Are our fiscal policies favourable to small industries?

When asked about the zero import duty and zero VAT on foreign made UPS, 'low price to serve consumer interest' was the excuse the policymakers put forward. When asked to offer similar zero tax regime to the local industries so that they could also compete and offer low prices, the answer was, "how would the country meet its expenses without taxes?" I think a reader would get the mindset of the authority, which is hardly going to allow local small industries compete even at a level ground, 'protection' being a far cry.

In fact, consumer interest will be served better if the local small industries are allowed to proliferate, because costs would then come down even further, repair and maintenance at low cost will be guaranteed allowing prolonged use of an equipment, ultimately resulting in long term saving for the consumer, as well as for the nation. This is how local assembly brought television within the affordability of millions, due to favourable fiscal policies taken in the late eighties. Again, it is an unfortunate story, that such a vibrant industrial sector has been totally destroyed by recent fiscal policies. In 2002, the import duties on the parts and components of TV were increased significantly causing closure of many of the assembly factories.

Tap here to add The Daily Star as a trusted source

Although the policy was rectified briefly in 2003 on appeals from civil society expert bodies and relevant associations, this was reversed again in March 2004, only 3 months before the next budget, by imposing an additional 22.5% regulatory duty on imported parts and components. Interestingly, a small 5% regulatory duty was also imposed on readymade TV, apparently as eye-wash. The fate of the local TV assembly was sealed further in the 2004 budget by making the import duties exactly the same on both finished TV sets and on its parts and components, and a further VAT at the local production phase, which remains unchanged till today. What was to happen happened, the TV assembly industry has totally been eliminated.

Many such examples can be given that particularly affect the small industries adversely. Although general policies of the Government are meant to support local industry, the opposite is done in individual cases deliberately, by the corrupt section of the tax formulating authorities while working out the details, under the influence of rich importers and traders. The small industrial entrepreneurs remain the unfavoured ones since they have neither the monetary power nor the organizational capability to match the rich traders. Small entrepreneurs investing their life savings, intellect and sweat into these enterprises find themselves in a big mess. They cannot either go back and retrieve the whole investment, nor can they survive under the unreasonable tax regime. An enterprise then becomes a hostage at the hands of the corrupt tax officials. Tax evasion, through bribing, then becomes the only way to survive somehow. This in turn makes the enterprise a perpetual hostage, and a 'milking cow' for the tax officials.

Since the early nineties, the single agency NBR has been given both the authorities of tax policy formulation and tax collection, an undesirable administrative situation that demands diversified mental challenge on one hand, and opens up opportunities of unhindered corruption on the other. This has, indeed, given the corrupt tax officials the opportunity of double benefit -- both from the traders, and from the small industrial entrepreneurs. Even if some policies are made to favour small industries, the corrupt section of NBR will try their level best not to implement the decision. This happened to a policy presented in the budget speech of 2000, which intended to allow indigenous electronic industries a simpler alternative to VAT payment. Instead of paying 15% on actual added value which is difficult to calculate, they were to be allowed a payment of 2.5% tax on the total sales value, which makes the account simpler without reducing Government income. Retail traders are allowed a similar alternative where they pay even less, only 1.5% on the total sales value. However, taking the opportunity of a change in the top personnel of the NBR soon after the budget, the corrupt section was successful in sitting on this policy resulting in its non-implementation ever since.

Since corruption cannot be eradicated from our society within the foreseeable future as it involves many other socio-political factors, the only remedies are: i) make the very small enterprises free from the requirement to pay taxes in any form so as to insulate them from the corrupt tax officials. Such schemes have also been taken in India since 1991 producing a successful result; ii) ensure that the TTI on the imported parts and components of a product are never above 60% of that on its finished form and allow its automatic implementation even if it is not specifically mentioned in the details of the tax policies. In fact these were the major fiscal recommendations placed by the National SME Taskforce last year of which the author was a member. Newspapers reported these as being approved by the Cabinet Committee on Economic Affairs in its meeting on January 5, 2005 (Daily Star, January 6). On the other hand this reported approval did not reach the Ministry of Industry at all. Instead, they were informed in writing later that in a Cabinet Committee meeting on January 21 all the SME Taskforce recommendations had been approved EXCEPTING these fiscal ones, and this stands as the policy till today. It can be guessed that seeing the newspaper report on January 6, interested groups influenced the policymakers to change their decision, but it was never published in the media, and the general public stands bluffed on this account.

In view of this backdrop I think the general public needs to know that their future is never going to shine unless the fiscal policies involving the small industries are rectified appropriately and transparently. All the money the Government and the donor agencies are pumping in for the small industries is going down the drain, and this will continue to happen if the fiscal policies retain their anti-industrial character in reality. In a recent move the SME Taskforce has recommended specific fiscal measures to save the indigenous technology based electronics industry from imminent destruction. They have suffered the most due to faulty Government policies. It needs to be seen what the people in authority, appointed on behalf of the people of this country, decide in the coming budget -- whether they want local industries to soar high, or to go down.

Dr. K Siddique-e-Rabbani is Professor of Physics, University of Dhaka, and Member, National SME Taskforce. He has documented evidences ready for verification for all the facts presented and takes responsibility for all the opinions expressed.