Tax exemptions: A thin line between inevitable and unnecessary

Illustration: TBS

Despite failing to achieve the International Monetary Fund's (IMF) recommended revenue target of Tk3.38 lakh crore until the end of June this year, Bangladesh still received the second instalment of the $4.7 billion loan from the global lender. 

​​​​​​NBR fell short at Tk3.31 lakh crore.

Now, for the third instalment, the IMF has laid down several new benchmarks including raising a revenue of additional Tk66,900 crores by next June and notably, providing a comprehensive list of tax exemptions. 

Tax exemptions have long been described as too high in Bangladesh, and experts say these privileges have been misused on many occasions, ultimately resulting in tax evasion. 

Moreover, as the exemption list is not always readily available in Bangladesh, there is scope for speculation on the avenues and extents of the offered concessions. 

"We have to evaluate our exemption size based on the revenue we generate. Considering that, exemptions are too high," said former NBR chairman Muhammad Abdul Mazid. 

Tax exemptions are normally awarded to deserving parties, but when they are given to undeserving candidates, the deserving groups are often denied their fair share.  

For instance, products imported in the name of megaprojects are exempted from duties. Project consultants are also exempted from tax. 

"This practice completely destroys discipline," Mazid said. 

The former NBR chairman said these taxes are sometimes exempted based on the logic that why would the state pay taxes to itself.

But that gives rise to a problem in competitiveness, as others who invested in the same sector have to come to the market after paying taxes. 

"The products manufactured in these situations should be priced less, since no taxes are paid. If Bangladeshis can get those products at lower prices, then that is fine. But that is not the case," Mazid added. 

It creates three different problems, according to the former revenue board official. 

"First, it is destroying the competitiveness of our products. Second, it should have an impact on the product prices, but that doesn't happen. Thirdly, their [tax exempt entities'] supplies are not properly monitored, which creates the privilege of non-transparency," he explained. 

"If they have to bring in products with proper taxation, we would know how many products and what types of products they are bringing, etc. But when it is said that the products don't require taxation, these are not well monitored," Mazid further explained.

This is why the IMF is asking for a list of tax exemptions, the former NBR chairman added. 

Dr Zaidi Sattar, chairman of the Policy Research Institute of Bangladesh (PRI), said it is not only the high volume of exemptions that is the issue, but also that the entire structure of tax exemptions is far too complex. 

"One raw material can be used in 10 industries. It should have a uniform duty system instead of far too many," he said. 

Garment exporters, for example, receive a 5% cash incentive when exporting apparel items made from locally procured raw materials such as yarn and fabrics. Besides, an additional 4% cash incentive is granted for shipments to non-traditional markets. The garment exports also benefit from an additional 1% cash incentive in all countries.

"Name 10 industries, you will see they have concessions in capital machinery import or raw material import. These are end-user concessions in economic terms. If you import for industry, for example an electrical industry, you get a concession, but if it is a consumer import, they have to give full duty," Dr Sattar said. "End-user concessions are problematic; they have many loopholes." 

He further explained that if you have to buy an air conditioner for a home or office, you have to pay general duty, but if this is bought for a factory and comes as capital import, then you have a concessional rate. Whereas you will pay 100% duty, the industry will pay only a bare minimum.  

But can we really get rid of exemptions altogether? Especially when exemptions are often subject to attracting foreign investment — something Bangladesh has long been struggling to increase. 

Dr Sattar does not think we can eliminate all tax exemptions. It is not the first time that the IMF or any other organisation is mentioning this, he said.  

"There are many exemptions; you cannot lift exemptions from everything. For example, in the case of investment, all countries allow tax exemption for four to five years. Some will remain. But the tax exemption policy has to be rationalised. There are many unnecessary exemptions which cause tax evasion. Those come into being through lobbying. So this has to be rationalised," Dr Sattar said. 

We also asked him if the IMF target of additional revenues is achievable. 

"This is an indicative target," he said. "It will be enough if we can get close to it. This is one of those targets, which is not a quantitative performance criteria. This is a floor estimation."

He further explained that even if the targets fall short for justifiable reasons, the IMF would consider this. "The IMF expects certain reforms by June — some fundamental reforms — that we are doing something at least." 

Abdul Mazid, however, says the target is not achievable. 

"It is not possible. Even the IMF knows these targets are not achievable. It is a way of creating pressure [for reforms]. The second instalment was released even though many conditions were not  fulfilled," Mazid added.