Overview of National Budget FY2019-20

The National Budget for FY2019- 20 comes with a wide array of policy changes. Following the suit of the previous budgets, this fiscal’s budget also took ambitious revenue target, however, the growth is minimal. A number of new aspects are discerned in this fiscal’s budget, namely, the new VAT regime, the taxation on reinvestment opportunity of corporations (retained earnings or stock dividend), increase in tax deducted at source on interest from National Savings Certificate, cash incentives for inward remittance, introduction of crop insurance and the like. However, debates are there how some policy changes would impact certain industries and if some alternative policy would have actually addressed the key problem.

The national budget FY 2019- 2020 is worth of BDT 523,190 crore with a targeted GDP growth of 8.2% for FY 2019-20. Previous years target was 8.13%. This
budget is 18.2% higher than last year’s revised budget of BDT 4.42 trillion (USD 52.3bn). The government has set a revenue collection target of BDT 3.78 trillion (USD 44.7bn) leaving a budget deficit of BDT 1.45 trillion (USD 17.2bn), 5.0% of GDP.

The national budget has been brought out in the context of some cardinal economic and socio-economic events

Next year will be the terminal year of our 7th Five Year Plan; hence its implementation will get priority in this budget.

Structured around the spectacular achievements of our government during the last 10 years

Regional parity, human resource development, infrastructural development and quality of expenditure have been given priority in the allocation for the annual development program.

Implementation of the pledges made in our Election Manifesto of 2018 and achieve Sustainable Development Goals and their targets.

Increasing the domestic demand through consumption and investment, and increasing external demand by enhancing exports.

Double-digit growth - through timely implementation of all nationally important infrastructure projects including mega projects

Education, infrastructure development and planned urbanisation of villages are the priority of the government in the budget. Overall Budget is focusing on improving infrastructure for which public administration sector has the highest budget allocation followed by Education, transportation etc. The construction of the third terminal at the Hazrat Shahjalal International Airport, mass transit project or metro rail are in progress to enhance the infrastructure. Most of the major infrastructure projects are entering the final stage of implementation. Beside these ICT sector should get more investment in this financial year. Industrial gas supplier will enjoy benefit while importing, which will enhance industrial productivity. Bank company act will be introduced to facilitate merger or acquisition of banks to enhance banking sector.

How the export performance is likely to be in the wake of Budget FY 19-20?

This year budget is not only providing fiscal incentives to large industrial sectors like RMG but also to other emerging and new sectors having export potential. Bangladesh is world’s second-biggest apparel exporter after China. Garments account for 80% of exports revenue and other sectors including jute goods, home textile, footwear and frozen shrimps and fish. With the new proposal, the government kept an allocation of TK 4,000 crore as cash incentives for the export-oriented sector. Cash incentives are given to these export sectors in order to encourage exports in accordance with the export-led economic growth strategy of the country. Moreover, this proposal will also promote the underprivileged exports market like leather and jute that earns nearly one billion US dollar per annum.

Readymade Garments

1% cash incentive to RMG sector

Currently, four sectors of ready-made garments (Alternative to duty bonds and duty drawbacks, SME apparel exporters, Exporter of new garments product and RMG in new markets and Exporters to EU markets) enjoy cash incentive of 4% for emerging markets. An export incentive of 1% is proposed in the next fiscal year to the rest of the sectors of ready-made garments. Now, effectively, exports to traditional markets will fetch a cash incentive of 1%, and to non-traditional markets will earn an incentive of 5%. An allocation of additional Tk. 2,825 crore will be made in the budget for FY2019- 20 for this purpose.

Cash incentive or devaluation of currency?
However, it is debated that whether Readymade garments sector really needed a cash incentive or devaluation of BDT would have helped the industry to a greater extent. Cash incentive are provided to selected export sectors to encourage the export growth. Cash incentive are provided only for those exporters who do not avail bonded warehouse facility or the duty drawback facility. For RMG, cash incentives are applicable for emerging markets. All the countries except for Canada, the EU members and the US are considered as emerging markets. Emerging countries account for 15.2% of total RMG export. Devaluation of currency would have attracted more export for this sector, which could have more far-reaching effect on the export potential of this sector.

Tax Rate kept unchanged

Currently, the tax rate for readymade garments is 12%. The rate is 10% if there is green building certification.

 

Leather

Leather and leather goods industry is included in the list of sectors that are eligible to enjoy tax holidays on the basis of geographical locations at different rates for different periods of time.

Jute

VAT has been exempted for Jute based products, which will help the export potential of this sector.

Pharmaceuticals

To facilitate pharmaceutical exports 20% incentives will be provided to the exporter of pharmaceutical raw materials and laboratory reagents. Incentives for
exporter of API and laboratory reagent will encourage companies to initiate more exports of those products.

How the Budget FY 19-20 affected the SME sector?

The recently announced budget for FY 2019-20 provides a handful of measures for the burgeoning SME sector of Bangladesh. While there is certainly some initiatives:

Increase in VAT exemption threshold in annual turnover

The national budget offered exemption of VAT to small and marginal traders with an annual turnover upto BDT 50 lacs. Previously, the threshold was BDT 30 lacs.

Boosting women entrepreneurship

In a bid to bring more women into entrepreneurship landscape, VAT has been exempted on the rent of a business showroom run by women entrepreneurs.

Tax free turnover limit pushed up

Tax-free turnover limit has been proposed to increase to BDT 50 lakh from BDT 36 lakh, which is a step towards encouraging the youth of Bangladesh.

Input tax credit for the 15% VAT slab

Along with the standard VAT rate of 15%, the new VAT & SD Act 2012 gives out reduced rates of 5% (on 91 goods and services), 7.5% (on 12 goods and services) and 10% (on 20 goods and services). However, the input tax credit can be obtained through the VAT return only by those who pay 15% VAT. This discrimination in input tax credit may discourage the small and medium enterprises who are entitled to the new VAT rates.

Local textile industry to be impacted for VAT on sale of yarn

The budget imposed 5% VAT on sale of yarn for local markets. At the same time, the export-oriented yarn producers are exempted from VAT. After the imposition of the VAT, the yarn makers who are catering to the local markets mainly will have to face BDT 24 as VAT on sale of a kilogram of yarn in the local market. Therefore, manufacturing cost of men and women apparel items will go up. Owing to this, the yarn users will not feel encouraged to purchase local variety of yarn. As a result, the local yarn market will be dominated by foreign yarn.

Construction industry to suffer a huge blow

The budget imposed VAT on mild steel (MS) products at the rate of BDT 1,200 per tonne on those made from imported/locally re-rollable scrap and BDT 1,000 on those from billet or ingot. The MS Products made from meltable scrap and billet at the retail level will carry VAT of BDT 2,000. The retail price of MS rod will likely to witness an average price hike of BDT 9,000 per tonne, ascribing to the new VAT and tax measures and recent hike in gas price.

Benefits for local bakeries

Local bakeries will gain some advantage since the budget exempted VAT on the production and supply of bread, handmade biscuits and handmade cakes upto the value of BDT 150 per kilogram.

Motorcycle makers and assemblers to get boost

The budget provides continuation of the existing VAT and supplementary duty exemptions given to motorcycle makers and assemblers. The motorcycle market size reached approximately BDT 4,000 crore in 2018, with local manufactures catering to 40% of the total demand for motorcycles in Bangladesh. Having discerned the prospect of this sector, it is being identified as a thrust sector now.

Furniture manufacturers face increase in VAT

VAT on manufacturing of furniture will rise to 7.5% from 7%, which will discourage the small and medium scaled furniture manufacturers.

 

Impact of Budget on Digitalization

Increasing tax on mobile operator company from 0.75% to 2% level and proposition of further supplementary tax on any service on mobile phone
to 10% to 5%.

Increase in tax on SIM card from BDT 100 to BDT 200.

Custom duty will on smartphone will increase to 25% and VAT & surcharge exemption has been offered on mobile manufacturing companies.

Increase in VAT on ride sharing services from 5% to 7.5% level, income tax on rider’s income.

Adding 5% VAT on ‘Virtual Business’ which is popularly known as ‘E-commerce Business’

 

While Bangladesh is heading towards a digitalization vision, additional duty on smartphone will deter the low-income group to purchase smartphone. On the
other hand, VAT and Tax on e-businesses will have an adverse impact on the growth of these businesses. E-commerce is still at nascent stage of development and instead of giving them incentives, additional VAT and taxes are imposed.

How much additional costing e-platforms have to bear?

If a passenger pays BDT 100 for a ride in any ride sharing  platform, this year they will be paying BDT 107.5 with the new imposition of tax (last year, they used to pay BDT 105). Ride sharing companies of Bangladesh are currently having 18 million rides each year which means because of the increase in VAT, consumers will have to pay approximately BDT 18 crore for taking ride sharing service.