The Financial Express

Creating an enabling environment for private investment

Muhammad Abdul Mazid | Published: June 26, 2016 18:10:09 | Updated: October 18, 2017 00:21:17

Creating an enabling environment for private investment

The national budget proposals have been made with the objective of (1) accelerating economic growth, reducing poverty, and creating higher employment opportunities which are required to implement the 7th Five Year Plan, (2) formulation of action plan to implement the SDGs, (3) formulation of LDC graduation strategy. Keeping these in mind, GDP growth target has been set at 7.2 per cent (7.05 in FY16, provisional), private investment as a share of GDP (23.3 per cent) to rise by 1.5 percentage points, ICOR to rise (decline in capital productivity) and inflation to decline to 5.8 per cent.
However, these prospects have been dreamed when  (1) pace of additional jobs creation slowed down considerably from about 1.3 million per annum (2010-2013) to about 3 hundred thousand (2013-Jul-Sep 2015),  (2) public debt is at a reasonable state (31.9 per cent of GDP in FY15) due to rise in domestic debt as currently about 57 per cent of the public debt is attributable to domestic source, (3) the quality of fiscal planning remained weak over the last four years,  (4) revenue target was not achieved for the last four years and rate of shortfall is increasing, (5) the weakest programming among all the indicators is net foreign borrowing: about 3/4ths of the target remained unattended.
It is apparent that revenue as a percentage of GDP declined since FY 12 when it was 10.9 per cent, expenditure as a percentage of GDP declined since FY 13 when it was 14.7 per cent, ADP expenditure as a percentage of GDP declined since FY 14 when it was 4.1 per cent.
Financial pundits have already expressed concern that high level of budgetary targets (36.8 per cent revenue growth, 28.7 per cent public expenditure growth) may undermine the implementation of the overall budgetary process.  According to Center for Policy Dialogue (CPD), country's celebrated civil society think tank, projections, "all major parameters of fiscal framework will need to register higher growth rates to attain the targets compared to those planned in the Budget FY17. Because the budget targets take revised budget figures for FY16 as its base which in reality turns out to be lower".
Eventually, NBR is to take the lead role (accounting for 81.3 per cent of incremental revenue) with 35.4 per cent growth.  LTU is expected to account for 37.1 per cent of incremental NBR revenue.  30.8 per cent of incremental revenue from income tax; while 28.8 per cent from VAT.   Two-thirds of total income tax will be collected from companies. Deferred implementation of new VAT act may pose serious challenge. Import duty collection growth target is set at 31.1 per cent.  About 50 changes are made in the Income Tax Ordinance through Finance Bill 2016. Corporate income tax remained the same (last year corporate tax rate for listed companies/banks were reduced by 2.5 percentage points. No new bank was listed in the stock market, only 10 IPOs were floated in FY16. Minimum corporate tax at source revised to 0.60 per cent from uniform rate of 0.3 per cent (for tobacco manufacturers: 1 per cent; for mobile phone operators: 0.75 per cent), payments from royalties and certain services (such as professional services, consultancy, event-management, supply of manpower, etc) will be taxed at 10 per cent if base amount is below Tk 2.5 million, and at 12 per cent for exceeding the amount.  ADR advance to be deposited will be 50 per cent of total dispute (10 per cent was the earlier provision), may discourage recourse to this casement. However, broadening tax base, curbing tax evasion and tax avoidance, institutional strengthening will be sin qua non for realising the expected revenue.
Changes in the proposed duty structure (CD, SD and VAT at import stage, operative tariff schedule at 8-digit level) is needed to be aligned with fiscal framework's tax growth. The estimated growth based on the changes in the duty structure departs significantly from the budgetary plans. Proposed duty structure may likely to have positive impact on domestic industries -- duty is reduced on inputs used in few much used popular items like plastic, poultry and dairy food, construction, chemical, electrical, CKD motorcycle for transport sector, laboratory refrigerators, LP gas cylinder. While increase in duties on a number of products may hurt consumers' interest, VAT registered importers may get differential treatment - may encourage VAT registration.  SD on mobile talk time and internet use has been raised from 3 per cent to 5 per cent.
As exportable items like RMG and accessories, terry towel, jute goods, frozen food, vegetables, leather goods and packaged food exporters have to pay AIT at the rate of 1.5 per cent (increased from 0.6 per cent), it may be counterproductive and challenging for the competitiveness in the global market. This needs to be reconsidered. If exemption from VAT is withdrawn from a number of locally produced products and services such as handmade breads,

cake and biscuits (of Tk. 100 or less), plastic and rubber sandal (of Tk. 120 or less), hardboard, fabrics produced from power looms, electric generator, e-commerce and online shopping, etc, cost escalation of those products and services will affect common consumers.  An assessee can take tax credit on investment by investing (reduced to 20 per cent, previously 30 per cent) of his total taxable income, tax liability will be higher for lower income group. If tax deducted at source is higher, it will reduce disposable monthly income and if interest income on savings instruments against approved superannuation fund, pension fund, gratuity fund or recognised provident fund is taxed at 5 per cent, it will be taxing on future income.
The proposed budget has put emphasis on agriculture and social sectors, though agricultural subsidy remains constant at Tk 90.0 billion.  The available fiscal space from lower demand for subsidy could be utilised to incentivise Aus and Aman cultivation further. Public procurement prices have been declared earlier; however, guideline should be there as to how farmers will benefit from this, the issue of crop insurance, mooted earlier has not been followed up. To ensure fair prices for agricultural commodities, and for farmers to benefit from this, CPD proposes setting up of a Permanent Agricultural Price Commission on an urgent basis to ensure incentive price for the producers while maintaining market stability.
Allocation for the education sector is 2.7 per cent of GDP and 15.5 per cent of the total FY17 Budget: remains short of UNESCO's suggested share of 3.8 per cent of GDP and 20 per cent of total budget. Civil Society already expressed concerns that MoPME budget allocation has not risen sufficiently to ensure adequate and timely payments of primary school teachers under the new pay scale, as number of teachers is projected to rise significantly when implementation of National Education Policy begins and there remains urgent need to pay attention to quality enhancement in   primary education. Proposed allocation in health sector  is far behind the strategic financing target: 5.1 per cent of total budget against 10 per cent target set for FY16 (12% for FY21) in "Health Care Financing Strategy 2012-2032" and despite rise in public health expenditure, Bangladesh is still behind  other comparable countries in a number of indices (e.g. nutrition status), public health expenditure in Bangladesh, as a percentage of GDP is much lower than other developing countries as figures show that growth in real per capita expenditure on health is much lower than is shown by the nominal figures.
The proposed budget proposes increase in allowance and number of female beneficiaries for 4 social safety net programmes - Programme for the Widow, Deserted and Destitute Women, VGD, Maternity allowances, Working Lactating Mother Assistance programme, improvement in Old Age Allowances (OAA) (31.3 per cent increase over FY16): both in number and coverage (20 per cent increase in amount, Tk 500/month, and 5 per cent increase in the number of beneficiaries). However, rationalisation of the programmes, better targeting, less leakage should be ensured.
       Continuation of earlier facilities to whiten black money type of provision (investing undisclosed money in real estate sectors and government treasury bond under Special tax treatment, voluntary disclosure of income [19e] through payment of 10 per cent penalty along with the regular tax) may create moral hazard, and is a disincentive for honest taxpayers and may encourage tax evasion. Considering the increasing outflow of illicit financing, once again exposed through Panama Paper scandal, think tanks pundits have emphasised the need for a predictable legal framework including a new law on undisclosed money and Benami Property Act.
Creating an enabling environment for attracting more private investment has been identified as one of the major challenges in Budget FY17. Attaining the proposed fiscal framework for FY17 is going to be an uphill task if challenges are not met in (a) mobilising the targeted domestic resources, (b) capacity to spend the earmarked allocations, (c) quality of public expenditure, (d) structural and institutional weaknesses, (e) more transparency in budget implementation and assessment procedures.
Muhammad Abdul Mazid,PhD, a former Secretary to GoB and Chairman of NBR, is the Chairman of the Chittagong Stock Exchange.

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