Political will needed to resolve financial sector problems

The revised budget of the current fiscal and its implementation till March this year indicate that the biggest weakness in our economic management is revenue collection. The budget speech laid emphasis on curbing tax evasion and bringing those with the financial ability under the income tax ambit.

The pitiful predicament of the banking sector and the growing problems of loan default were admitted. The budget speech also mentioned possible measures to restore order to the financial sector.

However, the finance minister himself is well aware that to implement such changes, political will is imperative. He spoke of applying the bankruptcy act regarding the loan defaulters. Of course, he knows very well how difficult it would be to bring the influential loan defaulters under this law.

The budget speech several times mentioned the commitment of becoming a high-income country. Our policymakers surely also realise that this will not be possible unless we emerge from the culture of corruption, loan default and tax evasion. When it comes to the international standards of good governance, Bangladesh is viewed in the same bracket as countries considered to be ultra poor or economically weak. We should have sought solutions to these problems long ago. However, it is a step in the right direction that the existence of these problems was at least admitted in the budget speech.

There was mention of steps to be taken regarding the standard of education, human resource training and social security. This indicates the good intentions of the policymakers. But our budget allocation for these social development sectors is inadequate which also leads to limitations in revenue collection.

The new VAT law may now finally be implemented, though the various VAT rates in the amended law remain unclear. The VAT categories could be based on production, wholesale, and retail, as exists at present. Then again, it could be categorised on luxury items and essentials. If the maximum VAT remains 15 per cent, this can be adjusted with the previously imposed VAT. There remains the fear of discrepancies in the amended VAT act, but most important is to take measures in order to reduce VAT evasion.

This budget from beforehand had been termed as business-friendly and it seems that the amended VAT law was the result of negotiations with the business community. The business community’s cooperation is certainly required to implement the tax policy, but there is also no alternative to having a neutral analysis and evaluation of the policy.

When it comes to the tax structure, the policymakers naturally aim at an investment and business-friendly environment. The policymakers must realise that indirect incentives for the honest entrepreneurs is an effective means to prevent tax evasion and also corruption in imports and exports. The budget does seem to have such considerations in some of its proposals.

Some of the proposals contained in the new budget are noteworthy. There is proposal for a 2 per cent incentive for remittance from expatriates in order to move the remittance away from illegal hundi channels to the banking sector.

Cash incentives for the readymade garment industry and other sectors have been increased to promote exports. However, devaluation of the taka exchange rate would perhaps be more of an incentive than cash.

There simply is no justification in hiking tax rates on mobile phone services and other related taxes. The lower income people still rely hugely on mobile phone for the everyday transactions. The authorities seem to reach out to this sector simply because it is easy to collect revenue from here. But this cannot be justified.

The middle class families who depend on savings certificates for monthly income will be hit by the 10 per cent tax-at-source being imposed on this tool. But the problem lies elsewhere. Those benefitting from the high interest rate of the savings certificates are mostly of the upper or upper middle class. The high interest rate is putting pressure on the government’s interest repayment as well as creating problems in the financial sector. Consideration is being made on keeping the high interest savings certificates for the lower class bracket, while decreasing the interest rate for saving certificates in general. Hopefully and effective solution can be worked out.

There also seems to be no justification in increasing taxable assets from from the minimum of Tk 25 billion to Tk 30 million to provide surcharge exemption on income tax. Even if the asset values are genuinely listed in the income tax returns, these are much less than market value. The rapidly expanding imbalance in wealth distribution is alarming and providing tax exemptions rather than imposing higher taxes on assets is simply making matters worse.

* Wahiduddin Mahmud is a professor and economists. This piece appeared in the print edition of Prothom Alo and has been rewritten here in English by Ayesha Kabir