Homeostatic budget system of Bangladesh

Mobile-virtual platforms become soft targets

Safwan Rob   | Published: June 10, 2018 21:50:57 | Updated: June 13, 2018 22:12:54

FINANCE MINISTER AMA MUHITH PLACES THE PROPOSED NATIONAL BUDGET FOR 2018-19 FISCAL YEAR IN THE JATIYA SANGSAD ON JUNE 07, 2018: "Without disruptive ideas and policy-support, the homeostatic system of revenue collection will never reach its target of collecting 40 per cent of the estimated revenues."

The proposed national budget for the upcoming fiscal year (FY), 2018-19, has been unveiled. While presenting the budget, the finance minister stated in parliament that this was not an election year budget! But even if he wishes the budget to be unrelated to an election, the fact of the matter is it does fall in an election year. Just a day after that statement, the esteemed finance minister changed his policy-stance, in his post-budget press conference, emphasising that all his budgets have been 'election-year' ones. The latter statement has a much deeper meaning and revelation about a fundamental realpolitik relation among voters, candidates and the status-quo.

Every year's budget prioritises first the benefits for those who finance the elections. Concurrently, the budget also emphasises programmes through social-safety nets and projects that are targeted towards the low-income people. The low-income people are reluctantly attached to such incentives due to the overall desperate conditions they face to overcome their day-to-day challenges. Hence, periodic local-government elections and national election after five years systemically benefit from this arrangement. The proposed FY 2018-2019 budget is an epitome of that arrangement -- where the subsistence-level people trapped in this system submissively support the system and the financiers of this political economy.

Gross domestic product (GDP) growth rate, per capita income etc., are such numbers that are being interpreted as absolute! If we adjust the economic output, in terms of relative output per individual (and ideally based on subsistence people), then the reality shows us how weakly the country's budgets in last ten years have performed. The 'demographic dividend', along with the rising middle class, is the true growth engine of a developing country's economy.

Gradually in last ten years and particularly in past few years, the per capita income of Bangladesh has increased but to use that single statistic as our citizens' absolute well-being would be an absolute falsehood. As income has increased, so has the cost of living and other expenses, too. In practical terms, the cost of living has increased relatively faster and higher than the increase in income. So the real picture of our country's income growth is that our per capita savings for most of our population has decreased.

The country is trapped within a homeostatic system and that specially applies to our budget and fiscal arrangement. The system that ensures the continuation of the status quo also ensures that the budgets systemically support the economic minorities. The minority that has seen their income and wealth rise above imaginable expectations.

In terms of weaknesses, the absence of budget implementation plan and irrational revenue sources are similar to those of the previous years. The proposed budget for the next fiscal is built on unrealistic revenue amount and it is 25 per cent larger than the revised one of the outgoing fiscal. Objectively speaking, the quantity of the budget is not the issue; it is the qualitative nature of the budget. Bangladesh's 160 million consumer economy and labour force of 72 million (World Bank 2016) can undertake this budget.

However, the budget planning shows no clear plan of implementation and in the last few years the implementation rate has continued to decrease. In last three years, our budget implementation rate has decreased from 88 per cent to 78 per cent of the revised ones. The historical trend for Bangladesh since 1990 confirms that the election-year economy will go south even after the best efforts from the government to create a positive economic atmosphere.

Since the last year's budget session until now, one thing has been consistent -- the historical trend of "Election Year Economy Going South". The government has set a GDP growth target of 7.8 per cent which requires almost US$17.5 billion in additional investment, out of which private sector investment part is US$ 14 billion.

In an election year in Bangladesh, both the private sector investment and the consumer spending, go into hibernation. In last nine years, government's revenue collections in real terms have increased from 9.1 per cent to 10.3 per cent of GDP, an increase of 0.13 per cent every year. The genesis of this meagre performance is that virtually no major fiscal reform has been implemented during this period. This year, too, no major fiscal reform has been proposed but the government has set some soft-targets for revenue collection.

To attract new investment, the corporate tax rate for banks and financial institutions has been proposed to be lowered by 2.5 per cent. But this will not bring in investors as sage investors know that given the anarchy in the banking sector, management and increasing non-performing loans (NPLs), the tax deduction will not have any meaningful effect. This tax incentive should have been given to productive sectors such as information technology (IT) and mobile financial services (MFSs).

The irony of next fiscal's budget is that innocent bystanders who could have brought investments have become soft targets -- the institutions linked with mobile-virtual platforms and IT. These platforms are not only bringing investments and creating jobs but are also providing much needed services. Uber and Pathao, the ride-hailing services, have been proposed to be charged VAT at the rate of 5.0 per cent on their services. Facebook, Google and YouTube will also come under the proposed new tax provision. Such provisions and VAT have been proposed without any consultation with the industry and stakeholders representing such institutions.

It is apparently a good policy to bring these sectors within the tax net. However, that is half of the story. Uber, Pathao, Google, YouTube are revenue targets because of the way they are built: digital platforms that have distinct paper trail (in this case digital trail) of its point of sale (POS) and transactions.

Hence, it is not government's credit that they are planning to collect revenue from these entities; rather, their unique design has made them soft-targets for tax collection under this broken system.

The business model and such disruptive technological ideas could be a congregation to design an adaptive modern tax system for Bangladesh. Mobile financial services (MFS) like bKash has an extremely high adoption rate due to its design to meet unmet need with simplicity. Collaboration with these IT and virtual platforms and also using their expertise can help develop a new revenue collection system.

Without such disruptive ideas and policy-support, the homeostatic system of revenue collection will never reach its target of collecting 40 per cent of the estimated revenues. Enforcing VAT on these new institutions highlights that there is no level playing field in the revenue collection method in Bangladesh. There are numerous institutions, and specially banks, that have not paid their fair share of revenue whereas these new companies like Uber and Pathao have become the scapegoats.

The writer is Archer Fellow, Lee Kuan Yew Scholar. safwanrob@gmail.com

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