Protections and post-LDC preparations - NBR has to balance

The upcoming national budget is set to be the most crucial one till date as it comes at a time that presents a unique set of challenges – recovering from a two-year pandemic, coping with setbacks on the global economy due to the Ukraine-Russia war, and preparing for the post LDC-graduation challenges.

Businesspeople are demanding the reduction of VAT as part of an investment and local industry-friendly fiscal policy to recover from the pandemic induced financial shock. The National Board of Revenue (NBR) is also in favour of a revenue structure that protects the local industry.

While it is necessary to support the local industries to restore the economic momentum, the post-LDC era from 2026 will require many facilities to be slashed, for which preparations need to begin now, say economists.

Balancing both these aspects are one of the major challenges for the government when they begin to map the economic path in the upcoming budget.  

During a discussion on the budget, NBR Chairman Abu Hena Md Rahmatul Muneem said that efforts to protect local industries will continue.

However, he also called on the industrialists to be prepared now, and said, "It would not be possible for Bangladesh to simultaneously keep providing a wide range of protections and adhere to the obligations of reducing benefits to local and export-oriented industries after LDC graduation."

Dr Ahsan H Mansur, executive director at Policy Research Institute, said as part of the preparations for the post-LDC graduation challenges, high tariffs on imported goods will have to be reduced in line with the World Trade Organization (WTO) policies.

Towfiqul Islam Khan, senior research fellow of Centre for Policy Dialogue (CPD), thinks balancing this is going to be the most important aspect in the next budget. 

"Preparation for the post-LDC time needs to begin now. Alongside providing opportunity for the local industries through increasing tariffs on foreign products, their capacity needs to be boosted. Incentives or facilities for any particular sector will need to be for a limited period," he said.

The government has taken bold initiatives in the last two budgets in the interest of local industries. Despite the risk of a major hit to the revenue, the corporate tax rate has been reduced by 5% to 30% for ordinary companies and 22.5% for companies listed on the stock exchange in the last two years.

Almost all business associations in the country have called on the NBR to reduce the tax rate by 2.5% in the coming budget.

They also sought measures to protect the micro and cottage industries, which were heavily hurt during the Covid-19 pandemic.

During NBR's pre-budget discussions with traders, trade bodies have raised various demands including withdrawal of advance tax, reduction of tariffs on imports of raw materials for local industries, provision of tax holiday facility in some sectors, increase of tax-free income limit for individuals, withdrawal of minimum tax and change in turnover tax limit.

Besides, the business associations have also proposed to eliminate various inconsistencies in VAT and duties and make it easier to pay taxes. However, over the last few years, there has been a flurry of demands to reduce taxes, VAT and tariffs in every budget by other organisations, including the Federation of Bangladesh Chambers of Commerce & Industries (FBCCI), the apex body of traders.

Traders say the law changes every year in the budget. Some changes are partial solutions to business problems while some changes create new problems. Changes in business patterns over time and changes in the policies of countries competing in the international market create new demands. As a result, they said they need to address the same issues every year.

Rizwan Rahman, president of the Dhaka Chamber of Commerce and Industry, said, "NBR has been coming up with certain benefits for traders for several years. However, the income tax, VAT and customs laws are very complicated. Taxes in many sectors are still higher than in competing countries."

In addition to reducing corporate tax rates, the NBR has been providing benefits such as tax breaks to local industries for the past few years. In order to reduce import dependence on electronics, home appliances, mobile phones, automobile industries, tax exemption has been given for a certain period of time in setting up industries and VAT exemption has also been given at the production stage. On the other hand, the government revenue generating agency is also providing additional benefits to the local industry by increasing the tariff on imported goods.

FBCCI has proposed to keep the maximum rate of customs duty on imported goods at 25% as well as to maintain regulatory duty, supplementary duty, advance income tax and advance tax and VAT.

In the pre-Budget discussion with the NBR, Md Jashim Uddin, president of FBCCI said they want to see meaningful and effective results in the budget.

FBCCI suggested the import benefits of import substitutes be extended to other sectors.

In addition, trade bodies sought a 10-year tax holiday for the new entrepreneurs in the SME sector.

Several organizations, including the Metropolitan Chamber of Commerce & Industry, Dhaka (MCCI), Foreign Investors' Chamber of Commerce & Industry (FICCI), and the Association of Mobile Telecom Operators of Bangladesh (AMTOB), said that they did not benefit from the reduction in corporate taxes.

The country currently collects advance income tax from 111 sectors, of which 41 are minimum tax or non-refundable. The amount refunded is only 0.20% of source tax.

Syed Nasim Manzur, former president of MCCI, cited the example of India on tax exemptions for sectors that creates production linkage industry (PLI) and jobs.

He said that in the last budget, India has reduced PLI from 30% to 22%. Taxes for those who set up new industries were reduced from 25% to 15%. He proposed a similar policy for Bangladesh like India and Vietnam.

Dr Ahsan H Mansur, said most of the demands of businessmen for the forthcoming budget seem reasonable. In particular, he emphasised the need to abolish the advance income tax system on transactions, even though there is no tax.

Regarding the minimum tax, he said that very few countries in the world have the provision to collect the minimum tax in this way, but there is also a refund system.

Dr Md Neyamul Islam, chief budget coordinator of the NBR, told The Business Standard, "So far some 350 companies have sent us their budget proposals. Nearly 200 of them came to NBR in person and presented their reasoning."

Neyamul added that they are now reviewing the proposals.