21st June 2006, DHAKA: Manufacturing sector is the base for the sustainable economic development of a nation. The contribution of manufacturing sector to the gross domestic product (GDP) of Bangladesh was 17 per cent in FY 2005-06. Out of fifteen sectors identified for computing national income, the contribution of manufacturing sector is the highest. In FY 2005-06, the growth rate in the manufacturing sector is estimated at 10.45 per cent, which was 8.53 per cent in the previous financial year. This trend in growth has accelerated the pace of economic development and made significant contribution in achieving 6.7 per cent GDP growth in FY 2005-06. In absolute figure, the contribution of manufacturing sector to the GDP of FY 2006-07 would be Tk 790.46 billion.
Manufacturing sector is also the highest job provider in recent years. Being the engine of economic development, manufacturing sector deserves the support of fiscal, monetary and infrastructure policies of the government.
The finance minister has proposed Tk. 697.40 billion budgets for FY 2006-07. The size of development budget is Tk. 260.00 billion out of which the followings have been allocated for manufacturing sector:
l Tk 1.00 billion as refinancing scheme for small and medium enterprise through the Bangladesh Bank. The World Bank and the Asian Development Bank will also provide Tk. 2.80 billion to the scheme.
l Tk. 1.0 billion to equity development fund for the development of agro-product processing and software industries.
l Tk 1.0 billion for agro-based industries assistance programme
l Tk 0.2 billion to create skill development fund for the readymade garments workers.
Thus, total allocation including the contribution of the World Bank and the Asian Development Bank for manufacturing sector in FY 2006-07 stand at Tk. 6.0 billion which is only 2.30 per cent of proposed development budget. This 2.30 per cent allocation for manufacturing sector in context of its 17 per cent contribution to GDP is very negligible.
Manufacturing sector is a capital-intensive sector. Investment comes largely from domestic savings. Over the last two decades, commensurate with GDP growth, domestic savings marked substantial improvement. Sponsor, security market, banks and financial institutions are the prime source of the capital for manufacturing sector. An investor assesses the risk and returns of available avenues and decides on the best option.
An investment in manufacturing sector is more risky than in any other sector. Generally, the investor adds risk premium to the rate of interest on long term government securities to calculate the expected rate of return for the assessment of the viability of investment in manufacturing sector. Accordingly, the cost of capital of a manufacturer also varies with the change in the rate of interest on government securities. Further, investment in savings certificate attracts more fiscal benefits than the investment in manufacturing sector.
Marking 16.87 per cent increase, during the period from July to April 2006 the net official borrowing through sales of savings certificate reached to Tk 255.20 billion. During the period the investors encashed savings certificate worth Tk 898.60 billion against total sales of Tk 1,153.80 billion. Thus, overall sale of savings instruments of the period was 35 per cent higher than in the corresponding period of the previous year. The Government raised the rate of interest on different types of savings instruments by 1.5 per cent at the beginning of 2006. The increase in government borrowing through savings instruments coupled with interest rate acceleration, has made the credit for manufacturing sector costlier. This will also hinder the capital inflow of manufacturing sector from the security market.
The budgeted borrowing for FY 2006-07 was fixed conservatively at the current level. However, its impact upon the investment in manufacturing sector will remain negative unless the rate of interest on savings instruments is reduced.
Bank borrowing is the key source of finance of manufacturing sector. The scope of borrowing as well as cost of finance is significantly influenced by the government borrowing. For FY 2005-06, the budgeted borrowing from the banking system was Tk. 34.46 billion. Superseding the estimate by 46.17 per cent, the government revised the borrowing to Tk. 50.37 billion. This indicates that the government borrowing from the banking system has gone up by a significant margin. For FY2006-07, borrowing from the banking system remains unchanged. If the estimates and control be weak as in FY 2005-06, it will make bank borrowing very difficult for manufacturing sector. The borrowing of Bangladesh Petroleum Corporation (BPC) may create further stress upon the credit flow to manufacturing sector.
Deficit budget and bank borrowing are common practice in world economy. What is needed, keeping the bank borrowing at tolerable limit. Private sector credit flow has declined substantially in the second half of the current fiscal year largely because of excessive borrowing by the government from the banking system. Immediate measures are essential to mitigate the situation.
Power is an essential element for manufacturing sector. For FY 2006-07, the Government has allocated Tk 1.0 billion for power rehabilitation programme, Tk 35.86 billion for the improvement of power generation, transmission and distribution and Tk. 1.0 billion for energy development fund to promote use of solar power and other renewable sources of energy. Manufacturing sector suffered huge production losses due to the power crisis in current year. The budget allocation seems inadequate to bridge the shortage of power.
The government has planed for the bifurcation of Chittagong Customs House into two, one for Import and other for Export. This administrative reform would expedite the customs clearance procedure and be helpful for manufacturing sector.
The government has proposed to reduce the rate of duty from 6 per cent to 5 per cent. This rate is applicable to imported basic raw material and machinery. The reduction will bring marginal improvement in the price attribute of locally manufactured product. A further reduction in duty coupled with the withdrawal of infrastructure development surcharge, from basic raw material could ensure meaningful support to manufacturing sector. The rate of duty leviable on intermediate material was also proposed for reduction from 13 per cent to 12 per cent. This would have mixed effect upon manufacturing sector. This will dent the competitiveness of intermediate material manufacturer in one hand and favour the consumer of such material on the other. The situation could be mitigated by micro level review.
The government has proposed reduction of supplementary duty from 35 per cent and 25 per cent to 20 per cent and 15 per cent. This reduction would be a blow upon the local manufacturer of relevant items. Generally, supplementary duty is applicable to luxury and socially undesirable items. There is no ground for such reduction excepting under pressure from donor agencies.
The proposal for the withdrawal of import duty and advance income tax (AIT) from capital machineries, their accessories and other input for poultry industries and machineries for the manufacturing of poultry feed, reduction in the import duties of certain basic raw material of plastics and melamine industries, enhancement of import duties of some plastic product like stopper, lid, cap etc, reduction of the import duty on diodes, transistors, semi-conductor devise and compressors, withdrawal of special rebate facilities from IPS/UPS of a capacity not exceeding 2000 KVA, withdrawal of all duties and taxes from certain spares required by readymade garments, textiles, hosiery, label, terry towel industries and affluent treatment plant, withdrawal of all duties and taxes from synthetic filament tow, one of the basic raw materials of hosiery industry, withdrawal of the conditions for the exemption of duties and taxes on the machinery and spares and imposition of 15 per cent supplementary duty on advertising materials, commercial catalogues etc would be supportive to manufacturing sector.
The tax structure in the corporate sector remains unchanged. It is common understanding that the effective tax rate on business is much higher as legitimate expenditures are disallowed under the discretionary power given to tax administration.
The government has proposed continuation of the tax concession to black money when invested in the purchase of land, apartment and car whereas Finance Act 2005 discontinued the facility for investment of such money in industry. Any scheme for the whitening of black money is immoral and disappointing to honest taxpayers. However, prioritisation of non- productive sector for such benefit is derogatory to manufacturing sector.
Continuation of the benefits of agro-processing, jute and textile industries until 30th June 2008, reduced tax rate of 15 per cent for diamond cutting and polishing industries, provision for prompt disposal of tax and VAT cases, expansion of perquisite limit and its re-definition are welcoming proposals for manufacturing sector.
Unlike trading and service sector, an entrepreneur is to wait for long to get return from manufacturing venture. Sometime its takes years together to reach even at break-even point. The government has proposed for charging a minimum tax of half per cent of turn-over or Tk 5,000 whichever is higher. The provision is a distortion of taxation system and will deter the development of manufacturing sector. Apparently, the proposal is to catch the assesses, who evade tax showing loss for years together. However, to address genuine cause of honest manufacturer the proposal needs recasting considering a time limit for the continuation of loss.
Tax holiday, investment allowance on the plant and machinery and accelerated depreciation were the three core benefits traditionally offered by the government to attract the investors to manufacturing sector. The tax holiday benefit was withdrawn from expansion unit by Finance Act 2002, from the backward linkage industry under common sponsor director by Finance Act 2003 and restricted to limited area by Finance Act 2005. Investment allowance and accelerated depreciation allowance for the expansion of tax holiday unit were also discontinued by Finance Act 2005. Thereafter, accelerated depreciation is the only benefit left for the manufacturer.
Since depreciation is restricted to the cost of capital item, the benefit of accelerated depreciation is only the time value of deferred tax. This accelerated depreciation is also a substitute of tax holiday. The government has proposed to allow the benefits over a period of three years instead of first year. The proposal for squeezing this last benefit for investment in manufacturing sector is difficult to justify in the context of the facilities available in competitive economies.
The government has proposed some restriction on the overseas travelling of any company. Any expenditure by way of overseas travelling exceeding one percent of disclosed turn-over shall be disallowed. Further, 50 per cent of more than two overseas tour expenses of a director of a company shall be deemed income. This will create mounting difficulty for the export-oriented manufacturer who needs frequent visit to procure business.
The finance minister pronounced that the key objective of this budget is poverty reduction. Poverty reduction is only possible by the development of manufacturing sector, which is the base of sustainable economic development. In view of the above, further considerations for manufacturing sector are highly recommended to achieve said objective.
The writer is a faculty of Institute of Chattered Accountants of Bangladesh (ICAB)
