The government is now under pressure, especially from development partners, as it has dropped the plan to enforce the new value-added tax law from the next fiscal year, according to official sources.
Finance Division officials said the country might have lost the trust of development partners and global lenders, including the World Bank and the International Monetary Fund, as it failed to fulfill some major funding conditions.
This is the first time that a proposed budget will face such major alterations before it is passed in parliament. Earlier, the finance minister had described the proposed budget as the best budget of his career.
To meet the budget shortage because of non-implementation of the new VAT law in the upcoming fiscal year, the government plans to impose import duties on raw materials and supplementary and extraordinary duties on different imported products.
But it is still unclear how much of a new budget deficit will be created because of non-implementation of the VAT law in FY2017-18 as there are conflicting figures from the Finance Division and NBR.
Finance Division sources said the NBR on Saturday submitted a report on how to meet the shortage of Tk17,000 crore for non-implementation of the new VAT law in the next fiscal year.
Finance Division and NBR have canceled Eid holidays to resolve the complexities in the wake of the decision not to implement the new VAT law right now.
On June 28 in parliament, Prime Minister Sheikh Hasina will announce cancellation of the plan of enforcing the VAT and Supplementary Duties Act 2012 from next fiscal year.
According to the proposal, the shortage of Tk17,000 crore will be covered up by imposing duties on import of raw materials. Local exporters already pay 1% import duty on import of capital machinery.
Supplementary and extraordinary duties will also be imposed on different imported products to meet the shortage.
The VAT rate of 15% will be withdrawn from the health sector and energy and electricity bills, according to Finance Division sources. It will also be withdrawn from sale of tractors, power tillers and solar panels.
Former Finance Adviser to a Caretaker Government AB Mirza Azizul Islam said if duties are imposed on import of raw materials, it will have a negative impact on the local price level of commodities.
Earlier, Finance Division estimated that 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.
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.
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 a bad impact on private investment, they said.
“If the government increases dependence on banking sector loans, a crowding out effect is likely to take place in the banking sector. Private sector loans may dry out,” said a Finance Division official.