Budget FY 17-18: Impact on Businesses

Budget FY 17-18: Impact on Businesses

August 30, 2017

When the budget for the fiscal year 2017-18 was announced in June amid much fanfare and criticism, many were surprised to see the expected uniform VAT law pushed back by 2 years. Earlier, finance minister AMA Muhith had proposed a flat rate of 15% on all products and services for the next three years, starting from 2017-18. But the decision was met by significant backlash from the business community and the public alike. After reported pressure from prominent business groups and lobbyists, the government decided to postpone the implementation of the VAT and Supplementary Duty Act.

Back in 2012, the VAT and Supplementary Duty act was drafted by the government to meet the conditions the International Monetary Fund had set for providing loans to the tune of 1 billion dollars. Three deadline misses later, it is now up to the next government to decide how to tackle this contentious issue. With general elections looming around the corner, this is a question that could become central to the political discourse in the upcoming year.

Unlike many developed economies, an intense analysis of the annual budget is a common scenario in countries like Bangladesh. Each year the budget proposal is dissected and fiercely debated in the media and by the public. It is taken as a precursor of the route through which the government will steer the economy. It is an indicator of the times to come.

The primary cause for concern of the proposed single-rate VAT was that costs for businesses would rise as a consequence. These concerns were echoed by consumers, quite understandably, since they are the ones who bear the brunt of the higher costs of goods and services.

The tax rate for publicly traded companies remain unchanged at 25%, despite the popular claim that the present corporate taxes are “outrageous”. But a look at the global average tax rate for public companies (which is 24.29%) reveals that the claim is far from the truth. In fact the rate is lower in Bangladesh than in most other countries. Similarly, non-publicly traded companies will continue to be taxed at 35%. The finance minister has stated that this is expected to provide these companies with sufficient incentive to go public and get listed on the stock exchange.

What this means for the government is that it has undertaken the precarious task of achieving both its revenue target while providing businesses with a conducive environment. On one hand, the postponement of the VAT law means significant cuts in revenue (estimated to be around Tk. 67,000 crore), and subsequently a greater budget deficit. On the other hand, even though the budget has kept getting bigger over the years, there hasn’t been an equivalent boost in economic activity. This is partly due to the structure of the budget. Only 38% has been allocated to development this year. Moreover, if past experience is any indication, full utilisation of the development budget cannot be assumed without qualifications.

On taking a glance at the budget we observe that Tk. 153,331 crore has been kept for development activities which translates to roughly 38.3% of the total budget of 400,266 crore taka. This basically implies that 61.7% of the budget is allocated for non-development activities.

The country finally broke out of the 6% growth it had been stuck in and is expected to grow by 7.4% in FY18. This could be an indication that businesses will have better investment and production opportunities, which by default includes more marketing scope too. But, how this growth will be achieved and whether the investment climate is suitable or not, is still questionable as no implementation plans have been proposed in clear terms.

BUDGET 2017-18: HOW CORPORATE FRIENDLY IS IT?

To boost the growth of local industries, the government has proposed to withdraw value added tax (VAT) on a number of products and services. The infrastructure has received much more attention than the others. This is quite logical since the lack of adequate infrastructure holds back our economy. Increased focus on both physical and social infrastructure development is a much needed and welcome aspect of this budget.

As the chart above shows, Bangladesh government is heavily dependent on the tax revenues mainly paid by the businesses and individuals. 62 percent of the budget is coming from taxes collected by the National Bureau of Revenue (NBR). The Bangladesh government plans to increase NBR collected taxes by 34.16% as per the currently put budget for financial year 2017-18 in compared to the revised budget of 2016-17. It is understood that generally businesses need to pay all the taxes in the categories mentioned in table 1.

This increase may actually limit the scope of firms to market and advertise their products, since the heavy duty taxes will raise basic costs by quite a margin.

Revenues (31.8% against trend growth rate of 15.3%) projected to grow faster (to collect additional Tk. 69,494 crore) than public expenditure (26.2% against trend growth rate of 14.7%) which will spend and additional Tk. 83,092 crore.

Total budget expenditure is set at 18.0% of GDP (16.2% in RBFY17).

Revenue income will be 13.0% of GDP (11.2% in RBFY17).

The revenue scenario is a cause for grave concern as increased pressure on the NBR alone cannot increase collection and the new sources introduced seem to affect the welfare and stability of the people, especially those at the middle and lower income level groups. So a major concern here is, even though businesses might have better scope to increase expenditures in marketing and branding, the effectiveness of such activities is uncertain as an increased tax burden may mean the consumers may have a hard time actually buying the end products.

VAT on import will grow by 32.5%, while on domestic by 33.1%. This is a close figure which shows that not only will imports becomes expensive, domestic production will be affected too. Hence firms might find this rather a disincentive in case of investments in domestic goods and services.

Conditional tax exemption for the infrastructure sector will lead to more investment in that sector, hence more scope for marketing and promotion by infrastructure developers. There may also be a major rise in marketing and branding activities in the ICT sector due to the extension of the coverage of tax exemption.

The pharmaceutical industry is expected to flourish because they will be able to export Tk. 1 lakh worth of medicines as sample without any VAT instead of the present figure of Tk. 30,000 only. Thus, startups and other business in the pharmaceuticals will have a huge potential at reinvesting the expected export revenues into intensive branding and marketing activities. Both ATL and BTL campaigns can increase. Moreover, some CSR spending can also be undertaken in these sectors.

The budget proposed that tax rate is to be reduced to 15% from 20% for knitwear and woven garments’ export earnings. It will be reduced to 14% for RMG companies which have factories with internationally recognized green building certification. It is, however, not clear how the reduced corporate tax will increase investment in the RMG sector.

ADP includes expenditure on transport and power. This will lead to infrastructural development, especially for roads that will in turn create more scope for setting up billboards. Power expenditure increase will lead to more electronic device connectivity, exposing us to more electronic ads.

Commodities like branded garments, paper, biscuits, rod, jewellery, furniture, tissue paper and apartments will see their VAT rates go up to 15 percent from varied rates that have been applicable to them under the existing VAT Act 1991. Prices will go up for commodities but may as well be accompanied by some marketing activity on the part of the businesses.  These marketing activities will allow these industries to justify their increase in price, communicate it to the public and convince customers through ad campaigns, whether physically or on electronic, digital or social media. 15% VAT charged on license issuance and renewal fee of jute and jute products and solar panel batteries have been withdrawn. But since the jute industry is in decline, there might not be any significant changes in their branding and marketing practices.

INITIATIVE FOR A GREENER FUTURE

Green growth has been prioritized by the government through providing tax benefits to the two largest export sectors – the RMG and leather industries, as mentioned above. Businesses practicing environmentally sustainable operations will be provided with tax benefits, recycling of plastic waste will receive VAT exemption and corporate tax will be reduced to inspire green industrialization. This would translate to an immense scope of CSR activities in these sectors.

However, current provisions of tax laws in other industries discourage CSR spending by companies largely. There are numerous restrictions on banks too when it comes to CSR spending. But the government should instead encourage this by allowing full CSR expenditure for tax purposes. There should also not be any requirement for prior approval from the government for CSR spending.

Tax exemption introduced for government allowances (freedom fighter allowances, destitute allowance, and welfare allowances), and incomes from national award, honorary received from Freedom Fighter Welfare Trust, and incomes of Elderly Care Home. These are good initiatives in terms of promoting social responsibility

Budget FY18 proposed to bring down the corporate rates for non-listed banks, non-listed mobile operators and cigarette manufacturing companies gradually. Rates for these are higher than 40% (42.5%, 45% and 45% respectively). Producers of cigarette, bidi, zarda, gul and other tobacco items have to pay a surcharge of 2.5% on their income from business – which is a welcome move considering health concerns as this will raise costs on them. However, reduction of the corporate taxes on cigarette manufacturing companies will be against pro-health tax policy being pursued by the government and need to be maintained at current levels.

If price goes up, demand might slightly fall for price elastic products. With that being a major concern for these companies, they will not increase price but let go of profit. That means to compensate for that lost profit, tobacco companies might want to cut down on other expenditures like CSR and marketing activities.

So, to sum it all up, the new budget is highly likely to usher in greener marketing and advertising efforts on the part of the businesses. The government’s efforts to incentivize local businesses may not work as pre-empted via the increased tax and duties, since domestic rates have gone up as well. Nevertheless, the specific tax exemptions on green certification will encourage the businesses to portray themselves as pro-environment companies. Therefore, we will see a lot of advertising and marketing campaigns directed towards projecting an eco-friendly image.

Moreover, the pharmaceutical companies are expected to capitalize on the new limited VAT exemption regulation. Hence, we are likely to witness an increase in advertising and marketing expenditure from the pharmaceuticals locally by reallocating funds to differentiate themselves in the consumer market.

However, the businesses will possibly try to be more conservative with their CSR activities. Given the advantages that RMG and Leather industry will receive in terms of CSR, other industrial businesses will try to focus more on marketing via information technology rather than splashing on CSR activities. The commodities with newly added VAT, like biscuits, jewelry and branded garments, will push the companies to focus on marketing. These companies will try to create added value in order to conjure positive acceptance of the price increases amongst the regular consumers.

The budget for 2017-18 has a lot going for the local businesses and a lot against them. Either way, we will hopefully witness increased endeavors in terms of marketing, branding and advertising to drive the local companies closer in competitive terms to their foreign counterparts.

 

Jointly Developed by

 Fabiha Naz Kabir

Halima Sadia

Eradul Kabir

Nafis Imtiaz Onish

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