IMF to step up pressure to increase tax collection

The International Monetary Fund is set to tighten its grip on the Bangladesh government over its dismal revenue mobilization by making the remaining disbursement of funds under the $4.7 billion conditional on meeting the collection target of taxes.

Until now, the tax collection target was not a quantitative performance criterion (QPC), mandatory criteria that the country must meet to release disbursements under the loan program.

During their latest visit to Dhaka, the IMF staff mission indicated that it would make tax collection a QPC objective, the Daily Star learned from Finance Ministry officials involved in the negotiations.

The staff mission visited Dhaka last month to assess the country’s performance before the release of the fourth tranche of the loan.

“Bangladesh’s low tax-to-GDP ratio requires urgent tax reforms to establish a fairer and more transparent system and sustainably increase revenue, focusing on streamlining exemptions, improving compliance and unbundling policy tax administration”, declared the staff mission at the end of the meeting. the visit.

The IMF’s focus on increasing tax collection comes after recommendations for measures to increase revenue collection were not reflected in the budget for FY24-25.

The measures include reducing corporate income tax exemptions and depletion deductions, increasing previously reduced VAT rates on several products to the statutory rate of 15 percent, introducing an additional tax bracket personal income tax for high-income earners and increasing tax rates on tobacco and certain products. products.

According to IMF estimates, the tax measures will increase Bangladesh’s tax-to-GDP ratio by 0.5 percent this fiscal year.

Additionally, Bangladesh has so far failed to meet tax revenue collection targets under the program, which began in January 2023.

It is unlikely that the country will be able to meet the target set for this financial year, given that tax collection in the first five months of the financial year declined by 2.62% year-on-year, at Tk 130,185 crore.

The tax revenue collection target set by the IMF for the first half of the financial year is Taka 215,120 crore. And for the entire fiscal year, the target is Tk 478,050 crore.

To meet the target for the full year, the government needs to increase its tax revenue by 29% compared to revenue in the 2023-24 financial year.

Subsequently, the mission suggested to the Bangladeshi authorities to take several preliminary steps, including a number of measures in the revenue sector, to demonstrate their commitment to the program before submitting the proposal for the release of the fourth tranche to the IMF Board of Directors next month.

In this context, the BNR decided on Thursday to increase the value added tax and additional duties on almost 100 goods and services, an unusual policy measure in the middle of a budget year.

As a result, consumers will have to pay up to 15 percent VAT or SD, up from 5 percent previously, for goods and services.

Such an unpopular decision was made in haste, at a time when the country’s overall inflation was continuously reaching double-digit levels, said Zahid Hussain, former chief economist at the World Bank’s Dhaka office.

Inflation averaged 10.87 per cent during the first half of the 2024-25 financial year, according to data from the Bangladesh Bureau of Statistics.

“Most likely, the IMF will include the tax revenue collection target in the QPC, which is why the government suddenly imposed these tax measures.”

It is a bad time for Bangladesh to see the tax revenue collection target being converted into QPC, he said, adding that the sudden tax measures including increase in VAT and SD on several products , will definitely put more pressure on ordinary people.

The government should negotiate with the IMF so that the multilateral lender does not include the tax revenue collection target under the QPC for the time being, Hussain added.

Talks are underway to revise downward the tax collection target in view of the July uprising, which hampered revenue mobilization and economic activities, Finance Ministry officials said.

Under the existing lending program for Bangladesh, the IMF has set three QPCs: minimum net international reserves (MNIs) and ceilings for fiscal deficits and accumulation of external payment arrears.

In addition, there are four indicative objectives (ITs) which, although not mandatory, carry considerable weight in assessing program performance.

Tax collection is so far an IT for Bangladesh under the program.