A brief note on FY25 fiscal measures

In the national budget for the fiscal year 2024-25 (FY25), some changes proposed to provide relief to low & middle-income groups, and to impose higher rates of taxes to high income groups. Retrospective to prospective tax system introduced for proper tax planning and embed some predictability (at least for two years) to the taxpayers.

There is, however, no change in taxes on monthly income between Tk. 29,167 and Tk. 37,500. Those with monthly income between Tk 70,833 and Tk 3,20,833 to get some tax relief. Highest 10 per cent tax relief for taxpayers whose monthly income is Tk 70,833; and lowest 1.0 per cent tax relief for taxpayers whose monthly income is Tk 3,20,833.

Those whose monthly income is between Tk. 4,16,667 and Tk. 40,00,000 will face higher tax burden. Again, highest tax burden will be for the taxpayer whose monthly income is Tk 40,00,000 and above.

MAJOR CHANGES IN THE UNDISCLOSED MONEY PROVISION: In FY25 Budget, a new provision has been proposed to legalise the undisclosed money and asset. A new clause has been proposed to be added in the Income Tax Act, 2023 (in schedule 1, part 3) to provide an opportunity to correct and earlier error: “According to the newly proposed provisions, no authority can raise any question if a taxpayer pays fixed tax rates for immovable properties like flats, apartments and land and 15 per cent tax on other resources including cash, irrespective of the existing laws of the country.”

The Centre for Policy Dialogue (CPD) has strongly argued against this type of provision on the ground that it is morally unacceptable. This would discourage honest taxpayers from paying taxes on time, creating moral hazard. CPD thinks this type of provision undermines rule of law and goes against the spirit of good governance. Rather, tax-dodgers must face accountability and made to pay for their misdeeds.

VALUE ADDED TAX (VAT) AND SUPPLEMENTARY DUTY (SD): A conscious effort is seen to align VAT rates with Value Added Tax and Supplementary Duty Act, 2012. IMF recommendations to this effect appears to be at play here. An effort to move towards 15 per cent flat VAT rate (for some items at one go, for others gradually) is discernible in the budget proposals.

Withdrawal of existing 20 per cent supplementary duty on packed powdered milk up to 2.5 kg will reduce price. Withdrawal of the concessionary rate for refrigerator compressors will help domestic import-substituting industries. Increased SD on all kinds of ice-cream from 5 per cent to 10 per cent will be passed on to the consumers. SD also increased on carbonated beverages which contain more than 145 mg/per litre caffeine from 25 per cent to 30 per cent. Additionally, the beverages containing ingredients different from the specified amount as defined in the Bangladesh Standards (BDS 1123:2013), also face 40 per cent SD from 35 per cent. The move is to support the domestic import substituting industry. • SD on cigarettes is proposed to increase from 65 per cent to 66 per cent which is also a good move from health point of view.

SD on the mobile telecom services (e.g., SIM/RUIM cards) increased from 15 per cent to 20 per cent. In addition to that, the amount of VAT is increased for each SIM/e-SIM card from Tk 200 to Tk 300 These will be passed on to the consumers.

VAT on locally manufactured mango bar, mango juice, pineapple juice, guava juice and tamarind juice increased from 5 per cent to 15 per cent; and increased VAT on locally manufactured energy saving bulbs with capacity 1 to 50 watt and tube light of 18 watt & 36 watt, from 5 per cent to 15 per cent will also be passed on to the consumers.

VAT on cigarette paper/bidi paper increased from 7.5 per cent to 15 per cent is a good move from health point of view which will raise revenue.

Increased VAT on the service of ‘Purchaser of Auctioned Goods’, ‘Amusement Park and Theme Park’ increased from 7.5 per cent to 15 per cent will be passed on to the consumers.

DOMESTIC INDUSTRY SUPPORT:To protect the domestic cashew nut industry in the hill tracts region of Bangladesh, it is proposed to impose a 5 per cent import duty and a 10 per cent regulatory duty on imported Shelled Cashew Nuts. It will help indigenous domestic producers.

The budget also suggested elimination of the current 20 per cent supplementary duty on packed powdered milk up to 2.5 kg which is a good move for local companies and consumers will be benefitted.

A proposal to decrease the import duty on Polypropylene yarn from 10 per cent to 5 per cent to foster the growth of the emerging local carpet manufacturing industry will also support domestic manufacturing local companies. A proposal to raise the import duty on LRPC Wire from 10 per cent to 15 per cent to encourage the utilisation of domestically produced high-quality iron and non-alloy steel wire, thereby reducing foreign exchange pressure and fostering the growth of the domestic industry is also a good move for local companies.

A proposal to rationalise tariffs through imposition a 1 per cent import duty on raw materials imported by generator manufacturing and assembling industries, which currently benefit from a zero per cent import duty under existing notifications will increase revenue but higher cost could be passed on to the consumers.

A proposal to bolster local aviation companies and enhance industry potential by withdrawing VAT on aircraft engines and spare parts of propellers at the import stage to address the challenges faced by domestic airlines in competing with foreign counterparts is a good step in support of domestic aviation companies.

Import duties on certain essential items have been reduced. For example, dialysis filter and dialysis circuit, polypropylene yarn, manganese, cashew nuts in shelled in bulk. Hopefully, the reduced rates will pass on to consumers and at retail levels.

EXCISE DUTY: In FY25 Budget, a new provision has been proposed to exempt excise duty for depositors or foreign lenders in the Offshore Banking Units under the jurisdiction of the Offshore Banking Act, 2024 (Act No. II of 2024). It will encourage offshore banking.

New measures proposed as regards excise duty on bank accounts. For banks, excise duty across the existing three slabs up to Tk 1.0 million remains unchanged. However, a few measures have been taken to generate more revenue, but create burden on account holders.

NEW MEASURES TO BROADEN TAX NET: To include resorts, motels, restaurants, convention centres in the definition of specified persons for the purpose of deduction or collection of tax at source: will increase tax collection. Imposing obligation to furnish proof of return while obtaining and renewing licenses of hotels, restaurants, motels, hospitals, clinics, diagnostic centres and community centres, convention halls or similar services will create opportunities for additional tax collection. Providing for a penalty of not less than Tk 20,000 and not more than Tk. 50,000 for failure to produce proof of filing of return at the place of business could also be an opportunity for additional taxes but will require enforcement.

AMENDMENTS ON VAT AND SD ACTS: To consider persons or units having annual turnover exceeding Tk 100 million to be considered as tax withholding entities (Section 2(21) of the Act) will help broaden tax collection net. Necessary amendments to pay 10 per cent instead of 20 per cent of the demand excluding fine while submitting an application for appeal to the Appellate Tribunal and Appeal Commissionerate may also reduce burden of taxpayers going for submitting appeal to tax authorities.

Provision to include the Cost and Management Accountants as VAT consultants is another step as ICMAB members’ longstanding demand has been made.

In case of any taxable supply of which value exceeds Tk 25000, there is a provision to issue a VAT challan mentioning the name, address and Business Identification Number (BIN) of the purchaser. Nevertheless, not all the purchaser has the obligation to obtain BIN. Considering this aspect, necessary amendments in the relevant provisions and VAT forms is proposed to ease business operation of Small and Medium Enterprises (SMEs).

TARIFF RATIONALISATION: There have been some measures in the budget to rationalise tariff values in view of Bangladesh’s upcoming Least Developed Country (LDC) graduation. This has been done in three ways: A. 10 HS headings where Minimum Value has been withdrawn; 5 HS headings where Minimum Value has been rationalised; and 3 HS headings where Minimum Value has been imposed.

Preparing Bangladesh’s tariff regime according to World Trade Organisation (WTO) obligations is a well-thought out strategy. In successive budgets, Bangladesh will need to keep on rationalising its tariff structure in line with its post-LDC future (to continue in FY2025-26 Budget).

Adjustments of customs duties and abolition of minimum prices will need to be done by undertaking thorough study of Bangladesh’s obligations as post-LDC developing country, and the bound tariffs it has committed in the WTO.

IT SECTOR TAX EXEMPTION: The government plans to extend the tax exemption for IT-enabled services (ITES) sector by an additional three years, contingent upon the implementation of cashless transactions. This extension is welcome in view of the sector’s potentials. However, this sunset clause should be complied with since some of the ITESs has been enjoying exemptions from direct taxation since 2008.

E-COMMERCE MORATORIUM: Bangladesh will need to strategise in view of the end of the moratorium on E-commerce in place in WTO since 1998. The moratorium is to come to end in March 2024 or WTO-MC14 whichever is earlier. Bangladesh has both offensive and defensive interest in this regard and should define its fiscal measures accordingly.

CONCLUDING OBSERVATIONS:The fiscal proposals in Budget FY2024-25 has come up with a number of positive proposals, but in some other respects have not gone far enough, or in the right direction.

Structure of income tax has been revised to make it more sensitive to needs of the middle class and to ensure equity and distributive justice by raising highest tax slab.

Tax proposals are to be valid for next two years, which will add predictability for the taxpayers.

In spite of the prevailing high levels of inflation, duties of only a few essential items have been reduced. Whether the duty reduction will result in reduced prices for consumers however remain uncertain.

There is a conscious effect to move towards aligning the VAT structure with the VAT and Supplementary Act, 2012. At times this was done at one go by raising VAT to 15 per cent, at other times this was done gradually. This alignment is being done at a time of high inflation and evidently tax incidence on consumers are set to rise.

There has been a conscious effort, through fiscal measures (exemption on import duties on intermediates, high tariff on finished goods) to support domestic import- substituting industries.

The regressive practice of allowing whitening of money, and this time with greater immunity, sends a wrong signal to tax-evaders and creates a moral hazard problem for honest taxpayers.

An appeal was made in the budget speech to MPs to not avail of the current privilege of duty-free import of cars. Whether MPs volunteer to set a ‘noble example’ to forego the privilege of ‘duty-free import of cars’ will be a litmus test of the willingness of people’s representatives to share the burden being borne by ordinary people and taxpayers at these difficult times.

Dr Fahmida Khatun, Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; Towfiqul Islam Khan, Senior Research Fellow, CPD, ([email protected]); Muntaseer Kamal, Research Fellow, CPD, ([email protected]); and Syed Yusuf Saadat, Research Fellow, CPD.

[The piece is based on ‘An Analysis of the National Budget for FY2024-25’ presented at the media briefing on June 07, 2024.]