Source tax on local supplies may drop from 5% to 4% to ease business costs

Highlights:

• NBR may cut source tax from 5% to 4% and import AIT by 1%.
• Source tax makes up 60%+ of income tax revenue; FY22-23: Tk15,728 crore (local) and Tk11,866 crore (import).
• Move aims to reduce costs and inflation pressure.
• At 5%, suppliers need 20%+ profit margin, raising prices.

The National Board of Revenue (NBR) is considering reducing the source tax on a range of non-core supply items – including packaging materials, office stationery, and administrative and marketing-related goods used in local industry and service sectors – from 5% to 4%. The advance income tax (AIT) levied at the import stage may also be trimmed by one percentage point.

A senior NBR official, speaking on condition of anonymity, said the proposal has been shaped by business demands and is expected to feature in the upcoming budget. "This may reduce costs for businesses and, ultimately, help protect consumers from rising prices of goods and services."

The move follows remarks by NBR Chairman Abdur Rahman Khan in March, when he signalled that source tax rates across sectors would be rationalised and aligned with firm and industry profitability to minimise refund complications.

Under the current framework, excess source tax deducted at the supply stage can be offset against future profits. In practice, however, many firms either fail to claim such adjustments or avoid doing so because of procedural complexity. The result: companies frequently pass on the burden through higher prices, while others underreport income to ease compliance pressure.

Business leaders and tax experts have broadly welcomed the proposal. 

Debabrata Roy Chowdhury, Director of Nestlé Bangladesh, called it a positive development. "We deduct tax from our suppliers and deposit it. But at the current rate, suppliers need to earn more than 20% profit to absorb it, which is not realistic. They cannot adjust it, so they pass it on through higher prices," he told TBS.

Another entrepreneur noted that while compliant firms properly deduct and remit taxes, a significant portion of the market underreports income to sidestep the burden – a trend the higher rate has helped entrench. Chowdhury added that at the 5% rate, a substantial sum is withheld annually at the supply stage, squeezing cash flows across the chain.

Tax experts are calling for further refinement, suggesting that source tax rates be calibrated against corporate profitability based on financial statement analysis. They note that the rollout of the Document Verification System (DVS) has improved transparency, making such fine-tuning more feasible.

Snehasish Barua, managing director of SMAC Advisory Limited, backed the proposal, describing the cut as beneficial for both businesses and consumers. "Lowering the upfront tax on imports and supplies from 5% to 4% directly solves a major corporate headache: trapped cash flow," he said, adding that easing upfront tax pressure would improve liquidity, reduce transactional friction, and strengthen compliance.

On the question of fiscal impact, Barua acknowledged a likely short-term dip in revenue but argued that improved efficiency and stronger compliance would offset it over time. "With inflation squeezing everyday budgets, this policy acts as a shield against rising prices," he said.

Source tax collections currently account for more than 60% of the government's income tax revenue, though a detailed breakdown between local supply deductions and import-stage AIT is not publicly available. 

According to NBR's 2022-23 financial statement, Tk15,728 crore was collected at the local supply stage and Tk11,866 crore at the import stage – a combined figure that experts say is substantially tied to the prevailing 5% rate.