Why sudden VAT increase amid high inflation?

For the past two years, the people of the country have been struggling against rampant high inflation. According to the Bangladesh Bureau of Statistics (BBS), the average inflation last year was 10.34 per cent. Although the overall inflation decreased slightly in September, food inflation remained above 10 per cent. BBS data shows that in December, food inflation was 12.92 per cent, while non-food inflation was 9.26 per cent.

Despite various measures taken by the government to reduce inflation over more than two years, there has been virtually no result. The cost of living for the people continues to rise. The disruption in the supply chain due to the anti-discrimination student movement led to inflation reaching 14.10 per cent. After the mass uprising, people had hoped that with the leaving of the fascist government, their cost of living would decrease. However, that hope was ruined as, at the start of the year, an additional burden of taxes and duties was imposed on them. The interim government has issued an ordinance increasing VAT and supplementary duties on more than a 100 products and services. The people of the country are not unaware that these increases in VAT are due to pressure from the International Monetary Fund (IMF).

On Saturday, January 11, it was reported that the ousted Awami League government had announced a budget of 7.97 lakh crore taka for the fiscal year 2024-25. The revenue collection target was set at 4.8 lakh crore taka. However, during the first five months (July-November) of the fiscal year, the revenue collected amounted to only 1.26 lakh crore taka, falling short of the target by 42,238 crore taka, a decrease of 2.62 per cent compared to the previous year. According to the National Board of Revenue (NBR), the increase in duties and taxes was necessary to raise an additional 12,000 crore taka in revenue.

Experts have pointed out that the government has taken the easy route of increasing taxes and duties to boost revenue, a move that has been met with widespread dissatisfaction, from the general public to business owners in the relevant sectors. The question has arisen whether the government could have addressed the issue in a different manner without making such a decision midway through the fiscal year. Economic experts suggest that tackling issues like money laundering, increasing capacity, reducing tax evasion, and controlling irregularities and corruption could have resulted in a solution without increasing VAT. However, they also note that even with these efforts, it would not have been possible to collect the 12,000 crore taka by June. Furthermore, raising income tax midway through the fiscal year does not result in increased collections, as it is based on the previous year's income. Thus, the government has chosen the simpler path of increasing duties and taxes.

The situation is far from ideal. With inflation already causing havoc in the market, the sudden hike in duties and taxes is bound to have a negative impact on the general public’s cost of living. Although economic advisor Dr. Saleh Uddin Ahmed has assured that these increased duties will not affect the prices of essential goods, economists argue that this is akin to denying the obvious. The government claims it wants to increase revenue, but it cannot deny that this will ultimately lead to higher costs for the public. Moreover, this sudden hike in duties and taxes has been imposed just before the holy month of Ramadan.

Upon hearing the news of the increased duties and taxes, people are already in distress. The market environment has become unstable, with prices of many products seeing a rise. Numerous political organizations, including citizen committee, are demanding the withdrawal of the ordinance that raised duties on over a 100 products. The public is calling for a reduction in indirect taxes by increasing direct taxes on higher income groups. This unexpected hike in duties and taxes is leading to growing discontent with the current government. We also urge the government to reconsider this decision to increase duties and taxes.