Are we being masked with a red flag while a recession is knocking on the door due to the novel coronavirus?
Although we were aware of the catastrophic outbreak since it started in Wuhan of China back in December 2019, unfortunately, we as a nation, have failed to initially anticipate and assess the possible impacts, threats and challenges that the virus might pose to the lives of millions in the country.
This has been evident from the lack of treatment and quarantine facilities for the affected and vulnerable ones and from the acute scarcity of testing kits and Personal Protective Equipment (PPE) for healthcare professionals and other front liners, who are combatting this microscopic monster.
As a consequence of lack in proactive policy and failure to prepare an action plan for addressing the global phenomenon, the country is now paying the price at the cost of our citizen's lives, despite having a good three months' reaction time.
However, the silver-lining is that, though late, the government as well as private sector entities have come forward to address the situation by procuring and distributing hand sanitizers, testing kits and PPE and distributing relief to the poorest sect of the society.
Furthermore, the government has also taken several steps to contain the community spread of this deadly virus by shutting down offices, factories and schools, enforcing social distancing, locking down different places and suspending communication means to secure public health.
In addition to introducing these combat tools, our policymakers also need to appreciate and evaluate the possible fiscal implications of these measures now and respond proactively to tackle the economic shocks that would arise due to the crisis.
At this point, it is imperative for the policymakers to understand the major direct economic disruptions that Bangladesh may face and the possible indirect implications for the business community along with the economy as a whole and how best the situation can be addressed.
The first and biggest toll the situation is taking is on the readymade garment sector, which saw cancellation and suspension of orders worth US$2.95 billion (as of April 1, 2020). This has resulted in uncertainties to the fate of numerous entrepreneurs and some 4.1 million people dependent on the industry.
Additionally, the unprecedented disruptions in the global supply chain has significantly affected all enterprises irrespective of any specific sector involved in manufacturing. Not to mention, the woes of the service sectors including tourism, hospitality, aviation, hotel, restaurants and others as the economic activities in these areas have almost stopped.
Furthermore, it is likely that we would be facing reduction in productivity and regulatory non-compliances due to the unprecedented "work from home policy" and "general holidays" imposed by the government. Finally, the entire demand-supply equation in all the sectors might massively change and a recession is probably just knocking at the door.
In such a backdrop, many countries have already planned and rolled out different fiscal, monetary and tax policy measures to address the economic shocks to recover from the Covid-19 outbreak. It is high time that our fiscal policymakers do the same.
We appreciate that the National Board of Revenue (NBR) has exempted all duties and taxes on imports of Covid-19 test kits, PPE, reagents, chemicals, raw materials for hand sanitizers and other necessary goods and the government has also announced fiscal stimulus package worth Tk 72,750 crore, all of which will mostly be distributed as loans.
However, there are a number of other ways that the government and the tax administration can ease burdens on taxpayers and support businesses and individuals with cash flow problems or other difficulties in meeting tax compliances.
As such, to respond to this emergency, the following tax policy and tax administrative measures can be considered by the NBR.
Firstly, adjusting the rate of advance tax (AT), which is at 5.0 percent now or temporarily waiving the AT imposed under the Value Added Tax and Supplementary Duty Act 2012 and Advance Income Tax (AIT) under the Income Tax Ordnance during the crisis. This might significantly boost their purchasing power capacity as it will reduce their working capital requirements and finance costs.
On one hand, this measure will release burden of additional working capital in the form of paying taxes in advance and also significantly ease pressure on the banking sector, which is seriously suffering from liquidity crisis.
On the other hand, the government has nothing to lose in terms of revenue in the long run since the advance taxes paid are all adjustable with the final tax liability. However, for importers and manufacturers, it would mean that they will be able to import more goods and raw materials at a time when we are facing serious crisis.
Secondly, deferring payments of VAT, customs or excise duties for imports of strategic goods such as food, medicine and capital goods avoiding abuse through careful administration, could be another measure to encourage the private sector to keep moving in this turmoil.
Thirdly, the policymakers may consider minimising tax burden or announcing fiscal benefits for business entities, since these enterprises will have to bear the overhead costs despite productivity losses.
Such reduction of tax burden will lessen the cost and will effectively help in offering a competitive price. Furthermore, lower tax rates or financial incentives may also play a role in encouraging foreign investors to inject further working capital.
Fourthly, the NBR may take administrative measures such as extending deadlines to file monthly VAT returns as well as making payments and also relax other regulatory compliances to minimise the impact of distorted productivity.
Tax payments, which are due in installments, could also be deferred in order to ease cash flow. Penalties and interest for late filing or late payment or non-compliance and except in the case of tax-fraud can be suspended or possibly be waived depending on the circumstances.
The NBR may also consider temporary suspension of debt recovery measures, including suspending or freezing bank accounts and other asset seizures and sales.
Refund is another area which came into limelight after introduction of the new VAT Act, as businesses are claiming that the refund process is cumbersome and needs much waiting. In this crisis, processes for refunds should be prioritised to ensure that the money is paid out quickly to taxpayers who owe them.
Although these administrative steps would hardly give any visible fiscal benefit to the business community, these measures might help them annihilate the pressure of other direct economic impacts.
In addition, our fiscal laws do not have any direct provisions or sections that allow addressing this kind of situation for an interim period. Hence, it is absolutely necessary to incorporate such provisions and make necessary legislative changes in the VAT, Income Tax and Customs Act that will allow the tax authorities and policymakers to address this kind of unforeseen situation within the legal framework.
Finally, considering the strength of our economy, it would be too optimistic to expect any self- employment allowance, business interruption loan or tax cuts. However, halting AT and AIT collection, tax reduction and relaxing compliance requirement may help in alleviating tax burden and cash-flow constraints to a great extent and will also support in fostering a business-friendly environment.
Therefore, it is high time that the concerned policymakers commenced to plan and implement proper tools to shore up procedural inconveniences as well as to roll out financial relief measures to taxpayers, in order to overcome possible economic shocks caused by the Covid-19 pandemic.
Md Saiful Alam Chowdhury is a taxation and fiscal policy consultant and an advocate at the Supreme Court of Bangladesh.