As the time of announcing another budget gets nearer, last-minute lobbying to avail fiscal incentives is also there. From the high level of the government, it has already been signalled that the upcoming budget would provide some handy fiscal incentives to the businesses.
Fiscal invectives in the form of tax break, tax exemption, subsidies and others are quite desirable to all business sectors. That's why, a long list of demands from trade bodies is always placed to the tax authority. The government has to deal with the demands carefully. In many occasions, it is the stronger lobby with political backing that succeeds in getting the desired benefits -- although the economic rationale with long-term effect doesn't always prevail.
Nevertheless, fiscal incentive is an essential part of the budget. Different potential sectors of the economy need such incentives and support to grow and sustain the growth. So, incentives have to be carefully designed. At the same time, it is important to clearly divulge the cost of incentives as well as the outcome as it is ultimately public money the government is handing over to different sectors. Thus, taxpayers as well as the people of the country have legitimate right to know that how these incentives are financed. Or, to put it in another way, how much amount they are actually sacrificing for different sectors for the sake of long-term benefits.
In this connection, a 'statement of the revenue foregone' is becoming relevant. This statement should be made public along with other budget documents.
REVENUE FOREGONE OR TAX EXPENDITURE: Revenue foregone shows the difference between what amount of revenue is actually earned and what could have been earned if certain fiscal incentives or tax breaks were not there. In other words, it is the cost of such incentives. For example, in 2014, National Board of Revenue (NBR) announced reduction in the source tax on ready-made garments (RMG) industry to 0.30 per cent from 0.80 per cent for 15 months. The huge tax reduction was announced to compensate for damages faced by the industry during the political turmoil in the second half of 2013. Besides announcing the tax reduction benefit, NBR also revealed a calculation of related revenue foregone. It showed that reduction of tax at source on export of apparel items would cost at least Tk 20 billion in revenue in 15 months.
NBR, however, usually doesn't disclose the amount of revenue foregone. But it makes its own calculations as part of budget exercise and keeps it secret. The only estimation of revenue foregone in Bangladesh is available for Fiscal Year 2004-05 (FY'05). Bangladesh Bank, in a policy note titled 'Tax Expenditures in Bangladesh: An Introductory Analysis', revealed the estimation.
The policy note showed that there were 106 fiscal incentive measures in FY'05 in the form of tax holiday, exemptions, deductions, reductions, deferrals and tax credits. Costs of these measures were calculated as tax expenditures.
The policy note also showed that in FY'05 revenue foregone due to fiscal incentives through direct tax measures accounted for 0.28 per cent of GDP and 3.44 per cent of total revenue collection in the country. The amount was Tk 10.28 billion. Incentives through indirect tax measures accounted for 2.24 per cent of GDP and 27.81 per cent of total revenue collection. The amount of revenue forgone stood at Tk 83.17 billion under indirect taxation. Thus, total revenue foregone amounted at Tk 93.45 billion in FY'05 which was 2.52 per cent of the GDP.
No doubt, the amount of revenue foregone has increased during the last 10 years. But, nobody knows the actual amount.
Revenue foregone is also known as tax expenditure. It is a category of government expenditure administered as relief from tax, rather than an explicit public outlay. Tax relief can take the form of exemption, payment at a reduced rate or deferral. Thus tax expenditure may be defined as the difference between potential tax revenue, which does not contain tax provisions, and net tax revenue or tax revenue received.
As a matter of fact, revenue foregone is the most common approach to measuring tax expenditure. The central bank policy note, as mentioned earlier, clearly showed the revenue expenditure by the main categories of taxes in FY'05.
Another alternative measure is 'revenue gain'. The approach tries to calculate the actual amount by which revenue would rise if a tax expenditure or revenue foregone step was withdrawn. Revenue gain is considered as a more comprehensive means of calculating the net revenue impact of introducing or revising tax expenditures.
A third option to measure revenue expenditure is the 'outlay equivalence' approach. It attempts to measure the amount of explicit public expenditure that would be needed to replicate the benefit received through the tax expenditure.
Oxford Economics in a paper titled 'An Agenda for Tax Expenditure Research in the Asia-Pacific Region' focuses on different aspects of revenue foregone and alternative measures. It may be noted that Oxford Economics is a commercial venture with the Oxford University's business college to provide economic forecasting and modelling.
INDIAN EXPERIENCE: The Indian government introduced the revenue foregone statement eight years back. In FY'07 union budget, the statement was presented for the first time in India for better transparency in budget and financing.
India defines revenue foregone as "the difference between the duty that would have been payable but for the exemption notification and the actual duty paid in terms of the said notification. In other words, revenue forgone=value X (Tariff rate of duty - Effective rate of duty). In cases where the tariff rate equals the effective rate, the revenue forgone becomes zero."
The reason behind preparing and publishing the revenue foregone statement is clearly stated in the budget document every year. It said: "The Tax policy gives rise to tax preferences and such preferences can also be viewed as an indirect subsidy to preferred tax payers. Such implicit subsidy payments are also referred to as 'tax expenditures.' It is often argued that such implicit payments should appear as expenditure items in the Budget."
From this year, the document has been renamed as "Statement of Revenue Impact of Tax Incentives Under the Central Tax System." India's tax revenue foregone as a percentage of GDP stood at 5.0 per cent in FY'14 from 5.6 per cent in FY'13. The ratio was 7.5 per cent in FY'08, highest in all nine years when revenue foregone estimation has been released.
But over the years, the revenue foregone statement becomes a matter of debate in India mainly due to the different perspectives of different quarters.
Many people say that the revenue foregone is actually a hidden subsidy to corporate entities and affluent people at the expense of the poor people of the country. For instance, in FY'11, diamond and gold as the top commodity group accounted for 23 per cent of total duty foregone. The amount was around US$10.3 billion (Rs 65,975 crore). These are clearly concessions on products consumed by the affluent sections of the Indian society.
In contrast, many also argue that these incentives are necessary to increase economic activity, which generate employment and income. Moreover, some tax reduction actually benefited poor, they added. For example, there are reductions of excise rates on medicines, toothpowder, candles, sewing needles and kerosene stoves. So, revenue loss on account of lower excise duties on these goods, is certainly not just tax sops to big corporates, but some relief for poor families also as these are essential components of their consumption baskets.
The Indian experience of calculation and publication of the statement of revenue foregone is important for Bangladesh. The country's economy is growing every year and so is the budget. The size of the budget for the next fiscal year (FY'16) may cross Tk 3.0-trillion level. In a growing economy, the government needs to collect more tax revenue and also provide fiscal and policy support to different sectors. Thus, calculating revenue foregone or revenue expenditure and revealing it to the people is a must. It will be an effective step to ensure fiscal transparency and good governance.
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