Tax to be cut to 25% for one-person companies

The government is going to offer a special tax exemption to one-person companies (OPC) through a 25% cut in corporate tax in the upcoming national budget for the fiscal 2021-22.

Currently, the tax rate for such entities is 32.5% as non-listed private companies formed under the Companies Act.

Welcoming the move, economists and business leaders have called for rationalising the minimum requirement of Tk25 lakh paid-up capital to attract a large number of small and new start-up entrepreneurs.

Otherwise, the tax cut benefit will not be effective to encourage small entrepreneurs to join the formal economy, they say.

M Masrur Reaz, chairman at the Policy Exchange of Bangladesh,  said, "The government has taken a good initiative to reduce corporate tax for OPCs as the rate in Bangladesh is higher than in other countries.

"The size of our informal economy is very big but we cannot take advantage of it for not being able to formalise it. The tax exemption will pave the way for incorporating small companies into the formal economy."

But the provision of a minimum paid-up capital requirement will spoil the spirit and objective of OPC, the former senior economist of the International Finance Corporation opined.

Increasing entrepreneurs, attracting more investment, boosting formal enterprises instead of trade licence based informal or semi-formal businesses were the key objectives of the amendment to the Companies Act in 2020, said Reaz, who was involved in the process of incorporating the OPC provision into the Act.

But fixing Tk25 lakh as the minimum paid-up capital is a fundamental error, which is not an easy job to arrange for a start-up or small business.

On the other hand, there is no such obligation for large companies to set up an OPC, he added.

Masrur said it has totally reversed the spirit of the law. The provision should be easier for small businesses not for large ones.

For example, a large company like Unilever can open a new company with Tk10,000 as a minimum paid-up capital, but a new start-up requires at least Tk25 lakh, Masrur said, adding that this is a barrier for small ones.

The minimum paid-up capital should be fixed by OPC entrepreneurs themselves and they will set it by their nature of businesses and strategies, he also said.

Some sectors like banking have a provision for a minimum paid-up capital amounting to Tk400 crore to start a new venture, which is necessary, Masrur further said.    

Ahsan H Mansur, executive director at the Policy Research Institute, said, "I think the government has decided to reduce the corporate tax rate for OPC in line with the highest rate for individuals."

Other tax rates should be rationalised too and no tax should be more than 25% no matter whether it is a listed or non-listed company.

On 18 November 2020, the Parliament passed the "Companies (Second Amendment) Bill-2020" with a provision for forming single-person companies.

The new rule was framed to attract greater investment, do better in the global ease-of-doing-business ranking and formalise informal business.

A "natural person" can start an OPC by registering online at the RJSC.

According to the bill, a single-person company has to have a minimum paid-up capital of Tk25 lakh and a maximum of Tk5 crore.

The minimum turnover of such a company in the immediate past year will have to be Tk1 crore-Tk50 crore.

If the paid-up capital and turnover exceed the amount, the OPC can transform into a private limited company or in some cases into a public limited company.

An OPC has to hold at least one meeting of the board of directors every year.

If directors and the main person of such firms is one person, it will get relief from holding board meetings and decision-making processes.

If that one person dies, as per the bill, the nominated person will get all the shares.

However, the shares of an OPC may be transferred to another natural person only.

The concept of OPC has been legally recognised in the United Kingdom, the United States, China, Singapore, Turkey, the UAE, Pakistan, Nepal and Sri Lanka over the years.

In most countries, there is no minimum paid-up capital requirement. Countries like India, Pakistan and Nepal have a 100,000 rupee requirement of minimum capital for an OPC in their respective currencies.

The Registrar of Joint Stock Companies and Firms (RJSC) has developed software for its website to begin registration online in march for opening an OPC, but the process has got stuck because of the pandemic.