The budget always brings with it numerous quakes that ripple through the economy. With the announcement, and subsequent postponement, of the uniform 15% VAT across all fields, the reactions have been no less stimulating.

Currently, there is no evidence to gauge the immediate effects of the announcement, though developers and investors everywhere must have breathed a sigh of relief at being granted a grace period. The interim time will allow real estate companies and private individuals to strategize their next course of action. Macro-economically, this has saved the nation from inflation for the time being, which could have been severe, especially with the elections coming up next year.

For those seeking a roof over their heads, this tax will simply make the struggle to make ends meet harder. Also rent prices might increase in the face of this tax, as producers often attempt to pass on the additional expense to consumers. A lot of the ‘who pays what,’ will depend on the negotiating capabilities of the parties involved. Chances of rent decreasing in the face of this decision are low, though not altogether impossible. A black market for rent could be on the rise, needing supervision to control.

For investors and property owners, this will be an expense they cannot navigate around easily. Also for the real estate industry, the additional tax will complicate their business model.  Buildings are on the rise in Dhaka and adjacent areas, but a drop in profit could make it much more difficult for developers to finalize different projects. May they choose to sell their product for higher prices, demand could drop to negatively influence cash flow.

As for now, what the business world fears most, is the crowding out effect; the government postponing the tax increase in 15 sectors including real estate, is roughly going to cost the government some BDT 67,000 crore, and the most anticipated way for the government to finance that is by borrowing from commercial banks. This would cause private investment to reduce drastically and potentially have a number of downward spiraling effects. The expansion of the economy would be slower with one component of aggregate demand drying up. And as commerce slows down, unemployment could increase. Additionally, the new VAT law will make it more difficult for consumers to spend by reducing their disposable income.

The full implementation of the new VAT law across various areas of the economy will see a number of little changes shape up and merge with the norm of the economic system. That is why this new VAT law, part of the set of IMF conditions for the Extended Credit Facility Program, may create some challenges in the short time, but should bring good news for the country in the years to come.

 

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