Proposed tax cuts from a 360 degree perspective

Finance Minister AHM Mustafa Kamal FCA, MP tabled his fourth national budget in parliament on June 9, proposing to significantly reduce the tax burden on businesses. The proposed base tax rate is 27.5%, a reduction of 2.5 percentage points from the current rate of 30%.

This base rate was 35 percent just a few years ago. The income tax rate for listed companies has also been reduced by the same percentage. All export-oriented industries will enjoy a corporate tax rate of 12% from the next fiscal year beginning July 1.

The corporate tax rate has been gradually reduced over the past two years. In addition, the Minister of Finance has proposed to reduce the anticipated income tax rates, the withholding tax, the anticipated rate of value added tax and, in certain cases, the anticipated VAT and the normal VAT. The proposed budget has generated enthusiasm in the business community.

The revenue generation target for the National Board of Revenue (NBR) for the coming year has been proposed at Tk 3.70 lakh crore, up from Tk 3.30 lakh crore for the current financial year. The new revenue generation target is 12.12% higher than the revised target for the outgoing fiscal year.

The finance minister’s budget speech did not mention how the perceived decrease in tax collection, due to the tax cuts, will be compensated.

Bangladesh’s business community has long called for a reduction in corporate tax, as our rates are higher than those of other foreign direct investment destinations. Economists and other experts have also advocated making corporate tax rates competitive to attract more FDI.

Ongoing trade tensions between the United States and China, resulting in a withdrawal of investment from China, have created an opportunity for us to attract investors. Proponents of the corporate tax cut also argue that the cut will boost profits, which will bolster private investment, growth and jobs.

The debate on lowering corporate tax is centuries old. One school of thought is in favor and the other against.

The arguments of proponents of corporate tax cuts rely on the neoclassical growth model associated with veteran US economist Robert Solow that long-term growth stems from exogenous technological progress. Fiscal policy can then “only” affect the level of gross domestic product and the transition to sustained growth. Lower corporate taxes encourage corporate saving and investment and therefore imply higher GDP in the long run.

The other school of thought holds that a rise in corporate tax can promote economic growth, by reducing the tax burden on labor and/or by financing productive public expenditure. In other words, economic growth is largely unaffected by the amount of tax the rich pay. Growth is more likely to accelerate if low-income people get a tax cut.

A corporate tax cut helps the wealthy at the expense of those with fewer resources, because services that would likely be cut benefit low-income people.

Proponents argue that if more money is put back into consumers’ pockets, spending will increase. Therefore, the economy will grow and wages will increase.

Ultimately, the result depends on where the cuts are made.

Given the arguments of both schools of thought, we can consider other common problems of our current socio-economic context.

First, is Bangladesh ready to compete with global competitors to attract FDI? To put Bangladesh in a competitive phase, tax cuts alone will not suffice. We also need to make our business environment competitive.

We will only be competitive when we can free businesses from bureaucratic hassles, when economic zones are available, when transport systems are facilitated and when we have robust physical infrastructure, uninterrupted energy supply and the availability qualified human resources. These developments will strengthen the business environment, attract foreign investment and increase domestic private sector investment.

For all of this to be available, we need to invest in these areas. Only the government can do that. The government needs money to make the investments. But the tax cuts will make the government weaker to invest in developments.

Is it guaranteed that the additional benefits of tax cuts will be invested in the economy? The answer is no. In particular, a country like Bangladesh, where tax evasion is rampant and Taka 68,000 crore is laundered abroad every year through bogus trade invoices, cannot expect profits companies are invested in the economy, which will therefore generate jobs and fiscal dynamism. We must first close the loopholes to prevent the embezzlement of money.

The second most important consideration for a corporate tax cut is that we are a net importing country. Our trading houses like to import and sell more than to manufacture. The export diversification strategy could not be effectively implemented despite considerable government efforts, due to a lack of adequate innovative entrepreneurship.

On the other hand, many local businesses are only designed to make a quick buck by producing and selling useless goods that suck money from low-income households by creating an environment that promotes cheap internationalism and rampant consumerism.

Many big companies are also destroying our traditions. Some are destroying micro-entrepreneurs by producing cookies, spice packets, crisps and puffed rice. Should we give them a wholesale tax cut or be judicious in giving tax breaks? Shouldn’t we be industry specific?

Our economy is still based on agriculture. More than half of job opportunities are created by the sector. Our country is rich in agricultural products.

In addition to staple foods, fish, dairy and poultry, we produce the tastiest fruits in the world. But the agro-food industries are not yet flourishing. Instead of using locally available raw materials, we manufacture goods by importing them from other countries.

Much of the population is unemployed while we produce goods that employ a tiny fraction of the employable population. Instead of offering wholesale tax breaks to all businesses, our policy should be designed to give a boost to agriculture-based industries and essential import-substituting industries, not novelties and luxury.

The author is the principal consultant of Dhaka Consulting Ltd.