Cutting tax exemptions to add Tk30,000cr in revenue in FY25: Ahsan H Mansur

Reducing tax exemptions in various sectors could increase revenue by Tk30,000 crore in the forthcoming fiscal year, said Ahsan H Mansur, executive director at the Policy Research Institute (PRI) on Wednesday (27 March).

"In order to increase revenue collection, cutbacks in exemptions will bring faster results than other reforms," he said during a press briefing organised to unveil a study report on "Domestic Resource Mobilisation" at the PRI office in Banani.

The economist believes that if this trend continues, revenue collection will increase in the following years as well.

"How much money is being waived through exemptions in Bangladesh, who is benefiting from it, what is their contribution to the socio-economy, or who they are – it is not clear," he deplored.

The former economist for the International Monetary Fund, however, did not specify any sectors for reducing the exemptions.

After the discussion, the PRI executive director told The Business Standard, "The National Board of Revenue will have to decide on reducing exemptions from various sectors. However, we have calculated that it is possible to collect additional revenue of at least Tk30,000 crore in the next fiscal year by reducing tax exemptions."

He mentioned that the finance minister had earlier provided an account that at least Tk1.25 lakh crore of income tax exemption is given. Additionally, VAT exemption is also being provided at the import stage.

"It is possible to collect the additional amount of revenue by reducing exemptions by Tk30,000 crore in the next fiscal year and another Tk30,000 crore in the following fiscal year, totalling Tk90,000 crore over the next three years in these sectors," Ahsan H Mansur added.

"Only reducing exemptions will not help increase the contribution of taxes to gross domestic product at the desired rate," he said, suggesting major reforms in the revenue sector in the next three years.

Ahsan H Mansur believes the recent advice from the IMF for Bangladesh to reduce exemptions is logical. He stated that taxing remittances would not be a logical approach. Additionally, he said the proposal to set the tax-free income limit at Tk5 lakh is also logical.

PRI Research Director MA Razzaque said, "There has been no uncertainty since the election. So, now is the right time for major reforms."

He also suggested collecting taxes at a higher rate from those who have more money.

The study, "Connecting fiscal policy changes to economic outcomes: Evidence from a quantitative exercise", has found that if the increase in tax revenue from personal income increases by two percentage points of GDP, it will result in a 0.5 percentage point increase in real GDP, amounting to Tk65,000 crore.

Additionally, if personal income tax, corporate tax, and VAT generate additional revenue of 2% of GDP, it will contribute less (0.2%) to real GDP growth than personal income tax combined.

The study has been carried out on the basis of three components: personal income tax, corporate tax, and VAT. It shows that increasing corporate tax and VAT collection may drive up inflation, which may reduce real economic growth.

It stated that a 2-percentage-point increase in corporate tax revenue as a share of GDP could raise inflation by 1.15% and reduce real growth by 0.44%.

Consequently, the agriculture and service sectors would benefit, but there are fears of a major negative impact being created on the manufacturing sector.

Similarly, if an additional 2 percentage points of GDP were collected from VAT, the inflationary effect would be 1.87%, leading to a reduction in real economic growth of about 0.37%.

While the agriculture and service sectors would benefit from this, the manufacturing sector might experience a significant negative impact.

However, the study suggests that none of the three sectors is likely to suffer if personal income tax is increased. Rather there will be growth.

PRI Chairman Zaidi Sattar presided over the programme while PRI Director Bazlul Haque Khondker presented the findings of the study.

It suggested that more revenue can be collected from these two sectors through reforms and increasing efficiency without raising corporate tax rates and VAT.

Zaidi Sattar called for a reduction in the high tariff rate on imports, saying that compared to many other countries, the import tariff in Bangladesh is three to four times higher.

Inflation acts as a hidden tax

Ahsan H Mansur said at the discussion that, regarding what is being done by borrowing and printing money (implementation of various development projects), "it is making my pocket lighter. I end up giving 10% more to the government as inflation or a hidden tax."

"I realise that when I go to the market. I am not directly paying tax, but it is being deducted from my pocket. Tax should be collected from me instead of in a hidden way," he asserted.

Reducing inflation requires macroeconomic stability, raising taxes, and being accountable, the economist suggested.

"We are currently giving 8-9% as tax (tax-GDP ratio) and experiencing 10% inflation. I am effectively giving a total of 18%," he said.

"Instead of this, the government could effectively collect tax at 18%, and inflation would be between 1-2%," he added.

He continued, "The burden of inflation falls heavily on the poor and those with fixed incomes, while those with assets become richer."

At the same time, he also mentioned that Bangladesh is heading towards a heavy debt burden due to the implementation of projects completely dependent on borrowing.

"No project becomes viable by relying 100% on borrowing. At least 25% should be financed by own equity," he lamented, adding, "Relying entirely on borrowing creates a debt burden, and that's the direction we're headed for."