Why sudden VAT hike amid soaring prices?

While vegetable prices have started to decrease slightly in the middle of winter, the prices of essential goods are still out of control. The prices of rice, lentils, and oil are beyond reach for most people. Recently, the price of chicken also increased. Amid all this, there is bad news for consumers at the beginning of the new year: VAT has been increased on 65 goods and services. This sudden VAT hike has been imposed under pressure from the IMF. Moreover, midway through the current fiscal year (2024-25), the government has taken the step of increasing VAT, supplementary duties, and other taxes to boost revenue. Initially, 15 per cent VAT will be imposed on 65 types of goods and services. This news is concerning for ordinary people who are already suffering from the pressure of inflation.

On Wednesday (January 1), a proposal to increase VAT was presented at a meeting of the Advisory Council at the Prime Minister’s Office. The Advisory Council has approved the proposal. According to sources, the order to raise VAT will soon be issued by the VAT Department of the National Board of Revenue (NBR), pending review by the Ministry of Law. Reports published on Thursday (January 2) revealed that the 15 per cent VAT will be imposed not only on sectors like restaurants, clothing, and hotels but also on production sectors such as biscuits, pickles, CR coils, mattresses, transformers, tissue paper, and others. Furthermore, a 15 per cent VAT increase is being proposed on the cost of making driving license cards by the Bangladesh Road Transport Authority (BRTA).

In the current economic context, the government is facing increased debt pressure, and thus, needs more revenue. To raise revenue, the government has decided to increase VAT and customs duties on various goods and services. As a result, the financial burden on the middle and upper-middle classes will increase, which is true. Moreover, our revenue-to-GDP ratio is very low, and it needs to be increased. This requires medium-term initiatives to raise direct taxes. However, it is essential to ensure that ordinary people are not adversely affected during this period of high inflation.

Although the economic advisor, Salehuddin Ahmed, has commented that the increase in VAT and duties will not significantly affect the prices of essential goods, it is hard to justify how increasing VAT by 15 per cent on 65 goods and services will not impact consumers. While avoiding the added VAT by not eating out, not buying clothes, or not traveling might be possible, the truth remains that both consumers and sellers will be negatively affected. This will have an adverse impact on the overall economy, which cannot be overlooked.

Particularly, the lower-income and middle-class people will be the most affected. If the government had increased VAT on fewer items at a lower rate instead of a 15 per cent hike on so many goods, the public might have felt some relief. Until now, a 5 per cent VAT was imposed on bills at air-conditioned or AC restaurants. A sudden 15 per cent hike is a huge blow, and it will certainly reduce the number of customers in restaurants. Similarly, travel and other luxury services will also see a decline. Instead of increasing taxes across the board in such a manner, the government could have focused on improving tax collection. How wise it is to increase taxes under the IMF's conditions, taking loans, and burdening the public, will become clear in the future.