Published in The Daily Star on Monday, 30 May 2016

Nobody ready for VAT law yet: economists

AB Mirza Azizul Islam

Economists have thrown their weight behind the demand for implementing the new VAT law in phases and reducing rates as the businesses and the government are not fully ready to run with it from the upcoming fiscal year.

“The law can be implemented in phases as there is a lack of readiness both from the supply and demand sides,” said Mustafizur Rahman, executive director of the Centre for Policy Dialogue, a think-tank.

Even if the government goes ahead with its plan to implement the law from fiscal 2016-17, the VAT rate should be reduced to 10 percent from the planned 15 percent, said AB Mirza Azizul Islam, a former finance adviser to caretaker government.

“This can result in improvement in voluntary compliance.”

Framed at the prescription of the International Monetary Fund, the new law envisages a flat 15 percent value-added tax, replacing the existing disparate VAT rates.

People may have to spend more for rod, edible oil and electricity, among others, as the VAT exemption for nearly 2,000 products and services as well as the privilege of reduced VAT rates would end, according to an analysis of the National Board of Revenue.

Islam said it was not wise to make the commitment of introducing 15 percent VAT rate to the IMF in the first place.

Rahman said the VAT is a progressive tax.

“It is true that we have to go for uniform VAT. It would be good if we go for it in phases,” he said, adding that the concerns of small businesses should be taken into consideration such that the new law is not imposed on them as sales tax.

Islam is doubtful of the efficacy of the impending VAT law. “The main point is, VAT is an account-based system. But we don’t have accounts. How will you make the new VAT law effective then?”

The IMF approached Islam in 2008, when he was the finance adviser of the then caretaker government, offering technical assistance to reform the VAT law.

He did not agree to the proposal as most businesses do not keep accounts properly. He even made mandatory the use of electronic cash register, but it was not much of a success.

Zahid Hussain, lead economist of the World Bank Bangladesh, said they look forward to a clear stance on the implementation of the VAT and SD Act.

“We look forward to a simpler, friendlier, revenue increasing and domestic protection reducing implementation action plan. We also look forward to specific time-bound commitments toward reforming the Customs Act and the Direct Tax Code.”

The economists also talked about other aspects of the budget, due to be placed in parliament on Thursday.

Hussain said budgeting in Bangladesh has been caught in a vicious cycle of over-ambition and underachievement.

“Over-ambition had become a political imperative, while underachievement has followed a logical consequence of unrealistic design not even closely matched by implementation capacity.”

“I would like to see the budget grow out of this vicious cycle,” he told The Daily Star, adding that he does not expect this to happen.

Neither the government nor the broader set of stakeholders is ready to deal with the hard tradeoffs that a sobering recognition of reality would warrant, he said.

Revenue collection fell short of the target for the third straight year in 2014-15, and may follow suit in the current fiscal year.

Public expenditure is expected to be lower than the budget size in fiscal 2015-16, according to the WB’s latest update on Bangladesh.

Inflation targets could not be reached in fiscal 2013-14 and fiscal 2014-15 before hitting the goal in the ongoing year.

Although the government is saying that Bangladesh will achieve 7.05 economic growth, a number of economists have raised eyebrows.

On the implementation side, major infrastructure projects have a history of problems in Bangladesh. Cost overruns, delays, failed procurement, or unavailability of private financing are common features.

In the first seven months of the current fiscal year, actual spending under the annual development programme was 28.4 percent of original planned allocation of Tk 97,000 crore, the lowest implementation rate since fiscal 2007-08.

Hussain said he would like to see the fiscal 2016-17 budget to take at least some baby steps to depart from business as usual, pointing to an ambitious revenue target, oversized ADP, unreformed subsidies and neglect of maintenance.

“We look forward to credible statements on what the implementation priorities will be at the sectoral and project level.” There should be much more serious attention to transformative projects both in terms of budgetary provisions and implementation support, he said.

Hussain, who has been working for the WB for more than two decades now, said maintenance has always eluded the country.

“We have failed to grow out of the ‘build, neglect, and rehabilitate’ culture. It’s time to think out of the box on budgeting for maintenance and maintenance management,” he added.

Islam said the budget should have a realistic basis.

For the last few years, the gap between the budget’s targets on spending, ADP or revenue generation and their actual realisation at the end of the year has been widening. “As a result, the credibility of budgets becomes subject to questions.”

Education, health and social safety nets should receive more allocation in terms of numbers as well as the budget size, as money going into these sectors is declining.

For example, the allocation in education and health sectors is half the standard allocation of the United Nations Educational, Scientific and Cultural Organisation and the World Health Organisation.

The budget should provide clear guidelines on how to implement the ADP efficiently, Islam also said.

The ADP size is always trimmed in the revised budget, and even that amount is not used in the end.

Furthermore, of the implementation, about 40-45 percent is carried out in the last two to three months of the fiscal year. “We have to come out of this tendency.”

The former adviser said high priority projects should be given priority in ADP allocation so they are completed within the schedule.

Islam said the government would have to take a hard look at unprofitable state-owned enterprises, both financial and non-financial enterprises. “Privatisation can be one option.”

He said money going to the state enterprises are shown as loan and are not shown in the budget.

“These enterprises never repay the loans. But no direction has been given in the budget since 2009-10 on the issue.”

Islam said subsidies for public utilities might be acceptable, but commercial enterprises should be closed if they cannot meet their operating costs.

He also said through regulatory and supplementary duties the government is forcing people to buy goods and services at higher prices. The import duty structured should be re-examined, he added.

Rahman of the CPD said the budget should strengthen resource mobilisation, maintain the efficiency of their distribution and utilise them with a high degree of efficacy.

The budget should also look at widening the base of direct tax.

Rahman, who is a former professor of Dhaka University, said the budget needs to come up with fiscal policies and incentives to stimulate private sector investment and entrepreneurship.


There should be more investment on infrastructure and more allocation for skill development training for youths, both male and female, said Nazneen Ahmed, senior research fellow at Bangladesh Institute of Development Studies.

She said there should be a report every three years on the quality of development projects and an update on implementation of the women’s development policy in the gender budget report.

The economist called for imposition of higher tax on low-quality tobacco products.




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