News and Update: IMF continues to pressure Bangladesh, wants further tariff cut, expansion of VAT

Nazmul Ahsan, NewAge, September 21, 2007

The International Monetary Fund has appreciated the budgetary measures of ‘tariff reforms’ through withdrawal of surcharge and zero duty from imports, but said further duty reduction is needed since trade regime is still complex. ‘A four per cent surcharge on imports (earmarked for infrastructure development) was consolidated into the tariff system, two supplementary duty rates were merged, and a number of goods were removed from the zero tariff band as part of a reform of the import tariff regime that aims to be revenue neutral,’ reads a report of the IMF, submitted to the finance ministry early September.

The report strongly recommended for further tariff reduction and expanding value added tax and elimination of tax and VAT exemptions. It also asked the government to remodel the VAT act and income tax ordinance, and stressed the need for separate entities for revenue collection and revenue administration. It also called for stopping tax holiday scheme after the current 2007-08 fiscal year. ‘With respect to trade liberalisation, nominal protection has declined gradually over three years, but the trade regime remains complex and, with nominal protection at 24 per cent, further tariff reduction is needed,’ says the IMF report.

It categorically said the government should form a tax reform commission to oversee tax collection and administration. The highest individual tax rate should be increased from current 25 per cent to 30 per cent to align it more closely with the corporate tax regime, which is now 40 and 45 per cent. The report asked the government to impose VAT on bank interest.

Revenue and finance officials, however, found most of the proposals unrealistic. The budget for 2007-2008 withdrew four per cent infrastructure development surcharge from import of above 2,600 finished and luxury goods, including foreign liquors, motor cars, apparels and toiletries. Besides, zero duty import facility was removed from above 400 industrial raw materials and machinery, which became subject to 10 per cent tariff in the current fiscal year. Furthermore, import duty on about 1200 items, mostly industrial machinery and raw materials, went up to 10 per cent from five per cent.

The measures instantly drew flaks from economists and trade leaders who viewed those would badly affect local industries and open the floodgate of cheap imports. But the government did not pay heed to the concerns voiced at different levels. Finance ministry officials said they are planning to establish a tax cell in the ministry, instead of two separate entities as prescribed by IMF to oversee the regulations relating to revenue matters and tax administration. The cell will be headed by a government secretary. ‘In that case, the NBR will be responsible only for revenue collection,’ a high official in the ministry told New Age.

NBR officials summarily rejected the IMF recommendation for further liberalising duty structure. ‘We have already cut tariffs significantly at the insistences of World Bank and IMF, and the local industry is bearing the brunt of those measures,’ a member in the revenue board told New Age.

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