IMF for luxury item tax hike, questions public investment decline

The International Monetary Fund (IMF) has recommended that the National Board of Revenue (NBR) increase the supplementary duty on luxury items.

It has also set conditions for achieving an ambitious revenue collection target for the remainder of the current fiscal year – around Tk60,000 crore each month – and the upcoming fiscal year.

However, the multilateral lender did not specify whether the proposed tax hike should apply only at the import stage or at both the import and domestic stages for luxury goods.

In a separate development, the IMF sought an explanation from the officials at the Bangladesh Planning Commission as to why public investment is declining.

During a meeting with NBR officials at its headquarters in Dhaka today, the visiting IMF delegation emphasised the need for fiscal reforms.

Currently, import duties on luxury vehicles in Bangladesh can reach up to 800% – one of the highest rates globally. Similarly, the maximum import duty on liquor and cigarettes can be as high as 600%.

Other products classified as luxury items include cosmetics, jewellery, branded clothing, footwear, certain electronic gadgets, and decorative items.

In the meeting, the six-member IMF team suggested that in order to meet the revenue targets, the existing VAT and income tax exemptions should be phased out.

They also proposed introducing a standard VAT rate of 15% across the board and abolishing the existing minimum tax rate system.

"If the revenue target cannot be met even after implementing these measures, the possibility of further increasing the excise duty on luxury items can be considered," said the IMF's presentation during the meeting.

A senior NBR official, speaking to The Business Standard on condition of anonymity, confirmed the proposal. "This recommendation was made alongside other suggestions. We will review it," the official said.

Economists have supported the proposal in principle but stressed the need for balanced implementation.

Mohammad Abdur Razzaque, an international trade expert and chairman of Research and Policy Integration for Development (RAPID), told TBS, "Taxes on luxury items can be increased if necessary for revenue purposes. However, supplementary duties should be applied equally to both imported and locally produced luxury goods."

He also emphasised the importance of clearly defining what constitutes a luxury item.

Mostafa Abid Khan, another international trade expert, echoed similar sentiments. He told TBS, "If taxes are increased on luxury items, they should be applied uniformly to both imported and domestic products. Otherwise, it would violate World Trade Organisation (WTO) principles."

The IMF has also advised against extending expired tax exemptions. Instead, it recommends gradually phasing out existing ones and implementing a standard 15% VAT rate universally, rather than maintaining reduced rates.

Challenging revenue targets ahead

In the first eight months of the current fiscal year, the NBR collected Tk2,17,971 crore – averaging slightly over Tk27,000 crore per month.

The IMF has set a target of Tk4,55,000 crore for the full fiscal year, equivalent to 7.9% of GDP. This would require an average monthly collection of around Tk60,000 crore over the remaining four months.

The revenue target for FY26 is set at Tk5,70,000 crore. Even if this year's target is achieved, significant additional growth will be required to meet next year's goal – a rate of increase never before achieved in the country.

According to NBR officials, these targets are unrealistic under current circumstances. The Washington-based lender has conditioned Tk57,000 crore in additional revenue – mainly through reducing exemptions and increasing taxes – to achieve next year's target.

The NBR official told TBS, "It is almost impossible to meet the targets set by the IMF based on the previous tax-to-GDP ratios."

He added that another round of VAT hikes, following the VAT increase in January, is unlikely to generate the required revenue by simply hiking the tax rate further.

"We've informed them of the economic situation expected after July, and they are aware of the challenges. However, they have yet to offer any assurance about adjusting the target," he said.

The official also mentioned that senior government representatives will meet with high officials of the IMF board in Washington this month to present the case.

IMF enquires about falling public investment

The IMF today sought an explanation as to why public investment is declining.  A visiting delegation from the multilateral lender raised the query during a meeting with the Programming Division of the Bangladesh Planning Commission.  

Officials at the commission explained that the size of the ADP is determined by the Ministry of Finance based on the government's revenue collection. As a result, only the ministry can provide a definitive answer on this issue.  

Additionally, limited implementation capacity sometimes leads to reduced government investment. As a result, the annual ADP allocation is often revised down. The IMF delegation was informed that this occurs in almost every fiscal year, according to sources present at the meeting.  

Iqbal Abdullah Harun, secretary of the Planning Division and member of the Programming Division, along with other officials from the Programming Division, were present at the meeting.  

Last month, the National Economic Council reduced the revised ADP size to Tk216,000 crore, down from the original Tk265,000 crore for the current fiscal year.  

The revised ADP allocation for the current fiscal year is Tk29,000 crore, or 11.83% less than the previous year's allocation. Typically, the revised allocation increases each fiscal year, but this time it has decreased. The revised ADP allocation for the last fiscal year was Tk245,000 crore.  

According to sources, the implementation has worsened this fiscal year compared to the last. In addition to the reduced RADP allocations, there are concerns about the actual spending of allocated funds.  

During the meeting with the Planning Commission, the IMF also urged the government to avoid unnecessary projects while also stressing the need for transparency in development initiatives.  

Planning Commission officials said several steps have been taken following IMF guidelines to ensure transparency in development projects. A circular has been issued requiring public opinion before launching new projects.  

To further enhance transparency, it is now mandatory to include updated information on each ongoing project in AMS software.  

Additionally, the government has decided to establish a directorate under The Implementation Monitoring and Evaluation Division to strengthen oversight, making the supervision of development projects more effective, even at the marginal stage.  

Planning Commission officials said the process of amending the Government Procurement Act to ensure transparency in development projects is in its final stages.  

Additionally, initiatives have been taken to prioritise environmental issues, as per IMF guidelines.

IMF enquires about tariff responses 

The IMF delegation today held a separate meeting with Commerce Secretary Mahbubur Rahman, during which the lender inquired whether the additional US tariffs would negatively impact Bangladesh's exports. 

They also asked how a potential decline in exports might affect the country's balance of payments.

An official from the commerce ministry said the commerce secretary informed the delegation about the various measures taken by the government to ensure that Bangladesh does not suffer due to the imposition of US tariffs.