Tax exemptions deliver little goods

Direct-tax exemptions aimed at cooling overheated market and incentivizing industries and investment cost the public exchequer around Tk 3.0 trillion in the past fiscal, to little avail though, sources say.
Latest available official data show growth in investment in proportion to Bangladesh's GDP stayed stymied around 23-24 per cent over last few years and industrial expansion made below-par progress. And there has been hardly any letup in market prices, up till now.
Manufacturing industries enjoyed tax benefits worth around Tk 106 billion on account of import of capital goods -- capital machinery and raw materials -- in the financial year 2022-23, according to data until May 2023,.
Of the incentives, import of capital machinery enjoyed tax benefit wroth Tk 89.01 billion while raw materials Tk 17.73 billion, according to a recent study by the customs wing of the National Board of Revenue (NBR).
Industries were handed out the tax benefit through different circulars and orders issued by the NBR.
However, the aggregate amount of tax exemption increased by 20.35 per cent or Tk 95.50 billion due to government vision on trade liberalization and support to local manufacturing units for expansion.
The NBR had offered aggregate exemptions on payment of import-duty taxes worth Tk 564.66 billion in July-May period of FY2022-23.
However, the volume of tax exemption was Tk 469.16 billion in the same period 2021-22.
Noted economist Dr Zahid Hussain says private investment remained stagnant for last three years despite the offering of tax benefits, which proves to be a futile effort to generate new investments.
According to data available with Bangladesh Bureau of Statistics, the private investment-GDP ratio in the country stayed stymied around 23-24 per cent during the last few years.
The former lead economist at the World Bank's Bangladesh office notes that tax benefit is a "temporary support for industrial growth, which cannot last longer".
"Target of the tax benefit is to boost investment. Tax exemption's impact on investments is not visible in the BBS data," he says.
"Government's revenue-GDP ratio is continuously declining despite offering tax benefits for attracting new investment for contributing to the revenue generation," he adds.
"Aggregate data on private investment do not show any visible impact of tax benefit for capital machinery and raw materials."
Import of capital machinery, raw materials, relief goods, Rooppur nuclear power plant, mobile- manufacturing industries, defence store, poultry farm, freeze and air-conditioner-manufacturing industries, duty exemptions on import of rice, edible oils, Power Grid Company, textiles industries, Bangladesh Economic Zones Authority enjoyed the major tax exemptions from customs wing.
Apart from the sectors, the customs has offered special exemptions worth Tk 8.98 billion for products having zero-rated duty.
The volume of such exemptions was Tk 105.74 billion in the corresponding period last year.
The NBR also offered tax exemptions worth Tk 51.84 billion by exempting advance tax (AT) last year against Tk 52.11 billion in the previous FY.
In 2021-22, the tax exemptions were worth Tk 5.78 billion and Tk 5.21 billion given through tax benefit to refrigerator and air-conditioner manufacturers and import of rice respectively.
The NBR withdrew tax benefit from those three products last year in a bid to build up tax-payment culture among the industries that developed financial capacity.
Textile sector enjoyed tax relief worth Tk 8.65 billion last year compared to that of Tk 5.26 billion in the corresponding period.
Bangladesh Economic Zones Authority (BEZA) enjoyed tax benefit worth Tk 10.12 billion last year for the developing country's economic zones.
Import of edible oils enjoyed Tk 38.24 billion last year as the NBR had offered 5.0-percent VAT exemptions until May to ease pressure on consumers amid reported jacking up of price on what is dubbed a captive market based on lack of wider competition.
The Power Grid Company Bangladesh enjoyed Tk 7.25 billion in tax benefit while poultry industries shared Tk 8.93 billion.
The revenue board waived taxes worth Tk 21.53 billion for mobile-phone manufacturers last year, down by Tk 6.46 billion from corresponding period.
A senior tax official says the volume of tax-relief cost would have stood above Tk 3.0 trillion if three departments had compiled the data on tax incentives.
He said the sum of tax exemption would be around 70 per cent of the country's tax-revenue- collection target at Tk 4.30 trillion.
Direct-tax expenditure was Tk 1.25 trillion in the financial year 2020-21. Of the amount, corporate taxpayers involved Tk 853.14 billion while individuals Tk 404.99 billion.
In the current fiscal budget, Tk 1.78 trillion has been projected as direct-tax expenditure in the form of various tax exemptions and other benefits. However, the VAT wing has yet to compile its volume of tax exemptions for unavailability of data on retail-and wholesale-level businesses.
Earlier, an analysis of value-added tax (VAT) showed half of the country's GDP remained exempted from the VAT on account of various forms of tax benefits.
Some 15 major sectors, including agriculture, livestock, fisheries, education, health, public administration, defence, and social-safety net, are enjoying tax exemptions worth Tk 19 trillion.
Of the direct-tax expenditure, microfinance sector bags 12 per cent or Tk 153.15 billion, remittance 9.0 per cent or Tk 112.87 billion, power and energy 7.0 per cent or Tk 83.80 billion, EZ and Hi-tech industries 4.0 per cent or Tk 46.12 billion, garments and textiles 3.0 per cent or Tk 34.38 billion, poultry and fisheries 2.0 per cent or Tk 31.20 billion, IT and software 1.0 per cent Tk 14.77 billion, and share- capital gains 1.0 per cent or Tk 9.66 billion.
The government offers tax exemption in the forms of concessionary tax rates, rebates, discounts, exclusion of income from computing total taxable income.
In FY21, the total direct-tax expenditure ate up 3.56 per cent of country's total GDP.
The NBR has compiled the tax-expenditure analyses following recommendation of the International Monetary Fund (IMF) that in a loan package, packing up reform recommendations, sought to know the sum of tax incentives.

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