Bangladesh fiscal policy

1. 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%

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%

3. 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

4. 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

5. 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.

6. 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