Consistency in policymaking to ensure sustainable revenues from key sectors

FE Team
| Published: Saturday, May 11, 2024

| Updated: May 11, 2024 00:39:44

Policy Exchange hosted a roundtable discussion titled “National Budget 2024-25: Priorities for High Potential Sectors” that brought together leaders from various sectors to discuss strategic considerations for the upcoming financial year. On May 6, 2024, Dr. M. Masrur Reaz, President and CEO of Policy Exchange, emphasized the need for coherent policymaking to support sustainable revenue growth. Participants highlighted pragmatic policies for sectors such as agriculture, tobacco, RMG, FMCG and digital economy in the face of prevailing macroeconomic challenges.
Here are excerpts from the Round Table discussion:

Budget discussions dominate the discourse every year, but they often lack sectoral analysis. Today’s roundtable takes on greater significance as it addresses a critical gap: the challenge faced by the National Board of Revenue (NBR) in drawing practical conclusions from broad discussions, resulting in a lack of alignment of budget priorities across sectors.
Amid a challenging economic situation locally and globally, Bangladesh faces persistent headwinds, necessitating careful consideration of sectoral needs in the upcoming budget. Allocation of resources to sectors that drive economic growth, employment and skills development is of paramount importance to successfully meet these challenges.
To solve pressing problems such as inflation, foreign debt and unemployment, a significant increase in the budget is necessary. This requires a solid revenue base, which in turn requires prioritization of key revenue-generating sectors. For example, the tobacco sector, which accounts for approximately 12-13% of total national revenues, has one of the highest tax burdens in the world – above the level recommended by the WHO. However, the prices of locally produced cigarettes are among the lowest in the world. To discourage people from smoking and ensure sustainable revenue growth, cigarette prices in all segments must be increased. Moreover, investments in education and health care are crucial for the development of human resources, constituting the basis for sustainable economic growth.

It is commendable that the lion’s share of our country’s needs are met locally, which highlights both our strengths and weaknesses. As we delve into budget discussions, three key aspects deserve attention.
First, the tax framework for agricultural sub-sectors remains largely unchanged despite significant progress in this area and changing climate patterns. Allocating budgetary resources to climate resilience measures can mitigate the risks to agriculture from climate change.
Secondly, it is necessary to strengthen the agri-food value chain. While intermediaries are often responsible for price increases, the real obstacles are compliance issues and dysfunctional supply chains.
Finally, the use of digital agriculture and mechanization is essential for the modernization of agriculture.

As we wait for the budget for the upcoming financial year 2024-25, the digital sector faces a major problem: the potential phasing out of income tax exemptions it has long enjoyed.
If we are to achieve our ambitious goals, the need to protect this industry cannot be overemphasized. With increasing international and domestic demand, the digital sector has enormous growth potential.

The VAT Act and customs regulations are still full of loopholes and anomalies that make it difficult for ordinary taxpayers to understand and cause unnecessary complications and harassment. Moreover, in many cases the approach of raising taxes remains impractical. For example, trying to discourage smoking
industry through increased taxes threaten one of the country’s main sources of income. Instead, a more sensible approach would be to discourage
consumption by increasing cigarette prices in all segments, especially low-end cigarettes
they constitute the majority of the market and are available to the poor.

One of the major threats facing our industry is widespread regulatory compliance issues. In addition, we face significant competition for foreign direct investment (FDI) from neighboring countries. The high import shortage is a significant obstacle to sectoral growth. Moreover, the lack of computer hardware manufacturing and the lack of viable supply chain linkages in the industry are notable challenges that require attention.

Despite the prevailing economic challenges, there has been a significant increase in revenue collections. In the previous financial year, revenue collection was 3.31 trillion taka compared to three trillion eight hundred thousand crore taka budgeted in the 2022-23 budget. This positive trend indicates a commendable 15% revenue growth over the past nine months, suggesting the potential to cross the 3.8 trillion-taki mark in the coming fiscal.
However, sustainability remains of the utmost importance. Streamlining taxation is essential to increasing economic resilience. Currently, income taxes, VAT and corporate income taxes are regulated by separate regulations, which leads to unnecessary tax payments and increased operating costs of enterprises. To formalize the informal economy, it is also important to switch to a system of cashless transactions.

There remains a widespread reluctance towards digital transactions, primarily due to price differences between traditional cash and modern cashless retail outlets. To overcome this resistance and unlock the huge revenue potential of digitalization, it is essential to encourage cashless payments. It is encouraging that widespread issuance of Taxpayer Identification Number (TIN) certificates to 8.2 million individuals could significantly increase revenue streams, given that the current taxpayer population is only 2.7 million. As we move towards a digitally inclusive future, encouraged digitalization emerges as the catalyst to unlock unparalleled economic growth and prosperity across the country.

With a GDP of $450 billion, the current size of our capital market of $70 billion represents a disturbing dissonance. Resolving this inconsistency is crucial to supporting a sound financial environment. There is a noticeable discrepancy between the lending and deposit facilities offered by banks and non-bank financial institutions (NBFIs). More corporate bonds and long-term debt instruments are needed to cultivate a sustainable economic landscape. Long-term financing needs should be met through the issuance of extended debt securities.

Agriculture is the backbone of our rural economy and has a direct impact on a significant proportion of our rural population. As agriculture affects us all in the market system, providing subsidies to the sector remains essential to maximize exports and minimize imports. To increase revenue generation, policymakers need to be creative and pragmatic.
For example, the NBR has routinely raised tax rates in the tobacco sector in previous fiscal years. However, a more cost-effective approach would be to raise the price of tobacco products such as cigarettes, which would benefit both tax collection and public health. Given that 80% of cigarettes sold on the market are in the lower segment, it would be beneficial to discourage consumption through price increases. Viewing tobacco as an exportable crop due to the high potential of dried tobacco leaves as an export commodity would further benefit farmers and also contribute to the goal of diversifying the export portfolio.

It is necessary to create a special research unit within the National Tax Chamber (NBR). Research-based insights will help inform policy formulation by providing pragmatic and effective means of attracting foreign investment. By implementing targeted reforms and leveraging data-driven strategies, Bangladesh can increase its attractiveness to investors and accelerate economic growth.

Media platforms serve as channels to highlight these key issues and facilitate dialogue between stakeholders. As we continue on a path towards sustainable growth, strong media engagement, spanning government, the private sector and media entities, becomes a cornerstone of shaping informed policy and supporting economic prosperity.

The agro-processing industry emphasizes the importance of mechanization for increasing productivity, facing challenges such as land fragmentation. Furthermore, while recognizing the health risks associated with tobacco, policymakers must consider its economic impact, particularly in rural areas where the crop supports livelihoods and improves socioeconomic conditions. When making budgetary decisions, prioritizing infrastructure development and addressing sectoral challenges is crucial to supporting sustainable economic growth and maximizing the potential of key industries.

Synergy between NBR and the private sector is essential to support economic development. While the government relies on revenues for national progress, the private sector equally depends on fiscal support. However, the current tax system requires optimization to achieve balance. Digitization appears as a key solution to increase efficiency and fill the existing gap.

The upcoming budget discussions for the ready-made garments (RMG) sector may differ significantly as Bangladesh begins its transition to LDCs, signaling the imminent end of sector incentives. This sector, which is crucial to the country’s exports, requires tailored policies to successfully achieve this transformation, given the significant private sector investment and complex governance and social issues.
The challenges that arise after graduation herald the need for comprehensive structural adjustments, especially in the field of taxation, to prevent potential crises. While Bangladesh remains open to foreign direct investment (FDI), stringent regulation is necessary to protect the integrity of the sector.