Govt mulls counting tax exemptions as subsidy

The government is thinking about counting tax exemptions provided to various individuals and institutions as subsidies, said sources at the National Board of Revenue.

Finance Minister AHM Mustafa Kamal may make an announcement in this regard in the budget speech on 1 June, said sources at the finance ministry.

Economists and policy analysts said the government's proposed initiative is not logical as it would violate the budgetary discipline.

According to sources at the National Board of Revenue, the government's direct tax expenditure – calculated as tax exemptions – in upcoming FY24 is estimated to reach around Tk1.78 lakh crore, and the direct government subsidy might stand at around Tk1.10 lakh crore.

That means, counting tax exemptions as subsidies will take the total subsidy amount to Tk2.90 lakh crore in the next fiscal year.

Currently, a large part of the government's direct tax expenditure is tax exemption given on office employees' salaries and allowances.

According to the National Board of Revenue, the government's direct tax expenditure in FY21 was about Tk1.26 lakh crore. Around 61% that was tax exemption for office employees' salaries, and allowances, and other tax rebates in different sectors.

The government provides a 50% tax exemption on employees' salaries. Besides, there is a tax exemption of up to Tk30,000 on transportation allowances for office employees. Salaries and allowances for workers in various development projects are also tax free. In addition to that, the salaries of people working in various offices of the United Nations in Bangladesh are also tax-free. Moreover, pension, gratuity and other allowances of office employees are tax free.

In FY21, such tax exemptions amounted to around Tk77,000 crore, said sources at the National Board of Revenue.

The government provides tax exemption or collects taxes at reduced rates in the energy and minerals, garments, textiles, IT and software, poultry, and fisheries sectors.

Besides, industries in economic zones and hi-tech parks, and capital gains from the share market enjoy a relaxed tax rate.

Meanwhile, objecting to the country's policy regarding direct subsidies, the International Monetary Fund (IMF) has recently recommended the government to exclude the interest on savings instruments from that account.

Subsidies and tax exemptions have different purposes. The government may be thinking of considering tax exemptions as subsidies to present the country's social protection measure as something bigger than actually it is, but the proposed initiative is not in harmony with proper budgetary discipline, Dr Debapriya Bhattacharya, an economist and public policy analyst, told The Business Standard.

"Subsidies are direct fiscal incentives, while tax exemptions are cost reduction incentives. The two are not the same," said Dr Debapriya Bhattacharya.