Govt controlling expenditure due to inability to generate revenue: Ahsan H Mansur

Highlights:

• 34% of government expenditure was borrowed last fiscal
• One third of the total revenue is from direct tax
• Less than one percent of GDP is spent on health
• Current tax rate on GDP is 7.6%

Achieving high-income status will remain elusive for Bangladesh without significant improvements in revenue collection, according to the Policy Research Institute (PRI).

To address this issue, the organisation proposed a series of measures, including combating the culture of tax evasion, enhancing direct taxation, eliminating the multi-level VAT collection system, strengthening the capacity of revenue administration, reducing corruption, and introducing automation.

PRI Executive Director Ahsan H Mansur voiced the concern while delivering the keynote address at the "Bangladesh's Domestic Resource Mobilization-Imperative and a Roadmap" seminar which was organised by PRI to express its concern over the tax collection situation in Bangladesh in comparison to the country's GDP.

The seminar was held at the Amari Hotel in the capital, and was presided over by PRI Chairman Dr Zaidi Sattar.

National Board of Revenue (NBR) Chairman Abu Hena Md Rahmantul Munim, a special guest at the event, however, expressed a contrasting view, stating that he does not see any significant concerns regarding the situation where revenue collection lags behind GDP growth, saying that with the "Made in Bangladesh" policy, collaborative efforts across various sectors are taking place to bolster industrial and agricultural expansion in the country. He cited examples such as the manufacturing of sea-going ships, motorcycles, mobiles, lifts, and air conditioners within Bangladesh.

Economist Ahsan H Mansur said, "The government's low revenue also limits its spending capacity due to which necessary expenditures are not possible. On the other hand, currently the money market is very weak. 

"In 2023, 22% of government expenditure had to be borrowed but  in the last financial year, 34% of government expenditure. This indicates an increased dependency on loans. Though the per capita income of Bangladesh has increased, the revenue income has not increased in proportion.

He further said, "One third of the total revenue comes from direct tax and the remaining two-thirds is from indirect taxes. India, China, South Korea have more revenue coming from direct taxes. 

"Bangladesh's tax system needs fundamental reform, otherwise, income inequality will not decrease. Inequality in the society is increasing mainly due to the inability to raise direct taxes.

"Now, the government is controlling expenditure due to its inability to generate revenue. Less than one percent of GDP is spent on health and education is about 2% of GDP. Revenue collection should be increased to improve the situation and this requires a long-term reform plan. 

"There is no alternative to coming out of the tax exemption culture to sustain the financial sector in the short term. Tk20-25,000 crore tax should be deducted every year to increase domestic revenue. This will increase revenue collection by Tk60,000 crores in four years."

"Also, the multi-level VAT system should be removed and to reduce corruption in revenue collection, revenue officers should stop going directly to the field and automatic systems should be introduced," the PRI executive director added.

He further said, "Currently the tax rate on GDP is 7.6% which is the lowest in South Asia. If not reformed, it will fall to 7.3% in the coming year and will further decrease to 6.8% in the following year. 

"It is not possible to reach high income status with a tax GDP of lower than 10%. Though the government has planned to take the tax GDP ratio to 21% by 2041, it is not possible. It can reach a maximum of 18% with necessary reforms and if the reforms are not made, it will be 6.5%."

Ahsan H Mansur said, "The biggest challenge in revenue collection and economy is the country's political economy. Due to this, the VAT law was not implemented in due time along with many other reforms that could not be done in time."

However, NBR Chairman Abu Hena disagreed with the statements of the economist. He said, "Everyone enthusiastically says that the tax-GDP ratio in the country is disappointing but I do not see it that way. It is not fair to compare Somalia with Congo in terms of tax GDP. If you compare with those countries, you have to compare all the parameters. Importantly, those with higher tax GDP rates need to look at the source of revenue. For example, Nepal, Maldives have higher tax GDP rates. The main source of revenue there is the tourism sector but we do not have such a source."

The NBR chairman further said, "The government is focusing on maintaining production without increasing revenue. Employment opportunities increase by supporting industries so corporate tax is gradually being reduced." 

"Everyone says they want to pay taxes but actually most people don't want to pay taxes, not even government institutions. Oftentimes, there is pressure for tax amnesty, so raising taxes is not an easy task," he added.

State Minister for Finance Wasika Ayesha Khan said "There is no alternative to automation to increase revenue. Tax collection from this sector is important as the informal sector is very large. So, the cooperation of the private sector is needed."

"Everyone should try to find out how to bring more good companies to the market. Then the pressure on the money market will reduce. It is important to increase the capital market, equity market and bond market." she added.

Economic affairs adviser to the Prime Minister Moshiur Rahman, who was president at the programme, said "Tax GDP ratio needs to be increased, either by getting out of tax exemption, or by changing the tax rate, that has to be reviewed."

FBCCI President Mahbubul Alam said, "An automation system should be introduced to increase revenue collection. Initiatives should be taken to collect revenue from the informal sector. 

MCCI President Kamran T Rahman said that revenue collection will increase if good governance is ensured and an automation system is introduced.

President of Dhaka Chamber Ashraf Ahmed said that it is not right to suddenly withdraw tax exemption because the industries that are currently receiving tax breaks will eventually become tax payers. 

He demanded that if the subsidy on fuel is withdrawn, tax on fuel should also be withdrawn.

In addition, PRI Chairman Dr Zaidi Sattar, Vice Chairman Dr Sadiq Ahmed, Chittagong Stock Exchange Chairman Asif Ibrahim, Research Director of PRI MA Razzak spoke.