A faulty tax policy equals a dehydrated housing sector
The housing sector in Bangladesh faces one of the biggest debacles in the country's history in the wake of the doubling of tax rate on urban property registration. Apart from the intricate details, it can be roughly said that the tax rate has been raised from four percent to eight percent on the deed value of the housing property, flats and land plots in the latest budget, without an understanding of what grave consequences this faulty policy may have. It will hurt fixed-earning households and the middle class by favouring wealthy buyers, bribe takers, and the corrupt. When high inflation has already eroded savings and purchasing power in the country, this additional tax burden on home buyers has added fuel to the flame quite mercilessly.
The art of designing tax rates warrants more economics than straight-line accounting in it. It is not simple high school arithmetic where we learnt that the total volume of tax doubles when the tax rate is doubled. It is more of macroeconomics, public finance, and finally welfare economics, factors that were largely missing in many tax rates of the previous budgets. The proposal of taxing Tk 2,000 for anyone holding a tax file number is testament to how ignorant the ministry was to the state of the poor. Moreover, no remarkable tax hike on the superrich is an example of how the affluent were favoured by public policy.
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Economist Arthur Laffer, adviser to US President Ronald Reagan, showed that simply raising tax rates does not necessarily guarantee a higher amount of revenue. Rather, lower rates can eventually generate higher revenue collection. Thus, there is an optimal rate above which any tax rate hike will be detrimental to the economy. This idea later created the theory of the Laffer curve. Laffer himself credited this concept to the 14th century Islamic scholar Ibn Khaldun. Hence, some economists jocularly call it the "Khaldun curve." Some historians later used Khaldun's concept to claim that the drastic fall of many empires, including the Roman one, is attributable to exploitative tax rates. High taxes led to tax evasion, financial corruption, shrinkage in the revenue base, and public discontent – which triggered the rapid fall of the extractive empires. The wisdom related to these anecdotes and theories advocate that designing tax rates is not a simple exercise of arithmetics or accounting – it is more of economics and ethics.
The tax rate poses a serious threat to the growth of the real estate industry in Bangladesh. It should go down to as low as two to three percent to help the middle class, stimulate the housing sector, and thus contribute to employment and economic growth.
By following Laffer's advice, the Reagan administration gradually lowered the marginal tax rate from some 70 percent to 28 percent, and its revenue collection ultimately increased by almost 40 percent. This was termed the tool of supply-side economics, which the Republicans seized as their success mantra, while the Democrats mainly stuck to Keynesian demand-side economics. Although fight between the two sides continues, one consensus has been achieved in that a mindless increase in tax rates – which the consumers will be tortured to pay – will eventually be detrimental to both revenue collection and economic growth. That is exactly what is happening now in Bangladesh's economy, where the urban middle class is increasingly becoming powerless to buy real estates and the housing sector has suddenly turned dehydrated. As REHAB reports, thousands of flats remain unsold in Dhaka alone, dampening their profitability and survival.
A report by the National Board of Revenue (NBR) divulged that tax collection from property registration in July this year was Tk 32 crore against Tk 101 crore in July last year, evidencing almost a 70 percent decrease. The partial August figure runs short of last year's August figure by Tk 50 crore. In the FY2023-24 budget, the target for registration tax has been set at Tk 4,700 crore; the achievement so far is less than three percent, suggesting that the higher tax rate for urban property registration is highly exploitative and self-destructive. Sheer accounting without any cultivation of economics proved faulty and damaging for both builders and buyers of the real estate sector.
One of the country's top developers, interviewed by The Daily Star in June, asserted that the property registration cost was 15 percent of the value before, which was already a painful burden for buyers. The FY24 budget raised it to as high as 19 percent. Thus, a flat priced at Tk 1 crore would cost an additional Tk 20 lakh even if it was a second-hand property. The developer also claimed that property registration cost in Bangladesh is too high compared to India, Pakistan, Malaysia and Thailand, where the fee ranges between four and six percent. Is Bangladesh more developed than countries like Malaysia or Thailand that the government can justify this coercive tax rate that has already begun to shatter the dream of owning humble abodes by fixed-income, middle class people who cannot launder money overseas, and thus cannot buy multiple mansions abroad? This faulty tax policy goes against the principles of the country's prime minister, who finds home ownership as part of the development fundamentals the regime is pursuing.
As another daily reported in July, under the Income Tax Act, 2023, the "gain" tax on plots, flats and commercial establishments in all parts of the country has doubled and redoubled. The report asserts that the source related to the housing sector said the registration cost has increased 24 times in some areas due to revenue loopholes. Additional duty has been imposed on at least 12-13 products including cement, stone, tiles, lifts, ceramics, glass, switches, sockets, cables, and kitchenware. The developers assert that these additional taxes will raise prices of flats further up, and buyers will have to pay that eventually.
Construction and transportation sectors together now occupy more than 16 percent of Bangladesh's GDP – bigger than the share of the whole agriculture sector, ensuring a rising trend of employment. But the tax rate poses a serious threat to the growth of the industry. The tax rate should go down to as low as two to three percent to help the middle class, stimulate the housing sector, and thus contribute to employment and economic growth.
Dr Birupaksha Paul is a professor of economics at the State University of New York at Cortland in the US.
Views expressed in this article are the author's own.
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