Budget a mixed bag

The budget for the upcoming fiscal year is a mixed bag as it finally puts the VAT Act into action and also raises doubts among experts over its implementation prospects amid a lack of initiatives needed to speed up reforms.

“The budget is overall a mixed bag,” said Zahid Hussain, lead economist of the World Bank's Dhaka office.

He said implementation of the VAT law was a courageous step as the government resisted pressure when it could have easily backtracked, given the elections are only a year away.

“Had the unified VAT rate been cut, the spirit of the law would have been compromised,” he said, adding that the government also did not compromise much on turnover tax and the VAT-free exemption limit.

He, however, said a lack of adequate attention was visible in case of reforms, particularly in the financial sector. “Even the budget speech has not mentioned the word 'non-performing loans' although it is a major problem and Tk 2,000 crore has been kept as provision for state banks.”

Hussain applauded the finance minister for allocating the highest 16 percent of the budget to the education and technology sector.

The Centre for Policy Dialogue (CPD) said their main expectation was that if the new budget cannot decrease the cost of living, it should not at least increase it.

Similarly, if the production cost in the agriculture and industrial sectors cannot be reduced, the new budget should not increase it, said the think-tank. 

“Our fear is that none of these two will be ensured by the new budget,” said Debapriya Bhattacharya, distinguished fellow at the think-tank, at a briefing in his office in Dhaka.

The macroeconomist said with implementation of the new VAT Act, the CPD had assumed that there would be adjustment in case of supplementary and regulatory duties to lessen the burden of VAT on consumers and domestic producers.

“But we have not seen the expected adjustment,” he said, adding that the fear that the living cost would go up in the next fiscal year is looming at large. 

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh (PRI), welcomed the introduction of the new VAT Act.

“It has been long-delayed. It has proved the bravery of the government as at least it could take the courage to move forward,” he said.

He said if the government could successfully implement the VAT Act, it would be able to push for income tax and customs reforms in the coming years.

Mansur said the proposal to increase excise duty on bank deposits is completely illogical. “This will drive people away from the financial sector to cash transactions and illegal investments, which will be a detrimental for the growth of our financial sector.”

Bhattacharya said as per the new budget, public expenditure would go up by 26 percent. “But the trend growth is around 16 percent for last eight-nine years.”

The budget proposal said tax collection would go up by 34 percent, said Bhattacharya. “But it will be a spectacular fact to increase tax collection by a third in a single year.”

He said it is good that a complete chapter has been dedicated to governance and reforms, but nothing has been said explicitly about reforming the banking sector and the capital market.

Hossain Zillur Rahman, executive chairman of the Power and Participation Research Centre, said the trend in budget implementation in the last several years showed that the revised budget had been 15 to 20 percent less than the original budget.

“So, it can be said right now that given the size of the budget, the implementation will be 15 to 20 percent less in the upcoming fiscal year.”  

He said when the income perspective of the large budget is uncertain it can be considered as an attempt to project the political ability ahead of elections.

On the 15 percent unified VAT rate, Rahman said the major consensus was that it should be kept at a tolerable level.

He said it remains to be seen whether the finance minister had taken risk by sticking to 15 percent VAT unified rate because it might stoke inflation and the business community may express discontent.