Proposed national budget 2021-2022: A flawed but pro-local industry endeavour

Finance Minister AHM Mustafa Kamal proposed the National Budget of Bangladesh in the National Parliament on June 3, 2021. This is the 50th budget of the country, and it is especially significant for few concurrent issues like the 100th Birth Centenary of the Father of the Nation, the 50th year of independence, and the LDC Graduation.

The vision of this budget is "Bangladesh towards a resilient future protecting lives and livelihoods." It means the government is targeting three objectives to achieve through this budget; namely, protecting lives, protecting livelihoods, and ensuring a resilient future. 

Another special focus of this budget is remaining competitive in the post-LDC graduation age. The Honourable Finance Minister mentioned in his budget speech that, until 2026, Bangladesh will be able to enjoy all these benefits applicable to LDCs. 

He also mentioned that the LDC Group of the World Trade Organisation (WTO) has put forward a proposal to ensure that all trade facilities pertaining to LDCs remain in force for another 12 years after transition. Bangladesh has actively participated in this process, and is continuing its efforts to get this proposal accepted. 

These statements have proven that, government is not only pursuing to be graduated from the LDC list but also equally sincere to enjoy LDC facilities up to a justified period to take required graduation preparations for remaining competitive in the international market after graduating.

The government devised four major strategies to ensure that our economy recovers quickly from the damage caused by the ongoing pandemic. These include: (a) discouraging luxury spending and prioritising government spending that creates jobs; and (b) facilitating loan facilities through commercial banks at subsidised interest rates for affected industries and businesses. (c) broadening the scope of social safety net programmes to protect the extreme poor and low-wage workers in the informal sector from sudden income loss as a result of the pandemic; and (d) increasing money supply to the economy.

Thus, the budget is worth Tk 603,681 crore (17.5% of our GDP). Total allocation for operating and other expenditures has been set at Tk 378,357 crore, while the allocation for the annual development programme is Tk 225,324 crore. 

The overall budget deficit for FY 2021-2022 will be Tk 214,681 crore (6.2% of our GDP). With such a large deficit, the government will almost certainly borrow from banks. Banks are very likely to feel safe co-operating with the government, but they may become more hesitant to lend money to the private sector as it is very risky.

Consequently, private-sector credit facilities could be hampered. It is worth noting that private sector credit growth is currently at its lowest point in a decade. The fact that private sector credit is growing at the slowest rate indicates that new investment is not coming up. Thus, the government reduced the corporate tax rate for most sectors to 2.5%.

GDP growth rate for the FY 2021-2022 has been targeted at 7.2% while inflation will be kept at 5.3%. To support the projected GDP growth rate, the government offered a VAT waiver at the production level for a wide range of products, including a 0% VAT rate on exports of services. The monthly rate of interest charged on arrear VAT has been reduced from 2% to 1%. 15% VAT was proposed to be chargeable on the net commission only with the aim of reducing burden of VAT on dealers and distributors of locally produced tiles and sanitary ware, and to facilitate the production of capital machinery by light engineering sector, VAT on paper cone manufacturing was proposed to be reduced from 15% to 5%. 

TBS Illustration

Income tax on different types of small businesses has been reduced. For example, the rate of business turnover tax for individual taxpayers was reduced to 0.25% from 0.50% and advance tax has been reduced from 4% to 3% for import of raw materials for industries.

Corporate tax for the majority of sectors was reduced, but for one essential sector, it was raised. For example, corporate tax has been reduced from 25% to 22.5% for publicly traded companies, from 32.5% to 30% for non-publicly traded companies, and from 32.5% to 25% for one-person companies.

On the other hand, it has been raised from 32.5% to 37.5% for publicly traded providers of mobile financial service (MFS) and from 32.5% to 40% for non-publicly traded providers of mobile financial service (MFS). It has probably been done to inspire MFS companies to be listed in the stock market. 

However, in order to obtain such a low tax reduction, the companies may be unwilling to bear all of the responsibilities of a listed company. As a result, this initiative may fail to meet its objectives. 

It is, however, important to note that MFS companies play a critical role in bringing rural poor citizens under the coverage of banking/financial services. They are crucial for expanding financial services to the general public across the country and ensuring inclusive banking for all. This is also one of the most popular digital services of the current government's initiatives. 

If the government imposes more corporate tax on these companies it will ultimately be transferred to the service receivers. Service charge will be increased and mass people will have to bear the burden. Consequently, before approval of the proposed budget, the Government may rethink this decision.

Government offered safeguard measures to the local industries by increasing import duties on some specific products and reducing duty on raw materials of some industries. For instance, reduction of specific duty on stainless steel from Tk 1500 per MT to Tk 500 per MT will reduce price and protect local steel industries, regulatory duties on chemical products have been increased which will increase price and protect local industries. 

Supplementary duties of meat and vegetable have been increased which will increase price and protect local agro and livestock industries, VAT has increased for imported meat and vegetables which will increase price and protect local agro and livestock industries, Tax holiday has been given for imported raw material of poultry, dairy, fish feed which will decrease price and support local agro and livestock feed producing industries. 

Furthermore, VAT has been reduced for the raw material of packaging, printing, etc. which will decrease the price and support local printing packaging industries to survive. VAT has been reduced from 60% to 0% for tiles cube which decrease the price to support local tiles industries etc. Also, VAT exemption has been offered to the local puffed rice manufacturers and fresh fruits sellers. 

Special attention has been given to women entrepreneurs and SMEs. They have been offered tax waiver for the women entrepreneurs up to yearly turnover of Tk 70 Lac and 1% tax exemption for the import of capital machinery to small and medium enterprises irrespective of commercial and industrial establishments. 

Tax holidays were offered to poultry, dairy, livestock, washing machine, woven, pressure cooker, washing machine, computer parts, medical devices, and API (Active Pharmaceutical Ingredient) etc. Therefore, this budget could be termed as a local industry friendly budget. 

Despite some flaws in this budget, adequate attention has been paid to protecting lives, livelihoods, and ensuring a resilient future. The only challenge here is to implement the budget properly and in due time, and only through strict oversight can this be achieved.

Md Joynal Abdin is the Executive Secretary of the Dhaka Chamber of Commerce and Industry (DCCI)

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.