VAT pressure to increase in next FY raising inflation concerns

Despite the government's initiative to formulate a contractionary budget in the upcoming fiscal year to control inflation, the finance ministry plans to generate around 51% more revenue from value added tax (VAT) and supplementary duties than the target of the revised budget of the current fiscal year, a measure stakeholders say could increase inflation, negating the government's intention.

According to the finance ministry's draft budget documents for FY25, the revenue collection target of the National Board of Revenue (NBR) is Tk4,76,500 crore including Tk2,40,000 crore from VAT and supplementary duties on goods and services.

According to stakeholders, VAT rates may increase in various sectors and be imposed in new sectors to collect additional revenue in FY25.

The National Bureau of Revenue (NBR) has already taken the initiative to impose VAT on metro rail ticket prices. Additionally, the concessions that the local industry has been enjoying on VAT may be reduced in the next financial year, they say.

Consequently, if the production cost of the product increases, the price of the product will also increase and that will be passed on to the consumer, they added.

Muhammad Abdul Mazid, former chairman of the NBR, told TBS, "Everyone knows that if VAT and supplementary duties increase, consumers inevitably bear the burden."

The Consumer Association of Bangladesh (CAB) has expressed concern over the Finance Ministry's plan to increase VAT amid the current high inflation in the country.

If VAT is increased again, it will be unbearable for low-income people, CAB officials told TBS.

The NBR set a revenue target of Tk2,24,540 crore in VAT and supplementary duties in the original budget for the current fiscal year. At the end of last January, the collection from this sector was Tk1,03,283 crore. In the revised budget, the target was fixed at Tk1,58,066 crore.

According to a finance ministry document, revenue collection from VAT and supplementary duty in the last financial year, 2022-23, amounted to Tk1,70,757 crore, compared to Tk1,58,181 crore in the previous financial year.

Meanwhile, the target revenue collection from taxes on income and profit in the budget for the next financial year is Tk1,75,000 crore. It was Tk1,53,260 crore in the original budget for the current financial year, which has been reduced to Tk1,45,865 crore in the revised budget.

On the other hand, the budget for the next fiscal year has set a target of revenue collection from customs duty at Tk54,500 crore, which is about 42% lower than the target in the revised budget of the current fiscal year.

Taming inflation could be challenging

The inflation rate is projected to be maintained at 6.5% in the next fiscal year's budget. To achieve this, the government may focus on debt control, boosting domestic agricultural production, and expanding the coverage of social safety nets, stakeholders say.

Inflation was projected to remain at the same rate in the budget of the current financial year, however, it hovered at nearly 10% throughout the year.

Although inflation was targeted to be maintained at 7.5% in the revised budget of the current financial year, policymakers expressed doubts about achieving this target. The wariness was expressed by those present at the Fiscal Coordination Council meeting on Thursday chaired by Finance Minister Abul Hassan Mahmood Ali.

Economists are advocating for increasing income tax collection to mitigate income inequality, yet the target for this sector remains relatively unchanged. Around a 17% growth is estimated in taxes on income and profits compared to the revised budget target.

Officials from the CAB also said they have long been requesting the NBR to raise income tax.

"We have been demanding that the NBR should increase the income tax. But the NBR is not listening to us," SM Nazer Hossain, vice president of the CAB, told TBS.

"People are already facing high inflation for the last two years, which has reduced their real income. In addition, the government has collected additional money as VAT on many daily essential products. If additional VAT is imposed now, it will be unbearable for low-income people," he added.

IMF's prescription

In line with the International Monetary Fund (IMF) target, the NBR aims to collect VAT of around Tk1,70,000 crore next year, which is Tk26,100 crore higher than the target for the current year.

The NBR has also submitted an outline to the agency regarding how this money will be collected. NBR sources said that the NBR sent a report on this to the IMF last week.

According to the report, "It is assumed that regular measures as taken by VAT offices may engender 11.6% revenue growth which will amount to Tk16,700 crore. Rest of the amount, that is, Tk9,400 core will be collected 'taking additional' measures."

The VAT department hopes it may collect Tk7,500 crore in additional VAT, of which Tk3,450 crore will be collected by restructuring cigarette taxation. Proper implementation of the electronic fiscal device system in the trading stage is expected to generate an additional Tk950 crore from this sector.

The IMF has been suggesting reducing long-standing tax exemptions in Bangladesh.

According to the NBR, new taxes will be levied on certain sectors next year by removing or reducing exemptions. Along with this, an increase of Tk5,000 crore will be realised by reducing the compliance gap.

"We have already sent an outline to the IMF for the next financial year based on the VAT collection target given to us by the agency," a senior official of the department concerned at the NBR told TBS on condition of anonymity.

Decline in imports and slow project implementation may impact revenue

In the report sent to the IMF, the NBR said that if the current trend of import slowdown continues and the government projects are slow in implementation, the target of additional revenue collection may not be achieved.

The NBR report reads, "About 40% of total VAT revenue comes from the manufacturing sector. VAT in the manufacturing sector is mostly dependent on imported raw materials whereas revenue from the trade sector is dependent on import of consumable items as well as production of goods. In this year, imports showed a negative trend which means if the trend continues revenue collection may slow down."

"So stability in the import of raw materials and consumable items, lessening of the existing UDS crisis, adequate supply of fuel to continue production are the prerequisite for achieving projected revenue."

The report also said, "VAT revenue collected against procurement by government projects and other agencies is about 10% of total vat revenue. This year this sector is expected to see a decline in revenue as many companies and the government have already curtailed their budget."