Shaping up realistic policies for upcoming budget

Shaping up realistic policies for upcoming budget

  • 22.03.2025 15:28
  • tbsnews.net
  • Keywords: High operational costs, Low tax-to-GDP ratio, Inflation projection

Bangladesh's FY2025-26 budget aims to address economic challenges and align policies with national needs. Pre-budget discussions highlight investor concerns over shifting policies, while reforms focus on improving tax collection and streamlining customs processes. The budget seeks to balance operational costs with development spending to support post-LDC graduation and WTO compliance.

Alphabet Products

Estimated market influence

Context

Analysis of FY2025-26 Budget and Market Implications

Overview of Key Facts and Data

  • Total budget: Tk8.48 lakh crore (Tk848,000 crore)
    • Operating budget: Tk5.78 lakh crore (Tk578,000 crore)
    • Annual Development Programme (ADP) allocation: Tk2.70 lakh crore (Tk270,000 crore)
  • GDP growth estimate: 6%
  • Inflation projection: 6.5%
  • Fiscal deficit trend: Widening annually
  • Tax-to-GDP ratio: Low compared to countries like Vietnam

Business and Market Insights

1. Operational vs Development Expenditure

  • ADP growth: 1.8% in FY2024-25, projected at 1.8% for FY2025-26
  • Operating budget growth: 6.7% in FY2024-25, projected at 14% for FY2025-26
  • Subsidies allocation: Dominated by energy sector, interest payments, and public sector salaries

2. Tax Policy Reforms

  • Proposed reforms:
    • Separation of tax policy and tax management wings
    • Amendments to Income Tax Act 2023, Customs Act 2023, and VAT & SD Act 2012
    • Introduction of e-returns for government officials (already implemented in FY2024-25)
  • Advisory Committee on NBR Reforms: Established to implement tax policy changes

3. Export Strategy and WTO Compliance

  • Post-LDC graduation:
    • Smooth Transition Strategy (STS) formulated
    • Focus on four key export sectors: agro, leather, jute, and pharmaceuticals
  • WTO-compliant benefits:
    • Removal of direct cash incentives for exporters
    • Introduction of Duty Drawback facility for non-bonded warehouse users
    • Simplification of customs valuation process (Customs Valuation Rules, 2000 not yet enforced)

4. Bonded Warehouse Policy and Export Incentives

  • Current policy limitations:
    • Only 100% export-oriented industries benefit from bonded warehouse facilities
    • Partially export-oriented industries face restrictions under Import Policy Order 2021-24
  • Proposed measures:
    • Expansion of bonded warehouse benefits to partially export-oriented industries
    • Simplification of customs and tax processes

5. ESG and Recycling Industry

  • Global trends: ESG issues gaining importance, with countries offering incentives for recycling
  • Bangladesh's lag: High taxes (4% source tax, 1% AIT, 15% VAT) on waste collection and recycling
  • Recommendation: Reform tax system to prioritize recycling industry

6. Long-Term Effects and Regulatory Impact

  • Export diversification challenge: Limited progress despite policy efforts
  • Customs valuation issues:
    • Use of thumb rule (highest import price of last three months) contradicts GATT/WCO guidelines
    • Need to align bound tariffs with MFN rates
  • Tariff structure alignment: Process underway to remove duties exceeding bound rates

7. Competitive Dynamics

  • Export sector competition:
    • Pressure on industries to comply with environmental and governance standards
    • Need for R&D support, infrastructure development, and easier loan terms for exporters

Strategic Considerations

  • Investor confidence: Inconsistent policies and high operational costs hinder business growth and investment
  • Policy alignment: Streamlining tax policies, subsidies, and export incentives will be critical for sustainable growth
  • WTO compliance: Alignment with international trade norms essential for maintaining competitiveness

Conclusion

The FY2025-26 budget presents a pivotal opportunity to address structural issues in Bangladesh's economic framework. Strategic reforms in tax policy, customs valuation, and export incentives are crucial for fostering a business-friendly environment and ensuring a smooth transition post-LDC graduation.