The Impact of Recent Increase

in the Holding Tax Rate on

Bangladesh Economy:
A Computable General Equilibrium (CGE) Analysis
Tonmoy, Md Taufiq us Samad
1B4083, IDP (IMF)
Supervised under: Professor Ryuta, R. kato, PhD

Abstract

Impact of an actual increase in the holding tax

Welfare effect

5 different scenarios of production tax uplift

SAM was formed from the latest I/O table, 2006 consisting of 15
sectors

Scenarios were presented in two segments, with or without the

compensatory policy in the agriculture sector

Results reveal the interconnectedness of the real estate sector

Can be a good policy measurement in the short run, along with a

compensatory fiscal policy

Introduction

Housing price drastically increasing

Boom in last few years, from 2005

Caused by socioeconomic progress

and high-paced urbanization rate

Generated more burdens on the

budget of households

Speculative investments

Includes a part of bubbles

Existence of a real estate bubble

Figure 1.1 Apartment Price Index in Dhaka City (additive

weighted method), Base Year: 1988-89 (1700). Source:
(Das, 2014)

Figure 1.2 Housing Price-to-income ratio; Source:

(Das, 2014)

Present Scenario

Government has decided to increase the Holding tax on

both commercial and residential buildings

from 12% to 27%

Source: March 2 Gazette, City Corporation Ideal Tax Schedule 2015

License fees will also face sheer increase

In a general equilibrium model, all channels are taken into

account

Data

Retrieved the Input-Output (I/O) Table of Bangladesh,

2006, from the Asian Development Bank (ADB) initiative of
Statistics for Dynamic Policy Making database
(https://sdbs.adb.org/)

The corresponding Social Accounting Matrix (SAM) was

formed from the I/O Table along with the required private
savings data accumulated from the Ministry of Finance,
Bangladesh website (www.mof.gov.bd)

Model

Standard static CGE model that was initially familiarized by Shoven

(1984) and later standardized by Hiosoe, Gasawa and Hasimoto (2004)

Assumptions:

One representative household consumes fifteen sorts of commodities to

maximize its utility

Governments decision over its revenue and consumption is governed by

its budget constraint

Households are endowed with two factors of production, capital and labor

Fully competitive economy and so-called price-taker agents

Software Package used: FORTRAN

Model

Capital and labor of sector i (Ki and Li respectively) are employed to produce a composite
factor Yi following the composite factor production function of Cobb-Douglas type.

Using Gross domestic output production function (Leontief type), composite factor of sector
i, Yi combines with intermediate inputs from itself and other sectors to sector i, j Xi,j to
produce gross domestic output of sector i, Zi.

Zi is then divided into two parts, namely domestic good of sector i, Di and export from sector
i, Ei using gross domestic output transformation function (Cobb-Douglas type).

Thereafter, composite goods production function (Cobb-Douglas type) integrates Di with

imports to sector i, Mi and produces final composite goods of sector i, Qi.

This Qi must be distributed among households, Xi as consumption; government (XiG) and

investing firms (XiS) as final output and also itself and other sectors as intermediate output, i
Xj,i.

At the top of the tree-diagram, households utility is being generated from the consumption
of goods from sector i, Xi and consumption of other goods, Xsi

Calibration
Tax
Income

Production

Tariff

HH

Gov.

Foreign

128447.312400600014

707783

-28063

339332

91243.726562500015 128447.312400600029

707783

-28063

339332.000241889735

Actual 91243.7265625

Model

Savings

Scenario List
Simulations

Policy Change (Increase in the tax Compensatory

Fiscal

Policy

rate of Sector 14)

(Reducing the tax rate of Sector 1)

S1

20%

None (Pure Effect)

S2

50%

None (Pure Effect)

S3

20%

Yes

S4

50%

Yes

S5

125% (Actual increase from 12% to Yes

27% in 2015 )

Effect on Real Estate Sector

(% changes)

Scenario

Price

Household

Labor

Capital

Consumption

Final Domestic
Goods

S1

0.37606

-0.00450

-0.09287

-0.09287

-0.0045

S2

0.23403

-0.41343

-0.65153

-0.65153

-0.43185

S3

0.04677

-0.64276

-0.74746

-0.74746

-0.65968

S4

0.11694

-0.64603

-0.88399

-0.88399

-0.66482

S5

0.29213

-0.65473

-1.22423

-1.22423

-0.67819

Effect on Agriculture Sector

Tax Rate

Original

S3

S4

S5

0.00961

0.00930

0.00883

0.00766

(% changes)
Household

Labor

Capital

Consumption

Final

Import

Export

Domestic
Goods

S1

-0.00450

-0.00329

-0.00329

-0.00329

-0.00329

-0.00265

S2

-0.41343

-0.39470

-0.39470

-0.39470

-0.39470

-0.31871

S3

-0.64276

-0.66275

-0.66275

-0.62715

-0.62715

-0.49950

S4

-0.64603

-0.61627

-0.61627

-0.62710

-0.62710

-0.50847

S5

-0.65473

-0.50121

-0.50121

-0.62756

-0.62756

-0.53118

Table 1: Industries List

S/N

INDUSTRIES

Agriculture, Forestry, Fishing and Other Related Service Activities

Mining and Quarrying

Manufacture of Food Products, Beverages and Tobacco

Manufacture of Textiles, Wearing Apparel, and Footwear

Manufacture of Wood, Paper and Paper Products

6
Manufacture of Basic and Fabricated Metals, Machinery and Equipment, and Other
Apparatus

Other Manufacturing

Electricity, Gas, Steam and Hot Water Supply

Collection, Purification and Distribution of Water

10

Construction

11

Wholesale and Retail Trade

12

Transport, Storage and Communications

13

Financial Intermediation

14

Real Estate, Renting and Business Activities

15

Other Service Activities

Effects on other sectors

% Change in Final Domestic Goods
Sectors

S1

S2

S3

S4

S5

-0.00329

-0.39470

-0.62715

-0.62710

-0.62756

-0.00361

1.38946

1.14726

1.14572

1.14130

-0.00120

-0.63414

-0.86472

-0.86600

-0.86975

-0.00403

-0.20659

-0.43823

-0.44040

-0.44638

-0.00211

0.30157

0.06642

0.06392

0.05706

-0.00718

2.23775

1.99116

1.98887

1.98257

-0.00301

0.43553

0.19862

0.19729

0.19343

-0.00326

0.12283

-0.11005

-0.11329

-0.12190

0.00004

0.12832

-0.10545

-0.10862

-0.11709

10

-0.01683

5.88702

3.06442

3.06149

3.05362

11

-0.00342

-0.01710

-0.25125

-0.25218

-0.25504

12

-0.00395

-0.08639

-0.31885

-0.32112

-0.32732

13

-0.00285

0.01814

-0.21301

-0.21789

-0.23069

14

-0.00450

-0.43185

-0.65968

-0.66482

-0.67819

15

0.03352

-3.08561

-3.31089

-3.31318

-3.31940

Consideration for Economic Welfare

(Values

are

in Household

Foreign Saving

EV

Million BDT)

Saving

Benchmark

707783

339332

0.00068

S1

724744.2

339281.7

-68.62823

S2

721780.4

348792

-6301.79759

S3

725768.8

339590

2086.02723

S4

722933.4

347784.8

-3877.09601

S5

731640.5

341964.4

14434.92674

Conclusion

Different manufacturing sectors are found to suffer from a decrease in the

domestic production with or without the compensatory policy related to the
agriculture sector. This mostly pertains to the baby-state of all the
manufacturing sides of the country

Acute housing demand is still persistent among people, hence in order to

combat the real estate bubble, government should think of more sustainable
housing

Overemployment signs in this not-so-productive sector. Bangladesh

government may focus on this issue by generating more employment
opportunity

Bangladesh is certainly on its way, shifting its economy from agriculture to

industry, although at a slow pace. Therefore, providing more and more
subsidy to the agriculture sector does not necessarily prove to be fruitful

Strength

Previous works mostly Global Trade Analysis Project

(GTAP) model

No previous work on tax policy based on CGE model after

the introduction of Vale-Added Tax (VAT) system in
Bangladesh

Weakness

Could not exactly simulate the original scenario due to

data insufficiency as well as complexity regarding the
accurate tax rate

Adopting a static CGE model, this paper studies only the

short term impacts of increasing the real estate
production tax rate