Govt mulls doubling source tax on exports

Bad news for exporters!

While export growth is projected to slow in the months ahead amid a gloomy global financial outlook, the government mulls raising the source tax on export earnings to 1% from 0.5% in the forthcoming national budget, sources said.

Doubling the tax rate, especially at a time when countries across the world are grappling with rising inflation with another spell of economic slowdown looming large on the horizon, could have serious repercussions for the export-oriented industries, fear people concerned.

Economists feel the National Board of Revenue (NBR) may want to raise the source tax on exports considering it the best possible option to increase its revenue collection. 

They, however, observe that if the rate of source tax is equal for all, non-RMG sectors will lag behind in the effective rate of protection since the RMG sector enjoys some special benefits from the government. This issue needs to be taken into consideration, they say.

The government imposed the source tax on exports for the first time in 2005. Initially, the rate was 0.25%. Later, it was raised at different times and was set at 1% in fiscal 2014-15.

More than 80% of Bangladesh's export income comes from the readymade garment sector alone. Accordingly, entrepreneurs in this sector become the most vocal against attempts to hike the source tax on exports. 

The government too kept the source tax at a low level as part of its assistance to the RMG sector considering its contribution to the country's economy and various challenges the sector faced in the past. As a result, other export-oriented sectors also came under the ambit of the facility.

Over the past decade or so, almost every time the source tax was hiked, exporters were able to persuade the government to bring it down again. 

Nevertheless, even if the source tax is equal for all export-oriented sectors, non-RMG sectors have to pay taxes at a rate almost 2.5 times as high as that applicable for the RMG sector.

For the last two years, the government has been levying 0.5% source tax on export earnings considering the pandemic situation. 

The Bangladesh Garment Manufacturers and Exporters Association (BGMEA had earlier demanded reductions to the source tax rate, but this time they have not made any such demand. Instead, they have recommended that the existing rate be kept unchanged for the next five years as part of a stable tax policy.

BGMEA President Faruque Hassan made the demand at a recent discussion with policymakers.

Speaking about the probable negative impact of a hike in source tax on exports, Md Fazlul Hoque, managing director of Plummy Fashions Ltd and former president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told The Business Standard that export from the sector is projected to decline in the coming months because of inflation in major export destinations, including Europe and America. 

"In such a situation, raising the tax rate would only add to our woes."

"Looking at the RMG sector's export growth, it may seem that our income has increased. In fact, this growth is mainly attributable to an increase in other costs including rising prices of raw materials. 

"Even if we get some extra money, we do not get it at the rate at which the expenditure has increased."

He also said they cannot get back the money deducted as source tax even if they incur losses – they have to pay tax even if there is no income. "Even then, we wanted that the existing tax rate is kept unchanged for the next five years in the interest of getting new investment."

Debapriya Bhattacharya, distinguished fellow at the Centre for Policy Dialogue, thinks that the NBR out of its revenue mobilisation compulsion chooses to raise income tax at source as it is the most efficient tax collection tool. 

He, however, said, "We hear about problems which transpire during the final tax adjustment of the amount deducted at source. This process should be made more transparent based on documentation and has to be specific to the performance of the taxed entity.' 

He pointed out that the tax rate should be applied to all exporters equally, and that no discrimination should be made between RMG and non-RMG exporters. 

The noted economist and public policy analyst also suggested that if the export-oriented sectors, including the RMG, feel that they need additional policy support to retain their competitiveness, they should approach other relevant agencies including the Ministry of Commerce, not necessarily the NBR. 

Debapriya maintained that the proposed increase in advance income tax on export revenue may be an opening gambit for the NBR. This rate may get negotiated downward – keeping it above the current rate – through discussions.

According to the latest data released by the Export Promotion Bureau (EPB), Bangladesh's export income stood at over $43 billion in the first 10 months of the current fiscal 2021-22, with a year-on-year growth of 35%. 

Exporters and the EPB expect that the figure will cross the $50 billion mark by the end of the year. 

From that count, the source tax collection from the export sector could be around $250 million or around Tk2,200 crore ($1 = Tk86).

The Ministry of Finance has projected a 20% year-on-year growth in exports in the upcoming fiscal 2022-23. 

If this projection becomes true, the country's export income would stand at $60 billion next year. In that case, if the source tax is collected at the rate of 1%, total revenue collection from this sector could be around $600 million or Tk5,100 crore.

In FY21, Bangladesh's total export income was $38.75 billion, while $193.7 million or Tk1,666 crore was collected in advance income tax on export revenue.

The rate of income tax is not the same for all exporters, but the source tax is levied at the same rate on all sectors in the current financial year.

According to the existing Income Tax Ordinance, the corporate tax rate on the export income in the RMG sector presently stands at 12%, while the rate is 10% for green factories and 30% for non-RMG sectors.

Exporters have to pay 0.5% advance tax on proceeds of their exports, but they have the scope for adjusting it as their final income tax while submitting the tax returns.

After speaking to the income tax department and exporters, TBS, however, has learned that almost all exporters show their income in proportion to the amount deducted as tax at the source. As a result, even if they have extra income, they do not pay tax for that, and even if they incur a loss, they do not get back the already deducted amount.

Exporters said they think it is not possible for everyone to get refunded by complying with the conditions set by the tax authorities.