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Finance Minister A H M Mustafa Kamal FCA, MP placed his fourth national budget in parliament on June 9, proposing reducing the tax burden on businesses significantly. The proposed base income tax rate is 27.5 per cent, a reduction by 2.5 percentage points from the current 30 per cent.
This base rate was 35 per cent only a few years ago. The income tax rate for the listed companies has also been cut by the same percentage. All export-oriented industries will enjoy a corporate tax rate of 12 per cent from the next fiscal year starting on July 1.
The corporate income tax rate has been gradually reduced in the last couple of years. Besides, the finance minister has proposed to cut the advance income tax rates, the tax deducted at source, advance value-added tax rate and, in some cases, advance and regular VAT altogether. The proposed budget has created enthusiasm among the business community.
The revenue generation target for the National Board of Revenue (NBR) for the coming year has been proposed to be Tk 3.70 lakh crore, up from Tk 3.30 lakh crore for the current fiscal year. The new revenue generation target is 12.12 per cent higher than the revised goal in the outgoing fiscal year.
The finance minister’s budget speech did not mention how the perceived decrease in tax collection, due to the reductions in taxes, will be made up.
The business community of Bangladesh has long demanded a corporate tax cut since our rates are higher compared to other foreign direct investment destinations. Economists and other experts have also advocated for making corporate tax rates competitive to attract more FDI.
Persisting trade tension between the US and China, which is prompting a withdrawal of investments from China, has created an opportunity for us to attract the investors. Advocates of corporate tax reduction are also arguing that the reduction will increase profit, which will enhance private investment, growth and employment.
A debate on the corporate tax cut is age-old. One school of thought opines in favour and the other against it.
The arguments of corporate tax cut advocates are based on the neoclassical growth model associated with the veteran US economist Robert Solow that long-term growth arises from exogenous technological progress. The tax policy can then ‘only’ affect the level of gross domestic product and the transition to steady growth. Lower corporate taxes encourage corporate savings and investments and so imply higher GDP in the long run.
The other school of thought argues that higher corporate tax can promote economic growth, by shifting the tax burden away from labour and/or by financing productive government spending. In other words, economic growth is largely unaffected by how much tax the wealthy pay. Growth is more likely to accelerate if lower-income earners get a tax cut.
A corporate tax cut helps the rich at the expense of those with fewer resources because the services that would likely get cut are beneficial to those in a lower-income bracket.
Proponents argue that if more money is put back into consumers’ pockets, spending will increase. Hence, the economy will grow and wages will rise.
At the end of the day, the outcome depends on where the cuts are made.
Considering arguments from both schools of thought, we may consider some other prevalent issues of our current socioeconomic context.
First of all, is Bangladesh ready to compete with global competitors for attracting FDI? To place Bangladesh in a competitive stage, tax cuts alone will not help. We need to make our business environment competitive too.
We will be competitive only when we can make businesses free of bureaucratic hassles, economic zones are available, transportation systems are eased and have a robust physical infrastructure, uninterrupted energy supply and availability of skilled human resources. These developments will make the business environment stronger, attract foreign investments and augment domestic private sector investments.
To make all of these available, we need to invest in these areas. Only the government can do so. The government needs money to make the investments. But tax cuts will make the government weaker to invest in the developments.
Is it guaranteed that incremental profits from tax cuts will be invested in the economy? The answer is no. Particularly a country like Bangladesh, where tax avoidance is rampant and Tk 68,000 crore is laundered abroad annually through trade mis-invoicing, cannot expect that the incremental profits in business houses will be invested in the economy that will consequently generate jobs and tax buoyancy. We must stop the loopholes to prevent the siphoning off money first.
The second most important consideration for a corporate tax cut is that we are a net import country. Our business houses love to import more and sell than to manufacture. The export diversification strategy could not be implemented effectively in spite of huge government efforts, because of a lack of adequate innovative entrepreneurship.
On the other hand, many of the local businesses are only designed to make quick money by producing and selling unnecessary goods that are sucking money from low-income households by creating an environment that promotes cheap internationalism and rampant consumerism.
Many of the big businesses are destroying our traditions too. Some are destroying micro-entrepreneurs by producing cookies, packet spices, chips and puffed rice. Should we provide them with a wholesale tax cut or be judicious in providing tax breaks? Should we not be industry-specific?
Our economy is still agriculture-based. More than half of the employment opportunity is created by the sector. Our country is rich in agricultural produce.
In addition to staples, fisheries, dairies and poultries, we produce the tastiest fruits in the world. But food-processing industries have not flourished yet. Instead of using locally available raw materials, we are manufacturing goods by importing them from other countries.
A large portion of the population is unemployed while we are producing goods that are employing a tiny fraction of the employable population. Instead of providing wholesale tax breaks to all of the business houses, our policy should be designed to give a boost to agriculture-based industries and essential import-substitute industries, not fancy and luxurious items.
The author is the lead consultant of Dhaka Consulting Ltd.
(TDS)
