Budget, tariffs and prices

Ghulam Mostafa

The budget for the coming fiscal year, 2007-08, is just round the corner. It  will be declared soon and become effective from next month. Although the budget is supposed to be only disclosed during its formal presentation, in the context of Bangladesh many aspects of the budget  are  traditionally  indicated in advance. There has been no exception to this unwritten rule also this time.
 Reports appeared earlier in the press about the budget being under formulation. The reports stressed on the point that government would be squeezing harder to mobilise greater revenues in the backdrop of  the difficulties faced in collecting sufficient  revenues during the last four months. Thus, it is projected that the tariffs  across the board on  imported commodities --  raw materials and intermediate products --  would be raised in the coming budget. 
The  rate of  tariff  on these industrial inputs is likely to be doubled from their present rate. There are  a large number of goods including life saving medicines which have been getting exemption from import tariff in recent years on various considerations ranging from their being essential goods consumed by common people. There is a likelihood of their tariff exempt status continuing in the coming budget  only for a few of them; tariff is likely to be imposed on all other items. Only the present 25 per cent uniform tariff on complete products or finished products, is likely to remain unchanged.
It is relevant to discuss here that keeping unchanged the tariff on only whole products or finished products, will help the overseas exporters of these products. If some of these products are manufactured locally, their manufacturers will not gain any competitiveness in relation to their imported equivalents. As for substantially increasing the rate of tariff on some raw materials, the same happening will raise sharply the costs of production in these industries. No matter whether these are oriented towards foreign markets or domestic ones, such enterprises will have to bear an extra burden  and suffer some erosion as well in their competitiveness. Local industries, which make consumption items with imported raw materials, can only  seek to compensate for the extra production costs by raising the prices of their consumption goods. This, in turn, will increase the costs of consumption for consumers in many areas.
Revenues are needed by the government and the same are certainly needed in much greater amounts. But the search for greater revenues needs to be directed with prudence and hindsight. Businesses  can be stimulated by  fiscal policies perceived by them as favourable that may create incentives or increase the same for them to go for business expansion. This, then,  would  likely facilitate  economic growth. The lack of such incentives will  create the opposite  undesirable results and consumer suffering.
There are other ways of improving revenue collection  leaving the economy and the consumers largely unaffected. For example, the potentials of the income tax remain  very largely untapped. There are at least three million potential income tax payers in the country  and half this number do not pay any tax. The ones who do, pay taxes that do not reflect even a small part of their real income. Income taxes yield only about 20 per cent of the total revenues. Thus, there is so much opportunity awaiting to increase revenue earnings by only ensuring payment of taxes in right proportion to income by the present payers of income tax and by bringing a large number of the current evaders under this net.  Big increases can also be achieved in the collection of value added tax (VAT) by cleansing the system of  corruption and irregularities. Similarly, higher revenue earnings is possible from streamlining the  collection of excise duties.
Thus, revenue earnings should be increased. But  doing of this should be attempted by going for  increased collection from the sectors mentioned above while easing the pressure of  tariff on sectors that directly involve production and consumption.