NBR mulls withdrawal of tax exemption of failing sectors

The National Board of Revenue (NBR) is considering withdrawal of tax exemption for sectors that have failed to meet their intended objectives or contribute substantially to the country's economy.

A tax expenditure report, published in the NBR website on Wednesday (8 May), recommends that "it is important to identify the tax expenditures that are not achieving their intended policy goals." 

The report also suggested eliminating the exemption for individuals or sectors which are no longer relevant with the government's objectives for exemptions.  

"Eliminate or a sunset provision of such expenditure measures can free up government revenue and also simplify the tax code," the report reads. 

An NBR official closely associated with the report told The Business Standard, "We are considering reducing some exemptions from the next fiscal year."

He also said, "By reducing exemption facilities, we want to collect an additional Tk1,000 crore from these sectors, a proposal that we have already discussed with the IMF visiting team."

Currently, over a hundred sectors (inclusive of individuals) including remittance, salary, share capital gains, power and energy, economic zones, hi-tech parks, dividends, agribusiness, interest on savings certificates, capital gains from asset transfers, export sectors, IT, and education, enjoy tax exemptions.

In the last budget speech for FY24, Finance Minister AHM Mustafa Kamal reported that tax expenditures in the fiscal 2020-21 totalled Tk1.26 lakh crore, or 3.56% of GDP.

As per the terms of IMF's $4.7 billion loan package, the NBR is pledge-bound to raise the tax-GDP ratio by 0.5 percentage points in the current fiscal year.

While the lending agency approved the loan package, it also put some conditions including the rationalisation of tax expenditure. 

During the last two weeks, the visiting IMF team held meetings with NBR officials and recommended reduction or withdrawal of tax exemptions (expenditure). 

Although the NBR report did not identify the sectors which were ineffective or failed to meet the government's objective for exemptions, experts have welcomed the initiative.

Dr Syed Md Aminul Karim, former NBR member of income tax policy, told The Business Standard, "It is logical that the sectors which failed to fulfil government intended economic, social or other objectives of exemption, should be removed." 

"Ready-made garment sector enjoyed a bunch of tax benefits for over 4 decades and at that time, the facility was logical. But now, it's not logical to provide the same facility to them forever," he added. 

He further said, "Some sectors, including non-government organisations and the manufacturing sector, are misusing the government's tax exemption facility.

"Some sectors also misuse the tax benefits and they should be identified." 

"However, the wholesale withdrawal of tax exemption facilities would not be justified and the NBR or the government should consider it carefully," he added.

The report titled "Tax expenditure in the direct tax of Bangladesh: Estimation and review" also suggests  limiting or capping exemptions, refining eligibility criteria, reviewing and adjusting tax credit rates, enhancing reporting and transparency, conduct periodic evaluation and create new tax incentive for the sectors which create jobs, innovate or contribute to the economy.