Published :
Updated :
For all latest news, follow The Financial Express Google News channel.
Bangladesh may fall short on the International Monetary Fund (IMF) lending condition regarding domestic revenue mobilisation for long neglecting fundamental reforms required for raising the tax-GDP ratio through economic vibrancy, economists say.
The reforms should have been carried out 15 to 20 years ago to avoid current poor state of tax-GDP ratio down to 7.4 per cent in the fiscal year 2023 from 7.9 per cent last year, the economists at the Policy Research Institute (PRI) said Sunday.
In FY 2011 to 2022, the growth in tax-revenue collection by the National Board of Revenue (NBR) was on average 12 per cent. The tax-GDP ratio declined 1.5 percentage points in FY 22 compared to FY 2011.
Without carrying out fundamental reforms in revenue administration, including separation of tax-policy wing from enforcement, there is little hope to increase the country's tax-GDP ratio, they opined.
As per IMF's conditions on disbursement of $4.7-billion credit support, the revenue board will have to increase its tax-GDP ratio by 0.5 per cent in each of FY24 and FY25 and 0.7 in FY26.
The government has set a 16-percent rise in revenue for budget FY24 worth Tk 4.30 trillion compared to that of FY23. The PRI-CDRM revenue projection says the revenue growth should be 36.3 per cent to reach the IMF mark.
Speaking at a pre-budget discussion arranged by PRI at its Study Centre in Dhaka on 'Domestic Resource Mobilisation', Dr Ahsan H Mansur, Executive Director of PRI, said the IMF-recommended formulation of mid-term revenue strategy (MTRS) which is necessary now for carrying out reform. But "the government has not taken any action in the past, which put it in a corner now".
To a question from the media, Dr Razzaque, Research Director of PRI and also director of PRI-CDRM, said no new measures would pay off unless the government carries out fundamental reforms.
He said existing tax rates in Bangladesh are considerably high but it is not contributing to increasing tax-GDP ratio as widening tax net is important rather than imposing high-rated tax that also triggers evasion, said Dr Razzaque while presenting the keynote.
"The government has opted for a less-expansionary budget this year. Considering the current macroeconomic situation, this is an appropriate decision," he said.
Dr Zaidi Sattar, Chairman of PRI, said a strategy of strong domestic revenue mobilisation must exclude further reliance on trade taxes already so high with its domino effect.
"Public finance literature confirms that trade taxes (on imports and exports) distort business and investment incentives more than income taxes or value-added tax. High trade taxes which make the trade regime rather restrictive are also a major deterrent to FDI inflows into Bangladesh, besides undermining dynamism of the economy," he said.
The current share of trade taxes in NBR tax-revenue is 26 per cent, much higher than in any developing economy pursuing export-led growth, he said, adding that most economies that are highly trade-oriented have trade taxes significantly below 10-percent share in revenue.
The IMF recommendation for increasing the tax-GDP ratio by 0.5 per cent does not indicate mobilising revenue increasing trade tax, he pointed out.
Dr Ahsan H Mansur terms the introduction of off-shore tax amnesty an unwise measure in the current FY, which he says should be ditched.
"The government should form strong economic team to carry out fundamental reform to make existing policies workable," he suggests.
"The government has taken no action so far to combat inflation, foreign-exchange-reserve crisis. Import has been compressed which could not offset reserve loss in the long run," he told the meet.
There is 'loss of confidence' contributed by 'inaction' of the government which may not be resolved in short run, he said. Rather the situation may go out of control in five to seven years for lack of 'strength of the measure'.
The government will have to make a massive move in the upcoming budget for framing macroeconomic measures. As the upcoming FY is an election year, there might be risk of capital flight too, he predicts.
Dr Mansur finds the growth projection in the country unrealistic, not commensurate with the economic context.
Both Dr Mansur and Dr Zaidi appreciated the expenditure-control skill of the government to adjust with the revenue shortfall.
The PRI projection says the NBR may face an around Tk 546-billion shortfall in revenue collection against its budget for FY23 while it might be Tk 214-billion compared to IMF target.
Responding on tax audit, Dr Mansur said the tax authority should conduct audit of the multinationals' tax files by international companies having expertise to deal with such accounts otherwise FDI would be discouraged if MNCs face unnecessary harassments in business operation.
Dr Zaidi Sattar said speculations on the market often create crisis of confidence in financial accounts though current-account-deficit situation is stabilised by the government.
Dr Razzaque said the upcoming budget in the election year has to shoulder macroeconomic pressure due to decline in remittance earning, reserve crisis, slow export growth and domestic revenue mobilisation.
In the keynote paper, he said the tax-GDP ratio could be raised by 1.6 per cent if the NBR could bring all households in the top 10 per cent of income under 10-percent tax rate.
Tax exemptions are also eating up 2.3 per cent of GDP or Tk 1.023 trillion, he added.
Short-term reform in VAT could increase tax-GDP ratio by 0.6 percentage points or additional Tk 267 billion.
Expansion of tax net may contribute an additional Tk 934 billion in personal income tax, or 2.1 percentage points of GDP.
Despite a revenue increase of Tk 920 billion since FY 18, Bangladesh has a lowest tax-GDP ratio among global economies.
In the FY 2023-24, approximately Tk 3.0 trillion in total would go for interest payments, subsidies and salaries and allowances.
Dr Razzaque also recommended reforming the state-owned enterprises (SOEs) to improve their financial performances by implementing hard budget constraint, improving the pricing policies for SOEs and strengthening corporate governance.