Speech 1998 - 1999
Part II

FISCAL MEASURES

In the first part of my speech I have explained the strategies and principles of socio-economic development of the present Government. I have also informed this august Parliament of the various steps taken by the Government to eradicate poverty and attain other policy goals. In this part I will highlight our revenue efforts for FY 1998-99. In last year's budget speech I had outlined the basic principles of our tax policy. We have followed the same principles in formulating the revenue proposals for FY 1998-99. In an article on development published in 1755 the renowned classical economist Adam Smith wrote:

‘Little else is requisite to carry a state to the highest degree of opulence, from lowest barbarism, but peace, easy taxes, and a tolerable administration of justice, all the rest being brought about by the natural course of things’

Thanks to the farsighted leadership of Prime Minister Sheikh Hasina, we have been able to put an end to the insurgency in Chittagong Hill Tracts by signing the historic Peace Accord. As a result peace has been established throughout the country. Our commitment and unrelenting efforts in establishing justice and good governance are well known. Therefore, now we should strive to fulfill the remaining pre-conditions for development through the introduction of a modern and pragmatic taxation system.

2. Keeping this goal in mind and following the principles of free market economy we have continued the trade liberalisation process. At the same time I have also proposed measures to provide reasonable protection to domestic industries. In fact, in last year's budget also we took effective steps to meet genuine protection needs of local industries. To achieve this goal, this year also I have attempted to rationalise our tariff policy without causing economy - wide distortions I have proposed measures to expand our tax base and simplify the tax payment procedure. I have also proposed practical measures that would reduce harassment in the tax collection process.

3. Instead of providing fiscal incentives in a haphazard manner, as was done in the past, we have carefully selected the sectors for incentives after detailed scrutiny. Factors like export prospects, national priorities, backward linkage, and employment generation potential of the sectors were considered in the selection process. Based on these considerations I have proposed special fiscal incentives for computer software and data processing, agro-based industries, solar power, plastic and plastic products, leather, textile and ready-made garment industries.

4. As a government accountable to the people, we had extensive pre-budget consultation with representatives from all relevant sections of the society. I wrote personally to the major political parties in the Parliament inviting them to a dialogue. Unfortunately, I did not get favourable response from the major opposition party in the Parliament. We received a large number of proposals from the different Chambers, Trade Bodies and professional groups and held detailed discussions on their proposals. Suggestions with positive developmental implications have been accepted inspite of potential revenue loss. Steps have been taken to incorporate the suggestions on which there was consensus. In a number of cases we had to establish a balance among divergent and conflicting interests of trade and industry and tried to establish an equilibrium acceptable to all. I am grateful to all of them for their suggestions. With these preliminary remarks, I would now like to place before this august Parliament the important tax proposals for the fiscal year 1998-99 which reflect the need for enhanced revenue, national priorities, international economic context and public opinion.

Direct Tax

5. Of all the direct taxes, income tax ranks foremost. Income tax is not only an important source of revenue, but it also plays a crucial role in ensuring social and economic justice. This year I have proposed a number of changes in respect of income tax with a view to making the tax system more realistic, rational and modern. With your permission I would now place before this Parliament the proposals related to income tax.

6. At present, we have five-tier tax rates for individual tax payers which are zero, 10, 15, 20 and 25 percent. In order to make the tax system simple, I propose to introduce four-tier tax rate structure for personal income tax. The revised tax rates will be zero, 10,18 and 25 percent. The existing rate of 20 percent will be reduced to 18 percent and the rate of 15 percent will be aligned with the proposed rate of 18 percent. At the same time I also propose to restructure the existing income slabs for the different tax rates. This will benefit tax payers in the lower income bracket. For example, earlier a person having a total income of Taka 1,20,000 was required to pay an amount of Taka 7,000 as tax; under the proposed revised income slab the same tax payer having the same total income of Taka 1,20,000 will be required to pay Taka 6,000 only as tax.

7. The existing law allows tax credit for investment at the rate of 15 percent to an individual tax payer on 20 percent of the total income or a maximum of one lac Taka, whichever is less. With a view to encouraging the tax payers to make investments, I propose to enhance the upper limit of investment from one lac Taka to one lac fifty thousand Taka.

8. Under the present arrangements taxes due on the salaries of government servants are deemed to have been paid by the government. There is a misconception among certain sections of people that all income of government servants are exempt from tax and they are not required to submit income or wealth tax returns. However, the fact is that the government servants like all other taxpayers are required to submit income tax return and pay taxes on all income other than their salaries. The government pays taxes on the salary part only. Therefore, those who have taxable income or wealth are required to pay taxes according to the provisions of the Income and Wealth Tax Acts. The National Board of Revenue will strengthen their monitoring efforts in this regard and take necessary legal actions, if required.

9. The existing Income Tax Rules provide for tax on perquisites received by a salaried person. We made some simplification last year. There is further scope to make the rules more rational and simple. To this end I propose the following measures :

1. In some cases, the employer pays income tax payable by an employee in respect of the salary income. The amount of tax paid by an employer is an expense of the employer. On the other hand, the amount of the tax paid by the employer is an income of the employee but does not form part of the taxable income of the said employee. In view of this, I propose to introduce a provision under which tax paid by the employer shall be included in the taxable income of the employee and tax in respect of salary shall be assessed on such income inclusive of the amount of tax so paid.
2. At present if an employee is provided free furnished or unfurnished accommodation the taxable salary income is adjusted upward at rate of 25 and 20 percent respectively. It is not easy to determine at the stage of assessment whether the accommodation is furnished or unfurnished. Besides, the tax payers also face difficulties in establishing the correct position in this regard. To make the provision more rational and its implementation simple, I propose that taxable income on account of salary be adjusted at 25 percent for accommodation provided by the employer, whether furnished or unfurnished.

Honourable Speaker,

10. The role of capital market in industrial and economic development of the country is undeniable. In order to stimulate the capital market I propose some amendments in the existing income tax law. The following are the proposals :

1. I propose that no question would be asked if any income not taxed earlier is invested in purchase of shares in the primary and secondary market, subject to the condition that the investor pays tax at the rate of seven and a half percent thereon. Further, the shares, have to be retained at least for one year from the date of acquisition.
2. At present, income from mutual fund of the companies issuing such fund is not exempt from tax. In order to stimulate the capital market, I propose to exempt from tax income from mutual fund accruing to the issuing companies. It may be mentioned that the mutual fund issued by the ICB currently enjoys such exemption. The same benefit shall be extended to all mutual funds established and operated in the private sector.
3. At present we have two rates for corporate income tax; publicly traded comparties are taxed at the rate of 3 5 percent and non-publicly traded companies at 40 percent. Whether publicly traded or not, banks, insurance companies, financial institutions and non-resident companies, are taxed at the rate of 40 percent. There are some banks, insurance companies and financial institutions which are listed with the stock exchange, but they are not getting the benefit of the lower tax rate applicable to other publicly traded companies. With a view to removing the discrimination in tax rates between publicly traded financial institutions and non-financial business or industrial enterprises, I propose 35 percent tax for banks, insurance companies and other financial institutions which are listed with the stock exchange and incorporated in Bangladesh. It is expected that a large number of banks and financial institutions will be encouraged to list themselves with the stock exchange as a result of this measure.
4. Industries enjoying tax holiday are statutorily required to invest 30 percent of tax exempt income in government securities or in the same industry. To stimulate the capital market I propose that dividend declared by companies enjoying tax holiday will count towards the statutory requirement of investment. In addition, I also propose that the statutory investment be made either during the tax holiday period or within one year from the expiry of the tax holiday period.
5. In respect of dividend income derived by individual tax payers I propose that the tax be deducted at source at the rate of 10 percent on the amount of dividend and this will be treated as the final settlement of tax liability. This will encourage the companies to declare dividend and is expected also to have a positive impact on the share market.

11. Last year we introduced a provision that investment of untaxed income in 'new industry' will not be subject to any question. The response from the tax payers was not satisfactory presumably because investment was limited to only 'new industry'. Now it is expected that expansion of the ambit of investment will generate better response to this provision for investment. To this end, I propose to include purchase of shares from primary and secondary market, BMRE of the existing industrial unit, expansion of the existing unit and repayment of industrial loan in the meaning of the term investment for the purpose of this provision. The condition that tax be paid at the rate of seven and a half percent will continue. It is expected that the tax payers will avail themselves of this opportunity and come forward to contribute to economic development of the country by productive use of their hitherto untaxed income; otherwise, penal provisions under the income tax law will be effectively enforced against them.

12. The provision for filing return under self-assessment scheme by a private limited company is subject to manifold conditions such as the company has to show ten percent higher income over the income assessed last year, the tax for the relevant income year must not be less than ten percent of the turnover and must be proportionate to the tax paid and, finally, the minimum tax shall be Taka 25,000. It has been gathered that the multiplicity of conditions has discouraged the tax payers from taking advantage of this scheme. In consideration of this situation, I propose to retain only two of these conditions relating to ten percent higher income over the assessed income of last year and minimum tax of Taka 25,000 and to delete the two other conditions. Initially the system was schedule to remain in force for FY 1997-98 and FY 1998-99; now I propose to retain the system beyond FY 1998-99. I hope that a larger number of tax payers will avail themselves of the self-assessment scheme.

13. At present public limited companies and multinational companies are allowed to submit return under self-assessment scheme on the basis of financial statements audited and certified issued by Chartered Accountants. This provision was introduced to simplify the tax payment procedure for the recognized companies. Unfortunately, this procedure is being abused by some companies which submit questionable returns for previous income years showing losses and claim refund on the basis of such returns. As a result, the Government is deprived of its due revenue. To restrict the misuse of the existing provision I propose amendment of the respective section of the law introducing time limit for submission of returns and also imposing the condition that income less than the previous year or loss cannot be shown in the return or refund shall not be claimed thereon under this particular self-assessment scheme. Furthermore, I propose that ten percent of the returns based on accounts certified by Chartered Accountants be subjected to audit and that the cases for such audit shall be chosen on a random basis.

14. At present, there are provisions for advance deduction of tax at source in certain cases. It is necessary to expand the scope of withholding tax at source in order to widen the overall tax base and check tax evasion as well as to prevent harassment and corruption. Such steps will help increase tax handles, expand the tax net and make tax payment free from hassle. Besides, it is also necessary to treat in certain areas tax so withheld as the final settlement of tax liability and to revise the existing rates for withholding taxes. There is also a long standing demand from the tax payers for such a dispensation. I would now like to mention the proposals briefly.

         (a) In the case of contractors and suppliers it is proposed that the tax deducted at source     will be treated as final settlement of their tax liability. The existing rates of tax deduction under this provision are proposed to be increased from one percent, two percent and two and a half percent to one and a half percent, two and a half percent and three percent respectively. 

         (b) Substantial profits are made from manufacturing and sale of biri. But in the case of biri manufacturers collection of tax through the normal assessment procedure is very difficult. To tackle this problem and to bring biri manufacturers within the purview of withholding tax, I propose that tax be collected at the stage of purchase of banderols at the rate of one-tenth of the value of the banderols.

          (c) I propose to treat the tax collected at source from the importers as the final settlement of their tax liability. In view of this convenient procedure extended to importers, I propose to enhance the rate of tax collected at source from the importers from two and a half percent to three percent.

         (d) The existing law provides for collection of tax at source at the rate of six percent from the sellers of immovable property. But generally the real value of the property is not reflected in the sale deed. For land acquired by the Government the owner of the land receives compensation at a rate fifty percent higher than the price at which land is sold as reflected in the registered deeds of transfer. This implies that the real value of land is fifty percent higher than the value shown in the registered deeds of transfer. As a result of undervaluation the real tax liability on the capital gains is not reflected by the tax collected at source. Besides, the tax payers also face various difficulties at the stage of computation of capital gains. To remove all these complexities and lo keep real tax burden in line with the tax collected at source it is proposed to increase the existing rate of collection from six percent to nine percent and also to consider this as the final settlement of tax liability. It may be mentioned that this provision will be applicable for land situated in the city and municipal areas. Agriculture land, situated in rural areas will remain outside the scope of this provision.

It is expected that final settlement of tax liability on the basis of the tax deducted at source will make the tax system free from hassles as, well as reduce undesirable and unnecessary contacts between tax payers and collectors. I am confident that the till payers will welcome these steps.

         (e) I propose to bring within the scope withholding tax, the compensation money received form the Government for acquiring immovable property within the limits of a city or municipality. In fact there is an amount of capital gain included in the compensation received for any acquired property. Therefore, the proposed collection of tax may be considered as payment of advance tax and that can be adjusted with the tax payable on capital gains. The rate of deduction is proposed to be six percent.

         (f) I propose to bring income from professional services and technical services fees under the purview of deduction of tax at source and fix the rate of deduction at ten percent. However, income upto first sixty thousand Taka will be exempt from such deduction at source.

15. At present tea plantation or replantation cost is allowed as an admissible expose. To provide similar incentive to rubber plantation I propose to allow rubber plantation and replantation cost as an admissible expense. I hope that in response to this incentive rubber plantation will increase and the supply of rubber will also be ensured.

16. Existence of several provisions for depreciation reduces the calculation of depreciation, written value of assets as well as computation of total income complex. There is no justification for retaining so many depreciation allowances. So, I propose to delete the provisions for initial and extra-shift depreciation allowances. At the same time I propose to enhance the general rate of depreciation by twenty percent in the case of assets eligible for initial and extra-shift depreciation. The proposed amendments will remove complexities in keeping accounts of depreciation and computation of income will become easier

17. Existing law provides for accelerated depreciation allowance on plant and machineries used for the protection of environment. This, however, failed to evoke desirable response and as a result no plant worth mention for environmental protection has so far been installed. But protection of environment is accorded the highest priority throughout the world and in Bangladesh. In consideration of this I propose to allow one hundred percent accelerated depreciation on plant and machineries engaged in the collection and processing of bio-degradable wastes.

18. Under the existing law tax exemption is allowed to capital gains arising from the transfer of land or buildings if invested in construction of single or multi-storied house for residential purpose. On the other hand, such exemption is allowed only if the capital gain is invested in the purchase of one apartment. The practice is not logical and is also discriminatory. Therefore, I propose to extend tax exemption to the capital gain from such transactions if invested in the purchase of more than one apartment.

19. Under the existing law a mandatory notice is required to be issued under section 83(1) mentioning the defects of the return submitted. In practice the existing provision slows down the assessment procedure. I, therefore, propose to delete the requirement.

20. The main objective of the proposed amendments in the income tax law and rules is to contribute to the growth of mutual trust between the tax administration and the tax payers, create a conducive environment for investment, widen the tax base and accelerate mobilisation of domestic resources by making the income tax law transparent, simple and modem. I hope that in the new environment tax payers will come forward to pay their taxes voluntarily and the role of income tax will be strengthened in mobilization of domestic resources .

21. I would now like to highlight the important features of the customs duty rates related proposals for FY 1998-99. In last year's budget speech I mentioned that we should pursue a tariff policy consistent with the international and regional trend. We favour gradual and moderate adjustment rather than rapid and extensive changes in customs duty rates so that the development of local industry is not constrainted. In continuation of the process, I propose to reduce the highest rate of customs duty from 42.5 percent to 40 percent. We will incur a revenue loss of l21crore Taka due to this reduction in customs duty on a large number of commodities covering 2325 H.S.Codes. The commodities covered by duty reduction include prepared food, fruits, used clothes etc. It is expected that due to reduction of the highest duty rate the consumers will get their products at a lower price. Local industries will develop the quality of their products and make efforts to reduce their cost of production in the face of increased competition.

22. Multiple duty rates or wide differences in customs duty rates for similar goods encourage misdeclaration of goods as well as their value. If the duty rate is simplified through rationalization assessment will be transparent, opportunity of misdeclaration or wrong classification will be minimised and discretionary power of the customs officials will be reduced. As a result assessment will be simplified and clearance of imported and exported goods will be expedited after realization of revenue due to the government. In the last two budgets I introduced various measures for speedy and hassle-free clearance of imported and exported cargo by reducing discretionary power of customs officials. These steps have yielded some benefits. In this budget also I propose to take a few steps in continuation of this policy. With this in mind, I propose adjustment of duty rates for items covered under 107 H.S. codes at the same level. In most cases these adjustments have been made with the lower rate of duty. The items covered by the measure include: benzene, toluene and xylenc, liquid lustre and glass frit, stone, bolder, pebbles and gravel, manganese di-oxide, iron oxide and lead oxide, phenolic resin, melamine resin, polyurethane and other amino resins, plasticizer, compound plasticizer and pthalic plastic etc. In pursuance of the policy of reduction of the number of duty rates for rationalization, simplification and consolidation as well as reduction of discretion any power of customs officials, I propose to abolish the duty rate of 2.5 percent. Most of the commodities including pace maker, heart valve, kidney dialysis machine and artificial respiratory machine previously subject to 2.5 percent customs duty will now be charged- zero- duty rate. I propose to re-fix the customs duty on the remaining items at 7.5 percent. These items include: raw silk, testing and other electro-medical equipment etc. At present two duty rates of 22.5 percent and 30 percent are applicable to similar intermediate raw materials. To reduce the difference I propose to reduce the customs duty on several commodities from 30 percent to 25 percent. To reduce the number of customs duty rates, I propose to abolish the 22.5 percent duty rate. Following these adjustments, the number of customs duty rates will be reduced to five from the existing six rates. If the aforementioned proposals are implemented, these five rates will be 7.5 percent, 15 percent, 25 percent, 30 percent and 40 percent.

23. Industrial investors and entrepreneurs often complain, that customs duty on raw materials and intermediate products are rather high. As a result their cost of production is high, they face uneven competition which makes their investment unprofitable and discourage further investment. To mitigate their problems, I propose to reduce customs duty rates ranging from 2.5 percent to 22.5 percent on large number of raw materials and intermediate products covering 852 H. S. Codes. I shall mention these items while discussing different classes of goods.

24. One of the basic problems of our agriculture is fluctuation in production due to dependence on weather. If agricultural output increases, prices fall owing to lack of facilities for preservation and processing. As a result our farmers do not get proper price. Development of a modern agro-based industry is essential to stabilise the price of agricultural products in these circumstances. Such an industry will increase farmers' income and create employment opportunities. In addition, this sector has an enormous potential for export due to high value addition in agricultural products. Generally, development of agro-based industry with its backward linkage can give a significant boost to our agricultural sector. In consideration of these factors, I propose to reduce duty rate of food flavour, tin can, crown cork and lug cap from 30, 22.5 and 15 percent to 7.5 percent and that of glass bottles and jars from 22.5 to 15 percent. Further, .for development of shrimp cultivation, poultry, bakery etc.— which fall within agriculture sector broadly defined — I also propose reduction of duty rates on a wide range of raw materials and intermediate goods used in these industries. The items covered under the proposal for reduction of duty include: active yeast from 30 to 7.5 percent; Vitamin B and its derivatives from 22.5 to 7.5 percent; and animal and vegetable fat and oil used as fish feed from 42.5 to 30 percent. The Government will incur substantial revenue loss due to these measures but we must make such sacrifices to stimulate industrialization, promote exports and provide assistance to the agricultural sector.

25. Computer software and data processing have been identified as promising export sector next to our ready-made garments industry. I have already announced various benefits including exemption of all import duty and taxes on software. I propose to expand these benefits further and exempt computer and parts used exclusively with computer from the entire applicable value added tax and from the currently prevailing customs duty of 2.5 percent and 15 percent respectively. One unit of Uninterrupted Power Supply (UPS) imported along with a computer will also get this benefit. In case of more than one UPS imported along with one computer or UPS imported separately, I propose to reduce the duty rate of UPS from 30 to 15 percent. These measures would cause a revenue loss of approximately Taka 20 crore. I hope this revenue loss will be more than offset by generation of employment opportunities for our educated young men and women. This will enable us to assemble computer and develop software for export. Some of our neighbours have achieved commendable success in this field. I am proud to say that the intellectual ability, creativity and technical knowledge of our young generation is in no way inferior to that of the young people of those countries. I firmly believe that use of these opportunities will help our country make progress in this modern field of knowledge.

26. Plastic industry has a vast potential. Many articles of everyday use are manufactured from plastic in small, medium and large industries. I propose to reduce customs duty rates on primary polymer which is the basic raw material for this industry from 30 to 25 percent. The items for which duty reduction has been proposed include: polypropylene, polyethylene polystyrene, polyvinyl acetate, polyvinyl chloride, polyacrylic and alkyd resins.

27. Solar electricity is not only an alternative to conventionally produced electricity; its potential for expansion is also unlimited. Use of solar electricity is increasing in many countries which helps overcome electricity crisis and power supply constraints. Solar electricity can play an important role in meeting demand for electricity in our country. Therefore, in order to encourage extensive use of solar power, I propose to exempt photovoltaic generator from the whole of customs duty and value added tax. Exemption of wind generator from customs duty and value added tax now in existence will continue.

28. Now I would like to propose a few measures designed to support the leather industry. Duty on various types of raw and processed hides and skins had been reduced from 2.5 percent to zero in the last year for a limited period. Frequent change of duty rate is not congenial to an industry. Therefore, I propose to continue this facility to help development of leather industry. In addition, I propose to reduce the duty rates on various pigments used in this industry from existing 15 percent, 22.5 percent and 30 percent to a uniform rate of 15 percent. This will simplify assessment process for dyes used in leather industry. In addition to lower duty, I have provided other benefits to leather industry in terms of access to credit.

29. Textile industry is one of the vital sectors of our economy. A large number of workers are engaged in this sector. This sector plays an important role in producing import substitutes for local use as well as export oriented garment industry. To consolidate and protect the competitive position of our export oriented garment industry, we have to increase value addition which can only be achieved through use of locally produced fabrics. In view of these considerations, I propose to reduce duty on synthetic fibre from 2.5 to zero percent, vat dyes from 15 percent to 7.5 percent, pigment — a raw material of textile, leather and paint industry — from 15, 22.5 and 30 to 15 percent, and some spares and components of textile industry from 30 to 25 percent. There will be substantial loss of revenue due to the proposed duty reduction. However, I hope that our textile industry will become competitive due to the impetus given and will be successful in meeting local demand and increasing our exports.

30. Ready-made garment has assumed the position of our biggest single export commodity. This sector contributes significantly to export promotion as well as employment generation of women. To consolidate the competitiveness of this sector, 25 percent cash incentive is provided. The Government has to incur an expenditure of about Taka 200 crore per annum on this facility. Despite heavy burden on the exchequer, I propose to continue this 25 percent cash incentive for another year i.e. in fiscal year 1998-99.

31. To consolidate the competitive position of local industries, I propose reduction of customs duty rates on important raw materials covered under 190 H.S. Codes, such as graphite electrode, synthetic and other natural rubber, beadwire, refractory bricks, blocks, tiles and similar refractory ceramic, sulphonic acid and magnesium chloride etc. Following the principle of consolidation of customs duty rates on similar goods, I propose to merge the duty rate of lac from 15 and 30 percent to 30 percent, increase customs duty rate of parts of rice huller form 15 to 25 percent and refix the rate of duty on soap noodles or palmitic acid at 40 percent. These goods or their substitutes are produced locally and hence the revision of duty rates will provide protection to the local industry.

32. Our newsprint industry was viable and full of promise. We even exported newsprint after meeting the local demand. But during the last few years the newsprint industry has been facing crisis owing to various reasons. Duty free importation of newsprint started from 1994-95. To protect the legitimate interest of local newsprint industry 15 percent import duty was imposed in 1996-97. But duty free import facilities for the newspapers and periodicals remained unchanged. It may be mentioned that the value of newsprint import during 1994-95 and 1995-96 was 17 crore and 75 crore Taka respectively. In 1996-97 the total import increased to 144 crore Taka, out of which duty free import was 136 crore Taka and 15 percent dutiable import was only 8 crore Taka. In 1997-98 the duty free import of newsprint by the newspapers and periodicals was made conditional; duty free import was limited to the quantity determined on the basis of the report of the Audit Bureau of Circulation. During July-December of 1997-98 duty free import was 37 crore Taka and 15 percent dutiable import was Taka 20 crore only. Locally manufactured newsprint could not be sold due to duty free import of large quantity of newsprint. The business community has complained that they are discriminated against and are incurring losses. A large number of workers make their living from this sector. To protect the domestic newsprint industry, I propose that the newspaper and periodicals will be allowed to import newsprint free of duty equal to the quantity of domestically produced newsprint purchased by them. However, their total requirement of newsprint will be determined on the basis of the reports of the Audit Bureau of Circulation. I firmly believe that the owners and the intelligentsia associated with the newspapers and periodicals will recognise the need for this measure for domestic industry and the economy as a whole.

33. Government advertisement is one of the important sources of revenue for the newspapers. Rate of government advertisement has not been increased by the previous governments in last II years. But in the meanwhile cost of production in the newspaper industry has gone up. Considering all these, I propose to increase the rate of government advertisement by 30 percent.

34. It is the policy of the present Government to reduce the cost of public transport and to make it easily available. Therefore, I reduced the customs duty rate on. double-dicker bus and taxi-cab in the last budget. In continuation of this policy, I propose zero customs duty on double-decker bus. I also propose to reduce the dusy on other types of bus and trucks from 22.5 percent to 15 percent. The proposed duty reduction will lower expenditure on initial capital and will increase profit. The entire transport sector especially the public will benefit due to this measure which will add a new dimension to our transport system.

35. Construction of roads is part of infrastructure development. Dumper and tipper trucks are used effectively in construction industry. Therefore, I propose to reduce customs duty rate on these two types of vehicles from 22.5 and 15 percent to 7.5 percent. If this proposal is implemented, local contractors who participate in international tenders— especially in aided projects — will have relief from uneven competition with the foreign contractors.

36. Pulses are essential food item for the common people. Dunpeas (motor dal) and chickpeas (chhola dal) attract 42.5 and 30 percent customs duty at present. I propose to reduce and align these customs duty rates at 30 percent. Lentil and other pulses are chargeable to 7.5 and 15 percent customs duty at present. I propose to align them at 7.5 percent. These measures will lower incidence of tariff on different types of pulses. Moreover, difficulties in identification of various types of pulses and assessment of duty will be eliminated.

37. In addition to these proposals for rationalization of duty rates I would like to propose introduction of a 'rapid clearance system for imported goods, similar to green channel facility for passengers. I hope this will prove to be an effective measure to reduce the discretion of the customs officials. Under the proposed system usual formalities at the assessment stage will remain unchanged but at the time of delivery a few category of goods and all the commodities imported by selected groups of importers will be released and ‘outpassed’ without physical examination. In addition, I propose to reform the present physical examination system. At present, up to 100 percent of each consignment of imported goods can be subjected to physical examination. Henceforth, if there is no reasonable doubt, a proportion not exceeding 10 percent of the total consignments will be examined. Consignments for examination will be selected randomly on the basis of a computer generated sample. I also propose to amend a few sections of the Customs Act to strengthen and simplify bonded warehouse administration.

Value Added Tax and Supplementary Duty

38. To take full advantage of the VAT system, it is essential that Value Added Tax (VAT) be gradually extended to wholesale and retail levels. Representatives of the business community have been demanding that the presently established standard of record keeping be dispensed with in order to make the payment of VAT at retail level by small traders simple and free from hassle. In view of our socio-economic scenario, the rationale of the demand cannot be denied though recognizing that records are an integral part of the ideal-type VAT system. One of objectives of the tax administration is to increase the numbers' of taxpayers by making the VAT system simple, free of complexities and more acceptable to the taxpayers. Such measures will encourage more taxpayers to come under VAT coverage voluntarily. In order to do justice and to collect more tax in a simpler manner, I propose introduction of a participatory system for determining annual sales volume of small traders and retailers by a Committee comprising representatives from trade associations, different Chambers of Commerce and Industry and the taxation authority. The proposed arrangement will facilitate voluntary compliance by taxpayers and collection of taxes without harassment at the retail level. This will help establish a system based on mutual exchange of opinion between taxpayers and tax collectors. An assessment made on the basis of collective decision and consensus will be just, minimize harassment and enhance transparency in tax administration. The National Board of Revenue has discussed the matter with the representatives of different Chambers of Commerce and Industries during consultatives meetings prior to budget formulation and received encouraging response.

39. I will now propose some expansion of the value added tax system based on the above principles. During FY 1996-97 and FY 1997-98 about seventy items were brought under VAT network at retail levels. In continuation of this practice, it is proposed that the following nine more items be included in VAT net at retail level: fire arms, carpet, watches, cement and MS products, ceramic crockery, glass, crystal, pyrex and melamine, household decoration pieces made of ceramic, silver, brass, bronze, and crystal glass, Cl sheet and foam.

40. Significant progress was made in assessment of VAT on the basis of retail price at production level during FY 1997-98. Collection of VAT on retail price at production stage began with footwear and condensed milk in 1997-98; on both the items considerable increase of revenue was registered in the last financial year compared to previous year's collection. To continue this trend audio simplify tax collection procedures, it is proposed that the following class of goods be assessed on the basis of retail price at production stage: cosmetics, toiletries, detergent, disinfectant, soft drink, tissue paper, paint, varnish, aerosol and air- freshner.

41. Expansion of tax base rather than enhancement of tax rate is generally considered to be a better method for augmenting revenue. Recently, there has been considerable expansion of a number of service sectors in the country Hence, the following five new services are proposed to be brought under the purview of VAT: security service, pathological laboratory, automatic or mechanized saw mill, air-conditioned garments shop and trade service i.e. wholesaling by importers and other domestic traders. It may be mentioned that in case of firms with turnover less than Taka. 15 Lac, the turnover tax will apply to all these items and services.

42. A procedure for interim release of vehicles and goods seized for violation of VAT law or rules against bank guarantee was introduced in the last fiscal year. From discussions with entrepreneurs and business representatives it is learnt that due to some practical problems they could not take advantage of this procedure. In order to make the procedure more ‘industry friendly’ the requirement for bank guarantee will be replaced by a new procedure under which seized conveyances will be released on an interim basis prior to adjudication against the owner's personal undertaking and seized goods will be given to the personal custody of the VAT registered units on a personal undertaking. Administrative measures will be taken to ensure release of goods and vehicles within three working days.

43. Too many exemptions in the VAT system deprive manufacturers, service renderers and traders of the real benefits of the system. If the input is liable to tax and the output is exempt, the manufacturer cannot get the credit on the tax paid on the purchase of inputs. Besides, in order to expand the tax base, a general policy of reducing exemptions in phases is being pursued to remove the existing discrimination in tax incidence among different items. It may be mentioned here that services similar to travel agency such as freight forwarding and shipping agency are subject to VAT. Travel agency had been subject to VAT from 1991 to 1994; then it was exempted from VAT in FY 1994-95, which created an inequitable incidence among similar sectors of services. To remove this anomaly, I propose to withdraw exemption of VAT from travel agency in order to bring it at par with entities rendering similar service.

44. During our discussions with representatives of different Chambers, Industry and Trade Associations, it was reported that they often face problems in getting credits for VAT paid on inputs, especially manufacturers who do not import their inputs find it difficult to take credit of VAT paid for inputs purchased locally. The system of issuing supplementary invoice by commercial impotents eased the problem to some extent. But the small and medium scale manufacturers most often do not purchase inputs from big commercial importers; instead they buy it from small-unregistered wholesalers. To resolve the problem, I propose to treat commercial importers as renderers of trade service. On their sales they will issue VAT Chalan instead of supplementary invoice. Similarly, wholesalers will also be required to issue tax invoices ( VAT Chalan ) for their sales. This will enable all manufacturers to take tax credit for their inputs and on the other hand the VAT system will also be improved.

45. A large share of domestic indirect tax revenue is collected from domestic cigarette industries. At present there are four rates of supplementary duty against four price-slabs on cigarettes manufactured in the country. The rates are 30 percent, 48 percent, 49 percent and 51 percent. The production cost of one packet of machine produced cigarettes cannot be less than Taka 2.49, but due to faulty declaration of prices supplementary duty collected is far less than the assessed duty on correctly declared price amount. Based on consultation with cigarette manufacturers and in order to safeguard government revenue, I propose a slightly upward revision of supplementary duty at the production stage and some readjustment of price-slabs for cigarettes. The revised rates of supplementary duty are 32 percent, 49 percent, 50 percent and 51 percent. Since smoking is injurious to health, the resulting price-increase will also discourage smoking to some extent.

46. In the last two fiscal years some qualitative changes were brought in the Value Added Tax system which will also be pursued in future. With a view to making the tax system more transparent and friendly to trade and industry, some amendments to the VAT Act and Rules have been proposed . Besides, some new rules indicating operational guidelines such as Interim Release Order, VAT Consultant Licensing Rules and Turnover Fixation Rules will be introduced.

47. I would now like to present the supplementary duty related proposals. Customs duty reduction on dried milk from 42.5 percent to 40 percent will cause considerable loss of revenue. In order to offset the loss, I propose to impose 2.5 percent supplementary duty on dried milk. This measure will keep the tax incidence on imported dry milk unchanged; therefore its market price will not be affected.

48. At present different rates of supplementary duty are imposed on imported cars and jeeps, depending on their engine capacity and type of fuel used. This creates difficulties in assessment. In order to do away with the various rates, I propose to impose supplementary duty on the basis of engine capacity irrespective of type of fuel consumed and the type of vehicle. Further, to encourage use of small cars and discourage use of bigger and luxurious cars, I propose to reduce supplementary duty on cars up to 1000 cc. At present there is no supplementary duty on jeeps of the same capacity. I propose to impose supplementary duty on jeeps at the same rate as applicable to cars for removing this anomaly. The existing rates of 35 percent, 40 percent and 45 percent supplementary duty on jeeps and cars of the capacity from 1000 cc to 1300 cc will be merged at 45 percent. I also propose to increase supplementary duty on cars and jeeps above 1300 cc at progressive rates. Due to this restructuring of supplementary duty the price of small cars will decrease and the price of the luxurious cars and jeeps will increase to some extent which the better-off consumers can afford.

49. Importation of reconditioned cars have increased substantially. Maintenance of relatively old cars is economically expensive and they are detrimental to environment also. In order to discourage importation of old cars I propose to reduce the maximum depreciation allowed on assessment of old cars from 60 percent to 40 percent.

50. In the big cities pollution has increased to a dangerous level. Three wheeler (auto rickshaw) is one of the major sources of environmental pollution. But such vehicles are used by the common people and hence its use cannot be stopped suddenly. Specially in the rural areas where roads are being constructed these are the only mechanised speedy vehicle. In small towns there is a high demand for these vehicles. Therefore, we have to discourage the use of three wheelers (auto rickshaw) in stages. In order to facilitate public transportation some alternative measures have already been taken to make bus and taxi cab easily available. In view of this and to discourage use of three wheelers, I propose to increase the supplementary duty on three wheelers from 25 percent to 50 percent. To achieve the same goal I propose to impose 50 percent supplementary duty on two stroke engines.

51. Augmentation of revenue is essential for development of the country. While keeping the common and poorer section of population free from onerous tax burden and imposing tax on the relatively prosperous section of the population, I propose the following measures to increase revenue:

1. I propose to increase supplementary duty on air conditioner from 10 percent to 40 percent, except air conditioner used as capital machinery in industries.
2. I propose to increase supplementary duty rate on refrigerators from 15 percent to 20 percent.

(c) I propose to increase supplementary duty on ceramic tiles from 10 percent to 20 percent.

(d) To discourage smoking which is injurious to health I propose to increase supplementary duty on cigarette papers from 35 percent to-45 percent.

(e) Furniture of good quality is now produced in the country; yet the import of furniture has increased. The affluent population of our society are their consumers. So I propose to impose 40 percent supplementary duty on furniture.

(f) The industries producing toilet soap and toiletries have grown in the country. Import of foreign toilet soaps and toiletries have also increased. To increase revenue I propose to increase supplementary duty on toilet soaps from 10 percent to 20 percent. I also propose to increase the supplementary duty on all perfumery products, room deodorant and toilet preparations, from 15 percent and 35 percent to a consolidated rate of 40 percent with the exception of agarbati.

52. After presenting the major tax proposals I would now like to present then on-NBR tax proposals. Under the Stamp Act 1899 at present stamp duties are levied on 65 items. The stamp duty rate has remained unchanged over the past 4/5 years. The cost of printing, maintenance and accounting of stamps have increased manifold during this period. To meet higher cost as well as to rationalise and simplify stamp duty structure and increase government revenue, I propose to refix stamp duty rates on 35 items. Our revenue collection from stamp duty was Taka 518.69 crore and Taka 578 crore in FY 1996-97 and 1997-98 respectively. Revenue from stamp duty in FY 1998-99 is estimated to be Taka 585 crore. Refixation of stamp duty rates will yield an additional amount of Taka 10 crore only. The increase in tax incidence is insignificant.

53. Taka 150 crore and Taka 180 crore were collected as fees for registration of deeds in FY 1996-97 and FY 1997-98 respectively. I propose some changes in the deeds registration fees levied under the Registration Act, 1908. These measures is estimated to yield Taka 10 lac in incremental revenue.

54. Motor vehicle tax and fees were raised slightly in FY 1993-94. Since then cost for construction, expansion and maintenance of road has increased considerably. Inspite of this motor, vehicle tax and fees have not been raised in the past. To keep pace with the increased expenses I propose to increase motor driving license fees and renewal fees by Taka 20 and Taka 10 respectively. In addition, I propose to increase tax on various types of motor vehicles upto 20 percent. These measures are estimated to yield additional revenue of Taka 8 crore annually.

55. I would now like to say a few words about the revenue collection efforts of FY 1997-98. Mainly due to the desire to finance a sizable Annual Development Plan (ADP) a high revenue target was fixed for FY 1997-98. A total receipt of Taka 15,000 crore was estimated from taxes administered by National Board of Revenue which was 20 percent higher than the collection for FY 1996-97. At the beginning of the current fiscal year it became clear that due to the limitations of the existing tax policies, structural weaknesses and problems accumulated over the years, it is necessary to revise the target. In addition, the Honourable High Court has passed interim orders on writ petitions filed by importers in about 4000 cases allowing clearance of goods against personal undertaking or bank guarantees for the disputed amounts. Approximately Taka 350 crore revenue is involved in such cases. In view of these realities the revenue target for taxes administered by National Board of Revenue was re-fixed at Taka 14100 crore which was 13 percent higher than the actual collection of the previous year. A reliable measure of revenue effort of a country is the percentage increase of revenue collection over the previous year collection. For example, in 1993-94 revenue increase according to the above measure was 5.36 percent; and in 1995-96 it was 8.05 percent. Therefore, in FY 1997-98 our revenue performance is noteworthy in a relative sense. However, we are not complacent with our success. Therefore, we are determined to achieve desired growth in revenue collection through changes in our tax policies as well as structural and procedural reforms.

56. I have placed the major tax proposals for FY 1998-99 before the Parliament. Now I would like to state the overall revenue implication of these proposals. The revised estimate for National Board revenue (NBR) administered taxes for 1997-98 is Taka 14,100 crore. The revenue estimate for NBR has been fixed at Taka 15,700 crore for 1998-99. Because of the adjustment of personal income tax rates and slabs, measures to support capital market and other measures, there will be a revenue loss of Taka 40 crore. On the other hand, due to expulsion of the tax base there will be a revenue gain of Taka 235 crore. Consequently, there will be a net increase of Taka 195 crore under this head. Implementation of proposals for reduction of customs duty rates is expected to result in revenue loss of Taka 175 crore and there would be a gain of Taka 75 crore from proposes for enhancement custom duty. The net loss on account of reduction- of customs duty would be Taka 100 crores. Expansion of VAT, withdrawal of VAT exemption, and procedural reforms of VAT will raise an additional revenue of Taka 40 crores. Rationalization of supplementary duties will yield an estimated additional revenue of Taka 215 crores. Net increase in revenue due to the proposed tax measures will be Taka 350 crore revalue will increase by another Taka 385 crore because of intensive monitoring, supervision, and procedural improvements. The remaining Taka 865 crore will come from autonomous growth of revenue.

57. For a long time economists explained the difference in per capita income between countries by differences in natural and human endowments, technical knowledge and productivity in various countries. Recently these ideas have been questioned. In the new economic thinking quality of economic policies and institutions have been identified as the most important explanation for difference in per capita income among various nations in the world. Mancur Olson, an American Economist who died recently, observed:

"the great differences in the wealth of nations are mainly due to differences in the quality of their institutions and economic policies". (Olson, Mancur, "Big Bills Left on the Sidewalk. Why Some Nations Are Rich, and Others Poor", Journal of Economic Perspectives, Spring 1996, p. 19.) In preparing the budget, therefore, we have emphasized the quality of economic polices and institutions These policies have been designed in a manner such that instead of inhibiting individual endeavour they help nourish them.

58. We are passing through the most opportune moment in our history. High growth in the last two years has ushered us into a new era. At the same time we must not forget that the dark cloud of economic crisis in Asia has not yet disappeared completely. World economy and the regional conditions are still volatile. We are determined to complete our agenda of economic reform programme and we need united national efforts to solve the problems accumulated over time. State owned enterprises which incur losses have become a drag on our development effort and we find it extremely difficult to extricate ourselves from these burdens To survive in a free market economy, we have to create an environment for sustainable development by completing these reforms speedy. To attain success in resolving difficult issues such as financial sector reforms and privatisation, we need national consensus. Such consensus though difficult is not unattainable. History bears testimony that time and again the Bangalee nation has always become united at times of need. The entire nation fought during the liberation war of Bangladesh under the leadership of Bangabandhu Sheikh Mujibur Rahman by closing all ranks. Similarly, at this opportune moment of history we have to implement the reform programme on the basis of national consensus. On the eve of the birth centenary of the rebel poet Kazi Nazrul Islam, let us join together to take a vow in his words:

"We shall go forward leaving behind the wilted past

We shall go out in the open meadows singing, leaving behind the closed cave

We shall create a brave new versatile world of our own

With vibrant glory of our labour".

Joy Bangla

Joy Bangabandhu

Long Live Bangladesh.