Where does fund to clear taxes come from?

With $4.7 billion loans, the International Monetary Fund (IMF) has tagged conditions to increase the tax-to-GDP ratio by 0.5 percentage points in fiscal year 2024, followed by 0.5 percentage and 0.7 percentage points in FY25 and FY26 respectively.

At these percentage points, the National Board of Revenue (NBR) will have to collect an additional tax of Tk234,000 crore over the next three fiscal years.

To this end, instead of tax exemptions, NBR officials are trying to meet the required tax deficit and urging the ministries to allocate money in the budget in terms of financial value of exemption in the sectors and services under their authorities and clear all sorts of duties and taxes from the budget.

Experts termed it accounting that will not help raise the net tax-to-GDP ratio and revenue collection as there is no such situation to increase ministry budget allocation. Instead, the government will have to focus on rationalisation of exemption soon, curbing tax evasion and controlling unnecessary expenditure.

The NBR revealed their decision regarding the budget allocation in some meetings between different ministries and divisions.

However, some ministries are against the NBR decision as they find it difficult to allocate budget because the overall budget will be increased later and the finance ministry is also facing paucity of fund release to the ministry.NBR’s former chairman Abdul Majid echoed the same saying, “Ministries should adjust the taxes for their project implementAtions and organisations under their authorities. There is no alternative but to raise the tax-to-GDP ratio and fulfill the IMF’s conditions.”

Commenting on the matter, economist and executive director of Policy Research Institute (PRI) Dr Ahsan H. Mansur said, “It will be accounting to raise the tax-to-GDP ratio like loan rescheduling to reduce non-performing loans (NPLs), but it will not increase net revenue collection and tax ratio. The decision will also raise government expenditure amidst crisis.”

“Already, the revenue board is doing the same thing regarding the development budget. The NBR gets 25 per cent tax and VAT from development budget, so if there is budget of around Tk 2 lakh crore a year, the board gets Tk 50,000 crore without any work.”

“The actual revenue collection by the NBR is more or less than we see. The NBR, Tariff Commission or Ministry will have to rationalise the exemption soon and keep political involvement away from taking decisions on exemption or lifting it so that the tax is raised to meet IMF conditions,” Mansur continued.

Replying to a question on how does the ministry budget allocation help ensure accountability, Mansur said, “It is a good move that will increase responsibility of the ministries, but in most cases, accountability is not ensured.”

Usually, the budget allocation comes from the revenue, domestic borrowing or foreign loans. But in the current situation, ministries need budget from other resources to boost revenue.

However, the country is also facing pressure to repay foreign debt taken from the development partners. In FY23, Bangladesh has to repay more than $2 billion foreign debt.

Bangladesh repaid 2 billion of foreign debts, including $1.5 billion principal amount and $491 million interest, according to the data of the Economic Relations Division (ERD).

Bangladesh will face maximum pressure in repaying debts by $2.5 billion in FY-2026-27, FY2027-28 and 2028-29, according to a senior ERD official.

In the first seven months of FY23, the government borrowed Tk 46,048 crore from the central bank to meet the budget deficit and repaid around Tk 11,089 crore loan to the commercial banks.

Government takes loan from the central bank to smooth the country’s money circulation system as the commercial banks are facing liquidity crunch. So, there are toughest situation to raise the budget allocation for the ministries to pay duties and taxes to the NBR that helps increase the tax-GDP ratio.

Even the revenue board falls short of target by more than Tk 17,170 crore in the first seven months of the current fiscal year. The NBR officials fears of Tk30,000 crore shortfall against the actual target of Tk370,000 for FY23.

Zahid Hussain, former lead economist of the World Bank Dhaka office said, “In a bid to meet the budget deficit, this year the government borrowed money from the central bank that may fuel inflation in the coming days.”

“The government needs to control financing and public expenditures and adjust to the revenue collection amidst the economic crisis,” he added.