Revenue can’t be increased by raising customs duty, VAT: Zaidi
Raising supplementary duty and VAT rates will not boost revenue effectively, says Dr Zaidi Sattar, Chairman of the Policy Research Institute (PRI). Instead, he believes expanding revenue coverage and fostering economic activity are essential for increasing government income. According to Dr Sattar, liberalising trade policy is a critical step to stimulate economic growth. In response to pressure from the International Monetary Fund (IMF), the government has recently raised VAT and supplementary duty on various goods and services in an effort to increase revenue and address the budget deficit. Dr Sattar shared his views on this issue during an interview with Jago News, conducted by senior correspondent Sayeed Shipon.
Jago News: Recently, VAT and supplementary duty have been increased on various products. What is your perspective on this mid-fiscal year adjustment?
Dr Zaidi Sattar: Supplementary duty is supposed to be a trade-neutral tax, meaning the same rate should apply to both imports and domestic products. However, in practice, 90 per cent of the supplementary duty levied on imports is not applied equally to domestic products, or the rate is lower for local goods. This discrepancy is not ideal. I believe supplementary duty should be consistent for both imports and domestic products.
Under the VAT Act, supplementary duty is not meant to function as a protectionist tool. Yet, for many years, it has been used as such, and this trend has only intensified. If supplementary duty is part of the VAT framework, it should be applied equally to ensure fairness and transparency in trade.
Jago News: Is it possible to increase revenue by raising supplementary duty?
Dr Zaidi Sattar: Increasing supplementary duty on imports primarily serves as a protective measure rather than a revenue-generating one. Protection inherently reduces imports by making them more expensive. If imports decline due to higher supplementary duty, the revenue collected from those imports will also decrease.
Currently, 90 per cent of the supplementary duty is tied to a protectionist policy. While this approach provides protection for local industries, it does not significantly contribute to revenue generation. Essentially, you gain protection but lose out on potential revenue.
Jago News: But initiatives have been taken to increase revenue.
Dr Zaidi Sattar: These initiatives will not lead to an increase in revenue. Instead, they will bolster protection. Efforts aimed at increasing revenue in this manner are unlikely to be effective.
Jago News: How can revenue be increased?
Dr Zaidi Sattar: To increase revenue, you must boost economic activity. And how do you achieve that? Economic activity doesn't grow by raising trade taxes. We saw this firsthand in the 1990s when adopting a liberal trade policy significantly expanded our economy's scope. Revenue grew substantially during that period, and there was never a loss in revenue. Despite reducing many tariffs throughout the 1990s, revenue remained strong.
Increasing revenue isn’t about raising tariff or VAT rates. Instead, it requires broadening the revenue base and bringing more sectors under its coverage. If economic activity grows, so does revenue. To foster economic activity, trade policy needs to be more liberal.
Bangladesh has already demonstrated this in the past, yet we fail to leverage that experience. Instead, we take the opposite route. Relying on higher rates to increase revenue is a flawed strategy. Specifically, in the case of supplementary duty, raising rates leads to increased protectionism, which in turn reduces revenue.
Jago News: Reducing inflation is now a major priority. To address this, the central bank has adopted a contractionary monetary policy. In this context, how logical is it to increase the duty and VAT on various products?
Dr Zaidi Sattar: Since May 2022, taka has depreciated by about 40 per cent. Where 1 dollar was Tk 85, it is now Tk 122 at the bank rate and around Tk 126 in the open market. This 40 per cent depreciation has had a significant impact. It means the cost of all imports has increased by 40 per cent. If Tk 100 worth of goods were imported, their cost is now Tk 140.
Now, consider the duties applied. If the duty was 10 per cent, that duty—calculated on the higher import value—has effectively risen by 40 per cent, going from Tk 10 to Tk 14 on the same Tk 100 item. This means duties have already increased due to the devaluation of the taka. So, why not reduce the duty rates to counterbalance this increase?
The common justification for maintaining high duties is avoiding a "revenue loss." But this argument doesn’t hold anymore, as the depreciation has already increased the revenue collected from duties.
This isn’t just about a single product; it affects capital goods, consumer goods, and raw materials—all import categories. The price of everything has risen, contributing to inflation. So, why not reduce duties to mitigate inflationary pressures? Lowering the duty from its inflated level to 20 or 30 per cent would still leave room for adequate revenue, given the increased import values.
Without addressing this, the inflationary impact remains unmitigated, and the logic of maintaining high duties becomes increasingly flawed.
