Global credit rating agency Moody’s Investors Service on Monday said that delayed implementation of the new VAT law by Bangladesh was ‘credit negative’ as it would impede revenue collection and underscore the institutional hurdles to effective policymaking in the country.
The agency in its report Moody’s Credit Outlook-July, 2017 said that deferral of the new VAT law, the third postponement since 2015, would only marginally reduce projected revenue gains for the fiscal 2018 budget, since the more significant revenue increase was projected for later years.
‘We expected the now-delayed VAT’s implications for future revenue collection and broader revenue reform to be more far-reaching,’ the outlook said.
It was the budget’s most crucial revenue measure, and would have improved the progressivity of the tax system while strengthening compliance, it said.
Revenues from the VAT were budgeted to account for about 32 per cent of total collections in fiscal 2018, only a 0.2 percentage point higher as a proportion of total receipts than fiscal 2017 levels.
However, the International Monetary Fund estimates that once the new VAT took effect, its collections would directly lift tax revenues by 1 per cent of GDP each year, it said.
Moody’s, however, estimated that it would be approximately 10 per cent of revenues.
Bangladesh last week passed budgetary proposals for the fiscal year 2018 but deferred implementation of a new digital value-added tax (VAT) system which sought to impose a uniform 15 per cent tax rate on goods and services by two years to July 2019.
The report said that Bangladesh’s revenue collections were significantly lower, at around 10 per cent of GDP, and among the lowest of all the countries that Moody’s rate.
Delayed VAT implementation will make it difficult for the government to achieve its target of raising revenues to 14 per cent of GDP by fiscal 2020, it observed.
It will also weigh on fiscal imbalances. Bangladesh has recorded consistent fiscal deficits, averaging 3.3 per cent of GDP over the past 10 years.
Repeated delays in implementing the VAT law also
pointed to difficulties associated with effective policy reform in Bangladesh. Previous postponements were due to opposition from business owners and other vested interest groups.
Delay this time, in the context of elections scheduled for 2018, indicates the political hurdles to implementing meaningful reforms, it said.
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