Subsidies vs inadequate public provisions and social protection


Dhiman Chowdhury | Published: September 29, 2017 20:59:04 | Updated: October 25, 2017 01:53:57


Subsidies vs inadequate public provisions and social protection

The taxation and subsidy policies of the country are apparently skewed in favour of the better-off people at the expense of their poor compatriots.  Cash subsidies of TK34000 million were given during 2014-15 and TK45000 million were allocated for 2016-17 for some exporters (textiles, jute goods, lather, vegetables and fruits exporters, potato and some agro-processing products, light engineering products, fish), at a rate of 2.0 per cent to 20 per cent of the price of exports.  Although there are many other incentives for exporters, including duty drawback and lower income taxes, such cash incentives for exporters are not allowed in any country in the world except Nepal. Nepal started the cash subsidy scheme in 2010 but it failed to meet desired objectives of increasing exports (The Kathmandu Post, February 26, 2017). Council of All-Pakistan Textile Association has criticised the government proposal for cash incentives saying that these will hurt genuine exporters (Business Recorder, January 5, 2017). 

The agreement on subsidies and countervailing measures of the World Trade Organisation (WTO) allows export incentives (not cash incentives) by developing countries whose gross national income (GNI) per capita is below $1000 per annum. In 2016, GNI per capita in Bangladesh was $1330 (World Development Indicators Database, World Bank 2017). There is also prohibition on export subsidies on non-agricultural goods (WTO World Trade Report, 2006: Exploring the Linkage between Subsidies, Trade and the WTO).

AS for the energy sector, subsidies averaged Tk 100 billion during 2010-12. Subsidies are given for gas for private cars (when household kitchens are off) and for electricity in air-conditioners while 70 per cent of the people does not have access to it. The average cost of petrol was Tk 88.5 per litre and selling price was Tk 81. The well-off segment of the population consumes 45.6 per cent of the total subsidies in petrol, the cost being Tk88.5 and selling price Tk81 per litre. Cost of octane was Tk 89.5 and selling price Tk 84. Unlimited gas supply to households is given at a cost of TK 450 a month, the market price being Tk 2000.

Bangladesh government is financing BICM (Bangladesh Institute of Capital Market) with an annual budget of Tk 40 million whereas in India, the National Institute of Securities Market (NISM) was established by the Securities and Exchange Board of India (SEBI). The NISM is financially independent and does not receive any grants either from SEBI or from the government. BICM can be financed and governed by the Securities and Exchange Commission (SEC), Investment Corporation of Bangladesh (ICB), various chambers of commerce and other private sector organisations. The SEC generated a surplus of Tk 116 million in 2013 and ICB is a commercially-run government organisation and paid income tax, amounting to TK 514 million, in 2015-16 financial year, and thus can well run an organisation like BICM without government funding.

The government has distributed TK6420 million, until 2016, to the small investors who suffered losses in the stock market and waved 50 per cent interest on their loan (SEC Annual Report 2016). These beneficiaries are mostly urban citizens. The Institute of Chartered Accountants of Bangladesh and Institute of Cost and Management Accountants of Bangladesh, the two professional elite groups received TK15 million each as grants from the government in 2015-16. ICAB had a surplus of TK73 million and total funds amounted to TK456 million. ICMAB had surplus of TK12 million and General fund of TK207 million (Annual Reports of ICAB and ICMAB). Their counterparts in India and UK receive no such grants from the government. At  the university level education, a significant portion of students is ready to pay more but the government remains silent about subsidies in this sector. Students pay a total of TK8000 for regular daytime-MBA programme whereas they pay TK1,80,000-- more than twenty times for the evening-MBA programme.

A good government can help reduce inequality by redistributing tax revenue from the rich to the poor. In our tax laws there are some privileges (subsidies) for the rich. House property is not taxable if it can be disclosed vacant. Gift tax collection is historically zero. There is no inheritance tax although it is very high in many developed countries. Top personal income tax rate was 25 per cent for a long time compared to India's 33.6 per cent, Vietnam's 35 per cent, and UK's 45 per cent. Capital gain, which mostly goes to the wealthy, is also taxed low in Bangladesh at 15 per cent compared to 20 per cent in Vietnam and Thailand, 25 per cent in China, and 28 per cent in UK. Capital gain on shares is virtually exempted. 

Globally, common people are benefited by tax from the rich through a judiciously designed redistribution policy that, both in theory and practice, is well settled. Most of the taxes around the world come from the rich and the wealthy; common people, particularly in the developing and least developed countries, do not have the ability to pay much tax. Even in the USA, rich people give 87 per cent of federal income tax and 69 per cent of all federal taxes (Tax Policy Center, Washington D.C.). According to the Annual Report of our National Board of Revenue (NBR), rich people give 34 per cent of personal income tax and big companies give 50 per cent of total corporate income tax. The standard of living of the common people depends on the ability of the government to collect tax from the rich people, who have the ability to pay, and then use the fund for the welfare of the people. Our total tax-GDP (gross domestic product) ratio of only 10 per cent, one of the lowest in the world, is a strong signal that common people of the country do not get a fair deal. Policies like low and top personal income taxes and wholesale exemptions of income accruing to the wealthy are corrupt because they represent an expensive way to benefit a small number of people at the cost of the common people.

On the other hand, public provisions and social protection for the ordinary people in our country are the lowest even in South Asian standard. Our access to drinking water is 87 per cent and to electricity is 62 per cent of total population which are the lowest in South Asia and to sanitation is 61 per cent, only higher than India. Other social protection services like police service, roads, per capita health expenditure, all are at the lowest level compared to others among our neighbouring countries. Our road distance is only 215 km per 1.0 million of people compared to 5433 in Sri Lanka, 4209 in India, 2609 in Thailand, 2169 in Vietnam, 2111 in Philippines, 1925 in Indonesia, 1318 in Pakistan and 640 in Nepal. Our health expenditure per head is $31 compared to $228 in Thailand, $142 in Vietnam, $135 in Philippines, $127 in Sri Lanka, $99 in Indonesia, $175 in India, $40 in Nepal and $36 in Pakistan. Our social welfare expenditure for the poor and the marginalised is 0.87 per cent of total government expenditure compared to India's 1.25 per cent.

Dr. Dhiman Chowdhury is Professor of Accounting, Dhaka University.

dhiman_chowdhury@yahoo.com

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