Overview of the National Budget for the FY 2021-22

    LightCastle Analytics Wing
    LightCastle Analytics Wing
    Overview of Budget for the Fiscal Year 2021-22

    Bangladesh is embarking on its 50th year of sustaining as a sovereign nation this year. The budget for the Fiscal Year 2021-22 (FY 21-22) has certainly generated significant discourse already. It is important to evaluate the allocation of the Budget to different sectors, such as Health, Agriculture, Tax Structure Reformations, SMEs, and Education.[1] Analysis of this budget should evaluate how effective it would be in paving a way towards salvaging the economy from its battle against the pandemic.

    This year’s budget amounted to BDT 6037 billion[2] with Public Administration having the lion’s share at 19%, followed by Education and Technology at 16%, and Transport and Communication at 12%. The budget allocation in some of the other areas is as follows: Health (5%), Agriculture (5%), Industrial and Economic Services (1%).  An exhibition of this budget segregation is shown in Figure 1.

    Figure 1: Segregation of the Budget FY21-22. Source: Ministry of Finance, GoB[2]

    A cross-comparison of the budget with the previous fiscal year, FY 2020-21, reveals the changes in the major development sectors. The amount allocated as a percentage of the total budget to the Education and Technology Sector and Health Sector has increased, but by less than 1% for each sector. The percentage allocated to the Power and Energy and Public Administration Sectors has decreased. This is summarized below in Table 1.

    Table 1: Cross comparison of the different sector allocation as a percentage of the Budget from FY 2020-21 to FY 2021-22[2

    Health Sector 

    This year’s Health sector allocation only comprises 0.95% of the total Gross Domestic Product (GDP) as compared to 0.84% in 2020.[3] The general expectation was a larger budget allocation for the Health sector. The reasoning behind this is the looming fear of the ongoing COVID-19 crisis worsening with the recent infiltration of the Delta variant into Bangladesh.  The budget transcript did not reveal any new project to battle the ramifications of the pandemic. The two ongoing projects (initiated in 2020) related to COVID-19 are – ‘COVID-19 Emergency Response and Pandemic Preparedness’ and ‘COVID-19 Response Emergency Assistance’, which are co-financed by World Bank and Asian Development Bank (ADB).  

    Previous data suggest that the Public Health Sector of Bangladesh receives little to no attention when it comes to budget allocation. In this ongoing health crisis, the total expenditure on healthcare in FY 2021-22 stands at BDT 327.31 billion, which composes around 5% of the total budget and 0.94% of the total GDP. For FY 2020-21, this allocation has been around BDT 293.47 billion. The allocation expectation for this year was much higher as COVID-19 still looms over this country.[3] However, as an attempt to make COVID-19 testing more feasible, the exemption of Value Added Tax (VAT) on the COVID-19 test kits, Personal Protective Equipment (PPE), Vaccination, and Medication services will be continued this year as well.[3]

    Sub-sectors such as Women’s Health are receiving help as VAT has been removed from the production of sanitary napkins, at the local manufacturing stage, to increase the supply of proper and affordable sanitary napkins.[4] In addition, an expansion of the existing concessional facilities has been proposed, particularly for the import of raw materials which are required to produce medical products. This will reduce the cost of making medicines and in fact, make medicines more accessible for the lower-income groups.[5] 

    Tax Structure Reformation on Industries and the Small and Medium Enterprises (SMEs)

    There are 79,00,000[4] SME establishments in Bangladesh and this sector is one of the vulnerable and most hard-hit sectors due to COVID-19. As persistent lockdowns have been imposed to mitigate the spread of the virus, many SMEs struggled to stay afloat. Declining demand coupled with persistent high fixed costs made it difficult for these enterprises to continue production as profit became more marginal. This pushed the SMEs into a situation where demand is continuously spiraling down. [6]As an attempt to help fight this low demand, tax reformation has been introduced. In addition to this, a few fiscal incentives have been proposed to encourage investment and reduce operational costs, such as corporate tax cuts. This would thereby promote employment. Most of these incentives are enterprise-oriented, which will help reduce operational costs by reducing tax on imports of capital and core raw materials. [8] 

    Furthermore, tax breaks and tax reductions have been introduced in this budget as an attempt to promote aggregate demand. Tax breaks will allow firms to sustain more profits, re-invest back in the economy. Corporate Income Tax (CIT) has been reduced on entities that identify as Partnerships, Private Limited Companies, Sole Traders, and Public Limited Companies. Table 2 shows the changes from FY 2020-21 to FY 2021-22.

        Type of Company FY 2020-21FY 2021-22-22
    Partnerships32.50%30%
    Private Limited Companies32.50%30%
    Sole Traders32.50%25%
    Public Limited Companies25%22.50%
    Table 2:Corporate Income Tax (CIT) Rates  for FY 2020-21 & FY 2021-22. Source: Centre for Policy Dialogue (CPD) [3]

    Tax holidays have also been extended for companies operating in the Information and Technology (IT) sector. The existing twenty-two IT enabler services will be subscribed to another year of enjoying tax exemptions and this provision has been expanded to six more services, i.e., cloud services, system integration, e-learning platform, e-book publications, mobile apps development service, and IT freelancing until 2024. This will create employment opportunities for new start-ups, and fresh IT and STEM graduates. [8]

    In addition, tax has been exempted for the production of three and four-wheeler and home appliances from FY 2021-22 till FY 2029-30. Home appliances will include microwave ovens, blenders, other cooking equipment, washing machines, and electric sewing machines. Products that promote ‘Made in Bangladesh’ will also be given tax exemption.  Currently, the size of the domestic home appliance market is worth BDT 100 billion and this market is surging, given that consumer purchasing power is on the rise. [8] Development of the domestic home appliance market will create aid in generating more jobs in the manufacturing sector. The unemployment rate was recorded at 5.3% in 2020 for Bangladesh, [9], and widening the parameters of this industry will allow more people to find work. This will create a substantial multiplier effect, and thus, lead to higher levels of consumption in the economy. In addition, the expansion of this sector will also allow Bangladesh to expand its export portfolio and in the long run, aid in reducing import dependency. [9]

    Besides, in the FY 2021-22 Budget, Advance Tax (AT) on imported raw materials for manufacturing industries has been reduced to 3% from 4%, which will reduce the cost of production in the secondary sector. Some existing VAT policies have been extended as well to curb down the manufacturing cost. For example, the 5% VAT on LPG Cylinders will be extended for another year. In addition, VAT will be exempted for the following:

    • Refrigerator (up to FY 23) 
    • Polypropylene staple fiber (Up to FY 24)
    • Air conditioner (Up to FY 25) 
    • Motor vehicle (Up to FY 26)
    • Manufacturing and Assembling of mobile phone (Up to FY 24) 

    A summary of the changes is shown in Table 3. 

    IndustryChangeEffect
    OverallCorporate tax reduced by 2.5%Enable companies to retain a higher portion of their profits. This is expected to help SMEs who are having a hard time to stay afloat
    SMEs – Women EntrepreneursIncrease in the minimum turnover threshold for Women Entrepreneurs from BDT 5 million to BDT 7 millionAllow Women-led enterprises to sustain a higher profit. This will encourage the existing ones to invest and will encourage new entrepreneurs as well
    SMEs1% exemption for import of capital machinery to SMEsReduce machinery costs for SMEs
    Export-oriented IndustryExpansion of existing concessionary rate on the imports of raw materials for refrigerator & compressor manufacturing industriesReduce the cost of production of refrigerators – thus allowing the domestic market of home appliances to grow
    LED light manufacturer/assembling IndustryReduction of existing tariff on the imports of parts used in LED manufacturing and assemblyReduce the production cost of LEDs
    Health IndustryTax exemption to general hospitals on certain conditionsIncrease the provision of healthcare services and make them more accessible 
    ICTAllowance is provided for the imports of computer accessories and raw materials for the ICT industryReduce the production cost of computers and allow the IT industry to grow
    Table 3: Changes in Tax for FY 2021-22. Source: Centre for Policy Dialogue (CPD)[3]

    Agriculture Sector

    The agriculture sector in Bangladesh employs around 38.3% [8] of the labor force and contributes to 12.7% [9] of the GDP and ensures higher food security for this country. This contribution to GDP can be even more substantial, given that this country has alluvial soil. But the limiting factor that holds this sector back is soil erosion and lack of technology. The amount allocated for Agriculture in FY 2021-22 is BDT 319.12 billion which is 7.4% higher than the amount allocated in FY 2020-21. [10]

    To make this sector more automated, the budget also revealed a VAT exemption at the manufacturing and trading stages for Weeders and Winnowers. The Weeders will allow farmers to break the soil crust and create soil mulch and remove the weeds from vegetable plantations. The Winnowers are used for the separation of grains from the chaff. Both will reduce the time and effort given by manual agricultural labor. Moreover, an exemption of tariff for importing major agricultural inputs, especially fertilizers, seeds, pesticides is included in the budget as well. This will reduce the cost of inputs for the existing farmers and will help set up new Agri-tech startups.

    In addition, to protect some domestic markets, a tariff has been imposed and a minimum value has been fixed on the imports of carrots, mushrooms, green chilies, tomatoes, oranges, and capsicum. This will level the playing field for the local farmers. Furthermore, exemptions on tax have been made for ten years for industries engaged in processing locally grown fruits and vegetables, producing milk and dairy products, and manufacturing agricultural machinery. [3]This will help promote new entrepreneurs in the agriculture sector and increase food security by reducing the dependency on imports. However, the integral concern for this sector is the untapped application of the allotted budget amount as, in recent years, almost 9.5% of the previously allotted budget tends to remain unutilized. [2] This is shown in Table 3. Some of the reasons contributing to this underutilization are – loss of arable lands, sudden climate changes, and inefficient management practices. [3]

    YearAllocationRevisedUtilizedUnutilized
    FY179,0006,0003,4932,507
    FY189,0006,0005,268732
    FY199,0008,0707,763307
    FY209,0008,0017,175826
    Table 3: Budget Utilization by The Agricultural Sector. Source: Ministry of Finance, GoB[2]

    For better utilization of existing resources, training centers for vocational training in the Agriculture Sector are required. The tax exemption that is given for ten years to agriculture and fisheries institutions to provide vocational education should aid in this process. 

    Education Sector

    Education will be a critical determinant of sustainable economic development – something that Bangladesh strives to attain. The benefits of education are reaped in the long run and to achieve this, the allocation of Budget this year to education increased by 7% [3] to BDT 719.53 billion, compared to BDT 662.07 billion in FY 2020-21.  The segregation of this allotted amount is as follows – BDT 263.1 billion for the Primary and Mass Education Ministry, BDT 364.86 billion for the Secondary and Higher Education Division, and BDT 91.54 billion for the Madrasa and Technical Education division. [13] The amount allocated this year as a percentage of GDP – 2.09% – is lower than that of last year, 2.14%. This may not be a welcome move for the Education Sector, given that the amount allocated to Education as a percentage of GDP is the lowest in Bangladesh, amongst the South Asian Countries. [13]

    Over the last 18 months, around 42 million children were affected by COVID-19, due to school closures. This forced students to start remote learning but not all students had access to the required technology that will enable them to attend virtual classes. [14] Almost 22 million [14] students are from rural areas and they come from underprivileged circumstances, and therefore, are unable to access remote learning opportunities. It is also estimated by UNICEF that 63% of the students do not have internet access. [15] It is also disclosed that 69.5% of Primary and Secondary School students did not participate in remote learning classes, which were conducted via television, radio, and the internet. [13]

    To increase the enthusiasm and participation of students, especially from underprivileged and rural communities, a primary kit allowance of BDT 1000 has been allotted, and the total budget allocation for this is BDT 12 billion. This kit will allow students to purchase new school uniforms, shoes, and bags. In addition, students will be given an allowance of BDT 150 instead of BDT 100 per month. [3]

    The Way Forward

    In the context of Bangladesh, more than a hefty budget allocation, proper implementation is necessary and essential. Money can be injected into the economy, but it will only translate to improved living standards when the allocated budget is utilized to its maximum potential. To attain the predicted growth rate of 5.1% [17] as per the World Bank, Bangladesh needs to deploy resources efficiently and put special emphasis on sectors that aid human development, such as Health and Education. This is especially important in the light of COVID-19. 

    The burden of COVID-19 on the Health Sector should have been prioritized further while formulating the allocations for the Sector. The Health Sector was in a dismal state pre-COVID. For example, according to the World Health Organization (WHO), there were 0.79 beds per 1,000 people in Bangladesh in 2016 [21] whereas the recommended rate by WHO is 5 beds per 1,000 people. In addition, the ratio of physicians to the population was 0.581 per 1,000 people in the same year.[21] Therefore, it is clear that the Health Sector needs more consideration in budget allocation and utilization. 

    The Budget for FY 2021-22 focuses on the reduction of the corporate tax to churn the wheels of the economy. This type of expansionary fiscal policy of tax reduction should allow enterprises to reinvest back into the economy, creating jobs that would, in turn, raise consumption and influence higher aggregate demand. However, many enterprises in Bangladesh do not disclose their actual profits. Furthermore, a reduction in corporate tax is one of the factors that influence investment. Other paramount factors include – state of business confidence, ease of doing business in the economy, and overall aggregate demand in the economy. In this scenario, this tax cut would rather raise inequality [19] as this tax break is most likely to benefit the rich, making them richer. Therefore, a corporate tax reduction may further fuel income inequality and poverty – crises that have already been exacerbated by COVID-19. [20] 

    References:

    • 1. Expectations for the Health Sector in a Pandemic Budget – The Daily Star
    • 2. Budget at a Glance – The Ministry of Finance, Government of Bangladesh (GoB) 
    • 3. An Analysis of the National Budget for FY2021-22 – Centre For Policy Dialogue (CPD)
    • 4. Ministry of Planning  – Government of Bangladesh (GoB)
    • 5. Budget FY22: VAT exemption on sanitary napkin production proposed – The Dhaka Tribune
    • 6. SMEs need credit the most – The Daily Star
    • 7. Budget FY22: IT sector gets tax exemptions for 22 tech services – The Dhaka Tribune
    • 8. New manufacturers of home appliance likely to get tax exemptions – The Dhaka Tribune
    • 9. Unemployment, total (% of total labor force) (modeled ILO estimate) – Bangladesh – The World Bank 
    • 10. Agriculture, forestry, and fishing, value added (% of GDP) – Bangladesh – The World Bank 
    • 11. Employment in agriculture (% of total employment) (modeled ILO estimate) – Bangladesh- The World Bank 
    • 12. Budget for coronavirus-battered education sector unchanged – The Daily Star
    • 13. Education gets little attention – The Business Standard
    • 14. Covid -19 divide deepens between Bangladesh’s Urban and Rural Students – Deutsche Welle
    • 15. Bangladeshi children share experiences of remote learning and the challenges they face – UNICEF
    • 16. 69.5% didn’t take part in remote learning classes during a pandemic – The Financial Express
    • 17. Bangladesh economy to grow 5.1pc in FY22 says World Bank – The Financial Express
    • 18. Proposed Budget may raise Inequality – The Daily Star
    • 19. Why inequality still matters – The Daily Star 
    • 20. Hospital beds (per 1,000 people) – Bangladesh – The World Bank 
    LightCastle Analytics Wing

    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.