Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI) congratulated Finance Minister A H M Mustafa Kamal for presenting his second national budget before the Jatiya Sangsad on Thursday for the financial year 2O20-2021 (FY21)1, said the chamber in a statement on Friday.
It is indeed a very challenging task for the Finance Minister to prepare a budget in the current domestic and global situation created by the Covid-19 pandemic. Over the last five months, the deadly novel coronavirus has completely changed the global and domestic social and business eco-system, it added.
With a vaccine and or a cure for the virus still to be found, in-person social and work-related interaction norms will remain changed and constrained. Without the full flow of interactions able to renew very shortly, the economy will take time to recover, it said.
This year, the budget cannot be like the usual budget of previous years. The FY21 budget is expected to address the normalisation of lives and livelihoods to a reasonably stable situation without being concerned much about deficits and growth targets. From a business perspective as well, the first priority of the budget must be to ensure the health and economic security of the citizens as far as possible; and secondly to infuse vitality in economic activities through the raising of aggregate domestic demand, the MCCI said.
Thereafter budget may be based on four main strategies, (1) to prioritise government spending on essential sectors while discouraging luxury expenditure, (2) creating loan facilities to help enterprises get back onto their feat, (3) expanding coverage of the social safety network, and (4) increasing money supply to the economy with the object of striking a right balance among multiple vital issues from raising aggregate domestic demand to health, education, growth, social safety and many other requirements.
The proposed budget of Tk.5,68,000 crore for FY21 is 8.56 per cent higher than the original budget (Tk.5,23,190 crore) and 13.24 per cent higher than the revised budget (Tk.5,01,577 crore) of the outgoing financial year (FY20).
The Chamber appreciated the Finance Minister for giving priority to agriculture, food security, and the health sector and expanding the coverage of the social safety net programmes.
MCCI feels that there should have been more focused indications in the budget for recovering jobs which have been lost due directly and indirectly to the Covid-19 pandemic: creating new jobs; and also to retain existing jobs in the labour market.
MCCI looked to the budget for measures to create means of livelihood opportunities for expatriate Bangladeshis who have been forced to return from abroad. Though there has been a reasonable increase in allocation of financial resources in priority sectors, a specific allocation for re-skilling and upskilling workers bearing in mind the probable changes to the working environment and new skill requirements would have been well-received.
In any event, it must be said that the benefits of enhanced allocations will not be fully derived until government enhances its capacity for implementation, as well as maintaining accountability and transparency.
Unfortunately, in a crisis situation, the weaknesses in governance and management capacity have been starkly brought forward, particularly in the health sector, it saqid.
MCCI also feels that the upcoming fiscal year (FY21) may be one of the most challenging years from the perspective of fiscal management due to the present economic slowdown caused by COVID-19, not just in Bangladesh, but also globally.
Revenue mobilisation will be a daunting task, given the various tax concessions and administrative forbearance that will have to be allowed to individuals and institutions in these very difficult times. During the current fiscal, the NBR revenue collection is likely to see a shortfall by nearly 25% or more; despite NBR acknowledging that, the current Budget has set a revenue target for the next fiscal with an increase of 8.6% which will be an extremely difficult target to achieve. As a result, ultimately tax compliant enterprises are likely to face severe pressure from the tax authority.
Besides, the budget did not present any indication in reforming and restructuring the tax administration to enhance its capacity to deliver the right kind of public services and to achieve the higher target set. MCCI as always advocates for meaningful structural changes in tax administration which will allow for an effective tax collection mechanism without burdening the few, while also bringing many others who earn high amounts of taxable revenue but do not pay the requisite tax into the net.
The budget deficit has been set at Tk.190,000 crore in FY21 (6.0% of GDP), up from the revised target of Tk.153,508 crore (5.5% of GDP) or the original target of Tk.145,380 crore (5.0% of GDP) the current fiscal year. In light of the disruptions caused to the economy already, and possible further disruptions, the budget deficit may be more than the target.
MCCI believes that the first priority of the Government being to ensure the health and economic security of the citizens as far as possible, the Government should not hesitate to increase the deficit if it is required for essential expenditure, infusing funds into the economy and raising aggregate domestic demand (we have not seen any specificity in the budget in regard to the latter).
It must be appreciated that the previous several years of prudential macro-economic management including keeping the budget deficit at or close to 5% has created the headroom which may now be used to expand the deficit in this emergent situation, if needed. At the same time, tightening its financial management will also yield a significant amount of savings if unnecessary over-spending, wastage, and other leakage of funds can be stopped.
Setting an ambitious revenue target may also distract the government's attention from trying to obtain as much low-cost funds as possible from multilateral and bilateral development partners, or pursuing innovative solutions such as the issuance of bonds.
MCCI strongly urges the government to use its diplomatic strength to pursue all the different sources of funding which are being made available internationally for Covid-affected countries, in order to reduce the pressure on domestic resource mobilization as well as keep the budget deficit duly funded.
The government looks to borrow Tk.84,980 crore from the banking sector to meet the budget deficit, which is slightly higher than the revised target of Tk.82,421 crore (original target of Tk.47,364 crore) this fiscal year.
Bank borrowing should be very carefully implemented so that the impact of crowding out does not further lower the already historically low private sector credit growth.
The Finance Minister may find it difficult to meet the bank borrowing target unless there is adequate money supply in the system. It must be recognized that the banks will bear a significant burden in implementing the Tk.101,117 crore stimulus packages, as well as a possible uptick in non-performing loans due to genuine financial difficulties caused by the Covid-19 situation. Bangladesh Bank will need to work closely with the banks, some NBFIs and effective NGOs as well as other stakeholders to ensure that the allocated funds reach the hands of cottage, micro and small enterprises, for which the current regulations are too cumbersome to comply with.
There is no alternative to raising the level of private investment including foreign direct investment (FDI) if Bangladesh is to confirm the status of middle-income country by 2021. An essential pre-requisite of high economic growth is a high and growing level of inward investment. MCCI believes the budget would have benefited if it included clear guidelines on actions to be taken to attract FDI, especially making an endeavour to tap the opportunities arising out of the pandemic situation.
MCCI's Comments on Budget 2020-2021
Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI) congratulates the Hon'ble Minister for Finance, Mr. A H M Mustafa Kamal, FCA, MP for presenting his second national budget before the Jatiyo Sangsad on Thursday, 11 June 2020 for the financial year 2O20- 2021 (FY21)1. It is indeed a very challenging task for the Finance Minister to prepare a budget in the current domestic and global situation created by the Covid-19 pandemic.
Over the last five months, the deadly novel coronavirus has completely changed the global and domestic social and business eco-system. With a vaccine and or a cure for the virus still to be found, in-person social and work-related interaction norms will remain changed and constrained. Without the full flow of interactions able to renew very shortly, the economy will take time to recover. This year, the budget cannot be like the usual budget of previous years.
The FY21 budget is expected to address the normalization of lives and livelihoods to a reasonably stable situation without being concerned over much about deficits and growth targets.
From a business perspective as well, the first priority of the budget must be to ensure the health and economic security of the citizens as far as possible; and secondly to infuse vitality in economic activities through the raising of aggregate domestic demand.
Thereafter budget may be based on four main strategies, (1) prioritize government spending on essential sectors while discouraging luxury expenditure, (2) creating loan facilities to help enterprises get back onto their feat, (3) expanding coverage of the social safety network, and (4) increasing money supply to the economy with the object of striking a right balance among
multiple vital issues from raising aggregate domestic demand to health, education, growth, social safety and many other requirements.
1 All figures are taken from the Budget speech. The proposed budget of Tk.5,68,000 crore for FY21 is 8.56 per cent higher than the original budget (Tk.5,23,190 crore) and 13.24 per cent higher than the revised budget (Tk.5,01,577 crore) of the outgoing financial year (FY20). Also, the proposed budget is 17.91 per cent of the upcoming GDP (Tk.31,71,800 crore).
The Chamber appreciates the Finance Minister for giving priority to agriculture, food security, and the health sector and expanding the coverage of the social safety net programs. MCCI feels that there should have been more focused indications in the budget for recovering jobs which have been lost due directly and indirectly to the Covid-19 pandemic; creating new jobs; and also to retain existing jobs in the labour market.
MCCI looked to the Budget for measures to create means of livelihood opportunities for expatriate Bangladeshis who have been forced to return from abroad. Though there has been a reasonable increase in allocation of financial resources in priority sectors (mentioned above), a specific allocation for re-skilling and upskilling workers bearing in mind the probably changes to the working environment and new skill requirements would have been well-received.
In any event, it must be said that the benefits of enhanced allocations will not be fully derived until government enhances its capacity for implementation, as well as maintaining accountability and transparency. Unfortunately, in a crisis situation, the weaknesses in governance and management capacity have been starkly brought forward, particularly in the health sector.
MCCI also feels that the upcoming fiscal year (FY21) may be one of the most challenging years from the perspective of fiscal management due to the present economic slowdown caused by COVID-19, not just in Bangladesh, but also globally. Revenue mobilization will be a daunting task, given the various tax concessions and administrative forbearance that will have to be allowed to individuals and institutions in these very difficult times.
During the current fiscal, the NBR revenue collection is likely to see a shortfall by nearly 25% or more; despite NBR acknowledging that, the current Budget has set a revenue target for the next fiscal with an increase of 8.6% which will be an extremely difficult target to achieve.
As a result, ultimately tax compliant enterprises are likely to face severe pressure from the tax authority. Besides, the budget did not present any indication in reforming and restructuring the tax administration to enhance its capacity to deliver the right kind of public services and to achieve the higher target set.
MCCI as always advocates for meaningful structural changes in tax administration which will allow for an effective tax collection mechanism without burdening the few, while also bringing many others who earn high amounts of taxable revenue but do not pay the requisite tax into the net.
The budget deficit has been set at Tk.190,000 crore in FY21 (6.0% of GDP), up from the revised target of Tk.153,508 crore (5.5% of GDP) or the original target of Tk.145,380 crore (5.0% of GDP) the current fiscal year. In light of the disruptions caused to the economy already, and possible further disruptions, the budget deficit may be more than the target.
MCCI believes that the first priority of the Government being to ensure the health and economic security of the citizens as far as possible, the Government should not hesitate to increase the deficit if it is required for essential expenditure, infusing funds into the economy and raising aggregate domestic demand (we have not seen any specificity in the budget in regard to the latter).
It must be appreciated that the previous several years of prudential macro-economic management including keeping the budget deficit at or close to 5% has created the headroom which may now be used to expand the deficit in this emergent situation, if needed.
At the same time, tightening its financial management will also yield a significant amount of savings if unnecessary over-spending, wastage, and other leakage of funds can be stopped. Setting an ambitious revenue target may also distract the Government’s attention from trying to obtain as much low-cost funds as possible from multilateral and bilateral development partners, or pursuing innovative solutions such as the issuance of bonds MCCI strongly urges the Government to use its diplomatic strength to pursue all the different sources of funding which are being made available internationally for Covid-affected countries, in order to reduce the pressure on domestic resource mobilization as well as keep the budget deficit duly funded.
The government looks to borrow Tk.84,980 crore from the banking sector to meet the budget deficit, which is slightly higher than the revised target of Tk.82,421 crore (original target of Tk.47,364 crore) this fiscal year. Bank borrowing should be very carefully implemented so that the impact of crowding out does not further lower the already historically low private sector credit growth.
The Finance Minister may find it difficult to meet the bank borrowing target unless there is adequate money supply in the system. It must be recognized that the banks will bear a significant burden in implementing the Tk.101,117 crore stimulus packages, as well as a possible uptick in non-performing loans due to genuine financial difficulties caused by the Covid-19 situation.
Bangladesh Bank will need to work closely with the banks, some NBFIs and effective NGOs as well as other stakeholders to ensure that the allocated funds reach the hands of cottage, micro and small enterprises, for which the current regulations are too cumbersome to comply with.
There is no alternative to raising the level of private investment including foreign direct investment (FDI) if Bangladesh is to confirm the status of middle-income country by 2021. An essential pre-requisite of high economic growth is a high and growing level of inward investment. MCCI believes the budget would have benefitted if it included clear guidelines on actions to be taken to attract FDI, especially making an endeavor to tap the opportunities arising out of the pandemic situation.
The budget could have indicated specific measures to draw FDI in required sectors like high tech agriculture, artificial intelligence, healthcare, manmade fibers, light engineering etc. Only tax incentives are not sufficient to attract potential companies to make fresh investments or divert existing investment from other countries to Bangladesh.
Besides, certain specific measures to ensure ease of doing business as well as reducing the cost and complexity of doing business, including enhancing the capacities of the investment regulators could have been indicated in the Budget which would have generated positive signal to potential investors.
In this regard, specific funding allocations should be made for BIDA, BEZA and other such government agencies to allow them to work out of the box in attracting investment. We have gained experience during this period of not-business as usual to see regulatory requirements are really essential. The lessons can be taken forward for appropriate regulatory reform.
Due to fall in exports and lower than expected growth in remittances (notwithstanding the record remittances received pre-Eid-ul Fitr, and as a result of the long and sustained worldwide lockdowns arising from the impact of COVID-19, the GDP growth rate in FY20 has been revised downward to 5.2 per cent from the original target of 8.2 per cent which appears to be rational. However, the present target of 8.2 per cent for FY21 is perhaps a very ambitious target considering the pandemic situation.
MCCI is of the opinion that the Government need not over-emphasize attaining GDP growth as against attaining financial and social well-being of the citizens in the current situation. If the required steps to infuse demand into the economy and enliven it are taken swiftly and effectively, MCCI is confident that under the leadership of the Honorable Prime Minister the GDP growth and other similar indicators will be back on track sooner rather than later once the effects of the pandemic To reach the next level of development, the country badly needs a skilled workforce.
The allocation for human resources development (Education) which is 5.11% more than that of the previous year’s allocation must be utilized in an efficient manner so that country’s potential huge unskilled or semi-skilled labour-force can be trained and up-skilled or reskilled as per the need of both the domestic and overseas labour markets.
MCCI also urges that the budget will make special allocation for National Human Resource Development Fund from other sources under human resource development head. The workers in the huge informal sector must be taken into account in this kind of activity.
To boost the capacity of agriculture sector and ensure better food security during the COVID-19 pandemic, allocation for the sector in the upcoming budget increased by 26.91 In this connection, the 0.6% minimum tax applicable to enterprises is another burden on new companies which cannot break even immediately upon commencing business. This should be removed, or at least not applied for the first 3-5 years of an enterprise’s commencement of business. MCCI takes note of the initiative for encouraging digital submission of tax return.
The proposal of tax rebate of Tk. 2 thousand to all the taxpayers who will file their income tax returns online for the first time is definitely an encouraging incentive to the individual taxpayers and smaller enterprises to submit their income tax returns online, which will in turn expedite the process of digital transformation of the Income Tax Department.
MCCI applauds the government’s decision to reduce the tax rate for individual tax payers with proposed minimum tax rate for individuals from 10 per cent to 5 per cent, and the maximum tax rate for individuals from 30 per cent to 25 per cent and also for increasing the tax free threshold for individual tax payers.
The lower segment of the taxpayers will be somewhat relieved because of this enhancement of the threshold, however the re-arrangement of the slabs may not provide the anticipated level of relief. In this connection it has also been noted that there is an increase in the tax on mobile telephone call charges and internet usage.
In any event this is contrary to the philosophy of Digital Bangladesh, but at this time of crisis when face to face or in person interaction is severely curtailed, this will deter families from connecting with the required frequency, as well as imposing further costs on smaller businesses which will be detrimental to their efforts to survive. This imposition should be reviewed at the very least for this upcoming fiscal year.
MCCI notes that as per newly introduced provisions under section 30(p) of the Income Tax Ordinance 1984, any promotional expenses of enterprises exceeding 0.5% of the disclosed turnover will become inadmissible expenses, hence the effective tax rate of the enterprise may increase by 3% to 5%, which will negate the corporate tax reduction for non-listed companies, as well as create an additional tax burden for listed and other companies.
Since promotional expenses are very essential for the growth of enterprises through the promotion of its products, this limit will directly and negatively impact all those companies and industries which are heavily dependent on such promotional activities. MCCI expresses its deep concerns about allowing indiscriminate opportunity of whitening black money by paying only 10% tax.
We have seen in the past that such opportunities to whiten black money have not yielded much results while unnecessarily raising questions about the probity of our financial and accounting practices. The cost benefit analysis will show a higher cost and almost no benefit.
This will seriously discourage the compliant tax payers, and in fact be seen as penalizing them. If at all, it should only have been allowed to those whose income is from legal sources but for some reasons, remained undisclosed. Again, the opportunity should have been given to investment in specific sectors only like employment creation, enhancing social safety net, innovation, technology transfer etc.
Allowing the entry of black money into the stock market may open up new problems for an already weak capital market. More importantly, allowing deposit of such money into bank accounts may bring Bangladesh’s banks into contravention of international moneylaundering laws and norms, thereby preventing them from interacting with international banks, which will be extremely detrimental to the economy. The deposit of such funds into bank accounts without any explanation should definitely not be permitted.
The Budget has provided for severe penalties for over-invoicing and under-invoicing in transactions which is appreciated. However, it is noted that even in proven cases of illegal transfer of funds outside the country, be it in cash or through banking or other channels, very little action has been taken to bring the known perpetrators to book and recover the moneys. Urgent action should be taken in this regard. In applying the new provisions, harassment of businesses for genuine transactions and disruption of business activities, particularly related to exports and imports, must be avoided at all costs.
The upcoming budget proposes to reduce the tax rate on the import of some of the raw materials used in the production of SME products. Duty and taxes on import of some products (e.g. nails, screws, small machinery parts, etc.) have also been proposed to increase to protect SMEs.
This is to be appreciated, but in the long run, policy interventions for enhancing productivity and competitiveness will be required to boost these sectors. The recovery of the global economy is still uncertain due to the ongoing pandemic.
Therefore, MCCI feels that there should be an interim evaluation of the budget after 3 months, and every 3 months for the next year, so that, if required, it can be restructured and revised accordingly. As there are still so many “unknown unknowns” to be dealt with in regard to the pandemic and its ongoing effect on society and economy, the need of the hours is flexibility to deal with situations and requirements swiftly as they arise.
MCCI, as the voice of responsible business, shares the optimism of the Hon'ble Finance Minister and the whole team serving the nation under the able leadership of the Hon’ble Prime Minister that Bangladesh shall recover quickly and strongly from this disrupted situation. MCCI extends its support and cooperation as always for the industrial and commercial development of the country and attaining the status of middle-income country by 2021.
