Shaping up realistic policies for upcoming budget

The National Board of Revenue (NBR) has been having pre-budget discussions since February of this year as a preparation for the Budget of FY2025-26.  The chairman and senior-level officials of NBR have been kind enough to listen to the proposals raised by different organisations. 

All private sector organisations have fervently highlighted significant issues that are hindering business growth and investment. Investors initially based their investment plans on the policies announced by the government. However, even before the completion of the business operation process, these policies have been altered. 

In Bangladesh, the investment process requires a considerable amount of time to mature. If policies change during this period, how can investors proceed with confidence? The explanations provided have been inadequate, leaving investors deeply frustrated.

Through various media outlets and the Ministry of Finance, it has been revealed that the framework for the FY2025-26 budget has already been outlined. The total budget is expected to be Tk8.48 lakh crore, comprising an operating budget of Tk5.78 lakh crore and an Annual Development Programme (ADP) allocation of Tk2.70 lakh crore.

With the fiscal deficit widening each year and a persistently low tax-to-GDP ratio, the rising operational costs are a growing concern. GDP growth is estimated at 6%, while inflation is projected at 6.5%. A clear and actionable roadmap is essential to effectively achieve these targets. 

Operational costs in Bangladesh are steadily increasing. In contrast, the allocation for the Annual Development Programme (ADP) is not keeping pace. In FY2024-25, the ADP budget grew by 0.8%, while the operational budget expanded by 6.7%. For the upcoming fiscal year, the growth rates are projected at 1.8% and 14%, respectively. A significant portion of operational costs is attributed to subsidies, primarily directed towards the energy sector, interest payments on domestic loans, and salaries and allowances for public sector employees.

Comparatively, the tax-to-GDP ratio and government spending reveal stark differences. For instance, in Vietnam, tax collection as a percentage of GDP aligns closely with government spending, whereas in Bangladesh, the disparity is much larger. 

Additionally, Bangladesh has one of the highest numbers of government agencies globally, after India. Given this context, revenue collection, spending, and the balance between operational and development expenditures must be carefully calibrated.

These issues are particularly critical for Bangladesh as the country prepares for its imminent graduation from Least Developed Country (LDC) status. The upcoming budget is expected to include provisions to facilitate this transition, ensuring a smooth and sustainable path forward.

The National Board of Revenue (NBR) has adopted several key initiatives, including the introduction of e-returns for government officials (2024-25), which will be gradually implemented for everyone. 

Other measures include the announcement of the Customs Strategic Plan 2024-28, the National Single Window Portal, the Automated Bonded Warehouse Policy, and the AEO (Authorised Economic Operator) Policy update. So far, 15 large companies have been awarded AEO status and can use the AEO logo. However, these AEO-certified companies are not yet able to enjoy all the benefits of this status, as all of them remain in Tier 1.

The government has already formed numerous committees and 11 commissions to work on reforms and provide recommendations on various issues. To implement effective reforms, an Advisory Committee on NBR Reforms has been established and is actively working. The committee has proposed separating the tax policy and tax management wings. An ordinance in this regard is expected to be announced soon. 

To implement the decisions of the ordinance, amendments will be required to the current Acts governing tax collection policies, including the Income Tax Act 2023, Customs Act 2023, and VAT and SD Act 2012. These policies involve around 44 tax authorities, whose roles and responsibilities will need to be adjusted in line with the reforms introduced through the Ordinance 2025.

In regard to the post-LDC graduation regime, as per preparation, a Smooth Transition Strategy (STS) has been formulated. Additionally, a committee is working on identifying WTO-compliant benefits instead of direct cash incentives that can be provided to four key export sectors of Bangladesh—agro and agro-processing, leather and leather goods, jute and jute processing, and pharmaceuticals.

In the post-graduation phase, no exporter will be eligible to receive direct cash support. Currently, cash incentives at varying rates are provided for 43 export products. It is essential to explore and implement WTO-compliant benefits to effectively support these sectors. 

Among these measures, the Duty Drawback facility is particularly noteworthy. This benefit allows exporters in sectors that do not have access to bonded warehouse facilities to claim a refund on the customs duties paid for imported raw materials used in export production. 

Industries that are not fully export-orientated cannot import raw materials duty-free but can reclaim duties through the Duty Exemption and Drawback Office (DEDO). However, providing this facility effectively to small exporters is challenging, with the complexity of duty determination being a major hurdle, as the process is not automatic. Reforms in the Customs Act and the VAT and SD Act 2012 are necessary to reintroduce a system where all types of duties, including VAT, can be processed from a single point.

Additionally, immediate measures are needed to introduce special bonded warehouse facilities, provide easier loan terms and interest rates for exporters, improve infrastructure, support research and development (R&D) for new markets and products, and offer incentives for compliance with environmental and other standards. These measures should be clearly reflected in the upcoming budget. 

The WTO Customs Valuation Agreement is mandatory for all member countries, so its implementation process must be incorporated into relevant laws and regulations through the budget. Notably, the Customs Valuation Rules, 2000, have already been announced but are yet to be enforced. Furthermore, the tariff structure outlined in the National Tariff Policy needs to be aligned with Schedule 1 of the Customs Act. Currently, the Customs Valuation Rules, 2000, are not applied in customs valuation. 

Instead, a thumb rule based on the highest import price of the last three months is used for duty assessment, which contradicts the GATT and WCO Valuation Guidelines. This practice must be rectified to ensure compliance with international standards.

To align bound tariffs with MFN (Most Favoured Nation) tariffs, it is essential to specify the types of changes that will be introduced in the budget. Currently, according to Bangladesh's bound schedule, the maximum bound rate for 933 products is set at 200%. Post-LDC graduation, protective duties such as Supplementary Duty (SD), Regulatory Duty (RD), and Advance Income Tax (AIT) will need to be gradually reduced. 

In this regard, a process is underway to remove duties that exceed the bound rates when combined with Other Duties and Charges (ODC) for products with the highest bound rates. Additionally, there are approximately 6,000 products outside the bound items, including semi-finished, finished, and raw materials. 

For products from which SD will be gradually withdrawn, it is crucial to align their customs duties with MFN duties. These measures need to be reflected in the budget to ensure a smooth transition and compliance with international trade norms.

In the coming years, ESG (Environmental, Social, and Governance) issues will emerge as, or have already become, critically important. We are significantly behind in this regard. With environmental concerns in mind, recycling has been given special emphasis as a developmental sector in the Export Policy 2024-2027. 

The recycling industry requires substantial capital investment in advanced machinery, technology, research, and infrastructure development. Many countries around the world offer various incentives for the recycling industry. 

For example, India provides tax exemptions for waste management and recycling startups under the Startup India Initiative. Malaysia offers tax exemptions for companies involved in sustainable (green) technologies, including the recycling industry. The European Union provides VAT exemptions on recycled products. In Bangladesh, waste collection is subject to a 4% source tax, 1% Advance Income Tax (AIT), and 15% VAT on utilities. To prioritise the recycling industry, the tax system needs to be reformed.

Despite years of efforts towards export diversification, significant progress remains elusive. Under the Bonded Warehouse Policy, 100% export-oriented industries enjoy benefits, while partially export-oriented industries do not. According to Chapter 4, Section 21(8)(J) of the Import Policy Order 2021-24, partially export-oriented industries can import raw materials and necessary inputs under Utilisation Declaration (UD) and Utilisation Permission (UP) against 100% bank guarantees, subject to customs clearance. 

To facilitate this, necessary provisions should be incorporated into the Customs Act 1969 (Chapter 11), Customs Act 2023, Bonded Warehouse Licensing Rules 2008, Entitlement Policy 2008, and the 100% Export-Oriented Industries (Temporary Import) Rules 1993.

In conclusion, as Bangladesh prepares for its post-graduation phase, it is imperative to address the challenges faced by exporters and industries through strategic reforms and WTO-compliant measures. Streamlining policies such as the Duty Drawback facility, expanding bonded warehouse benefits to partially export-oriented industries, and simplifying customs and tax processes will be crucial. 

Additionally, the upcoming Budget offers a pivotal opportunity to shape tax policies that not only support economic growth but also enhance the tax-to-GDP ratio. By prioritising these reforms and fostering a business-friendly environment, Bangladesh can ensure a smoother transition and sustainable development in the years to come.

Ferdaus Ara Begum. Sketch: TBS

Ferdaus Ara Begum is the CEO of BUILD, a public-private dialogue platform that works for private sector development.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.