Incentive structure needs to be streamlined

Over the years, successive governments have been providing fiscal incentives to various business sectors. The idea behind providing incentives is to help the sectors move ahead and increase their contribution to the national economy.

'The Medium-Term Macroe-conomic Policy Statement 2018-19 to 2020-21' released last month as a part of the national budget documents, briefly sheds light on the trend of fiscal incentives. Fiscal incentives are generally known as instruments such as tax reduction, grants and subsidies provided by the government to support various activities of individuals and firms. The policy statement, however, does not clarify what it means by the fiscal incentives. It also does not specifically outline the scope of the fiscal incentives which is considered as a part of 'subsidy and transfer' portion of government spending.

The policy statement, prepared by the Ministry of Finance, shows that three sectors are currently availing direct fiscal incentives. These are: agriculture, export and jute goods. From this, one may presume that no other sector is enjoying any type of fiscal incentives. This is a misleading perception, as it is not unlikely that some other sectors may have been receiving fiscal incentives in some form or other.

The document shows that the amount of fiscal incentives has declined in the last three years but it is likely to increase in the outgoing and next fiscal years. The ratio of fiscal incentives in terms of total public expenditure has been declining for the past few years. The ratio was 8.20 per cent in FY13 which came down to 2.80 per cent in FY18. In terms of gross domestic product (GDP), the ratio of fiscal incentives also came down to 0.5 per cent in the outgoing fiscal year from 1.20 per cent in FY13.

Some ambiguities are there due to the absence of clear-cut definition of fiscal incentive. Do the fiscal incentives include cash incentive, tax reduction or tax incentive and direct subsidy? Are the reduced amounts of tax for a sector like ready-made garments (RMG) considered as tax forgone and the value included in the total incentive?  By not clarifying such ambiguities, the policy statement provides a deceptive scenario of the fiscal incentive.   

According to the document, fiscal incentives to the export sector increased to Tk 40.0 billion in FY18 from Tk 20.5 billion in FY13. Thus, fiscal incentives for exports doubled within five years. At the same time, annual export earnings increased by around 30 per cent with annual average growth of around 6.0 per cent. Thus, export is growing at a modest rate. Moreover, the ratio of direct fiscal incentives in terms of export value is quite low-- around 0.02 per cent of the total annual export.

The RMG industry is believed to be receiving the maximum share of the direct fiscal incentives. Beside cash incentives, the industry has been enjoying a number of other incentives and benefits for long. Finance minister in his budget speech pointed out that 'readymade garments sector has been given special tax incentives' considering its 'role in generating employment and fostering economic growth.'

The industry has been paying corporate tax at the reduced rate of 12.0 per cent and source tax at the rate of 0.70 per cent while the original corporate tax rate is 35.0 per cent. The budget for fiscal year 2018-19 (FY19) set 15.0 per cent corporate tax for the RMG industry and source tax at 1.0 per cent. For the environment-friendly RMG units, corporate tax rate is, however, set at 12.0 per cent which was10.0 per cent in the past year.

But the tax at source is considered as the final settlement of tax payable by any export-oriented RMG unit. Now, if the tax paid at source is Tk 500 and operating profit of the unit stands at Tk 3000, tax liability of the unit will be Tk 360. This amount will be adjusted with the amount paid as source tax. The adjustment facility gives the RMG sector a good incentive which is absent in many of the export-oriented sectors. By enjoying lower tax rate over the years, the country has forgone a good amount of revenue beside direct cash incentive.

Fiscal incentives to agriculture sector increased declined sharply in the last five years -- from Tk 120.0 billion to Tk 60.0 billion. Regarding the reason, the document states, "Government plans more price adjustments to encourage peasants' in using more non-urea fertilizers (which are required less in quantum) and thus reduce agriculture incentives in the medium term."   

The government has also been providing fiscal incentive to jute goods for long. But the amount is very low. It was Tk 3.5 billion in FY13 which became zero in FY16. In FY17, the government again provide Tk 3.90 billion as fiscal incentive to jute goods. In FY18, the revised amount is set at Tk 5.0 billion and in FY19, the budget amount is also Tk 5.0 billion. 

While fiscal incentive for jute goods may be reasonable, it has also created problem for the sector in terms of export. India, the largest importer of Bangladeshi jute and jute goods, has imposed anti-dumping duties on these products. Indian local jute industry alleged that by taking advantage of the government incentives, Bangladeshi jute millers were dumping the products in the Indian market.  Taking the allegation into consideration, Indian government launched anti-dumping investigation and imposed duties ranging from $19 to $352 per tonne on products of 255 Bangladeshi jute mills and exporters in 2016. Fighting anti-dumping duty is, however, a trade-related legal matter and noting to do with fiscal incentives

As direct fiscal incentive is very low in terms of GDP, there is scope to make such benefit available to deserving sectors that have remained beyond its coverage. But the incentive structure needs to be streamlined. The components or instruments of incentive policy should be well-defined and transparent. Equally important is regular review of the fiscal incentives, along with costs and benefits analysis.

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