The implementation of the 2017-18 budget is facing challenges from the very beginning. This has resulted from withdrawal of proposed new Value Added Tax (VAT) Act. Revenue earnings will now be much less from VAT sources. The government has not yet cut expenditures. So there will be more imbalances between income and expenditure triggering serious concern about execution of the budget. The development budget may have to be cut. The Ministry of Finance, the Ministry of Planning and the National Board of Revenue (NBR) might be squaring up the accounts.
Because of widespread criticism, the Ministry of Finance shed a number of the original budget proposals. This will lead to sizeable shortfall in earnings. The budget deficit will increase unless there is proportionate cut in expenditure. The Finance Minister has not yet indicated as to how the deficit will be met. Incomes have been reduced by keeping expenditure unchanged. Non-implementation of new VAT Act, reduction of excise duty on bank accounts and cut in import duty on rice import have sizeably reduced the government's estimated revenue earnings in the budget for fiscal 2017-18.
The government has no alternative other than borrowing from banking and other sources to meet the shortfall in expenditure. It had planned to increase revenue earnings by 33 per cent but this will not happen now due to the withdrawal of the new VAT Act. It might think of some strategies to meet the situation. These may include a cut in development expenditure, mobilisation of more loans from banks and savings certificates, reduction of targets of revenue collection and increase in the coverage of taxes.
In the current budget, the estimated deficit is Tk 1,067 billion. Decline of income from VAT may make the deficit unprecedented. A senior official of the Finance Ministry has said that the expenditure target still remains unchanged. The target of bank loans at Tk 282.03 billion may increase as the government is expected to meet VAT deficit through heavy bank borrowing. The current budget is the last for a full annual one, before the next general election.
A big development budget has been planned for the 2017-18 fiscal year. The size of the Annual Development Programme (ADP) at Tk 1,533.31 billion may now be reduced to meet the shortfall in funding.
The Finance Minister observed that achieving the revenue collection target of Tk 2,481.90 billion for this fiscal year will be very difficult after the withdrawal of the new VAT law. An additional Tk 200.00 billion was added to the collection target depending on implementation of the new VAT law which had prescribed a 15 per cent VAT for most of goods and services available in the country.
Following opposition from the business community and the general public, the implementation of the new VAT law was shelved at the eleventh hour by lawmakers in parliament. But the VAT collection target was not changed. The last-minute change meant that the National Board of Revenue did not get time to make the requisite adjustments in its collection arrangements.
The Finance Minister, however, assured that he would give further details at the end of this month after holding meetings with the concerned authorities. The tax authorities said that new measures could be taken under the existing VAT law to generate about Tk 170.00 billion. But, it would be tough to meet the VAT collection target of Tk 912.54 billion for the fiscal year, which is 33 per cent higher than the outgoing year's receipts. The NBR, however, is preparing a work plan to achieve the target through administrative measures including curbing evasion and realising arrears. They should look for tapping new areas to achieve the annual collection target.
The CPD has forecast a revenue shortfall between Tk 430 billion and Tk 550 billion. The budgetary target for revenue collection is Tk 2,879.90 billion. The possible revenue shortfall could be significant but its extent will depend on the public expenditure plan. The government will need to put utmost emphasis on mobilising resources from both NBR and non-NBR sources. The think-tank suggested bringing in more businesses under the existing VAT Act. They also supported the new VAT law.
To implement the budget, the CPD recommended that the government should prepare a work plan based on new circumstances while considering the objectives of maintaining macroeconomic stability, supporting private investment and generating more employment. It recommended widening of the income tax base citing its findings that only 27.3 per cent of all potential income taxpayers declared income tax in 2010. It also called for more stringent measures to reduce illicit financial outflows and actions against proven cases. Motivation of honest taxpayers will surely erode if the government does not take action against people making money illegally and sending it abroad.
On one hand, increasing amounts of money are being transferred abroad and on the other, the tax burden is being increased on legally-earning taxpayers. This is not morally acceptable. Increased attention should be given to curb unlawful outflow of capital as it is always seen to intensify ahead of the national election. Replying to questions on the sluggish growth of exports, falling remittance and achievement of sustainable development goals, the CPD distinguished fellow stressed the need for taking reform measures. He suggested increasing productivity and diversification of exports to attain higher export growth. Bangladesh has to ensure productivity-driven growth. Declining remittance flows may affect consumption spending in the domestic market thereby eroding the tax-base. The final budget figures are not yet firmed up. The Finance Minister has to announce those figures in order to remove uncertainty. .
The writer is an economist.