Middle class dream dims as ‘conventional’ budget adds tax burden

After years of economic strain, many in Bangladesh had pinned their hopes on reforms to ease the burden. But the first-ever cost-cutting budget from Finance Advisor Salehuddin Ahmed has left them disheartened.

Far from offering a roadmap out of the grip of inflation, the budget delivers little reprieve for ordinary citizens. Rather than relief, what they found was more pressure. Instead, the middle class, already tightening their belts just to get by, finds itself squeezed further.

While the government pledged to simplify the tax regime and reduce inequalities -- particularly to ease the path for doing business -- the budget stops short of offering a clear strategy to steer the economy out of ongoing political uncertainty. It says little about how to restore real confidence or revive public hope.

In his presentation of the country’s 55th budget televised on public network and private channels alike, Finance Advisor Salehuddin Ahmed offered Tk 7.9 trillion for the fiscal year 2025-26.

However, analysts did not see strong steps to fulfill the expectations of reforms. On the contrary, he had to endure criticism for presenting a traditional budget in the mold of the past.

A former governor of Bangladesh Bank, Salehuddin sounded the message of hope for building a new country free from the misrule and corruption of the past. Replacing the “dream journey of a Smart Bangladesh on a road to Sustainable Development', he announced a budget “resolved to build a non-discriminatory and sustainable economic system”.

He said, “I would like to inform you with relief and joy that in less than 10 months, the interim government has already been able to move forward a long way in fulfilling that goal. We will soon be able to fulfill the hope that we had after the July Uprising, if Allah wills."

However, in his hour-long speech, he outlined plans to reduce inflation, which has been hovering around 9 percent for two years, to 6.5 percent and increase GDP growth to 5.5 percent to move the economy forward.

Economists also consider the targets he has set for revenue collection and private sector investment to be “ambitious” numbers.

Despite saying that he will borrow less to cover the deficit of 3.6 percent of GDP in a relatively small budget, analysts and businessmen believe that the bank loan plan he has drawn up of over Tk 100,000 will be an obstacle to private investment.

Dhaka University’s Prof Selim Raihan said, “Now suppose that next year, if bank deposits increase by Tk 1.6 trillion, out of which Tk 1.44 trillion is taken by the government [government bank loans to cover deficit], the private sector won’t have much money left.”

TAX BURDEN ON THE MIDDLE CLASS

Although spending plans for the upcoming fiscal year have been slightly trimmed, the NBR faces increased pressure to meet revenue collection targets.

The country’s prime revenue-collecting agency, which has failed for years to expand the tax net effectively, has opted for the easier path: raising tax rates and targeting the low-income middle-class people by imposing additional taxes on many essential items. Meanwhile, those with higher incomes have been given concessions.

At this time of high inflation, there was pressure to increase direct taxes alongside a push to not do so to avoid burdening the poor. Yet, when a taxpayer files their income tax return next fiscal year based on this year’s income, they will be disappointed.

In the following 2026–27 fiscal year, they will see some tax relief, but only after paying added taxes first. The current minimum tax rate of 5 percent has been raised to 10 percent for the upcoming fiscal year’s income.

To explain the “tax relief,” the finance advisor said the portion of annual income exempted for personal taxpayers has been raised from one-third of their total income or Tk 450,000 to Tk 500,000. However, this benefit will only apply to those with an annual income above Tk 1.5 million.

While there is some relief for essential items such as rice, lentils, wheat, potatoes and jute, taxpayers will still struggle to cover the associated costs of daily life.

Using mobile phones, elevators, LPG cylinders, washing machines, microwave and electric ovens, blenders, juicers, mixers, grinders, electric kettles, irons, rice cookers, multi- and pressure cookers, soaps, shampoos, refrigerators and freezers, air conditioners and their compressors, as well as polypropylene staple fibre—all these will require people to spend more money, putting the greatest strain on the poor and people with limited income.

Watching movies and series on over-the-top (OTT) platforms is likely to be more expensive; costs will also rise for a wide range of beauty products.

Although the minimum income tax was Tk 5,000, Tk 4,000, and Tk 3,000 depending on the region, the new law has standardised it at Tk 5,000 for everyone, further burdening low-income individuals.

On the other hand, people with higher incomes have received multiple government concessions: costs for buying flats and land have declined by about 40 percent.

Even though tax rates have increased, there remains an opportunity to legalise black money through investment.

For individual taxpayers, the turnover tax exemption threshold has been shot up from Tk 30 million to Tk 40 million. There has also been a relaxation in wealth surcharge rules.

Where there was previously an environmental surcharge for more than one car, the new rule affirms that it will not apply to the purchase of multiple electric vehicles.

For private sector employees who receive perks beyond their basic salary, the tax-free limit for such benefits (“perquisites”) has been raised from Tk 1 million to Tk 2 million.

EFFORTS TO CALM TRUMP, THE IMF

In the budget presented by Salehuddin, he himself highlighted the efforts to appease US President Donald Trump.

In his budget speech, he said: “In order to gradually reduce the taxes and duties and as part of preparations for trade dialogue with the United States, it has been proposed to completely withdraw import duties on 110 products and reduce import duties on 65 products.

"In addition, supplementary duties on nine products are proposed to be fully withdrawn, while those on 442 products are proposed to be reduced. This will ease the tax burden on citizens and reduce anti-export bias."

The finance advisor, however, did not explain why the security policy of many domestic industries would end or why certain industries would lose previous tax benefits or see them completely removed.

In addition to trying to calm down the Trump administration, Salehuddin’s plan also shows efforts to meet the International Monetary Fund (IMF) conditions by setting highly ambitious revenue collection targets and cutting back on tax exemptions.

For income tax, it was said that no extensions have been granted for exemptions expiring in June 2025.

For value-added tax (VAT), current benefits for many domestic industries have been removed or reduced. The minimum tariff value has been withdrawn for more than 80 products. With these cuts in import duties and the removal of tariff values, domestic industries will face additional pressure.

However, in the case of the United States, most of the products for which duties have been withdrawn are not produced by domestic industries. The list of reduced duties includes items such as weapons and aircraft, which are imported only by the government.

WHERE IS THE BUDGET ‘AMBITIOUS’?

While presenting the budget for the outgoing fiscal year 2024-25, erstwhile finance minister Abul Hasan Mahmood Ali had promised a “journey towards a smart Bangladesh in the trajectory of sustainable development”.

However, his government did not get the opportunity to implement that budget.

Just a month after the budget took effect, the 15-year rule of the Awami League government ended on Aug 5 last year following a student-led mass uprising.

In the changed scenario following the political shift, Salehuddin had to juggle many pressures and demands, including those from the IMF, while crafting the new budget.

Despite showing restraint in the overall size of the budget in terms of GDP, he has set some ambitious targets in several sectors.

To implement the budget, the IMF had advised setting a revenue collection target of Tk 5.8 trillion for the new fiscal year. But the proposed budget has set it at Tk 5.64 trillion—an increase of 8.9 percent over the revised revenue of the outgoing fiscal year.

Of this, the advisor hopes to collect Tk 4.99 trillion in taxes through the NBR. Thus, the NBR’s tax collection target is surging by over 7.66 percent.

Given the revenue collection trend of the current fiscal year, many see this target as “ambitious”. Zahid Hussain, former lead economist at the World Bank's Dhaka office, said if the NBR even manages to collect Tk 4 trillion this fiscal year, it would itself be a “significant achievement”.

To meet the new target for the upcoming fiscal year, the NBR would have to increase its revenue collection by about 25 percent.

However, even in the best economic conditions, the agency has only managed to maintain growth rates of around 15 percent. In the current fiscal year, this growth is hovering around 4 percent.

Economist Selim Raihan also believes that the target is “not rational”.

Meanwhile, the inflation target for the forthcoming fiscal year has been set at 6.5 percent, even as the country has been grappling with towering inflation for three consecutive years. Despite repeated interest rate hikes to rein in inflation—some success was seen, but in May the rate still stood above 9 percent.

The finance advisor’s speech also did not specify any plans for how the target could be reached.

DU economics teacher Sayema Haque Bidisha said, “When we talk about controlling inflation, it actually requires both monetary and fiscal policy working together. Monetary policy is already contractionary, and if it’s tightened further, it could hurt investment.

“What I keep emphasising, especially regarding food inflation, is that it remains at a high level. So, bringing it down to 6 percent will be extremely challenging, in my view.”

In terms of GDP growth, Salehuddin has shown a glimmer of hope, setting a target of 5.5 percent.

Yet, with political “uncertainty” discouraging private sector lending and investment drying up, economists are questioning how he could be so optimistic about GDP growth when there are no signs of improvement.

Economist Selim Raihan said, “The assumption of a 5.5 percent growth rate or bringing inflation down to 6.5 percent seems overly ambitious to me.”

‘DESPAIR’ IN EDUCATION, HEALTH, WHAT IS THE STATUS OF SOCIAL SAFETY PROGRAMMES?

At this time of reforms, many had hoped for increased allocations in sectors such as education, health and social protection.

However, the finance advisor has made them “disappointed” in this respect.

In the proposed budget for the new fiscal year, the allocation for education and technology in proportion to GDP has been slightly reduced, which educationists have dubbed as “frustrating”. They believe that the "aspirations of the July Uprising" are not reflected in the education budget.

Prof Abdul Halim, former chairman of the Institute of Education and Research at Dhaka University, said: “Does this budget reflect the aspirations of the July Uprising? Absolutely not. "At a time when there’s an emphasis on improving the quality of education, it is disheartening to see the allocation decline relative to GDP. Finance is the backbone of any initiative. Without sufficient allocation, how can we expect improvement in education?”

Just like in education, expectations were not met regarding the allocation for the health sector in the new fiscal year.

No structural changes in the three sectors– health, education and social protection– have been made, economist Selim Raihan said.

“Therefore, there remains a big gap in the proposed budget when it comes to the interests of the nation.”

However, the finance advisor highlighted that the government has taken into account the “scope and significance” of the social protection sector and has proposed an allocation of Tk 1.16 trillion.

For the social safety net excluding pensions, he proposed an allocation of Tk 912.97 billion, with several proposals to increase the rate of certain allowances. However, the budget did not provide detailed explanations about whether the scope of open market sale (OMS) benefits or the number of beneficiaries would be expanded, or about the irregularities in drafting beneficiary lists under political influence.

CPD Executive Director Fahmida Khatun said that about 140 projects were previously implemented under the social security programmes, which have been reduced to 95, with their financial allocations also reduced. It’s not a huge reduction, but compared with the budget, it’s 14.7 percent and roughly Tk 1.16 trillion in total budget allocation.

IMITATION OF OLD BUDGET

Selim Raihan, executive director of the South Asian Network on Economic Modeling (SANEM) said: “Within the old framework, there has been an effort to reflect our expectations and public aspirations. But we know that if we try to do it within the old frame, many problems linger.”

Business leader and the BNP’s Vice Chairman Abdul Awal Mintoo shared his observations, saying: “I will not even attempt to find anything new here”.

According to him, the caretaker administration has also followed the approach of past governments.

He said, “Whether it’s health, reducing corruption, or education—many reforms can be achieved through the budget. What we see right now is that it’s better not to expect too much.

“I believe they have followed the previous budget. Because, although expenditures have been reduced, the revenue collection target has not been lowered and instead it has been increased. So, I think there is little chance of achieving this. Because if trade and business do not expand, if investment does not rise and if economic activities do not broaden significantly, then your revenue collection will automatically decline.”

Referring to investment, he said: “The first thing necessary for investment is social order which is unfavourable for investment right now. If political instability increases in society, then the situation for investment does not exist there.”

He added, “Savings are also decreasing in the country because, for the past three years, inflation has outpaced real wage growth. If savings decline, how will investment happen? If there is no investment, then there will be no employment. If employment falls, social unrest will intensify even more.”

[Writing in English by Akramul Momen]