Tax
blow for Bangladeshis By Syed
Tashfin Chowdhury
DHAKA - The Bangladesh
parliament votes by the end of this month on what
is likely to be the government's most important
budget before elections are called by January 2014
at the latest, with the economy beset by falling
exports, high inflation and burdened by costly
debt.
Finance Minister Abul Maal Abdul
Muhith, presenting the budget last Thursday for
the fiscal year to June 30, 2013, proposed higher
taxes, increased borrowing from overseas, and
renewed efforts to pull into the legal economy the
large amounts of undeclared income that evades the
tax net in what is one of the world's most corrupt
countries.
At the heart of the
government's financial woes is the amount of
undeclared income - according to Muhith worth
between "42% and 82%" of the country's gross
domestic product - that cannot
be taxed to meet
spending needs. Meanwhile, three years into the
five-year term of the Awami League-led government,
Prime Minister Sheikh Hasina has struggled to hold
down inflation, at present running at 9.15%, while
overseeing burgeoning government debt, driven up
by rising costs of imported fuel amid higher
global oil prices.
Muhith, who pledged to
cut inflation to 7.5% in the coming 12 months,
proposes to increase spending 19% to $23.4
billion, amounting to 18% of gross domestic
product (GDP), against a revenue target of $17.06
billion.
His response to the resulting
forecast fiscal deficit of 5% of GDP is to
increase by income tax, value-added tax and
supplementary duty that is imposed on items such
as tobacco.
Muhith also proposes to double
to 1.2% the tax paid by exporters, even after
Bangladesh's exports fell for the third month in a
row in May as orders for ready-made garments, the
country's biggest earner, fell on declining demand
from crisis-hit Europe.
Muhith said
government borrowing will be cut 21% to $2.8
billion in the coming 12 months - though that
comes after a 54% jump to $3.6 billion in the
present fiscal year compared with the original
target set last June. Interest on government debt
will jump 18% in the coming year to $2.85 billion,
the finance minister said, soaking up as much as
17% of the government's non-development budget.
Government borrowing from local banks is
driving up inflation and the cost of loans to
small businesses. In January, interest on loans to
small and medium-sized importers and manufacturers
shot up 3-5 percentage points, to around 17-18%
from 12%.
Muhith proposed to switch
borrowing more towards non-bank sectors, by
increasing the amount of funds raised through the
sale of savings certificates and the like by 95%
to $1.28 billion, and raising net overseas
borrowing 69% to $1.53 billion.
As a sop
to merchant banks, their income tax will be cut to
37.5% from 42.5%. Muhith also proposes to buy off
voters with a 31% rise in development expenditure
to $7.34 billion and increased subsidies. The
budget was short of details, but the Daily Star
and other media quoted finance ministry officials
as saying total subsidies for agriculture, power
and energy could be increased more than 16% to
around $4.3 billion.
The finance minister
is also seeking to revitalize the stock market,
which is strongly followed by small retail
investors who saw their savings melt away as the
Dhaka Stock Exchange Index crashed 58% between
early December 2010 and early February this year.
It staged a brief recovery before tumbling 14% in
the past eight weeks.
Muhith proposes to
encourage more companies to list shares by giving
a 10% tax rebate to new listings, while granting a
nominal tax waver on dividends to individuals. The
proposals did little to please Dhaka Stock
Exchange president Rakibur Rahman.
At a
post-budget briefing with colleagues from the
Chittagong stock exchange, he said high government
borrowing in the coming 12 months will "intensify"
the country's liquidity crisis and "that will not
be good for the market".
That crisis would
be eased if the government could get its hands on
parts of the "black" economy. To that end, Muhith
proposed to keep in place a tax of 10% over and
above the standard rate on individuals who wanted
to legalize their undeclared money, the low
additional rate designed as an encouragement.
Muhith, who last year conceded that such
offers were "a bit unethical", should "immediately
withdraw" the proposal, Transparency International
Bangladesh (TIB) said, calling it
"unconstitutional and immoral".
TIB
executive director Dr Iftekharuzzaman said the
move was an "example of political bankruptcy" and
"helpless surrender of the government to the
immoral pressure of black money holders". By
"allowing the illegal money holders to whiten
their black money, the tax dodgers have been
rewarded instead of punishing them. It also
discourages legal earners and honest taxpayers."
Earlier such efforts, however, have proved
a failure - as Muhith acknowledged when announcing
last year's budget. "In 2009-2010, a total of 9.22
billion takas [US$124 million] was legalized and
only 1.21 billion takas was realized as income
tax", he said
The present provision
allowing undeclared funds to be legalized via the
stock market expires on July 15, but Nasiruddin
Ahmed, chairman of National Board of Revenue (NBR)
in Bangladesh, said that none had so far been
declared as invested.
Muhith's other
proposals also drew criticism. Shafiul Islam
Mohiuddin, president of the Bangladesh Garment
Manufacturers and Exporters Association, said the
increased tax on exports would merely add to the
burden faced by manufacturers - already struggling
against regular strikes and recurring power cuts.
It may also exacerbate the country's
worsening trade deficit, which increased almost
10% in the first nine months of this year, to
$7.34 billion, compared with the year-earlier
period.
Mohiuddin, however welcomed a
provision to cut to zero the existing 1% duty on
import of capital machinery.
The
government target of a 7.2% GDP growth for the
coming fiscal year was questioned by the World
Bank and other organizations. With June data still
to come in, the WB predicts the growth to next
June will be around 6.3%. The bank's economic
outlook for Bangladesh, released on June 3, said
growth was slowing down due to $16 billion of
foreign aid being unused, causing delays to
infrastructure projects.
The country's
continuing energy crisis, unplanned subsidies, and
weak management of spending in the power sector,
would also slow growth, as would "lax
macro-economic management, weak fiscal management,
stagnation in investment, slow implementation of
ADP and scanty foreign aid disbursement", the bank
said.
Syed Tashfin Chowdhury is
the Editor of Xtra, the weekend magazine of New
Age, in Bangladesh.
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