A budget that shrinks to fit

Illustration: TBS

For the first time in 54 years, Bangladesh has broken tradition. The proposed national budget for the upcoming fiscal year is smaller than its predecessor – down by 0.9% from the outgoing year's original outlay. That alone tells a story. The budget now stands at just 12.65% of GDP, the smallest in 15 years. To put it in perspective, this ratio was over 18% in FY20.

So, what changed?

The answer is sobering: when the purse is tight and the options limited, ambition must give way to austerity. The interim government's Finance Adviser Dr Salehuddin Ahmed has chosen restraint over rhetoric. His message was unambiguous: "For now, we are focusing more on strengthening the foundation of the economy instead of accelerating the pace of growth."

That's the realism the country must live with, at least for now.

The economy inherited by the interim administration last August was anything but robust. A toxic mix of high inflation, exchange rate instability, festering financial scams, and bloated public expenditure has left little room for expansive policy manoeuvres. Add to that a battered banking sector and a trust deficit among investors, and the path becomes narrower still.

"This budget is conservative and aimed at containing inflation," noted Dr Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD). Indeed, the signs are there. The budget deficit has been capped at 3.6% of GDP, lower than regional standards of around 5%. Bank borrowing targets have been pared down, and in a move to provide some relief to lower- and middle-income earners, the tax-free income threshold has been raised by Tk25,000 to Tk3.75 lakh from FY27.

These are not grand gestures. They are cautious, calculated nudges.

"Nothing significant to boost jobs"

But what the budget offers in fiscal prudence, it lacks in directional boldness. "I did not see anything significant that can boost investments and create new jobs," Dr Fahmida added. A new PPP (public-private partnership) fund has been announced with the intent of catalysing private investment, but as history has shown, such initiatives have often struggled to get off the ground.

Indeed, some big questions remain unanswered – how to stimulate investment, how to boost import volumes, and most crucially, how to expand the direct tax net without stifling enterprise. Doubts linger as well: if investment fails to pick up, how realistic is the projected 8% rise in tax revenue? And if revenue falls short, how will the budget be financed? A rise in borrowing could only add to the already mounting burden of debt repayment.

Md Farid Uddin, a former member of the National Board of Revenue (NBR) and a member of the Revenue Reform Commission, finds little in the proposed budget that could significantly boost direct tax collection or spur investment.

"About 80% of our total tax revenue still comes from indirect taxes. Even a large portion of what we call direct taxes is actually collected indirectly," Farid told The Business Standard. He pointed to mechanisms like tax deduction at source (TDS) and turnover tax, which are collected in advance – regardless of whether a grocer or an enterprise ultimately makes a profit.

Farid had hoped the interim government would outline a clearer plan to enhance direct tax collection, which does not burden consumers. He also noted that taxation is closely linked to investment, as it directly influences investment decisions.

Despite its conservative stance, the budget is not without purpose. For industries strained by rising input costs, some targeted relief has arrived through extended VAT exemptions and a set of tariff and duty rationalisation measures aimed at curbing arbitrary bureaucratic discretion and aligning trade practices with global norms.

How the budget looks

Among the notable moves, raw material imports for sanitary napkins and diapers will remain VAT-exempt until June 2030 – an effort to keep essential hygiene products affordable. VAT relief has also been extended to materials used in hospital bed production and to APIs for the pharmaceutical sector.

The government has extended VAT exemptions on mobile phone assembly until 2027, with similar benefits through 2030 for items like washing machines, ovens, LPG cylinders, and kitchen appliances.

Even the auto sector sees gains: locally made hybrid and electric vehicles, ambulances, and four-stroke three-wheelers will retain tax relief, though with scaled adjustments – a budget mindful of both industry and restraint. 

The issue of double VAT on LNG has been addressed, with VAT now to be imposed only once instead of at multiple stages, a development that may reduce energy prices. Agriculture is another focus, with duty reductions proposed on machinery parts like combined harvesters and inputs such as insecticide raw materials and fruit bags.

The tax rate for "cashless companies" rises to 27.5%, while listed firms see reductions. Banks and NBFIs must now follow IFRS for provisioning bad loans. Excess minimum tax can be carried forward, easing burdens. TDS on essentials drops to 0.5%, and withholding tax returns shift to quarterly. Proof of return relaxed for 12 services. Disallowed expenses now count as business income, potentially raising effective tax rates. Merchant banks get a 10% tax cut; brokerage commission tax trimmed. Arbitrary tax on investment gaps removed. EVs get a boost with the scrapping of environment surcharges.

In a clear move to smoothen the trade, the government has set its sights on modernising the long-criticised customs bond system. The introduction of "Central Bonded Warehouses" and "Free Zone Bonded Warehouses" is expected to offer export-oriented industries quicker, more efficient access to imported raw materials – cutting delays, reducing costs, and limiting bureaucratic entanglements that have long plagued the sector.

Alongside this, a fresh coat of reform is being applied to the customs law itself. Proposed amendments aim to make the legal framework more business-friendly. Penalty thresholds for customs duty evasion have been revised, offering breathing space to businesses. Interest rates on delayed payments have also been rationalised and brought in line with existing tax laws.

That brings us to the inevitable question: where will the additional tax revenue – Tk40,000 crore come from?

End of tax privileges

The answer, as it turns out, lies in the quiet withdrawal of long-standing tax privileges. Several mature industries that have basked in VAT exemptions for years are now being nudged off the comfort cushion. Notably, VAT exemptions have been rolled back for items such as refrigerators, air conditioners, and their compressors, a move that will likely reach into the pockets of middle class consumers.

At the same time, turnover taxes for small to big businesses have been increased to 1% from present 0.6%, which may bring in several thousand crore takas. 

Also, taxes on cotton yarn and man-made fibre have been increased by Tk2 per kg to Tk5, which industry insiders say will raise production costs for spinning mills already struggling with low gas pressure. 

The government has also hiked advance tax on numerous imported items, including baby food, spices, fruits, garments, vehicles, toys, ceramics, bathroom and electric fittings, switches, and medical devices. The rate will jump from the current 5% to 7.5%. 

But one thing is becoming increasingly clear: the era of easy benefits – blanket VAT exemptions, discretionary waivers, and unchecked tax holidays – is drawing to a close. The budget signals a decisive shift toward a more rules-based, revenue-focused regime. And in this transition, it is the middle class that may once again find itself squeezed.

Squeezing the middle class

With VAT exemptions rolled back on everyday items like refrigerators, air conditioners, kitchen appliances, and imported essentials facing higher advance taxes, household expenses are set to climb. At the same time, relief measures remain modest – raising the tax-free income threshold by Tk25,000 offers only marginal breathing room amid persistently high inflation.

For a class that is neither poor enough to qualify for subsidies nor rich enough to absorb rising costs with ease, the pain will be real. As their living expenses continue to rise with no sign of easing, the middle class stands to bear the brunt of this shifting fiscal reality.