Macro Analysis /

Bangladesh: FY23 budget tackles macro challenges with subsidy and tax easing

  • BDT 6.8 trillion (USD 74 bn) budget, aiming 7.5% GDP growth and 5.6% average inflation

  • Budget deficit is expected to be BDT 2.5 trillion (USD 27 bn), roughly 5.5% of FY23f GDP

  • 250 bps corporate tax rate cut to foster earnings growth over 3%, given they adopt cashless transactions

Shopnil Paul
Shopnil Paul

Research Associate

IDLC Securities
12 June 2022
Published byIDLC Securities

BDT 6.8 trillion (USD 74 bn) budget, aiming 7.5% GDP growth and 5.6% average inflation.

This budget is about 14% higher than the prior year’s revised budget of BDT5.9 trillion (USD 65 bn). The size of total budget is about 15.2% of FY23f GDP. Around 64% of the expenditure needs to be met by BDT 4.3 trillion (USD 47 bn) revenue collection. The size of targeted revenue collection is about 9.7% of FY23f GDP.

Budget deficit is expected to be BDT 2.5 trillion (USD 27 bn), roughly 5.5% of FY23f GDP.

The amount of deficit is around 20% higher than that of the FY22 revised budget. The deficit financing is likely to focus on domestic bank borrowing (BDT 1.1 trillion, USD 12 bn, 43% of deficit) and foreign borrowing (BDT 1.0 trillion, USD 10 bn, 39% of deficit). Financing from bank and foreign sources in FY23f may be around 22% and 24% higher respectively over that of FY22 revised budget. This time, there is less focus on sourcing from domestic savings certificate and other non-banking sources. Borrowing from such sources may increase by only 8%.

Higher subsidy to tackle inflation.

One of the key challenges in FY23f budget is to check inflation which is rapidly rising due to global commodity price hike as well as currency depreciation. Increasing subsidy by about 24% from BDT 668bn (USD 7bn) in FY22R to BDT 846 bn (USD 9 bn) in FY23f is an endeavor to subdue the effect of inflation. Despite such high allocation for subsidy, the budget speech addresses that the actual subsidy could be 15-20% higher than the estimates should commodity prices increase further. The budget prioritizes fertilizer and energy (fuel, gas, electricity) sectors for subsidy. Please note that the increase in subsidy explains around one-fifth of the increase in total expenditure in FY23f budget over FY22 revised budget.

250 bps corporate tax rate cut to foster earnings growth over 3%, given they adopt cashless transactions.

The listed, not-listed and one-person companies - except for banks, NBFIs, telecoms, tobaccos - are to enjoy 250bps cut in tax rates, mentioned in the budget speech. Because of the tax rate cut, the tax rate of listed, not-listed, and one-person companies will stand at 20.0%, 27.5%, and 22.5% respectively. The 250bps tax rate cut is likely to result in 3%+ increase in profit for these companies. However, availing such benefits requires (a) receiving all revenue and income and (b) paying all expenditure and investment above BDT 1.2mn through banking channels. On top of that, the listed companies need to offload more than 10% ownership through IPO to qualify for the reduced tax rates. From our universe, Marico and Berger need to issue shares to lower their effective tax rate.

Summary of major implications

  • 250 bps tax rate cut suggests 3% increase in corporate earnings for eligible companies.

  • Imposition of tax on contributions to Workers’ Profit Participation Fund (WPPF is no more tax-deductible) will increase tax burden of all the listed companies. It suggests 1.5% earnings dent for manufacturing companies, 4% for tobaccos and telecoms.

  • 15% tax rebate for all investors may encourage investors over BDT 1.5mn taxable income to invest more to avail more tax benefit. Previously, this group of investors used to get 10% rebate. However, lowering the allowable investment limit from 25% to 20% may reduce fund flow towards the stock market.

  • The introduction of capital gain tax (likely to be 15%) for treasury bonds would reduce the earnings potential of banks. It would also discourage some investors to benefit from the interest rate cycle by investing in treasury bonds.

  • Withdrawal of taxes on the service charge of Mobile Financial Services (MFS) to benefit BRACBANK’s subsidiary bkash. However, a 20% source tax on interest earnings from bank deposits is likely to adversely affect bkash’s cash flow. bKash’s bottom line may be affected if the source tax on the earnings of Trust Cum Settlement Account is non-refundable or non-adjustable with other tax payments. We will look for further clarification on this.

  • Research and Development (R&D) expenditure to be defined and treated as an allowable expense. It may benefit all pharma companies.

  • The rate of source tax on export proceeds is raised to 1.0% from that of 0.5%, which is negative for all export-oriented RMG companies.

  • Reduction of tax to 12% for all non-RMG export-oriented companies and 10% for green ones is likely to benefit Apex Footwear, Beximco Pharma, Square, Renata and other non-RMG export-oriented company. Please note that RMG companies already enjoy such reduced tax rates.

  • 5.0% VAT imposition at the local manufacturing stage for refrigerators and freezers is negative for Walton and Singer. However, some policy supports are favorable for Walton. They include VAT exemption for manufacturing mobile phone batteries, chargers and interactive displays; 15% VAT imposition on laptop import; duty raised to 5% from 1% for import of complete lift; custom duty reduction to 10% from 25% for LCD/LED TV panel imported by TV manufacturing industry.

  • RUNNERAUTOS may benefit from (a) VAT and SD exemptions on import of raw materials and parts for a domestic motor car, motor vehicle, and 3-wheelers production; (b) SD imposition on import of two-stroke motorcycles with engine capacity above 250 cc; but negatively affected by 5% VAT imposition at manufacturing stage of three-wheeler and AIT imposed on income from the operation of commercial vehicles.

  • The cigarette tariff hike could be neutral to positive for BATBC. The price hike is positive in terms of margin expansion. A 5% tariff hike in the premium segment and a c3% tariff hike in the low and medium segment does not pose much threat to volume. However, a 9% tariff hike for the high segment (Goldleaf) may affect demand adversely and increase the chance of down-trading.

  • Tax exemption until 2030 for income earned in foreign exchange by ocean-going vessels carrying the Bangladeshi flag is likely to benefit Bangladesh Shipping Corporation.

  • Withdrawal of VAT exemption for Concrete ready mix may increase costs for Lafarge. Increased import duty for electrode and a reduction of regulatory duty for carbon dioxide are likely to be positive for Linde. VAT exemption at the trading stage for sugar may be positive for Olympic