VAT increase:  a fresh burden on the poor

At the very start of the year, the middle and lower-middle classes received a "gift" from the government in the form of increased VAT (value-added tax). Before delving into the implications, it is crucial to define the "lower-middle class." These are individuals who perceive themselves as middle class and aspire to maintain a middle-class lifestyle but remain financially tethered to the lower-income group. For instance, they are able to dine out with their family twice a month but cannot order everything they desire in one sitting. If they order beef curry once, they have to save lamb leg roast for the next time. Similarly, if their child suddenly asks for another scoop of ice cream after the first, it might mean cutting back on protein at home for a meal. These are the people who constitute the lower-middle class. These are the people who struggle to balance indulgence and affordability.

Now, let's discuss this "gift" of increased VAT and how that will affect us, the common people. According to the economic advisor, businesses with an annual turnover of BDT 5 million or more will now be required to pay a 15 per cent VAT. This translates into a monthly revenue of TK 416,000 or a daily sales figure of approximately Tk 13,900. While the tax is levied on businesses, the burden ultimately falls on consumers.

Let's illustrate this with an example. Imagine operating a restaurant that serves only one popular dish, biryani, priced at Tk 280 per plate. If the restaurant sells 50 plates a day, it must pay 15 per cent VAT on the total revenue, regardless of profit margin. To stay profitable, the restaurant will have to either reduce portion sizes, compromise on quality, or raise prices. In all scenarios, the end consumer bears the brunt of these changes. However, the economic advisor stated that the VAT increase is unlikely to cause distress, asserting, "There's no reason for people to feel discomfort."

The government requires funds to run the country and sustain itself. These funds are provided directly or indirectly by the people through businesses, jobs, remittances, and other sources. The purpose of giving this money to the government is to ensure that it takes care of its citizens, provides security, and reduces inequalities. This system is universal across the world.

Globally, governments impose higher taxes on those who have more wealth and on goods and services consumed primarily by the rich. The revenue collected from these taxes is then used to provide benefits and support to the poor, lower-income, and middle-class populations. These benefits cover basic living necessities, services, and essential goods.

The new VAT policy affects 43 categories of goods and services, many of which are consumed by the middle and lower-middle classes. Under the new VAT law, the tax on non-AC restaurants has been doubled from 7.5 to 15 per cent, while AC restaurants have seen an increase from 5 to 15 per cent. The VAT on all types of clothing has been raised from 7.5 to 15 per cent, and sweets have experienced a similar raise from 7.5 to 15 per cent. These items are commonly used by the middle class, lower-middle class, and even occasionally by the lower-income groups. Now, one might ask, don't the wealthy or upper-class individuals consume these as well? Of course, they do. Sweets, for instance, are enjoyed by everyone, from day labourers to the wealthiest elites. Both the day labourer and the person stepping out of a luxury SUV will pay the same 15 per cent VAT for the same sweets.

The products and services subjected to increased VAT primarily have the middle class and lower-middle class as their main consumers. As a result, the government is extracting more money from the middle, lower-middle, and lower-income groups, whereas the burden should have been placed on the wealthy. Taxes and VAT should have been increased on goods and services consumed by the affluent.

Just as previous political governments exploited the poor to benefit the rich-diverting savings from the middle and lower-income classes'-this non-political government appears to be following the same approach. They aim to please the wealthy by squeezing more money from the middle and lower-middle classes. Everyone seems to be complicit in this, acting in agreement.

The government needs funds. However, the NBR has failed to increase revenue due to its shortcomings and inefficiencies. Instead of expanding its revenue base by taxing the wealthy and bringing more people under the tax net, the NBR has opted to squeeze more money from existing sources.

In Bangladesh, only 1.8 million people pay taxes, of which 1 million are government and private sector employees. This means that only 800,000 business owners pay taxes. Does this imply that the country has only 800,000 wealthy or ultra-wealthy individuals? In a nation of 200 million people, only 1.8 million taxpayers exist! Even if 10 per cent of the population paid taxes, that figure should be 20 million. The NBR has failed to bring these wealthy and ultra-wealthy individuals into the tax net and has instead opted for the easier route of extracting additional funds from the middle and lower-middle classes.

Reforms are easy to suggest but difficult to implement. Despite having many ways to expand the tax net, these measures are not being applied. Here's a simple solution: Almost everyone in the country has a National ID (NID). The NID is already linked to bank accounts, mobile banking, mobile numbers, and TINs (Taxpayer Identification Numbers). By creating a list of individuals over the age of 35 without a TIN and checking their bank account transactions for a certain amount within a specific month, it would be simple to identify those outside the tax net. This process, including reconciling data with bank records, can be automated and completed in just 10 minutes using software. Once identified, the NBR can bring these individuals under the tax umbrella. However, the NBR has little interest in pursuing such initiatives. The government must push the NBR to adopt these measures.

2025 is poised to be a challenging year for the middle and upper-middle classes. These groups have never truly had anyone advocating for them, and it seems unlikely that they will now. They will have to fend for themselves, battling against high inflation, minimal salary increments, the government's arbitrary stance, and the discriminatory policies of bureaucracy. In the process of fighting to survive, many will likely slip from the middle class to the lower-middle class.

Rubaiyat Shaimom Chowdhury, Associate Professor, Finance, Bangladesh University. rubaiyat.shaimom@gmail.com