A sophomoric analysis of National Budget 2007-08
Wednesday, 27 June 2007
Reshma Islam, Farzana Shiraj Kanta and Tasmia Ali
THE caretaker government's budget of Tk 871.37 billion (87,137 crore) for fiscal year(FY) 2007-08 is the biggest budget proposed ever. The main feature of the budget is its huge deficit of Tk 298.36 billion (29,836 crore) and this deficit will be financed to the tune of Tk 192.76 billion (19,276 crore) from domestic sources.
From our commonness and a little knowledge of economics we think that the government will face a great challenge in offsetting this huge deficit. Before trying to analyse the budget we must admit that as second-year students of BBA programme at Bangladesh University of Business & Technology (BUBT), it is very challenging for us to analyse the whole picture of the budget. We will try to analyse this year's budget with our academic knowledge of macroeconomics, and our sophomoric commonsense.
First of all, the most important challenge for the budget is to tackle the inflationary pressure in the coming days. We know from our study of economics there are two types of inflation: (1) cost-push inflation, and (2) demand-pull inflation. The cost-push inflation emerges from the lack of supply or production in an economy.
To control this type of inflation the level of production must be increased by supply-side macroeconomic management along with the proper demand management policies to manage the demand-pull inflation, which emerges from excess demand for goods and services.
According to the budget, the government wants to control the existing rate of high inflation by (1) strengthening sale of essentials through Bangladesh Rifles (BDR)-operated markets, (2) importing the essentials by the government, (3) increasing productivity in agriculture through increased allocation in research. In our opinion, the first step is not a long-term and sustainable solution as operating the kitchen markets is not the task of the BDR and for the third one there is a time lag and uncertainty to reap the result from research.
So we think that for immediate and sustainable solution, the government can import essentials by strengthening the operation of the Trading Corporation of Bangladesh (TCB). There is a common allegation that the high price of the essentials is created by forming syndicates, which we call cartel in economic language. Cartel is a source of market imperfection and from our simple knowledge of microeconomic theories we know that to correct this imperfection government must intervene in the market.
And we believe that the appropriate intervention for the government is to revive and to strengthen the TCB. In syndicates all the suppliers unite themselves and set a price higher than that of a competitive market price. We think a strong competition from the TCB will abate the monopoly power of the syndicates in controlling the prices of essentials.
In our analysis we find it contradictory that the government wants to control inflation by increasing production, simultaneously increasing minimum tax on raw materials import from 5.0 per cent to 10 per cent which will increase the cost of production and thereby will increase price level and decrease production.
If the tax increases on import of raw materials, the investors will be discouraged to invest and there will be a decline in private investment. Industries which totally depend on imported raw materials and machineries will be badly affected. So the increase in tax on raw materials import will lead to increase in price of goods as the level of output will be decreased. On the other hand, the tax increase will increase trade-deficit by decreasing the price-competitiveness of our products with the rest of the world. Increased prices of locally produced goods -- produced by imported raw materials -- will induce to increased import of substitute goods and to decrease export. This will lead to increase the trade-deficit and the government will than face the twin-deficit as it has already faced budget deficit. So, the situation of balance of payment (BOP) will deteriorate.
The increased trade-deficit and deteriorated BOP will create a pressure on foreign exchange market which will increase the exchange rate and the high exchange rate means high price of imported essentials. Considering this, we do not think that increase in minimum tax on raw materials import will be an appropriate measure.
An unprecedented step in this budget is the internalisation of the liability of Tk 75.23 billion (7,523 crore) of Bangladesh Petroleum Corporation (BPC). This step will certainly revive our nationalised commercial banks (NCBs) but in return it will give the economy a contractionary pressure as the government is planning to bail out this liability by issuing bond in the market. This will create a contractionary pressure on the money market. We know from our macroeconomic knowledge that the measure will increase the interest rate and the increased interest rate will lead to decrease in private investment. So, in the long run, this will decrease the level of production in our economy and will create a cost-push inflationary pressure. On the other hand, the government's debt service liability will soar for the subsequent fiscal years. To tackle the situation the Bangladesh Bank(BB) has to take an expansionary monetary policy but this policy will also result in an inflationary pressure!
We think that it is a good decision to expand the value-added Tax (VAT) net on goods and services like English medium schools, immigration services, coaching centres, land developers, building construction companies, renting service of chartered plane and helicopter, health club, engineering firms, etc. As VAT is an indirect tax and the incidence of the tax is finally incurred by consumers and the consumers of these goods and services are in the affluent part of our society. Expanding VAT net on these goods and services will improve the equity in our society.
But we do not understand the reason for expanding VAT net on soft drink, toilet soap, Internet Service Providers (ISP), Water Supply & Sewerage Authority (WASA), telephone and fax operators. Introduction of VAT on these goods and services will increase the Consumer Price Index (CPI) and thereby inflation rate and cause suffering to ordinary people. So the government should not expand its VAT net for the products consumed by ordinary people if it wants more progressive effect through its tax system.
Another weakness of this budget is the lower share of income tax in total tax revenue, 24.72 per cent. This rate is much lower than that of India and Pakistan at 39 per cent and 38 per cent respectively. Apart from revenue collection, one of the main objectives of taxation is redistribution of income and bringing equity in society by lowering the income inequality. To achieve this objective, the government charges taxes on income and profit at progressive rate so that high income group pays a high rate and low income group pays a lower rate. Income is the tax base where government can apply progressive system of taxation. So the share of income tax on total tax revenue is supposed to be the highest if we want equity and lower income inequality.
Although it seems that the proposed share of income-tax on total tax revenue is set higher than that of last five years' revised budgets, we do not think that this is ambitious. Moreover, we think that the government can collect more income tax revenue by increasing its efficiency in tax administration. According to National Board of Revenue (NBR), there are about 1.9 million Taxpayer Identification Number (TIN) holders in our country but ironically only about 50 per cent of these TIN holders pay taxes. If the government can make the other 50 per cent pay their due taxes, we believe that it can collect more than Tk 108.38 billion (10,838 crore) -- (24.72 per cent of the total tax revenue) from income tax. Based on last year's collection of income tax revenue, which was 4.99 per cent higher than that of proposed amount, we can also say that it is possible to collect income tax revenue more than that of the anticipated amount of this year's budget.
There is a common allegation from the end of many tax payers that in our country paying tax is a big hassle and therefore many tax payers try to avoid it as much as they can by evading taxes and paying bribe. So to induce the tax payers to pay their due income tax there is no other alternative than reform of the tax administration. In doing so, the government has to channel its efforts towards raising revenues from income taxes, and bringing equity and efficiency in the tax system by operating on functional lines to render efficient services to the taxpayers by ensuring uniform application of laws with integrity, efficiency and high degree of professionalism. The reform process for tax machinery has to design to churn out long term benefits through efficiency gains.
In the proposed budget the tax exemption limit has revised upward to Tk 150,000 from the existing limit of Tk 120,000. Considering the rise in living expenses and high rate of inflation, we suggest that this revised tax exemption limit of income should be more than that of a proposed limit. If we think of a family of four members then we can easily calculate that the minimum monthly expense for the family which should be Tk 15,000 and the yearly expense should be Tk. 180,000.
If the family has to pay 15 per cent income tax, then it can not maintain a minimum standard of living. So we suggest that the minimum tax exemption limit of income should be at least Tk 180,000 and to cushion the revenue loss from this measure government can increase the existing tax rate for the high income groups.
We think that the increase in corporate tax on mobile phone companies from 40 per cent to 45 per cent is a positive decision. In Bangladesh the mobile phone companies are making a large amount of profits, but our economy cannot reap the proper benefit from these profits as almost all the mobile phone companies' major portion of shares is owned by foreign companies and these companies are not off loading their share in the local share markets. If corporate tax increases from 40 per cent to 45 per cent, then the government revenue will increase and for this tax increase we do not think that the mobile phone users' will be affected by high prices.
For example, in the budget of 2005-06 fiscal year the then finance minister Mr. Saifur Rahman imposed Tk 1,200 tax on SIM cards. At that time, all the mobile phone companies projected that the tax on SIM card will finally be incurred by the consumers as high price but by this time we have experienced that the price of SIM card comes to the pre-tax price level as mobile phone companies are incurring this tax burden on the SIM card. So we believe that the increased rate of corporate tax on mobile phone companies will increase government revenue without hampering the users' of the mobile phone service.
We believe that the 10 per cent tax on computer and computer accessories will affect negatively to the computer users, especially the students. In his speech, the Finance Advisor said that if someone can afford Taka 25 to 30 thousand to buy a computer, then he or she can also afford the 10 per cent tax on it, which will not affect the users of computer.
But our common sense says that because of this tax use of computers will be reduced among the students, as computer is still a luxury product for most of the students in our country. We know from our knowledge of microeconomics that the price elasticity of demand for luxury good is very high, in other words, a small percentage increase in price will decrease a large percentage of quantity demand. So the imposition of tax on computer and computer accessories is not a wise decision.
Last of all the success or failure of the budget depends on the government's ability to finance and to implement its huge target without hampering the standard of living of the mass people and to control the growing income-inequality in our society by ensuring equity. It also depends on the government's ability to control the price level, as the real income or the purchasing power of the nominal income of the people is determined by the price level.
The writers are students of BBA programme, 9th Intake, Bangladesh University of Business & Technology (BUBT), Dhaka Commerce College Campus, Mirpur-2, Dhaka-1216.
THE caretaker government's budget of Tk 871.37 billion (87,137 crore) for fiscal year(FY) 2007-08 is the biggest budget proposed ever. The main feature of the budget is its huge deficit of Tk 298.36 billion (29,836 crore) and this deficit will be financed to the tune of Tk 192.76 billion (19,276 crore) from domestic sources.
From our commonness and a little knowledge of economics we think that the government will face a great challenge in offsetting this huge deficit. Before trying to analyse the budget we must admit that as second-year students of BBA programme at Bangladesh University of Business & Technology (BUBT), it is very challenging for us to analyse the whole picture of the budget. We will try to analyse this year's budget with our academic knowledge of macroeconomics, and our sophomoric commonsense.
First of all, the most important challenge for the budget is to tackle the inflationary pressure in the coming days. We know from our study of economics there are two types of inflation: (1) cost-push inflation, and (2) demand-pull inflation. The cost-push inflation emerges from the lack of supply or production in an economy.
To control this type of inflation the level of production must be increased by supply-side macroeconomic management along with the proper demand management policies to manage the demand-pull inflation, which emerges from excess demand for goods and services.
According to the budget, the government wants to control the existing rate of high inflation by (1) strengthening sale of essentials through Bangladesh Rifles (BDR)-operated markets, (2) importing the essentials by the government, (3) increasing productivity in agriculture through increased allocation in research. In our opinion, the first step is not a long-term and sustainable solution as operating the kitchen markets is not the task of the BDR and for the third one there is a time lag and uncertainty to reap the result from research.
So we think that for immediate and sustainable solution, the government can import essentials by strengthening the operation of the Trading Corporation of Bangladesh (TCB). There is a common allegation that the high price of the essentials is created by forming syndicates, which we call cartel in economic language. Cartel is a source of market imperfection and from our simple knowledge of microeconomic theories we know that to correct this imperfection government must intervene in the market.
And we believe that the appropriate intervention for the government is to revive and to strengthen the TCB. In syndicates all the suppliers unite themselves and set a price higher than that of a competitive market price. We think a strong competition from the TCB will abate the monopoly power of the syndicates in controlling the prices of essentials.
In our analysis we find it contradictory that the government wants to control inflation by increasing production, simultaneously increasing minimum tax on raw materials import from 5.0 per cent to 10 per cent which will increase the cost of production and thereby will increase price level and decrease production.
If the tax increases on import of raw materials, the investors will be discouraged to invest and there will be a decline in private investment. Industries which totally depend on imported raw materials and machineries will be badly affected. So the increase in tax on raw materials import will lead to increase in price of goods as the level of output will be decreased. On the other hand, the tax increase will increase trade-deficit by decreasing the price-competitiveness of our products with the rest of the world. Increased prices of locally produced goods -- produced by imported raw materials -- will induce to increased import of substitute goods and to decrease export. This will lead to increase the trade-deficit and the government will than face the twin-deficit as it has already faced budget deficit. So, the situation of balance of payment (BOP) will deteriorate.
The increased trade-deficit and deteriorated BOP will create a pressure on foreign exchange market which will increase the exchange rate and the high exchange rate means high price of imported essentials. Considering this, we do not think that increase in minimum tax on raw materials import will be an appropriate measure.
An unprecedented step in this budget is the internalisation of the liability of Tk 75.23 billion (7,523 crore) of Bangladesh Petroleum Corporation (BPC). This step will certainly revive our nationalised commercial banks (NCBs) but in return it will give the economy a contractionary pressure as the government is planning to bail out this liability by issuing bond in the market. This will create a contractionary pressure on the money market. We know from our macroeconomic knowledge that the measure will increase the interest rate and the increased interest rate will lead to decrease in private investment. So, in the long run, this will decrease the level of production in our economy and will create a cost-push inflationary pressure. On the other hand, the government's debt service liability will soar for the subsequent fiscal years. To tackle the situation the Bangladesh Bank(BB) has to take an expansionary monetary policy but this policy will also result in an inflationary pressure!
We think that it is a good decision to expand the value-added Tax (VAT) net on goods and services like English medium schools, immigration services, coaching centres, land developers, building construction companies, renting service of chartered plane and helicopter, health club, engineering firms, etc. As VAT is an indirect tax and the incidence of the tax is finally incurred by consumers and the consumers of these goods and services are in the affluent part of our society. Expanding VAT net on these goods and services will improve the equity in our society.
But we do not understand the reason for expanding VAT net on soft drink, toilet soap, Internet Service Providers (ISP), Water Supply & Sewerage Authority (WASA), telephone and fax operators. Introduction of VAT on these goods and services will increase the Consumer Price Index (CPI) and thereby inflation rate and cause suffering to ordinary people. So the government should not expand its VAT net for the products consumed by ordinary people if it wants more progressive effect through its tax system.
Another weakness of this budget is the lower share of income tax in total tax revenue, 24.72 per cent. This rate is much lower than that of India and Pakistan at 39 per cent and 38 per cent respectively. Apart from revenue collection, one of the main objectives of taxation is redistribution of income and bringing equity in society by lowering the income inequality. To achieve this objective, the government charges taxes on income and profit at progressive rate so that high income group pays a high rate and low income group pays a lower rate. Income is the tax base where government can apply progressive system of taxation. So the share of income tax on total tax revenue is supposed to be the highest if we want equity and lower income inequality.
Although it seems that the proposed share of income-tax on total tax revenue is set higher than that of last five years' revised budgets, we do not think that this is ambitious. Moreover, we think that the government can collect more income tax revenue by increasing its efficiency in tax administration. According to National Board of Revenue (NBR), there are about 1.9 million Taxpayer Identification Number (TIN) holders in our country but ironically only about 50 per cent of these TIN holders pay taxes. If the government can make the other 50 per cent pay their due taxes, we believe that it can collect more than Tk 108.38 billion (10,838 crore) -- (24.72 per cent of the total tax revenue) from income tax. Based on last year's collection of income tax revenue, which was 4.99 per cent higher than that of proposed amount, we can also say that it is possible to collect income tax revenue more than that of the anticipated amount of this year's budget.
There is a common allegation from the end of many tax payers that in our country paying tax is a big hassle and therefore many tax payers try to avoid it as much as they can by evading taxes and paying bribe. So to induce the tax payers to pay their due income tax there is no other alternative than reform of the tax administration. In doing so, the government has to channel its efforts towards raising revenues from income taxes, and bringing equity and efficiency in the tax system by operating on functional lines to render efficient services to the taxpayers by ensuring uniform application of laws with integrity, efficiency and high degree of professionalism. The reform process for tax machinery has to design to churn out long term benefits through efficiency gains.
In the proposed budget the tax exemption limit has revised upward to Tk 150,000 from the existing limit of Tk 120,000. Considering the rise in living expenses and high rate of inflation, we suggest that this revised tax exemption limit of income should be more than that of a proposed limit. If we think of a family of four members then we can easily calculate that the minimum monthly expense for the family which should be Tk 15,000 and the yearly expense should be Tk. 180,000.
If the family has to pay 15 per cent income tax, then it can not maintain a minimum standard of living. So we suggest that the minimum tax exemption limit of income should be at least Tk 180,000 and to cushion the revenue loss from this measure government can increase the existing tax rate for the high income groups.
We think that the increase in corporate tax on mobile phone companies from 40 per cent to 45 per cent is a positive decision. In Bangladesh the mobile phone companies are making a large amount of profits, but our economy cannot reap the proper benefit from these profits as almost all the mobile phone companies' major portion of shares is owned by foreign companies and these companies are not off loading their share in the local share markets. If corporate tax increases from 40 per cent to 45 per cent, then the government revenue will increase and for this tax increase we do not think that the mobile phone users' will be affected by high prices.
For example, in the budget of 2005-06 fiscal year the then finance minister Mr. Saifur Rahman imposed Tk 1,200 tax on SIM cards. At that time, all the mobile phone companies projected that the tax on SIM card will finally be incurred by the consumers as high price but by this time we have experienced that the price of SIM card comes to the pre-tax price level as mobile phone companies are incurring this tax burden on the SIM card. So we believe that the increased rate of corporate tax on mobile phone companies will increase government revenue without hampering the users' of the mobile phone service.
We believe that the 10 per cent tax on computer and computer accessories will affect negatively to the computer users, especially the students. In his speech, the Finance Advisor said that if someone can afford Taka 25 to 30 thousand to buy a computer, then he or she can also afford the 10 per cent tax on it, which will not affect the users of computer.
But our common sense says that because of this tax use of computers will be reduced among the students, as computer is still a luxury product for most of the students in our country. We know from our knowledge of microeconomics that the price elasticity of demand for luxury good is very high, in other words, a small percentage increase in price will decrease a large percentage of quantity demand. So the imposition of tax on computer and computer accessories is not a wise decision.
Last of all the success or failure of the budget depends on the government's ability to finance and to implement its huge target without hampering the standard of living of the mass people and to control the growing income-inequality in our society by ensuring equity. It also depends on the government's ability to control the price level, as the real income or the purchasing power of the nominal income of the people is determined by the price level.
The writers are students of BBA programme, 9th Intake, Bangladesh University of Business & Technology (BUBT), Dhaka Commerce College Campus, Mirpur-2, Dhaka-1216.