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Economy

Bangladesh tax reform stalls amid tough opposition

Unlike India, Dhaka fails to implement major changes, putting pressure on finances

Customers at the Panthapath, Dhaka, outlet of Shwapno, a chain superstore owned by leading conglomerate ACI Group. (Photo by A.Z.M Anas)

DHAKA -- On the day that neighboring India launched its biggest tax reform in 70 years, the stage was set for Bangladesh to do the same, introducing a new value added tax system.

But in the face of strong opposition from business and political lobbyists, Dhaka pushed back the revamp for a third time, creating a substantial hole in its budget which the country may struggle to fill. The deferment by two years leaves the fate of the VAT reforms in the hands of the next government, as Bangladesh will hold a general election in late 2018.

New Delhi rolled out its goods and services tax on July 1, just three months after parliamentary approval. But for Bangladesh, implementation of its reforms has been pending since 2012, when parliament passed the new law.

The new VAT system would levy a 15% rate across the board, replacing nearly a dozen different rates in the old system, ranging from 1.5% to 15%. The key feature that distinguishes the new Bangladesh system from India's GST is rates, said Zahid Hussain, the World Bank's lead economist for Bangladesh.

GST has multiple rates between 5% and 28%, compared with Bangladesh's new single rate. A uniform rate limits opportunities for corruption because tax officials have "no discretion in terms of deciding which rate to apply to which goods or services," Hussain told the Nikkei Asian Review. "A single rate system is not only more efficient, but also less costly to administer."

But businesses think otherwise. Shop owners vehemently oppose the 15% rate and have demanded the retention of multiple rates. If the rate is 15% across the board, prices of goods will go up, hurting consumers, said Helal Uddin, president of the Bangladesh Shop Owners Association.

He said a diner would have to pay 15% tax whether the meal was at an upscale establishment or an ordinary restaurant. The association's stance is backed by the Federation of Bangladesh Chambers of Commerce and Industry.

The steel industry also opposes the new system. Steel millers reject the new single rate, and have pushed for a 7% rate for the industry, claiming the abrupt increase would lead to "drastic" price rises for steel rods and hit demand. Aameir Alihussain, managing director of Chittagong-based BSRM Group, Bangladesh's largest steelmaker, said the rate could be increased to 15% over a period of four to five years.

Blow to business

Masadul Alam Masud, managing director of Dhaka-based Shahriar Steel Mills, said he is worried about the potential impact on prices. Buyers would have to pay $93 in VAT for a 1 ton rod in the new system, instead of the $11 they now pay, he estimated, adding: "Stagnation is something we could foresee."

While many businesses have cheered the delay, it threatens government finances. More than a third of the revenue target of $35.73 billion for the 2017-2018 financial year was expected to come from VAT.

Options to plug the hole are limited. The government will need to make major adjustments in tax-raising or expenditure, or a combination of both. Higher government borrowing could put upward pressure on already-high lending rates.

Tills at the Panthapath, Dhaka, outlet of Shwapno. (Photo by A.Z.M Anas)

The World Bank's Hussain said the fiscal deficit is likely to swell, meaning the country could miss its budget deficit target of 5% of gross domestic product. Bangladesh has managed to keep the deficit below 5% of GDP for the past two decades.

In addition to opposing the reforms, some business interests also complained about a lack of preparation for the roll-out, saying the National Board of Revenue -- the tax collecting authority -- tried to push the changes through without resolving contentious issues such as the regime for rebates.

Yussuf Abdullah Harun, a businessman-turned politician and former FBCCI president, backed the delay in implementation. "I think this has given us a temporary relief, sparing us from the half-hearted implementation and harassment," Harun said.

However, he supported eventual reform, noting that the budget is getting bigger each year, and needs additional financial resources.

Ziauddin Ahmed Bablu, a lawmaker from the opposition Jatiya Party, attacked the proposed tax regime. "This would impose $2.5 billion in additional tax burden on the people," he said. "Indirect tax is paid by people. That is why we stood by the people and resisted."

Tracking accounts

Despite widespread opposition, the tax changes do have some support among economists. "The new law is extremely pro-business," said Ahsan Mansur, executive director of the Policy Research Institute, a Dhaka think-tank. "I don't think the business community as a whole is happy with the postponement," he said.

Some businesses fear tracking of their accounts by the revenue authorities, he said. "A vested business interest group who does not pay taxes and won't pay taxes was against the new VAT."

The $200 billion-plus Bangladesh economy grew by a record 7.24% in the financial year ending in 2017, but it is one of the least-taxed economies in the world. Taxation amounts to 8.4% of GDP, compared with 11% in India and 18.6% in Nepal, according to World Bank statistics.

In both Bangladesh and India the tax changes were designed not only to shore up public finances, but also to spark sweeping legal, administrative and procedural reforms. Passage of the VAT law by parliament also helped the government to secure a $1 billion credit line from the International Monetary Fund.

A new digitized system is intended to allow businesses to register, file returns and make tax payments online, complemented by a 24-hour call center and electronic services -- all without visiting a tax office.

So far, 43,000 companies have registered online, according to data from the revenue board. Some 850,000 companies are registered under the manual system, but only 37,000 pay VAT, suggesting that evasion is endemic.

Expanding the VAT base was at the core of the reforms, and the revenue board hoped to bring at least 100,000 new businesses into the tax net by December this year. Officials remain bullish, saying the modernized system will ease the tax burden while cutting the cost of doing business.

"Taxpayers' life will be simple," said Mohammad Zakir Hossain, deputy project director of VAT Online, a revenue board project funded by the government and the World Bank to promote the tax changes. The new system will be "like flowers for honest taxpayers and thorns for dishonest taxpayers," he added.

Stella Kaendera, the IMF's resident representative in Dhaka, described the delay in the reforms as "regrettable," but said relations with the government would not sour over the issue. "The IMF stands ready to support the government's reform efforts wherever possible," Kaendera said.

The reform would allow public investment and social spending to be ramped up to levels consistent with the country's growth ambitions without compromising fiscal sustainability, she said.

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