New squeeze for middle class

Shifa Hosne and her husband have been saving up money to buy a small flat in the city, where property price is already way beyond the capacity of service holders with fixed income.

With the new budget announced, she has begun worrying over the additional cost the family will have to pay to get a permanent address, as flats up to 1,100 square feet are likely to become more expensive. 

The new budget proposed an increase in VAT on such flats from existing 1.5 percent to 2 percent. 

Hearing this, Shifa sat down to calculate how much extra might have to be paid, and how the couple can manage this with their static income.  

However, things are looking brighter for those with higher income, who are looking for flats between 1101sqft and 1600sqft, as VAT on such apartments has been reduced to 2 percent from 2.5 percent. VAT for flats above 1,601sft will remain unchanged at 4.5 percent next fiscal year.

The fresh VAT measures come at a time when real estate companies have been demanding reduction in registration cost of flats.

At present, the fresh registration cost of a flat hovers between 14 and 16 percent of the price, depending on the size.

It will be difficult for buyers to purchase small flats, as the registration cost will also increase if the new VAT rate is implemented, said Liakat Ali Bhuiyan, first vice president of Real Estate and Housing Association of Bangladesh (REHAB).

The demand for smaller flats is high, he said, adding that the average price of an 1,100sqft flat ranges from Tk 40 lakh to Tk 50 lakh.

The new budget has also brought bad news for people who are planning to buy furniture for home décor, as an increased VAT rate is proposed on both sale and manufacture of furniture.

Shihab Ahmed and Shiuly Akhter, a newly-married couple, were excited about buying new furniture before moving in to a rented flat together to start life afresh. Now they are worried they might have to shorten the list of things to buy, to accommodate their budget.

Finance Minister AMA Muhith in his proposed budget for fiscal 2018-2019 imposed 5 percent VAT on selling of furniture from existing 4 percent, and 7 percent on manufacturing instead of 6 percent at present.

The new budget, if implemented, will also increase the cost of daily life as the prices of imported commodities will go up due to the imposition of 5 percent Advance Trade VAT (ATV) at both import and trading stages, instead of the existing 4 percent.

The importers are already facing high costs due to rising exchange rate amid dollar crisis in the market, said Shah Alam, an importer.

Dollar price has increased by Tk 3 within a year to Tk 83.70, according to central bank data.

The finance minister has also brought online shopping, ride-sharing services and non-branded apparels within the VAT net.

Those who buy non-branded apparels will have to pay 5 percent VAT.

Suraiya Ferdous is aggrieved as she hears that the government this year has imposed VAT on ride-sharing services like Uber, Pathao, Amarbike, and Chalo.

Considering the business opportunities the app-based services have created, the National Board of Revenue in a circular said 5 percent tax would be collected from the amount paid to the ride-sharing companies for the services.

Naturally, the fear is that additional charge will eventually trickle down to those who are availing the services.

The 34-year old NGO official says she opts to travel by car or motorbike services of Uber, because public transport takes more time and is always overcrowded.

"The government should ensure safe and smooth travel in public transport first before imposing VAT on such services," says Suraiya, environmental governance associate at UNDP Bangladesh.

"I take these services to save time and for safety," she adds.   

Talking about saving time, Suraiya says she chooses to do online shopping to avoid wasting time.

Taken by surprise by the imposition of 5 percent tax on online-based business outlets, she says the business has recently become popular.

"People are seeing this as an opportunity of self-employment. Neither their investments nor their profit margin are big."

The additional cost burden will discourage customers to buy products online. "It will not be good for either customers or these small-scale businesses," Suraiya adds.

E-commerce business is in its growing stage, and VAT imposition at this moment will hamper the growth, said Zeeshan Kingshuk Huq, CEO of kiksha.com.

"I don't find any rationality in these decisions," Suraiya says.