749 in the previous year. This estimate is based on data from the first seven months of FY24.
Initially, the government had projected a growth rate of 7.5% for the current fiscal year in the budget, but this was later revised downward to 7%.
Bangladesh’s Gross Domestic Product (GDP) at current prices has increased to $459 billion, up from $452 billion in the previous fiscal year.
Sector-wise analysis shows mixed trends. The agriculture sector is estimated to grow by 3.21% this fiscal year, down from 3.37% last year, marking a 0.16% decrease. The industry sector is projected to grow by 6.66%, down from 8.37%, reflecting a 1.71% decrease. Conversely, the services sector is expected to grow by 5.80% this fiscal year, up from 5.37% in the previous year, indicating a 0.43% increase.
The investment-to-GDP ratio remains steady at 30.98%, according to BBS data. In the agriculture sector, the estimated growth for this fiscal year is 3.21%, down from 3.37% the previous year, marking a 0.16% decrease.
Additionally, the domestic savings and national savings rates stand at 27.61% and 31.86%, respectively, for the current fiscal year. Compared to the previous fiscal year, investment increased by 0.03%, domestic savings by 1.85%, and national savings by 1.91%.
Private sector investment growth is estimated at 23.5% this fiscal year, compared to 24.18% in the previous year.
The BBS also estimated the consumption rate at 74.24% in FY24, up from 72.39% in the previous fiscal year.
Bangladesh to Host Major Roadshow in the USA to Boost Dollar Deposits
Next Friday, on May 24, Bangladesh will host a significant roadshow in the USA, featuring 30 managing directors from various domestic banks. This event aims to attract dollar deposits in response to recent fluctuations in foreign exchange rates.
A total of 45 officials, including the managing directors of these 30 banks, will travel to the USA for a special promotional program designed to increase US dollar deposits in banks via offshore accounts. This marks the first time such a large gathering of Bangladeshi bank MDs will take place abroad.
Sources indicate that commercial banks are launching special campaigns to boost the flow of dollar deposits. The program will encourage expatriates to send dollars through official banking channels. To this end, a specific event focused on Offshore Banking Fixed Deposits has been organized for expatriates at a hotel in New York.
The Bangladesh Ambassador to the United States, Mohammad Imran, will serve as the chief guest at the event. Other special guests include Muhammad Abdul Muhith, Permanent Representative of Bangladesh to the United Nations in New York; Deputy Governor Kazi Sayedur Rahman; and Md Najmul Huda, Bangladesh Consulate General in New York.
This gathering highlights the increasing interest among Bangladeshi banks in diversifying their foreign currency reserves by exploring opportunities in offshore banking.
As part of this initiative, a promotional event has been organized to encourage Bangladeshis residing in the United States to deposit dollars through offshore banking.
During the eleventh month of the current fiscal year, the country’s foreign currency reserves have fallen below $19 billion for the first time. After paying off some import bills, the reserves have now stood at $18.26 billion on Sunday.
According to the International Monetary Fund (IMF), as of May 8, the total foreign currency reserves of the country were $19.82 billion.
Mohammad Mezbauul Haque, the spokesperson of Bangladesh Bank, informed that through the Asian Clearing Union (ACU), the central bank has paid off import bills totaling $1.63 billion over the past two months.
However, Bangladesh Bank maintains that after paying off the import bills, the foreign currency reserves now stand at $23.71 billion.
According to the Central Bank’s accounts, the reserves were $25.27 billion on May 8.
