Revenue mobilisation drive should be implemented with caution

Illustration: Asifur Rahman

Given the prevailing global geopolitical unrest and domestic macroeconomic challenges, it is most likely that the FY 2024-25 budget will be a contractionary one. Of course, such a fiscal policy is most likely to slow down economic growth. 

Given the circumstances, maintaining macroeconomic stability must be prioritised over bolstering growth. This is desirable, especially in the context of a persistent high inflationary situation prevailing for quite some months without any respite. And who does not know that inflation hurts people with low incomes the most?

Discourses regarding the budget for the next year mainly highlight the need for higher revenue mobilisation targets and government strategies. In the current fiscal year (i.e., FY 2023-24), the National Board of Revenue (NBR) is attempting to mobilise a significantly higher amount of revenue than the previous fiscal year as required by the IMF programme imperative. There is nothing wrong with this. Perhaps this is also desirable. 

However, imports have substantially decreased due to global economic turmoil and pressure in our external economy. Consequently, attaining the revenue targets has become challenging for the NBR. Due to fluctuations in the exchange rate and the scarcity of USD, overall business and trade activities have also slowed significantly. 

This also makes revenue mobilisation very difficult. Even after reducing the revenue targets for this year from Tk4.3 trillion to Tk4.1 trillion, just over 55% of the revenue target has been achieved in the first eight months of the ongoing fiscal year.

Considering the prevailing challenges, the NBR is developing its strategies for revenue mobilisation for the next budget, embracing some desirable policy reforms. Of course, this reflects NBR's awareness of the prevailing macroeconomic situation of the economy and, hence, the prudent move. 

Yet it must also be noted that, in the context of high inflation and a lack of investment, any sudden move for tax reforms may create additional hurdles for the stakeholders. Given this backdrop, I am putting forward an analysis of the impacts of possible tax reforms (discussed in the public sphere) with the hope that maximum caution can be exercised while pursuing any change in the revenue structure.

There will likely be some moves to rationalise the tax incentives currently being enjoyed by investors. Such reforms may be desirable to increase revenue collection. However, the decision-makers must also ensure that any such move does not hamper the process of industrialisation and employment opportunities. For example, we should be cautious about reforms related to the tax facilities being enjoyed by RMG exporters. 

The RMG entrepreneurs are already under pressure due to the increasing cost of imported inputs (as Taka has been significantly devalued against USD), even though they also gained domestic income from currency devaluation. 

Furthermore, demand for our RMG products in developed countries also faces the risk of contraction because of the global economic slowdown, except in the US market. Therefore, tax measures should focus on protecting RMG exporters from these challenges instead of burdening them with additional taxes. The same is true for ICT exporters. This sector is growing. 

There is absolutely no point in killing this 'golden goose' with the withdrawal of tax benefits at this phase of its growth. Mind it, this has the potential to become our 'second RMG' sector if we can take advantage of the soon-to-be-completed number of ICT parks.

Raising the tax rate for top-tier individual taxpayers from 25 to 30% is also on the table. This rate was reduced from 30 to 25% during the pandemic-induced economic slowdown. The NBR may contemplate returning to the previous rate to mobilise additional revenue. 

But the decision-makers must not also forget that these taxpayers have been enduring almost double-digit inflation the last year. Therefore, raising their tax burden at this point may not be a prudent move. 

Instead, the NBR should focus on bringing more individuals into their tax net. Of the approximately 10 million TIN holders in Bangladesh, only around one-third are paying their taxes. Given this backdrop, the decision-makers should emphasise incentivizing other eligible citizens to pay their taxes instead of imposing more taxes on those already paying their dues. 

Of course, this will require a complete digitalisation of the tax collection process. The strategic use of AI tools in capturing potential taxpayers can also yield desired results, resulting in higher revenue mobilisation.

Of all the possible tax proposals for the coming fiscal year, the one that requires special attention is related to imposing taxes on the income of the MFIs. At the very outset, it must be pointed out that the MFIs in Bangladesh are registered as nonprofits. Therefore, whatever amount is saved (upon bearing the operational expenses) from their 'service charges' cannot be taken by any person or group as dividends. 

Instead, this surplus must be reinvested in socioeconomic developmental activities to benefit their members. Therefore, imposing taxes on MFIs will curtail resources for such socio-economic development activities. That, in turn, is likely to adversely affect the marginal and poor households that benefit from the activities of the MFIs. 

MFIs, who may be forced to curtail their socioeconomic development activities to cope with the tax burden, will become like mainstream commercial lenders, which would be most undesirable. They will then try to bypass the smaller borrowers to cut their costs and concentrate on a small number of larger borrowers.

Secondly, 45 to 57% of the loans provided by the MFIs are equal to or less than Tk50,000. Most of these small borrowers are involved in small agricultural or non-agricultural activities. If additional taxes are imposed on the MFIs, they will become more inclined towards delivering larger loans (for cost-effectiveness). 

This will reduce the supply of small-size loans for small-scale borrowers, which goes in the opposite direction of our policy imperative of inclusive and sustainable financing. This will help MFIs shy away from the bottom of the social pyramid, a move that will contradict Bangladesh's well-appreciated success story of an orchestrated campaign for poverty eradication.

Thirdly, at least one-third of the MFI borrower families rely on agriculture. Hence, there is also the possibility of a significant adverse impact on food security if MFIs are burdened with taxes. It must be pointed out that, amid the current tumultuous macroeconomic environment, point-to-point growth in the industrial and service sectors has already been declining. 

Yet the same has been increasing in agriculture. That is, agriculture is playing a vanguard role in our macro economy just as it did during the pandemic-induced economic slowdown. So, imposing taxes on MFIs may cause the agricultural sector to lose effectiveness as the vanguard for our economic growth.

MFIs paying 0.15% of their service charge earnings as fees to the Microcredit Regulatory Authority (MRA) must also be considered a tax component. Imposing further taxes on them will harm the debt-equity ratio of these organisations. If so, these MFIs will find securing funding from commercial banks challenging. 

Currently, the MFIs are struggling to cope with the increasing interest rates of the commercial banks (SMART rates) while taking loans from them. At this point, additional tax burdens may induce them to cut down on human resources, decreasing their ability to monitor their borrowers intensively. If that happens, the MFIs' almost 100% recovery rate track record may also be affected.

Above all, it must be considered that increasing MFIs' operational expenses (through imposing taxes) will reduce the supply of credit for informal and quasi-formal MSMEs. This, in turn, may adversely affect overall consumption. As a result, the government will risk losing earnings from VAT. This potential VAT loss must be weighed against the government's possible income from imposing taxes on MFIs.

The idea that a government needs to impose new taxes to increase its income has become outdated. Instead, incentivising more taxpayers (through favourable tax policies) to pay their taxes is more effective. A study by Bangladesh's Foreign Investors' Chamber of Commerce and Industries (FICCI) has revealed that a 33% reduction in taxes on businesses between 2022 and 2041 is likely to result in increasing government revenue from $34 billion to $227 billion (almost 10% of the GDP). 

Given this context, the sensitised stakeholders expect the budget-makers to consider the prevailing realities and develop innovative and pro-people approaches to revenue mobilisation. None is against a more significant mobilisation of the revenues. However, this must be done more prudently and cautiously to avoid instability in the country's macroeconomic development.

Dr Atiur Rahman is an Emeritus Professor at Dhaka University and former Governor of Bangladesh Bank.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.