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Don’t kill the golden goose

  • Published at 12:45 pm June 25th, 2016
Don’t kill the golden goose

• Bangladesh’s fiscal budget for FY2016-17 has ambitious revenue targets

• The government continues to target the same small group of tax-payers

• The lack of broader tax reform will be dangerous if oil prices start increasing again

The Finance Minister Abul Maal Abdul Muhith announced the fiscal budget for the year 2016-17 on June 2.

Not surprisingly, it was a very large budget of Tk3,41,000 crore (29% higher than the revised budget). Even more ambitious was the revenue growth target of 35%.

More than the number itself, it is the lack of any major tax reforms to broaden the tax base that draws the reader’s ire.

Instead, more burden is placed every year on the very small number of honest tax-payers.

Tax burden on formal tax-payers keeps going up

Out of a population of approximately 160 million, only around 2 million are registered tax-payers. Approximately half of them actually pay taxes.

This indicates that a disproportionate share of the tax burden is placed on a small group of people who are either unable to evade taxes (eg salaried), or decide to remain honest due to ethical standards.

Meanwhile, the rest of the population, including a much wealthier group, are enjoying the fruits of tax revenues paid by the salaried few.

Over the years, the burden on this small tax-payer group has gone up. While the cost of living has been creeping upwards, the government has rarely changed the income tax slabs to keep pace with inflation.

As a result, as incomes have risen in nominal terms, honest tax-payers have fallen under higher tax brackets, while still having to contend with rising cost of living pressures.

This year’s budget has an even bigger nasty surprise. The investment allowance has been reduced to 20% from 30%, while the tax rebate on the investment allowance has also been reduced from 15% to 10%.

Out of a population of approximately 160 million, only around 2 million are registered tax-payers. Approximately half of them actually pay taxes. This indicates that a disproportionate share of the tax burden is placed on a small group of people

That means more taxes for the actual tax-payers, and a disincentive on private investment, which lags behind the government’s targets.

The increase in duty on phone usage is also evidence of the government taking the easy option of taxing a soft target.

In the last budget, a 3% duty was imposed on any SIM card transactions (calls, texts, etc), in addition to a 15% VAT. This year, the duty has been increased to 5% -- an easy yet regressive way of taxing the population.

Lack of reform initiatives creates vulnerability

Higher tax burdens on a small group of honest tax-payers increases the incentive for tax evasion, and also leads to unequal distribution of income (when people in similar or higher income groups are routinely not paying).

Furthermore, there is a broader risk in place. Backing away from bigger reform initiatives such as implementing the new VAT law, or the inability to broaden the tax base means there are slim chances of the government meeting its revenue targets.

While it is common for the government to undershoot on expenditure targets to balance out the revenue shortage, one must remember that we are in a low oil-price environment.

The Bangladesh Petroleum Corporation is enjoying a profit bonanza of around $1.5bn (7% of revised revenue targets), which could easily vanish if oil prices rise.

To avoid any negative shocks to the economy from oil prices rising to $100 a barrel (from $50, currently) in the future, it is imperative that tax reforms are undertaken today.

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