Further Tk15,000cr likely cuts in tax exemptions in FY25

Infographics: TBS

Income tax exemptions, also known as tax expenditures, are expected to be reduced by Tk15,000 crore in the upcoming fiscal year, bringing the total down to Tk1.63 lakh crore.

This reduction will be implemented by cutting existing exemptions and minimising irregularities through stricter monitoring by tax authorities, according to finance ministry sources.

In line with the International Monetary Fund's (IMF) recommendations, the government started disclosing tax exemption amounts beginning with the last budget.

The projected amount for FY24 is Tk1.78 lakh crore as per calculations by the tax authorities, a senior finance official told The Business Standard, seeking anonymity.

"In FY21, direct tax expenditures accounted for 3.56% of GDP, and this is expected to decrease to 2.91% by FY25," he said. "The reduction in exemptions will be added to the revenue."

The official mentioned that the finance minister will likely disclose the projected tax expenditure in his upcoming budget speech, specifying areas where exemptions will be reduced.

Meanwhile, an official from the National Board of Revenue (NBR) indicated that exemptions in sectors such as physical infrastructure may be decreased.

"Exemptions for ready-made garments, microfinance, remittances, poultry, fisheries, export cash incentives, and IT-enabled services may also be cut," the official said.

The government's aim is to reduce exemptions to below 2% of GDP within the next five years, added the tax official.

'Reduced amount still big'

Despite plans to reduce tax expenditures significantly, the total will be still roughly equal to the next fiscal's revenue collection target, likely around Tk1.77 lakh crore.

Ahsan H Mansur, executive director of the Policy Research Institute, told TBS that reducing tax expenditures to Tk1.63 lakh crore is still too high. "There's nothing to be proud of, as this amount would equal the tax collection target."

The economist also said the government should publish a comprehensive tax expenditure report, including income tax, VAT, and customs.

He said the report should outline which sectors receive exemptions, the amount each sector receives, and their economic contributions.

Besides, Mansur said the report should include a clear plan for reducing exemptions within a specific timeframe, and unjustified exemptions should be avoided.

Who are enjoying tax benefits

Tax expenditures refers to rebates, discounts, exemptions, reduced tax rates, and income exclusions from total taxable income.

Currently, over a hundred sectors, including remittances, salaries, share capital gains, power and energy, economic zones, hi-tech parks, dividends, agribusiness, interest on savings certificates, capital gains from asset transfers, export sectors, IT, and education, enjoy tax exemptions.

Currently Bangladesh's tax (revenue) to GDP ratio is over 7%. This includes value-added tax, income tax, and customs duty.

As per the terms of the IMF's $4.7 billion loan package, the revenue board wants to increase the tax-GDP ratio by 0.5 percentage points this fiscal year.

Syed Md Aminul Karim, former NBR member, said the strategy to reduce direct tax exemptions is logical but drastic reduction could disrupt economic balance.

He emphasised the need for a clear reduction plan for a smooth transition.

The former income tax policy member noted that the ready-made garment sector has had tax benefits for over four decades. "It was once logical, continuing these benefits indefinitely is not justified."

Besides, some sectors, including NGOs and manufacturing, are misusing tax exemptions and should be identified, he said.  

Tax exemptions should be limited to extraordinary situations to enhance transparency and better manage the budget deficit, said Karim.

"It is my firm belief that the tax-to-GDP ratio will significantly increase if tax exemptions are reduced, and this will accelerate revenue collection," he added.

IMF prescribes slash in exemptions

As part of the $4.7 billion loan agreement, the IMF has stipulated conditions, including the rationalisation of tax expenditures.

Following meetings between the IMF visiting team and NBR officials in April, recommendations were made to reduce or withdraw tax exemptions.

A report published on the NBR website on 8 May, titled "Tax Expenditure in the Direct Tax of Bangladesh: Estimation and Review," suggests limiting or capping exemptions, refining eligibility criteria, adjusting tax credit rates, improving reporting and transparency, and conducting periodic evaluations.

Additionally, the report proposes eliminating exemptions for individuals or sectors that no longer align with the government's objectives for exemptions.