Home ›› 19 Jun 2022 ›› Editorial
The annual budget encompasses the interest of different segments of society such as agriculturalists, industrialists, technologists, educationists, and disadvantaged groups in society. Strictly speaking, a budget resembling a cake or a pie is a document of accommodation or compromise to be allocated on the altar of equity among the different segments of the society.
Thus, there arises a question of distributional efficiency in the allocation among the different segments. Each segment asks for a befitting portion of the pie. However, the bargaining strength of the segment determines the piece of the pie. There is always a crucial allocation aspect that the civil societies and trade bodies ask for amendments and necessary adjustments on equity grounds after the budget is placed in the national assembly. Governments try to ensure distributional and allocation efficiency through various strategies under the general guideline of distributional efficiency. This year's budget, characterized by the post-Covid-19 pandemic and the Russian aggression on Ukraine, poses a different dimension in the allocation efficiency with creeping inflation and job losses.
However, a few issues in the budget of FY23 could not address the fair distribution norm and thus need reconsideration by the authority. It appears that the budget is tilted towards the interest of the business community at the expense of consumers. Tax cuts on many counts, such as corporate tax and tax relief to exporters, augment the profit margin of the business community but simultaneously burden the fixed income earner with unprecedented inflation and job loss. Moreover, the safety net funds appear to be inadequate to deal with inflationary pressure.
There are arguments and counterarguments on the amnesty on laundered money. The amnesty can be salutary on the assumption of reverse flow arguments, as the finance minister stresses with examples from the United Kingdom, the United States, Canada, Germany, Malaysia, and Norway. However, the perspective is different in Bangladesh, where there are multiple loopholes in laundering money, and it relates to black money earned illegally. Money is transferred in dubious ways, and the earner failed to quote the ill-gotten money in the income statement for tax purposes. The trade body, Federation of Bangladesh Chambers of Commerce and Industry [FBCCI], and the policy research think tank, Center for Policy Dialogue [CPD], argued that it is unethical to float such a proposal and encourage the perpetrators in indulgence that breeds this type of corrupt practices. Instead of inflow, this may promote the infusion of black money in the system, fueling corruption and discouraging taxpayers from paying taxes at a higher rate on their legal income on the presumption that the amnesty would be there in such practices in the future. Another think tank, SANEM, questioned the system's loopholes in facilitating the exodus of the fund earned illegally. It is now a practice in Bangladesh of siphoning black money for more than three decades, though the magnitude of accumulation was minimal in the early years.
Another pertinent issue is the income tax exemption level and the investment rebate for the honest taxpayer. Every year several trade bodies and civil society beg for a higher exemption limit. The ideal tax exemption limit should be indexed with the inflation rate or any other parameter that correctly reflects the standard of living. Assume that the annual average inflation rate is 6 per cent; there will be an accelerator clause that the exemption level is raised by 6 per cent. Thus the exemption limit could be Tk.3,18,000 for FY 20 when this exemption level was initially set and you can calculate the subsequent income tax exemption level based on the accelerator clause of the prevailing inflation rate. The exemption level for the FY 23 based on this fixed rule could be Tk. 3,78,743. This fixed rule is convenient and saves time in designing discretionary measures prescribed in a specific year. Unfortunately, the one-time gallop deprives many taxpayers of the relief of inflationary pressures which tantamount to inflation tax on the honest taxpayer. The trend in the cost of living during the last few years manifests that a taxi driver's income could be taxable at the yearly income above Tk. 3 lakh. The uncanny element in FY23 is the higher level of exemption on perquisites [Tk. 10 lakh instead of Tk. 5 Lakh] gives an elbow room for tax dodgers in switching element A to element B to benefit from an exemption. When the authority cannot raise the legal ceiling for an honest taxpayer, it is unfair to encourage dishonest persons in such a swing.
Another problem is in the investment rebate and variance in rates each year. The previous investment rebate was based on 25 per cent of total income, so a taxpayer whose income was Tk.10 lakh is supposed to get a tax rebate of Tk. 37,500; fifteen per cent on the Tk. 2.50 lakh. The rate is slashed to 20 per cent from 25 per cent in FY23, now the same taxpayer would get the investment rebate of only Tk. 30,000; 15 percent on Tk.2 lakh. The investment rebate is thereby reduced by Tk.7,500. The postulation of a flat rate at 15 per cent in FY 23 now gives a higher margin for taxpayers with higher income and penalizes the taxpayer with lower income. The previous rate penalizes the taxpayer with higher income because of the slabs; 15 per cent up to Tk.15 lakh and 10 per cent for more than Tk. 15 lakh. It is preferable to stick to a static percentage rule at least for a decade and then rationalize the rate on the basis of changed parameters. Unfortunately, we observe changes in rates in each financial year.
The social safety allocation has been slashed to 11.2 per cent in the proposed budget from the existing 13.7 per cent; a blow to the Eighth Five Year Plan that stipulates about 2 percent GDP in the social safety net. The vulnerability of different groups of people needs to be critically assessed on diverse economic shocks for an effective roadmap of distribution in the future years, but the budget document lacks a detailed modus operandi on distribution. The budget makes no additional allowance for a cash grant of monthly Tk.500 per person for 57 lakh elderly and widows reeling under the increased price of bare necessities. Again Tk.223 crore is reduced from the subsidized sale of essential commodities that could harm low-income and fixed-income households. The per capita allocation for the core social safety net programmes must be inflation-adjusted.
The effectiveness of budget implementation warrants a balancing game in sectoral allocation among the different segments. The economy is facing several headwinds, and the uncertainty in recouping could derail the budget implementation speed. Social stability is a must in this critical moment of Bangladesh’s economy.
The writer is the Treasurer and a Professor at the School of Business and Economics, United International University. He can be contacted at obaidur@ eco.uiu.ac.bd
