Advance tax hike risks fuelling inflation: Experts

The government's decision to raise the advance tax (AT) rate for importers, excluding industries, to recover revenue lost to VAT evasion, could fuel inflation, experts warned during a post-budget discussion in Dhaka today.

Presenting a keynote paper at an event titled "Budget Insights: Challenges and Opportunities Ahead," organised by the Metropolitan Chamber of Commerce and Industry (MCCI) in collaboration with the Policy Research Institute (PRI), Zaidi Sattar, chairman of PRI, cautioned that the new fiscal measures could intensify inflationary pressures and burden consumers.

In the 2025-26 fiscal year's budget, the government raised the AT rate for commercial importers from 5% to 7.5%, while reducing the rate for industrial importers of raw materials from 3% to 2%.

Persisting above 9% for the past 27 months, general inflation eased further in May, falling to 9.05% from 9.17% in April. Both food and non-food inflation declined in May, with food inflation falling to 8.59% from 8.63% and non-food inflation easing to 9.42% from 9.61%, according to the Bangladesh Bureau of Statistics.

Zaidi Sattar emphasised that Bangladesh must raise its competitiveness and productivity to drive economic diversification, stronger growth and job creation. He advocated for tariff rationalisation, supplemented by improved income tax and VAT mobilisation, as vital revenue reforms. He also called for urgent attention to tax policy and administration to bolster revenues.

Sattar warned that rising budget deficits, long financed by bank borrowing and central bank money printing, have fuelled inflation and sharp currency depreciation. He added that relying too heavily on T‑bills is inflating interest costs and crowding out private credit. "To mitigate this, bank financing should be limited to 1% of GDP, with the rest of the deficit met through external funding." 

He advocated for the elimination of export and remittance subsidies, arguing that they drain resources and contradict a market‑based exchange rate regime.

Kamran T Rahman, president of the MCCI, said that in response to the Finance Ordinance 2025, certain measures, such as a higher government borrowing target from the banking system, could lead to a crowding‑out effect, restricting private sector investment, and potentially intensify inflationary pressures that ultimately burden consumers. 

Speaking as the chief guest, Anisuzzaman Chowdhury, special assistant to the chief adviser, said, "Although this is not a perfect budget, it can certainly be called a business‑friendly one."

He said that due to reliance on foreign loans, external influences often shape the country's policy decisions. "While accepting foreign aid for development projects, the country must adhere to certain conditions, which ultimately hamper both revenue generation and foreign investment. We must work towards reducing dependence on foreign loans."