Tax incentives vs IMF conditionalities

One of the conditions Bangladesh was to meet for utilising the multilateral lender IMF's US$4.7 billion loan package has been improvement in the country's tax-to-GDP ratio, one of the lowest in the world. Currently, the ratio is 6.6 per cent, which the IMF wants to be raised to 8.4 per cent within this year.

Achieving that target would require the tax regulator, the National Board of Revenue (NBR), to mobilise an increased amount of revenue by way of widening the tax net and doing away with the various facilities and incentives in the form of slashing tax, outright waivers, incentives, discounts and various other benefits it has been awarding to businesses both small and big. In this connection, the multilateral lender has urged the NBR to impose new taxes on the businesses as well as withdraw the tax exemptions they have already been enjoying under the NBR's previous commitment. But the tax regulator during its recent meeting with the IMF team, which had been on a visit to spot-check the progress on the utilisation of its tied loan package, did, reportedly, expressed its inability to suddenly withdraw all tax exemption measures before their expiry dates. The NBR's position is quite understandable. For whatever decisions the tax regulator might make, businesses plan their investments and expansion policies based on those.

Moreover, the slapping of a uniform 15 per cent VAT on all goods and services, as suggested by IMF, runs the risk of fuelling inflation as well as hurting the essential goods and services sectors including basic foods, poultry, fisheries and vital healthcare services. Similarly, any abrupt withdrawal of the tax exemptions or imposition of new taxes midway is apt to send a wrong signal to investors about the government's overall business policy, particularly when it looks hostile to investment in general. Worse, it might raise questions about the very predictability of the government's policy stances. Reportedly, following the IMF's recommendations in December and January last, the NBR withdrew income tax benefits for oceangoing vessels, though those provisions were valid till 2030. In a similar vein, the 'reduced 10 per cent corporate tax-benefit' for the local electrical goods manufacturers who were entitled to enjoy it till 2032, was not only revoked, but a fresh tax of 20 per cent was also imposed on them. As expected, in either case, seeking redress, the aggrieved parties went to law through filing writ petitions with the High Court, which stayed the government's orders. This is undoubtedly embarrassing for the government, or tax regulator for that matter. Worse, the example might encourage other investors similarly taxed also to seek the court's intervention to resolve their issues.

As the tax regulator is confronted with such challenges while implementing the multilateral lender's recommendations in the case of shipping and electrical goods industries, the removal of the tax waivers being enjoyed by other sectors including the country's vital foreign investment earning sectors like the Export Processing Zones (EPZs) and Economic Zones (EZs) may not also go unchallenged. If common sense is any guide, the government's tax policy should be rational and predictable so that those already in business may duly accommodate it, while the would-be ones might plan accordingly. Under any circumstances, the tax policy should not frighten off investors which goes against the basic premise of the tax regulator. The premise is to increase revenue. Under the circumstances, to meet the IMF's obligations, the government would be well-advised to take a rational approach to cancellation of tax exemptions, preferably in a phased manner without adversely affecting investments.