Budget Review of Bangladesh: FY 2012-2013

 

2.0 Budget Profile  On the 7th of June, 2012 the 42nd budget of Bangladesh was announced by Mr. Abul Mal Abdul Muhith. The budget came into activation on the 1 st of July, 2012. This is for the first time in the history of  Bangladesh where the budget was not activated on the very day of the announcement. This is because some new duties and taxes were introduced that needed the sanction from the parliament and took some time in the bureaucratic process. The short profile of the budget is given below: Table 1: Budget Profile Sector

Allocation

In terms of Budget

In terms of GDP

Total Budget

1,91738

x

18.41%

Total Income(with revenue

1,45,714

76%

13.99%

Revenue Earning

1,39,670

72.84%

13.41%

Foreign Aid

6,044

3.15%

0.58%

Annual Development

55,000

x

5.28%

46,024

24%

4.42%

52,068

27.15%

5%

and foreign aid)

Program (ADP) Total Deficit (with Foreign Aid) Total Deficit (without Foreign Aid) Financing

46,024

Foreign Loans

12,540

6.54%

1.2%

Domestic Loans

33,484

17.46%

3.22%

Total GDP

10,41,360

*The amounts are in crore Bangladeshi Taka

Assumptions GDP Growth of 7.2% Infalation Rate 7.5%

 

This was the view of the budget in short. We can see clearly that there is deficit which means the budget is not balanced. And we have 24% deficit which is an alarming factor. Now let us have a look at the budget Structure comparatively. comparatively. Table 02: Budget Structure over the years

*Amounts are in crore Bangladeshi Taka

 

2.1 Budget Allocation and Sources   The whole financing procedure expected according to the Finance Minister of Bangladesh is providein in the following. Table 03: Financial sourcing Source

Contribution

NBR Tax

58.50%

Domest5icc Financing

17.50%

Non Tax Revenue

11.90%

Foreign Sources

6.50%

Foreign Aid

3.20%

Non NBR Taxes

2.40%

Figure 01: Sources of Financing (comparatively)

Foreign Sources, 6.50%

Foreign Aid, 3.20%

Non NBR Taxes, 2.40%

Non Tax Revenue, 11.90% Domest5icc Financing, 17.50%

NBR Tax, 58.50%

From the chart we can clearly see that the major source of financing is National Board of Revenue Taxes. NBR Taxes: The National Board of Revenue (NBR) is the central authority for tax administration in

Bangladesh. Administratively, Administratively, it is under the Internal Resources Division (IRD) of the Ministry of Finance (MoF). Negotiating tax treaties with foreign governments and participating in inter-ministerial deliberations on economic issues having a bearing on fiscal policies and tax administration are also NBR's responsibilities. The main responsibility of NBR is to mobilize domestic resources through

 

collection of import duties and taxes, VAT and income tax for the government. Side by side with collection of taxes, facilitation of international trade through quick clearance of import and export cargoes has also emerged as a key role of NBR. Other responsibilities include administration of matters related to taxes, duties and other revenue related fees/charges and prevention of smuggling. Under the overall control of IRD, NBR administers the excise, VAT, customs and income-tax services. Domestic Financing: Domestic financing here means financing from local banks and other financial

institutions. Non-Tax Revenue: It is a type of national and local governmental budgetary income. This includes

revenue arising from state-owned enterprises enterprises and from the issue of bonds and paper money. Non-NBR Taxes: Non NBR taxes are the duties and taxes that are not managed by the National board of 

revenue. Foreign Aid and Foreign Sources are foreign contribution to our country and economy.

2.1.1 NBR Taxes  The sources of the NBR Taxes are given in the following. Figure02: Specific sources of NBR Taxes Others 2% Import Duty 13% Supplementary Taxes 18%

Income Tax 31%

VAT 36%

 

2.2 Budget Expenditure   The total sectors of expenditure for Budget of fiscal year (FY) 2012-2013 are presented graphicall in the following for comparative view. Figure 03: Total Expenditure (in percentage) Entertainment, culture, religion 1% Industry & Financial services 1%

Total Expenditure

Housing 1% Miscellaneous 12%

Individual Security & Discipline 5%

LGRD 7% Agriculture 8%

Education & Technology 12%

Health 5% Fuel & Electricty 5%

Social Security & Welfare 6%

Interests 12% Deffence 7%

Administration 13%

Transportation & Communication 7%

These are the total sectors and their allocation thereby. This is how the utilization of the resources has been planned.

 

2.2.1 Sectorwise Distribution and Priority   Table 04: Sectorwise Distribution Priority

 

 

 

2.2.2 Sectorwise Allocation of ADP   Table 04: Sectorwise Allocation of ADP

 

 

2.3 Summary  The Taka 1917.38 billion proposed budget for the forthcoming fiscal, 2012-13, is sized at 18.1 per cent of  the country's gross domestic product (GDP) that is projected to do grow at 7.2 per cent during the year. There are challenges and risks, both domestic and external, that do provide some strong reasons for being not much optimistic at this stage about achieving this growth performance. That does not mean that the growth target itself is overambitious. The actual performance of the Bangladesh economy has otherwise been impressive over the past several years in a row, given the comparative picture of other low-income developing countries and the odds and difficulties, both exogenous and endogenous. But even this performance has been considered below the potential of Bangladesh. This is what the economists, analysts, development practitioners and all others, within and outside, have been stating about Bangladesh over the years.

The growth rate, however, is not the sole indicator of 'socio-economic development' in its broad sense. But it unquestionably remains to be one of the important criteria for assessing the overall performance of an economy. The quality of growth -- its nature and dimension of inclusiveness, impact on social development indices concerning the state of education, health, nutrition and, thus, human resource development, income-distribution income-distribution and employment-generation effects, poverty alleviation efforts etc. --

 

is also a pertinent point for consideration. The budget through its tax measures and expenditure allocation and use pattern, does have a relevance to both overall growth rate and its quality, though the outcome of efforts for improvements in both areas can be influenced better by a medium-term framework for public policy actions and interventions than the routine annual budgetary exercise.

So far so good. Looking at the overall size of the proposed budget for the fiscal year (FY), 2012-13, in its relation to the country's GDP, it is certainly not overbloated. In comparable countries in both regional and wider international contexts, governments' aggregate expenditures there, as are made through their respective national budgets, are higher than those in Bangladesh, in terms of size of their GDPs. In developed countries, public expenditures as the ratio of GDP are much higher. Total public expenditure in Bangladesh, according to figures available from Thursday's 'Budget Speech 2012-13' of Finance Minister AMA Muhith, will stand, under the revised budget for the outgoing fiscal, at 17.6 per cent of  the country's GDP against an estimated 18.2 per cent under the original budget for the same year. The government had to lower its public expenditure in the outgoing fiscal because of its downsizing the original Annual Development Programme (ADP) -- that represents essentially pubic investment -- to the tune of Taka 23.76 billion under the revised budget. This decrease in revised ADP size has been attributed to the failure in utilising external project aid to the expected level during the outgoing fiscal.

In this context, one key challenge before the government in areas of implementation of the proposed budget of FY 2012-13, with an allocation of Taka 550 billion for the year's ADP against Taka 410.80 billion under the revised ADP for the outgoing fiscal, will be the management of its development expenditures. This is all the more so because the proposed budget for the next fiscal is predicated upon an estimated disbursement of external assistance at the level of Taka 264.42 billion -- Taka 203.98 billion in foreign loans (mostly on concessional terms) and Taka 60.44 billion in the form of foreign grants (that do not entail any repayment or debt servicing liability) -- for funding projects under the ADP and also for meeting other related resource requirements. Without strengthening the capacity of the government for implementing the externally-aided projects, improving overall budgetary management-related operations and forging better understanding with the development partners, it will be well-nigh impossible to ensure an increased flow of external assistance to the tune of Taka 79.46 billion -- Taka 63.62 billion in project aid and Taka 15.84 billion in the form of grant -- in the forthcoming forthcoming fiscal over the aggregate level of foreign aid disbursement at the level of Taka 184.96 billion -- Taka 140.36 billion as project assistance and Taka 44.60 billion in the form of grants -- under the revised budget of the outgoing fiscal. The priority for the government here is all too obvious: concentration of its focus, attention and efforts on proper implementation of projects that are supported by low-cost external aid funds by avoiding inclusion of any new unapproved projects on political and other narrow considerations having no worthwhile links with the real development needs of the economy. Then the available domestic resources will not be thinned out on such unapproved new projects and also the matching taka resources will not fall short of the requirements to utilise effectively external assistance for the approved, aided projects. In the pen-ultimate year of an incumbent government under the

 

periodic electoral cycle, this is extra-ordinarily important to keep this in mind if the stated goals, objectives and desired outcomes of the proposed budget, particularl particularlyy in areas of fiscal management for meeting its growth target and taming inflation from the current near double-digit one to 7.5 per cent in fiscal 2012-13, are to be achieved as far as possible. Otherwise, wrong politics with electoral considerations only in view for inclusion of more short-sighted, unapproved projects for making claims on public resources, will run afoul of the overriding need to follow a sound economic rationale for efficient uses of budgetary resources.

The proposed budget for fiscal 2012-13 does otherwise provide no plausible ground to consider it to be any symptomatic fiscal profligacy -- a case that is not unusual in countries like Bangladesh when it is framed solely on electoral considerations. Its expenditure outlay, on both recurring (non-development) and development (ADP) sides, is more or less in line with what was witnessed in the recent past. In order of allocations of fund under overall public expenditures, expenditures, first comes public administration (14.0%), followed by interest payments (12.2%), education & information technology (11%), subsidies (7.5%), local government & rural development (7.4%), transport & communication (6.8%), defence (6.0%), social security & welfare (5.3%), energy & power (5.0%), health (4.7%), agriculture (4.3%) and public order & security (4.2%). The rest of overall public expenditure outlay has been proposed for pension (2.3%), industrial & economy services (1.5%), recreation, culture & religious affairs (0.8%) and housing (0.7%), with the miscellaneous expenditure accounting for the remaining 6.3 per cent of such aggregate expenditure. The resource allocation pattern, in terms of share in the projected aggregate budgetary expenditure, is not largely inconsistent with the trends witnessed in previous fiscal years. Yet then there remains some cause for disconcert about the swelling expenditure bills, in absolute terms, in areas of  interest payments (largely on account of domestic borrowings of the government), subsidies and public administration, transfer payments, pensions and retirement benefits (which are still managed on asand-when-required and yet-unfunded basis). Quality of such expenditures, their targeting, links with efficiency and institutional strengthening, and creating enough space for meeting their expected growing burden in the future without putting strains on budgetary resources that may cause diversion of funds away from needs having greater priority, do merit attention of all concerned for sustainable fiscal management in the years ahead.

The overall budget deficit for the forthcoming fiscal has been projected at 5.0 per cent of GDP, despite the increase in the aggregate size of the proposed budget by about 19 per cent over the revised one of  Tk. 1612.13 billion for the outgoing fiscal. If the year-end actual deficit can be maintained at the projected level in FY 2012-13, this will even then be marginally lower than that of 5.1 per cent under the revised budget for fiscal 2011-12. This, by itself, will be a challenging task, if the government is to limit its domestic borrowing from the banking system to Tk. 230 billion -- a level which is Tk. 61.15 billion lower than that of such borrowing (involving higher higher costs than those of o f foreign aid in the form of loans) at Tk. 291.15 billion under the revised budget of the outgoing fiscal. However, government's domestic borrowing form non-banking sources has been projected at Tk. 104.84 billion for FY 2012-13 which is Tk.

 

51.30 billion higher than the level of Tk. 53.54 billion under the revised budget for the outgoing fiscal. The projected level of overall budget deficit for the forthcoming fiscal is not a cause for any extra concern, provided the government can collect its projected level of tax and non-tax revenues at Tk 1396.70 billion -- which is over 20 per cent higher than that of Tk. 1168.24 billion under the revised budget for fiscal 2011-12 - and ensure disbursement of external grant at more than 13% over the level of the outgoing fiscal, without borrowing funds from the banking system exceeding its projected target.

The collection of both tax and non-tax revenues will largely depend on the level of performance of the economy. Export activities, import operations, remittance remittance flows, volume of investments, investments, actual level of  production in real sectors etc., will be the major determinants of the pace at which the GDP will expand. Here the challenges in areas of deficit of both infrastructure-related services and good governance, high costs of doing businesses and the likely adversities under the present difficult times in the Eurozone and other developed economies, can under no circumstances be glossed over. For the government, hard and determined efforts will be needed to address the domestic constraints to accelerated growth performance of the Bangladesh economy, remaining, at the same time, alert about taking appropriate actions to create adequate space to absorb the external shock-effects in an uncertain and unpredictable situation. Things here are easier said than done.

The proposed budget for FY 2012-13 takes note of the challenges and risks facing the Bangladesh economy. It also reiterates the commitment of the government to implementing some critical economic reforms. All concerned would look forward to see actions coming in right time and at an appropriate sequence, amid doubts persisting about the government's political will and courage to undertake any hard reforms in the pen-ultimate year of its tenure under the periodic electoral cycle.

 

3.0 Budget Issues   In this part of the report the challenges and important topics have been discussed.

3.1 The arithmetic of projections and ground realities   One need not be too curious to notice that reactions to the proposed budget for 2012-13 pouring in since the past few days have followed a more or less structured patter pattern, n, a good deal of which seems to emerge from number games difficult to reconcile. Yes, there have been rhetoric and polemics too, terming it 'election-centric' by some quarters, a 'document of failure' by the spokesperson of the main opposition alliance, and 'mysterious' by the key celebrity of a renowned think tank.

Rhetoric apart, the fact remains this is a budget designed to meet a huge number of challenges with resources that are neither ready nor adequately geared up, and hence the patch work calls for — you know what — assumptions. To be true to realities, designing a budget proposal for a country like Bangladesh is hugely dependent on assumptions However, assumptions can either be sound and for that matter grounded in reality or if you let loose, fantasy-driven. In the budget proposal, there are areas where one tends to see an element of indulgence in assunptions. The result is an apparent clash between projections and ground realities, and more so a growing scepticism about the bottom line —  achievement of the projected GDP growth rate at 7.2 per cent in the next fiscal from an estimated 6.32 per cent in the current one.

The much talked-about issues in the past few days on the budget proposal included among others, domestic financing and government borrowing, expected foreign aid, incremental export tax at source, shift of subsidies from agriculture, ADP implementation etc. It need not be stressed that speculation, indeed sound speculation, has to play a crucial role in each of these issues.

To start with domestic financing and government borrowing, there is a strong sense of disbelief that excessive loan dependency aimed at meeting the deficit will fetch the desired results as anticipated by the finance minister. In his budget speech to Parliament, the finance minister said the government plans to borrow Tk 338.84 billion from domestic sources. The figure includes Tk 230 billion from banks, which is Tk 50 billion higher than what was in the current fiscal. Trying to put forward a rationale behind the plan, the FM said the target of borrowings from the banks although seems higher than the previous year

 

in terms of numbers; it is actually lower in terms of GDP growth. But stakeholders do not seem at all convinced. The Federation of Bangladesh Chambers and Commerce and Industry (FBCCI) has urged the government to slash its target on borrowing from domestic sources to meet budget deficit. 'The private sector would be harmed if the government plans to borrow such a huge amount of money from the banks. It will deepen the liquidity crisis. Interest rates of the banks will also go up' — the chief of the apex body has made his statement clear and loud. However, it is a general assumption that the government eventually may not brave the risk in the wake of a deteriorating liquidity situation in order to fund the deficit. In that case, the projected borrowing is not going to materialise.

Beside the targeted bank borrowing of Tk 230 billion, the budget speech mentions Tk 74 billion to be collected from selling savings instruments. Under the prevailing situation this does not at all seem plausible. The net sale of savings certificates was only Tk 3.28 billion in 10 months (July-April) of the current fiscal. So, chances are high that the finance minister is not getting the money he plans to procure, though at a very high cost, to finance the deficit.

As regards deficit financing from expected foreign aid there appears an over indulgence in the arithmetic of projection. In his budget speech, the FM expected to receive Tk 210 billion from foreign sources. The targeted amount is equal to $ 2.5 billion as against a paltry $ 838 million of foreign aid received by the country in the first 11 months of the current fiscal. Given the lingering global recession compounded further by the Eurozone crisis, a hike in foreign aid by as high as $ 1.67 billion defies logic, to say the least.

Doubling export tax at source to 1.20 per cent from the existing 0.07 per cent for readymade garments and 0.06 for other export sectors appears to be more backed by revenue generation than increasing exports. Both the FBCCI and the Bangladesh Garments Manufacturers and Exporters Association (BGMEA) have strongly reacted to the proposal terming it sacrificing export growth to the revenuecentric policy of the proposed budget. Here also the estimated revenues on account of higher export tax and its impact on export earning appears to have been grossly misjudged.

One of the most noticeable features of the budget proposal is the shifting of priority from agriculture to power and energy. The drop in the budgetary allocation for agriculture is sure to encourage discrimination between urban and rural areas, as has been very aptly pointed out by the Centre for Policy Dialogue (CPD). In the absence of increased subsidies in the farm sector, fertiliser fertiliser price will shoot up resulting in an undesirable escalation in production costs.

 

Another issue, also believed to have emerged from flawed arithmetic, is the increase of minimum income tax from Tk 2000 to Tk 3000, as against the demand for raising the ceiling for tax-free income. A wider tax net at low rates would in all probability fetch higher revenue than in a totally reversed scenario.

Implementation of Annual Development Programme (ADP) has been a headache for the government over the years. Less than 50 per cent ADP implementation in the current fiscal (July-April) has starkly exposed the incompetence of respective ministries in expenditure management. The FM has recognised this as a serious impediment impediment and mentioned some measures to take care of the time-consuming patter pattern n of expenditure management. Given the current year's performance, the projected ADP implementation to the tune of Tk 550 billion seems lofty indeed. However, it is for the government to bring in necessary dynamism to do away with lackluster implementation mechanism.

From what is apparent in the budget proposal-- especially the projections not often well grounded, at times bordering on the outlandish-- it is thus important that the conflicting areas are revisited to make things look plausible.

3.2 The growing Risk of Political Stalemate   Finance Minister AMA Muhith has proposed a Tk 1917.38 billion budget for the fiscal 2012-13. The proposed budget is saddled with a high level of deficit. With such a huge deficit, the government will have to go for excessive borrowings from the banking channels which will create liquidity crunch and squeeze credit flow to the private sector. If the government fails to receive the expected foreign aids and loans, the pressure on bank borrowing may further increase, and without improving project implementation capacity, expected foreign aid/loan might not come through. As a result, overall investment in the country would decline, creating problems in achieving GDP (gross domestic product) growth rate which in turn would affect employment generation. The government may have to face a big challenge in implementing the budget, especially in terms of financing. Achieving the optimistic 7.2 per cent GDP growth in the coming fiscal may not be possible. A review of the key features of the proposed budget follows.

Increasing revenue: The government will be able to collect a significant amount of revenue if it introduces an automation system in revenue collection and increases the number of taxpayers. The government can possibly reduce its dependence on the banking system.

 

Confrontational politics: politics: There is a possibility of worsening political situation in the coming days and the government might have to borrow more from the banking sector. These two things will have a negative impact on investment prospects.

Bank borrowings: The expansion of private sector would be hampered in the coming fiscal year as the government has made a target of borrowing Tk 230.00 billion from the banks for deficit financing. The overall deficit financing of the proposed budget would be Tk 520.68 billion, of which the government would borrow Tk 230.00 billion from the banking source to make up the deficit. Due to higher borrowing target from banking source, the banks would fall into a severe liquidity crisis and the interest rate on loan disbursement and deposit collection might be increased. Under the circumstances, the credit flow in the private sector will reduce and as a result the country's industrialisation process would be severely affected. The government had initially made a borrowing target of Tk 189.57 billion from the banking source for FY2011-12, but the target was eventually surpassed within first half of the outgoing fiscal year.

Tax at source: The budgetary measure to increase the tax at source on export goods to 1.2 per cent from 0.6 per cent would affect exports. This amounts to about 17 per cent tax on profit, a significant increase from the existing level. The country's export sector is now facing a crisis due to the economic recession in Europe and the proposed tax at source will be the last straw. We request the government not to increase the tax at source.

Investments: In the current context where FDI and general investment has slowed down, it is worthwhile to allow the facility of whitening black money.

Budget implementation: The implementation of the proposed budget for fiscal year 2012-2013 would be difficult as there is no clear-cut indication on how the government will address the issues like inflation, investment, employment, and power and energy crisis.

Tax burden: The budget will also increase tax-burden on regular taxpayers as minimum tax rates have been increased without increasing the ceiling of tax-free income for individuals.

Energy crisis: In the budget, there is no clear picture on energy crisis which will also lead to lower-thanexpected investment.

 

  Growth rate: Achieving 7.2 per cent GDP growth and reducing inflation to 7.5 per cent may not be achievable. In May, overall point-to-point inflation remained very high compared to the target set by the government for the current fiscal year.

Achieving the target of 22 per cent growth in revenue earnings may also prove difficult in the context of  some internal and external factors such as possibility of declining import. The main challenge of the proposed budget would be to increase investment, pursue austerity measures in government expenditure, improve government's fiscal management and maintain proper coordination between the fiscal and monetary policies. Export sector would face problems in the coming days with the government going for increasing the tax at source.

Interest earnings on life insurance: The move to collect tax from the interest earnings of the life insurance policyholders comes in Finance Minister AMA Muhith's budget proposal for the coming fiscal year. The minister proposed a deduction of 10 per cent tax on incomes in excess of premiums paid by a policyholder at the time of maturity of the policy. It will discourage people, especially who are in rural and semi-urban areas, to buy life insurance policies. The government should review the decision considering the poor coverage of life insurance in our country. The imposition of tax may discourage long-term savings as it will act as a disincentive to the policyholders. Life insurance can be a protection for low- and mid-income people as social security is low in Bangladesh. From that perspective, the step does not seem appropriate. Currently, 19 life insurers, including state-owned Jiban Bima Corporation and foreign Metlife Alico, are in operations in Bangladesh.

Surcharge on mobile phone calls: The government plans to impose surcharge on mobile phone users at the rate of Tk 0.15 to 0.20 per call. The move, which comes on top of a 2 per cent tax on mobile talktime proposed by the finance minister in his budget speech, is aimed at creating an energy fund. Many poor people now use mobile phones. Imposition of such tax or surcharge on mobile phone calls will not be justified. As of April this year, 96.30 million people in the country use mobile phones, according to Bangladesh Telecommunication Regulatory Commission.

Power tariff hike: Currently, production cost of per unit electricity is Tk 6.8 while it sells at Tk 4.02 on an average. A proposal to hike power tariff by Tk 2 a unit is under consideration of the Bangladesh Energy Regulatory Commission. If approved, the fresh hike will bring down the annual deficit to Tk 35.00 billion, according to the ministry document.

 

Fuel subsidy: In the current fiscal Bangladesh Petroleum Corporation (BPC) sought about Tk 280.00 billion in fuel subsidy, in view of price hike in the international market. However, the government eased the pressure by increasing fuel prices thrice in the last nine months. Even so, the government will have to count a huge subsidy on fuel. In the current FY the government already spent Tk 90.00 billion in fuel subsidy. For fiscal 2012-13, the government has allocated Tk 62.00 billion for energy subsidy and Tk 64.00 billion for power.

Rental power plants: The government should reconsider its decision on rental power plants if the fuel price continues to spiral in the world market. If the price does not increase further there is no need to dole out more subsidies.

Tax on interest income: A proposal to hike tax on interest incomes of bank-account holders with no tax identification numbers will hurt small savers and Bangladesh's financial inclusion effort.

The government announced plans to increase tax at source on bank interests to 15 per cent for those without TIN from the current 10 percent, a uniform rate for all account holders with or without TIN. The decision contradicts with the central bank's effort to encourage banks to open farmers' accounts with only Tk 10. It would be an attempt to squeeze money out of the common people. It could also discourage thousands of pensioners, housewives, students and other professionals to park their money with the banks.

Personal taxable income: Personal income tax thresholds remain at Tk. 180,000, but minimum tax has been increased from Tk 2,000 to Tk. 3,000. In Bangladesh, per capita income has increased. Despite this, one should keep in mind that this is a threshold income level, below which one is believed not to be in a position to pay taxes. In a view, the unchanged threshold and the increased minimum tax is social injustice. Individual taxpayers bear the brunt of increased cost of living due to inflation. Under the circumstances, it is necessary to hike the tax-free income limit.

TIN not mandatory for stock investors: It was a wrong decision for the government not to make TIN mandatory for stock investors. All stock investors must have TIN. In principle, the people who are investing in the stock market are not small earners.

Tax rate for merchant banks: In the Budget proposal tax rate has been reduced for merchant banks (from 42.5 per cent to 37.5 per cent) while other banks continue to pay 42.5 per cent. It is mentioned as

 

an incentive to the capital market. But it does not match the Bangladesh Bank's view on reducing merchant banks' exposure to the capital market.

Tax rate for cigarette cigarette companies: Tax rate increased for cigarette companies (for non-listed: from 37.5 to 42.5 per cent, for listed: 27.5 to 35 per cent). This is a right measure for revenue collection.

Land tax: Depending on the location of property, 3.0-5.0 per cent tax is to be deducted at source for sale of land by developers. This will cause hike in land prices from the consumers' perspective as the additional tax burden will be shifted to them.

Imported refrigerators and motor cycles: 20 per cent regulatory duty has been withdrawn. This will hurt the local manufacturers. manufacturers.

Value Added Tax (VAT): A uniform VAT rate of 15 per cent is applicable to both goods and services. 15 per cent VAT is applicable for all business or industrial units with an annual turnover of Taka 2.0 million and above. Turnover tax at the rate of 4.0 per cent is leviable where annual turnover is less than Taka 2.0 million.

Edible oil: Total tax burden (including import duty and VAT) on edible oil decreased from 38 to 16 per cent is a positive move, likely to impact significantly on its prices.

Air-conditioners: Total tax burden (including import duty and VAT) on air conditioners increased from 152 to 213 per cent. Considering the electricity situation, it is a positive move.

Agriculture credit and incentive: The target of agriculture credit in FY 2012-13 is set at Tk. 141.43 billion while in FY 201112, credit disbursement was 73.9 per cent up to April, 2012 against a target of Tk. 138.00 billion. It's essential to reach the target group by finding out the obstacles of not achieving the target. Measures for ensuring incentives for farmers (farm-level price for agricultural commodities higher than production cost) are absent.

 

Crop insurance: Crop Insurance has been introduced on pilot basis in one Upazila under the district of  Habigonj. No specific allocation and modalities have been mentioned for crop insurance.

Fisheries and livestock: Prospects of marine fishing has increased due to the establishment of the legal rights in the sea. No specific allocation has been mentioned for marine fishing to tap the unlimited resources. As a priority basis, government is implementing a project titled 'Modernisation of Vaccine Production Technology and Extension of Laboratories'. Very little has been mentioned to address the loss incurred by the poultry farmers, as a short term priority. It is expected that fish production, meat production and milk production will be increased significantly with proper research, legal framework and incentives. However, for FY2012-13, no new inducement has been added to accelerate the rate of  production.

Women entrepreneurs: entrepreneurs: Proposed allocation of Tk. 1 billion for women entrepreneurs entrepreneurs and 15 per cent of  SME loans to the women entrepreneurs will positively contribute towards flourishing of women entrepreneurship.

ICT: It is good to see that the budget for the new fiscal year has an allocation of Tk 2.94 billion for information and communication sector in the annual development plan. There is, however, no indication which specific areas will enjoy this allocation.

Tax on private universities: It is a theoretical contradiction that the government addresses private universities as non-profit organisations, and yet imposes taxes on them. Private universities, according to the Private Universities Act 2010, cannot be profitable organisations as they have to spend the surplus of their income for the development of their respective universities. Thus, being non-profit organisations it will be difficult for them to pay the proposed 15 per cent VAT on operating surplus and 15 per cent VAT on rented buildings.

Concluding remarks: The budget relies on generating nearly 60 per cent of the expenditure through increased revenue collection. Specific steps are needed against the backdrop of the sluggish business and investment scenario and other risks. The government's huge tax collection target will put extra burden on individual taxpayers and entrepreneurs affecting economic growth.

 

Exports and imports will need to grow by 50 per cent to achieve the budgetary targets. targets. Instead of taking measures to increase exports, the government plans to hike taxes on exporters' income, impose duty on raw materials and expand the net of value added tax payers. These measures will discourage trade and investments.

It is a bold step to fix the budgetary targets at 7.2 per cent GDP growth and also contain inflation.

The implementation of the budget would be at stake due to the growing risk of political stalemate. The impasse in politics might affect garment exports, the lifeline of the country's economy.

The government's various promises and measures including digitisation and automation, e-governance and formulation of law for public private partnership (PPP) for the next fiscal year are noteworthy. noteworthy.

3.3 The Politics and The Economics   There are many who fear that Bangladesh is going to bloat its national budget (2012-13) to a disproportionate size that makes them very worried, given the present 'fragile' economic condition of  the country. They substantiate the word 'fragile' by presenting a series of economic indicators, indicators, including uncontrolled inflation, falling exchange rates that cause a decline in the value of Taka, and the grinding poverty of the common people. This desperate situati situation on is largely because of the poor rate of economic growth - what in the estimate of some is only 5.5 per cent - which the country has achieved in 2011-12. We feel quite confused about the growth rate they mention. The Statistics Department of Bangladesh Bank, the Bureau of Statistics, the World Bank and the Asian Development Bank Bulletins inform us otherwise. A summary of their publications read as follows. In January 2012, the government tightened its monetary policy to combat double-digit inflation. As a result, the inflation as of May has dropped from double digits (10.32 per cent) to single digits (9.13 per cent). The rate of exchange between US dollars and Bangladeshi Taka has also improved - from US $1 = Tk. 85.50 in January 2012 to US $1 = Tk. 82.20 in June 2012. While the rate of inflation has been stemmed, the exchange rate has substantially improved. Our thanks go to the increasing flow of remittances and we appreciate the fiscal discipline and prudent monetary policy adopted by the Bangladesh Bank. Two more points also need to be clearly mentioned. The first one is their estimation of a 5.5 per cent rate of economic growth in 2011-12. The statistics (5.5 per cent rate of economic growth) is simply

 

incorrect, and therefore misleading; the correct figure is 6.3 per cent. Given the recession in the United States and austerity measures in the European Union - the two major buyers of our exports - a growth rate of 5.5 per cent (had it been so) is still respectable and certainly not in accord with the term 'fragile.' The second point is: a desperate and deteriorat deteriorating ing mass poverty situation prevails in the country. This is a total misrepresentation misrepresentation of facts that demands more objective-orien objective-oriented ted discussions rather than scoring point on sensational rhetoric. According to the Bangladesh Economic Review 2011(Ministry of Finance), the proportion of people in extreme poverty has declined from about 40 per cent in 2008 to 20 per cent in 2011 and the declining trend continues. The government allocated 15.22 per cent in 2009-10 and 14.75 per cent in 2010-11 of budget outlay, and 2.52 per cent and 2.64 per cent of GDP respectively to the poverty alleviation programme. Moreover, during the same period, 11.38 million men and 2.40 million women were brought under the safety net of an elaborate social security and female empowerment empowerm ent programme. This is a laudable pro-poor development endeavour of the government that deserves praise.

After the presentation presentation of the budget in the parliament, quite a number of articles has been published in this paper and elsewhere, not all of which are thoroughly fact-based. A well documented monograph by the Centre for Policy Dialogue (CPD) has also been published, followed by a rich discussion in the presence of Professor Rehman Sobhan, among others. Although we do not fully subscribe to several comments on theperformance of the governmentincluding two Achilles' Heels, namelythe Stock Market and the Quick Rental Power Project-some of the analysis of the monograph is reasonably useful. Structural changes in the economy: The statistics mentioned in the CPD's monograph (Table 1) clearly indicate a shift from the more staid system of agriculture towards a more progressive industrial society. According to the commonly accepted economic wisdom, development is achieved when a country moves from low value-added agricultural sector to high value-added industrial and service sectors. This process of structural change combined with a Chicago-style shift away from governmental involvement in the private sector only indicates an economic enlightening in the country, not the other way around. The Table 1 also indicates that despite the fact that a large amount in terms of subsidies has been given to the agriculture sector, its rate of growth per se and its contribution to the national economic growth

 

is modest and has declined by half over the time period. On the other hand, two more productive urban sectors of the economy - industry and services - have recoded consistent growth; their contributions to the national economy are also many times higher than that of agriculture, which structurally suffers from the law of diminishing return. In order to substantiate our arguments from a larger perspective, we present statistics from the Europa yearbook (Various Years) and the CIA Factbook 2011 (Table 2). Table 2 is pretty self-explanatory. While the absolute contribution of the agriculture sector is indeed substantial in terms of providing food and farm employment, its relative contribution to the economy in terms of GDP share and employment provision has been consistently declining. This trend of declining agriculture is true for over twenty years, a time period that includes regimes of both the Bangladesh Nationalist Party (BNP) and the Awami League. Given this fundamental reality of structural changes in our economy, one should not quickly generalise that since the economy of Bangladesh is overwhelmingly rural, rural development is synonymous with economic development. The net result is that the country's public works, housing, and urban development are neglected. The budget allocation to this sector has been proposed to be reduced in 2012-13 fiscal year, in both absolute and relative terms, compared to the previous year. The issue deserves more attention from the policy makers.

Public policy measures have an important impact on the long-term growth rates of a country. While our political leaders and public policy makers - supported by the technocrats in charge of macroeconomic management - cherish the goal of achieving 7 per cent + rate of economic growth, they utterly miss the defining feature of a higher level of productivity. That is -- the economic geography of productivity is to be achieved through functional urbanisation and urban development. It is not enough to produce large varieties of farm products, but to add their value to the economy; not enough to work hard but to work smart. Must find something to sell to the world: On a global perspective, for Bangladesh to become a middle income country, we must develop a sustained source for generating incomes. To put the matter in cruder terms, we must find something to sell to the world. Among our neighbours India has made an example of selling brains, while Malaysia followed a labour-centric strategy. Therefore, a steady

 

production must be achieved, in anything, be it ship building or financial services. Look at Switzerland, spring water from the Alps does not drive their economy, pharmaceuticals and banks do. The economic geography of urban development - supported by a substantial amount of investment in infrastructure, secular education, scientific research and technology development - contributes to higher economic growth.

We repeat, there are serious lapses in our discourse on economic growth. There is a dangerous omission in the fundamental units of production: geography, such as cities and regions. Geographical units-in terms of location, place, climate, resource endowments, culture, coastline and environment-are constituent elements of the engine of growth, forming vast swaths of trade, transport, innovation, and talent. The home of all these constituent elements of economic growth and social progress are the large urban cores, not the rural areas. For example, China is building empty cities in anticipation of growth. Urban centres are places where entrepreneurship and network fuel economic growth. This is the experience of old industrialised countries as well many newly industrialised countries, including Brazil, Mexico, China, and India. Many cities of Southeast and South Asia have experienced dramatic economic growth, reflecting the fact that the region is completely integrated into the global economy. The sooner we realise the economic geography of urbanisation - housing, and environment - followed by more and efficient allocation of resources, the better it is for the economy and society.

3.4 NBR’s Chan ge VA VAT Law   NB R’s Proposal to Change The revenue board has proposed a raft of changes to the Value Added Tax (VAT) law including a cut in exemptions granted to different sectors. It has tried to make the tax-benefit time-bound in line with suggestions from the International Monetary Fund (IMF). A high-powered IMF team recently concluded a two-week visit to Dhaka in connection with its extended credit facility (ECF). Introduction of a new VAT law replacing the existing one, framed in 1991, is one of the conditions that the IMF had attached to the disbursement of the US$ 1.0 billion ECF fund to Bangladesh. The team held a series of meetings with the authorised persons of the National Board of Revenue (NBR) to help prepare the new VAT law in line with the IMF suggestions. The board held a meeting with the local representative of the IMF Thursday in the NBR and handed over the amended draft law.

 

"The team has expressed its dissatisfaction over changes on the draft VAT law by a committee to continue with the truncated-based and package systems of VAT. The IMF found these two systems to be the major cause of distortion in the tax law," said a senior government official. The NBR team was able to convince the team about the need for keeping the systems for at least three years, until 2018, after implementation of the VAT law from July 1, 2015, he said. In the new draft VAT law, the government has fixed a 5.0 per cent rate for the businesses that are unable to maintain books of accounts and can claim tax credit against raw material purchase. The system will also be valid for at least three years after enforcement of the new law in 2015. Talking to the FE, Dr Ahsan H Mansur, former member of the draft VAT law committee and executive director of Policy Research Institute of Bangladesh (PRI), said some of the words in the draft law were changed when the committee translated the language into Bengali from English. "The IMF team that visited the country is not an expert team on VAT. An expert team is likely to visit the country this month to see the pros and cons of the law," he said. He said multiple VAT rates is the major cause of tax evasion and it creates difficulties on proper collection of VAT. "Multiple VAT rates make the tax administration complicated," he said. IMF suggested cutting of discretionary power of taxmen to ensure a friendly environment for taxpayers, he said. A senior tax official said the IMF has suggested that the NBR define the input materials against which the businesses can claim tax credit. "We have defined some specific input items of businesses against which businesses cannot claim credit like other raw materials," he said. Except those defined items, businesses would be able to claim tax credit for all other input items, he added. The IMF team also found the term 'public interest' a 'vague' one and suggested to define what will be definition of the term, he said.

The NBR team will also define the 'national emergency' situation to offer exemption for those selected sectors, he added.

 

Officials said the VAT law has gone through several changes during the last few months following suggestions of the IMF and businessmen. The NBR has reconstituted the VAT law drafting committee several times also. Dr Mashiur Rahman, economic affairs adviser to the Prime Minister, who is now on leave, was last head of o f the draft committee. The draft VAT law was approved by the cabinet last March. It will be placed before parliament after being examined by the parliamentary standing committee concerned.

3.5Fees, non-NBR tax rates likely to go up next  fiscal  The total revenue income target for the upcoming 2012-2013 fiscal (FY) year is likely to be set at Tk 1396.70 billion, Tk 213.85 billion or 18.06 per cent more than what was projected in the budget for the outgoing fiscal, according to sources in the Ministry of Finance (MoF). The higher revenue projection is based on the planned hike in rates under the broad areas of non-tax revenue and non-NBR tax along with the expansion of tax net under the revenue board in the next fiscal, officials concerned said. Of the total projected revenue receipts, Tk 1122.59 billion will be generated from National Board of  Revenue (NBR) portion, Tk 228.46 billion from non-tax revenue and the rest Tk 45.65 billion from nonNBR tax in 2012-2013 fiscal. The actual growth target in the revenue is likely to be between 20 and 21 per cent for the next fiscal, if  calculated on the basis of the revised estimate for the current fiscal, sources said. The revenue receipt target in the original budget for the outgoing 2011-2012 fiscal was fixed at Tk 1183.85 billion. But the revised target is likely to be lower than the original one as the revenue earnings from non-tax revenue and non-NBR tax as of May, 2012 were not up to the expected levels, officials said. The finance ministry officials said the hike in rates for almost all items falling under the non-tax revenue and non-NBR tax are expected to take place in the next fiscal to help boost revenue earnings of the government and keep the budget deficit in check. They said fees for vehicle registration, vehicle fitness, land certificate, land registration, mutation, land development, bridge toll and narcotics tax will be revised upward in the upcoming budget. Besides, the existing taxes and duties on bond, debenture, sea insurance, tax on mortgage or settlement, debt transfer, ad valorem duty on stock and securities, ad valorem duty on conversion of  Taka into any foreign currency and tax on adhesive stamps are also likely to be increased in the upcoming fiscal, sources said.

 

Around 20 per cent of the total annual revenue income of the government comes from non-tax revenue, and only about three per cent from non-NBR tax. The rest of the revenue income is generated by NBR tax, finance ministry officials said. According to sources, of the projected Tk 1122.59 billion to be generated from NBR portion, Tk 353 billion will come from income tax, Tk 404 billion from Value Added Tax (VAT), Tk. 356 billion from import duty (including supplementary duty) and Tk 9.59 billion from different other heads of taxes. The projected revenue growth in the NBR portion in 2012-2013 fiscal is likely to be projected at 22.19 per cent from its original target set for the current fiscal year. Highlighting the strategies, revenue officials said they were expecting a large income from the planned money whitening facility to be offered in the next fiscal. Besides, expansion of tax net to at least 85 upazillas and growth centers to tap more tax income and plugging of loopholes in the VAT and customs duty are expected to generate more revenue, they said.

 

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