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News Analysis
IMF's misdirected reform?
Shamsul Huq Zahid

          The role of the International Monetary Fund (IMF) fits in well with what has been said in a popular Bengali spiritual song --'Tumi sarpa hoiya dangshan karo oja hoiya jharo'.
The Fund, according to a news report, has, of late, advised the government to withdraw all forms of tax incentives to recoup revenue losses and improve the existing tax-GDP ratio, which is one of the lowest in the region.
The IMF advice came following a report submitted to it by the National Board of Revenue (NBR) explaining the details of the incentives given to various sectors of the economy, including tax holiday, tax exemption, rebates, depreciation benefits and cash incentives.
According to the NBR report, the revenue loss of the government on account of tax incentives amounted to about Tk. 11 billion. And the beneficiaries of the same include the new small and medium industrial units, poultry, fisheries, livestock, textile units, export-oriented garments, foreign direct investments, units at the export processing zones, power plants in the private sector, computer software companies, investment in shares and provident funds.
There is no denying that Bangladesh does need to improve its tax revenue earning. But the question is: How far will the latest advice help the country attain the Millennium Development Goal (MDG) of halving poverty by 2015? The IMF along with its sister Bretton Woods institution-the World Bank- has been asking the poor countries to attain the MDGs by adopting their respective appropriate poverty reduction strategies. The role of the IMF and the WB in the formulation of the strategy does not require any elaboration.
It is hard to dismiss the positive impact of the tax incentives on the recent growth of the country's manufacturing sector, agro-processing, poultry, exports etc. The manufacturing sector for the first time has emerged as the single largest contributor (17.05 per cent), followed by pure agriculture sector (16.91 per cent) in the last fiscal (2005-06). The industrial sector growth in that year is also estimated to be 10 per cent, the highest ever since independence. The export earning hit the record $10.50 billion in the last fiscal. The agriculture sector, traditionally, the major provider of employment, has been on the decline for decades. The growth of the manufacturing remains the key to generation of adequate number of employment opportunities. But if the reported IMF proposal on the withdrawal of tax incentives is adhered to by the government, the pace of industrialisation would surely suffer and that, in turn, make the task of achieving the goal of poverty alleviation difficult.
The cost-benefit analysis of the tax incentives will certainly go in favour of continuation of the facilities. The tax incentives do not only help generate a substantial number of employment opportunities but also encourage new investments in various productive sectors of the economy. Thus, the net output of the tax incentives is very much in line with what has been preached in the poverty reduction strategy paper (PRSP). The NBR in its report to the Fund has explained the benefits that are accrued from the tax incentives. But, according to a newspaper report, the IMF wants the government to do away with the incentives for the sake of improved revenue earning.
The IMF had attached a few conditions to the availability of the Poverty Reduction Growth Facility (PRGF) loan and revenue sector reform is one of those. The finance minister had gone to Washington in the first week of the current month to convince the IMF and the WB bosses for early release of the sixth and fourth tranches of the Development Support Credit (DSC) and the PRGF respectively. An IMF team is scheduled to visit Dhaka in the first week of the next month to see whether the conditions attached to the PRGF have been fulfilled or not.
A poor country like Bangladesh, to be honest, cannot just pooh-pooh suggestions coming from global multilateral agencies like the WB and the IMF. But these agencies also need to look at the problems and potentials in the right perspective. For instance, the real problem of the Bangladesh revenue sector lies in the abuse of incentives and tax evasion. Only a small percentage of the eligible taxpayers have been brought under the tax net and those who are already in the net, generally, pay far less than what is due. And in most cases, abuses and evasion are done in connivance with a section of dishonest tax officials. Primarily, the reforms should be directed towards the improvement in the quality of manpower in tax administration, followed by improvement in logistics. If abuses of tax incentives and evasion of taxes can be checked to a considerable extent, the government would not be required to worry much about losses due to tax incentives that are, otherwise, making a great contribution to the economic growth as well poverty alleviation.


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