Increase in indirect taxes may adversely affect consumers

"The Global Economic Prospects 2020" recently released by the World Bank has indicated that the possible global recession due to the Covid-19 pandemic would be the greatest within the last eighty years. About 700-1,000 million people may face extreme poverty. In the face of reduced GDP growth worldwide, Bangladesh's economic growth will also shrink during the fiscal years 2019-2020 and 2020-2021 when compared to the steady growth attained during previous years. 

The novel coronavirus situation in Bangladesh is deteriorating day by day. As of June 11, the total number of Covid-19 cases in the country is 78,052 and the number of deaths is 1,049. Unofficial numbers, as it is said, are much higher than these. How to contain the pandemic through public awareness and appropriate health and sanitation measures should therefore be the prime objective of the nation at this moment. Alongside the measures taken up by the government, a lot more preventive and health administrative measures need to be undertaken by the government as well as the private sector.

In such a situation, the government, on Thursday, placed before the parliament the proposed budget for the fiscal year 2020-2021. The budget for the next fiscal year should aim not only at the growth prospectives of the economy but also at the reconstruction of the pandemic-hit economy. The proposed budget for FY2021 is Tk50,000 crore larger in volume when compared to the revised outlay for the outgoing fiscal year. Larger budgetary allocations are expected in the health, agriculture and social safety net sectors. However, monetary allocations can be revised within the financial year to meet the urgent necessity of financing in important sectors. 

Meanwhile, what pinches the public immediately is the increase of taxes by the National Board of Revenue (NBR). Fiscal policy may influence the domestic investment, production, employment, and trade in the country directly or indirectly. A reduction in corporate tax may induce the entrepreneurs to expand investment as the tax burden is low. However, a reduction in direct taxes may result otherwise to increase indirect taxes – which may adversely affect consumers as a whole.    

A 2.5 percent reduction in corporate tax may reduce the overall collection of revenue. To compensate for the corporate tax reduction the NBR has raised VAT and customs duty on quite a number of commodities – which will be treated as an unpopular attempt. Moreover, downward restructuring of the existing tax would result in a substantial fall in the amount of indirect tax collection. 

Increasing tax rates on bank deposits, mobile phone use, personal vehicles, electronics, and consumable imports will adversely affect the general public. The positive result of the tradeoff between a reduction in direct taxes and an increase in indirect taxes will depend on the extent of decrease and increase in the two types of taxes. However, the ideal situation of any economy should be to raise direct tax revenue through widening the tax net as well as through progressively adjusting tax rates – which Bangladesh has followed for the last one or two decades. 

It is laudable that the minimum threshold of tax-free income has been raised to give some relief to marginalised taxpayers. That can also be supplemented through lowering the minimum rate from 10 percent to 7.5 or five percent. However, recovery of revenue loss should be followed by a progressive rise in the upper rate from 30 percent to 35 percent or, keeping at least the upper rate unchanged. 

The total revenue collected in FY2020 is estimated to be lower than that collected in the previous fiscal year. However, the budget of an ambitious figure of revenue in the next fiscal will not be fulfilled unless a well-thought-out fiscal policy is adopted through the finance bill of the budget. 

The author is a retired senior secretary and former chairman of the National Board of Revenue