The tax exemption limit for general taxpayers remains at the same level of Tk 250,000 for the last three years, the last change being in the Finance Act 2015. The lowest tax bracket also remains at 10%. The finance minister has shown a correlation between per capita GDP and tax free limit to justify the limit remaining unchanged. To my mind, this is an apple and orange comparison. The per capita GDP is derived from the income of the entire population including more than 91% of the population who are either not required to pay tax or are evading tax.
The reality is that inflation has hovered in the range of 6 to 7% in the past three years. Using a compounded rate of 6%, the tax exemption limit should have increased by 20% to BDT 300,000.
If we look around in the neighbouring countries to understand the tax free limits and the lowest rate of tax, we see a different picture. In India, the tax free limit is INR 250,000 which at current rate of exchange stands at BDT 325,000 with the starting tax rate of 5%. In Pakistan, the tax free limit is 400,000 Pakistan Rupee 400,000 (equivalent BDT 310,000) and a starting tax rate of 2%. In Thailand, the tax free limit is 150,000 Thai Baht (equivalent BDT 355,000) and a starting tax rate of 5%. If we turn our heads towards the west to a developed economy such as UK, the tax free rate is 11,500 British Pound (equivalent BDT 12,00,000).
In fact, there is no cheer for the low and middle class so far as tax is concerned. Despite inflation, tax exemption in respect of house rent allowance, transport allowance and medical allowance remains the same. Tax exemptions are given on the premise that the individual is spending at this level. When the spending level goes up but exemption remains the same, he ends up paying higher tax but struggles to find the source from where to pay the tax since his spending has gone up due to inflation.
It is often said that education is an essential prerequisite for creating a skilled workforce that provides the backbone to economic development. The ironical part is that the current tax laws do not provide any exemption for education allowance nor is a part of investment allowance.
The new VAT Act that is due to take effect from 1 July 2017 has raised considerable concern both for corporate as well as individuals. Earlier VAT was levied on multiple rates on a truncated basis for more than 80 goods and 38 services. The new VAT law provides for application of a single rate of 15% with the facility to take full rebate. Provision also exists for a number of products that are exempted from VAT.
The debate that is raging now is whether the new VAT law will increase the cost of goods and services. It is evident that there will be cost increases across many sectors that is bound to impact the common man although the honourable finance minister maintains that the new VAT will not cause prices of goods to rise as there will be concessions to small and medium firms, and VAT exemptions to 1042 items, rising from 536 items under the currently effective VAT Act 1991.
Let us look at some of the areas that will impact the common man.
Currently, truncated VAT of 5% is levied on electricity. This will go up to 15%. Also, one will be required to pay more for furniture and plastic goods. Energy saving lamps and tube lights to light the house are expected to become more expensive with implementation of the new VAT Act.
In addition, people will also pay 15 per cent VAT for repair and maintenance of their cars at workshop, eating at restaurants, buying apartments, paper, exercise books as well as tissue papers. The new VAT Act would also have made sending children to English medium schools more expensive. Thankfully, the honourable High Court has cleared that English medium schools will no longer be subject to VAT in line with zero VAT in other educational institutions.
Low income groups will also have to pay more VAT for biscuits and bread since leading biscuit manufacturers have warned it will not be possible to claim rebate on bread and biscuits as the raw materials of these processed foods are exempted from VAT. Fast food chains will become more expensive with 10% additional VAT in addition to 15%.
Prospective bride grooms now face a bleak future with cost of jewellery expected to go up with imposition of 15% VAT against the current truncated rate of 5%.
Flats will now become more expensive. VAT on sale of apartments will go up to 15 per cent VAT from the present 1.5 per cent-4.5 per cent depending on size of flats. At the same time, cost of two key building materials such as rod and bricks will also go up. Currently, VAT is charged on rods on a low tariff value that will change to transaction value when the new VAT law goes into effect. In the coming months, individuals will have to pay nearly Tk 7,500 for each tonne of rods against Tk 900 per tonne i.e. an increase of more than 8 times!! On the other hand, VAT for each piece of brick is likely to go up 5 times from the current Tk 0.22-Tk 0.32 per brick to more than Tk 1 per brick.
The construction industry is worried of increase in production costs owing to increase in VAT on electricity, gas and other utility. This may further push up cost that will dampen construction activity and demand. The real estate sector is already going through sluggish demand with more than 20,000 unsold flats. There is knock off effect on related sectors such as cement, bricks, paints, architects and engineering firms, electricity cable and appliances, furniture, etc.
The government however, maintains that prices will not rise as businesses would be able to claim rebate, which is not given to products and services where multiple rates are applied now. Consumers fear that the rebate will not be passed on to the consumers. On the other hand, businesses said it will be tough for small and medium businesses to maintain accounts in line with the rules and claim rebates. Currently, VAT is generally restricted at manufacturers’ level. Extending this to the retail level requires a huge change management exercise with increased cost of doing business.
Unfortunately, logic and reasoning takes a back seat when less than 10% of the population pays tax and NBR is faced with the arduous task of increasing revenue by more than 30% when GDP increase is in the range of 7%.
The low and middle income population is already at their wit’s end on how to make ends meet faced with this relentless inflation. Income levels are rising at a much lower level on all fronts faced with sluggish private sector growth, the malaise in the capital market and the low rates of bank interest. Let us hope that rising taxes do not pose to be the last straw, and that better sense will prevail with the authorities.
* Masud Khan is chief financial officer, Lafarge Holcim Bangladesh Ltd