More woes for businesses as govt plans almost doubling minimum tax

Infograph: TBS

Highlights:

• Government plans to raise company turnover tax from 0.6% to 1%

• Individual turnover tax may rise from 0.25% to 1%

• IMF pressure drives move to boost tax revenue collection

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• Business leaders say tax punishes compliant, low-profit, or loss-making firms

• Critics claim new rates deter foreign investment and violate fairness

• Only 8,000 companies currently pay the minimum tax obligation

Despite widespread criticism from both local and international investors, the interim government is set to increase the mandatory minimum tax levied on company turnover to 1% from existing 0.6% in the upcoming budget.

Officials familiar with the matter have also indicated a potential fourfold increase in the minimum tax burden for individual taxpayers.

Insiders suggest that the National Board of Revenue (NBR) is pursuing this unpopular measure due to its limitations in curbing tax evasion and pressure from the International Monetary Fund (IMF) to boost revenue collection.

A senior NBR official, on condition of anonymity, confirmed the veracity of the information. "There is pressure from the IMF to increase revenue collection. Furthermore, there are allegations that a significant portion of companies do not accurately report their transactions and profits. Therefore, there are plans to increase the minimum tax," he told TBS.

The official said the turnover tax for individual assessees could rise to 1%, a significant jump from the current 0.25%. "This decision could be finalised during a meeting with the finance adviser this week," he said.

However, the official noted a potential future relief, stating that while there was no mechanism for adjusting the minimum tax in the past, the upcoming budget may include a provision for carrying forward this tax for adjustment in subsequent years.

Currently, the minimum tax on company and individual turnover generates approximately Tk2,500 crore. The NBR anticipates that the proposed tax hike could generate an additional Tk3,500 crore.

Businesses, experts voice objection

Business leaders and experts have voiced strong opposition to the minimum tax, arguing that it penalises compliant companies, forcing even those with low profits or losses to pay.

The Foreign Investors' Chamber of Commerce and Industry (FICCI) in Bangladesh has long been a vocal critic of the minimum tax, particularly highlighting how it increases the effective tax rate for compliant companies.

Mohammad Zaved Akhtar, president of FICCI, told this newspaper, "This is something we were hoping the NBR to gradually reduce and ultimately eliminate. An increase is a big surprise and a move in the wrong direction."

He further said, "The FICCI would believe this will put an inordinate tax burden on compliant businesses, specifically in SMEs and budding businesses."

Aminur Rahman, a former NBR member for income tax policy and a member of the revenue reform committee, told TBS, "The fundamental principle of taxation is that those who earn income should pay tax. But this method of tax collection goes against the core principles of taxation and is not in line with global standards, which is a major obstacle to attracting foreign investment to Bangladesh."

He added that the revenue reform committee is preparing a report proposing the abolition of this minimum tax system. "It is questionable why this tax system is being further increased when it is already facing widespread criticism."

Rupali Chowdhury, managing director of Berger Bangladesh Limited, and former president of FICCI, told TBS, "It takes at least five years for any company to reach its break-even point after setting up in the country. Imposing a minimum tax during this period is not logical."

According to NBR, in fiscal year 2023-24, only 24,381 companies/institutions out of 2.88 lakh registered ones submitted returns.

The Income Tax Act currently imposes a minimum tax ranging from 0.25% to 5% on five categories of individuals and companies. This includes a 5% rate for carbonated beverage companies, 3% for tobacco companies, 2% for mobile phone operators, 0.25% for individual taxpayers with an annual turnover exceeding Tk3 crore, and 0.60% for the remaining companies. Exporters face a minimum tax rate of 1%.

According to NBR data, approximately 24,000 companies, excluding around 200, fall under the 0.60% minimum tax rate. However, only about one-third, or 8,000 of these companies, actually pay the minimum tax. This suggests that the proposed tax hike will primarily impact these 8,000 compliant entities.

Snehasish Barua, a tax expert and a partner of chartered accountant firm Snehasish Mahmud and Company, said, "Increase of minimum tax on gross receipt will add further burden to the compliant assessee who discloses actual turnover in their audited financial statement. On top of that, their suppliers will also add this as a cost component, which will further escalate the cost."

How minimum tax to put pressure on companies 

Illustrating the burden, consider a company with an annual turnover of Tk100 crore. Under the current 0.6% minimum tax, it would pay Tk66 lakh. However, if its actual profit tax liability (at 27.5%) is Tk50 lakh, it is already paying an excess of Tk16 lakh. If the minimum tax rate is increased to 1%, the company would be liable for Tk1 crore, effectively increasing its tax rate to 55% despite a nominal rate of 27.5%. For loss-making companies, the entire minimum tax payment would come directly from their capital.

SK Zami Chowdhury, managing partner of Chowdhury Emdad and Company, a chartered accountant firm that audits around 150 companies annually, told TBS, "Around 100 out of the 150 companies we audit have to pay minimum tax. Among them, at least 15% are actually making losses but are still required to pay the tax."

He warned, "The proposed tax increase will further burden these companies."

NBR rationale

Explaining the rationale behind the move, an NBR official said, "There are allegations that companies underreport their profits to evade taxes. If this minimum tax is not collected, the government will not receive revenue."

However, former NBR official Aminur Rahman argued, "It is not logical to burden honest companies to offset the losses from dishonest businesses who evade taxes. Cutting off the head is not the solution to a headache."