Fiscal Policy (Budget Review FY2014-2015) ACAML Research

Bangaladesh Macro Economy Update research@acaml.com.bd

August 5, 2014

Last Fiscal year’s Budget:

2013-14

Sector Budget Revised Actual (Upto

Mar)

Total Revenue Income 167,459.00 156,671.00 98,531.00

NBR Tax 136,090.00 125,000.00 77,254.00

Non-NBR Tax 5,129.00 5,178.00 3,132.00

Non-Tax Revenue 26,240.00 26,493.00 18,145.00

Total Expenditure 222,491.00 216,222.00 115,180.00

(a) Non-development Expenditure 113,471.00 115,998.00 69,828.00

(b) Development Expenditure 72,275.00 65,145.00 25,642.00

Annual Development Plan 65,870.00 60,000.00 24,735.00

Other Expenditure 36,745.00 35,079.00 19,710.00

Budget Deficit 55,032.00 59,551.00 16,649.00

Financing

(a) Foreign 21,068.00 18,569.00 1,426.00

(b) Domestic 33,964.00 40,982.00 15,231.00

Banking Source 25,993.00 29,982.00 13,233.00

GDP 1,188,800.00 1,181,000.00 1,181,000.00

* Source: Budget Speech, 14-15, (all amounts are in crore)

When we look at the implementation we can see there is a very poor scenario. Only 62.89% of planned (revised)

revenue has been collected in 9 months of fiscal year 2013-14. Again only 53.27% of expenditure has been done.

ADP implementation status is very poor its only about 41.23% in 9 months. ADP implementation status is very poor

due to the political turmoil in the last fiscal year. Almost all the economical activity was stagnant.

Proposed Budget along with last 5 years comparison:

Actual Revised Budget Next

Year

CAGR

5 year

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Growth Growth

Total Expenditure 102,977.00 128,249.00 152,428.00 174,013.00 216,222.00 250,506.00 +15.9% +19.5%

Non-Dev

Expenditure

67,013.00 77,488.00 89,299.00 99,376.00 115,998.00 128,231.00 +10.5% +13.9%

Dev Expenditure 28,115.00 35,734.00 40,672.00 53,172.00 65,145.00 86,345.00 +32.5% +25.2%

ADP 25,553.00 33,284.00 37,508.00 49,474.00 60,000.00 80,315.00 +33.9% +25.7%

Other Expenditure 7,849.00 15,027.00 22,457.00 21,465.00 35,079.00 35,930.00 + 2.4% +35.6%

Total Revenue 75,905.00 92,993.00 114,693.00 128,128.00 156,671.00 182,954.00 +16.8% +19.2%

Tax Revenue 62,485.00 79,548.00 95,228.00 107,452.00 130,178.00 155,292.00 +19.3% +20.0%

NBR Tax 59,742.00 76,225.00 91,595.00 103,332.00 125,000.00 149,720.00 +19.8% +20.2%

Non-NBR Tax 2,743.00 3,323.00 3,633.00 4,120.00 5,178.00 5,572.00 + 7.6% +15.2%

Non-Tax Revenue 13,420.00 13,445.00 19,465.00 20,676.00 26,493.00 27,662.00 + 4.4% +15.6%

Budget Deficit 27,072.00 35,256.00 37,735.00 45,885.00 59,551.00 67,552.00 +13.4% +20.1%

Financing of

Deficit

25,074.00 79,548.00 37,736.00 45,884.00 59,551.00 67,552.00 +13.4% +21.9%

Foreign 9,254.00 76,225.00 7,193.00 12,691.00 18,569.00 24,275.00 +30.7% +21.3%

Domestic 15,820.00 3,323.00 30,543.00 33,193.00 40,982.00 43,277.00 + 5.6% +22.3%

Banking Source 2,092.00 13,445.00 27,191.00 27,464.00 29,982.00 31,221.00 + 4.1% +71.7%

GDP 690,571.00 787,495.00 914,784.00 1,037,987.00 1,181,000.00 1,339,500.00 +13.4% +14.2%

Source: Budget Document

The target budget size has been increased by 15.90% compared to last fiscal year (2013-14) revised budget which is

below that compounded annual growth rate of last 5 years. Revenue collection target has been increased by 16.8%

which is fully consistent with target increase in budget size. Though it is below than its last 5 years CAGR (19.20%)

but still we do believe it needs to be adjusted and will be revised downward later. Collection of the huge tax revenue

in this forthcoming fiscal year will not be feasible as the economy is not in full potential swing. Budget deficit is

26.97% which slightly higher than average of last 5 years average (26.49%). Target of funding the deficit from

foreign loan or grants will not be possible as the relationship of newly form government with foreign country is not

in favorable position. So ultimately burden will be in Bangladesh national economy specially banking sector. So

excessive borrowing of government may create crowding out effect for private sector which might slow down

private sector’s infrastructure development. Though government has set the ceiling of taking loan but in our view we

think it will be difficult to be in the ceiling. Nominal GDP growth target is 13.4% and it is consistent with the last 5

years CAGR (14.2%). Considering target inflation rate of 6%, GDP real growth rate target is 7.3% which is nearly

impossible. We do believe that real GDP growth rate will be somewhere around 6.00% and inflation rate will be

around 7.00%.

Tax Structure:

Personal Income Tax ( FY 14-15) Last (FY 13-14)

Income Tax Rate Income Tax

Rate

BDT 0 - 220,000 0% BDT 0 - 220000 0%

Next BDT 300,000 10% Next BDT. 300,000 10%

Next BDT 400,000 15% Next BDT 400,000 15%

Next BDT 500,000 20% Next BDT 300,000 20%

Next BDT 3,000,000 25% On Balance 25%

On Balance 30%

Source: Budget Document

Company (Tax Payer) FY 14-15 FY 13-14

Publicly Traded Company 27.50% 27.50%

Non-Publily Traded Company 37.50% 35.00%

Bank, Insurance & Finanial Institutions 42.50% 42.50%

Merchant Bank 37.50% 37.50%

Publicly Traded Cigarette Manufacturer 40.00% 40.00%

Non-Publicly Traded Cigarette Manufacturer 45.00% 45.00%

Publicly Traded Mobile Company 40.00% 40.00%

Non-Publicly Traded Mobile Company 45.00% 45.00%

Dividend Income 20.00% 20.00%

Minimum Turnover Tax 0.50% 0.30%

Source: Budget Document

Government plan should be increase the number of tax payer rather increasing the slabs. By observing the tax

structure it can be inferred government is encouraging non listed company to be listed as they have increased tax

rate for non-publicly traded companies and keeping same tax rate for listed companies.

We do fell that government should have increased the tax free limit little bit higher. As there was inflation so

keeping the same tax free limit like earlier will reduce the purchasing power of the people. And definitely

government should take some more initiative to cover all taxable income earning person in tax bracket. For that

government needs to provide some remuneration to those who pays their taxes on regular basis.

Tax Rebate Facilities:

Industries Proposed Tax Rebate Period of Tax

Rebate

Tax rebate for the industrial undertakings not

eligible for tax holiday facilities set up in the

least developed areas

10% Up to 30 June,

2019

Tax rebate for the industrial undertakings not

eligible for tax holiday facilities set up between

1 July, 2014 and 30 June, 2019 in the

20% Up to 10 years next

from he date of

commencing

commercial

operation

Tax rebate for the industrial undertakings

shifted to least developed areas between 1 July,

2014 and 30 June, 2019 in the

20% Up to 10 years next

from the date of

commencing

commercial

operation

Source: Budget Document

Extension of Tax Holiday FY 14-15 FY 13-14

Extension of period for the industrial

undertakings enjoying tax holiday facilities set

up in the least developed areas

10 years 7 years

Tax holiday for the industrial undertakings

eligible for tax holiday facilitites set up

between 1 July, 2014 and 30 June in the least

developed areas

10 years 7 years

Source: Budget Document

Budget Impact on Different Sectors: `

Sector Budget information Impact on equity price

Bank & NBFI Government target borrowing

from banking sector will grow

by 4.1% which is almost half of

last year increase.

Reduction of LC tax rate

Though the growth rate is lower

than previous any year but still

the absolute amount is much

higher which is enough to create

crowding out effect.

Reduction of LC tax rate might

increase the number of LC

operations which may have

positive impact on price.

Pharmaceuticals Reduction of Supplementary

Duty (SD) on basic 40 raw

materials.

Custom Duties has been

exempted from the raw material

of anticancer drugs

Positive cash flow increasing due to

lower COGS. As most of the raw

materials are imported so all

company will be benefited.

Textile Tax deduction rate at source on

garments export has been

reduced.

Reduction of SD on different

kinds of fabrics

Exemption of duty on the raw

materials necessary for

developing prefabricated

buildings

Increase of gross profit.

Local manufacturer of fabrics

will face tough competition but

those companies who import raw

material will be benefited.

Power & Energy Increase of import duties on

LPG cylinders to 25% from 5%.

Increase of Customs Duty at

25% on energy saving bulbs and

electric fan motors.

Local provider of cylinders will be

benefited. So far only listed

company which has cylinders supply

business is MJL Bangladesh Ltd.

Telecommunication BDT 100 SIM replacement Tax

imposition

SD on SIM card decreased by

5%

Sales tax on imported handset

has been changed to 15%

This will decrease operating

Profit of Telecom sector (GP)

New imported mobile company

price will go up this might

decrease the growth rate of new

subscriber.

Real Estate Increase the rate of tax at source

from 3% to 4% on the deed

value of land

Imposition of tax at source at 3%

on registration value in city

corporation & 2% in municipals

and 1% in other than municipals

Black money can be invested in

Real estate giving 10% penalty.

This will make people reluctant

to buy and sell real estate that

might hurt the business of EHL.

Black money might increase the

demand of real estate.

Tobbaco Increase of Cigarete price in

different slabs

Additional 1% HDS (Health

Development Surcharge)

Increase the price of Handmae

Tobacco (Biri)

Might decrease the demand of

Cigarate

Additional HDS might decrease

the operating profit marging of

BATBC.

Source: Budget Document

Some key points of Budget:

Real GDP growth target is 7.3%

Nominal GDP growth Target is 13.4%

Target GDP growth rate in 2021 is 10%

Government targets to raise power generation capacity to 18,162 MW of electricity by 2017.

Contract signing for the construction of Padma Multipurpose Bridge will be done this month and

construction will be completed by 2018

Government wants to raise the revenue as a percentage of GDP from existing 13.5 percent to 17 percent in

the next five years.

It is proposed to reduce the rate of deduction of tax at source on Cash Incentive from 5 percent to 3 percent.

Tax deduction rate at source on garments export has been reduced from 0.80 percent to 0.30Percent

The rate, for all other exports, has been reduced from 0.80 percent to 0.60 percent

Tax exemption on interest income from investment on pensioner savings certificate and wage earners’ bond

up to Tk. 5 lakh to ensure payment of monthly house rent amounting more than Tk. 25 thousand through

banks.

To increase the rate of tax at source from 3 percent to 4 percent on the deed value of land in areas other

than the important commercial and posh areas within the jurisdiction of RAJUK and CDA.

To impose tax at source at 3 percent on registration value in other City Corporations and municipalities at

district headquarters and 2 percent in other municipalities and 1 percent in all other areas outside

municipalities.

To reduce deduction-rate at source from existing 5 percent to 3 percent on local LC valuing more than Tk.

5 lakhpropose not to deduct at source on local LC of daily necessary consumer items including rice, onion,

dal, turmeric, chili, wheat, maize, flour, salt, edible oil, sugar, etc. Besides, I propose to reduce tax rate

from 5 percent to 3 percent on deemed commissions

Analyst Observation:

Budget amount is extensively high and too optimistic which implementation is going to be difficult assuming

current political and economical condition. Considering the current economic sluggishness it can be said it will be

difficult for the government to implement 75% of its ADP. There was no detail indication about the recapitalization

of the state owned banks.

Introduction of new tax slabs will increase the tax burden to high income earning people. It might affect the

consumer goods industry sale along with luxurious products market.

Except demutualization aspect, there was nothing more to be addressed for the capital market. Though some sectors

will be benefited but no overall direction or proper guidance for capital market was there. So in a nut shell, it can be

said that overall market will be heavily affected neither positively nor negatively.

Disclaimer: Estimates and projections herein are our own and are based on assumptions that we believe to be

reasonable. Information presented herein, while obtained from sources we believe to be reliable, is not guaranteed

either as to accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a

solicitation of the purchase or sale of any security. This report is intended for distribution in only those jurisdictions

in which Alliance Capital Asset Management Ltd. is liable and any distribution outside those jurisdictions is strictly

prohibited.

ACAML Capital Market Research Department

Research In-charge

Md. Nafeez-Al-Tarik, FRM Vice President & Chief Investment Officer nafeez@acaml.com.bd

Analyst Designation E-mail

Mr. Imam Rasul Mohammed Imtiaz Senior Assistant Vice President & Deputy

Chief Investment Officer

imtiaz@acaml.com.bd

Ms. Nishat Raihan Senior Investment Analyst & Fund Manager nishat@ acaml.com.bd

Mr. Benazir Rahman Investment Analyst benazir@ acaml.com.bd

Mr. S.M. Galibur Rahman Investment Analyst galib@ acaml.com.bd