CHALLENGES & OPPORTUNITIES - ICAB CHALLENGES & OPPORTUNITIES 18.7% 23.8% 6.5% 18.4% 6.9% 12.3% 4.2%...

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April - June 2015

National Budget 2015-2016 | C

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April - June 2015

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Editorial 2President’s Desk 4

ARTICLESBangladesh National Budget 015-16: 6Challenges Encountered and Priorities Beseeched- M Jalal Hussain FCA

Budget Expectation 2015-16: Sizeable 11Revenue Forecast, Reformed Plan of Expenses and the Better Implementation Strategy- Dipok Kumar Roy ACA

Budget 2015, Facts & Prospects: 17Bangladesh Economy- Masih Malik Chowdhury FCA

National Policy Brief: Bangladesh 21- 1Dr. Binayak Sen | 2Dr. Zulfiqar Ali

Anti-Money Laundering and Combating 27Terrorist Financing: Bangladesh Perspective- Md. Syful Islam FCA, FCMA

Reforms Needed for a Taxpayer-Friendly Policy 37- A F Nesaruddin FCA

Dreaming a Real Pro-people Budget 40- Raihan M Chowdhury

Domestic Credit Rating - Operation 43and Effectiveness in Bangladesh- N K A Mobin FCA, FCS, CFC

Economic Cost of Road Accidents 52and Owner's Liability in Tort Law- S M Abu Nayem Ahmed

Economy of Bangladesh: Taking off to Next Level 59- Mohammad Zahid Hossain FCA

What Should be Our National Budget 69Balanced, Surplus or Deficit?- Esha Nabila Hussain ACA

Private Equity 73A New Source of Equity Investment in BangladeshIts Meaning and Role in Economic Development- Muallem A Choudhury FCA

National Budget 2015-16: 80Not Absolute People Friendly- Md. Shahadat Hossain FCA

A Succinct Disclosure on Budget 2015-16 85- SK Md Tarikul Islam ACA

CONTENTS ISSN 1993-3649

"The opinions expressed in this publication are those of the respective authors themselves and do not necessarily reflect the views of the Editorial Board of the Institute of Chartered Accountants of Bangladesh (ICAB) or the ICAB itself."

DISCLAIMER

EDITORIAL BOARDChairmanMd Abdus Salam FCA

EditorHarun Mahmud FCA

MembersA F Nesaruddin FCAAkhtar Sohel Kasem FCANasir Uddin Ahmed FCAMd. Shahadat Hossain FCAGopal Chandra Ghosh FCAAmanullah Khan FCADr. Jamshed Sanyiath Ahmed Choudhury FCAMd. Liaquat Hossain Chowdhury FCAMd. Rokonuzzaman FCASabbir Ahmed FCAMd. Sayeed Ahmed FCAMahmudul Hasan Khusru FCASnehasish Barua FCAMuhammad Aminul Hoque ACAAbdullah-Al-Mamun ACAZareen Mahmud Hosein ACAMuraheb Malik Chowdhury ACAAbu Haider Mohammed Kibria ACASK. Md. Tariqul Islam ACAShah Md. Jubaer ACADipok Kumar Roy ACAAbuzer Ghaffari ACAMohammad Mosttafa Shazzad Hasan ACABidhan Chandra Mandal ACAMd. Yasin Miah FCA, Chairman-DRCMohammad Saif Uddin FCA, Chairman-CRC

Member SecretaryMohammed Emdadul Haque FCATechnical Adviser-ICAB

Published by the Editorial Board of the CouncilThe Institute of Chartered Accountants of Bangladesh (ICAB)CA Bhaban, 100 Kazi Nazrul Islam Avenue, Dhaka 1215Tel : 9117521, 9112672, 9115340, 9137847Email : [email protected] : www.icab.org.bd

ORIALEDIT

The National Budget 2015-16 has already been placed before the Jatiya Sangsad this month in the backdrop of satisfactory position in the Balance of Payment (BoP) due to declining of fuel price in the international market. We expect that the Budget would ensure better corporate governance and investment friendly business environment which are the affirmative measuring barometers for development.

At present the development indicators of our economy are quite impressive. Increase of productivity, inflow of remittance, infrastructures development, technology and skills development, streamlined policies, improved quality financials have set the country in right track. However, if we place our economy in the global context, it needs to undertake stringent policies to uplift the economy further.

The country is still hovering around 6.0 percent growth. We are living with huge unemployment, inadequate and erratic supply of power and gas, budget deficit, slow FDI, money laundering, tax avoidance by the individuals, organizations and multinational companies (MNCs), low production capacity & low food intake, political unrest, etc.

As far as the free flow of information and the free market

April - June 2015 The Bangladesh Accountant02

economy is concerned and congenial atmosphere is believed to exist, Bangladesh has to compete with other countries. Such competitiveness depends upon proper functioning of Regulatory Institutions and the policies. The factors determine the level of productivity of a country, which, in turn, influence the level of prosperity in an economy. Although the productivity of a country and the earning of foreign exchange through exports determine its ability to sustain a high level of income, these are also the central determinants of return on investment, which is one of the key factors explaining an economy's growth potentials.

With steady GDP (Gross Domestic Product) growth of around 6 percent, the country’s target to reach middle income country by 2021 may not be achieved. The principal reason behind this setback is slow investment. According to ADB, we have to raise the investment from current level 28.7 per cent to around 34.3 per cent of GDP to attain our desired goals.

The total expenditure of the Budget for FY 2015-16 has been estimated at Tk. 2,95,100 crore. The allocation for non-development expenditure including other expenses has been estimated at Tk.1,98,100 crore. In addition, Tk. 97,000 crore has been estimated for Annual Development Plan (ADP). With the

allocation of Tk. 3,996 crore for autonomous bodies, total development expenditure stands at Tk. 1,00,996 crore (11.6% of GDP). The size of the ADP allocation is much higher than previous year.

The Sector-wise allocations of the next year’s ADP have been shown at TK. 21,308 crore in Human Resources Development, 24,521 crore in Agriculture & Rural Development, Tk. 18,479 crore in Power & Energy, Tk. 21,649 crore in Transport and Communication and 11,033 crore under the head of others.(Source: National Budget 2015-16).

ADP is the key tool for public investment and the foremost challenge is its successful implementation. Steps are required to accelerate the pace of implementation of slow-moving projects, identify projects facing slow foreign aid disbursement problem and scale up disbursement. As a result, the rate of ADP implementation would increase.

The Budget proposed incentives include raising of threshold of tax exemption on dividend income from Tk 20000 to Tk 25000, reduced the tax rate from 42.5 percent to 40 percent for publicly traded banks, insurance companies and other financial institutions, tax reduction from 27.5 percent to 25 percent for other listed companies, withdrawal of 10 percent

Development Indicatorsquite Impressive,but Challenges are more

The Bangladesh Accountant April - June 2015 03

Md Abdus Salam FCAChairman, Editorial Board andCouncil Member & Past President-ICAB

deduction at source on income from share market by any company or joint venture, etc, which we believe would bring dynamism in the national economy. The Institute already disseminated to the practicing members through workshops and seminars about the government’s initiatives and advised them to uphold the professional integrity while performing their duties specially in auditing of listed companies.

The main challenges of this Budget are to generate more revenues, increase foreign and local investment, taming inflation, ensuring food security, improvement lifestyle and creating employment opportunity. We expect the government would give more attention on these areas.

The tax-revenue collection fell short of its aggregate target by Tk 4,271 crore in the first nine months of the last fiscal year (FY), largely due to slowdown in investment and development activities. The National Board of Revenue (NBR) tapped in an aggregate amount of Tk 92,729 crore as revenue during the July-March period of the current FY against its target of Tk 97,000 crore. According to some newspaper Reports, implementation of the Annual Development Program (ADP) was poor in the three quarters that affected the tax-revenue collection. Further, economic situation hit by political turmoil is the other prime reason for the estimated shortfall in revenue collection. In this situation, with the same manpower in the tax departments, the government has to face a challenge to collect the revenue about 2,00,000 crore in FY 2015-16. Increase of the tax net and political stability may help to increase the revenue collection of the government.

Government declared some benefits and incentives to attract

local or foreign direct investment (FDI) which also depends heavily on the relative strengths in business environment, source of raw materials, production facility, market opportunities and uninterrupted gas & electricity supply, etc.

Bangladesh, one of the major economies in South Asia, over the last decade, has shown some degree of success in addressing the problems in providing such logistic supports for FDI. Now it needs more stringent policies to attract the investors, whether it is domestic or foreign.

The government gave priority on social safety net program and human resources development. It is required to reduce the income gap between the rich and poor and appropriate program to eradicate hunger and poverty from the country also. Rigorous initiatives are required to boost export of skilled manpower to Middle East and the European countries so that the current upward trend of remittance inflow is maintained. At present, according to the Bangladesh Bank, inward remittance rose to 7.08 percent year-on-year in 10 months of this fiscal year USD 12.55 billion which is very good sign for our economic advancement.

The formulation of a national subsidy policy is an urgent need to avoid indiscrimination in allocation and abuse of subsidy, the government provides the financial support to keep the price/cost of products or services at low level. To ensure transparency and accountability, there should be a provision to review all subsidized programs of the government and analyze its distribution system and impact.

It is disappointing to notice that in certain selective sectors, black money was allowed to be invested without declaring source of income by giving additional tax. Often it is reported that MNCs are avoiding

real tax by manipulating prices through the transfer pricing system. This practice should stop altogether. Tax departments are to be equipped, strengthened and motivated to control such tax evasion.

We are very optimistic that our Honorable Finance Minister Mr. Abul Maal Abdul Muhith, MP in several occasions emphasized on a better economic growth in this fiscal, as he felt the urgency of getting out of the 6.0 per cent GDP-growth cycle. But to this end, massive administrative reforms are needed. Through the Budget proposals, the Finance Minister has given a clear indication to this end which is laudable.

Before passing the Budget 2015-16, the Government should consider opinions and proposals from different stakeholders in order to improve the level of quality and acceptability of the Budget. The ICAB submitted its suggestions and recommendations regarding Income Tax and VAT policies to the National Board of Revenue (NBR) and organised a Pre-budget Roundtable Discussion in collaboration with Daily Prothom Alo in May 2015 from which recommendations and suggestion emanated could help for proper implementation of the Budget.

To conclude, I would like to mention that, like other years, the April-June issue is as always dominated by budget discussions and related articles. We appreciate, if you please feel free to give us your feedback about the articles, contents and any other issues. Your valuable suggestions and opinions would greatly contribute to enrich the 'The Bangladesh Accountant'.


PRESIDENT’S DESK

FRA is a long outstanding issue of ICAB which had emerged in 2003 out of World Bank’s 20 recommendations in ROSC Report. Since then the Institute has been making relentless efforts for development in its academic and regulatory regimes. The WB report 2014 referenced to the realities that ICAB has complied with 19 recommendations in great were appreciation by the World Bank. From the very beginning of the FRA, a quarter has been trying to sabotage the accountancy profession in the name of volatility in capital market vis-à-vis statutory audits. It has by now seemed that the government has become determined to enact the law. We had suggested some recommendations which were incorporated in the draft FRA approved by the Cabinet last year. Priorly we have had meetings with the Hon’ble Finance Minister in this regard. The Parliamentary Standing Committee of JS on Finance Ministry has reviewed the Act and suggested some strange amendments. Those changes are having a number of contradictions vis-s-vis the country’s many existing laws. The committee recommended the Act for JS approval. We expressed our observation with grave concern especially on 7 points about the misleading changes through print & electronic media. In the back drop of the perplexed scenario, ICAB is now passing through a crisis.

On behalf of the Council-ICAB, I am confident that we would bring it into the Cabinet approved format away from the misleading changes in the Act proposed by standing committee of JS. Our Council Members are working with passionate attention & relentlessness efforts to stop such untoward happening. Intellectual efforts will ultimately benefit the profession at large, I believe.

Since its inception, ICAB has been playing a significant role creating awareness; generating idea and thoughts useful for economic developments & emancipation. ICAB as always, remains passionately committed to the national development & way forward process. As the national professional accounting body, ICAB is working closely with the Government and policy making bodies like NBR, Bangladesh Bank, BSEC, IDRA, Ministry of Finance, Ministry of Planning and Ministry of Commerce, other ministries and different corporate entities, interalia.

As part of its regular exercise, ICAB submitted its proposals with comments/justifications regarding VAT and Income Tax towards National Budget 2015-16 to National Board of Revenue (NBR) in April 2015.

At the time of the announcement of the National Budget 2015-16, the ICAB and the Daily Prothom Alo jointly organized a Pre-Budget Roundtable discussion on 16 May

at CA Bhaban. Prominent Chartered Accountants, Economists, Budget Analysts, former Advisers of the Caretaker Government & Journos participated in the discussion. Speakers have put forward suggestions regarding Government’s Borrowing, Budget Deficit, ADP, Inflation, Investment, use of Foreign Loans, introduction of Sovereign Bonds etc. which surely provided a source for pragmatic thought to the concerned policy makers. The suggestion of ICAB's members particularly on widening the VAT net, exemption of VAT to facilitate commercial import, encouraging investment and hinder the outflow of capital from the country would benefit the country’s economy at large & revenue in particular.

For the first time ICAB has also organized a discussion on ‘Post Budget Scenario 2015’ in National Press Club on 18 June 2015. The members of the Institute also discussed about some clauses of proposed Financial Reporting Act 2015 in the discussion. The different print and electronic media also gave good coverage of the event with due importance.

ICAB is always striding for professional excellence and impart trainings on contemporary issues relating to accounting and auditing in national and international perspective. Members' conference on ‘Anti-Money Laundering and Counter-Terrorist Financing

Masih Malik Chowdhury FCAPresident-ICAB


Measurers of Financial and DNFBP Sectors: Bangladesh Perspective’ was LPD event in 2015.

Besides, ‘Financial system stability: key issues and challenges’, Practicing Members' Conference on ‘Quality audit in public interest entities – challenges and cost of audit’ and Members’ Conference on ‘Transfer pricing regulations in Bangladesh’ were organized in the Institute to benefit of the members.

To encourage the CFOs for maintaining proper standards in preparing their annual reports keeping in view the matters of the "Best Presented Annual Reports" Awards, given by SAFA, ICAB organised Conferences of Chief Financial Officers (CFOs) of Banking, Insurance and Non Banking Financial Institutions (NBIs) sectors, manufacturing, public sectors, NGOs and other entities in 21 & 28 May 2015. A total of 49 CFOs of different Banking, Insurance and NBFIs, Manufacturing, Public Sectors, NGOs and other entities participated in the Conferences.

Organizing workshops and trainings are the key components of ICAB’s regular activities. Three workshops on Compliance with Rules, Regulations & Accounting Standards and Preparation of

Financial Statements for Life Insurance Companies were organised by ICAB in association with Insurance Development & Regulatory Authority (IDRA). IDRA did this event first time with ICAB. It is likely to recur in future.

Finance Division, MoF, GoB has taken a range of reform initiatives to bring critical changes in regulatory framework. These are meant to build an improved and efficient Public Financial Management (PFM). As part of its initiatives workshop on “Public Expenditure and Financial Accountability (PEFA) Repeat Assessment 2015” was organized in the Secretariat. I had the opportunity to share my experience about PFM in Bangladesh through this international Standard Workshop where a number of representatives from donor agencies like WB, EU, CIDA, JICA, DFID, etc were present.

Besides, training on "Advanced Excel and Financial Modeling, workshop on "How to maintain Quality in Audit and Assurance Services", "Transfer Pricing Regulations & Practice”, " Code of Ethics for Professional Accountants" and training on "Advanced Excel and Financial modeling" took place in ICAB.

I have taken part in seminars and

workshops organised in national level. Conference on ‘Bangladesh Economy and Capital Market Development’ organized jointly by Daily Bonik Barta and Chittagong Stock Exchange (CSE) at a Hotel in Dhaka. As a discussant I addressed it covering interest rate, bank’ loans and capital market, as my instant reactions.

ICAB too is contributing to educate in pre-graduation level. Recently ICAB discussed on study curriculum in Business Studies Group in SSC & HSC levels under National Curriculum and Textbooks Board (NCTB) in 2 meetings with Education Secretary. The Secretary requested ICAB for the involvement of ICAB for reviewing and updating textbooks under SSC and HSC academic syllabuses. ICAB agreed with the Secretary’s proposal. It is in process, however. ICT division, GoB has also given financial impetus to ICAB for drawing a software on CAAT. Works would soon start, hopefully.

I appreciate that the Institute is going to publish its Quarterly Journal 'The Bangladesh Accountant' on April-June 2015 issue with special emphasis on National Budget. I believe the Journal would benefit the readers & the policy makers, if they take cognizance of issues made therein.

We are objectives driven to move ahead with our professional acumen with excellence and deliver the best for the Institute and our country as a whole. As always, Fellow Members, I continue to hope for your all out co-operations.

Thanking you,

FRA is a long outstanding issue of ICAB which had emerged in 2003 out of World Bank’s 20 recommendations in ROSC Report. Since then the Institute has been making relentless efforts for development in its academic and regulatory regimes. The WB report 2014 referenced to the realities that ICAB has complied with 19 recommendations in great were appreciation by the World Bank. From the very beginning of the FRA, a quarter has been trying to sabotage the accountancy profession in the name of volatility in capital market vis-à-vis statutory audits. It has by now seemed that the government has become determined to enact the law. We had suggested some recommendations which were incorporated in the draft FRA approved by the Cabinet last year. Priorly we have had meetings with the Hon’ble Finance Minister in this regard. The Parliamentary Standing Committee of JS on Finance Ministry has reviewed the Act and suggested some strange amendments. Those changes are having a number of contradictions vis-s-vis the country’s many existing laws. The committee recommended the Act for JS approval. We expressed our observation with grave concern especially on 7 points about the misleading changes through print & electronic media. In the back drop of the perplexed scenario, ICAB is now passing through a crisis.

On behalf of the Council-ICAB, I am confident that we would bring it into the Cabinet approved format away from the misleading changes in the Act proposed by standing committee of JS. Our Council Members are working with passionate attention & relentlessness efforts to stop such untoward happening. Intellectual efforts will ultimately benefit the profession at large, I believe.

Since its inception, ICAB has been playing a significant role creating awareness; generating idea and thoughts useful for economic developments & emancipation. ICAB as always, remains passionately committed to the national development & way forward process. As the national professional accounting body, ICAB is working closely with the Government and policy making bodies like NBR, Bangladesh Bank, BSEC, IDRA, Ministry of Finance, Ministry of Planning and Ministry of Commerce, other ministries and different corporate entities, interalia.

As part of its regular exercise, ICAB submitted its proposals with comments/justifications regarding VAT and Income Tax towards National Budget 2015-16 to National Board of Revenue (NBR) in April 2015.

At the time of the announcement of the National Budget 2015-16, the ICAB and the Daily Prothom Alo jointly organized a Pre-Budget Roundtable discussion on 16 May

at CA Bhaban. Prominent Chartered Accountants, Economists, Budget Analysts, former Advisers of the Caretaker Government & Journos participated in the discussion. Speakers have put forward suggestions regarding Government’s Borrowing, Budget Deficit, ADP, Inflation, Investment, use of Foreign Loans, introduction of Sovereign Bonds etc. which surely provided a source for pragmatic thought to the concerned policy makers. The suggestion of ICAB's members particularly on widening the VAT net, exemption of VAT to facilitate commercial import, encouraging investment and hinder the outflow of capital from the country would benefit the country’s economy at large & revenue in particular.

For the first time ICAB has also organized a discussion on ‘Post Budget Scenario 2015’ in National Press Club on 18 June 2015. The members of the Institute also discussed about some clauses of proposed Financial Reporting Act 2015 in the discussion. The different print and electronic media also gave good coverage of the event with due importance.

ICAB is always striding for professional excellence and impart trainings on contemporary issues relating to accounting and auditing in national and international perspective. Members' conference on ‘Anti-Money Laundering and Counter-Terrorist Financing


Introduction

The New Year 2015 started with political fiasco in Bangladesh. It continued three to four months that brutally affected the beleaguered economy of the country. The national budget for the FY 2015-16 is of utmost important as the country has been facing serious problems starting from political to economic to financial. The stock market, real estate business, investment in private and public sector economies, remittances from abroad and unemployment situation of the country don’t show a sound track of good and stable economy. The economy faces appalling opposition due to political turmoil and instability. To cope with the present situation and to put the economy on the right track, the budget for FY 2015-16 needs special attention, extraordinary prudence and professionalism in utilization of limited resources. Seminars, meetings and discussions are happening, partaken by renowned economists and analysts off and on, in different parts of the country. It’s expected that the authorities who are responsible for preparation and presentation of a national budget would take stock from the suggestions and proposals put forward by various organizations.

Bangladesh National Budget 2015-16:Challenges Encountered and Priorities Beseeched

M Jalal Hussain FCA

The people of a country are the end users or the stakeholders of the national budget and the budget should not be a conundrum to them. When the scribe asked Farid Mia, a slum dweller, about budget he replied “I don’t know what is budget. I know government is changing but my fate is not changing. I am living in the raunchy slums in Dhaka city for the last 40 years. There’s no change, no improvement in my life and my family lives”. Millions of people like Farid Mia and his family have been living more than 40 years in the most unhygienic and grungy conditions in the slums at different parts of the country although 40 national budgets had been prepared, passed and approved by the peoples’ representatives at the parliament during the period. In this scenario the question strikes the minds of general people “What’s the use of preparing billions of worth Taka budget every year if the budget fails to change general people’s lives in forty years?”

Some critics may opine that the country is moving forward with progress. But a comparison of the progress achieved with the contemporary world is not praise-worthy and frustrating. Some countries made tremendous progress in terms of per capita income, reduction of poverty, export earnings, education, science and technology, job creation and


elevating standard of living of the common people. During the last forty years some countries in Asia had increased their per capita income by 100 to 130 times and increased their export earnings from USD 100 million to 100 billion, reduced poverty from 50% to 5% . When we compare the progress of other countries with the progress made by Bangladesh, it gives a bleak picture of the economy.

Achieve Stable and Desirable GDP Growth

The major challenge of a national budget of any country is to achieve a targeted GDP growth and keep it stable. Last FY 2014-15 budget forecasted GDP growth at 7.3% and actual achievement was 6.2%. The current year’s budget as we heard from the media would forecast GDP growth at 6.4%. Enhancing the GDP growth or reviving the growth should be on the anteriority list in the budget. Enhancing GDP growth won’t be possible if the economic sectors that contribute to GDP, remain economically dilapidated. Real

estate, stock markets, financial institutions and private sector industries directly contribute to GDP. But these sectors are not performing well and fail to contribute enough to GDP due the present economic situation of the country, either created from the political mayhems or other reasons. Without improving these sectors it’s rather impossible to enhance GDP growth at the desirable limit.

The aims of the fiscal policy should be to create an investment-friendly atmosphere for both private and public sector economies. Financial institutions and stock market play a striking role in the investment process in any economy. Both the sectors’ present performance is not at all satisfactory. Sapless performance of these sectors would definitely affect the GDP growth of the country. These sectors deserve fiscal support by the upcoming 2015-16 budget in the forms of incentives, tax rebates, reduction of registration fees for apartments or land purchase, corporate tax-cut for financial institutions. It’s worth mentioning

HUGE DEFICIT FINANCING OF THE BUDGET ALWAYS SPURS THE INFLATION RATE. LAST FY 2014-15 BUDGET HAS HAD HUGE AMOUNT OF DEFICIT FINANCING OF ADP, ESPECIALLY BORROWING FROM BANKS AND OTHER SOURCES, AFFECTED THE INFLATIONARY SITUATION IN THE COUNTRY. MOREOVER, REPEATED PRICE INCREASE OF GAS, OIL AND ELECTRICITY DIRECTLY ENHANCE THE INFLATION RATE. IF THE GOVERNMENT OF BANGLADESH (GOB) WANTS TO CONTROL AND KEEP THE INFLATION STABLE, IT SHOULD NOT INCREASE THE GAS AND ELECTRICITY PRICE REPEATEDLY UNLESS THERE IS AN ABNORMAL INCREASE OF OIL PRICE IN INTERNATIONAL MARKETS.


here that the rate of corporate tax in Bangladesh is the highest in Asia, EU, US and Canada.

Control and Keep Inflation Rate to Tolerable Level

The inflation rate of Bangladesh is higher and necessary techniques need to apply to contain the inflation while preparing the national budget for FY 2014-15. During the FY 2011-12, 2012-13, 2013-14 and 2014-2015 Bangladesh had inflation rate of 10.7%, 6.2%, 7.5% and 7.2% respectively. Huge deficit financing of the budget always spurs the inflation rate. Last FY 2014-15 budget has had huge amount of deficit financing of ADP, especially borrowing from banks and other sources, affected the inflationary situation in the country. Moreover, repeated price increase of gas, oil and electricity directly enhance the inflation rate. If the Government of Bangladesh (GoB) wants to control and keep the inflation stable, it should not increase the gas and

electricity price repeatedly unless there is an abnormal increase of oil price in international markets.

Fiscal Deficit or Deficit Financing

Analyses of national budget of Bangladesh for the last few Fiscal Years show that the budget financing has been ensnared with deficit financing. The deficit has been increased by 23% in FY 2014-15 in comparison to FY 2013-14. The country’s fiscal budget for FY 2015-16 is likely to face 26.74% higher than the fiscal budget of FY 2014-15. If the political unrest escalates that will severely deter investment scenario and widen the fiscal deficit, commented by Finance Division officials. The government plans over 75% of that deficit will be met by the bank borrowings and saving instruments as there could be a lack of external funds. Interest payment of the next July-June fiscal year will also increase to Tk 35,000 crore from the current

fiscal’s Tk 31,043 crore. The deficit in this fiscal is Tk 61,346 crore and the next year it would be Tk77,750 crore.

The deficit financing policy intensely matters the national budget of a country as borrowing has a cost to bear. Most of the countries in the present times try to downsize the fiscal deficit. Finance Minister Carlos Leitao of Quebec (Canada) did his best by presenting the budget, Quebec’s first without a deficit in seven years, as a burst of sunshine. “With this budget, the government is sending all Quebecers a message of confidence: together we are building our economy,” he told the National Assembly. The days of paying for services on credit are over, he said, and the dream of a more prosperous Quebec is becoming reality.

Highly deficit budget is not apposite from economic points of view as it salves short-terms pains of a nation but put the nation in

the long term endurable pains. Greece has been adopting high deficit financing policy for many years and ended up with economic and financial crisis that were temporarily bailed out by EU and IMF. It is highly desirable that GOB authorities for budget preparation and presentation would consider high deficit financing proposition as big challenge for the upcoming budget for FY 2015-16 and adopt deficit-adverse policy. Excessive borrowings from the commercial banks will drastically affect the private investments and in turn affect the GDP growth as it did in the FY 2014-15.

Eliminating Waste and Controlling Government Spending

Resources of developing countries like Bangladesh are sporadic and exiguous though the needs for the national budgetary requirement are limitless. In this economic scenario it’s wise to eliminate waste and control government spending. If one asks Americans how many cents of every dollar that the federal government spends they believe is wasted, their answer reflects a belief that Washington is vastly incompetent when it comes to managing taxpayer money. A 2014 Gallup poll reported that Americans think the federal government wastes 51 cents of every dollar they pay in taxes. The size of the national budget of Bangladesh is highly overambitious. Finance Minister of GOB told the media recently that the national budget size for the FY 2015-16 would be Tk 300, 000 crore, 20% more than the size of FY 2014-15. The size of the budget is immaterial, according to the economists, unless the budgeted fund is allocated to the productive sectors that increases production, creates employment opportunities,

contributes to GDP growth. The challenge lies ahead with the GOB to spend the hard-earned taxpayers’ money in productive sectors, eliminate the waste of budgeted fund by misuse, by adopting corrupt practices, by false and fabricated projects, in the name of projects only in white papers and on and on. Unproductive expenditure needs to be discouraged and in no way the taxpayers’ money should be enjoyed by a section of privileged people, sitting idle and doing nothing to contribute to GDP.

Whitening Black Money

It’s not a new concept. The practice of whitening black money has been following in Bangladesh and some others countries for some years. It has given some benefits to economy of Bangladesh in forms of investments although the concept was discouraged and criticized by some groups. Every concept or practice has some merits and demerits. Bangladesh economy needs investment, more investment in productive sector of industries that increases production and creates job opportunities. According to economists and analysts huge amount of money especially black money or officially undisclosed money remain idle, unutilized due to the tax provisions and other provisions of law of the country. There’s no economic justification of keeping the money idle. Fiscal policy may encourage the “black money holders” to invest in some productive sectors by paying a reasonable amount of tax. The productive sectors may include: manufacturing industries that employ substantial number of employees, week sectors like stock market, real estate, investment in financial institutions, export-oriented trades and so on. Once the “black money holders” pay tax and come under the

jurisdiction of tax-net, their transactions of money and others, can be traced. But if they remain outside the tax-net, they can use the undeclared money in illegal or immoral dealings or unproductive purpose inside the country or in foreign countries.

Education and Energy Sectors Need to be on Top Priority of the National Budget

Education is the backbone of a nation. Without education no nation can develop, prosper and stand on its footings. Still the illiteracy rate in the country is high, economically much higher than the desirable level. Education sector deserves to be on the top most anteriority list of the upcoming budget. Long term, medium term and short term programs to deracinate illiteracy must be made in the fiscal policy. Accordingly, adequate provision should be made in the national budget for FY 2015-16. Productive sectors of the economy is severely suffering for inadequate and interrupted supply of electricity to manufacturing industries. Dearth of gas and electricity has been standing as a stumbling block on the way of new investment and expansion of manufacturing industries. Many industries could not start production due to lack of gas and electric connection, although the industrialists have the approval from the gas authorities and invested huge amount for factory building structures, acquiring and installing plant and machineries. It’s the responsibility of the government of any country to make infrastructures needed for industrial development and put in the priority list of its fiscal policy. Traditional energy source from fossil fuels need to be replaced by renewable energy source. National


Conclusion

The people of Bangladesh have had many annual national budgets since its independence. Every year a budget is prepared, presented to the parliament and got approved as usual. This country got its independence long time back but still it is far behind with the developed and emerging worlds in terms of literacy rate, per capita income, per capita electricity consumption, per capita internet usage, industrial development, health care and employment generation. The whole world is changing, advancing with the time. Lessons learned from modern economy and from previous budget history must be cultivated and practiced. We are pessimistic that the national budget for FY 2015-16 would be prepared and presented with clear vision, precise focus and unyielding determination to bring the country and the nation to the fore-fronts of the developing countries.

The Author is the CFO of aprivate group of companies anda Fellow Member, ICAB


budget must make appropriate allocation for infrastructure development and implement it.

Climate Change and Global Warming

Climate change and global warming are direct threat to Bangladesh because of its geological location. Bangladesh is number one country highly vulnerable to climate change as revealed by the various eco-geological researchers and environmental scientists. The southern parts of the country is suspictable to flood and salinity. The northern parts of the country has been experiencing drought affecting the agricultural production and lives of people. To face and encounter the crucial climate change effects, adequate budget allocation needs to be in the national budget FY 2015-16 and to be implemented by undertaking massive plans for forestation, water reservoirs, canals and ponds.

Job Creation

Creation of conditions for economic growth and job creation for the millions of unemployed or underemployed people is the important responsibility of any government. Job and investment-friendly budget is sine qua non for Bangladesh. Bangladesh is a small country with huge population. The upcoming budget should make adequate provision for human capital development that helps create job opportunities for the people. Natural resource-scarce countries in Asia like South

Korea, Singapore, Philippines made tremendous progress in their economies by undertaking human capital development programs. Bangladesh may take the examples of these countries and may improve the employment situation in the country. The budgets of the developed economies clearly show the existing unemployment rate and the governments’ target to reduce the rate in the upcoming budget. But the budget preparation culture in Bangladesh doesn’t present unemployment rate nor does it show the target of reduction. It’s expected that budget will show a clear picture of present unemployment in the country and the budgeted targets for creation of new jobs.

Frequently it was discussed about prioritization of sectors in designing budget instead of sketching conventionally by increasing or decreasing of expenses based on some speculative assumptions. Unless the sectors are prioritized, the strength and opportunity of the country may not be utilized and capitalized respectively in the way they need to address. Sectors priorities mean giving importance and focusing the sectors in budgetary allocation which have been identified strategically to sustain or accelerate the economic development of the country either for its proper utilization of strength and capitalization of opportunity or for the dire need of the country. In developing countries like Bangladesh, the budget is mainly focused to reduce property. If we see the ultimate goal of Vision 2021, we find it to become a middle income country where poverty will be completely eradicated. The poverty reduction focused budget mainly design to ensure basic needs of life and to scale up the standard of living boosting up the sectors prioritized based on strength and opportunity. A reform plan of

Budget Expectation 2015-16:Sizeable Revenue Forecast, Reformed Plan of

Expenses and the Better Implementation StrategyDipok Kumar Roy ACA

expenses focusing prioritized sectors needs sizeable revenue stream specially collection of tax, the significant part of revenue, to save the country from foreign loan for deficit budget. The plan of tax as revenue and reform of expenses are not enough unless the financial management is adequate and transparent. As such, budget should have a clear implementation strategy of revenue collection and efficiency of expenses.

Sizeable Revenue Forecast Intending to Raise Tax to GDP Ratio

As stated earlier the significant portion of revenue is tax (more than 80%). The collection of tax is very lower compared to its Gross Domestic Product (GDP). The tax to GDP ratio of Bangladesh is not comparable with any developed country and lowest amongst the comparable countries in Asia like India, Sri Lanka and Pakistan, Philippine, Vietnam and Indonesia. The following chart will give us a picture of tax to GDP ratio of developing and developed countries to figure out our positions:


Year Developing Countries Developed Countries (Best Tax-to- GDP Ratio)

Bangladesh India Pakistan Sri Lanka Philippines Vietnam Indonesia USA UK Belgium France Finland Sweden

2012 9.35 17.7 10.02 15.3 14.4 13.8 12.00 26.9 39 46.8 44.6 43.6 45.8

Source: Heritage Foundation


The growth of tax to GDP ratio is not consistent at all with the growth of GDP more than 6% over last 10 years. In one of my articles published in the Financial Express, I concluded to widen tax net instead of raising tax rate. It was intensively discussed as well in pre budget discussion 2015-16 to widen tax net and to reduce tax rate to increase the tax to GDP ratio. In developed countries as stated earlier Tax-to-GDP Ratio is significantly higher because the people encourage paying tax from the belief that the paid tax would be back to them with better value which they could not generate or buy with the money they pay as tax. In Sweden, free education upto university level, subsidies for unemployment people, pensions for every taxpayer and free medical services for those below 18 years are provided. Could the people of

Sweden get all of the aforesaid benefits with their own tax money payable to Govt. unless not paid? So, the Govt. has to ensure the benefits against tax payment by the countrymen. We are far away to reach the level of tax to GDP ratio like Sweden and other developed countries to provide improved services for citizens & tax payers. But we should have effective efforts to raise the ratio from year to year to a reasonable rate in line with growth of GDP.

As per the annual report of NBR, Tax-to-GDP Ratio is 9.35 % in 2011-2012 as against 3.41% in 1972, an increase of 5.94% over last 40 years. Over the last 10 years, growth of GDP of Bangladesh was significantly higher than growth of Tax-to-GDP Ratio.

AS REVENUES ARE NOT COLLECTED AS FORECAST, THE GOVERNMENT HAS TO DEPEND ON FOREIGN LOAN AND DONATIONS OR INTERNAL BORROWINGS FROM BANKS TO MEET UP THE BUDGETED EXPENSES. SOMETIMES, THE FOREIGN LOAN AND DONATIONS BECOME CUMBERSOME TO AVAIL AND THE GOVERNMENT HAS TO BORROW FROM BANKS. EXCESSIVE BORROWING FROM BANKS MAKES LIQUIDITY CRISIS, MONEY MARKET BECOMES RESTLESS AND CREDIT FLOW TO THE BUSINESS IS REDUCED SIGNIFICANTLY HAMPERING THE GROWTH OF BUSINESS AND REDUCTION OF GROSS DOMESTIC PRODUCT (GDP).

6.275.96

6.63 6.436.19

5.746.07

6.716.32

6.01

5

5.5

6

6.5

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GDP Growth

8.24%8.45% 8.55%

8.27%

9.06% 8.98%9.36%

9.02%9.35% 9.45%

7.50%

8.00%

8.50%

9.00%

9.50%

10.00%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Tax to GDP Ratio

is 5%. What is the benefit of growth of GDP then to general people if additional income does not come under tax?

Some problems are associated in our country to bring all income under tax base or net which are (i) Faulty tax policy: Much dependency on indirect tax like VAT that affects general peoples and flexibility of higher level taxation like property tax, gift tax etc. Wealth tax act has been repealed. 10% and 15% surcharge (10% or 15% of tax payable) on wealth has been imposed if total wealth is above 2 crore and 10 crore respectively. As per report of NBR two years back, such surcharge payers were 4,865 persons and as of today it might be changed slightly. Wealth or property tax should be enacted instead of such faulty and unreasonable surcharge and the person could be over some lacs if we do cross check with undisclosed assets they hold like luxury cars registered with BRTC (value of each cars could be more than 2/3 crore) or number of luxury apartments or house. In reality, the wealth owners are paying less tax

If we see the above charts, the growth of GDP is consistently about 6% for each year over the last ten years where growth of tax to GDP is insignificant and increase of ratio is marginal from 8.24% to 9.45% over the last 10 years which is not rational with growth of GDP at all. What does it mean? It means that tax was not collected in line with the growth trends of GDP. It may be due to more peoples are not migrated to tax slab (not being eligible) or not coming under tax net (eligible but evading the tax net or escaping the income in an unfair way) as tax rates were not significantly reduced rather being increased. Considering the size of the economy, ie. GDP and growth thereof, the tax collection especially NBR tax collection is much lower than it could be. How this tax collection could be increased either extending more tax net/ tax base or increasing tax rate? This is now a debating issue to ponder.

If we review the average global rate of tax in accordance with information of www.taxrates.cc, we see the 'Global Average

Indirect Tax Rate' (VAT) and 'Global Average Individual Tax Rate' are almost constant which tend not to increase the tax burden on individual rather keep them flexible to spend with increase of income. On the contrary, 'Global Corporate Tax Rate' tends to reduce that indicates an opportunity to invest to increase GDP. This will ultimately increase the GDP as well as government revenue as tax resulting higher rate of tax-to-GDP ratio. We may review some examples of USA, (i) President Calvin Coolidge cut taxes drastically in 1929, resulting in economic growth of 61 per cent in total revenue; (ii) John F. Kennedy significantly cut income tax rates in 1961, leading to GDP growth and increased federal revenues of 62 per cent; and, (iii) Ronald Reagan cut taxes for all classes of the population in 1982, resulting about doubled the federal tax revenue. So, apparently it is not the rate to increase to get the growth of tax to GDP ratio. The tax base or net is the main bucket to fill in order to increase tax to GDP ratio in line with the consistent GDP growth. Tax base of Bangladesh is below 1% of total population where India


rationally than middle income groups who are simply under employment. Gift tax is a very rare practice (ii) Undisclosed income i.e. escaping of income to evade tax: Income and assets are hidden both for individual and Companies and no such technical approach to fund out those to bring under tax net. As stated earlier, the surcharge payers having wealth more than 2 crore are only 4,865 persons only due to escaping the income of people and showing inaccurate assets in IT10B, the list of the assets. (iii) Weak accounting and auditing: There is very common tendency to evade tax through accounting engineering. Here auditors’ role could be stronger to uphold professional status as well as serve the nation as dignified profession and assisted taxpaying to govt. Very recently, Institute of Chartered Accountant of Bangladesh has requested National Board of Revenue (NBR) to provide the list of Chartered Accountancy firms involving false auditing for taking stern punitive action against complain submitted by NBR (iv) Corruption: Corruption in corporations and NBR due to lack of professional integrity in performing job to evade taxes like VAT, income tax and custom duty and charges are very common features in our country. The corruption is the cancer and we need a national commitment to protect this. (v) Complexities of assessment and law: Assessment process, determination of allowable/disallowable expenses, exemptions and taxable income, computation of tax, penalty, interest etc are complex and there are loopholes in making assessment to evade tax (vi) Abuse of laws: In many cases the exemption, deduction and allowable/disallowable expense clauses lead to abuse of law by tax

payers and the regulator. (vii) Cumbersome legal procedures: Appeal process or Alternative Dispute Resolution (ADR) are cumbersome and time consuming. In order to better result such appeal wings and such ARD systems may be fastened and effective. (Viii) Regressive nature of taxation: Same rate of VAT for all means higher rate VAT on lower income group (ix) Low literacy ratio: Generally the educated people of the country are skilled having higher income group. Tax authority should have the survey data on the rate of the educated peoples under employment and under tax net. (x) Improper tax survey and spot assessment: Survey and spot assessment are the way to increase tax payers. Such survey and spot assessment are not fair and efficient to bring the escaped income under tax. Here efficient and effective efforts and professional integrity is the main to do such national jobs without harassing peoples unduly. (xi) Lack of technical and professional manpower: Irrespective of technical or professional issues, sometimes whimsical judgment take place unless appeal for fair judgment further. This leads the tax payers to hide income and does not come under tax net.

In the budget of 2014-2015 some initiatives were taken but those are not significant to raise tax. Some of those initiatives are: (a) Health development surcharge (b) Environment protect surcharge (c )Surcharge on wealth (d) Separate highest tax rate for Cigarette Company (e) To reduce tax rate for private limited Company and Bank & Financial Institutions (f) reduction of VAT on some specific items. The weakness of implementation makes it inefficient to collect properly. Efforts and

efficiency of collection of taxes in large scale will assist to reform massive target of expenses plan and protect the country from government debt. The proposed budget should focus on the avenues of tax collection widening the tax net.

Reform Plan of Expenses

In another article on budget I focused to prioritize two wings of our strength – (i) the ARMS and the (ii) LEGS. The ARMs are: Agriculture (A), Readymade Garments (R), Manpower (M) and Second-best Sectors (S) which are wings of the nation to be wealthier. The LEGS are Liberty and Democracy (L), Education (E), Governance (G) and Seminal Infrastructure (S) which are base of a nation to be stronger. The ARMS generates income directly standing on healthy and strong LEGS. ARMS will not function well with a good achievement even if provided adequate allocation unless LEGS are not healthier and stronger i.e., Liberty and Democratic practice is reasonably strong, quality Education and good Governance is ensured and seminal infrastructure like roads, railway, bridges or other establishment to promote business and all other economic activities. The budget should focus those areas of ARMS and LEGS on priority basis with reforms plan and objectives.

Why ARMS and LEGS?

We may have a thousand of political parties but we must have unity in the sense of liberty to present us in the world in one identity as nation with prestige and pride. We will have freedom of speech that will ensure a sound democratic practice. The liberty in thinking and expression will open


larger one. So, ARMS need to be focused in the budget reforming their existing pattern to attain competitive advantage in the world market for product and service specification and place the nation on a strong dias of ARMS to be a stronger and wealthier nation.

Implementation Strategy Combating Challenges

Implementation becomes difficult because of non-structured process of revenue and expenses and as such, there is lack of credibility of budget formulation for both revenue and expenses. Over and above these, corruption, inefficiency, political influence and substandard process of financial management make the whole implementation process of the budget inefficient. As revenues are not collected as forecast, the

the door of novelty and the practice of democracy will find the avenues of speeding up the nations economically and socially ensuring accountability and efficiency. There is no alternative of quality education to make our human resources wealth for the country and to make us competitive advantageous to compete in the world. If they are well educated or technically sound, we can work anywhere in the world as skilled manpower. Corruption comes from lack of inferior governance. Corruption eats abut 2-3% GDP each year. Good governance combating the corruption is must to get stronger LEGS. Without seminal infrastructure like roads, railway, bridges or other establishment to promote business and all other economic activities, no nation could register a good record of growth. So, LEGS need to

be focused in the budget reforming their existing pattern for massive change in quality and quantity considering long term effects on the nation to be a smarter and enlightened one.

Our budget takes care of ARMS on routine basis which should be focused on reformed plan basis. The national strength is on agriculture, ready-made garments, manpower and some other sectors like jute, leather, renewable energy, tourism, information technology etc in the form of Small and Medium Enterprises (SMEs). So, the ARMS as a whole must be addressed with reform plan to be stronger technically and technologically with a view to attaining competitive advantage compared to others in the world. In addition to banking sectors, private equity fund could be a good driver to migrate SMEs from smaller to


The Author is anAssociate Member of ICAB

government has to depend on foreign loan and donations or internal borrowings from banks to meet up the budgeted expenses. Sometimes, the foreign loan and donations become cumbersome to avail and the Government has to borrow from banks. Excessive borrowing from banks makes liquidity crisis, money market becomes restless and credit flow to the business is reduced significantly hampering the growth of business and reduction of Gross Domestic Product (GDP). So, the proper revenue plan should be on research based on tax net and collection strategy should be based on this. With a view to spreading the tax net, the implementation strategy of revenue should cover(i) analysis avenue of incomes (for any particular profession or business, its industrial analysis and distribution of sector income), (ii) analysis of tax payers (target tax payers, property tax payers, gift tax payers, professional tax payers, businessmen tax payers under any profession like doctors, lawyers, chartered accountants etc. and business sectors)(iii) reformed tax administration process (simplified, technical manpower with highest integrity in dealing with laws and taxpayers, proper survey and

research, hassle and corruption free but justified in implementing with rule of law) (iv) proposed modernization of laws ( to cover up the untaxed area, tax evasion people and equitable taxation systems for all level people of the society), (v) strengthening the accounting practice making the concerned professional more accountable and (v) initiatives and efforts against destructive corruption for a healthier revenue record.

If expenses are reformed plan based with a view to being stronger in wings, of course the budget should entail the strategy of ensuring expense efficiency. These could be better by (i) decentralization of political power and spending power to local govt. with transparent follow up of implementation (ii) making independent political free Govt. administration and project implementation process (iii) appropriate Human Resource Management formalizing the policies of performance based promotion or hire & fire for problematic employees, training & development (iv) improving financial management and accountability

The budget should realistically address the strategy of all avenues of enhancing tax collection to give an clear perception on target large scale revenues. In the same way, the strategy on expenses and project implantation should be stated to ensure better efficiency

The above revenue plan specially tax, priority based reform plan of expenses and implementation strategy of budget will be guided by the 7th five year plan. The revenue plan especially on tax, the sectors priorities under reform plans and implementations are to be addressed in the ways and process based on the aspirations and objectives set under Vision 2021. The financial year 2015-’16 is the first year of the 7th five year plan after ending the period of 6th five year plan on 30 June, 2015. The aspirations set up to 30 June, 2015 have not been achieved. So revenue in the form of tax, reformed expense plans and suitable implementation strategy are essential to cover the gap of target so far achieved up to 2015 and to reach the ultimate aspirations under Vision 2021.


The recurrent political philosophy of the incumbent government about economic development of the country is vision-2021 & perspective planning (2010-2021). Under the gamut of this plan & vision, the 6FYP is ending on 30th June 2015. From July 2015 the first month of this plan the 7FYP will be on card.

The stable condition of our Economy has over the last 6 consecutive years (2009-2015) earned laurels by sovereign credit rating agencies. Moody’s has been consistently scoring us in Ba3. S & P has been consecutively marking us at (BB-). These mean our stability is positive, however our growth is not. Bangladesh has been trapped in 6 group of GDP growth for long. Efforts to get out of the trap is curtained by one kind of complacence in the Government. On the contrary the ‘Complacence’ is a “Concern” in reality for all as we are fixed at 6%+ growth.

About 103 countries of the globe are having less than 10 million population. Our population is closed to 150 million as per last census. Addition to labour market for employment is 22 lacs per annum. 67% of people of workable population is between 15 to 59 years of age. Unemployment in this group of population is around 25%.

Our socio political perspective requires the GDP to grow at least @ 7+%. The

Budget 2015, Facts & Prospects:Bangladesh Economy

Masih Malik Chowdhury FCA

aspired mission of reaching Middle Income Countries (MIC) group again need 8+% GDP growth. In the terminal year 2019-2020 of 7FYP the GDP has to grow @ 8.5% or so with the goal of MIC on card. We must put allout endeavor to reach MIC, when the title of LDC would erode from Bangladesh. Our goal is realistic but Financial Management capability needs capacity building & improvement. Capability needs qualitative improvement, Capacity building of financial management of the economy is a sine qua non to walk through the route to MIC & thereafter.

In 2013-14 FY the export earnings touched USD 30.5 billion. It was a modest US$ 10.5 billion in FY 2005-2006. In the same period the remittance earnings touched close to USD $ 15 billion in FY 2013-2014 from only USD 4.8 billion way back in FY 2005-2006. The remittance happened with unskilled or semi-skilled manpower. We can imagine the effect on remittance if skilled manpower could replace currently employed expatriates effectively!

We prospered enormously in food production despite reaching close to, if not Autarky. In fact this happened due to intensive government care amidst exogenous pressure to stop subsidy in agriculture, bravo policies on Agriculture of this government. It can now go for a commodity exchange for Agricultural



Products. When USA even put subsidy at large in their economy their policy overseas is to keep other countries like Bangladesh dependent on food imports. The vision for the government has been categorically followed no matter what USA advocated for. A foe in our liberation war if they really want friendly gesture for common interest with Bangladesh- we have big questions of ambivalence about it.

Bangladesh economy has accomplished a place of laurel in world. The place of our economy as per report of WB & IMF published in April 2015 is now 44th in 2015 which was 58th in 2013. Our economy’s size is US$ 205.30 billion way forward from USD 149.99 billion in 2013. On the basis of purchasing power parity the economy is yet stronger in 33rd place in 2015 from 36th in 2013. This was the evaluation of IMF-WB in its report published recently. Padma bridge,the report remarked, would add another 1% to the GDP. PPP based GDP of Bangladesh in 2015 is US$ 572.40 billion. This was BD461.64 billion in 2013.

Our industrial growth is 9% except for lack of accountability & transparency, elements of good governance are practiced here quite well but need improvements largely.

Our export earnings for 8 months of FY 2014-2015 was USD 22.90 billion, 2-98% increase from the

preceding period. Import bills in 8 months rose by 14.23% from USD 25.70 billion to USD29.36 billion. Inflation in February 2015 on point to point basis was 6.14% but 6.27% in March 2015. FCY reserve crossed USD $ 23.7 billion on April 26, 2015. Foreign debts in July- February 2014-2015 was USD $ 1.853 billion. Net of DSL it was USD $ 1.119 billion. Bangladesh’s track record in DSL is clean & consistent since 1983. Our per capita income is now USD $ 1314, in March 2015.

Thus the backdrop of the Budget 2015-2016 is solid & stable. The FM has placed his budget proposal on this stronghold of the Economy. He deserves appreciation. We applaud his performance as the finance boss of the Country for over 6 years.

The GDP growth showed 6.51% rise against expected 7.3% in budget & 6FYP. There is a gap of 0.8% which the FM would envisage to overcome by his fiscal measures. We observe in Millennium Development Goals (MDG) except for 11 indicators Bangladesh excelled very well. The exceptions include employment creation for elderly, literacy rate & hunger poverty eradication efforts. Out of all the 33 MDG indicators 12 have been achieved. Progress on 10 indicators are of complacence. The rest 11 indicators are yet to be accomplished by Bangladesh. From MDG UN will approach into SDG- Sustainable Development Goal.

THE STABLE

CONDITION OF OUR

ECONOMY HAS OVER

THE LAST 6

CONSECUTIVE YEARS

(2009-2015) EARNED

LAURELS BY SOVEREIGN

CREDIT RATING

AGENCIES. MOODY’S

HAS BEEN

CONSISTENTLY SCORING

US IN BA3. S & P HAS

BEEN CONSECUTIVELY

MARKING US AT (BB-).

THESE MEAN OUR

STABILITY IS POSITIVE,

HOWEVER OUR GROWTH

IS NOT. BANGLADESH

HAS BEEN TRAPPED IN 6

GROUP OF GDP GROWTH

FOR LONG.

Item(Billion Tk.)

Total Share(%)

Public Share(%)

Private Share(%)

Total Investment 13469.4 100 3075.8 100 10393.6 100

Domestic Resource 12215.3 90.7 2239.6 72.8 9975.7 96.0

External Resources(Net)

1254.1 9.3 27.2 27.2 417.9 4.0

Financing of Sixth Five Year Plan Investment (FY 2011 prices)

backdrop of consistent progress of Bangladesh Economy during last term & this term this was obvious & has actually happened. The amount is need based not ambitious in any way. Critics have many points but these would not hamper the development.

However, budget revealed that in 2014-15 FY the contributors of GDP were Service sector : 54.10% , Industry : 29.6% & Agriculture : 16.33%. This means service sector is on the top for our growth engine.

The terminal year of 6FYP 2014-2015 shows that financing of 4% will be from exogenous means. This gives a signal of dependence on indigenous resources by planners on future plans for development finance sources. The negative part of the accomplished FM is we could not reach 7% or 7.3% GDP growth. The last year of 6FYP showed us 6.51% growth in GDP. This means we are lagging well behind by 0.8%. We got to find ways & means to get out of the trap by more prudent & pragmatic macroeconomic management.

The Budget : Some Points to Ponder

The budget has been unveiled on 4 June 2015 in the JS. The Finance Minister has announced the budget for 2015-2016 & finance bill (FB) for FY 2014-2015 in his address in JS. It is pertinent that the FB is for retrospective year while the budget itself, prospective. This means the assessees have to await for the whole year to know the fiscal rules applicable for them. Neither they

can resort to own prudent tax planning nor the government cares for them despite their being the client for the Govt. So the Finance bill for 2014-2015 FY can be made applicable for 2014-15 plus 2015-206 FYs. Tax payers can then know about their tax liabilities in advance & plan their tax implication minimization drives, peoples’ government must keep tax payers’ prerogatives & rights in priority.

The budget unveiled a total outlay of Tk. 295,100 crores. In the

Sectoral value additions to GDP were as follows :

Growth % Agriculture Industry Service GDP2014 -15 3.04 9.60 5.81 6.512013 -14 4.37 8.16 6.62 6.06

Inflation in % was as follows :

2014 -2015 2013 -2014 2012 -2013 2011 -2012 2010 -20116.6% 7.3 6.8 8.7 10.9

Black Money (Shadow Economy all over the world was Georgia- 72.5%,Bolivia- 70.7%, Ucraine - 57.5%, Bangladesh- 37% & India - 23%.


The Author is Founder Partner ofMasih Muhith Haque & Co, CharteredAccountants and President, ICAB

The budget is well advanced in our journey to MIC. However the goals may appear to be higher than realistic. It is again encouraging except when the mission to the vision is not specified. The FM has rightly & courageously spelled out that Bangladesh is in 6% trap of GDP growth. We need a ‘Big Push’ to achieve 7% or more he assertively noted. The 6FYP had envisaged 7.3% growth in terminal FY 2014-2015. Bangladesh has fallen aback as planned vision has not been accomplished in absence of an unfailing mission.

NBR Capacity vs Tax Payers’ Burden

The budget has envisioned a revenue rise of 30% by NBR. The NBR boss has also undertaken this challenge in the post budget press conference. It is highly appreciated. However, the NBR is now manned with over 22,000 people from 13,000 back in 2008-2009. It does not mean that its capacity for collection has improved. It also means that their capacity for aggravating sufferings of Tax Payers has also multiplied. It is expected that good sense & deed will prevail in tax collectors to be tax payer friendly. They must equip themselves to build own capacity to cater to the revenue needs with respect & regards for Tax Payers.

It is pertinent that FM has raised the minimum tax by individuals- 11 lacs in number to Tk. 4,000 each from Tk. 3,000. Thus rather than banking on NBR tax collectors, he has forced existing tax payers on book to pay more. It

was not a good reward indeed. Although be banked in words upon NBR, he has initiated with increased tax on common tax payers. This, he did to compensate for the tax cuts in corporate classes & appears NBR. This is not equitable at all. Sufferings for individuals to benefit corporate tax payers.

To get out of the 6% growth trap, he has talked of a Big Push. It has been widely appreciated. However, the failures in 2014-15 have not been rightly dealt with. On the contrary FM has begun with a big push. The Revised budget of 2014-15 has been passed in JS instantly. There has been no discussion on it at large. Had there been discussions in JS, the limitations to achieve the targets would have been focused. Lack of accountability & transparency could have been identified & prevented. Instead of this, leaving it in past FM could think of quarterly budget session in FY 215-2016. Then the JS can talk about reasons & rationales for non-achievements of budget goals. The points of pitfalls & failures could be floated up. Corrective measures could replace the age old practice in JS when we have gone digital. The revised budget indeed is a weapon to favour bureaucratic procrastination & the government officials. The PM & FM must come apart from this practice for the interest of tax payers in particular & the envisioned nation at large.

The drive to achieve 7% GDP growth is not easy with the same set of people, policy & practice.

Only 13 countries of world has so far been consistently holding 7% growth. It is Asia’s pride that 10 out of those 13 countries are from Asia. The FM could have spelled out policies of those countries vis-à-vis ours.

A Research & Development division in NBR may be most timely at the current perspective. This would, led by a Member (R&D), would entail all the Tax Circle in digital network. Thus comparative assessment of performance and tax collection will be readily on card. Huge improvements & standardization of assessments for tax collection will be possible. Moreover Tax Collectors & Tax Payers must not meet across the table. It will phase out corruption to a great extent. Again the Audit or Reopening of tax files are done by the same assessing offices. This files are dealt with by the assessing DCTs. This causes grave injustice to Tax payers as the same DCT does the sampling of files. Their neutralities are questionable. NBR (R&D) can take this task on its own to raise revenue. It would also relieve tax payers from their grave concerns about the collectors.

Then the reality of his mission goals could have been properly founded, focused & analyzed. We really & direly need big budget outlay to go ahead & out of the 6% trap in this way forward. Thank you FM- bravo!


A Surprising Turnaround? Rethinking Lessons in Tackling Chronic and Extreme Poverty in Bangladesh• Over the last 25 years the poorest

people in Bangladesh have seen considerable improvements in their incomes, levels of education and health.

• A reduction in the fertility rate, children staying in school longer, improved agricultural productivity and migration from rural to urban areas have all contributed to higher rural wages.

• Urban wages have also increased, including in sectors where the poorest frequently work, thanks largely to increased levels of construction and a vibrant ready-made garment industry.

• Innovative NGO and donor programmes which transfer substantial resources to the poorest households, alongside interventions to improve literacy, market linkages and entrepreneurial skills have been important to reducing poverty rates.

National Policy Brief: Bangladesh1Dr. Binayak Sen | 2Dr. Zulfiqar Ali

The successful programmes should now be replicated to cover all extreme and chronically poor groups.

• Favourable economic conditions that have been central to poverty reduction so far must be maintained by supporting the five major drivers of growth: developments in agriculture, the rural non-farm sector, exports, remittances and managing urbanisation.

• There is both need and scope to increase tax revenue (currently only 12% of GDP) to pay for scaling-up investments in human development, social protection and pro-poorest economic growth required to end extreme poverty.

Shifting Images of Bangladesh

During the 1970s and 1980s, Bangladesh experienced war, famine, recurrent disasters and a protracted period of authoritarian rule. It was referred to as a ‘test case of development’ (Faaland and Parkinson, 1975) and pronounced to be stuck in a ‘below-poverty level equilibrium trap’ (Alamgir, 1978). By the


The Chronic Poverty Advisory Network (CPAN) is a network of researchers, policy makers and practitioners across 15 developing countries (Bangladesh, Benin, Burkina Faso, Cambodia, Ghana, India, Kenya, Nepal, Niger, Pakistan, Philippines, Senegal, South Africa, Tanzania, Uganda, Viet Nam) focused on tackling chronic poverty and getting to zero extreme poverty and deprivation. It is looking to expand this network to the 30 countries with the largest numbers of poor people, and it is planning to launch a consultancy service to help countries ‘get to zero’. It has a ‘hub’, which is currently hosted by the Overseas Development Institute in London.


mid-2000s though, Bangladesh had turned around its fortunes, being a ‘development surprise’ (Devarajan, 2005), and towards the end of the 2000s was seen as one of the ‘next 11’ world’s largest economies in a ranking by Goldman and Sachs.

This turnaround came with the backdrop of sustained growth in per capita GDP of around 4-4.5% for a decade. The poverty headcount declined rapidly from 62% in 1991/92 to 32% in 2010. With over 1000 USD per capita, Bangladesh is fast approaching the target of Middle Income status. Human development progress has been even more striking with significant reductions in child mortality, total fertility rate, maternal malnutrition and maternal mortality, as well as female schooling expanding at a rapid pace to achieve more than parity with that for males.

Success at Tackling Chronic and Extreme Poverty

The proportion of households living below the ‘lower poverty line’, or national food poverty line, declined from 41% in 1991/92 to 18% in 2010. In both rural and urban areas, this progress has accelerated in recent decades. In the 1990s the annual poverty reduction rate of food poverty was 1.8%, compared to 4.8% in the 2000s.

Box 1: Measuring Chronic Poverty Reduction

To measure progress at chronic poverty reduction nationally representative panel data, or surveys that return to the same households at more than one point in time, are needed. As Bangladesh does not have such data, this policy brief reports on progress by the poorest households in the country: those living below the national food poverty line (taken from national household income and expenditure survey) and the poorest wealth

quintile (as identified in Demographic and Health Surveys) to give an indication of how the chronically poor have fared.

Human development of Bangladesh’s poorest people has improved considerably over the past two decades. Firstly, illiteracy among people living below the food poverty line has declined from 64% to 46% in just seven years. Secondly, infant and child mortality rates for the poorest have fallen impressively. The under-five mortality rate dropped impressively from 121 deaths per 1000 live births in 2004 to 64 in 2011 (Table 1). Thirdly, women from the poorest group now have better access to reproductive healthcare, with the proportion of those with access to antenatal care rising from 34% to 48% between 2004 and 2011.

The poorest areas of Bangladesh have made significant progress for a number of reasons:

• The rapid economic growth and social progress experienced in the country since the early 1990s has been inclusive of remote areas. The poorest 40 upazillas (sub-districts) initially identified in 1991 have exhibited progress in education and health indicators (BBS 2013), and in real wages.

• These areas have been the subject of targeted programmes and activities carried out by NGOs.

• A number of important political representatives have been elected from poor constituencies who have successfully lobbied to allocate public resources, and even NGO programmes, for the poor areas. Political competition even under imperfect but sustained democracy creates a favourable environment for attacking chronic poverty.

OVER THE LAST

TWO DECADES PER

CAPITA GROWTH

ACCELERATED AND

WITH MINIMAL

VOLATILITY; INFLATION

REMAINED WITHIN

SINGLE-DIGITS;

DOMESTIC INDUSTRIAL

ENTREPRENEURSHIP

DEVELOPED; EXPORTS

AND REMITTANCES

INCREASED; AND AN

ENGLISH EDUCATED

URBAN MIDDLE CLASS

STARTED TO MAKE ITS

PRESENCE FELT IN THE

ECONOMY AND MEDIA.

IN THIS MILIEU OF NEW

AFFLUENCE COMBINED

WITH PROUD

NATIONALISM, IT WAS

POSSIBLE TO DEVELOP

BROAD-BASED POLICIES

OF HUMAN

DEVELOPMENT AND

SOCIAL PROTECTION

PROGRAMMES FOR THE

POOREST GROUPS.

The tightening of the agricultural wage labour market has contributed to increased non-farm employment opportunities for the extreme and chronic poor through two principal channels:

(a) Relocation of farm labour to rural non-farm sectors. The spread of new technology in rice agriculture has released workers for higher productivity non-farm work. In 2008, in villages with high land productivity, the proportion of household heads with farming as their main occupation was 39% compared to 47% in villages with low land productivity. (Hossain et al. 2013).

(b) Relocation of rural labour to urban activities. Between 2001 and 2011, the share of the population living in urban areas

Drivers of Improvements in the Situation of the Poorest People

New job and income-earning opportunities, combined with real gains in daily wage rates, have been key drivers of progress for the poorest people.

Increased Rural Wage Rates

Agricultural wage labour comprises a significant component of household income for the poorest people, who are often functionally landless. Real wages in rural areas (both agricultural and non-agricultural) increased during the 2000s (Table 2). The rice value of the daily wage received per day remained largely constant during the 1980s and increased only modestly in the 1990s (from 3.5 kg in 1990/91 to 4.5 kg in 1999/90). The real breakthrough came only

in the second half of the 2000s: the rice wage per day remained at 8-10kg during the 2008-13 period.

Rising land and labour productivity and growth in rice agriculture in the 2000s had beneficial effects on the real agricultural wage rate and subsequently, on rural poverty. In 1988, agricultural wage income was 95% higher in places where agriculture incorporated modern technologies than in those that relied on traditional rice cultivation techniques. This difference declined over time to being 60% higher in 2000 (Hossain and Bayes 2009). Also, increases in the agricultural wage rate tend to be faster in villages experiencing high growth in land productivity (Hossain et al. 2013). Migration (both domestic and international) has also contributed to the rise in agricultural and rural wages for the remaining workers in rural areas.


Wealth Quintile Infant Mortality Child Mortality Under -5 Mortality

2004 2007 2011 2004 2007 2011 2004 2007 2011Poorest 90 66 50 34 22 15 121 86 64

Second 66 67 51 34 19 15 98 85 64

Middle 75 63 41 23 22 9 97 83 49

Fourth 59 46 38 23 16 10 81 62 48

Wealthiest 65 36 29 7 8 8 72 43 37

Total 65 52 43 24 14 11 88 65 53

Table 1:Trends in Infant and Child Mortality (per 1000 live births)

Table 2: Rural Real Wages by Gender and Season (HIES)

Year Peak Season Lean SeasonMale Female Male Female

2010 193.55 141.03 154.16 112.572005 133.66 84.87 105.52 71.132000 134.01 92.25 106.60 76.311995 128.57 84.72 101.49 71.20

Growth rate from 2000 to 2010 (%) 44.43 52.88 44.62 47.52

Source: Zhang et al (2013). Calculated using the general consumer price index.

increased from 20% to 28%. Urban real wages have also increased (see Table 3). International migration and remittances have contributed to an increased level of construction and real estate development, which has in turn generated demand for domestic migrant labour, benefitting the chronically poor. The rural-urban relocation of labour also benefited from the growth of export-oriented manufacturing, including the ready-made garment industry, which currently employs about four million workers (75% of whom are first-generation female rural-urban migrants mostly from poor families).

Migration has directly and indirectly benefitted the chronically poor. Most domestic migrants belong to landless and functionally landless households. The latter accounted for 51% of domestic migrants in 2000 and 57% in 2008.

Despite the high up-front costs of international migration, the share of the two lowest land-owning groups in rural areas (owning up to 0.40 ha) among rural households reporting international migrants increased considerably, from 38%

in 2000 to 54% in 2008 (Hossain et al., 2013). The share of migrants with ‘no formal schooling’ among households with overseas migrants has increased from 29% to 40% during the same period.

For casual agricultural labourers who have limited resources to migrate overseas, it is the indirect effects of international migration through the channel of the labour market that are of greater significance. Wage growth tends to be faster in villages experiencing high growth in overseas remittances. Meanwhile, remittances are one key driver of construction jobs in urban areas.

Improvements in access to health care and education for the poorest

people have been driven by a pluralistic health system. Since the 1990s the total fertility rate has declined across all wealth quintiles, facilitated by a public social policy of using family planning workers to visit households and offer modern family planning methods at a subsidised price (Cleland, 1994). This was further aided by social interactions in densely populated communities supported by organised NGO and self-help groups. Bangladesh now has an enormous network of community

health workers who cover most households and provide innovations in oral-rehydration therapy, vitamin A supplementation, tuberculosis and maternal and child health (Adams et al., 2013).

Looking to the Future: Eradicating Chronic and Extreme Poverty by 2022

The recently published Manifesto for the Extreme Poor (Shiree, 2013) demands the eradication of extreme poverty by 2022, a year after the country’s goal of reaching Middle Income status. Eradicating chronic and extreme poverty will involve several measures:

1. Maintaining the Favourable Economic and Social Conditions that Underpinned the Decline in Extreme and Chronic Poverty.

Over the last two decades per capita growth accelerated and with minimal volatility; inflation remained within single-digits; domestic industrial entrepreneurship developed; exports and remittances increased; and an English educated urban middle class started to make its presence felt in the economy and media. In this milieu of new affluence combined with proud nationalism, it was possible to develop broad-based policies of human development and social protection programmes for the poorest groups.

Maintaining a favourable economic context for chronic poverty reduction means sustaining the five major drivers of growth— (i) agriculture (requiring research and development and the adoption of new technologies), (ii) the rural non-farm sector (dependent on developing linkages with urban markets), (iii) exports (maintaining


Male Female National

2010 253.43 223.21 245.11

2005 230.33 216.51 225.24

2000 203.23 129.26 194.07

Growth rate from 2000 to 2005 (%) 13.33 67.50 16.06



Source: Zhang et al (2013)

Table 3: Urban Real Daily Wages by Gender (HIES)

particularly affects the poorest people because they lack supplementary resources to invest in private tutoring to compensate for the quality deficiency in the public schools or to pay for private healthcare. As incomes increase, it is likely that there will be a change in the behaviour of those seeking health care - demanding higher quality services and shifting away from traditional quacks to modern or alternative medicine. However, this increased demand is barely or inadequately met by either market or public health services.

Some of the human development targets require social change and cannot be addressed by policy alone. Making breakthroughs in these areas can take a long time and will require innovative norms-changing institutional interventions. High prevalence of dowry, for instance, leads to early marriage: in 70% of cases in rural Bangladesh, the age that women first marry tends to be below the legally permissible age of 18. The extreme and chronic poor are particularly affected by this, as they tend to allow their daughters to be married at a relatively early age to avoid high dowry payments that come with marriage at a higher age.

4. Scaling-up Social Protection Schemes and Making them Inclusive to Prioritise the Extreme and Chronic Poor

There are currently 95 social protection schemes--large, small and very small— which comprise up to 2.2% of GDP. A bulk of the resources earmarked for these programmes is prone to leakage, and does not reach the intended beneficiaries.

Renewed policy emphasis on social protection is welcome, provided reform of social

factory compliance of working conditions is important), (iv) remittances (requiring easing finance barriers and labour skilling to promote overseas work beyond traditional destinations) and (v) managing urbanisation.

These measures are necessary to attain the national target of becoming a Middle Income Country by 2021. But, the central point is to maintain current patterns of stable and decent poverty-reducing growth to contribute to further pro-poor transformations in terms of labour market tightening and service delivery.

2. Replicating Successes in Attacking Extreme and Chronic Poverty.

There have been several small scale successes in the area of poverty reduction (as in case of targeted microfinance by Grameen, BRAC and ASA), and in that of human development (such as the female stipend schemes, immunisation programs and family planning).

Since the 2000s there have also been innovative programmes specifically to combat extreme and chronic poverty. These include BRAC’s Targeting the Ultra Poor programme, Urban Partnerships for Poverty Reduction, DSK-Shiree and the Chars Livelihoods Programme. A defining marker of many of these programmes is that they aimed to provide consequential transfer of resources (assets or financial savings) to extreme poor households. The size of the needed transfer is reckoned to be USD 400-500 per beneficiary spread over 1.5-2 years of programme intervention. This amount of money, if properly executed and combined with a package of support including a provision to

build literacy, financial and marketing skills and building organisations for the poorest people, can lift an extremely poor household from extreme and chronic poverty (on this, see Sen, 2012).

The aim should be now to replicate - and modify where applicable - these programmes to cover all extreme and chronically poor groups. Such an

approach, while ambitious, would be financially possible. Every year the total costs of such replication would not exceed 2% of GDP annually, permitting the escape of 6 million extreme poor per year (altogether 36 million extreme poor in 2015-21) from the grip of extreme and chronic poverty (Shiree 2013).

3. Addressing the Growing Human Development Needs of the Extreme and Chronic Poor

There are areas of progress in human development that have in the past tended to bypass the extreme and chronic poor. While access to antenatal care improved for the lowest wealth quintile, access to antenatal care from ‘medically trained providers’ remained at 30% between 2007 and 2011. Child nutrition is another area where the poorest households made only modest improvements. DHS data shows that the proportion of children underweight in the lowest wealth quintile has dropped from 59% to 51% during 2004-2007, but remained at that level in 2011.

As incomes increase, the demand by chronically poor people for human development needs, including quality education and healthcare, will also increase. Quality services are a concern for all wealth groups, but it


The Authors are1Research Director and2Sr. Research Fellow of BIDS


protection along a life cycle approach means that the poorest people will be served first. This principle also requires social protection to become more broad-based as it becomes more affordable over time. Fiscal affordability, in turn, depends on the strength of the tax and tax-financed instruments. Here Bangladesh, with a tax-GDP share of 12%, has a way to go, suffering from one of the lowest tax revenues (7% lower than India, for instance).

References

Adams, A.M., Rabbani, A., Ahmed, S., Mahmood, S.S., Al-Sabir, A., Rashid, S.F. and Evans, T.G. (2013) ‘Explaining equity gains in child survival in Bangladesh: scale, speed, and selectivity in health and development’. The Lancet November 21st 2013

Alamgir, M. (1978) Bangladesh: A Case of Below Poverty Level

Equilibrium Trap. Bangladesh Institute of Development Studies: Dhaka.

BBS (2013) Equity Atlas. Bangladesh Bureau of Statistics/ UNICEF/ BIDS: Dhaka.

Cleland, J. (1994) ‘Fertility Levels and Trends in Bangladesh’, in J. Cleland et al. (eds.), Bangladesh Fertility Survey 1989, Secondary Analysis, National Institute of Population Research and Training (NIPORT), Dhaka.

Devarajan, S. (2005) ‘South Asian Surprises’, Economic and Political Weekly, Vol. XL. No. 37, September 10-16, pp.4013-4015.

Faaland, J. and Parkinson, J. R. (1975) Bangladesh: A Test Case for Development. University Press Ltd: Dhaka

Hossain, M., and Bayes, A. (2009) Rural Economy & Livelihoods: Insights from Bangladesh. Dhaka: A H Development Publishing House.

Hossain, M., Sen, B. and Sawada, Y. (2013) Jobs, Growth and Development: The Making of ‘Other’ Bangladesh. Background paper prepared for World Development Report 2013: Jobs, World Bank, Washington, D.C.

Ravallion, R. and Sen, B. (1994) ‘Impacts on Rural Poverty of Land-contingent Targeting: Some Further Results for Bangladesh’. World Development, Vol. 22, No. 6, June 1994, pp. 823-838.

Sen, B. and Begum, S. (2011) ‘Identifying and Targeting the Extreme Poor: A Methodology for Rural Bangladesh” in What Works for the Poorest? Poverty Reduction Programmes for the World’s Extreme Poor (Eds. David Lawson, David Hulme, Imran Matin, and Karen Moore), Practical Action Publishing Ltd, Warwickshire, UK, 2010.

Sen, B. (2012) Breaking the Cycle of Urban Chronic Poverty? An Evaluation of DSK-Shiree Program. Dusthya Shasthya Kendra (DSK): Dhaka.

Shiree (2013) A Manifesto for the Extreme Poor. Shiree/DFID: Dhaka.

Zhang, X., Rashid, S., Ahmad, K., Mueller, V., Lee, H. L., Lemma, S., Belal, S. and Ahmed, A. U. (2013) Rising Wages in Bangladesh. Washington, DC: International Food Policy Research Institute.

Background

Now-a-days money laundering has become a worldwide concern due to its pervasive impact on a country’s social and economic stability. With the pace of rapid development in communication technology money laundering processes are also changing into new shape and dimension ultimately leading the whole international community into a great challenge to combat it down from the root. Hence the world leaders and governments of all the countries are pursuing all out efforts both united and unilaterally to strengthen their respective anti-money laundering drives.

Today each of the countries in the world has their own anti-money laundering laws and regulatory framework in operation consisting of distinct supervisory, implementing and executing agencies. The Government of Bangladesh is also not in isolation in any way from international community in the process of anti-money laundering drives. Therefore, we cannot maintain wait and watch policy.

Impact of Money Laundering

Although difficult to quantify, it is clear that money laundering is a serious threat and detrimental to the economy of a country and the society at large causing:

Anti-Money Laundering andCombating Terrorist Financing:

Bangladesh PerspectiveMd. Syful Islam FCA, FCMA

a. Economic distortions due to lack of legitimacy in the transactions;

b. Erosion of financial sector by way of low cost vehicle for criminals wishing to launder their funds;

c. Loss of government revenue due to non collection of due income from related transactions as it could have been in regular form;

d. Socio-economic costs in the form of transfer of economic power from the market, the government and the citizens to criminals abetting therefore crimes and corruption;

e. Increased crime, social disparity and corruption threatening the social stability;

f. Damage of Country’s reputation and international relations;

g. Non operation of perfect market system resulting in an uneven competition in the market;

h. Increase in human trafficking;

i. Weakened role of the government functionaries resulting in social injustice



What Money Laundering Encompasses

“Money Laundering” covers all kinds of methods used to change the identity of illegally obtained money (i.e. crime proceeds) so that it appears to have originated from a legitimate source.

The Financial Action Task Force (FATF) defines the term "money laundering" as "the processing of criminal proceeds to disguise their illegal origin" in order to "legitimize" the ill-gotten gains of crime.

TODAY EACH

OF THE COUNTRIES IN

THE WORLD HAS THEIR

OWN ANTI-MONEY

LAUNDERING LAWS

AND REGULATORY

FRAMEWORK IN

OPERATION

CONSISTING OF

DISTINCT

SUPERVISORY,

IMPLEMENTING AND

EXECUTING AGENCIES.

THE GOVERNMENT OF

BANGLADESH IS ALSO

NOT IN ISOLATION IN

ANY WAY FROM

INTERNATIONAL

COMMUNITY IN THE

PROCESS OF

ANTI-MONEY

LAUNDERING DRIVES.

THEREFORE, WE

CANNOT MAINTAIN

WAIT AND WATCH

POLICY.

How Money Laundering Takes Place

a. Placement: It involves placing the crime proceeds in the financial system (e.g. depositing cash into a bank account, exchange currency of small denominations to currency of large denominations);

b. Layering: It involves converting the proceeds of crime into another form and creating complex layers of financial transactions to disguise the audit trail and the source and ownership of the funds (e.g. buying precious metals or stones with cash, buying and selling of stocks, commodities or properties; taking out and repaying a loan); and

c. Integration: It involves placing the laundered proceeds back in the economy under a veil of legitimacy.

Offences Which Constitute as Money Laundering

a. Knowingly move, convert, or transfer proceeds of crime or property involved in an offence for the following purposes:

i. Concealing or disguising the illicit origin/nature, source, location, ownership or control of the proceeds of crime; or

ii. Assist any person for evading the legal consequences of his or her action who is involved in the commission of the predicate offence;

Kidnapping

Extortion

Bribery& Corruption

Gambling,Robbery,Cheating

Counterfeiting& ForgeryTerrorist Act

Smuggling(arms, people,

goods)

DrugTrafficking

Prostitution

CriminalActivities

financing is that the funds involved may originate from legitimate sources as well as criminal activities. Such legitimate sources may include donations or gifts of cash or other assets to organizations, such as foundations or charities that, in turn, are utilized to support terrorist activities or terrorist organizations.

c. “Terrorist Financing” covers all kinds of financial support, in any form, of terrorism or of those who encourage, plan, or engage in terrorism.

d. Money launderers will send crime proceeds through legal channels in order to conceal its criminal origin, whilst terrorist financiers will transfer funds that may be derived from legal or illicit origin in such a way as to conceal their source and ultimate use, i.e. support of terrorism.

b. Smuggle funds or property abroad earned through legal or illegal means;

c. knowingly transfer or remit the proceeds of crime into or out of Bangladesh;

d. Conclude or attempt to conclude financial transactions in such a manner as to avoid reporting requirement under Guidelines issued by concerned regulatory body on prevention of money laundering & combating financing of terrorism.

e. convert or movement or transfer property with the intention to instigate or assist the carrying out of a predicate offence;

f. acquire, possess or use property, knowing that such property is the proceeds of a predicate offence; or

g. perform such activities so that illegal source of the proceeds of crime may be concealed or disguised; or

h. Participate in, associate with, conspire to commit, attempt to commit or abet, instigate or counsel to commit any offences mentioned above.

Comparison and Contrast Between “Money Laundering” and “Terrorist Financing”

a. The techniques used to launder money are essentially the same as those used to conceal the sources of, and uses for, terrorist financing. It is important for terrorists to conceal the use of the funds so that financing activities goes undetected.

b. A significant difference between money laundering and terrorist


The Process of Money Landering and Financing of Terrorism

Cash from CriminalAct

Placement &StructuringCash is depositedinto Account

Bank

Bank Bank

SecutitiesFirm

Legitimate Asset orCash from CriminalAct

Placement &StructuringAsset deposited intoteh Financial System

LayeringFunds moved toother institutions toObscure Origin

IntegrationFunds used toAcquire LegitimateAssets

Non-BankFinancialInstitution

InsuranceCompany

Legitimate Asset ofDistribution

$$$$ $$$$

LayeringFunds moved toother Institutions toOBscure Origin

IntegrationFunds used toAcquire LegitimateAssets

Money Laundering Financing of Terrorism

Typography of Money Laundering - Financial Sector

a. Issue of illegal IBDAs / IBCAs.

b. Generation and creation of funds against Benami Accounts through excessive charging of profit / interest or excessively charging of the expenditure.

c. Transfer of illegal Branch profit to Benami accounts maintained by the Branch Officials;

d. Transfer of Branch’s illegal Investment Profit to Benami Accounts of the Bank Officials, which was earned for the timing gap of the illegal Transaction of the IBDAs and IBCAs for restating the previously offset Loan Liabilities.

e. Tax evasion against the import of capital machineries

f. Performing transaction below the STR/CTR threshold and using multiple bank accounts to bypass the reporting requirements of BFIU.

g. Creating of Letter of Credit (LC) with same beneficiary & applicant in connivance by the Bank officials


Step – 1 Suppose that a fund for Tk. 10 Cr. was created under 10 benami / fictitious accounts by issuing 10 unauthorized IBDAs from “M” Branch of ABCD Bank Ltd. by debiting Head Office General Account for Tk. 10 Cr. and crediting Loans and Advance Account for Tk. 10 Cr..

Step – 2 Cash was withdrawn for Tk. 7 Cr. and 3 Pay Orders have been issued for Tk. 3 Cr. from 10 benami/ fictitious accounts in favour of Mr. Alam Account maintained with “O” Branch of “XYZ” Bank Ltd. by debiting Loans and Advance Account for Tk. 10 Cr. and crediting Cash and Bank Accounts for Tk. 10 Cr..

Step – 3 For offsetting the Head Office General Account, Adjustable Blocked Accounts has been debited for Tk. 10 Cr. and Head Office General Account has been credited for Tk. 10 Cr..

Step – 4 Ultimately in consolidation of the financial statements for clean off this defalcated amount from the records, Profit and Loss Appropriation Account has been debited for Tk. 10 Cr. and the Adjustable Blocked Account has been credited for Tk. 10 Cr..

Case Studies – Financial Sector

Money laundering transactions can be easily camouflaged in genuine commercial transactions among the huge number of real estate transactions taking place.

Complicating matter is the fact that often these less developed economies do not have an average market price for real estate, but rather prices varying across sectors and districts

The methods, techniques, mechanisms, and instruments used for money laundering in the real estate sector:

Use of complex loans or credit finance.

Manipulation of the appraisal or valuation of a property.

Use of monetary instruments.

Use of mortgage schemes.

Use of investment schemes and financial institutions.

Use of properties to conceal money generated by illegal activities.

Case Studies – Real Estate Developers

Mr. X was the owner of Company A and the individual and the sole controlling authority of its activities. Mr. X hired Mr. Y as front man of Company A. Company A had some low-profile practices in managing and dealing with the properties. During the life of Company A, Mr. Y set up a relationship with various Banks. The property managed by Company A was used by other companies for warehouse activities.

Typography of Money Laundering - Lawyers, Notary and Trust & Company Service Providers

Mismanagement of fund by the legal professionals for their own personal gain thereby involving in money laundering;

Assist the fraudulent clients carry out money laundering activities by assisting them in forming Shell and Front companies for the placement of proceeds of crime;

Providing services to clients (especially foreign clients) without carrying out CDD (Customer Due Diligence) activities as they might have been referred to by another person from within the same profession;

Assisting in the preparation of companies and trusts on behalf of foreign clients which might be used for fraudulent activities;

Carrying out fraudulent activities using the accounts/funds managed on behalf of the clients for own personal gain.

Case Study: Carrying Out Fraudulent Activities using the Accounts/Funds managed on behalf of the Clients for Own Personal Gain

Mr. M, who is a lawyer in Bangladesh and have been maintaining the accounts of several of his clients and issued false power of attorneys to take out a mortgage/loan on their behalf. He persuaded the mortgage lenders to release the mortgage into the clients’ accounts. Once the money was paid to the clients’ accounts

he transferred the funds to various bank accounts operated by him (both personal and business) and to a number of bank accounts held under false names. Later, when the issue was identified, it was found that a total of 50 bank accounts were maintained by the person (in his name, wife’s name and his father’s). The money was used to purchase flat, furniture, car, land and some were invested into the capital market and FDRs. Mr. M, also formed a shell company in Bangladesh and formed another shell company in another country (which is owned by his wife) Mr. M opened LC with a local bank to import goods from the foreign shell company. False Pro Forma Invoices were issues by the wife of Mr. M was thus able to remit the money to a foreign country.

Typography of Money Laundering - Real Estate Developers

Real Estate Agents might register lands procured on behalf of clients at a rate which is below the actual consideration paid for acquiring the asset, thereby effectively carrying out money laundering activities by hiding the true financial implication;

The clients might make payments in cash for the procurement of Real Estates which will hide the true nature and substance of the transaction;

People may not disclose the real value all the assets owned by them to the tax authorities which in turn allows them to hide the sources of fund and the recipient of the proceeds to hide the income earned by them;


Mr. X. planned to buy office buildings for BDT. 80,000,000 via Company A. The office buildings had to be renovated to make it marketable. Mr. X. knew a licensed valuer, Mr. Z.

Mr. X. and Mr. Z found a way to set up false but plausible assessments of the market value of the office buildings after renovation.

Mr. X ordered Mr. Y to negotiate a mortgage loan with a Bank to finance the purchase and renovation of the property. Based on the assessment, the Bank was willing to grant a mortgage loan of BDT. 130,000,000. Mr. Y entered into the loan agreement on behalf of Company A as the buying party. After the disbursement of the loan, the real estate value was paid for. Mr. X. then paid Mr. Y BDT 5,000,000 and retained the remaining BDT 125,000,000 together with the proceeds of other criminal activities, transferred it into several bank accounts in different countries with strict bank secrecy.

Money Laundering – Dealers in Precious Metals and Stones

a. Use of Diamonds as currency;

b. Acquisition of diamonds with proceeds of crime as a mean to store wealth;

c. Laundering through stages of the diamond trade;

d. Trade-based money laundering and customs rules violations;

e. Use of financial hubs and FTZs (Free Trade Zones);

f. Due to their easy transportability, diamonds may be used to transfer assets across borders by international crime syndicates;

g. Terrorist financing through trade in diamonds;

h. Use of blood diamonds and other diverged resource as a means of money laundering;

i. Poor control by the customs authority regarding the

valuation of these assets might act as a gateway for under-over invoicing by fraudulent persons;

j. Weakness in transfer pricing might be exploited by dishonest persons as the pricing differences between rough and polished diamonds vary significantly.

Case Studies – Dealers in Precious Metals and Stones

Mr. A is a government employee responsible for awarding contracts for civil/ industrial works.

Mr. B of Company XYZ Ltd. applied for contract and approached a middleman – Mr. C (who’s a friend of Mr. A).

Mr. C and his wife Mrs. C contacted Mr A and a deal was settled for an amount of BDT 2,000,000 for granting the contract.

Mr. A asked them to get in contact with Mrs. A to arrange the payment.

Mr. C & Mrs. C contacted Mrs. A who asked them to get the cash converted into gold.

Mr. C then bought the gold and handed over to Mrs. A.

Mrs. A took the gold and deposited into her bank locker.

Typography of Money Laundering - Accountants and Auditors

Accountant and legal professional provides a wide range of services, including financial and tax advice, auditing, bookkeeping, company formation and administration, trust, property


Through the introduction of the accountancy firm, company bank accounts were opened. Cash deposits were made into the bank accounts both by Mr. X and staff of the accountancy firm.

Some of the money was then used to invest in the local property market while certain amount was sent overseas for purchase of electronic components which were then shipped to the local market for sale. By such activities, Mr. X successfully laundered huge amount of money earned through illegal activities.

Case study: Auditor’s Failure to Report on Money Laundering

One common form of illegal activities engaged by the Bank officials are the illegal Transfer of the Branch Investment Profit to Benami Accounts of the Bank Officials, which was earned for the timing gap of the illegal Transaction of the IBDAs and IBCAs for restating the previously Off-settled Loan Liabilities.

transactions and introduction to banks, etc. While these activities have their legitimate purposes, they are a very attractive gateway which criminals/terrorists would want to use for laundering crime proceeds/financing terrorism. Given the likelihood of being used for money laundering/terrorist financing purposes, accountants must be vigilant at all times and report anything suspicious to BFIU.

Suspicious activity indicators:

Complex corporate structures which obscure the ultimate beneficial ownership;

Frequent changes in the legal structure of a client’s company which has no clear Justifications;

The level of activities of a client’s company does not match its volume/frequency of fund flows;

Over/under invoicing of goods/services;

Payments received from an un-related party without supporting business activities;

Clients are “politically exposed persons” (PEPs) or their relatives/friends;

A dormant client suddenly becomes active; and

Large/frequent international payments without underlying business Clients come from jurisdictions which lack appropriate AML/CFT laws, regulations or other counter-measures; transactions.

Clients come from jurisdictions where corruption or other criminal activities are of significant concern;

Case Study: Accountants – Assist for Money Laundering

Mr. X was a drug trafficker who had to dispose of a large amount of cash. He decided to employ an accountancy firm to set up a company, purportedly for trading purposes.


The auditors failed to report the said fraud under section 39(3) (…….) of the Bank Companies Act 1991(As amended in 2013).

Suppose that 20 IBDAs were issued for Tk. 30 Cr. on 1st January 2008 and 25 IBCAs were issued

for Tk. 32 Cr. on 29th January 2008 for the time gap of 29 days.

Accounting Entries were made on 1st January 2008When IBDAs were issuedDr. Head Office General Accounts Tk. 30 Cr.Cr. Loans and Advances Tk. 30 Cr.

Accounting Entries were made on 29th January 2008When IBDAs were issuedDr. Loans and Advances Tk.32 Cr.Cr. Head Office General Accounts Tk. 30 Cr.Cr. “X” Benami A/c (instead of Branch Income Account) Tk.2 Cr.

Withdrawal of the Investment Income Tk. 2 Cr. from the Benami Accounts by the dishonest Bank Officials bydebiting “X” Benaml Accounts and crediting the Cash Account.

Step - 4

Step - 1

Step - 2

Step - 3

These are the common measures, but the sector specific measures and guidelines developed by BFIU of Bangladesh Bank for Financial sectors & DNFBP sectors namely Lawyers, Notary and Trust &

Company Service Providers, Real estate developers, Precious metals and precious stones dealers, Accountants and Auditors, Insurance Companies, Money Changers, Postal Remittance

Business, Non-Government Organizations and Non-Profit Organizations are to be mandatorily complied with.


Where do We Stand – World & SAARC Ranking?

Major Observations

Transfer Mispricing

Country SAARC Ranking Overall scoresWorld Ranking

Lower score denotes lower money laundering risk and more effectiveness of anti-money laundering measures.Source: 2014 Basel AML Index

India 7 88 5.64Bangladesh 6 57 6.38Sri Lanka 5 54 6.42Pakistan 4 48 6.53Maldives 3 28 7.13Nepal 2 14 7.64Afghanistan 1 2 8.53Bhutan - - -

10 Denotes Highest Risk0 Denotes Nil Risk

Situation 2 : Case of Transfer Mispricing

ABC (Switzerland Limited) ABC (Bangladesh) Limited

Combined group tax liability is Tk. (20+37.5) Cr. = Tk. 57.5 Cr.

Sales Tk. 400 Cr.

Cost & expenses Tk. 200 Cr.

Profit Tk. 200 Cr.

Tax @ 10% Tk. 20 Cr.

Sales Tk. 600 Cr.

Purchase Tk. 400 Cr.Expenses Tk. 100 Cr.

Profit Tk. 100 Cr.

Taka @ 37% Tk. 37.5 Cr.

Situation 1 : Case of Regular Pricing

ABC (Switzerland) Limited

Sales Tk. 300 Cr.

Cost & expenses Tk. 200 Cr.

Profit Tk. 100 Cr.

Tax @ 10% Tk. 10 Cr.

Sales Tk. 600 Cr.

Purchase Tk. 300 Cr.Expenses Tk.100 Cr.

Profit Tk. 200 Cr.

Taka @ 37.5% Tk. 75 Cr.

ABC (Bangladesh) Limited

Combined group tax liability is Tk. (10 + 75) Cr. = Tk. 85 Cr.

concerned, thousands of our nationals have to give-up their lives in the Jungles of Thailand and around 8,000 are still floating in the sea of Thailand & Indonesia waiting for rescue due to the vicious claws of the human traffickers, - certainly these heinous crime being deeply rooted to the cause of money laundering and poor enforcement of law and order, - this issue now needs all the more attention of the concerned AML agencies for the sake of humanity.

Measures to Deter Money Laundering

Board and management oversight of AML risks.

Appointment a senior executive as principal officer with adequate authority and resources at his command.

Systems and controls to identify, assess & manage the money laundering risks.

Make a report to the Board on the operation and effectiveness of systems and control.

Appropriate documentation of risk management policies, their application and risk profiles.

Appropriate measures to ensure that ML risks are taken into account in daily operations, development of new financial products, establishing new business relationships and changes in the customer profile.

Screening of employees before hiring and of those who have access to sensitive information.

Appropriate quality training to staff.

Quick and timely reporting of suspicious transactions.

Here Bangladesh is losing equivalent foreign currency of Tk. 100 Cr. without any value for money and at the same time, losing tax revenue of Tk. 37.50 Cr. constitutions both way money laundering due to the transfer mispricing by the Switzerland based ABC Company, although transfer pricing regulation (2012) and transfer pricing regime is in force.

The relevant regulating agencies must take all possible measures to close this gateway for foreign currency outflow and loss of due tax revenue.

Government’s Accounting System

For presentation of true & fair view of financial statement of any entity/organisation/authority accrual basis accounting is the only scientific and internationally accepted accounting system which is absent in out country.

In absence of accrual basis accounting true financial status in a particular year could not be ascertained for monitoring and performance evaluation of respective ministries & Govt.

itself. As a result wide scope remains there for generating crime proceeds which ultimately leads to money laundering activities.

It is believed that the sooner the existing cash basis Government accounting system is changed into the accrual basis accounting system with provisions of annual auditable balance sheets for the central government as well as for each ministries the less will be the drainage out of Government spendings with more assurance of economic use of resources.

Currently Australia, Canada, New Zealand, UK & USA are already applying full accrual accounting standards that are broadly consistent with IPSAS requirements and about 25 countries are pursuing accruals basis accounting system for the Government accounts and IMF is also insisting the government accounting system to be of accrual basis.

Human Trafficking

So far the very recently published wide news coverage are


The Author is a Council Member &Past President, ICAB

Recommendations

In view of the above details following recommendations are put forward for consideration of all concerned:

a. Capacity of BFIU in respect of manpower and facilities must be enhanced for activating it in full force.

b. BFIU may exercise more investigative approach to identify all the areas of our country’s total money laundering threats with particular emphasis on the sector-wise government spending & revenue sources and categorise these threats in order of priority of needed attention.

c. BFIU may formulate sector-specific reporting requirements involving the responsible government ministries/divisions with provisions for regular review and actions, if needed by a separate taskforce in each ministry/division in order for gradual upgrading of country’s Anti-Money Laundering world ranking.

d. All government revenue and expenditures accounts may be brought under the purview of statutory audit by the Chartered Accountants Firms annually for ensuring economic benefits and to guard against misuse and the money laundering activities of the country.

e. A tripartite arrangement among BFIU, NBR & ICAB has now become very vital to control the effect of transfer mispricing of the MNCs in the interest of saving foreign currency and generation of due tax revenues.

f. BFIU may take proactive steps for adoption of accrual basis accounting in the Government accounting system for establishing the integrity of markets and soundness in financial framework of the country which help to mitigate the factors that facilitate financial abuse in the form of money laundering and terrorist financing.

g. A separate appellate division may be formed for financial sector for quick disposal of lawsuits in the banking sector and more attention may be given for curving the writ petition culture of the country.

h. BFIU should work together in close contact with the Bangladesh Bar Council so that the wrongdoers can not have any support from its members.

i. BFIU and ACC should also be more vigilant over all the money laundering threat areas and timely enforcement activities should be ensured.

j. Bangladesh Bank, with the support and cooperation from the Government of Bangladesh should partner with World Bank, IMF or any other agencies to take up more and more projects, scheme and program for the purpose of capacity building in the AML respect.

k. Concerned AML agencies should be vigilant and activate AML drive in the filed of human trafficking related to money laundering.

Reference

• Bangladesh Bank:

o Money Laundering and Terrorist Financing Risk Assessment Guidelines for Banking Sector;

o Guidance notes on Prevention of Money Laundering for Banks;

o Guidelines on Prevention of Money laundering & Combating Financing of Terrorism for Designated Non- Financial Businesses and Professions;

o Guidance notes on AML&CFT for insurance companies;

o Guidance notes on AML&CFT for money changers;

o Guidelines for Postal Remittance Business for Combating Money Laundering and Terrorist Financing Risks;

o Guidelines on Prevention of Money Laundering & Combating Financing of Terrorism for capital market intermediaries;

o Guidelines on Prevention of Money Laundering and Terrorist Financing for NPO/NGO Sector; https://www.bb.org.bd/aboutus/regulationguideline/guidelist.php

o Bank Companies Act 1991 (As amended in 2013);

o Anti-Terrorism Act;

o Money Laundering Prevention Act; https://www.bb.org.bd/aboutus/regulationguideline/lawsnacts.php

• FATF (Financial Action Task Force): 40 Recommendations; http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB4QFjAA&url=http%3A%2F%2Fwww.fatf-gafi.org%2Fmedia%2Ffatf%2Fdocuments%2FFATF%2520Standards%2520-%252040%2520Recommendations%2520rc.pdf&ei=kqGHVdGKLdCFuwSi8r3IBQ&usg=AFQjCNFR-xQapeLu1kUOfpArNJ2iDaWMQQ&bvm=bv.96339352,d.c2E

• APG (Asia Pacific Group) on Anti-Money Laundering:http://www.apgml.org/

• AUSTRAC compliance reports & typographies:

http://www.austrac.gov.au/

• BASEL AML Index: http://index.baselgovernance.org/

• BFIU Annual Report 2014;

• Google.


Tax is the main source of government revenue in Bangladesh like any other country which does not have major mineral and similar other resources. Three major taxes are customs duty, income tax and VAT (Value Added tax) and are administered by the National Board of Revenue (NBR). Of these, only income tax is treated as a direct tax while both customs duty and VAT are categorised as indirect tax although in many countries, VAT is considered a direct tax.

Traditionally, customs duty has been the single largest contributor to our tax revenue. But recently, there has been notable changes in the composition of our revenue collection. Contribution of customs duty is gradually declining. It is largely due to trade liberalisation and re-structuring of import duties following WTO guidelines.

On the other hand, contribution of income tax is steadily rising. During the 1990s, income tax was contributing around 20 per cent of the NBR's total collection. Even in financial year 2010-2011, its contribution was less than 30 per cent. But in FY 2013-2014, income tax had contributed 36 per cent of tax revenue while contribution of customs duty had declined to 28 per cent.

Reforms Needed for a Taxpayer- Friendly Policy

A F Nesaruddin FCA

In the budget proposals for FY 2014-2015, income tax was treated as the single largest contributor of tax revenue. Out of the total collection target of Tk. 1,497.20 billion, income tax was projected to be collected by 38.4 per cent, VAT 37.7 per cent and customs duty 23.9 per cent. During the last few years, the quantum of collection from income tax, in absolute terms also, increased significantly. During financial year 2010-2011, the total collection from income tax was Tk. 230.11 billion whereas during FY 2013-2014, it rose to Tk. 429.16 billion. This is no doubt a positive indication towards minimising the gap between the rich and the poor.

In fact, the government has been making constant efforts to attain a position where income tax would become the main source for collection of tax revenue. In the present article, our focus will be mainly on various aspects of income tax in Bangladesh. In recent years, the government has taken several policy decisions and timely steps with regard to tax laws and tax administration which deserve appreciation.

Introduction of universal self-assessment system has brought significant relief to taxpayers, particularly small taxpayers. Now, after filing the income tax returns, they do not need to go through the hassle


of appearance and hearing before the assessing authority (DCT/ACT) for assessment unless the case is picked up for audit. And, in fact, not more than 5 to 10 per cent of the returns are selected for audit. Small and fixed-income taxpayers are normally kept out of audit.

The income tax department underwent a large-scale expansion in 2012. The number of tax circles has more than doubled covering, among others, many smaller towns. Consequently, tax offices have been more easily accessible and services more easily available to taxpayers. The government is also taking other steps to increase taxpayer awareness. 'Income Tax Day' is observed all over the country on September 15 every year. Colourful rallies are brought out and other events held to mark the day. And then the Income Tax Fair is held from September 16 to 22 where direct assistance is given to the taxpayers for filling up and submitting tax returns. These obviously have generated awareness and encouragement among taxpayers. During this period, both print and electronic media play a very positive and supportive role. They give wide coverage to the

events during the whole week and air discussions/talk shows on various issues related to income tax.

The government has also set up taxpayer information and service centres in all major cities in the country. They provide necessary service to the taxpayers throughout the year. Award of CIP (Commercially Important Persons) status to 10 individuals and 10 corporate taxpayers each year on national level has been in practice over last several years. In addition, 3 top taxpayers and 3 longest time taxpayers are given recognition at district level through formal presentation of a crest and a certificate.

Another taxpayer-friendly move was introduced in 2013, encouraging on-line registration (e-TIN) system for taxpayers. This has been welcomed in every circle. Another project for on-line submission and processing of tax returns is now underway. It is expected to be operative by the middle of 2016.

We have so far discussed some positive and encouraging features of our tax administration. But naturally

OVER THE LAST

FEW YEARS, WE HAVE

ATTAINED SIGNIFICANT

PROGRESS IN MANY

AREAS OF

TAX-ADMINISTRATION,

PARTICULARLY WITH

REGARD TO TAX

COLLECTION. BUT, AS

NOTED ABOVE, THERE

ARE ALSO MANY AREAS

WHERE IMPROVEMENT

IS URGENTLY CALLED

FOR. REFORMS IN THE

TAX ADMINISTRATION

ARE PRIMARILY A

RESPONSIBILITY OF THE

NATIONAL BOARD OF

REVENUE. BUT AS

CONSCIOUS CITIZENS OF

THE COUNTRY WE ALL

HAVE THE MORAL

RESPONSIBILITY TO

PERFORM OUR ROLES IN

THIS REGARD WITH

HONESTY AND

DILIGENTLY.


The Author is a Vice President, ICABand a Partner of Hoda Vasi Chowdhury& Co., Chartered Accountants

Over the last few years, we have attained significant progress in many areas of tax-administration, particularly with regard to tax collection. But, as noted above, there are also many areas where improvement is urgently called for. Reforms in the tax administration are primarily a responsibility of the National Board of Revenue. But as conscious citizens of the country we all have the moral responsibility to perform our roles in this regard with honesty and diligently. Taxpayers in particular should act with sincerity and responsibility regarding compliance with tax laws. Tax officials, on the other hand, must give due respect and recognition to taxpayers so that they do not feel harassed. They must always bear in mind that their attitude towards taxpayers should be friendly and helpful. Media, both print and electronic, now plays quite a significant role in almost every sphere of our social life. Therefore, media can also play an effective role on this issue by generating awareness and sense of responsibility among taxpayers and a sense of equity and fairness among tax officials. In fact, we all should sincerely contribute towards achieving the common goal of having an efficient, effective and taxpayers' friendly tax administration in Bangladesh.


there are some limitations and bottlenecks also in our taxation system. It is a recognised fact that in spite of all these efforts, Bangladesh has a very narrow tax base. It has a population of more than 160 million out of which the number of regular taxpayers is around one million only. It is generally believed that the number of potential taxpayers in Bangladesh would be much higher than one million. Somehow a large portion of these potential taxpayers are outside the tax net.

The NBR has to take effective measures to improve this situation. The main focus would be to inspire and motivate potential taxpayers to declare their true income and file tax returns. The media can also

make a positive contribution in this regard by assisting the NBR to reach its message to the people. Moreover, the corporate tax rate in Bangladesh is quite high compared to many other countries of the region. Arbitrary use of discretionary powers by tax officials is still quite rampant and there is an apparent lack of accountability.

Neutrality and independence of the Taxes Appellate Tribunal are practically compromised to a large extent since almost all members of the Tribunal are Tax Commissioners working on deputation. There are some of the shortcomings of our tax administration which need to be addressed as well.

* The Article is reproduced from the Financial Express

The annual home work or exercises among the government functionaries, stakeholders and policymakers for framing a budget for another fiscal year have already begun. In the backdrop of our national dream to become a middle income country by 2021, we hope that the next budget will have a clear indication to such graduation.

After assessing the recent reports on the pre-budget exercises, we believe the government remains strongly committed to formulate an investment-friendly inclusive budget for the fiscal year 2015-16. The budget will also try to bridge between the sixth five year plan and upcoming seventh five year plan.

Business leaders in the recent pre-budget meetings have welcomed the government to withdraw the opportunity of whitening black or undisclosed money from the next fiscal year. They also urged the government to prevent the source of black money.

Some of the business leaders requested NBR to issue Tax Card to all tax payers so that they can be proud of being tax payers. They urged for giving tax rebate to the businesses as the businessmen could not run their businesses especially during the last couple of months due to political turmoil.

Dreaming a Real Pro-people BudgetRaihan M Chowdhury

Bangladesh is a land of 160 million populations whereas we have only 1.8 million tax payers. We have to increase the tax net to increase revenue collection. The business leaders said the new VAT law 2012 should be business-friendly and urged to impose minimum fixed VAT for small and medium traders like before. They also urged for 7.5% VAT instead of existing 15% ensuring wider tax net. In another budget proposals, tax-free income limit for individual tax payers was proposed Tk. 2,75,000/ from next fiscal year. Preparing separate policies and roadmap for the automobile industry of Bangladesh is another demand from the business circle. The government should recognize this sector as an import-substitute industry.

In its proposal, the Dhaka Chamber of Commerce and Industry (DCCI) proposed for withdrawing present 15% VAT on use of internet in order to take this facility to the remote areas of the country as a part of changing the country into a Digital one. The DCCI also urged to give tax exemption facility to Chambers/trade bodies as these organizations spend most of their income in doing research, policy advocacy, publication, activities to promote trade and commerce etc.

Another national chamber proposed for reducing Advance Income Tax (AIT) to 3%



SURELY

BANGLADESH HAS

PROGRESSED WELL IN

TERMS OF ACCESS TO

ENERGY AND

EXPANSION OF ROADS.

BUT IT HAS EQUALLY

TO BE ADMITTED THAT

THE EMPHASIS HAS

MOSTLY BEEN ON

ROAD TRANSPORT

RATHER THAN ON

RAILWAYS AND

WATER TRANSPORT.

ROAD TRANSPORT

REQUIRES MORE

LANDS AND IT IS LESS

ENVIRONMENT-FRIEN

DLY WHEREAS

RAILWAY AND WATER

TRANSPORT REQUIRE

LESS LANDS AND

MORE ENVIRONMENT-

FRIENDLY.

from 5% in case of import. If any multinational company floats more than 30% share in the capital market in that case he proposed for 5% tax rebate. The chamber also proposed for reducing corporate tax rate for Merchant Banks to 35% from existing 37.5%. And for listed companies he proposed to reduce it to 25% from 27.5%. The chamber also sought tax holiday for 20 years for private software park. Government can impose additional duty or tax on imported finished goods which are being produced in Bangladesh in order to protect local industry, the chamber mentioned.

Disaster Management Mechanism

In the backdrop of recent (April 25, 2015) devastating earthquake in Nepal, we believe the new budget should include ‘disaster management mechanism’ in its thrust area chapters. The last budget had three chapters-poverty alleviation, private sector development and environment & development- in the thrust area chapters. We, therefore, demand of the government that ‘disaster management mechanism’ will be included as a new addition in the thrust area chapters of the next budget considering the safety and security of teeming millions.

Nepal’s earthquake which claimed 8,000 lives is a real wake-up call for a disaster-prone country like Bangladesh.

This is a grim reminder of how vulnerable all of South Asia is to earthquakes, tsunamis, cyclones, flash-floods and other natural disasters. It also shows how its governments fail to mitigate their effects on the plea that these events cannot be predicted.

The United States and Western Europe are earthquake-prone. Yet, quakes killing over 10,000 people haven't occurred there for a century. They have only occurred in Third World countries (except for super-vulnerable Japan).

In 2010, a magnitude-7 earthquake killed 300,000 in Haiti, history's highest earthquake toll. That year, a magnitude-8.8 earthquake hit Chile. It released 500 times more energy, but killed 525.

In Hurricane Elena in the US (1985), five died. But when a cyclone slammed Bangladesh in 1991, 500,000 perished.

Major Economic Challenges

The higher rate of interest on savings certificate at 12-14 per cent has immensely increased the sales of certificates and caused a burden of interest payment on the government. In the next budget, the yawning disparity between interest rate on savings certificates and bank deposits should disappear. Revenue generation has lagged far behind the target and more revenue generation would require increased efficiency on the part of tax collectors and the implementation of the VAT act. Private investment has been limping on account of many factors which are well-known (such as infrastructural deficiency) but the recent political crisis has resulted in economic uncertainty to deter both foreign and domestic investment.

The required amount of investment may not flow and growth rate might be stuck up at 6 per cent or so without the settlement of political disputes. The challenges are also there regarding the completion of the ‘mega projects’ in due time and deepening of the reforms. Without convincing progress in these two fronts, attainment of 7-8 per cent

ICOR nor could one accept the projection made by the World Bank which stands at 5.6 per cent. It appears that the WB has deducted loss of 1 per cent from the GDP growth rate estimate. Based on ‘quick and dirty’ estimates on the economic losses during the last three months, increase in Aus, Aman production over the same period last year and an expected bumper crop brewing over Boro rice, trend in export, import, private credit flows, foreign assistance and remittances, we can possibly project that the economic growth rate for 2014-15 would range between 6.0 per cent to 6.5 per cent.

growth rate may remain elusive. And finally, the governance issues should be ensured properly.

According to economic analysts, Bangladesh is facing major economic challenges in the backdrop of shortfall in collection of revenue vis-à-vis target, infrastructure deficit and depressed investment, culminating into non achievement of targeted rate of growth in gross domestic product (GDP).

Calling for public debates for shifting the focuses of policies and functions of the Ministry, a private think tank suggests three core areas - expansion of productive capacity, effective provision of social services to the citizens, and sustainable development - for the next national budget of 2015-16.

So proper and efficient functioning of budgetary components is a sine

qua non to implement the budget within the stipulated time-frame.

Surely Bangladesh has progressed well in terms of access to energy and expansion of roads. But it has equally to be admitted that the emphasis has mostly been on road transport rather than on railways and water transport. Road transport requires more lands and it is less environment-friendly whereas railway and water transport require less lands and more environment- friendly. In the next budget, one would also like to see steps taken to revitalise the rural economy. Especially, more resource allocation should be on agricultural research and extension.

Of course, one could question whether the Finance Minister’s expectation of 6.8 per cent would to be validated by the existing GDP-investment ratio or prevailing


The Author is Business Editor,The Financial Express

Background and Introduction

This paper is written on the role and function of Domestic Credit Rating Agencies (DCRA) in Bangladesh. The paper addresses definition of credit rating and its benefits, methodology followed by DCRAs, context of Basel II, current practices in Bangladesh and recommendation thereon. With the implementation of Basel II (Introduced in Bangladesh by BRPD Circular No- 09, published on December 31st 2008), in the context of Pillar 1, regulatory capital requirements for credit risk is calculated according to two alternative approaches:

(i) Standardized Approach; and

(ii) Internal Ratings-Based Approach.

The Standardized Approach is generally conducted worldwide by independent Credit Rating Agency (CRA) who is licensed by domestic regulators [Bangladesh Securities and Exchange Commission (BSEC) and Bangladesh Bank (BB) in Bangladesh]. Recent scandals and events has reinforced the need for strict framework and regulatory awareness to various banks nationwide which furthermore extends the requirement and support of CRAs to operate and execute credit rating efficiently. BRPD Circular No-

Domestic Credit Rating - Operationand Effectiveness in Bangladesh

N K A Mobin FCA, FCS, CFC

18 (published Dec 21, 2014) issues a roadmap for implementation of Basel-III in Bangladesh and also additional BRPD Circular No- 01 (published January 01, 2014) issues external CRA’s to perform credit rating of Small and Medium Enterprise (SME). Therefore the need for CRA in a drive to develop the financial system of Bangladesh is evermore growing.

Credit rating is an independent opinion on ability of a business or a government to repay its debt obligations. Hence CRAs act as corporate gatekeepers to bridge the gap of asymmetric information between lenders, investors and issuers about the creditworthiness of companies or business.

What is Credit Rating?

Credit rating is the assessment of the credit worthiness of a particular borrower with reference to a particular debt or financial obligations. Ability to pay debt is known as “creditworthiness”. Credit Rating usually appears in form of alphabetical letter grades such AAA, A+,BBB etc. Usually a credit rating grade is inversely proportional to default risk which means higher the grade lower the risk. A credit rating can be assigned to any institution that intends to borrow money; any individual, government, proprietorship



CREDIT RATING

ONLY TAKES

FINANCIAL RISK INTO

ACCOUNT AND DOES

NOT CONSIDER OTHER

RISKS. ONE SHOULD

NOT USE CREDIT

RATING AS

INVESTMENT ADVICE

AND SHOULD NOT

HOLD IT AS

RECOMMENDATION TO

BUY SELL OR HOLD

SECURITIES.

ACCORDING TO THE

PRESIDENT OF

STANDARD & POOR’S

DOUGLAS L PETERSON

“CREDIT RATING

ADDRESSES ONLY ONE

ASPECT OF A DEBT

INSTRUMENT-CREDIT

QUALITY”.

business, partnership business, company or a government institution may opt for credit rating for the purpose of borrowing funds. These are known as entity ratings. Credit Rating is also applicable for the issuance of commercial papers such bonds; however credit rating is not applicable for issuance of common stock. Typically the entity who is applying for credit rating is known as obligor.

As article of S&P states “From a slightly different perspective, credit ratings are a specialized type of securities research, similar to what independent securities analysts and analysts at sell-side firms produce. Like such research, credit ratings embody forward-looking opinions designed to contribute to an investor's decision-making process. However, instead of providing opinions about the overall investment merit of specific securities or types of securities (which embodies many different dimensions, including creditworthiness), a credit rating addresses creditworthiness only. Accordingly, credit rating agencies operate only in the fixed-income arena, while securities analysts cover the entire landscape of the capital markets.” In addition Peterson [2013] states that an ideal credit rating should have three major attribute: (i) transparent, (ii) comparable and (iii) forward looking.

What Credit Rating is Not

Credit Rating only takes financial risk into account and does not consider other risks. One should not use credit rating as investment advice and should not hold it as recommendation to buy sell or hold securities. According to the president of Standard & Poor’s Douglas L Peterson “Credit Rating addresses only one aspect of a debt instrument-credit quality”.

Domestic Credit Rating Agencies of Bangladesh

Credit Rating Agencies performs credit rating assignments of various entities and debt instruments. In Bangladesh they are known as External Credit Assessment Institution (ECAI). Elkhoury [2008] explains that rating agencies falls into two categories: (i) recognized; and (ii) non recognized. The former are recognized by supervisors in each country for regulatory purposes. In Bangladesh there are four regulatory authorities: (i) Bangladesh Securities and Exchange Commission; (ii) Bangladesh Bank; (iii) Insurance Development and Regulatory Authority of Bangladesh; and (iv) Association of Credit Rating Agencies in Bangladesh. These regulatory authorities recognize the following eight local credit rating agencies:

I. Emerging Credit Rating Ltd (ECRL)

II. Credit Rating Association of Bangladesh Ltd (CRAB)

III. Credit Rating Information and Services Ltd (CRISL)

IV. National Credit Rating Ltd (NCRL)

V. Alpha Credit Rating Ltd (ALPHA)

VI. WASO Credit Rating Company (BD) Ltd (WASO)

and guidelines. To perform credit assessment, credit rating companies must be recognized as an External Credit Assessment Institution.

Limitations of Bangladesh Bank Regulations

Although Bangladesh Bank states in its recognition that credit rating companies should perform their rating assessment free from any conflict of interest, however, the term “conflict of interest” has not been defined anywhere in circulars or policy or any guidelines. It is also not clear whether all the credit rating reports should be sent to Bangladesh Bank or not. Since, in the recognition given by Bangladesh Bank, it is mentioned that disclosure should be made of credit rating reports of “related parties” quarterly to the Bangladesh Bank. In the recognition given, “related parties” is not given any clarified meaning.

3. Insurance Regulation

For credit rating assessment of insurance companies, the respective regulatory authority is Insurance Development and Regulatory Authority Bangladesh (IDRA). To perform credit assessment, credit rating companies can be recognized as a Credit Rating Institution by IDRA. Circular of Chief Controller of Insurance No. 21/21/98-376 dated 27 March 2007 requires all general insurance companies to get credit rating assessment once a year and all life insurance companies to get credit rating assessment every two years. Further to that, a circular issued by Banking Regulation and Policy Department (BRPD) No.06 dated March 13, 2011 also made it

VII. Argus Credit Rating Services Ltd (ARGUS)

VIII. The Bangladesh Rating Agency Ltd (BDRAL)

International Credit Rating Agencies

Apart from these Credit Rating Agencies the Bangladeshi Regulatory Authorities also recognizes the following international credit rating agencies

I. Standard & Poor’s (S&P)

II. Fitch Ratings

III. Moody’s Investor Service (Moody’s)

Who are the Regulators?

For Domestic Credit Rating Agencies of Bangladesh the regulatory agencies and their guidelines are listed below:

1. Bangladesh Securities and Exchange Commission

Bangladesh Securities and Exchange Commission (BSEC) has been one of the prime regulators for CRA, along with the authority to issue license and quarterly monitoring of CRA’s, it also oversees the compliance requirement and rules laid down by Credit Rating Companies Rules 1996.

Limitations of Credit Rating Companies Rules 1996

Rule 6 mentions that the Commission has power to cancel or suspend the registration of a

credit rating company if the company has contravened any provision or has otherwise failed to comply with any requirement of the 1969 Ordinance or any rules given by the Commission if it considers necessary in the public interest to do so. There are many rules in Credit Rating Companies Rules 1996 which have been made according to international standard practice but which need to be revised or rephrased according to practical scenario of Bangladesh. Hence, it is not possible to fulfill all the requirements of the rules and contravention of such rules may make it liable to have registration cancelled. It may be proposed to the Commission to make an amendment to the rules to incorporate more definite and concrete situations where credit rating companies can have their registration cancelled or suspended.

No definition/description has been given of compliance report submission in rule 4(g). Compliance issues have not been defined properly and work of a compliance officer needs to be addressed more. Professional qualification has not been described in the rules. Such as analyst when reviewing/analyzing or rating a certain company or an industry, their level of qualification has not been described in details. This is a major issue which needs to be addressed in more details.

2. Bangladesh Bank Regulations

Credit Rating Companies (“Company”) are also being regulated by Bangladesh Bank through various circulars policy


mandatory for general insurance companies to get credit rating assessment.

Benefits of Credit Rating

Credit Rating provides various benefits such as it gives insight of financial health of a company. Since financial risk analysis is a major component of a credit rating report, reading this particular section will give the user an idea how sound the financial health of the obligor is. Another benefit of credit rating is that its comparability, if two obligor operating in the same industry is rated and the grades are presented to an investor; simply by taking the grades into account the investor shall understand which obligor has higher credit risk. This is why credit rating particularly helpful for an issuer with little or no credit history (New Company or a company which never borrowed before), as less well-known issuers gains market access by having information and analysis of their credit widely available on a comparable basis [Peterson, 2013].

BASEL II and Credit Rating

Roy [2005] states that “In May 2003, the Basel Committee on

Banking Supervision released its third - and final – consultative paper on the New Basel Capital Accord, which is meant to replace the 1988 capital adequacy framework by a more risk-sensitive approach. One year later, on June 26, 2004, central bank governors and the head of bank supervisory authorities from the G-10 countries endorsed the new framework commonly known as Basel II”. The Basel Committee has developed two approaches for calculating regulatory capital for

credit risk, the so-called “standardized approach” and “internal ratings based approach” (hereafter IRB). The standardized approach uses external ratings such as those provided by ECAI to determine risk-weights for capital charges, whereas the IRB allows banks to develop their own internal ratings for risk-weighting purposes subject to the meeting of specific criteria and supervisory approval. Large International Financial Institution usually opts for IRB however the small and medium financial institution does not have necessary funds to adapt IRB so it usually chooses standardized approach to calculate regulatory capital risk. In compliance to international standards Bangladesh Bank has made the guidelines statutory for all scheduled banks in Bangladesh from January 01, 2010. Basel II attempts to integrate Basel capital standards with national regulations, by setting the lowest capital requirements of financial institutions with the goal of ensuring organization or Institution liquidity.


2. CRA Independence and the Avoidance of Conflicts of Interest; and,

a) General

b) CRA Procedures and Policies

c) CRA Analyst and Employee Independence

3. CRA Responsibilities to the Investing Public and Issuers.

a) Transparency and Timeliness of Ratings Disclosure

b) The Treatment of Confidential Information

4. Disclosure of Code of Conduct and Communication with Market Participants

Apart from ACRAA, BSEC also advised DCRAs to follow this ISOCO Codes.

Performance of DCRA of Bangladesh Regarding Best Practice of Compliance

ACRAA website denotes that only four DCRA, CRISL, CRAB, ECRL & NCRL are members of ACRAA. The remaining four companies WASO, ARGUS, ALPHA and BDRAL are yet to opt for ACRAA membership, means they are still outside the scope of following some best practices in their operations. ECRL, CRAB and CRISL at this stage broadly comply with ADB Handbook. Tsunoda[2013] explains that Bangladeshi DCRAs faces difficulty in running its operation as the paid up capital required for Bangladesh DCRAs to get a license is only BDT 5 million, which is very little to the comparison to its operation. The paid up capital was decided in 1996 when there was little or no market for credit rating and only one company was operating. But

Best Practices in Credit Rating Industry

Best Practices Advocated by ACRAA

Association of Credit Rating Agencies in Asia (ACRAA) was formed on 14th September 2001 at the Asian Development Bank Headquarters Metro Manila, by 15 Asian credit rating agencies from 10 countries. It was formed with the following objectives

• To develop and maintain cooperative efforts that promote interaction and exchange of ideas, experiences, information, knowledge and skills among credit rating agencies in Asia and that would enhance their capabilities and their role of providing reliable market information.

• To undertake activities aimed at promoting the adoption of best practices and common standards that ensure high quality and comparability of credit ratings throughout the region, following the highest norms of ethics and professional conduct.

• To undertake activities aimed at promoting the development of Asia's bond markets and cross-border investment throughout the region.

Keeping these objectives in mind ACRAA has designed a detailed checklist which member credit rating agencies can fulfill in order to understand what are the best practices of credit rating companies in Asia and how far

behind are they from that practice. ACRAA now has around 31 Rating agencies in 14 Countries in Asia as member. ACRAA is also in the process of attaching with other similar association in the World like Europe and Latin America.

Best Practices advocated by International Organization of Securities Commissions (IOSCO)

Published in September 2003, International Organization of Securities Commissions, IOSCO’s Technical Committee issued a statement of principles regarding the Activity of CRA’s. These Codes would help reduce the asymmetry of information and avoid any conflicts of interest or a lack of independence that would undermine the overall investor’s confidence in the transparency and integrity of the Credit Rating Report. Events of misunderstanding of Credit Rating process by investors, minimal oversight and formal regulation and concerns over the integrity of Credit Rating process have encouraged IOSCO to develop such guideline of principles

The principles were set upon discussion among IOSCO members, CRA’s, Representatives of BASEL Committee on Banking Supervision, International Association of Insurance Supervisors, Issuers and the public at large. The Code Fundamentals are broken into four sections:

1. The Quality and Integrity of the Rating Process;

a) Quality of the Rating Process

b) Monitoring and updating

c) Integrity of the Rating Process


as more licenses are being issued the DCRAs are facing fierce competition which puts their survivability in question. If a DCRAs cannot survive in long term then the quality of its services shall also deteriorate.

Lack of accounting transparency makes it even very difficult for Bangladeshi DCRAs to function properly. Tsunoda[2013] elaborates the problem with a detailed example “Suppose the audited financials reveal that a client has never earned any profit during the last 10 years and capital is in the negative. Here the analyst in charge of the assessment needs to raise a flag on how and under what circumstances the client was able to pay all its loan installments in a timely fashion without a single instance of default. Such dichotomies need to be identified, highlighted, and investigated before a rating report is released.”

Credit Rating vs. Auditing

Although there are some similarities but there are also quite substantial differences between these two professions is the assignment of credit rating is a continuous process. Upon assigning a final credit rating grade to the firm or security, the CRA can re-assess the grade anytime it seems fit, i.e. when certain circumstances does not reflect the assigned grade whereas the assignment of audit is a reflection of a certain period of time which has already passed. With the

conclusion of that period, the audit examines the financial statement of the entity and states whether the true position of the company is reflected within the financial statement.

Both credit rating and audit have their own limitations. Since there are future events and developments that cannot be foreseen, the assignment of credit ratings is not an exact science. For this reason, credit rating opinions are not intended as guarantees of credit quality or as exact measures of the probability that a particular issuer or particular debt issue will default. Instead, ratings express relative opinions about the creditworthiness of an issuer or credit quality of an individual debt issue, from strongest to weakest, within a universe of credit risk. On the other hand an opinion is not a guarantee of an outcome, but rather a statement of professional judgment. The auditor cannot obtain absolute assurance that financial statements are free from material misstatement because of the inherent limitations of an audit. These are caused by a number of factors. For example, many financial statement items involve subjective decisions or a degree of uncertainty (e.g., accounting estimates). Consequently, such items are subject to an inherent level of uncertainty which cannot be eliminated by the application of auditing procedures. It should not be assumed that every single fact and detail in a set of audited financial statements has been checked and verified by the auditors, and is therefore guaranteed to be 100 percent accurate. The auditor obtains reasonable assurance by gathering evidence through selective testing of financial records.

Emergence of ACRAB

Due to the problems mentioned before the domestic CRAs operating in Bangladesh were facing severe problems as the price of performing rating assignments were severely falling because of intense competition. As mentioned in the earlier sections lack of accounting transparency already makes the job DCRA quite difficult and doing it at a discounted fee almost made it impossible. To counter this problem on 1st April 2014 the DCRA operating in Bangladesh formed an association called ACRAB (Association of Credit Rating Agencies in Bangladesh) with the objective of providing a stable market condition and to increase collective bargaining power of the DCRA operating in Bangladesh. After taking consent from all the members a minimum rating fee chart was drawn this is strictly being followed by all the members. Failure to follow this chart will result in high penalty; this has bought some stability in market and has provided the DCRAs with level playing field. Members of ACRAB are listed below:

I. Credit Rating Information and Services Ltd (CRISL)

II. Credit Rating Association of Bangladesh Ltd (CRAB)

III. Emerging Credit Rating Ltd (ECRL)

IV. National Credit Rating Ltd (NCRL)


Current Scenario in Bangladesh

Although the concept of credit rating emerged in early twentieth century in the financial market of USA, it is still new in the developing countries like Bangladesh. Long after a century of its emergence, Bangladesh Securities and Exchange Commission (BSEC) of Bangladesh promulgated rules regarding the operation of rating agencies in 1996. No rating agency was licensed in the country till 2002, hence no rating was published. It was South-East Bank Limited to be rated for the first time in Bangladesh which was carried out by the credit rating agency CRISL, in November 2002. After that delayed initiation, hundreds of institutions and few bonds are rated each year. ECRL, CRISL, CRAB, NCRL, ALPH, WASO, ARGUS and BDRAL are licensed credit rating agency of the country permitted to rate the entity and debt instruments under the Credit Rating Companies Rules 1996.

1. Little or Less Monitoring by Regulators

Along with Bangladesh Securities and Exchange Commission (BSEC), Bangladesh Bank, Insurance Development & Regulatory Authority Bangladesh (IDRA) is responsible to monitor the regular operation of each listed credit rating agency (CRA). However, recent scandals in the financial sector suggest that a more rigid approach towards the screening of various segments of financial sector is required. In order to develop a mechanism of self scrutiny, Association of Credit Rating Agencies in Bangladesh (ACRAB) was formed in April 2014 by the recommendation of Bangladesh Securities and Exchange Commission and Bangladesh Bank.

V. Alpha Credit Rating Ltd (ALPHA)

VI. WASO Credit Rating Company (BD) Ltd (WASO)

VII.Argus Credit Rating Services Ltd (ARGUS)

Criticisms of Credit Rating Agencies

Credit Rating Agencies were widely criticized during global financial crisis of 2007-2008. It was claimed by many that the credit rating agencies assigned inflated grades to issuers. The fact that issuer pays the credit rating fee instead of the investor was the primary driver of criticism. Ryan [2012] added four more criticisms to the list

1. Lack of Competition: International credit rating market is dominated by three CRA, S&P, Moody’s and Fitch, since it ratings to issue major debt, there is not much competition among the firms.

2. Lack of Accountability: It has been criticized that even though CRA are considered as an important gatekeeper of the financial industry, the ratings it assigns are based on fixed documented standards and agencies themselves agree that its evaluations are basically opinions which cannot be verified on court.

3. Lack of Timeliness and Pro Cyclical Behavior: It has been criticized that the credit rating agencies do not issue warnings on timely manner, for example

US congressional report published on 13 April 2011 stated “Emails in 2006 and early 2007 show employees were aware of housing market troubles, well before the massive downgrades in July 2007.” If the CRA had heeded its own warning then it would have issued a more conservative grade.

4. Rating Triggers: Since a CRA may downgrade any entity any time, this creates a big problem. Because downgrading the company will decrease its credit worthiness and increase its financial cost causing it to fall in an acute liquidity crisis. So in other words CRA itself might trigger financial crisis.

In reply to this criticism Douglas L Peterson, President of S&P stated that “We have taken significant actions to further strengthen our independence from issuer influence. We have long had policies to manage potential conflicts of interest such as a separation of analytic and commercial activities, a ban on analysts from participating in fee negotiations, and de-linking analyst compensation from the volume of securities they rate or the type of ratings they assign. After the crisis, we decided to strengthen analytical independence by rotating the analysts assigned to a particular issuer and enhancing analyst training. We also improved the integrity and validity of our methodologies and models: We reassessed the principles underlying the way we rate all debt and changed the way we rate almost every type of security that was affected by the financial crisis. For mortgage-related securities, for example, we significantly increased the credit enhancement required to achieve a 'AAA' rating and made it more difficult for securities to achieve high ratings.”


2. Banks are Most Benefited from Credit Rating

Since Basel II is directly addressed to financial institutions (FI), it’s guidelines help assist FI’s calculate its risk asset base and eventually maintain a cautious lending and deposit ratio. Hence the benefits of credit rating of financial institute and its clients are more visible to the FI compared to that of client. For the borrowing client, credit rating report is merely a complain requirement which is to be fulfilled prior to loan sectioning or registering for IPO. This therefore has discouraged various corporate clients to do rating.

3. Information Keeping of Local Organizations in Some Cases is Very Poor

Since modernization and the use of accounting law and guidelines were neglected by previous generation owners, the visibility of revenue and expenses was reluctant. Imposition of banking and various association rules to some extend have tutored local businesses to maintain a certain set of paperwork which needs to be further refined to help the flow of information and its visibility.

4. Clients are Reluctant to Provide Sufficient Information

Risk of data theft and confidentiality of information, clients are often reluctant to provide information. Along with Credit Rating Agency’s it is also the responsibility of a banker to educate the client in this event. Every credit rating agreement holds a confidentiality clause which the CRA’s abide by to safeguard the confidentiality of information received from the respective client.

Conclusion & Recommendations

The paper explained concept of credit rating, how it is being implemented over the world and the evaluation practices followed by DCRA of Bangladesh compared to the best practices. The paper also mentioned the difficulties faced DCRA operating in Bangladesh. One of the major problems faced by DCRA operating in Bangladesh is intense competition. United States of America a country with GDP of $16.722 trillion (2013) has 10 nationally recognized credit rating organizations whereas Bangladesh

with a GDP of $161.76 billion has 8 nationally recognized credit rating agencies. Even though BSEC has the regulations for credit rating in 1996, credit rating is still fairly a new concept and many finance profession still does not understand credit rating properly. On positive note implementations of Basel II in the banking industry of Bangladesh has familiarized the bankers with credit rating and over last five years majority of the Banks have made credit rating mandatory for their clients in order to meet its capital adequacy requirements.

Recommendations

1. Effective Monitoring from the Regulators: Regulators are required to monitor DCRAs of Bangladesh more effectively, so that there is less malpractice and DCRAs who are breaking the rules and regulations are penalize. This will encourage the DCRAs to provide high quality service to its clients. BSEC initiated to prepare one Manual on visiting the Credit Rating Companies to ensure quality and responsibility which is yet to be introduced.

2. Banks Should Offer Benefits To its Clients: All financial institutions should offer some benefits to its clients such as a declined interest rate so that more and more clients are encouraged to obtain a credit rating report. As mentioned above clients in most of the time not interested to provide information which leads to a bad grade if the banks offer lower interest rates than the clients will be encouraged to provide more information which may lead to a better grade which will be mutually beneficial to the client and the bank.


The Author is Managing Directorand CEO of Emerging CreditRating Limited

CONFLICTS OF INTERESTS PLAYED IN RECENT FINANCIAL CRISES. U. OF PENNSYLVANIA JOURNAL OF BUSINESS LAW,12:3, 921-946.

Peterson, D. (2013). The Role Of Credit Rating Agencies In The Financial System. RATINGSDIRECT,1.

Roy, P. (2005). CREDIT RATINGS AND THE STANDARDISED APPROACH TO CREDIT RISK IN BASEL II. WORKING PAPER SERIES,517.

The ABCs of Credit ratings. (n.d.). Investor Bulletin,161.

Tsunoda, J., Ahmed, M., & Islam, M. (2013). Regulatory Framework and Role of Domestic Credit Rating Agencies in Bangladesh. South Asia Working Paper Series,21.

Utzig, S. (2010). The Financial Crisis and the Regulation of Credit Rating Agencies: A European Banking Perspective. ADBI Working Paper Series,188.

White, L. (n.d.). Credit Rating Agencies and the Financial Crisis: Less Regulation of CRAs Is a Better Response. Journal of International Banking Law and Regulation.

Younglai, R., & LYNCH, S. (2011, April 13). Credit raters triggered financial crisis: Panel. REUTERS.

3. Default Rating Calculation: Because of completion of span of 4-5 years of rating operations by most of the DCRAs in Bangladesh, regulator should insist DCRAs to calculate default Rating Chart on all its future ratings.

4. Introduce Co-Rating and/or Rotation: Like Audit of large banks, corporations and big business houses, regulators might make the rules of Co-rating for maintaining and ensuring the quality of rating. Regulator should also consider for rating rotation after each 4 years amongst the rating companies. This will definitely ensure the high quality service to its clients.

5. Engage DCRAs in Sovereign Rating: DCRAs are now quite capable of taking responsibility of conducting the Sovereign (Country) rating of Bangladesh along with the International rating organizations, Moody’s, S&P and The Fitch. Currently 1 or 2 local multinational banks are providing those services to all those International rating agencies.

6. Arrange Workshops and Seminars: The DCRAs operating

in Bangladesh should undertake more active role to educate the finance professionals of the country. The importance and benefits of credit rating needs to be clearly communicated to all the stakeholders. ECRL one of the credit rating agencies operating in Bangladesh has already started working towards this endeavor. It has held multiple seminars to promote credit rating.

References

Bhatia, A. (n.d.). Sovereign Credit Rating Methodology: An Evaluation. IMF Working Paper,WP/02/170. Retrieved October 1, 2002.

Code Of Conduct Fundamentals For Domestic Credit Rating Agencies. (n.d.). Retrieved April 27, 2015, from http://acraa.com/publication.asp

Elkhoury, M. (2008). CREDIT RATING AGENCIES AND THEIR POTENTIAL IMPACT ON DEVELOPING COUNTRIES. Discussion Papers,186.

Guide to Credit Rating Essentials. (n.d.). Standard & Poor's.

Handbook on International Best Practices in Credit Rating. (2008). ADB.

Hassan, A. (Ed.). (2008). Guidelines on ‘Risk Based Capital Adequacy for Banks. Banking Regulation and Policy Department,BRPD Circular No. 09.

Hilscher, J., & Wilson, M. (2013). Credit ratings and credit risk: Is one measure enough?

Neuman, N. (2010). A “SARBANES-OXLEY” FOR CREDIT RATING AGENCIES? A COMPARISON OF THE ROLES AUDITORS’ AND CREDIT RATING AGENCIES’


Introduction

The death of 44 school children, after the truck they were travelling skidded and fell into a pond, shook the whole country. 44 young dreams and hopes lost due to reckless driving. Only a month after this tragedy, Bangladesh lost two brilliant citizens, filmmaker Tareq Masud and journalist Mishuk Munier, to yet another road accident in August 2012. At least 24 people were killed and more than 22 others injured when a passenger bus veered off the road and fell into a ditch in central part of Bangladesh. These are few among many horrifying stories. There are numerous such incidents leaving many of us dismayed to travel inside the country.

It is true that road accidents are one of the major causes of death, injuries and disabilities throughout the world; every year about 1.2 million people die and nearly fifty million get seriously injured or permanently disabled with significant losses of resources and properties leaving enormous burden both for society as well as economy. However, the situation in Bangladesh is worse compared to other countries. Losses of lives and property are affecting the community personally, socially and economically. Road/ waterways accidents lead to direct

Economic Cost of Road Accidentsand Owner's Liability in Tort Law

S M Abu Nayem Ahmed

economic costs and a large waste of the country’s scarce resources.

Such accidents kill everyone, the poor, and the rich impartially. The liabilities of drivers, traffickers are often talked about; the government is sometimes blamed for not doing enough. However, is there anything else we can think about? What is the extent of the owner’s responsibility or liability? Is it possible to hold the owners of the vehicles accountable where they had something more to do? Possibly a duty of care!

In this write up, an effort is made to bring the liabilities of the owners in tort law as exists in the provision of other countries together with the exploration of economic cost.

Impact on World Economy

According to the estimate of the World Health Organization (WHO), the economic costs of road crashes is US$ 518 billion globally per year; for the developing countries the economic loss is about US$ 100 billion (1-3 percent of GDP). It is equivalent to double of all overseas development assistance. It has a disproportionate impact on lower income groups, thus contributing to the persistence of poverty.


The costs related to road accident victims may be classified into three main components, namely: victim related cost, property damage and administration cost. The monetary value of each of these components has been estimated in accordance with the four types of accident severity: fatal, grievous injury, simple injury and property damage. According to a survey conducted in different private and government hospitals, clinics, insurance companies, vehicle ownership associations and other organizations for collecting data on costs relating to different items, it was observed that in a global context about one million people die from road accidents. The poor countries have about 40 percent of world's motor vehicles but have 86 percent of fatalities. In some countries, more than 10 percent of the hospital beds are occupied by persons injured in road accidents. In low and middle income countries, the cost of road traffic injuries is estimated at US$65 billion, exceeding the total amount these countries receive in development assistance.

Road/Waterways Accidents go Unabated in Bangladesh

There has been an alarming rise in road accidents. The highway accidents in Bangladesh go unabated. According to a study conducted by the Accident Research Centre (ARC) of Bangladesh, University of Engineering Technology (BUET), road accidents claim on average 12,000 lives annually and lead to about 35,000 injuries. According to ARC, annual fatality rates from road accidents are found to be 85.6 per 10,000 vehicles, of which about 75 percent fatalities occur in rural areas.

In the last 15 years, a shocking total of 49,847 road crashes occurred in the country, killing 42,526 people and injuring around 39,000, said another ARI report prepared on the basis of police records. On an average, around 3,000 people die every year in road accidents across the country, as per police records. The actual number is presumed to be much higher as many accidents remain unreported.

THE

LIABILITIES OF

DRIVERS, TRAFFICKERS

ARE OFTEN TALKED

ABOUT; THE

GOVERNMENT IS

SOMETIMES BLAMED

FOR NOT DOING

ENOUGH. HOWEVER, IS

THERE ANYTHING ELSE

WE CAN THINK

ABOUT? WHAT IS THE

EXTENT OF THE

OWNER’S

RESPONSIBILITY OR

LIABILITY? IS IT

POSSIBLE TO HOLD

THE OWNERS OF THE

VEHICLES

ACCOUNTABLE WHERE

THEY HAD SOMETHING

MORE TO DO?

POSSIBLY A DUTY OF

CARE!


Existing Scenario

A high growth in urbanization and motorization can be identified as one of the factors leading to the higher number of road accidents. Recent studies claim that the annual urban growth rate in Bangladesh stood at 4% in 2010,

whereas the present growth in motor vehicles stands at 8%. Consequently, the road systems are experiencing greater congestion, physical deterioration and safety problems. The maintenance, repair and expansion of roads coupled with setting up dividers on national highways, cautioning signals for

hazardous locations, disseminating information on driving and road safety to masses through media and exemplary punishment for violating traffic laws are some of the main areas that have been emphasized.

Many argue that road safety laws


Casualties Involved in Accidents, 1999-2008

Source: BRTA Website

Change in Recorded Casualties Involved in Accidents, 1999-2008

year

number of accidents1

seventy

fatal

Divisions, excluding the Cities1999200020012002200320042005200620072008

1999200020012002200320042005200620072008

448394341512511453377528597513

391450235347319202179174185189

134492042564121114741

973893596901886696577713829743

9.4499.5939.7389.882

10.02610.17610.32710.48010.63512.182

0.4740.4110.3500.5180.5100.4450.3650.3650.5610.421

2432252320292599275224472424266828932723

9861029642904921664631610679658

304209137200239211142127172150

3722376128083703391233223197340537443531

0.2040.2080.1650.2080.2170.1900.1860.2010.2150.177

0.3110.3100.2280.2960.3090.2580.2450.2570.2780.229

119.506121.328123.152124.974126.798128.700130.605132.538134.500154.060

1.0300.9310.6120.9120.8840.6840.5590.6800.7800.610

1999200020012002200320042005200620072008

Bangladesh

Cities3

1984212916882087224119942047214022962210

595579407557602462452436494469

2749286822122802302626262620269229152788

110.057111.735113.414115.092116.772118.524120.278122.058123.865141.879

0.1800.1910.1490.1810.1920.1680.1700.1750.1850.156

0.2500.2570.1950.2430.2590.2220.2180.2210.2350.197

170160117158183170121116125109

grievous simpleinjury

(000.000)(no. per 10,000 pop’n)fatal

accidentsfatal+injury

accidetsTotal

population2 accident rates

such compensation even if the amount is meager compared to those from other countries. In many countries there are adequate measures in terms of payment of compensation due to tort law. The economic impact on the poor people in particular caused by road accidents is despicable. It is said that the heads of households or their spouses are often the fatal victims of road accidents. This has an adverse economic impact on other members of the families. If there was application of the law of tort in Bangladesh then the owner of the bus or launch had to pay compensation to each of the victims of the accident.

Owner's Liability in Tort

In practice, much of the law of tort is concerned with compensating the victim of the defendant’s accidental wrongdoing. Accordingly, at a general level, the function of a remedy in the law of tort is to relieve the claimant in respect of the loss or damage he has suffered rather than to punish the defendant. There is a range of means by which the compensation objective is sought to be achieved. Generally, the tort system is concerned with wrongs in the sense that the defendant is required to compensate the claimant in respect of damage caused by some fault-based or culpable conduct on his (the defendant’s) part. In this sense, tort liability rules are concerned with loss shifting in that they make the defendant responsible for the loss suffered by the claimant because he (the defendant) is in some way to blame for that loss.

Owner's and Driver's Liability

Generally, an automobile owner is not vicariously liable for the conduct of another person who

exist without being effective due to lenient punishment for culprits and lengthy legal processes. There is opposing ideas, as well, that blaming the driver is not going to reduce the number of accidents. There brings the question of burden of responsibilities; who to be blamed. Of course, it would vary case to case. But we must not fail to recognize the liabilities leaving us mourn to more deaths and miseries.

Then can the owners of the motor vehicle be allowed to shy away from their responsibilities? They are supposed to ensure that they employ drivers with genuine licenses who are adequately trained, capable and treated humanely.

Economic Cost of Road Accidents for Bangladesh

It is preliminary estimated that the total annual cost of road traffic accidents and injuries in Bangladesh varied between 1.8 to 2.2 percent of GDP which could be between Taka 75 billion to Taka 90 billion. The total cost is distributed as follows:

This enormous economic and societal loss is a burden to our economy and looms as a serious development challenges. Countries like Bangladesh are losing about 1.5 % of annual GDP due to road accidents which is three times annual expenditure of the RHD.

The study has estimated the national cost of road accidents. The elements taken into

consideration to calculate the costs include lost output, suffering, property damage and medical costs. The estimated cost is Tk. 38 billion or US$ 644 million. The study has claimed that even the above estimate is conservative because it has not taken into consideration such other factors as (a) number and cost of permanently disabled, (b) travel time lost to road accidents, (c) value prevention i.e. how much public would be willing to spend to reduce risk of road accident.

A previously mentioned study said that the heads of households or their spouses are often the fatal victims of road accidents. This has an adverse economic impact on other members of the families. The study findings indicated that for the 70 percent poor, the household income, food consumption and food production decreased following road deaths. For the non-poor, the impacts were less with 54 percent reporting loss of income.

Immunity of Owners

The research of The Daily Star reveals (based on the reports published in the newspaper) that in the last four and a half years around 72 percent of deaths in road accidents involved buses or trucks. Since 1977 there have been 248 motor launch accident records by BIWTA with a loss of 2309 lives, 374 persons are injured and 208 persons are missing. Most of the accidents happened because of the negligence of the launch operator and their owner. Whenever any launch accident occurs basically the government pays minimum amount as compensation to families of deceased victims. The owner is exempted from compensating individual victims. Same goes with the owner, rarely they had to pay


Subject matter Cost in

(%)percentage

Lost output cost 57.4 %

Pain, grief & suffering cost 34.1 %

Vehicle damage cost 4.8 %

Medical and other cost 3.7 %

drives the car. However, this rule is subject to exceptions:

Permissive Use/Auto Consent Statutes: Some countries have enacted statutes that make a car owner vicariously liable for the tortuous conduct of any person that drives the car with the owner’s consent. Of course the driver has to act reasonably within the scope of the owner’s consent, e., if John lends his car to Romel to go to a movie, then Romel drives 2,000 miles, then Romel was not given consent to drive 2,000 miles. If an owner lends a car to a driver who in turn lends it to another, the owner will be liable for damages by the second driver if the first driver was in the car at the time of the accident.

The entire law of tort is founded and structured on morality. As such, the scope for tort liability is ever expanding and offering remedy in unknown area of our lives.

Liability in Tort Law for the Employers

The key question of any case of vicarious liability is whether the employee was acting in a personal capacity, or in the course of their employment. Employers have a duty of care to their employees, which means that they should take all reasonable steps to ensure their health, safety and wellbeing.

Requirements under an employer's duty of care are wide-ranging and may manifest themselves in many different ways, such as:

• Clearly defining jobs and undertaking risk assessments

• Providing adequate training and feedback on performance

• Ensuring that staff do not work excessive hours

• Protecting staff from bullying or harassment, either from colleagues or third parties

• Protecting staff from discrimination

• Providing communication channels for employees to raise concerns

• Consulting employees on issues, which concern them.

There is a distinction between a “duty” which is better characterized as a social obligation and true legal duties or responsibilities which are enforceable by claims for damages. When I drive my car, for example, I am under a legal duty of care to any other motorist.

Either way, the employer is charged with legal responsibility for the negligence of the employee because the employee is held to be an agent of the employer. If a negligent act is committed by an employee acting within the general scope of her or his employment, the employer will be held liable for damages. For example, if the driver


the driver is irrelevant in determining the liability of the registered owner who the law holds primarily and directly responsible for any accident, injury or death caused by the operation of the vehicle in the streets and highways.

As explained by this Court, the general public policy involved in motor vehicle registration is the protection of innocent third persons who may have no means of identifying public road malefactors and, therefore, would find it difficult – if not impossible – to seek redress for damages they may sustain in accidents resulting in deaths, injuries and other damages; by fixing the person held primarily and directly liable for the damages sustained by victims of road mishaps, the law ensures that relief will always be available to them.

To identify the person primarily and directly responsible for the damages would also prevent a situation where a registered owner of a motor vehicle can easily escape liability by passing on the blame to another who may have no means to answer for the damages caused, thereby defeating the claims of victims of road accidents. Some motor vehicles running on our roads are driven not by their registered owners, but by employed drivers who, in most instances, do not have the financial means to pay for the damages caused in case of accidents.

These same principles apply by analogy following another case. Filcar (Owner) should not be permitted to evade its liability for damages by conveniently passing on the blame to another party; in this case, it's Corporate Secretary, Atty. Flor and his alleged driver, Floresca. Following our reasoning in Equitable, the agreement

of a gasoline delivery truck runs a red light on the way to a gas station and strikes another car causing injury, the gasoline delivery company will be responsible for the damages if the driver is found to be negligent. It is a form of strict liability as the company will automatically be found liable if the driver is negligent.

Another common example of imputed negligence is attributing liability to the owner of a car, where the driver of the car committed a negligent act. This type of relationship has been labeled the family car doctrine. The doctrine is based on the assumption that the head of the household provides a car for the family's use and, therefore, the operator of the car acts as an agent of the owner. When, for example, a child drives a car registered to a parent for family purpose, the parent is responsible for the negligent acts of the child at the wheel.

Liability can also be imputed to an owner of a car who lends it to a friend. Again, the driver of thecar is acting as the agent of the owner. If the owner is injured by the driver's negligence andsues the

Driver, the owner can lose the lawsuit because the negligence of the driver can be imputed to the owner, thereby assigning him imputed contributory negligence.

Application of Tort Law in Bangladesh

In Bangladesh tort law is yet to be introduced as in many other countries. Application of tort law is limited in Bangladesh penal code, civil procedure code and criminal procedure code. Countries such as India, Sri Lanka, Nepal, USA, and UK have adopted tort law. The

context of the law of tort in particular include the tort of negligence and its specific off-shoots relating to Employer’s liability, Occupiers’ liability, Liability for animals and Product liability. The key feature of the tort of negligence is that it attributes responsibility on the basis of principles of personal fault that require individuals to adhere to a standard of reasonable care.

Case Study: Court of Appeal, Phillipines

The rationale for the rule that a registered owner is vicariously liable for damages caused by the operation of his motor vehicle is explained by the principle behind motor vehicle registration act, which has been discussed by the Court in Erezo, a Philipino case cited by their Court of Appeal (CA), Philippine in its decision:

The main aim of motor vehicle registration is to identify the owner so that if any accident happens, or that any damage or injury is caused by the vehicle on the public highways, responsibility therefore can be fixed on a definite individual, the registered owner. Instances are numerous where vehicles running on public highways caused accidents or injuries to pedestrians or other vehicles without positive identification of the owner or drivers, or with very scant means of identification. It is to forestall these circumstances, so inconvenient or prejudicial to the public, that the motor vehicle registration is primarily ordained, in the interest of the determination of persons responsible for damages or injuries caused on public highways.

Thus, whether there is an employer-employee relationship between the registered owner and


The Author isSenior Deputy Secretary, ICAB anda Law Graduate of University ofLondon Int'l Programme

between Filcar and Atty. Flor to assign the motor vehicle to the latter does not bind Espinas (innocent victims of road accident) who was not a party to and has no knowledge of the agreement, and whose only recourse is to the motor vehicle registration.

Accordingly, the case was concluded by the huge compensation that had to pay to the victim of Road accident by the owner.

Conclusion

A country like Bangladesh cannot bear huge social/economic cost that road or waterway accidents cause every year. Bangladesh has one of the highest fatality rates by road accidents in the world. It is necessary to find the remedial measures against shoddy highways, poorly maintained vehicles, and violation of traffic rules by inept drivers. At the same time, the owners of the transport cannot be immune. They should also be responsible to employ driver who is competent and ensure do not cost public lives. They must ensure that vehicles operating in the roads or waterways have proper maintenance and are safe. Once that is not there, adequate compensation for the innocent victims should have been ensured through the dispensation of justice system as evidenced in many countries. Bangladeshi tort law

should be developed in that direction.

Many employers are unaware that they can be liable for a range of actions committed by their employees in the course of their employment. It is also possible to take action against an employer for the behavior of third parties, provided these parties are deemed to be under the control of the employer as seen in the judgment given by the Court of appeal of the Philippines.

In Bangladesh, we have ignored to introduce the law of Tort in our legal spectrum. We need specific codification of the law of Tort, if required, which can cover not only accesses to justice but also assurance of justice. Undoubtedly a code is useful, but is also good to recognize that this branch of law is still in the process of growth. The proper application of this law can take place if we can rise against our own narrow interest causing wrongdoings. All concerned should come forward to help developing such law, which can benefit the victims and be helpful to reduce the number of so many innocent losses of lives.

Bibliography

1. Road Accidents in Bangladesh: An Alarming Issue - Tashmina Rahman published in the Daily Star on 01/03/2012.

2. Research paper “The Cost of Road Traffic Accidents in Bangladesh”; Dr. Md. Mazharul Hoque, S. M. Sohel Mahmud, Sanjay Paul

3. Research paper “Road Accidents: Contemporary Scenario and Policy Issues in Bangladesh”; Naila Sharmeen, Md. Rabiul Islam.

4. The Economic Cost of Road Accidents in Bangladesh; A M M Shawkat Ali, published in the Daily Star on April 18, 2004

5. Personal Injury & The Duty Of Care In Tort , William Norris QC, William Norris QC is a former Chairman of the PIBA and General Editor of Kemp and Kemp. He acted for the Appellant in famous case “Poppleton”

6. 2013 State of Michigan Transportation Compendium Of Law : Paul E. Scheidemantel , Eric Shih, Clark Hill PLC

7. Republic of the Philippines, Supreme Court, Manila, Second Division, G.R. No. 174156, Filcar Transport Services, Petitioner - versus - Jose a. Espinas, Respondent , June 20, 2012

8. Vicarious Liability, Discussion paper, WP 48, Queensland law Reform Commission, Australia, July 1995


Bangladesh is a developing country and its economy is classified as a Next Eleven emerging market and one of the Frontier Five. The size of Bangladesh economy is around USD 175 Billion. The Gross Domestic Product (GDP) in Bangladesh expanded 6.12 percent in 2013-14 from 6.03 percent from previous year. GDP Growth Rate in Bangladesh averaged 5.62 percent from 1994 until 2013-14, reaching an all-time high of 6.71 Percent in 2010-11 and a record low of 4.08 Percent in 1994. Current GDP Growth Rate of Bangladesh is higher than other two neighboring countries (India: 1.6 percent, Pakistan: 4.14 percent) while the GDP rate of Sri Lanka (6.4 percent) is marginally higher than Bangladesh. Bangladesh is one of the 10 countries that are set to take over as emerging economies from the powerful BRICS (Brazil, Russia, India, China and South Africa) nations.

GDP rate in Bangladesh was initially set for 2014-15 at 7.3% which was revised to 6.1%. Though the outlook of Bangladesh

Economy of Bangladesh:Taking off to Next Level

Mohammad Zahid Hossain FCA

economy is showing a positive trend contemplated by various research bodies, the macroeconomic factors of such an economy are always challenging to manage. Political instability and rampant corruption are the main setback of Bangladesh economy to experience reasonable growth. Yet the domestic consumption of 158 million people along with strong remittances of migrant workers and RMG export is helping the economy to remain on its track.

Deficit or Surplus?

Bangladesh has been resorting to “deficit financing strategy” in budget for long. Since the economy was running under recession or challenging situation and socio-economic development was at the top of priority list, a deficit financing approach was rightfully taken. In upcoming budget, the same approach seems to be rational to improve the macroeconomic indicators including industrialization and employment opportunities.


Table-1: Budget Deficit

Details 2014-15 2013-14 (rev) 2012-13 2011-12 2010-11 2009-10Budget Expenditure 250,506 216,222 174,013 152,428 128,249 102,977Deficit Budget 67,552 59,551 45,885 37,735 35,256 27,072Deficit as % of GDP 5.00% 5.00% 4.40% 4.10% 4.50% 3.90%

Amount in Cr. BDT


THE EFFICIENT

IMPLEMENTATION OF

ADP HAS BEEN A

PRIORITY FOR ALL

REGIMES IN

BANGLADESH.

HOWEVER, THE RATE OF

IMPLEMENTATION IS

ALWAYS MUCH BEHIND

THAN THE

EXPECTATION. IN FY

2013-14, THE ADP SIZE

WAS INITIALLY TK. 65,870

CR. WHICH WAS

REDUCED TO TK. 65,000

CR. IN REVISED BUDGET

DUE TO THE INEFFICIENT

IMPLEMENTATION.

UPTO APRIL 2015, THE

OVERALL ACHIEVEMENT

RATE OF 56% IN ADP

IMPLEMENTATION IS

HIGHLY

UNSATISFACTORY.

Such deficit financing approach will help to create employment and fueling money into the economy to make it more vibrant. The deficit of budget is financed by bank borrowing as well as foreign sources. Bank borrowing will create a negative impact on the flow of cash towards new and existing ventures. However, currently the limited flow of funds of banks to Industries leaving the banks with significant amount of idle cash. But as soon as the economy gets momentum, bank may experience cash crunch to finance “budget deficit” which is very unlikely in FY 2015-16.

Revenue Target

The country is reeling with a poor tax-GDP ratio, which is the poorest

among the south-east Asian countries. Though this rate is gradually improving, it has to go a long way to make it comparable with other developed countries. Last year, the number of tax returns submitted by the individual taxpayers was 1.0 million. The current rate is not enough to achieve the ambitious target of 5 million taxpayers by 2021. On the other hand, corporate bodies are paying tax at a rate highest among many countries to match the revenue target of Govt. while it’s not very business friendly for compliant companies to pay taxes at such rate. Corporates which circumvent the tax laws are not worried about such rates but it does not motivate ethical corporates to go for further investments and expansion.

50,000

100,000

150,000

200,000

250,000

300,000

Budget Expenditure

Deficit Budget

Chart-1: Budget Deficit

Table-2: Corporate Tax Rates of Various Countries

Countries=> India Bangladesh Sri Lanka Singapore Malaysia Canada Australia

Corp Tax Rate=> 30.00% 35.00% 28.00% 17.00% 25.00% 26.50% 30.00%

in NBR's tax-revenue collection may stand at Tk. 150 billion at the end of FY 2014-15. This will be another challenge to resize the revenue as well as budget expenditure. It also gives an indication that first half of FY 2015-16 will not be very favorable to meet any ambitious target because the financial shock of the business enterprises experienced during H2 of FY 2014-15 will not be recovered so quickly. So, searching new sources of tax collection and taxpayers as well as combating corruption in tax collection process will be extremely important issues.

Annual Development Plan

The efficient implementation of ADP has been a priority for all regimes in Bangladesh. However, the rate of implementation is always much behind than the expectation. In FY 2013-14, the ADP size was initially Tk. 65,870

Despite all limitations, Bangladesh has been progressing a lot in mobilizing local resources and reduced the dependence on foreign funds to a great extent. However, during FY 2015-16, Govt. will be requiring to increase the revenue target to manage the larger size of budget. Though the business houses could not perform satisfactorily during ongoing FY due to the political turmoil, the revenue target should be higher than last year. In order to achieve any ambitious target, bringing efficiency in income tax and VAT (value added tax) management system will be an important issue. Simplification of VAT law and training of the relevant VAT officials are extremely important to mobilize local resources at the maximum level. Govt. also needs to find workable alternative

solution to resolve the disputes pending with higher courts.

According to an initial estimation of the experts, aggregate shortfall


Chart-2: Revenue Collection

Table-3: Revenue Collection

Details 2014-15 2013-14 (rev) 2012-13 2011-12 2010-11 2009-10Total Revenue Income 182,954 156,671 128,128 114,693 92,993 75,905NBR Tax 149,720 125,000 103,332 91,595 76,225 59,742TR as % of GDP 13.70% 13.30% 12.30% 12.50% 11.80% 11.00%

Amount in Cr. BDT

Table-4: ADP

Details 2014-15 2013-14 (rev) 2012-13 2011-12 2010-11 2009-10ADP (BDT Cr.) 80,315 60,000 49,474 37,508 33,284 25,553Growth 33.86% 21.28% 31.90% 12.69% 30.25%

2000,00

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

2014-15 2013-14 2012-13 2011-12 2010-11 2009-10(rev)

TotalRevenueIncome

NBR Tax

Cr. which was reduced to Tk. 65,000 Cr. in revised budget due to the inefficient implementation. Upto April 2015, the overall achievement rate of 56% in ADP implementation is highly unsatisfactory. So, it’s clearly evident, the overall target of ADP in FY 2014-15 will not be achieved, as always. To improve this situation, more concentration needs to be given in identifying and removing the setbacks.

The food prices are not expected to hike amid the satisfactory supply of them. All other factors are also not giving any sign of rising of inflation. The average lending rate is still in double digit (12+) which is also controlling the money supply into the economy. But the biggest worry is the revision of salary of Govt. servants. According to the recommendation of the Pay and Service Commission, salary of public servants is expected to be increased by 100 percent on average, full implementation of which would raise the government spending on salary and allowance by 63.7 percent. Implementation of the recommendations will require

additional Tk. 18,247 crore. This initiative will undoubtedly trigger inflation in the economy which may motivate the private employers to adjust their employees’ salary too. So, the effect of salary adjustment in private and public sector will result in a significant inflation. In

addition to that Govt. is planning to hike the price of electricity and gas which will also induce the inflation.

Foreign Direct Investments

Creation of more employment is one of the focused areas of Bangladesh Govt. Investments of private sectors both from home and abroad plays important role. Unless the overall investment friendly environment is created, only fiscal initiatives cannot do anything. Political stability, development in infrastructure, seamless support of power and energy, competitive income tax rates, peaceful law and order situation, moderate corruption in managing business, modern facilities in port etc. needs integrated effort of various departments of the Govt.


-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2014-15 2013-14(rev)

2012-13 2011-12 2010-11 2009-10

Annual Dev Plan

ADP (BDT Cr.)

Chart-4: Trend of Monthly Inflation

Details 2013 -14 2012 -13 2011 -12 2010 -11 2009 -10

USD Million 1,495.50 1,730.63 1,194.88 779.04 913.02

Growth -13.59% 44.84% 53.38% -14.67% -4.95%

Table-6: Yearly FDI

Chart-5: Trend of Yearly FDI

-

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

1,600.00

1,800.00

2,000.00

2013-14 2012-13 2011-12 2010-11 2009-10

FDI

USD Million

Arabia in the role of maid while Bangladesh Govt. has agreed to send several thousand female workers there.

Remittances

More than 10 million people are working outside Bangladesh and sending foreign currency through formal banking channel. The export of manpower in many Gulf countries and Malaysia are at stake yet Government is struggling to explore new markets. Such effort should be continued to ensure positive impact on foreign currency reserve, favorable Balance of Trade (BOT) and Balance of Payment (BOP), investments, socio-economic development, reduction of unemployment etc.

Exploring of new and safe export destination of migrants cannot be the only workable solution for Govt. Rather, removing of corruption in manpower export business is extremely important to

save the image of the country as well as to ensure sustainable growth. Many countries including Nepal, India, Philippines declined to send migrant workers to Saudi


Table-7: Yearly Remittances

Chart-6: Trend of Yearly Remittances

Amount in Billion USD

Details Jul 14-Mar15 Jul 13-Mar14 2013-14 2012-13 2011-12 2010-11 2009-10Remittances 11.25 10.50 14.23 14.46 12.44 11.60 10.90Changes 7.19% -1.61% 16.21% 7.27% 6.42% -

-

2.004.006.008.00

10.0012.00

14.0016.00

2013-14 2012-13 2011-12 2010-11 2009-10

Remittances

Remittances

USD Million % (***) USD Million % (***) USD Million % (***)RMG 18,866 82.10% 16,068 80.60% 15,228 78.40%Jute 684 3.00% 750 3.80% 658 3.40%Fish, shrimps 528 2.30% 448 2.20% 605 3.10%Leather 883 3.80% 677 3.40% 540 2.80%Others (excluding EPZ) 2,013 8.80% 1,986 10.00% 2,387 12.30%TOTAL (Non EPZ) 22,974 100.00% 19,929 100.00% 19,418 100.00%EPZ export 4,480 3,829 3,426TOTAL Million USD 27,454 23,758 22,844Growth (year-on-year) 15.56% 4.00% 41.36%

*** % on Total export excluding EPZ's contribution

2013-14 2012-13 2011-12Sectors

Poverty Reduction

Of the 158 Million people in Bangladesh, 26% live below poverty level. Bangladesh had reduced the number of people living in poverty from 63 million in 2000 to 46 million in 2010, despite growth of total population to approximately 158 million. If a large portion of the population live below poverty level, the overall socio-economic development of the country cannot be possible. Though the economy is becoming larger, GDP growth rate is remarkable and per capita income increased by 41% in 2014 over 2009; ultimate endeavor of Bangladesh should be leaving no single person in poverty which is a part of MDG (Millennium development goal). The main target of the Govt. is to eliminate extreme poverty from Bangladesh by 2018. If so, numerous effective and value adding development programs are to be undertaken and should be properly managed. The execution of projects should be successfully completed at optimum efficiency level through proper monitoring and evaluation process. A much talked about project named “one house, one farm” has been highly criticized for the

corruption in the management of this project. So, allocation of fund in the Social Safety Nets is not enough to reduce poverty. Efficiency, good governance and transparency are extremely important to make the effort successful.

Exports

The sustainable growth of the economy has been possible just because of the robust export earning which is having double digit year-on-year growth (except few years). Despite many unfavorable forces including political turmoil, Rana Plaza and

Tazrin tragedies, Bangladesh has registered remarkable growth in export. Export earnings in July’14-Mar’15 of FY 2014-15 increased by 2.98% to USD 22.98 billion compared with the corresponding period of FY 2013-14 of USD 22.24 billion.

The export target for Bangladesh set at USD 34.5 billion for 2014-15 including USD 29 billion in RMG sector. The ambitious target of export earnings can touch USD 50 billion milestone in next four years if the political stability prevails, govt. extends proper monetary and non-monetary support and capacity in this sector is adequately built.


Table-8: Yearly Export Earnings

Textile sector itself is contributing more than 80% of the total export. Though Bangladesh Govt. is trying to diversify the export product basket, the dependence on textile is not reducing noticeably. This dependence is posing threat amid various turbulences in Bangladesh’s RMG export market.

On the other hand, the export destinations of Bangladesh are also concentrated into several countries which also need attention. Four countries (USA, Germany, UK, and France) are collectively importing 50% of total export (Non EPZ) of Bangladesh.


-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2013-14 2012-13 2011-12

RMG

Jute

Fish, shrimps

Leather

Chart-7: Sectoral Export Earnings Over Years

Chart-8: Contribution of Various Sectors to Export

Table-9: Export Earnings by Country

Export: 2013-14

RMG

Jute

Fish, shrimps

Leather

Others(excluding EPZ)

USD Million % (***) USD Million % (***) USD Million % (***)USA 4,062 17.68% 3,723 18.68% 3,793 19.53%Germany 3,705 16.13% 3,143 15.77% 3,188 16.42%UK 2,243 9.76% 2,033 10.20% 2,004 10.32%France 1,455 6.33% 1,235 6.20% 1,292 6.65%Spain 1,113 4.84% 915 4.59% 895 4.61%Italy 1,056 4.60% 791 3.97% 851 4.38%Canada 809 3.52% 848 4.26% 765 3.94%Others 8,531 37.13% 7,241 36.33% 6,630 34.14%EPZ 4,480 3,829 3,426TOTAL EXPORT 27,454 23,758 22,844*** % on Total export excluding EPZ's contribution

Export destinations 2013 -14 2012 -13 2011 -12

Finding new destinations to export is crucial in order to reduce the dependence on these countries. Bangladesh missions located in various countries across the world should actively work to open new markets in terms of geography as well as products.

Capital Market

The cost of the fund in Bangladesh is excessively high which cannot be justified by the return of the business. Hence, it is believed as a critical deterrent for the industrialization of the country. Organized Capital market could play an important role in mobilizing local resources to convert the scattered savings into capital. For various reasons, this market could not be developed to perform such role despite the vigorous monitoring systems of regulatory bodies.

Following the scam of 2010, the market is still struggling to come back to its usual rhythm. The mastermind of the scam did not hear the music of law. So, the confidence of existing and potential investors could not be regained till now. Moreover, seamless supply of shares of financially strong companies is essential to attract the investors of home and abroad. However, it’s indeed a pragmatic decision of Govt. of offloading the shares of power generation and distribution companies. This will not only arrange funds of these companies for further investments, it will make the share market more investment friendly. Other state enterprises especially engaged in energy and service industry should also think to go for public to grab benefits for their own as well as for the economy.


Chart-9: Contribution of Countries

Table-10: Year wise Market Cap and Index

Chart-10: Market Cap & Turnover

Export destinations

USA

Germany

UK

France

Spain

Italy

Canada

Others

Issues Cap. & Deb Market Cap

Yearly Turnover

2010 445 66,436.00 347,250.20 400,991.28 8,290.40 2011 501 87,890.50 261,673.00 156,055.63 5,257.61 2012 515 94,987.60 240,356.00 100,108.49 4,219.31 2013 529 99,978.50 264,779.00 95,269.21 4,266.55 2014 546 105,492.60 325,925.00 118,851.15 4,864.96

Enlisted issues

In BDT Crore Gen Index/DSE broad

IndexCalendaryear

-

50,000.00

100,000.00

150,000.00

200,000.00

250,000.00

300,000.00

350,000.00

400,000.00

450,000.00

2010 2011 2012 2013 2014

Market Cap

Yearly Turnover

institutions cannot attract the investors to borrow money and invest it in new or existing ventures. So, the interest rate needs to be brought down to single digit to take calculated risk for the entrepreneurs. Though some business giants are obtaining loans from foreign sources at a cost significantly lower than local borrowing, mid-level companies cannot “manage” to get it. So, despite having business opportunities and efficiencies, such companies cannot plan for new ventures. In addition to that, huge burden of VAT and direct tax cannot make anyone’s business plan financially viable. Instead of collecting tax and VAT from existing sources, Govt. should explore new avenues as well as new taxpayers. To assist them, professional accounting firms can be engaged.

The ratio between market capitalization and GDP is also very poor in Bangladesh compared to other developed countries.

Bangladesh Government should ensure good governance in Capital market to attract local and foreign investors to make the market vibrant. To ensure proper

discipline in capital market, regulatory bodies need to be duly empowered to implement rule of law impartially.

Cost of Funds, Direct & Indirect Taxes

Double-digit commercial lending rate of the banks and financial

Chart-11: Trend of Index

Table-11: Ratio of Market Cap and GDP

Table-12: VAT Rate of VariousCountries

-

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

8,000.00

9,000.00

2010 2011 2012 2013 2014

Gen Index/DSE broad Index

Gen Index/DSE broadIndex

Country Name 2012 2011 2010Australia 83.8 86.3 127.5Bangladesh 13.1 18.3 13.6Brazil 54.7 49.6 72.1China 44.9 46.3 80.3India 68.8 55.1 94.6Japan 61.8 60.0 74.6Malaysia 156.0 136.4 165.8Nepal 21.7 20.4 32.7Pakistan 19.5 15.3 21.5Philippines 105.6 73.8 78.8Russia 43.4 41.8 65.9Singapore 144.3 112.5 156.5Sri Lanka 28.7 32.8 40.2Thailand 104.7 77.7 87.1UK 115.5 112.0 129.0US 115.5 100.8 114.5Vietnam 21.1 13.5 17.6

Country Name VAT rate (%)Australia 10.0Bangladesh 15.0Brazil 17 to 25China 17.0India 5.5 to 14.5Japan 8.0Malaysia 6.0Nepal 13.0Pakistan 14.5Philippines 12 or 7 or 0Russia 0-18Singapore 7.0Sri Lanka 12 or 0Thailand 7.0UK 20 or 5 or 0US 0-11.725Vietnam 10.0


The Author is a Fellow Member, ICAB& Member, Board of Directors, BAPEX

Corruption

It’s nothing new to us about the corruption in various sectors of the economy. According to the report of Transparency International Bangladesh (TIB), Bangladesh has been clinching its position in the list of top 20 countries of Corruption Perception Index (CPI) for many years. The remarkable achievements of 156 million people of this country are blurred with a small bunch of corrupt people. In the list of least corrupt countries, Bangladesh positioned itself on the 145th rank out of 175 countries in 2014 while it stood 136th previous year. Political and administrative influences on the country's corruption watchdog “Anti-Corruption Commission (ACC)” and chopping its administrative power are key reasons behind the worsening situation. From the survey conducted in 2012, it was found that the households of Bangladesh had been forced to pay about Tk.

2, 19,556 million annually in the surveyed service sectors as unauthorized payment, which is 13.4% of the national budget of 2011-12 fiscal year and 2.4% of the GDP. If such situation continues, all the efforts of the country towards socio-economic development will be ended in smoke. Government should come up to reform various sectors with zero-tolerance mindset to combat corruption. If the current pace continues, rate of unauthorized payment on GDP will exceed the GDP growth rate!

Conclusion

Bangladesh is a country of ample opportunities which is attracting many entrepreneurs of home and abroad to invest here. “Low cost people” of this country and local consumption of 158 million people have been extremely lucrative for the investors to make their investment viable. This is one of the reasons for Bangladesh to

become the second largest RMG maker of the world despite having many hurdles. Good governance to be ensured at all levels of the country in order to ensure the security of the investments of the entrepreneurs. In absence of those, currently there's no investment on one hand while money is being siphoned off on the other (a research finding of CPD). So, inviting potential investors to invest in Bangladesh is not enough rather creation of investment friendly environment is much more important. Bangladesh has already set a target to move to middle income country by 2021. Without objective driven and firm efforts, such target can never be achieved and will remain as merely a dream. So, instead of having jumbo-size budget, country needs a budget which will aim for overall sustainable development of all sectors in the long term.


Introduction

The objective of a public budget is to translate a government’s policies, political commitments, and goals into decisions on how much revenue to raise, how it plans to raise it, and how to use these funds to meet the country’s competing needs, from bolstering security to improving health care to alleviating poverty.

The two basic elements of any budget are the revenues and expenses. In the case of the government, revenues are derived primarily from taxes. Government expenses include spending on current goods and services, which economists call government investment expenditures such as infrastructure investment or research expenditure.

Economists have varying opinions about how a government budget should be managed. The three most common budget philosophies are:

• BALANCED BUDGET

• SURPLUS BUDGET

• DEFICIT BUDGET

What Should be Our National BudgetBalanced, Surplus or Deficit?

Esha Nabila Hussain ACA

Balanced Budget

A Balanced Budget exists when government revenue and expenditure are equal. A balanced budget, particularly a government budget, is a budget with revenues equal to expenditures. There is neither a budget deficit nor a budget surplus; in other words, "the accounts balance." More generally, it refers to a budget with no deficit, but possibly with a surplus. A cyclically balanced budget is a budget that is not necessarily balanced year-to-year, but is balanced over the economic cycle, running a surplus in boom years and running a deficit in lean years, with these offsetting over time.

Classical economists believe that governments should balance their budgets each year. Some economists would even like to go beyond merely balancing our budget. They propose that governments should incur surpluses and set aside funds "for a rainy day" during healthy economic times. If the economy experiences a downturn, the surplus money should be used to finance essential government programs, without having to raise taxes and without causing the disadvantages of deficits.

However there are undoubtedly arguments for and against a balanced budget.



CLASSICAL

ECONOMISTS BELIEVE

THAT GOVERNMENTS

SHOULD BALANCE

THEIR BUDGETS EACH

YEAR. SOME

ECONOMISTS WOULD

EVEN LIKE TO GO

BEYOND MERELY

BALANCING OUR

BUDGET. THEY

PROPOSE THAT

GOVERNMENTS

SHOULD INCUR

SURPLUSES AND SET

ASIDE FUNDS "FOR A

RAINY DAY" DURING

HEALTHY ECONOMIC

TIMES.

Advantages of Balanced Budget

• Over a long period of time, you’d have a higher standard of living if you moved to a balanced budget and stayed there

• It is important to reduce the debt, and balancing gets you there faster. A balanced budget takes you there much faster than a deficit budget.

• A balanced budget is a goal everyone can understand. It is transparent and it has a lot of virtues:

- Decrease interest rates, making it easier for businesses and individuals to invest;

- Increase savings and investment, which would provide security to individuals;

- Shrink trade deficits; and

- Help the economy grow faster over a longer period of time.

Disadvantages of Balanced Budget

• Balancing the budget would not restore the nation’s still-weak economy to health in the near term. Indeed, rushing to do so with unemployment still elevated and the economy growing at only a sluggish pace could even set back the effort to reduce the deficit.

• Although the term balanced budget sounds all perfect and magical in theory it is actually quite difficult to keep the debt from growing faster than the economy which is our ultimate motive.

Surplus Budget

It is a situation when anticipated revenues exceed expenditure. This is a type of budget where the

governments’ revenue is higher than its spending and there is a surplus at the end of the fiscal year.

A surplus budget is ideally for a very rich economy that has sufficient growth, no recession and has a very healthy economy. Since Bangladesh is still a developing country which has to strengthen the middle class people’s earning and aims for a rise in economic growth every year this budget is certainly not suitable for our country.

A nation should opt for a surplus budget only during economic expansions.

Deficit Budget

It happens when anticipated expenditure is greater than revenues.

Advantages of Deficit Budget

• It stimulates the economy during economic recessions.

• Government spending increases which leads to more job opportunities and less chances of recession.

• Countries are generally able to run modest deficits for years on while still keeping debt stable as a share of economic output. One year’s deficit is effectively paid off by later economic growth, especially if a government is investing in public goods like roads and schools.

Disadvantages of Deficit Budget

• Deficits cause higher interest rates.

When the government incurs a deficit, it borrows money from the private sector. A decrease in private sector fund availability increases interest rates.

• Deficits, if financed by increases in the money supply, lead to higher inflation.

This step should be helpful for keeping tracks and reducing corruption.

Budgets for Developing Countries

Developing countries like ours typically lack the blessings of education. In order to make the budget more effective and user friendly the nation has to be “budget educated”. Recently, the budgets are circularized in national newspapers and are available online. Due to this the budgets are available to anyone who needs it but the important question is, “do we understand the budget”? How many of us actually understand the impact of this document that contains a fancy display of numeric? Since each and every citizen is a stake holder of national budget it is absolutely important they understand its meaning and impact.

The government should take initiatives to organize campaigns in which the budget shall be broken down in an easier manner and be explained to the general public who are not accustomed to all the terms mentioned there. If this is done after the draft budget is proposed the citizens will be aware of the merits and demerits of the budget before the budget gets approved.

Educational institutes must carry our compulsory workshops so that students of every department are aware. As the young generation will understand the topic it shall soon be the hype and a topic of discussion in their general forums, blogs, interactive websites and conversations. This will eventually increase the level of national awareness which is not present at the moment.

• Deficits cause higher taxes in the future.

Unless government spending decreases (which has proven to be a challenging task for any government), taxes will need to increase if in the future an attempt is made to pay down the national debt. Even if the national debt is never paid off, the increasing interest payments on the national debt cause government spending and taxes to be higher as compared to a situation with little or no national debt.

Need for Budget for Developing Country

Government budgets are at the core of development. It is the government’s most powerful economic tool to meet the needs of its people, especially those who are poor and marginalized. Whether you are interested in health, education, the environment, or pensions, the most well-meaning public policy has little impact on poverty until it is matched with sufficient public resources to ensure its effective implementation.

There is a growing body of evidence showing that, when ordinary people have access to budget information, coupled with the skills and opportunities to participate in the budget process, the resulting engagement between government and citizens can lead to substantive improvements in governance and service delivery.

Public budgets translate a government’s policies, political commitments, and goals into decisions on how much revenue to raise, how it plans to raise it, and how to use these funds to meet the country’s competing needs, from bolstering security to improving health care to alleviating poverty.

While a government’s budget directly or indirectly affects the lives of every one of its citizens, it can have the greatest impact on the well-being and prospects of certain groups, such as the elderly, children, the poor, rural residents, and minorities. Budget cuts tend to have the greatest impact on programs that benefit the poor and vulnerable, while items like the interest owed on government debt, wages for public employees, or military expenditures are more likely to have first claim on scarce funds.

Moreover, even when funds have been allocated to specific programs—whether for minorities, children, or the disabled—poor management and misuse can keep these funds from reaching the intended beneficiaries. Marginalized people lack political power, so it is hard for them to hold their government to account—another factor in poor budget execution (i.e., after the budget is passed, how money is actually raised and spent).

The new budget proposed gives a glimpse of some improvements that are particularly beneficial for the less privileged community of a developing nation.

• Old age allowance has been proposed to be raised to Tk.3 million from Tk.2.72 million.

• Allowance for widow, abandoned and destitute women is raised to Tk.1.11 million from Tk.1.01 million.

• For insolvent and disabled person allowance is increased to Tk.600,000 from Tk.400,000. As reported in a national newspaper there is also a plan to provide identity cards to all disabled persons by using the national disability database.


The Author is a Partner, HussainFarhad & Co. Chartered Accountants

Unlike general budgets the national budget has the influence of politics besides its economic influence. This undoubtedly makes the budget a complicated tool. It will be very difficult if I may not say impossible to find a person with reasonable level of intelligence who has gone through the entire budget with no questions popping in his mind. So besides the above-mentioned issue of education in budget, the budget should also have optimum transparency and clarity.

Bangladesh Perspective

The table below gives a quick glance of the proposed budget this year and 2 years before.

When I look at the above table a thought comes in my mind whether we are making some mistake every year by accommodating a deficit financing budget. Is this path leading us to the right direction? Are we actually breaking the 6.0pc growth trap or is it just a fairytale promise?

The mainstream economic view is that having a balanced budget in every year is not desirable. If a country rigidly pursues a balanced

budget regardless of the circumstances, critics argue that economic downturns would be needlessly painful.

Before deciding on which budget is suitable for us we must bear some points in our mind. Bangladesh is still a developing country. As a growing nation we must relate the budgets to the needs of a developing nation.

During any growth period a government should run with a modest deficit budget i,e. the

deficit should be lower than the anticipated growth. Countries are generally able to run modest deficits for years on while still keeping debt stable as a share of economic output. One year’s deficit is effectively paid off by later economic growth, specially if a government is investing in public goods like roads and schools.


Details Actual FY 2014

Revised FY 2015

Proposed FY 2016

Tax Revenue 1160.31 1406.76 1822.44

Non Tax Revenue 243.43 226.95 261.99Foreign Grants 63.57 56.74 58Total revenue 1467.32 1690.45 2142.43Non Development Expenditure

1210.08 1493.99 1845.59

Development Expenditure 591.51 804.76 1025.59Others 80.49 97.93 79.82Total expenditure 1882.08 2396.68 2951.00Deficit 414.76 706.23 808.57Foreign Borrowing 33.49 159.09 243.34Bank Borrowing 181.68 317.14 385.23Non- bank borrowing 199.68 230.00 180.00Deficit financing 414.85 706.23 808.57

Source: Budget Document FY ‘16

As of now, private equity (PE) is something – a new concept in Bangladesh. There are only few Bangladeshi companies who are actually enjoying the benefit of private equity. In developing countries like Bangladesh, where capital markets do not have much depth (liquidity), encouraging private equity investment plays an important part in ensuring that capital is available where it is required, and hence it is big propeller for economic growth.

Many of the times I was asked questions like what is private equity, how it is different from debts, how we can get access to private equity etc. I thought that it would be useful to give some basic ideas about private equity, how the PE firms works and how the country or the businesses can be benefited from the private equity participation.

PE in simple terms, is the investment of equity capital in private companies. In a private equity investment, an investor (PE firm) buys a stake in a private company with the hope of ultimately realizing the increase in value of that stake. Though the private equity investment is still very low in Bangladesh, worldwide it actually attracts and deploys hundreds of billions of dollars annually. Some of the people and organization who have allowed

Private EquityA New Source of Equity Investment in Bangladesh

Its Meaning and Role in Economic DevelopmentMuallem A Choudhury FCA

private equity firms to invest their money have enjoyed astronomical returns. This allows private equity firms to enjoy record degree of interest from investors, corporate executives, young professionals, regulators and general public.

PE firms are group of individuals who come together to pursue private equity investments. While almost all private equity professionals invest a portion of their own money, PE firms today primarily deploy capital on behalf of others. These firms normally have partnership structure, similar in form to other professional services firm like chartered accountants or law firms, for example.

The business model of a PE firm is as follows – raise capital from external sources, invest the capital in a series of PE deals, sell (or “exit”) those investments (often many years later) and return the proceeds from those exists to the external capital partners while retaining a certain agreed percent of the total profits for the general partner of the fund (PE firm). This percent take is called carried interest. The partners also earn income from other fees, such as management fees and transaction fees. The parties who invest in the fund are called limited partner (LP). The party who manages the fund is called general partner (GP). So when we talked about



private equity firms we generally meant GPs. General partners tend to be individuals who have been able to convince the investors (LPs) that they will be skilled at investing capital in private companies, adding value to those companies, and exiting the investments in a time and fashion that maximizes profit for the investors. The skills needed by GPs are highly specialized. They can be thought of as a set of competencies. Key skills that GPs must possess are:

Deal Sourcing - PE firms need to be skilled at finding attractive investment opportunities, at generating great deal flow. The deal flow will come from a network built up working in a particular industry, from aggressively developing contacts among senior corporate executives, owners, sponsors and others. PE firm partners are highly visible, well respected individuals with great contacts and connections in the business and regulatory circles.

Research and Due Diligence - before agreeing to a deal, GPs must painstakingly form a view on the future of the given industry or market, and then on the potential of a particular company within that market. The GPs must be able to deeply understand the inner

workings of a potential portfolio company and, based on that, determine the right price to be paid for the company. Private equity firms/GPs build elaborate model that tell them how their investment in a company will be valued, given a range of assumptions about the future performance of the company. In addition to financial due diligence, GPs also go for extensive legal due diligence to be sure about the title and rights of the assets that company possesses, or litigation or contingent liabilities that the company is exposed to. For carrying out due diligence GPs employ financial consultants like chartered accountants firms for financial due diligence and law firms for legal due diligence. Due diligence also include checking of backgrounds of executive leaders of the organization including the sponsors.

Financial Engineering - this is a bit of jargon that refers to a dealmaker’s ability to masterfully structure an investment to his or her best interest. A good financial engineer will be able to rework a company’s balance sheet and creatively apply capital-market products, most importantly corporate loans, such as the equity provider is positioned to gain as much as possible from the deal.

ONE OF THE

BIGGEST BENEFITS THAT

PE FIRM CAN BRING TO

THE PORTFOLIO

COMPANY IN A COUNTRY

LIKE BANGLADESH IS

INTRODUCING

CORPORATE CULTURE

AND INSTITUTING

CORPORATE

GOVERNANCE WITHIN

THE COMPANY. SINCE

MOST OF THE PRIVATE

COMPANIES WHERE PE

FIRMS INVEST ARE

FAMILY RUN

BUSINESSES, ONE OF THE

PRIME PRIORITY FOR GPS

IS TO INTRODUCE

CORPORATE CULTURE

WITHIN THE

ORGANIZATION BY

SUGGESTING

STRUCTURAL CHANGES,

BRINGING PROFESSIONAL

MANAGERS AND

LIMITING THE SPONSORS’

ROLES IN OPERATING

ACTIVITIES.

Types of Private Equity

Venture Capital- venture capital investments almost exclusively involves firm taking equity stakes in young companies, many of which do not have proven business models. Venture capital investors look for companies that have potentially revolutionary technologies or business methods, which offer the potential for enormous returns if the business plan proves successful. The venture capital investments are also termed as “seed money” where companies require mere “seeds” of equity to get going.

Buyouts- buyout firms look for target companies with predictable cash flows to generate.

Growth Equity- in between venture capital and buyouts is a wide space that is often called growth equity. Private equity firms in this space often have substantial capital to invest, but are willing to take a minority position in exchange for a stake in the company. The money invested in the company are mostly used for the expansion plan of the company in the form of capital expenditures,

Operating Skills - once a private equity firm has made an investment in a company, the GPs are responsible for adding value to the company, or at least monitoring it to ensure that its performance does not deteriorate rather it improves. Also include suggesting structural change in the company allowing right professionals to join in the company, improving corporate governance and accountabilities within the company. The whole idea is to improve the company culture allowing employees to become motivated and thereby improving the performance.

Salesmanship - GPs must gain the confidence of many parties. They must convince the management of potential portfolio companies and their owners (board) that they will make for valuable investments. They must convince investors to sign up for lengthy commitments to PE funds. They must convince the potential buyers on the public markets or in the M&A markets that their portfolio companies are worthy of lofty valuation.

Overall, fund managers require entrepreneurial and administrative

ability of running the fund, forcing them into the field. Therefore, learning private equity investment can only occur “on the job” rather than at business school.

Private Equity Fundraising

Before a PE firm can get down to the business of managing fund, it must raise the fund from limited partners. Limited partners to private equity funds are overwhelmingly institutional investors and wealthy individuals. LPs include public and corporate pension funds, development banks, insurance companies, sovereign investment funds, endowments, foundations and professionally managed investment offices of wealthy families.

The fundraising market is the greatest barrier to entry in private equity. If a team of general partners have not previously managed a fund together, it is often difficult getting LPs to commit regardless of merit of investment strategy. Limited partners often want to see a group’s previous experience, or track record, investing together and exiting from several private equity transactions.


acquisition of a new business or venturing into a new territory or introducing new line of products. The whole objective is to participate with the portfolio company’s growth plan in order to increase the value of the company or investing in a sector where there is enough opportunities to achieve growth. With the new investment from the PE firm, Company can implement its growth plan and so thereby increasing the value of the Company often with other forms of direct involvement of PE firm.

Turnaround Investment- sometimes called distressed investing or, more pejoratively, vulture capital, turnaround investing is a specialized strategy by which GPs look for companies that are financially troubled. These special situations are deemed attractive because they hold forth the opportunity to acquire a company at a steep discount. The risk, of course, is that the troubled company cannot be turned around and sinks into bankruptcy, wiping out the private equity firm’s investment. Warren Buffet is a great public equity investor. He is also a big private equity investor. Large chunk of his returns come by using Berkshire’s insurance cash flows to buy distressed companies and turning them around.

PE firms are also involved in leveraged buyout (LBO) and mezzanine financing.

The Exit Strategy

While investing in any company, GPs always consider at the beginning what would be the exit strategies for that particular company. The common options available to GP are IPO i.e. exiting through capital market whereby the portfolio company or part of the company, is listed on the stock exchange, trade sale or strategic

sale where a buyer (investor) is interested to buy the stakes at a price giving the GP good return on investment or exercising “put option” clause as specified in the shareholders’ agreement where the portfolio company, if reluctant to go for IPO, is bound to buy back the shares at a predetermined price based on certain formula and metrics. In general, GPs normally start thinking about their exit path from day one, continuously tracking options and identifying potential buyers from the start and preparing the business accordingly.

How Private Equity Fuels the Economic Growth

As GPs are always eager to increase the value of the business of the portfolio companies, study shows that portfolio companies are highly benefited by the private equity companies at least in following major ways:

Innovation

Research done by international organization reveals that private equity involvement in portfolio companies increases the efficiency of innovation efforts. PE backed companies are more focused in their innovation efforts and deploy better management of innovation processes than their peers, on average.

Productivity

In addition to the improved productivity that arises from higher levels of innovation, PE contributes to creating an enabling environment to enhance the level of productivity in the economy as a whole. It does this by increasing the finance available for capital investments, supporting companies through periods of commercial or financial distress, and by increasing the operating performance of portfolio companies.

Competitiveness

Improvements in productivity either through innovation or other productivity enhancing measures at an individual company level translate directly into increased competitiveness at a macroeconomic level. Moreover, PE has a direct impact on competitiveness through making funding available for risky but potentially lucrative new business opportunities

Corporate Governance and Compliance

One of the biggest benefits that PE firm can bring to the portfolio company in a country like Bangladesh is introducing corporate culture and instituting corporate governance within the Company. Since most of the private companies where PE firms invest are family run businesses, one of the prime priority for GPs is to introduce corporate culture within the organization by suggesting structural changes, bringing professional managers and limiting the sponsors’ roles in operating activities. By instituting different committees and strengthening the board by devising clear roles for board members and management, most of the portfolio companies see significant changes in their performance and employees’ motivation.

With the inclusion of foreign investors in the board as part of PE’s and other investors’ participation, there will be a greater need to improve transparency and accountability of the management to the board and board to all shareholders.

By implementing improved board processes, PE firms will ensure that the board is asking the right


finding lesser operational, environmental and social risks.

Linking Private Equity and Economic Growth

Economic growth is the increase in the amount of goods and services produced by an economy over time. Over the past sixty years, two classes of economic models that seek to explain economic growth have evolved: growth models based on capital accumulation and growth models where innovation has a direct impact on growth (endogenous growth models). All of these models link economic growth with the amount and productivity of capital and labour, and the changes to productivity that arises from technological change.

Therefore, any examination of either productivity itself, or factors that shape it – such as competitiveness and innovation – are important and valuable in understanding economic growth.

The following model will depict the picture clearly showing how private equity brings economic growth.

questions to management, efficient and effective information flow from management to the board, and empower all board members to exercise their oversight functions.

The other factor which basically restricts the local companies to grow is their accounting practices and level of compliance that they maintain. It is something common in Bangladeshi private enterprises to maintain two sets of books of accounts and thereby hiding their true performance to the regulatory authorities or pursuing a culture of tax evasion. One of the major tasks for GP is to convince the willing sponsors to understand the risks of being non-compliant or merits of being compliant. In line with GP’s exit strategy, it is paramount for GP to come to an agreement whereby the portfolio company is ready to balance their books in next couple of years and opted for one set of books of accounts. In most cases sponsors with vision can see the merit and agree with the GP’s arguments. This transformation of the local company is not only a “shift changer” for the company but it brings significant benefits for the national economy in the form of realizing higher taxes and duties.

Another major benefit is improving the moral of the management and employees. Though in most cases those companies used to show lower profit which in turn means avoiding a big portion of taxes and duties, the management on the other hand requires to manage the regulatory authorities by paying bribes or illegal money. By making true disclosure and preparing transparent accounts, moral of the employees improves and that result in higher loyalty and motivation. Culture of the Company sees changes and so the performance of the company.

Environment, Health and Safety

GP as part of their due-diligence strategy, on their own, and since the fund investors are mostly comprised of international organisations like IFC or agencies of other developed countries, carry out extensive environment, health and safety due-diligence on the portfolio company on a regular basis and by complying or implementing their suggestions the standard of EHS of the portfolio companies improves. These investing organizations use internationally recognised sector specialists to conduct environment, health, safety and social studies for the portfolio companies with clear action plan to follow to transform the Company into a compliant organization. These include health and safety issues to honouring employees’ rights to acknowledging social obligations. This ultimately becomes a blessing for the portfolio companies since the improved standard of EHS gives them scope to improve their market image as well as increase their chances of fetching orders from overseas markets including

vities

Source – Frontier Economics

Activities Outcomes

Intermediate effects on investors,

companies, sectors and the economy.

Long term improvements in

companies, sectors and the economy

Attracting funds and investing them to

support companies

Impacts

Private Equity

Economic Growth



PE and Emerging Market

Worldwide there is renewed trend in investing in emerging markets where Bangladesh also fits in.

In a 2013 global survey of LPs, conducted by EMPEA, the emerging market private equity association, one-third of LPs indicated that they plan to increase the share of their PE allocation in emerging markets. GPs and LPs are

broadening their horizons beyond the BRICs to seek diversification in markets that will offer the next wave of growth, including Sub-Saharan Africa, Southeast Asia and Latin America (excluding Brazil). Both investment deal value and targeted new fund-raising reflect the increasing importance of these rising markets (see Figure). This is a good news for us since we do not fall into the group called BRICs.

Private Equity in Bangladesh

In Bangladesh PE is still a new concept. Most of the private companies in Bangladesh are extremely debt dependents. The companies do not consider the extent of debt burden they are carrying or consequence of high leverage. Analysing the accounts of those companies will reveal that a significant amount of hard earned operating profit goes to the banks’ pocket in the form of financing costs and ultimately, company ends up with profit which does not go with the size and turnover of the company. The banks on the other hand without giving any consideration of covenant clauses, continue to allow loans pushing the company into “debt trap”. It becomes difficult for those companies to come out from the trap and therefore, falling themselves into vicious circle of taking more loan and to pay interest and paying loan and taking new loan. Private equity in this kind of situation can come as a savior for those companies. The

PE Investors Have Their Eyes on a New Tier of Emerging Markets

Emerging-market deal value

2009 2010 2011 2012 2013 Q3

Note: Fund-raising excludes real estate and Infrastructive fundsSources: EMPEA, AVCJ; Preqin

Non-BRIC BRIC Pan-emerging markets

2009 2010 2011 2012 2013

100%

80

60

40

20

0

100%

80

60

40

20

0

Emerging-market fund-raising value

Investment Fund-raising

The Author is a Fellow Member, ICAB

advancement in technical knowledge mainly in the form of new products, processes and markets where PE comes in. The growth of the middle class, a young population, urbanisation and enormous infrastructure needs in Bangladesh generate huge opportunities for private equity. Furthermore, a well-developed legal and regulatory framework would lead to increased financial activities in a country hence facilitating exits which would result in a more favourable legal environment that induces venture capitalists and PE funds to invest more often in the country.

References1. Private Equity: A Brief Overview-

David Snow, PE Media

2. Private Equity Shifts Gears in Emerging Markets , Bain & Company

3. Frontier Economics May 2013

companies can get access to new equity, saving interest payment, improving debt/equity ratio and revamping the balance sheet of the Company. Not to be mentioned, they will be blessed with other “step changes” activities in operation and governance and compliance - the PE firm is bringing. There is also growing need from some sponsors to invite private equity who don’t want to take bank loan for the sake of not to be involved with interest payment. So from the religious point of view PE can be more acceptable. Moreover, since the investors in the funds are from the developed counties and by capitalising on PE‘s association with various reputable international organisations – the portfolio company can get enormous opportunities and exposures in developing its business, its culture, technological advancements etc. and become a formidable player in the relevant sector.

The private equity investments (since currently these are from overseas sources) in Bangladesh are treated as FDI. However, current law is not entirely conducive to investors as there is a lock-in-period while exiting through IPO or condition on remittance of trade sale value up to NAV of the Company are not at par with surrounding countries or international best practices. For Bangladesh to invite more private equity for investment in growth sectors these policies need to be reviewed.

Conclusion

Private equity presents a huge universe of opportunities and can undoubtedly add value to Bangladesh growth economy. It is certainly an alternative investment class, but not only because of low liquidity, but rather because it marries management science with pure investment. For economic growth to be sustainable there should be continuous


National Budget for the financial year 2015-16 has been placed in the parliament for its approval. Traditionally national budget is the forecast of governmental expenditures and revenues for the ensuing financial year but in modern industrial economies, the budget is the key instrument for the execution of government economic policies. Budget of the country is a very important document. It is not only a statement of annual Income and Expenditure but also a document which impacts on a nation's citizens in terms of how much taxes needs to be paid and in terms of the benefits individuals and groups receive from the government. There are two types of budget; balanced budget and unbalanced budget. Balanced budget is a situation, in which estimated revenue of the government during the year is equal to its anticipated expenditure. The budget in which income & expenditure are not equal to each other is known as unbalanced budget.

National Budget 2015-16:Not Absolute People Friendly

Md. Shahadat Hossain FCA

Unbalanced budget is of two types, surplus budget and deficit budget. The budget is a surplus budget when the estimated revenues of the year are greater than anticipated expenditures. Deficit budget is one where the estimated government expenditure is more than expected revenue. Though a healthy practice for any government is to have a balanced budget, in the developing countries like Bangladesh, where huge resources are needed for the purpose of economic growth & development, it is not possible to raise such resources through taxation. Deficit budgeting is the only option and accordingly every year the government is preparing and implementing deficit budget. However, in the present day scenario the role of budget in the economy of the country has tremendously increased. If we analyze the budget for the financial year 2015-16 we will find some features of the budget.


Element of Budget Fiscal2015-16BDT in Crore

Fiscal 2014 -15BDT in Crore

% of Increase

Total Budget 295,100 250,506 18%Total RevenueDeficit

208,44386,657

182,95467,552

11%13%

From the above statistics it appears that volume of the budget has been increased by almost 18 percent compared with that of previous fiscal. Taking into consideration the expected GDP growth and inflation the volume of the budget seems to be to some extent overambitious but it is achievable. Revenue has been projected to increase by almost 14 percent compared with that of previous year’s budget which seems to be reasonable but compared with the previous year’s revised budget revenue growth was targeted at 31 percent above which is abnormally high. No specific ways and means was mentioned in the budget about collection of such a huge amount of incremental tax revenue. However, from the budget it is clear that emphasis has been given on tax deduction at source which is the easiest way to collect tax. But main demerits of the tax deduction at source are that its implication is similar with indirect tax. An example may be presented to make it clear. According to the fundamental principles of tax law, tax payable amount of a company will be determined based on its net

profit as presented in its annual audited financial statements. If the company earns a net profit, it will have to pay tax at a determined rate. On the contrary, if the company incurs a loss for a particular period of time, it will not have to pay any tax. Suppose a company X earned Tk.200 net profit in the year 2011. In that case it will not be able to distribute full amount of Tk.200 as dividend among its shareholders. It will have to pay Tk.70 as tax (assuming applicable tax rate is 35%) to the government and the balance Tk.130 may be distributed among its shareholders as dividend. So, according to principle of direct tax the excess purchasing power will be taken away by the amount of Tk.70 from the shareholders of the company. There is no scope to shift this tax liability on others by the shareholders of the company X. But according to the scheme of tax deduction at source the tax from company X is not collected based on net profit, it is being collected on turnover/revenue of the company. Suppose the company X is selling its goods to the company Y (customer).

TAX

AUTHORITY ENHANCES

THE INCOME THROUGH

ESTIMATION AT THE

TIME OF CALCULATING

TAX LIABILITY.

SIMILARLY TAX PAYER

ALSO DECLARES HIS

INCOME LESS

COMPARED WITH

ACTUAL INCOME WITH

A VIEW TO

INCREASING THE

INCOME BY THE TAX

AUTHORITY. DUE TO

HAVING SUCH LACK OF

CONFIDENCE

BETWEEN TAX PAYERS

AND TAX AUTHORITY

THE TAX REVENUE IS

NOT BEING COLLECTED

EXPECTEDLY.


Under the tax law, the company Y is given the responsibility to deduct tax from the sales price of the company X which is considered as the final tax irrespective of year-end profit or loss. Under this system if the company X sells goods of Tk.100 to the company Y, tax of Tk.4 (assuming rate of tax deduction at source is 4%) will be deducted by the company Y and Tk.96 will be paid to the company X. The company X knows that Tk.4 which has been deducted by the customer will not be refunded despite incurring the loss at the end of the year. Therefore, it will be considered as cost not as tax

payment in advance. Since this tax will be considered as cost, subsequently the company X will increase the sale price of the product to Tk.104 as against Tk.100 so that after deducting tax it can get Tk.100 as before. By this manner the company X gets opportunity to shift its tax liability to its customers and according to principle of indirect tax it is contributing to increase the rate of inflation as well as inequality in the society. In this connection it is pertinent to mention that as regards to the collection of tax; a major part (i.e. 60 percent) is being collected through deduction at source. Out of total collection of

tax through deduction at source 30 percent i.e. 18 percent of total income tax equivalent to Tk 12000 crore is being collected from contract bill. Almost full amount of contract bill is paid by the government from Annual Development Program. So, if we consider the impact of this tax collected from contractors’ bill in the economy, it may be said that this tax collection is merely in one hand increasing the tax revenue and on the other hand increasing the development cost. For example, at present tax system if there were no tax deduction system from the bill, the contractor would have bidden for the work by Tk 100. But, since there is a system of tax deduction at source from the bill, the contractor will bid for the work by Tk 104.50.Due to this tax system one department of the government will pay Tk 4.50 in addition to actual construction cost and other department of the government i.e. tax department will collect Tk 4.50 in the form of tax. So, there is no impact in national economy of this tax. Secondly, value added tax on micro business has been increased by more than 24 percent which will seriously affect the poor people of the society. Now, the question may be raised why the government has taken such decision which will adversely affect the poor people. As answer to the question it may be mentioned that the government has given emphasis on easy way to collect the revenue instead of consideration of economic and social impact. But under this circumstance if we look at the details of national income, it may be seen that five percent of mega rich people of the country are holding more than 30 percent of the national income i.e. Tk 42000 billion. On an average per head income is Tk 560000 which is within the minimum taxable


implemented within 10 months period of time i.e July-April and balance 46% was implemented within May-June two months period. Likewise during the same 10 months period i.e. July-April of fiscal 2014-15 ADP 56% was implemented balance 44% was implemented within May-June two months period. From the above information it is very much pertinent to raise question how far it is possible to implement ADP four times in the months of May – June compared with that of July- April(during the months July- April average ADP implementation 5.6% and during months rate of average implementation is 22%).This wide variation of rate of ADP implementation indicates either serious distortion of quality of development work or financial irregularities in the way of making payment without getting the development work completed as per contract.

As earlier mentioned our budget is deficit budget. In this context another important issue of budget is the means of deficit finance. For the fiscal year 2015-16 deficit finance has been estimated Tk 80,857 and sources of such deficit finance has been projected as under:

income limit. Present number of individual tax payer is only seven lac. If we compare the above two information, it can be easily viewed that a major part of the income earners are not paying tax and tax authority is not able to bring them in the tax net. As per another information only ten thousand people are holding assets valued Tk two crore which is also not acceptable comparing with the information as mentioned above. So, it is clear that there remains a gap between the number of the people earning more than minimum tax limit and actual number of tax payer. Now the question is why such gap exists? As answer to the question it may be said that one of the main reasons behind such gap is non fulfillment of benefit principle of tax. One of the principles of payment of tax is benefit principle i.e. tax should be paid against receiving sufficient benefit especially in the form of defense, law and order etc from the state. But there remains dissatisfaction about getting benefit from the state by the tax payers. Lack of confidence in each other between the tax authority and tax payers is also another reason of collecting less amount of tax. Income, which is declared by the tax payers, especially in case of a company, is hardly accepted by

the tax authority. Tax authority enhances the income through estimation at the time of calculating tax liability. Similarly tax payer also declares his income less compared with actual income with a view to increasing the income by the tax authority. Due to having such lack of confidence between tax payers and tax authority the tax revenue is not being collected expectedly.

As regards to the budget allocation it may be said that there may be some conceptual differences among persons, political parties to allocate the funds among the various sectors. Someone may give highest allocation for education and others for health. Whatever amount for which sector, it does not matter abnormally because all the allocations are for the betterment of the nation and economy of the country. But the allocation matters on effective utilization of the fund. For example, a major part of the budget is allocated for Annual Development Program (ADP). For the fiscal 2015-16 total ADP has been allocated Tk 97000 crore which is 33% of total budget. But if we look at the implementation history, it may be observed that during the fiscal 2013-14 ADP 54% of total allocation was

Source of Deficit Finance BDT in CroreForeign Loan 24,334

Bank Loan 38,523

Savings Certificates

Total1 8 ,000

80,857

31%

50%

19%


The Author is a Council Member, ICAB

Out of total deficit finance of Tk 80,857 Tk 38,523 i.e. almost 48 percent has been estimated to obtain from banks in the form of loan. With the view to obtaining major part of deficit finance from bank loan, very recently interest rate of saving certificate has been reduced. This plan may be helpful for collecting the money for budget but how much this plan will be effective for the national economy, there remains a question. If we analyze the economic impact in the society, it may be observed that the interest against saving certificates, which is paid due to sale of savings certificates, directly comes to the benefit of the general people of the society. But the interest, which is paid on account of bank loan, is initially paid to Bangladesh Bank. Bangladesh Bank pays such interest to the commercial banks as the money was collected by the central bank from the commercial banks on behalf of the government through selling treasury bill or treasury bond. A part of interest earned by the commercial banks on account of selling treasury bill is distributed among the depositors of the bank and a part is retained by the banks which enhances the capacity of the bank to disburse loan and a portion of the loan is converted into bad loan. Finally, parts of the interest expense as incurred by the government are not used for betterment of the general people. But the interest expense, which is spent for savings certificates, as earlier mentioned is fully utilized for the betterment of the general people. In this connection there is a common voice normally uttered by the economists that loan taken by the government from the banking sector reduces the capacity of disbursement of loan for private sector. It stands to

believe that based on this common voice interest rate of savings certificate has been reduced so that small savers deposit their money to the banks and obtaining loan from the commercial bank do not reduce the capacity to disburse loan to private sector. But, if we see the banking operational system, it may be observed that general people deposit their money to the commercial banks, commercial banks transfers their liquid assets to central bank through purchase of treasury bill or bonds, central bank makes payment to or adjust with the commercial banks any payments made by the commercial banks to the contractors, suppliers, other service providers to the government. Contractors, suppliers, other service providers to the government again deposit

the money to the commercial banks. The operational system may be presented in the diagrammatic form as under;

From the above graphical presentation it appears that there is no scope to reduce the capacity of disbursing loan to the private sector due to making loan payment to the government to meet budget deficit. Finally on reviewing the budget for the fiscal 2015-16 in a nutshell it seems that the mode of collection of revenue, way of utilization of fund and means of finance for deficit amount are not absolutely in line with the betterment of national economy.

Commercial Bank transfer fund to central

Bank for purchasing treasury bill

Depositor deposit money to commercial

Bank

Central Bank disburses/ adjust

money to the Commercial bank

for making payment to Contractor,

Suppliers and other service provider to

the Govt.


Introduction

Seemingly Bangladesh economy is now thrice as big as it was in 2006-07. The Government of Bangladesh (GoB) formulated the “Perspective Plan 2010-2021” colloquially known as “Vision 2021” aiming to eradicate poverty, inequality, and human deprivation and providing the road map for accelerated growth. The expectation of the perspective plan is that by 2021, Bangladesh will cross middle income threshold and basic needs of the population is ensured. Inspired by its vision, the GoB has presented second budget of their tenure on 04 June 2015 before the nation. The budget size has

A Succinct Disclosureon Budget 2015-16

SK Md Tarikul Islam ACA

been increased to Tk 295,100crfor fiscal year 2015-16 from Tk 2, 39,668cr(revised budget) in 2014-15.

Budget Framework

Of total expenditure, development budget is set to Tk 97,000cr with an awfully high non-development expenditure of Tk 1,98,100cr which has been projected to be backed by an ambitious revenue collection of Tk 2,08,443cr resulting a massive deficit of Tk 86,657cr. GDP is projected to grow at an elusive 7 percent rate with a manageable inflation rate of just 6.2 percent. Before moving onto the details of the budget 2015-16, it’s worth looking at the budget at a glance.



THE GROWING

DEPENDENCE ON

DOMESTIC BORROWING

TO MEET THE DEFICIT

FINANCING WOULD

SHRINK THE FUNDS FOR

THE PRIVATE SECTOR

WHICH MAY IN TURN

MOUNT THE INTEREST

RATE WHICH WOULD

INEVITABLY CAST A

WORRYING IMPACT ON

INVESTMENT

SCENARIO.

Revenue

Not being an exception, NBR tax remains the major source of revenue in 2015-16 representing nearly 60 percent of present budget size (10.3 percent of GDP). In other words, 85 percent of total revenue is set to feed from NBR tax – income tax 31 percent, VAT 31 percent and import

duty 23 percent - leaving immense pressure on NBR (around 31 percent higher than previous year). Tax revenue from non-NBR sources and non-tax sources has been estimated as little as 2 percent and 8.9 percent of budget respectively raising collectively just over 13 percent compared to previous budget.

Proposed Budget Structure(Crore Tk.)

Sector Budget 2015-16

Revised 2014-15

Budget 2014-15

Actual 2013-14

Total RevenueOf which,

2,08,443(12.1)

1,63,371(10.8)

1,82,954 (13.7)

1,40,375 (10.4)

NBR Tax 1,76,370 1,35,028 1,49,720 1,11,423Non-NBR Tax 5,874 5,648 5,572 4609

Non Tax Receipt 26,119 22,695 27,662 24,343Total Expenditure 2,95,100

(17.2)2,39,668

(15.8)2,50,506

(18.7)1,88,208

(14.0)a) Non Development Revenue expenditure

1,64,571 (9.6)

1,27,371(8.4)

1,28,231 (9.6)

1,10,567(8.2)

b) Development ExpenditureOf which,

1,02,559(6.0)

80,476(5.3)

86,345(6.4)

59,151(4.4)

Annual Development Program

97,000(5.7)

75,000(5.0)

80,315(6.0)

55,333(4.1)

c ) Other Expenditure 27,970(1.6)

31,821(2.1)

35,930(2.7)

18,490(1.4)

Budget Deficit -86,657(-5.0)

-76,297(-5.0)

-67,552(-5.0)

-47,833(-3.6)

Financinga) External 30,134

(1.8)21,583

(1.4)24,275

(1.8)9,706

(0.7)b) Domestic 56,523

(3.3)54,714

(3.6)43,277

(3.2)38,136

(2.8)Of which, Bank 38,523

(2.2)31,714

(2.1)31,221

(2.3)18,168

(1.4)GDP 17,16,700 15,13,600 13,39,500* 13,43,674

Sources of Revenue 2015-16(In Crore Tk)

Income tax31%

VAT31%

Import duty and others

23%

Tax revenue

(Non-NBR)3%

Non-tax revenue

12%

NBR Tax revenue 176,370

Income tax 64,904VAT 64,375Import duty and others 47,091

Non-NBR revenue 32,073

Tax revenue (Non-NBR) 5,874Non-tax revenue 26,199Total revenue 208,443

Source: Finance Division, Figures in parenthesis indicate percent of GDP;* nominal GDP while preparing budget.

Deficit Financing

The gap between revenue and expenditure shows a budget deficit of Tk 86,657cr (29.4 percent of budget) which will be channeled through a blend of domestic borrowing of Tk 56,523cr (19.20 percent of budget) and foreign borrowing of Tk 30,134cr (10.2 percent of budget). The growing dependence on domestic borrowing to meet the deficit financing would shrink the funds for the private sector which may in turn mount the interest rate which would inevitably cast a worrying impact on investment scenario.

Expenditure Framework

Total expenditure of Tk 295,100cr (17.2 percent of GDP) is made up of development (ADP) and non-development expenditure to the tune of Tk 97,000cr (32.9 percent of budget) and Tk 1, 98,100cr (67.1 percentof budget).

ADP budget has been laid down focusing on regional parity, human resource development, infrastructural development and quality spending. Sector-wise allocations suggest to allocate 22.0 percent of development outlay to the human resource sector (education, health and other related sectors), 25.3 percent to overall agricultural sector (agriculture, rural development and rural institutions, water resources and related others), 19.1 percent to power and energy sector, 22.3 percent to communication (roads, railway, bridges and others related to communication) sector and 11.4 percent to other sectors.


Sourcing of Deficit Financing 2015-16

(In Crore Tk)

Domestic borrowing

65%

Foreign borrowing

35%

Domestic borrowing: 56,523

Bank borrowing 38,523

Non -bank borrowing18,000

Foreign borrowing: 30,134

Budget deficit 86,657

21,308 24,521

18,479 21,659

11,033

-

5,000

10,000

15,000

20,000

25,000

30,000

HR Agri & Rural Dev

Power & EnergTrans & Comm Others

Annual Development Program (Sectoral Allocation of Tk 97,000cr)

Sectoral Allocation of Budget (Tk. 295100 Crore)

Ministry/Division Budget 2015-16

Ministry/Division Budget 2015-16

a) Social Infrastructure

69,183(23.44)

b) Physical Infrastructure

90,419 (30.64)

Human Development

60,071(20.36)

Agriculture and Rural Development

40,975 (13.89)

Food and Social Safety

9,112 (3.90)

Power and Energy 18,540 (6.28)

c ) General Services

82,560 (27.98)

Transport and Communication

26,329 (8.92)

Other Sector 4,575 (1.55)

Total (a + b + c) 242,162 (82.10)

d) Interest Payment 35,109 (11.90)

e) PPP Subsidy and Liability 6,509 (2.21)

f) Net Lending and Other expenditure 11,321 (3.84)

Total Budget 295,100

Source: Finance Division, Figures in parenthesis indicate percent of budget.

Overall expenditure framework has been designed categorizing different ministries and divisions between three main groups - social infrastructure, physical infrastructure and general services sectors. In the proposed budget, 23.4 percent of the total outlay has been allocated to social infrastructure sector, of which 20.4 percent has been proposed for the human resource sub-sector (education, health and other related sectors);30.6 percent of the total allocation has been proposed for the physical infrastructure sector, of which 13.9 percent will go to the overall agriculture and rural development, 6.3 percent to power and energy sector and 8.9 percent to overall communication sector. 28.0 percent of the total allocation has been proposed for the general services sector. Besides, 2.2 percent has been allocated for public-private partnership (PPP), financial assistance for various industries, subsidies and equity investment in state-owned banks, commercial banks and financial institutions; 11.9 percent for interest repayment; and the rest 3.8 percent for net lending and miscellaneous expenditure.

Fast Track Projects

In order to ensure fast track implementation, the GoB placed 8 growth supportive projects under a Fast Track Project Monitoring Committee headed by the Hon'ble Prime Minister. These are: Padma Bridge project, Ruppur Nuclear Power project, Rampal Coal-based Power project, Deep Sea Port project, MRT-6 project, LNG Terminal project, Matarbari Power project and Paira Sea Port project. Among these projects, Padma Bridge and Ruppur Nuclear Power projects will hopefully be completed during the current term

of the Government as stated by Finance Minister in his budget speech. He also referred to the World Bank stating that the Padma Bridge project, once completed, alone will enhance GDP by 0.56 percent annually while accelerating economic activities in the backward south-western region of the country.

Economic Zone

In addition to the Fast Track Projects, the GoB has taken initiatives to establish economic zones in prospective regions with a view to encouraging industrialization, generating employment opportunities, enhancing production and ensuring export promotion and diversification. Approval has already been accorded to the establishment of 30 public and private economic zones in different parts of the country. Among them, Sirajgonj, Mongla, Mirsarai, Anwara and Srihatta economic zones received approval in the first phase and their implementation is in progress. Implementation of another 25 economic zones approved later has commenced. Two economic zones have been earmarked for Japanese and

Chinese investors. The Government is also actively considering keeping another such zone earmarked for India. Besides, six economic zones are going to be established in the private sector.

Key Fiscal Measures

The budget brings mixed reception among different stakeholders. Relying heavily on four sources of the NBR revenue namely Income Tax (Corporate and non-corporate), Value Added Tax (VAT), Supplementary Duty and Import Duty (Customs),the GoB has set to impose tax at high rate in several cases compared to previous year.

Corporate Tax

Some good news for listed and prospective listed financial institutions and companies has been conveyed but not such great news for non-listed financial institutions and cigarette manufacturers. However, definition of income year has been changed that would normally mean the July-June period with only exceptions for banks, insurance and financial institutions for which it would mean a calendar year.

Corporate Tax RatesStatus Existing Proposed

Publicly Traded Company 27.5 percent 25 percentNon-publicly Traded Company 35 percent 35 percentPublicly Traded-Bank, Insurance and Financial Institution (other than Merchant Bank)Non-publicly Traded-Bank, Insurance and Financial Institution

42.5 percent

42.5 percent

40 percent

42.5 percent

Merchant Bank 37.5 percent 37.5 percentCigarette Manufacturer:Publicly Traded Company-Non-publicly Traded Company-

40 percent45 percent


Mobile Phone:Publicly Traded Company-Non-publicly Traded Company



Dividend Income 20 percent 20 percentMinimum Turnover Tax 0.30 percent 0.30 percent**** (0.10 percent in first 3 assessment years of commencement of commercial production)Source: Finance Division


The Author is anAssociate Member of ICAB

budget for 2015-16. On the other hand, Finance Minister AMA Muhith expressed at a post-budget press conference that, “we know that our target is ambitious – it is very high. We have decided to give a push this time and we want to do it.” However, over the last few years, it has been observed that degree of implementation was not up to the expectation. Therefore, the GoB needs to take initiative to increase the quantum of implementation by taking necessary measures. In order to witness the actual result we need to wait, of course not so long, as the implementation is imminent.

Individual Tax Payers

Raising the minimum tax-free income and reorganizing the income slabs keeping the corresponding tax rates unchanged, individual tax payers from lower income group to affluent people are likely to get some relief. Allowable limit of perquisites in case of salaried persons raised from Tk. 350,000 to Tk. 450,000.

VAT and TDS

On the top of hefty tuition fees, English medium school, private universities, private medical colleges and private engineering colleges will be levied10 percent VAT. Surprisingly, a 4 percent VAT on all online sales will put this sector into challenge. Change in current 2 percent VAT on super shops to 4 percent might impact the consumers and thus hurt the target VAT collection.

The new budget proposes VAT at 1.5 percent for flats up to 1,100 square feet and 2.5 percent for 1,100 – 1,600 square feet making a little less difficult for middle-income group to buy flats. Flat over 1,600 square feet will attract 4.5 percent on purchase price as VAT.

RMG and other exports will see the highest change in TDS which has been proposed at 1 percent.

Tax Holiday & Tax Exemption

The government has proposed tax holiday for automobile manufacturing sector, tyre

manufacturing and bicycle industry in order to attract investment and propel growth. Further, Information Technology Enabled Services and Nationwide Telecommunication Transmission Network will enjoy tax exemption till June 2024.

Conclusion

Evidently the budget has been crafted with high hopes for the sake of mass peoples’ interest. According to Debapriya Bhattacharya, a distinguished fellow of CPD, “the budget targets are quite impressive, and if realized, they will do justice to the development demands of Bangladesh.” Yet, he has raised his doubt on financing and implementation of the proposed


Threshold of Taxable Income of Individual Tax Payers:Status Threshold of Taxable Income

Existing ProposedGeneral Taxpayers 2 lakh 20 thousand 2 lakh 50 thousandWomen and senior citizen aging 65 years and above

2 lakh 75 thousand 3 lakh

Physically challenged 3 lakh 50 thousand 3 lakh 75 thousandWar- wounded gazette freedom fighters

4 lakh 4 lakh 25 thousand

Individual Tax Rate:Total Income Tax Rate

Existing ProposedOn first Taka 2 lakh 20 thousand of total income

On first Taka 2 lakh 50 thousand of total income

Nil

On next Taka 3 lakh of total income


10 percent



15 percent



20 percent



25 percent

On balance of total income On balance of total income 30 percent

Minimum tax for individuals fixed at Tk. 4000.Source: Finance Division


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