The move of the National Board of Revenue (NBR) to raise value-added tax (VAT) and supplementary duty (SD) on nearly 100 goods and services has evoked both surprise and anguish.
Surprise, because the hike that has come halfway through the current financial year has all the potential to fuel inflation, which hovered between 10 per cent and 11.5 per cent in the preceding months. Though essential food items have been spared, the latest tax increase -- in many cases, the increase is nearly 200 per cent -- covering a number of food and non-food items will surely impact the overall price situation.
A case in point is the hike in VAT rate on medicines. NBR says the hike is negligible but, in reality, patients will have to pay more than what the Board estimates. Taxmen are aware of this arithmetic. People have been hard hit by an unabated rise in the prices of medicines for a long time, as the government is found to be reluctant to take up the price issues with pharmaceutical companies, for reasons best known to it.
What is most surprising is that the latest tax hike effectively dilutes the serious efforts of the central bank to rein in inflation. It, with a few exceptions, has stopped printing high-powered money that fuels inflation. Besides, it has hiked the policy rates several times, as part of its contractionary monetary policy.
Two key institutions of the government -- the Bangladesh Bank and the NBR, it seems, are not in sync and operating in opposing directions, as far as the task of reining in soaring inflation is concerned.
The central bank has been partially successful in stabilizing the country's reserves situation, thanks to increased exports and remittance earnings in recent months. Its efforts to contain inflation have not met with success up to the desired level.
The food inflation last month dropped a little, mainly because of the increased supply of vegetables and fish. Despite a notable fall in the prices of the two food items during the current month, it is hard to make any prediction about the price situation in the coming months, as the country's main staple -rice -- is becoming costlier even during the peak harvesting season. The men in authority blame the so-called syndicates or millers for the price rise but they do little to stop the malpractice. Such a failure pains the poor consumers. So, the nominal decline in food prices could be short-lived because of the possible supply crunch and the increase in VAT and SD.
The last week's hike in tax rates has aroused deep anguish among consumers, particularly those who belong to the lower to middle classes and poorer sections of society. These people are truly hard-hit. In fact, they are skipping or have cut down on food items the prices of which have gone beyond their reach. Also, many of them have put on hold their travel and leisure plans for the time being.
In such a situation, one question might be agitating the minds of many why has the interim government taken such an unpopular move of raising taxes right at this moment when people are unhappy with the price situation? The skyrocketing prices of most essentials had been one of the key reasons that had prompted low-income and poor people to take to the streets alongside the students. They expected some price relief under the non-political interim government. Unfortunately, their hope has been largely dashed, primarily due to the failure of the authorities concerned. The latter are clueless about the price increase. The reason/s they cite in their public statements, however, are not different from the honchos of the immediate past regime.
The latest NBR decision coupled with the proposal placed by Petrobangla to raise gas prices has also stirred up deep resentment among the businesses who feel that the move would further push up their cost of production and reduce the ability of the local exporters to compete in the international market. The economy has been stagnant for a considerable time. This is evident from the continuous slide in the private sector credit growth. Last week's tax measures are likely to intensify the crisis.
What, it seems, has prompted the NBR to go for such an unpopular move to raise VAT and SD on many items in the middle of the fiscal year is the compliance issue. The Board will have to collect a sum of Tk.120 billion in taxes over the amount to be mopped up normally by June 30 next, to meet the target set under the IMF's US$ 4.7 billion loan facilities approved earlier for Bangladesh. The NBR has been facing a serious shortfall in revenue earnings this fiscal. During the first five months of the fiscal year 2024-25, the deficit vis-à-vis the revenue target amounted to more than Tk. 420 billion. The revenue shortfall is feared to be bigger at the end of the year. So, it is very difficult to justify the NBR's move to collect an additional amount of Tk.120 billion by raising VAT and SD on a large number of goods and services. These are indirect taxes that are passed on to the consumers. The NBR should have mobilized more revenues, particularly through direct taxation, by raising its efficiency level.
Many see the IMF as an institution that maintains double standards. They complain that the Bretton Woods institution extends bailouts in crisis time to countries but causes enormous suffering to their poor consumers in return. At the policymakers' level, the multilateral lender is seen as a saviour, but some others have reservations about its role. The bailout often falls through.
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