Challenges of revenue mobilisation, deficit financing

The fiscal framework for FY21 will need to break free from the traditional mould given the magnitude and impact of the ongoing Covid-19 pandemic and its short-term impacts and medium-term footprints. Adverse impacts of domestic and export-oriented activities and likely slow recovery will make resource mobilisation particularly challenging in FY21. On the other hand, there will be pressure on the Ministry of Finance to provide additional incentives (in terms of both fiscal measures and budgetary allocations) from perhaps across all sectors and segments of the economy. The Ministry should pursue fiscal policy in a judicious manner considering the overall welfare of the economy. Taking this into consideration, the revenue mobilisation strategy for the FY21 budget should be pursued by taking the following four approaches: i) setting the revenue mobilisation targets in a prudent and realistic manner; ii) designing the tax measures considering both the risk and vulnerability mitigation urgency and the subsequent economic recovery in tandem with revisiting current fiscal incentives; iii) strengthening of monitoring and enforcement mechanisms and iv) prioritising implementation of medium-term reform plans.

In view of this, Centre for Policy Dialogue (CPD) is putting forward a set of recommendations, presented below, for consideration while formulating the budget for FY21.

a) Keeping food prices low to ensure food security of low-income people should be seen as a strategic objective. Budget proposals for NBR in FY21 should be guided by this. Reduction of import related tariffs (such as AIT and VAT) on essential food items such as onion, lentil, garlic, ginger and soybean oil etc., should be considered in the light of the evolving market scenario in terms of price, projections about production and the demand scenario.

b) In the FY21 budget, NBR should consider raising the tax-free income threshold levels from Tk 250,000 to Tk.350,000. Besides, it may also consider restructuring the first three slabs of income tax from 10, 15, and 20 per cent to 5, 10, and 15 per cent respectively, at least for next two years. NBR may consider allowing payment of individual income taxes for FY20, by instalments, by March 2021.

c) NBR must be restrained from all ad-hoc provisions of tax incentives. NBR needs to be selective and careful in the next fiscal year as more demand for incentives will be lined up in the wake of Covid-19. Proper cost-benefit analysis must be conducted before coming up with new provisions. The objective of the tax incentives should be to directly support particularly the marginalised group. Fiscal incentives provided should take cognisance of other measures in support of particular groups/sectors. For example, corporate tax rate should be unchanged in view of the fact that a number of measures have already been taken in support of large entrepreneurs.

d) CPD would like to reiterate its earlier proposals urging the NBR to initiate wealth and property taxes in Bangladesh. Also, an inheritance tax, informed by global best practices, may be introduced. Besides helping to mobilise additional revenue, such initiatives will also provide an opportunity to build a more equitable society.

e) All types of tax evasions and illicit financial flows (IFF) will need to be curbed with a strong hand. As is known, Bangladesh loses a sizable amount of resources as a consequence of IFF. Coordinated efforts by several policy actors will be required to implement the National Strategy for Prevention of Money Laundering and Combating Financing of Terrorism (NSPMLCFT) 2019-21 in all areas related to tax evasion and IFF

f) The planned procurement and installation of EFD and SDC devices by NBR must be accelerated in order to ensure effective implementation of the new VAT law and augment additional revenue at a time of resource constraint. At the same time, unfinished components of the VAT online project must be completed in a comprehensive and timely manner so that hassle-free submission of VAT returns can be ensured

g) The existing black money whitening facility through voluntary disclosure of undisclosed income discourages honest taxpayers while tax evaders are encouraged. This provision should not be continued from the next fiscal year. There may be increased pressure for this on the ground of mobilising additional money in the backdrop of likely difficulties in resource generation in FY2021. As is well known, this measure has failed to register any notable response in the past

h) Since automation is an integral part of the new VAT regime, NBR should eliminate all hurdles with regard to registration and getting BINs, updating information, installation of devices and submission of returns. It should also clarify ambiguities concerning the VAT law including central registration system, exemption and registration threshold, definitional complexities as regards businesses and stakeholders in line with Public Financial Management (PFM) Action Plan 2018-23

i) NBR should, at the earliest, launch a comprehensive on-line payment system for VAT, income tax and customs together with an interface with iBAS++ and ensure harmonisation and taxpayer data sharing across various wings of the NBR, as has been envisaged in the PFM Action Plan 2018-23.

j) Broader use of technology may bring forth some uptick in revenue mobilisation efficiency. CPD urges NBR to introduce an e-TDS system to this end. Such a system will enable NBR to issue tax certificates against an e-TIN linked to the 'tax-deducted-at-source (TDS)' collection system. This will make evasion of TDS difficult.

k) For the upcoming FY21 budget, a viable completion timeline should be chalked out for implementing the reforms which are already under consideration (e.g., Customs Act and Direct Tax Act), so that results could be generated at the earliest at a time when this is most needed.

DEFICIT FINANCING: In view of the favourable debt situation and the need for increased public expenditure, to combat Covid-19, in the backdrop of subdued revenue mobilisation, the possibility of pushing the budget deficit beyond the traditional cap of 5.0 per cent of GDP may be a necessity in view of the upcoming FY21. However, this increased budget deficit should be managed through prudent use and appropriate diversion of available resources.

It is critically important to give heightened attention to both tapping and utilisation of new funding opportunities from external sources, particularly those from multilateral and bilateral sources. The funds need to be mobilised to combat the Covid-19 pandemic. The government has already approached a number of development partners in this regard. Such efforts should be intensified and every available opportunity should be exploited. To this end, Bangladesh should actively seek budgetary support from potential external sources as such funds can allow more flexibility in terms of spending.

Bangladesh should take advantage of the decision of the G-20 as regards providing low income countries funds at low interest to combat Covid-19 pandemic. There may also be opportunities for suspension of debt service payments and debt cancellation not only from traditional OECD development partners but also from Southern countries which are members of G-20. These should be proactively explored and pursued.

It is to be noted that sale of NSD certificates has already come down by a substantial degree. Given the downturn in economic activities, credit demanded by the private sector is expected to remain low. Hence, the government may opt for borrowing from commercial banks to finance the increased deficits considering availability of liquidity in the banking sector.

The current regulations pertaining to NSD certificates (e.g., purchasing limit, requirement of e-TIN and NID while purchasing, interest rate etc.) should be kept unchanged, and properly enforced.

Mobilisation of idle funds lying with state owned entities could be accelerated to finance the increased deficit in view of the added expenditure required to tackle the ongoing pandemic. For example, windfall gains of the Bangladesh Petroleum Corporation (BPC) in the backdrop of lower oil prices should be channelled towards resource mobilisation.  PUBLIC EXPENDITURE: The government is set to propose a fiscal budget of about Tk. 5.60 trillion (560 thousand crore) in FY21 which is higher than the original budget of FY20 and the revised budget of FY20 by about 7.0 per cent and 11.3 per cent respectively. It is pertinent to have some idea about the benchmark situation based on latest available data to provide plausible recommendations to the government to pursue its development, non-development and sectoral allocative priorities in view of immediate and short-term recovery in the context of Covid-19.

According to the MoF, actual expenditure under non-development head during July-February of FY20 was 44.3 per cent of the originally planned allocation (48.3 per cent in FY2019). It was characterised by a growth of 42.0 per cent in subsidies. For FY2020, the government set aside Tk. 28.25 billion and Tk. 30.60 billion as subsidies to provide 1.0 per cent cash incentive for RMGs export and 2.0 per cent cash incentive for remittance senders, respectively. However, this will not be exhausted fully following the decline in RMG export earnings and remittance inflows in view of the Covid-19 pandemic. Accordingly, the government should be able to save about Tk. 13.0 billion, after April 2020, from its earmarked subsidy amount for the aforementioned sectors. Further, falling oil prices in the international market in the aftermath of Covid-19 and the oil-war between Saudi Arab and Russia have provided an opportunity to the Bangladesh Petroleum Corporation (BPC) to make significant profits, which was likely to provide some fiscal cushion to the government. (BPC is currently making a profit of around Tk 230 million per day since late February 2020, particularly in view of short-term procurement).

According to the IMED data for the first eight months (July-February), actual spending under ADP was 38.5 per cent (30.9 per cent as per MoF data) of the originally planned allocation of Tk 2027.21 billion (38.8 per cent in FY2019). Lower utilisation (35.5 per cent) of foreign aid (lower than both FY18 and FY19 for the corresponding period) led the reduction of ADP by Tk. 98.0 billion (or 4.8 per cent), downsizing the ADP to Tk 1929.21 billion in the RADP for FY20. Government has already identified 330 projects as less priority ones from which it expects to save about Tk 100 billion to be spent in priority sectors. This will lead to further reduction of RADP for FY20 (up to April, these projects were able to spend less than 50.0 per cent of respective allocations).

Pursuing an expansionary fiscal approach is aligned with government's four declared strategies which were to be pursued over the next three fiscal years. This approach is critical for boosting domestic demand and providing food security and to ensure livelihood for the marginalised citizens. To this end, MoF should pursue some measures as described below.

NON-DEVELOPMENT EXPENDITURE: To reduce public expenditure pressure, the government needs to identify non-development expenditure which may be deferred. Some of these are expenditures on foreign travel, acquisition of assets, investment in shares and equities, recapitalisation of state-owned enterprises. These should be deprioritised

a) Expected fiscal cushion emanating from non-utilisation of cash incentives for RMGs and remittances following the declining trend in the RMG export growth and the expected significant decline in remittance flows over the coming months due to Covid-19 may be channelled as 'minimum income support' for the returnee migrants and the RMG workers [if needed in addition to the government announced support for working capital (wages) provided under the credit line].

b) Expected savings from lower oil prices at the global level need to be channelled to selected sectors particularly health, agriculture and SSNPs.

DEVELOPMENT EXPENDITURE: The ADP for FY21 should be designed with due caution to ensure that required priorities are followed and inclusivity is maintained in view to responding to the ongoing Covid-19 pandemic (e.g., adequate and priority allocation for health, agriculture, social protection and, labour and employment sectors). Additionally, efficient utilisation of the allocated funds needs to be ensured so that no major revisions are required towards the end of the fiscal year.

a) MoF should identify which projects need additional funds for completion in FY21 that are critical to support the causes of health and economic emergencies. This additional allocation needs to be made available from other projects where activities could be deferred without incurring high costs and debt burden. Identification of such projects could be based on a number of criteria including: (i) projects which do not involve commitment of foreign aid and those whose completion rate was less than 30.0 per cent in financial terms in FY20; (ii) projects in case of which targeted project aid may be disbursed at a lesser amount against the disbursement schedule; (iii) projects where economic costs for delayed implementation could be accommodated (compensated) through economic gains of some other priority projects. It is to be noted in this connection that approximately 1,192 (81 per cent of total) projects in FY20 ADP do not have project aid component.

b) Inclusion of projects with 'symbolic' allocations (for example, Tk 0.10 million to 1.0 million) should be avoided in the ADP for FY21 considering the requirement of funds for priority projects. For example, there were a total of 100 projects in ADP for FY20 which received allocation of less than or equal to Tk 10 million.

Dr Fahmida Khatun, Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; and Towfiqul Islam Khan, Senior Research Fellow, CPD.

[email protected]; www.cpd.org.bd

[The article is based on CPD IRBD 2020. Research support was received from Md. Zafar Sadique, Mostafa Amir Sabbih, Muntaseer Kamal, Md. Al-Hasan, Abu Saleh Md. Shamim, Nawshin Nawar and Tamim Ahmed]