Inflation target of 6.5% for FY25 not realistic: MCCI

The Metropolitan Chamber of Commerce and Industry (MCCI) said the current inflation target of 6.5% in the FY25 budget is not realistic. 

"In the current FY24, the inflation target was set at 7.5%. A target of 6.5% has been set for the inflation rate in FY25. However, the inflation rate reached 9.89% in May," the chamber said in its initial response to the proposed national budget for FY25 today (7 June). 

In its response, MCCI said the inflation rate had remained above 9% for 14 consecutive months.

"Given the present circumstances, MCCI holds the view that the current inflation target is not realistic," it said. 

MCCI also expressed concern that the proposed increase in supplementary duty rates on imported goods could lead to an upward trend in the cost of living. 

"High commodity prices have presented a difficult predicament for individuals of limited means or low incomes," the chamber said in its initial response. 

Finance Minister Abul Hassan Mahmood Ali unveiled the Tk7.97 lakh crore proposed national budget for the fiscal year 2024-25 with an eye toward battling inflation.

He announced Bangladesh's largest-ever budget before the Parliament yesterday (6 June), a far cry from Tajuddin Ahmad's first budget of Tk786 crore for FY1972-73.

In its initial response, MCCI praised the government for extending the tax exemption on Information Technology-Enabled Services (ITES) until 30 June 2027. 

Based on the latest data, the annual domestic turnover in the ITES sector is estimated to be approximately $1.5  billion, with exports reaching around $1.9 billion. 

The current investment in this sector stands at approximately $600 billion.

However, the chamber said implementing the budget in the present context is highly challenging. 

Nonetheless, for the budget to be effectively executed, the chamber opined that there are further prospects to optimise the budget's management, reform tax policies, automate the tax system, reduce system loss in overall tax collection, enhance tax administration capacity, and deliver adequate services to the public.

MCCI has consistently recommended significant structural reforms in tax administration to enhance effective revenue collection.

"In the present framework, a considerable number of qualified entities with high income remain outside the scope of taxation," the chamber said it its initial response, adding that there is a growing imposition of a tax burden on individuals and businesses who fulfil their tax obligations regularly. 

In its initial response, MCCI strongly emphasised the need for a proper resolution of the matter. 

The estimated budget deficit for FY25 is Tk256,000 crore, representing 4.6% of GDP. 

Out of this total deficit, Tk95,100 crore will be funded through external sources, while Tk160,900 crore will be sourced internally. Of this, Tk137,500 crore will be obtained from the banking sector, while Tk23,400 crore will be sourced from savings certificates and other non-banking financial institutions. 

MCCI said the final budget deficit is likely to widen because of ongoing tax reform conditions imposed by the International Monetary Fund (IMF). 

Under the IMF loan conditions, the tax-GDP ratio is expected to rise by 0.5% to 8.8%, potentially increasing the tax burden on taxpayers. 

Therefore, MCCI advised implementing effective financial management practices to limit expenditure on government projects. 

The government borrowing target from the banking system is Tk137,500 crore, which is 11.82% higher than the revised budget of Tk155,935 crore for the fiscal year  2023-2024. 

MCCI said there are two borrowing scenarios that the government might confront. First, a rise in the banking system's credit supply has the potential to have a crowding-out effect on the economy, resulting in a shortage of funds for private sector investors. 

In addition, government borrowing from the central bank contributes to an increase in inflationary pressure, thereby placing the burden on either the consumer or the public. 

Consequently, MCCI prioritised the need for seamless coordination between these two aspects. 

The chamber said it is also apprehensive about the potential impact of increasing inflation on future business expansion. 

MCCI said it holds the view that the budget for the FY25 should concentrate on pro-poor and inclusive growth. 

"It is crucial to increase the support given to the needy through the social safety net significantly," it said in the initial response to the budget. 

The proposed budget allocates Tk136,026 crore for the social safety net, up from Tk126,272 crore in FY24. 

This sector has experienced a Tk9,754 crore (7.72%) increase only. MCCI deemed it imperative to increase the allocation for this sector judiciously. 

MCCI said it believes that economic growth continues to face significant obstacles because of underdeveloped communication systems, infrastructure, and bureaucratic complexities. 

Also, MCCI said the weak revenue collection system (70.6% collected between  July-April of FY24) and ADP (49.3%  implemented during July-April of FY24) cause economic concern. 

"Additionally, in light of the escalating import trend and the current global crisis, it is crucial to implement precautionary measures in foreign exchange expenditures to maintain macroeconomic stability. The excessive subsidies on electricity, gas, and fertilizer prices need to be regulated," MCCI said, mentioning that the subsidy cost could otherwise increase. 

MCCI applauded the government's decision to reduce the corporate tax rate by 2.5% for unlisted companies and one-person companies in the FY25 budget. 

The chamber proposed a decrease in this rate for other listed companies as well. 

In light of this, MCCI said it foresees companies being motivated to comply with tax payments. 

MCCI expressed its disappointment regarding the absence of any proposed amendments to the terms of cash transactions pertaining to the corporate tax rate. 

"Given that the informal economy makes up approximately 80% of Bangladesh, such terms and conditions are not compatible," it said. 

On the other hand, the chamber suggested reducing the rate of tax deduction at source (TDS) on services that create employment, such as construction and infrastructure. 

The chamber mentioned that Bangladesh's effective tax rate is very high and emphasised the need for a prompt initiative to reduce it by streamlining permissible business expenses and TDS rates. 

Saying that the cost of living is steadily increasing because of inflation. MCCI also requested a reevaluation of the proposal to increase the tax rate from 25% to 30%  without changing the tax-free income limit for individual taxpayers. 

The chamber said it believes simply raising the tax rate for current taxpayers without expanding the number of taxpayers or the tax net will not accomplish the desired tax GDP ratio.