The Financial Express

The dilemma of budget-making

The dilemma of budget-making

The job of budget-making is difficult in a country like Bangladesh. There are expectations galore from all directions and the government will have to employ vast resources if it were to meet those. But resources here are not that easy to come by since none will pay the amount of tax he or she should be paying. The weaknesses of the tax administration are no less important here.  

 The size of the budget has grown. In the fiscal year 1972-73, the budget was worth Tk 7.86 billion. It first crossed the trillion-taka mark in the FY 2009-10. At the end of one decade, the size of the budget has reached a record Tk 5.86 trillion.  The budget is, however, revised downward, usually at the end of the third quarter of every FY. The revision is done primarily due to the failure of the state agencies to spend allocations made in the budget for development projects.

The government would have prepared an even bigger budget every FY if it could manage enough resources. A major constraint such as the lack of capacity to spend, particularly on development projects, would not have deterred it from presenting budgets far bigger than the usual ones.

Mobilising resources from domestic sources has always been a tough ask for the government. The Ministry of Finance fixes revenue targets on the higher side --- often targets are found to be too ambitious to achieve. It does not take even the ground realities into account while fixing those.

The government exercised some amount of prudence while fixing the tax revenue target for the current fiscal year (2020-21). It kept the projected revenue growth at a somewhat lower level. Yet there could be a substantial shortfall in revenue. Like the previous one, the pandemic has affected the revenue collection drive this year.

However, there have been a few exceptions. The large tax unit (LTU) of the VAT wing of the NBR has reported a notable rise in VAT collection from the tobacco, telecom sectors during the first three-quarters of the current fiscal.

The economy has been going through an unusual time since the deadly pathogen struck the country in March last year. Naturally, unusual time calls for taking unusual measures on the economic front.

Some noted economists talking to this paper recently have underscored the need for toeing an expansionary fiscal policy, marked by higher money supply, usually achieved either through greater public spending or tax cut. One of them suggested raising the tax threshold for individuals to create more disposable income.

Under the prevailing circumstances, generation of enough demand in the economy is necessary without losing sight of the inflation chart. The poor and the fixed wage earners are already hard hit by the soaring prices of essentials. These people have seen substantial erosion of their income in recent months.

Higher public spending and cut in tax rates do not go together. The government will need an increased volume of resources to meet its higher spending. A tax cut in such a situation produces an opposite outcome.

The policymakers, however, might choose the simple way of dealing with the situation. They might focus on the sectors --- tobacco, telecom, cement --- that have been contributing the most to the government exchequer in taxes year after year. 

One of the leading economists of the country has likened these sectors to the geese that lay golden eggs for the government, in terms of revenue generation. But, he has cautioned against burdening these sectors unduly since that would amount to killing the 'golden eggs-laying geese'.

The pandemic has emerged as a challenge of unprecedented nature for the government. To keep the economy afloat during such a tough time, the government needs to be innovative.

There is a growing realisation that the government has offered too many tax exemptions and rebates. Some experts have even suggested the withdrawal of a few. Under the prevailing circumstances, the government is unlikely to go for that.

So, what could be the best way to generate sufficient revenue without creating many waves? Should the taxmen target the big sectors that have fetched a handsome amount of revenue even during this Covid time? The VAT revenue from three sectors -- cigarette, mobile and pharmaceuticals -- recorded over 9.0 per cent growth during the first three-quarters of the current FY over the corresponding period of last FY. The cigarette industry has provided the most.

The National Board of Revenue (NBR) took recourse to an effective policy concerning the cigarette industry while framing the budget for the current FY. It fixed the price of every segment of cigarettes in line with the rate of inflation prevailing. The move, it is estimated, would fetch additional revenue worth Tk 35 billion. In the preceding year, the board raised the price at an abnormally high rate, which had led to a revenue shortfall of Tk10 billion.

Some people plead for raising the price of lower segments at a higher rate to discourage smoking by the poor and low-income people. Unfortunately, that is not happening. These people do switch to even cheaper cigarettes that skip tax payment.

The government is not also doing enough to plug another revenue leakage. Cigarettes worth billions of taka are smuggled into the country every year, leading to a substantial volume of revenue loss for the government.

Discouraging people from smoking, of course, remains a priority job for the government. But the government has to make a compromise for the sake of revenue generation.  It has to maintain a love-hate relationship with the cigarette industry. Such an equation  will continue for many more years, it seems.


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