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Published in The Financial Express on Monday, 8 June 2015.

Can budget attract investment without reform?

MS Siddiqui

Finance Minister AMA Muhith has placed an ambitious budget amid some macroeconomic advantages, including low inflation, declining rates of interest, stable exchange rate, healthy foreign exchange reserve, positive balance of payment. Still some challenges remain in the areas of revenue mobilisation, implementation of the Annual Development Programme (ADP), external trade, manpower export and foreign assistance. According to him, the budget is “to break free from the 6.0 per cent growth trap, and climb up to a higher growth trajectory.”.

The budget objective is to increase the total private investment, a key ingredient for boosting growth, to 24 per cent of GDP (gross domestic product) in the medium term (2016-18) and scale up public sector investment to 7.8 per cent of the GDP.

There is no programme for removal of obstacles to private investment except some tax incentives. But his promises ran short of addressing the regulatory and governance-related problems.  The issues of deep-seated structural reforms and creating an enabling environment, in terms of political stability, physical infrastructure and bureaucratic efficiency, for attaining higher economic growth are not given due attention.

According to economists and various development-research organisations, to achieve 7.0-8.0 per cent GDP growth, the investment-GDP ratio should be around 32 per cent.

According to the minister, over the last ten years the total investment in terms of GDP increased to 28.9 per cent from 25.8 per cent. During this period although public investments rose to 6.9 per cent from 5.5 per cent, private investments were hovering around 21 to 22 per cent of the GDP.

The inflow of foreign direct investment (FDI) was not increasing despite good incentives, being offered by Bangladesh to investors from abroad. The country received FDI worth US$ 1.6 billion (160 crore) or slightly more than 1.0 per cent of its GDP in 2013, and $ 1.52 billion in 2014, less than 1.0 per cent of the GDP worth $ 170 billion.

The government in the new budget has presented a blueprint for augmenting overall investment by raising it to 24.0 per cent of GDP from the private sector and 7.8 per cent from the public exchequer in the medium-term (2016-18). The budget’s weakest side is lack of directions as to how to accelerate the private investment. The government has plans to set up 100 economic zones (EZs) in 15 years but there is no plan to allocate land for local investors. The minor fiscal incentives will be offset by high bank interest rate, non-availability of land, infrastructure and good governance, uncertainty about political stability etc.

The Finance Minister proposed some changes in the tax thresholds that would offer some relief to the individual taxpayers. Publicly-traded companies, banks, insurance and financial institutions other than merchant banks will be paying 2.5 per cent less tax on their profits in the next fiscal. In contrast, the budget imposed tax on poultry industry and restructured the tax rates of poultry feed, dairy, pisciculture, shrimp, horticulture etc. He has proposed changes in supplementary duties on a wide variety of imported goods, apparently, with the objective of reducing the level of protection enjoyed by the domestic industries in various sectors of the economy for long. He has also proposed increase in the source tax on apparel exports from 0.3 per cent to 1.0 per cent.

The government hopes to initiate supply of gas from imported liquefied natural gas (LNG) by mid-2017, although necessary infrastructure including building of an LNG terminal and the pipeline is not yet completed. This may be good news, if the project is implemented as proposed.

The Finance Bill 2015 has proposed a six-tier tariff structure – zero per cent, 1.0 per cent, 2.0 per cent, 5.0 per cent, 10 per cent and 25 per cent – for the next FY, from the existing five-tier ones. Presently, zero per cent, 2.0 per cent, 5.0 per cent, 10 per cent and 25 per cent tariffs are applicable. Businesses were acquainted with the five-tier tariff structure. They hope the new 6-tier tariff structure will not destabilise the market and it will be good for local manufacturers and traders.

Also, regulatory duty (RD) on some 2,500 products has been lowered to 4.0 per cent. The indemnity bond facility for import of capital machinery by export-oriented industries under the duty-free facility has been scrapped in the proposed budget. Currently, exporters are enjoying zero duty on import of capital machinery while other industries are paying 2.0 per cent duty for it.

The Finance Bill 2015 has proposed to reduce the rate of regulatory duty on products, on which maximum 25 per cent duty is applicable (with some exceptions), and 10 per cent duty on some other products. Besides, the proposed bill has also restructured the existing supplementary duty (SD) to 11 tiers, from the existing 12 tiers. The changed rates of SD are: 10 per cent, 20 per cent, 30 per cent, 45 per cent, 60 per cent, 100 per cent, 150 per cent, 200 per cent, 250 per cent, 350 per cent and 500 per cent.

There was no demand for such changes in tariff structure from any stakeholders. These changes may require detailed evaluation of impact on manufacturing and trading in the local market.

Tax-free ceiling for individual taxpayers has been proposed to be raised to  Tk 0.25 million (2,50,000) from the upcoming the fiscal year (FY), 2015-16, following increased cost of living and inflation and the amount of minimum tax for all individual taxpayers set at Tk 4,000 irrespective of place of residence. Currently, taxpayers in the city corporation areas pay Tk 3,000 as minimum tax. It is Tk 2,000 for taxpayers in the district towns and municipalities and Tk 1,000 for other areas.

The National Board of Revenue (NBR) has been tasked to arrange Tk 1.76 trillion in revenue despite the shortfall of Tk 150 billion in the tax revenue earnings during the FY 2014-15 through mopping up the largest amount of revenue-36.8  per cent of the projected total tax revenue of the NBR-from taxes on income and profit. The shortfall in income tax revenue earning has been estimated at about Tk 60 billion in the outgoing fiscal.

The non-development revenue expenditure in the proposed budget is equivalent to 9.6 per cent of the GDP, 1.2 per cent higher than that of the revised budget for the FY 2014-15. The allocation proposed in the next fiscal’s ADP is equivalent to 5.7 per cent of the GDP, higher by 0.7 per cent than that of the revised ADP for the outgoing fiscal year.

According to Dr Debapriya of the Centre for Policy Dialogue (CPD), the total revenue growth in the last three years never exceeded 10 per cent. “But the new budget aspires to achieve 27.5 per cent revenue generation growth. It is actually 36 per cent more than the final figure of 2014-15.”

The budget proposed imposition of 50 per cent additional tax or Tk 0.5 million (5 lakh) (whichever is higher) for companies employing un-authorised foreign nationals, besides cancellation of tax holiday and other tax exemption facilities along with prosecution and punishment for the unscrupulous entities engaged in such unlawful acts.

According to data of the Special Branch (SB) office, nearly 0.4 million (4 lakh) foreigners now work in the country and more than 0.1 million of them do not have any work permit. The outbound payments went up by more than 16 per cent to US$ 3.48 billion during the last July-December period from that of the corresponding period a year earlier, according to the sources.

The budget has proposed 10 per cent VAT (value added tax) on private universities as well as medical and engineering colleges for the first time. This tax is discriminatory for the students of public and private institutions.

The tax measures are not sufficient to attract investment from home and abroad. For, Bangladesh needs efficiency for implementation of infrastructure and utility projects and improvement in governance to gain confidence of investors apart of long-term political stability.

The writer is a Legal Economist.

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