The International Monetary Fund (IMF) loan conditions dealing with raising tax-GDP ratio must be fulfilled to meet the government’s own mid-term plan for increasing domestic revenues, said Policy Research Institute (PRI)
The private think tank made the observations after analysing the IMF’s conditions tagged with its $4.7 billion loans to Bangladesh.
One of the key conditions is raising domestic revenues by additional 0.5 percent of GDP per annum in FY 2023-24 and in FY 2024-25 and 0.7 percent in FY 2025-26, the last year of the loan programme.
According to the IMF requirements, Bangladesh’s tax-GDP ratio should rise from the current 7.8 percent to GDP’s 8.3 percent in FY 2023-24, to 8.8 percent in FY 2024-25 and finally to 9.5 percent by FY 2025-26.
Bangladesh will need to mobilise Tk 560 billion additional domestic revenues by FY 2023-24 fiscal year, Tk 1,382 billion by FY 2024-25 and Tk 2,340 billion by FY 2025-26, PRI estimated.
But the government’s 8th five-year plan aims to enhance domestic revenue’s share in GDP to 12.3 percent, which is much higher than the current level and IMF-set targets.
Besides, the IMF also asked to put in place the National Board of Revenue (NBR) Compliance Risk Management Units in the customs and VAT wings by December this year for higher revenue mobilisation.
Citing that Bangladesh has one of the lowest tax-GDP ratios in the world and this has significant costs, he said, “Our current health spending of less than 1 percent of GDP stands poorly against the global standards of at least 3-5 percent of GDP.
"For low revenues, Bangladesh’s education spending of close to 2 percent of GDP is just half of the target. Similarly, the country’s spending on health is also very poor," PRI said.
"Bangladesh’s weak revenue generation abilities have kept its poor and vulnerable population groups underserved, failing to address the growing inequality in the society," it added.
The PRI thinks that the IMF conditions of 1.7 percentage points increase in the tax-GDP ratio over the next three fiscal years is actually a soft target, and thus its materialisation must not cause any complacency.
Rather, this should be considered as part of achieving our home-grown policy target, as set out in the 8th Five-Year Plan, of raising the tax-GDP ratio to 12.3 percent in FY2024-25.
PRI analysis showed that increasing the tax-GDP ratio by 5 percentage points (i.e., to fulfill the 8th FYP target) could increase economic growth by up to 3.3 percentage points and reduce the poverty headcount rate by up to 2.2 percentage points.
For this, PRI came up with a set of suggestions which includes cutting tax exemptions, increasing compliance with the personal income tax system and generating additional revenue to raise the tax-GDP ratio by 2.1 percentage points.
They also included short-term VAT reforms to increase tax-GDP ratio by up to 0.6vpercentage points. Additional reforms could increase this further in the medium to long term.
Also, increasing compliance with corporate tax could increase the tax-GDP ratio significantly.
“To achieve the Tax-GDP target, Bangladesh will need to carry out large-scale reforms, and policies should be executed. The reforms should range from policy, administration to tax system modernisation,” IMF said.
PRI Executive Director Dr. Ahsan H Mansur, however, said, "The IMF has acknowledged that this is not the time to increase tax, rather it has insisted on increasing social security at this critical moment."
He said given the current population size, the number of Bangladesh’s total taxable people may stand at 15 million as "there is a huge informal economy, which is very tough to be brought under the tax net."
In reply to a question, Dr. Mansur said the government won’t be able to meet the increased revenue generation target in a business as usual scenario.
PRI emphasised on increasing NBR’s capacity with the observation that the "tax regulator is not able to handle tax returns if submitted by 8.5 million TIN holders."
