High Inflation And Unjust Tax :Evils Faced By The Middle Class

Tax oil,shop owner and block allocation, Give some rebate amid high inflation.

The lower income group is already battered by double-digit inflation (officially it is hovering around 9 point something). The problem is only compounded by the declaration of minimum tax of Taka 2000 irrespective of income level of the registered taxpayers. Monetary policy statement designed to bring the price levels down has failed to do so.

People are not optimistic that the next MPS will contain the inflation into single-digit. However, the MPS quite successfully reduced the import. Current account balance is improving. But acute dollar crisis holds back the government in settling the foreign bills and debt obligation in time.

Volatility in onion market, undocumented transaction in soybean oil market and poultry market and inflated bus fare are indicative of weak regulatory grip on the markets in general. Many ahead of the next general election may exploit the prevailing environment to finance electoral cost. Increasing incidence of undocumented transaction (money-receipt less transaction) exposes this kind of opaque business system. Undocumented economy is playing a role in pushing up the price levels. Earlier I had penned a piece titled "Inflation Woes Remain" highlighting how the injection of money derailing the inflation -controlling measures¹.

Govt has to take the share of the responsibility of driving up the price levels. Central bank is printing the money and lending it to the government against treasury bonds. Central bank is both the legitimate authority to print money and issue treasury bonds and it is not selling the bonds to the banks. But govt is paying the bills of development expenditures and other spending through checkable deposits,which is increasing in volume. This ultimately leads to lower currency-deposit ratio that ends up in higher money-multiplier. So government's intention to have a low money-multiplier is not working. Central bank could do so by increasing the reserve ratio of banks,which is now only 4%². Higher reserve ratio will do the trick.

However, central bank is not doing so as it could curtail the credit to private sector, which is getting less and less amid govt's increasing borrowings from the banks.For the first two quarters of the next fiscal year,it could forget about private sector credit growth. As election is near, investors will await till the next govt assumes power. Meanwhile, higher reserve ratio could lower the money-multiplier.

The minimum tax complicated the tax burden of the lower income group. Instead of giving the group a rebate,govt decides to impose a minimum tax of Taka 2000.Around 800000 TIN holders fall into this category and govt plans to collect around Taka 160 crores (according to CPD the amount is between Taka 300 and 400 crores) through such tax. The tax policy should be designed to hold the unaccountable accountable. By targeting the transport business, shops that have multiple owners, NBR could achieve more. Those who furnish money receipt and keep a record of transaction should pay less VAT and tax than those who don’t. Poor and ordinary people already contribute to the economy by paying VAT through their purchase of talk time and data,soap,cigarette and other commodities. NBR could impose duties on oil and earn huge revenues. It could float special bond for the street vendors and curtailing the share of the extortion emanates from such unregulated businesses. Every year both the ADP and nondevelopmental expenditures have some block allocation (total Taka 5000 crores; see the table for details)³. If NBR imposes 20% tax on their use then unnecessary use of them will be discouraged.Minimum tax should be a voluntary one or should be kept at such a low level that does not become a burden. Otherwise, such tax will cost NBR more by losing its existing revenue as more and more in the vicinity of that tax range will opt for Taka 2000 tax. And many aspirant taxpayers will prefer to stay away from the registration process. In times of inflation,govt could help people by introducing ways that ultimately work as some kind of rebate. Saving some money is like giving a cash incentive. A 180-degree turn on Taka 2000 tax could be that incentive the middle class is longing for.

Notes And References

1. "Inflation Woes Remain",Rezaul Hoque,https://hoquestake.blogspot.com,April 15,2023.For more read at https://hoquestake.blogspot.com/2023/04/inflation-woes-remain.html?m=1
2. Bangladesh Bank
3. Bangladesh Economic Review 2021-22

   Block Allocation On ADP and Nondevelopment Expenditures(Taka in crore)

   	2015-2016	2016-2017	2017-2018	2018-2019	2019-2020
   ADP	2219.75	2323.00	2404.22	2465.99	2468.35
   Revenue	279	282	530	2139	1617

[Update: This piece is updated by me on June 14,2023 at 15:41 Bangladesh Standard Time.Update includes correcting the references(wrongly attributed earlier) and inclusion of block allocation table.]