Dr. Selim Raihan, Executive Director of the South Asian Network on Economic Modeling (SANEM), has stressed the urgent need to get Bangladesh’s economy back on track and to reinforce its foundations. Speaking at a press conference today at the BRAC Centre, Dr. Raihan emphasized the importance of institutional reform and outlined a specific roadmap for achieving it.

“Our economy was running on a track, but it has deviated. Without strengthening the economy, we will face more problems. What we primarily need is reform—institutional reform. For this, a specific roadmap for reform is necessary,” said Dr. Raihan, also a Professor of Economics at Dhaka University.

Reflecting on the period from 2010 to 2019, which he described as a golden era for Bangladesh, Dr. Raihan noted that despite the upward growth trend, underlying issues in the financial and banking sectors were overlooked, leading to current economic challenges.

The press conference aimed to present SANEM's observations on the proposed national budget for FY 2024-25, as introduced by the Finance Minister on June 6 during the National Parliament’s budget session. Dr. Sayema Haque Bidisha, Research Director of SANEM and Professor of Economics at Dhaka University, delivered a presentation.

Dr. Raihan raised three fundamental questions regarding the proposed budget: 

1. Do we have a proper understanding of the current economic crisis, and is this reflected in the budget?

2. Are the measures proposed in the budget sufficient to address the crisis?

3. What actually should have been done?

Dr. Bidisha highlighted several pressing economic challenges, with high inflation being the foremost issue. She also pointed to macroeconomic problems such as the negative trend in foreign exchange reserves and the overall depreciation of the taka against the dollar. According to SANEM, foreign exchange reserves have fallen to around $25 billion, which, considering various liabilities, is effectively less than $20 billion. 

SANEM noted that maintaining the dollar exchange rate had not positively impacted the market. The sudden increase in the dollar price has further strained the economy.

Regarding inflation, Dr. Raihan remarked that conventional monetary policy alone is insufficient to curb it. SANEM proposed a two-year economic plan to boost business confidence and private sector investment. Additionally, measures should be taken to restore depositor confidence in banks.

In response to a question, Dr. Bidisha stressed the need for both financial and non-financial incentives for remittance providers. On the matter of the taka’s value against the dollar, Dr. Raihan advocated for a smoother implementation of the crawling peg system, warning against administrative controls that hinder a market-based exchange rate.

Addressing the legalization of black money, Dr. Bidisha criticized the policy, stating, "This step is against the principles of our economic philosophy. It will discourage those who conduct their business honestly."

Dr. Raihan also commented on the increasing burden on lower and middle-income individuals, criticizing the proposed tax increase on mobile phones, which he described as essential items, while many wealthy individuals remain outside the tax net.

The SANEM budget research team included Dr. Selim Raihan, Dr. Sayema Haque Bidisha, Senior Research Associates Israt Hossain, Eshrat Sharmin, and Afia Mubasshira Tiasha; Research Associates Khandakar Iffah and Shafa Tasneem; and Research Assistant Nafisa Zaman.

MSH

Companies and organisations will be required to file tax returns on the income generated by employee welfare funds from the current fiscal year and pay a 27.5 percent tax on the earnings. 

The Income Tax Act 2023 incorporates the provision, lifting the tax exemption and amnesty on the compulsion to file returns for funds such as provident funds, gratuity funds and workers' profit participation funds maintained by the private sector.

The law, however, has exempted government-managed provident funds from taxation, raising questions.

TIM Nurul Kabir, executive director of the Foreign Investors' Chamber of Commerce & Industry, said there were many other avenues to collect tax.

"Employees benefit from provident funds after their retirement. So, the authority should not slap taxes on retirement benefit."

He said while levying the tax, the government has not treated provident funds of the private and public sectors equally.

"It is discriminatory," he said, adding that they would appeal to the tax authority for the withdrawal of the tax on income from provident funds.

Debabrata Roy Chowdhury, director for legal, regulatory and corporate affairs at Nestlé Bangladesh PLC, said the introduction of income tax on trust funds would lower the overall income from such schemes.

"This will have an adverse long-term impact on retired employees of private organisations."

Chowdhury urged the authority to address the issue in line with the spirit of the government's initiatives aimed at ensuring social security for private sector employees.

"The recent introduction of the universal pension scheme for private sector employees is a good example of that."

A senior official of the NBR, on condition of anonymity, said the income of government-managed provident funds was exempted in line with the Provident Fund Act 1925.

He said provident funds under the private sector had been historically exempted and there was no requirement to submit tax returns. As a result, it was unclear whether the funds were properly utilised.

"From now onwards, we will see proper disclosure."

The tax official said the contribution of payroll tax is about 3 percent of the total income tax although it should increase as the economy is growing.

Md Shahadat Hossain, a former president of the Institute of Chartered Accountants of Bangladesh, said income from investment in savings certificates, where people invest as a source of future earnings, is already taxed.

"From that perspective, the imposition of tax on provident and other employee welfare funds seems okay."

However, Towfiqul Islam Khan, senior research fellow at the Centre for Policy Dialogue, said social protection for private sector employees was low.

"Provident and other workers' welfare-related funds provide little social protection. The imposition of tax will increase inequality. But there can't be any discrimination in taxation between private and government provident funds."

Khan, citing the latest income tax law that replaced the Income Tax Ordinance 1984, said the NBR tried to find new avenues to increase tax collection and improve the nation's revenue-gross domestic product ratio, which is one of the lowest in the world.

"We can see the desperation of the tax authority to boost collection. This ultimately reveals the inability of the NBR to catch the tax evaders and illicit money makers."