VAT hike without proper evaluation risks economic backlash

Economists and business leaders have warned that the interim government's decision to increase VAT and customs duties without thorough evaluation will fail to generate the desired revenue. 

Instead, it risks reducing consumption, harming businesses, exacerbating inflation, and increasing the cost of living for ordinary citizens, making daily life increasingly difficult.

This concern was raised during a roundtable discussion titled 'Additional Tax Burden on Consumers: What to Do to Overcome It' held on Wednesday (February 12). The event brought together prominent figures from academia, industry, and civil society to deliberate on the implications of recent tax hikes.

Khondaker Golam Moazzem, Research Director of CPD, highlighted a critical issue in Bangladesh's tax system, stating that 67% of individuals earning crores annually remain outside the tax net. Despite two-thirds of high-income earners avoiding taxation, the government has chosen to widen the tax burden rather than expanding the tax base. 

"Rather than increasing VAT rates," he argued, "those currently outside the tax net should be brought under it. Long-term reforms are necessary, and this government must lay the groundwork for sustainable changes." 

He cautioned against further VAT increases in the next budget, urging policymakers to create a business-friendly environment instead.

Former Director General of BIDS Dr Mustafa K Mujeri criticised the timing of the VAT hike, describing it as a "wrong decision at the wrong time." He noted that the economy had largely stagnated under the interim government, with no significant progress in six months. 

"Increasing VAT mid-year will only worsen inflationary pressures and harm businesses," he remarked. Mujeri also questioned whether the interim government, which lacks electoral legitimacy, has the authority to implement such fundamental policies, emphasizing the need for proper impact assessments before taking drastic measures.

Policy Exchange Bangladesh Chairman and CEO Masrur Riaz echoed similar sentiments, questioning the appropriateness of implementing VAT reforms now when inflation is already affecting all classes of society. "Is this the right time to unify VAT rates?" he asked, pointing out that businesses and consumers alike have been struggling under rising costs for over two years. 

He stressed the importance of preparing stakeholders with a clear roadmap before altering tax structures. "The IMF may have pressured the government, but hasty decisions will backfire," he warned.

BKMEA President Mohammad Hatem drew attention to ongoing extortion practices, despite regime change. "While we hoped for reform, extortion continues in markets like Jatrabari," he said. Unless these illicit activities are curbed, inflation will persist, and essential goods will remain unaffordable. He urged immediate action to stop such practices, warning that failure to do so would undermine efforts to stabilize prices.

Economist MM Akash criticised the government's economic policies, stating that halting truck sales and imposing new tax measures will deepen the budget deficit and limit the government’s ability to fund social security programs. "Real income is declining, and people are questioning the legitimacy of this government. Since you are an unelected interim government, you do not have the right to implement fundamental economic policies. If the political economy is unstable, any economic impact assessment becomes meaningless," he argued.

Rezaul Hasan, former NBR (VAT) member, noted a shift in public attitude toward taxation. "In the past, people resisted paying VAT and taxes, but now they are more willing. However, VAT collection has not yet reached its expected level. The goal should be to establish a business-friendly VAT structure, but we are not there yet," he said.

Ahsan Khan Chowdhury, Chairman and CEO of PRAN-RFL Group, emphasised the need for rationalised tax and VAT rates to ensure economic stability. "For the country to progress, we need an environment where businesses can thrive, create jobs, and generate revenue. The government must engage more with the private sector instead of imposing informal tax hikes. We want to collaborate with the NBR to expand the tax net rather than burden existing taxpayers," he suggested.

BAPA President MA Hashem expressed fears that increased taxes would lead to higher food prices, disproportionately impacting marginalised groups. "Processed foods like biscuits and cakes, staples for many, will become costlier," he explained. Farmers and low-income labourers face direct consequences, underscoring the need for careful consideration of tax policies affecting daily necessities.

Bangladesh Auto Biscuit and Bread Manufacturers Association President Shafiqur Rahman Bhuiyan  criticised the interim government for neglecting longstanding demands to reduce VAT on essential goods. "We’ve protested for a month to lower VAT, yet our pleas seem ignored," he lamented. Comparing Bangladesh to developed nations like England, where food products are exempt from VAT, Bhuiyan called for similar exemptions to protect nutritional security, especially among children and low-income households.

Former DCCI President Ashraf Ahmed highlighted the disparity between registered taxpayers and actual contributors. With 15 million businesses nationwide, only 5,00,000 are VAT-registered, and fewer still—around 40,000 companies—pay VAT consistently. Among these, just four to five thousand firms contribute over Tk 1.5 billion annually in VAT. 

Ashraf emphasised the growing pressure on compliant businesses and advocated for widening the tax base instead of raising rates.

Addressing traders ahead of Ramadan, CAB Vice President SM Nazer Hossain urged them not to exploit the festive season by hiking prices. "Ramadan essentials, including items affected by recent tax increases, must remain accessible," he stated. His appeal aimed to prevent shortages and price spikes, ensuring consumer comfort during the holy month.

Faria Yasmin, Chief Business Officer (CBO) of ACI Foods, warned that the current VAT hikes could push key food products out of reach for lower and middle-class families. "Biscuits, juices, and other staple items will exceed the purchasing power of many, jeopardizing child nutrition and overall health," she said.

Participants agreed that expanding the tax base through inclusive policies would yield better results than indiscriminate rate hikes. They urged the government to prioritize consultations with businesses and consumers, fostering a collaborative approach to fiscal management. 

Moderated by Jago News Acting Editor KM Zeaul Haque and hosted by Chief Reporter Ibrahim Hussain Ovi, the roundtable featured contributions from notable personalities, including: Saif Uddin Nasir, Managing Director, SMC Enterprise Limited, Mohiuddin Rubel and Rajib Chowdhury, former directors of BGMEA, Daulat Akhter Mala, President, Economic Reporters Forum (ERF), and Saiful Hossain, former banker.