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    Bangladesh Budget: Education, E-Commerce and Capital Markets

    LightCastle Analytics Wing

    Bangladesh’s annual budget is a crucial cornerstone to the pursuit of inclusive economic development. In light of this reality, this year’s budget aims to fully reflect the present challenges the country faces and offer inclusive solutions to these problems, while still remaining growth-friendly. With respect to this, Parliament has passed the budget for the fiscal year 2019-2020, amounting to a mammoth 5,23,190 crore BDT or approximately $62.17B.[1][2] The budget, the largest in Bangladesh’s history, promises to do things differently. Some analysts, however, are not so optimistic.[3]

    The Budget: Key Takeaways

     

    FIGURE: Operating and Development Budget FY 2019-20 (Use of Resources) / Source: Ministry of Finance, Government of People’s Republic of  Bangladesh

     

    Education Receives a Boost

    A total of approximately $9.4 billion (BDT 79,486 crore) has been allocated to the Education and Technology sector for FY2019-20.[8]  This is roughly $1.56 billion (BDT 13, 213 crores) more than the allocation in last year’s budget. The sum specified is the highest allocated to the Education and Technology sector since Bangladesh’s independence.[10] The sum stands at 3.04% of Gross Domestic Product (GDP).[10]

     

    FIGURE: Budget Allocation for Education Sector 2016-2019

    Meanwhile, India allocated only 2.05% of its union budget to education while Nepal reserved 10.6% of its annual budget to education.10 The budget recommends bringing in trained teachers from abroad to facilitate skills and knowledge transfers in the same spirit as that of Emperor Meiji of Japan when he brought in Western-educated teachers during the Meiji Restoration.[16]

    However, there are some pressing concerns for the sector as well. The budget has yet to fully fulfill the vital government document, the National Education Policy 2010.[9] The aims of this policy were twofold: the implementation of ICT education and the spreading of quality education at each level.[11] While the government has been successful in achieving the first objective, it is struggling greatly to ensure quality education at all levels.

    The key issues here include the following:

    • Salary increments for teachers mentioned in the budget may not be sufficient to attract  more teachers; 
    • The lack of a concerted strategy for quality improvements in teaching, learning, and research;
    • No regional allocating of the education budget to ensure equal opportunities for students from remote areas;
    • No detailed plans on building better schools with a more modern curriculum centered around quality textbooks;
    • No mention of an end to the rote-learning, certificate-oriented education.[9]

    E-Commerce to be Taxed at 7.5%

    A striking feature of this year’s budget is the proposed 7.5% VAT on online businesses. Amidst the growing popularity of online shopping, a 7.5% VAT has been imposed to help the government meet its revenue targets. Last year, a  5% VAT was imposed on e-commerce but was later dropped on the grounds that it was a printing mistake.12 According to industry insiders, last year’s VAT proposition was excluded through a clear definition. However, this year it has been included through definition in the documents.[12]

    According to Asif Ahnaf, founder-director of the e-Commerce Association of Bangladesh (e-CAB), the 7.5% VAT is too much of a burden on the burgeoning e-commerce sector and the e-commerce sector should be exempted from VAT till 2024.[12]

    The convenience offered by online shopping has been a major driving force behind e-commerce’s rise to prominence.[13] However, with this additional cost imposed on the sector, many people might revert to traditional means of shopping.

    Additionally, e-commerce employs a significant number of young people. The imposition of the 7.5 percent VAT on the sector will adversely affect the employment of these youth.[13] This may adversely affect the ongoing digitization agenda.

    Despite the government setting aside nearly $11.76 million (approx. 100 crore BDT) as seed money for start-ups, the new VAT imposition makes survival difficult for existing ones.[13]

    Capital Markets Receive a Helping Hand

    This year’s budget has produced a set of incentives in order to breathe in new life to Bangladesh’s struggling capital markets. Foremost amongst these incentives is a new tax exemption on dividend income up to approximately $592 (BDT 50,000). Currently, the tax exemption on dividend income stands at BDT 25000.[14] In order to encourage the dispensation of cash dividends, the new budget has also imposed a 15% tax on stock dividends as well as retained earnings. This has been done to ensure that investors are guaranteed a cash return on their investments.[14]

     

    FIGURE: The Plan to Energize the Stock Market

    By ensuring that general investors are guaranteed their return, the budget is creating an investment-friendly environment in the share market whereby more general investors want to enter.[14] This, in turn, energizes the stock market and benefits both the companies listed as well as general investors. Additionally, double taxation on listed companies has also been removed.[15]  To encourage foreign investments in the capital markets, the dividend income tax exemption provision has been extended to non-resident companies.[14] DSE Director Minhaz Mannan Emon believes the budget will help both small investors and solve the liquidity crisis.[15]

    Concluding Thoughts

    The budget for FY2019-20 does two crucial things correctly. Firstly, by allocating more resources to education, it has effectively taken the first steps–small though they may be–towards creating a more skills-driven economy. However, despite this initiative, no proper plans have been laid out as to how quality education will be implemented and as such, the root problems of education quality in Bangladesh have not been addressed.

    Secondly, extending the tax dividend exemption to BDT 50,000 should help more small investors and will create incentives for additional small investors to enter the stock market. As such, the liquidity crisis could be suppressed.

    However, the government kowtowing to Big Tobacco possess a big threat to revenue mobilization. With an estimated $46.36 million (BDT 400 crore) loss in revenue due to offering input tax credit to cigarette companies, a big question mark looms over the issue of revenue mobilization.6 Imposing a 7.5% VAT on e-commerce is going to stifle the expansion of the sector as it is still in its fledgling stages.

    The biggest concern that lingers around the budget is one of vision. There is no unifying philosophy that singularly defines this year’s budget. The lack of a unifying vision will make it difficult to measure the budget’s performance with respect to past budgets. While some factions of the economy will win, others who should have been part of the agenda will almost tragically miss out. Through proper critique, however, the right feedback can be generated which could avert these problems.

    References

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.