Prioritize Policy Implementation Gaps for FY23 Budget Investments

The highest ever budget of Tk 6.77 trillion, about 12.27% higher than the budget originally announced last year, is going to be announced in a very tumultuous global situation. Almost all FY23 budget foundations are set with a high ambition (11.31%) revenue target. It looks like a bright picture with an expectation of increased growth, but intermittent challenges such as amplified inflation, dismal employment situation, declining domestic and foreign investment, fluctuating exchange rates, etc. require better policy prescription and greater attention.

Closing the implementation gaps between announced and implemented policies could pave the way for increased investment and activity. The country needs increased investment, jobs for marginalized people so that they can combat the post-COVID situation and the continued rise in consumable prices. Non-transparency of policies is one of the black holes where policy benefits cannot be appreciated to attract new investment.

Investment in 2019 was 32.21% of GDP, reduced to 31.09% in 2021, while the target for 2022 is 33.10%. The ICOR is expected to be 4.6 in 2022, which means 4.6 Taka is invested to produce additional product worth Taka One. The ICOR was 4.09 in 2019, it went to 4.6 in 2022, which means that the productivity of the investment is falling. The investment has become expensive. The unemployment rate increases, while employment in the informal sector increases from 81.4% of the total labor force of 57 million people in 2021 to 85.71% in 2022. Decent work and economic growth in accordance with SDG 8 are far from being achieved.

The industry-to-GDP ratio for the 8th FYP is set at 41.9% (2025) compared to 35.4% in the 7th FYP (2020). The manufacturing to GDP ratio is to be increased from 24.2% of the 7th FYP to 30.2% in the last year of the 8th FYP. Gross Investment/GDP must be between 31.8% of 7th FYP and 36.6% of 8th FYP. The private investment/GDP ratio must be 27.4%, the FDI/GDP ratio must be 3%.

The overall external balance from July to March of FY21 recorded a surplus of US$6,990 million. The figure turned negative, at US$3,097 million in the same period of FY22, which is another cause for concern. Imports of consumer goods in the first three quarters of FY22 were $6.8 billion (up about 19% over last year), capital goods at 3 .8 billion dollars (2.6 billion dollars in the same period of last year) and imports of industrial raw materials are 22.13 billion dollars (14.39 billion dollars in the same period of the exercise 21). The export in July-April 2022 is 43.34 billion dollars against 32.07 billion dollars in the same period last year.

For several years, the government has reduced corporate income tax (IRS). Last year there was a 2.5% reduction in CIT for unlisted companies. However, with the reduction in corporation tax and the increase in the rate of AIT and TDS, the total impact of corporation tax has increased to around 40-45%, as these taxes do not are not refundable. TDS were collected under 54 headings and 111 sub-headings by different sections and sub-sections of ITO 1984. Among 54 income headings, 22 headings of TDS are refundable, the other 32 income headings are non-refundable because 82C recognizes other TDS as a minimum tax. 41 Caps are non-refundable and are treated as minimum tax like 82C.

In 2020-2021, NBR earned Tk 510.91 billion as TDS (excluding AIT BDT 185.37 billion) where tax was deducted under 55 heads of departments. Total income tax collection amounted to 852.24 billion taka (where withholding tax covers 81.7% including AIT).

With the reinvestment condition, the corporate tax can be further reduced. At the same time, the minimum tax provision should be removed, all withholding taxes should be made refundable. Under no circumstances should the effective tax rate be higher than the IRS advertised rate, any taxes paid in excess of the amount should be refundable, and in this regard policies should be reformed.

Employment incentives can help increase balance sheet investment. Companies can show off their new job data, even banks and financial institutions can get some credit with the creation of new jobs.

The tax rate should be based on accounting profit. The tax should not be imposed on total receipts and sales, or it should be refundable. The gross profit calculated by the officials on the ground does not follow the proper guideline, which is one of the disheartening facts why companies do not like to pay taxes.

The private sector advises that eligible expenses in companies are not properly implemented. Most eligible expenses are well below actual expenses. In the case of promotional expenses, only 5% was allowed as eligible expenses, which increases the cost of businesses. On the other hand, as withholding tax is non-refundable, suppliers have added the cost, with supplies contributing about 15-20% higher cost.

The same goes for VAT. Because of the high goal, tax professionals want to collect taxes. Small businesses are generally hard hit. There was instant signup prompting them to provide a number of benefits. However, after registration, people are claiming overdue VAT and fining them for non-compliance with VAT policies, which has created fear factor about NBR and created barriers to widening the net tax.

VAT-exempt turnover can be up to 5.0 million taka. This benefit is not for Dhaka and Chittagong businesses. The turnover ceiling exempt from VAT is not applicable to all sectors. Reference can be made in this regard to VAT OG-17. VAT registration is not mandatory whose annual turnover is less than Tk 5.0 million. But this GO obliges 140 products and services to pay taxes regardless of the annual turnover, which is a distortion of the VAT law. Through this SRO, businesses of district and city corporations such as manufacturers of biscuits, chanacur, jam jelly, pickles, logense, soap, medicine, ink, detergent, d Matches, toilet paper, nails, bicycle parts, plastic, rubber, leather and wooden products were subject to VAT regardless of their turnover. Some services such as; laundry, decorators, beauty salons, confectionery, RMG marketing, selling products online, carpooling, etc. are also subject to VAT regardless of turnover.

A number of exemptions have been granted to small businesses. However, very few of them can take advantage of these exemptions. Large contractors are expected to source primary and intermediate goods and supplies from small businesses through linkage establishments. The situation is different in the country, the big industries depending on the backward linkage industries, produce all their supporting materials by themselves. In this way, large entities take advantage of the advantages granted to small entrepreneurs.

Even though online submission of VAT declarations is allowed, small entrepreneurs cannot take advantage of these opportunities, they must submit all documents directly.

The policy allowing the use of VAT credit by themselves for large tax deduction entities (there are ten contracting entities) is not working properly. The VDS certificate must be provided instantly and online or a software version of the certificate can serve the purpose, e-TDS has been introduced since October 4, 2021, but a significant number of people are not aware of the benefits and therefore do not pay no TDS online.

In case of customs valuation, the database should be updated to reduce taxpayer harassment. Fixing the HS code remains a problem, the advance ruling does not work. Bonded warehouse policy for RMG and Non-RMG should be similar. The 8th FYP contains a provision for a new customs law, which may be implemented in the next budget.

Ultimately, we should learn from experience that policies are for implementation, only policies on paper, isolated from implementation, will not work as an incentive for local and foreign investors.

Ferdaus Ara Begum, CEO, BUILD-a public-private dialogue (PPD) platform works for the private sector. [email protected]

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