Why good policy benefits elude businesses, consumers

The government sets high targets for exports and pledges generous fiscal and policy support, encouraging entrepreneurs to dream bigger. All the pledges are never met, some are met only partially. But the way these are put into effect, and the time chosen, gains are far from what was intended. Some recent examples speak a lot about how good policy measures come to a little or no benefit for the business or the public.

Cut in import duty on some Ramadan essentials is one. With a little over a month left before the holy month of fasting, the National Board of Revenue (NBR) slashed import duty and tax on date, sugar, edible oil and rice.

The decision met immediate reactions from importers and refiners, who found the duty reduction much lower than what should have been because of the weaker taka, and said consumer level price reduction might hardly be Tk0.5 per kg for sugar and at best Tk5 for edible oil. Date price would rather go up further due to, what traders argued, wrong value assessment by the customs. It means the duty cut will just lead to revenue loss for the government without bringing any relief for consumers for Ramadan goods.

Another one was slashing export cash incentive as a groundwork for preparing business with post-LDC days when such subsidies will no longer be allowed. Exporters were aware of the World Trade Organization rules, but Bangladesh Bank's decision surprised them because of its timing. Businesses are the worst sufferers of import curbs that made LC opening difficult, latest hike in interest rate and drastic fall in taka's value – all consequences of the central bank's measures. Leading export sectors were caught quite off-guard to see the central bank choosing this hard time to deprive them of the benefits they were getting for years. However, the central bank later delayed the decision for a month. Cash incentive cuts will now be effective from 1 February.

The revised decision came only after the leaders of the apparel sector, the country's largest export earners who are to lose the most from export incentive cuts, met the prime minister.

The NBR's decision to cut import duty for Ramadan essentials also followed the prime minister's instruction given at a policy meeting. If the revenue authorities made the decision earlier, it could have delivered the intended benefits.

Businesses have blamed the additional cost of opening letters of credit (LC), as well as taxation, on a higher valuation of the imported products than their invoice price, for dates in particular.

Consumer rights body, CAB, however, trashed such complaints as traders' mere excuses not to reduce prices in the local market.

Ghulam Rahman, president of the Consumers Association of Bangladesh, told The Business Standard that if supply does not increase even after the reduction in duty-tax, the government will lose revenue and traders will gain, with consumers, of course, getting nothing.

Trade and industry associations use every possible occasion as a chance to remind the government of its old promises to facilitate business and place new demands. Pre-budget discussion is an annual ritual where the NBR listens to demands from the business sectors and assures them of considering the "logical" ones in the next budget. A few of the demands are addressed, while most go unheard, prompting businesses to repeat those every year.

All their demands are not just for reducing tax and duties or increasing fiscal benefits. Some of their demands are to change approach or attitude in relevant government offices to make businesses enjoy the benefits already in offer.

Take the issue of corporate tax, which has been lowered significantly in phases over the years in response to repeated demands from business bodies, and economists stated that higher taxes made Bangladesh's businesses less competitive. Leading chambers this time did not ask for further cuts; they rather pointed out how cumbersome procedures deprive them of the benefit expected from the favourable decision of the government. The effective tax rate, according to business associations, has risen to nearly 50% due to several disallowances and tax deductions at source, they said.

Two leading trade bodies, represented by leading local conglomerates and foreign companies operating here, raised the issue at pre-budget parleys with the NBR chief, urging the revenue authorities to create an enabling environment for the much-needed foreign investment. Metropolitan Chamber of Commerce and Industry (MCCI) President Kamran T Rahman said the corporate tax rate was lowered by 2.5% in the previous fiscal year, but effective tax rate goes "exceedingly high", limiting businesses' gain from tax cuts. Businesses are required to submit Proof of Submission of Returns to the NBR for 43 services, in cases with high penalties, which, the MCCI president said, impedes the country's efforts to improve the ease of doing business and diminishes business capacity.

An effective tax rate is calculated by taking the actual income tax expense and dividing it by the company's actual net income.

Foreign Investors Chamber of Commerce and Industry (FICCI) President Zaved Akhtar explains how the effective tax rate grows significantly high and why it is one of the primary reasons for the low foreign direct investment in Bangladesh. The country's FDI stands at a mere 0.3% of GDP, even lower than that in Pakistan. Ideally, FDI should be at least 5% of GDP, he said.

Zaved Akhtar cited a recent FICCI study that showed a 33% cut in tax rate by 2031 would bring 16 times higher FDI and generate 6.6 times more revenue by 2041. Keeping the tax rate unchanged at a higher rate would only increase FDI by 2.5 times and revenue would merely double during the period, said Zaved, also the Unilever Bangladesh CEO.

These survey projections are less likely to convince NBR chief Abu Hena Md Rahmatul Muneem, who rather suggested that businesses should get ready for post-LDC graduation days.

"The prevailing trend in the industry is to seek support without preparing to establish their own foothold. It is time to confront this challenge," he was heard telling the business leaders, though acknowledged some of their grievances as "valid".

During the routine pre-budget sessions that started earlier this month, businesses reiterated the issue of hefty upfront payments for contested assessments and the lack of refunds, highlighting the financial strain on them.

Responding to steel industry leaders' complaints of "harassment" by VAT officials for excessive tax, the NBR boss said investigation into such allegations may reveal "something else".

While the revenue authorities must plug the loopholes in the tax system to check tax theft and raise revenue to bankroll the budget and reduce public debt, it is their responsibility too to facilitate smooth running of businesses to generate more revenue for themselves as well as for the exchequer.

The 20% tax imposed by the NBR on interest payments for foreign loans with effect from July 2023 also came as a blow to companies that borrowed short-term loans from abroad. The decision has reduced external fund flow greatly at a time when the country is suffering its worst dollar crisis.

The decision was later delayed until December this year. But the exemption will not be extended beyond December, the NBR chief made it clear at a pre-budget session.

"We have given you breathing space. But after December, the facility will not exist," he said, suggesting businesses should negotiate accordingly with their foreign lenders.

Businesses need such breathing space with favourable policy support to grow sustainably and chase the target set by the government.

Though agro-products' exports fell below $1 billion last year, Foreign Minister Hasan Mahmud hopes that the amount would reach $10 billion in the next few years, expecting $3 billion this year. He cited the government's commitment of "all kinds of logical support" to help the agro-processing sector capture the market share.

At a pre-budget meeting, the agro-processing industry and sectors related to it demanded fiscal support for cold storage owners and feed-makers to help reduce cost of farming and make egg and chicken cheaper for consumers. If the NBR finds their demands "logical", those need to be taken care of so that agro-products become affordable for local consumers and competitive for the export market.

The same is expected for all other industries so that they can become more productive, efficient and competitive for post-LDC graduation.