The decision to not implement the new value-added tax law in the upcoming fiscal year has raised questions about how the government will manage its possible impacts on budget deficit.
There will be a short of Tk67,000 crore in the VAT collection target due to postponement of the new law which introduces a 15% flat VAT rate for all sectors.
According to Finance Division officials, the decision may force the government to borrow more from saving instruments and banking sectors to meet the enlarged budget deficit.
The increased dependence on saving instruments of high interest rates will increase the expenditure of the government and heavy borrowing from the banking sector can have bad impacts on private investment, they said.
“If the government increases dependency on banking sector loans, a crowding out effect is likely in the banking sector. Private sector loans may be dried out,” said a top Finance Division official.
If there is slow-down in private investment, it will hamper the country's economic expansion plans and worsen the unemployment situation while heavy borrowing can also boost inflation, he said.
But the government decided to postpone the new VAT law fearing price hikes in the next fiscal year ahead general election. Currently, the inflation rate hovers around from 5% to 5.5%. The new law received strong opposition from the country's business community.
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While the next fiscal year's budget deficit has been estimated at Tk1,12,276 crore in the proposed budget, Finance Division officials said the deficit could cross Tk1,80,000 crore if the new VAT rate is not enforced. The ratio of budget deficit against GDP is going to increase to 8.1% from the existing 5%, they said.
But Dr Ahsan H Mansur, Executive Director of Policy Research Institute doesn't think that there would be a “huge budget deficit” due to non-implementation of the new law.
“I think the deficit can be widened by only Tk10,000 crore which will have no impact on banking sector's loan availability,” he said.
Finance Division officials, however, said there will be no change in estimation of budget deficit in the FY2017-18 and the deficit financing will be managed “carefully without risks.”
The profit rate of the government saving certificates will not be reduced in the present situation as the people are buying the certificates in increasing numbers, they said.
Also Read- New VAT rate likely to be postponed
Besides, the National Board of Revenue sources said the three Statutory Regulatory Orders (SRO) by increasing the multiple rates of VAT and some other changes were vetted by the law ministry Wednesday to incorporate those into the existing law.
The increase of the rates will be in 15 sectors including electricity, real estate and steel manufacturing.
The government will have to cancel or suspend two SROs issued on June 01, 2017 with the proposed budget for the upcoming fiscal year.
According to the next fiscal year's budget, the loan target from the banking sector is Tk28,203 crore and that from the government saving instruments is Tk30,150 crore.
The excess liquidity in the country's banking sector now stands at Tk1,30,000 crore, decreasing from Tk1,50,000 crore a year ago.
While the deposit rate in private banks is now 5.15% to 6%, the loan rate in the banking sector is 9%. Besides, the bank rate is 5%.
Meanwhile, the global lenders are unhappy with the decision to postpone the new VAT law.
Asked about the issue, a high official of Finance Division told the Dhaka Tribune that IMF and World Bank want the new VAT law be implemented, but postponement of the implementation of the law is the country's “internal political decision.”
He added: “The decision to halt new VAT law will not, however, hurt the relation of mutual trust between Bangladesh and the global lenders though the new law was one of their major conditions for financing.”
The new date for implementing the VAT and SD Act 2012 is expected to be announced in parliament on June 28 when the Finance Bill 2017-18 will be put for passage.