Bangladesh far from middle-income tax structure: Expert at BIDS seminar

Bangladesh is far from a middle-income tax structure, with tax effort remaining stuck for decades at a low level, even below 8% of GDP, compared to 17.9% in India, 15.6% in Africa (low-income countries), 19.8% in Asia-Pacific (upper middle-income countries), Professor Emeritus of Concordia University of Montreal Syed Mainul Ahsan said in Dhaka yesterday.

The economist identified a corrupt and weak revenue system, burden of informal economy and pervasive use of tax incentives among the reasons behind the poor tax base, which limits the government scope to enhance public investment.

He said the issue of low tax base is duly recognised in the Awami League's economic manifesto which promises to raise tax to tax revenue to 11% of GDP by 2028.

"While any increase is welcome, it may not be content with the middle-income vision," the economist said, presenting a paper at a Bangladesh Institute of Development Studies (BIDS) seminar that revisited the ruling party's economic manifesto and discussed ways to achieve those.

"Neither low income nor low tax rates were per se the reasons for the low tax effort in an LMIC like Bangladesh," he pointed out. Instead, a dormant tax structure, the substantial burden of an informal economy and a weak, corrupt tax administration were among the chief culprits, he identified, suggesting ways to tax the informal sector, de-emphasize indirect tax, broaden tax base and streamline tax expenditure—the foregone revenue in the form of tax incentives and waivers for businesses.

Finance Minister Abul Hassan Mahmood Ali and Planning Minister Abdus Salam attended the seminar, "Unpacking the economic manifesto of the Awami League: trends and challenges for tomorrow's Bangladesh." Mashiur Rahman, Tawfiq-e-Elahi Chowdhury and Kamal Abdul Naser Chowdhury, advisers to the prime minister on economic, energy and education affairs, respectively, responded to issues raised by senior economists and policy researchers in seminar papers. The daylong seminar was moderated by BIDS Director General Binayak Sen.

Syed Mainul Ahsan described how low tax constraints Bangladesh's capacity to spend at a higher level to deliver universal health coverage, build human capital, invest in tech education, flight climate change and build public capital by creating public saving than financed via borrowing — the visions stated in the ruling party's 2024 election manifesto.

"This constraints our capacity to spend at a higher level to deliver universal health coverage, build human capital, invest in tech education, flight climate change and build public capital by creating public saving than financed via borrowing," said Prof Ahsan, who is also a visiting professorial fellow at BIDS.

Referring to Bangladesh's higher out of pocket expenditure for health care (74% compared to 50% in India and 47% in Sri Lanka), lower human development score (0.46% compared to 0.69% in Vietnam) and lower investment in research and development (0.03% compared to 0.70% in India and 2.55% in China," he said, adding Bangladesh cannot improve in these areas without additional revenue.

Tax expenditure (TxE) amounted to 3.6% of GDP in FY21 on account of direct taxes only, exceeding the revenue of close to 2.6% of GDP, which, Prof Ahsan said, is evidence of weakness of the tax codes and weak compliance.

A Bangladesh Bank report in 2006 — the only study on record on the issue — claimed indirect tax expenditure was 2.25% of GDP, he said, feeling the need to eliminate erosion in VAT tax expenditure in the name of exemptions and rebates.

Citing National Board of Revenue data, Prof Ahsan said corporate income tax expenditure in fiscal year 2020-21 exceeded the entire revenue collection from corporate sectors --- 68% of TxE vs 60% share of CIT in direct tax.

"Pervasive use of investment incentives (via rate rebates/tax holidays/ accelerated depreciation) are mostly ineffective and subject to abuse," Prof Ahsan noted, stressing the urgency to minimise CIT expenditure.

Commenting on the presentation, Mashiur Rahman, economic affairs adviser to the prime minister, said the impact of tax waivers needs to be assessed deeply to see if these incentives really helped industries to be more productive. "In fact there is no benefit of such incentives if these are used as a compensation for low productivity of industries," he said.

He said that it should not be up to the tax authorities (NBR) to decide how much tax to waive.

"It requires consideration by a party of the state that will assess and analyse industrial policy and strategies. Keeping in mind which sector can contribute to the growth of our industry and exports, attention should be paid to providing the necessary assistance first."

Mashiur emphasised the need for detailed and in-depth analysis regarding why the tax-GDP ratio is not increasing. "It is essential to examine how reforms can be made in this regard. We are unable to make any significant changes to the fundamental structure we have. Sometimes we increase tax rates to meet government expenditure needs, while other times we reduce them. We are not paying enough attention to the underlying problems. It is crucial to focus attention here."

The PM's adviser also said that those who pay corporate taxes have to pay taxes ranging from 45% to 50%. "However, rates are being lowered. Deep and thorough analysis is needed here."

Former state minister for planning Shamsul Alam said corporate tax should be kept within a range of 20-30%. "A policy-driven approach is necessary for tax collection. The NBR should be responsible for tax collection, while tax policy should be formulated by the Internal Resources Division.

IDS Director General Binayak Sen said achieving a tax-GDP ratio of 15-17% in Bangladesh is not feasible overnight. "If we can achieve a growth of 0.5% per annum, then we can increase by 2.5% in 5 years and 5% in 10 years. We need to plan ahead accordingly."

Merger is good move, new banks in 5 years: Monzur Hossain

BIDS Research Director Monzur Hossain referred to AL's election promises on macroeconomic stability, high growth, sustainable and inclusive development through prudent management of inflation and market. Adopting a prudent monetary policy, stabilising exchange rates and maintaining a decent foreign exchange reserve were also in the ruling party's manifesto, which promised proper reforms in the financial sector, strict enforcement of laws against loan defaulters and effective measures against hoarding and market cartel, he pointed out.

To keep up with promises, the government needs to form a banking commission to fulfil committed reforms in the sector and strictly enforce laws to check loan default, money laundering and financial irregularities.

He found merger and acquisition of banks is a good move, but suggested caution, while loan rescheduling and write-offs need to be discouraged. "New banks should not be allowed at least for the next five years," said the economist.  

He believes that further 10-15% depreciation of the taka will align with the unofficial market that might regain real effective exchange rate depreciation and lead to exchange rate stability.    

Monzur suggested that policies to sell foreign exchange through money exchange houses need to be revisited and they could be replaced by bank booths.

"Allowing Bafeda and BAB (two associations in the banking sector) to decide on the exchange rate is unacceptable," the economist said, feeling that foreign exchange management must be under the central bank's jurisdiction.   

Take lesson from South Korea, China: Kazi Iqbal

Bangladesh needs to prioritise a few strategic sectors, following instances of South Korea and China, to take the country to the next stage of industrial development to reach $150 billion exports by 2030 and employ 20 lakhs people every year, as envisaged in the Awami League's election manifesto, BIDS Research Director Kazi Iqbal said in his paper.

Citing how South Korea and China achieved success through limiting focus on few sectors and ensuring technology transfers from foreign investment, he said priority should not look like a 'shopping list' of over two dozens of sectors selected in the AL manifesto and industrial policy.   

South Korea fixed its industrial priority in 1970s, such as chemical, heavy engineering, electronics and ship building, and achieved the targets by 1990s, by combining industrial policy with new skills trained in American and Japanese technology, he said.

"We observe a similar story in China," Iqbal said, citing how China ensured technology and knowledge transfer through large projects implemented by foreign firms." He asked: "What lesson could we gain from our mega projects? How many bridges do we need to have before we can build on our own?"

The BIDS economist pointed out that the current industrial policy is not very specific about transfer of new technology which is a key driver to industrial growth of a country that dreams to be a middle-income country by 2030.

Going by manifesto is AL's political decision: FinMin

The government has started working on the implementation of the 11 priorities declared by the Awami League in its election manifesto, Finance Minister Abul Hassan Mahmood Ali has said.

The Awami League has made a political decision to implement its election pledge, the minister said at the second session of a seminar organised by Bangladesh Institute of Development Research (BIDS) yesterday.

"The development journey of Bangladesh has entered its next phase," stated the minister. "Though obstacles exist, overcoming them to advance to the next level won't be overly challenging."

He further said the manifesto was carefully crafted after extensive research. "We identified priorities by analysing the country's development goals and the needs of our people. Real progress will only happen if we act upon these priorities."

The ruling party's election manifesto emphasises on revenue collection by strengthening revenue management. It targets 10% to 11.1% revenue growth.

During the first session of the event, Planning Minister Abdus Salam addressed the challenges faced by middle-income countries.

He said special efforts will be taken to increase foreign investment and actions will be taken to build capacity in the financial sector.

"Necessary arrangements have been made for economists with experience in managing banks and financial sectors," he added.

Enforcement of laws and keeping of statutory reserves will continue to be mandatory for recovery of defaulted loans, he further said.

During the event, four BIDS researchers presented papers on the state of the country's industry, education, and health sectors.

Their analysis revealed that despite having infrastructure for industrialisation, there are significant skill gaps.

Besides, inadequate education quality leads to unemployment among educated youth. Also, the analysis found that government investment in the health sector remains insufficient.

They recommended increasing investment in these vital areas.

Other speakers participating in the open session suggested that the implementation of the election manifestos announced by the Awami League should be seriously monitored. They proposed the formation of a high-level committee for this purpose.

Prime Minister's Economic Adviser Mashiur Rahman said the institutional structure in the country is adequate. However, it is now essential to ensure the quality of work performed by these institutions. He emphasised the need for a focus on information technology.

Prime Minister's Advisor on Power, Energy, and Mineral Resources Tawfiq-e-Elahi Chowdhury said, "A robbery has taken place in this country. Over the past three years, foreign oil companies have made away with an additional $14 billion. This is due to global factors, including the war in Ukraine."

"The US then raised interest rates, and all the dollars moved there. Consequently, everyone comes and advises us to fix the exchange rate management, do this, do that. I mean, they impose their advice on us," he expresses frustrations.

He emphasised that countries like Bangladesh have to bear the brunt of events in different countries worldwide.

Kamal Abdul Naser Chowdhury, an advisor to the prime minister on education and cultural affairs, emphasised the need to identify the obstacles in the implementation of the manifesto.

He mentioned that the country's universities are not as interested in knowledge development activities as they are inclined towards infrastructure projects. Asserting that the infrastructure is sufficient, he stressed the importance of students taking the initiative to develop their knowledge.

Participating in the open discussion, Dhaka University Professor MM Akash emphasised that the manifesto priorities should be implemented according to a time and plan. However, before that, the deficit in democracy must be addressed.

Educationist Professor Manzoor Ahmed highlighted that although political parties announce their manifestos earlier, their implementation is often lacking.

He stressed the importance of identifying why the manifesto is not implemented and where the obstacles arise from.