Tax relief on cards for firms with turnover up to Tk2cr

Infographic/TBS

The National Board of Revenue is set to exempt businesses and companies with annual turnover of up to Tk2 crore from minimum turnover tax, easing a tax burden that currently applies regardless of profitability.

Under the proposed structure, businesses and companies with annual turnover of up to Tk2 crore would pay no minimum turnover tax. Those with turnover above Tk2 crore and up to Tk3 crore would pay 0.25%, while those with turnover above Tk3 crore and up to Tk4 crore would pay 0.50%. Businesses and companies with turnover above Tk4 crore would continue to pay 1%.

Businesses and companies with turnover above Tk4 crore would continue to pay the existing 1% minimum turnover tax, according to officials familiar with the proposal.

A senior NBR official, speaking to The Business Standard on condition of anonymity, said the summary of the proposal had already been approved by Finance Minister Amir Khosru Mahmud Chowdhury and sent to the law ministry for vetting.

"We expect the order to be issued by Thursday [tomorrow] or early next week," the official said.

The proposal is aimed at reducing the tax burden on small businesses and companies with relatively low turnover. At present, a 1% minimum turnover tax is imposed on turnover regardless of whether a business makes a profit or incurs a loss.

Business community welcomes relief but seeks broader reform

Md Fazlul Hoque, administrator of the Federation of Bangladesh Chambers of Commerce and Industry, said the proposed changes would reduce the tax burden on small businesses and companies.

He said, however, that tax should ultimately be based on actual income and called for the minimum turnover tax system to be abolished in favour of taxation based on actual profits.

The FBCCI sent a letter to the finance minister on 24 August urging the government to gradually move away from the 1% minimum turnover tax imposed on businesses and companies.

Taskeen Ahmed, president of the Dhaka Chamber of Commerce and Industry, also supports moving away from the existing minimum turnover tax system.

Until the fiscal 2024-25, most companies, with some exceptions, were subject to a minimum turnover tax of 0.60% of annual turnover, while non-company businesses with annual turnover above Tk4 crore were subject to a 0.25% minimum turnover tax.

The 2025 budget raised the minimum turnover tax rate to 1% for both categories, increasing the effective tax burden on businesses with low profit margins and causing loss-making businesses to pay tax despite having no profits.

Minimum turnover tax can raise effective tax burden

Tax experts said the proposed changes would provide some breathing space for small businesses and companies with low turnover, but warned that larger businesses making low profits or operating at a loss would continue to face the same problem.

Snehasish Barua, a chartered accountant and managing partner of SMAC Advisory, said the proposed reduction would provide some relief to small businesses and low-turnover companies.

"However, larger businesses can also incur losses or make low profits," he said. "Without relief for them, the measure will ultimately do little to reduce their effective tax rate."

Currently, non-listed companies are subject to a corporate tax rate of 27.50%, while the maximum income tax rate for individual taxpayers, including owners of non-company businesses, is 30%.

The FBCCI has cited examples to show how the minimum turnover tax can result in an effective tax burden far higher than the tax payable on actual income.

According to its letter to the finance minister, an individual business with annual sales of Tk50 lakh and a 5% profit margin would earn Tk2.5 lakh. As this amount falls within the tax-free income threshold under the existing system, no income tax would otherwise be payable, the FBCCI said. However, the 1% minimum turnover tax would require the business to pay Tk50,000.

Similarly, if annual sales were Tk1 crore and the profit were Tk5 lakh, the tax payable under the regular income tax system would be Tk10,000, while the 1% minimum turnover tax would amount to Tk1 lakh, according to the FBCCI.

Barua said recent Finance Act reforms had changed the fiscal framework, including by separating minimum turnover tax obligations from source deductions, but the statutory minimum turnover tax remained unchanged.

"For enterprises currently running at a loss or suffering operational strain, deferred mechanisms such as future tax adjustments offer no immediate liquidity relief," he said.

Risk of turnover manipulation

The proposed exemption for businesses with turnover of up to Tk2 crore could create an incentive for some businesses to underreport sales to remain below the threshold, according to concerns raised by some stakeholders.

Similar concerns arose in the past when a 1% minimum turnover tax applied to businesses with turnover above Tk4 crore, with some businesses allegedly reporting lower turnover to avoid crossing the threshold.

The NBR official said, however, that businesses that previously underreported turnover to remain below the Tk4 crore threshold generally reported turnover above Tk2 crore, meaning the proposed structure would leave less scope for such manipulation.

The official said the NBR's calculations showed that at least one lakh individuals and companies would remain liable to pay tax under the proposed system.

"According to our calculations, tax collection will not decrease; rather, it will increase," the official said.

The NBR is also integrating its systems with different organisations to improve monitoring of business transactions, the official said, making it more difficult for businesses to underreport turnover.