How minimum tax is eroding companies' capital

Infograph: TBS

Companies in Bangladesh are grappling with rigid minimum taxes and source tax deductions regardless of profitability amid rising production costs and an economic slowdown in recent months.

Entrepreneurs say the political instability in the country since mid-July has further impacted their businesses, making the collection of minimum tax at the existing rates feel like "adding insult to injury".

Under the Income Tax Act, companies have no provision to adjust or claim refunds for minimum tax deducted on turnover or, in many cases, tax deduction at source (TDS).

This means that if a company's profit is lower than the advance tax deducted, its effective tax rate increases. Even in case of losses, the tax cannot be adjusted directly reducing the company's capital.

In Bangladesh, companies are subject to a minimum tax ranging from 1% to 3% of their annual turnover, depending on the type of business. Additionally, export-oriented companies must pay a 1% source tax on their export value.

Entrepreneurs and economists consider the system inconsistent with global tax standards and unjust, arguing that it is a key reason for the sluggish pace of local and foreign investments in the country.

Zaved Akhter, president of the Foreign Investors Chamber of Commerce and Industry (FICCI), told TBS, "Since last July, supply chain disruptions and other factors have further reduced company profitability. In this situation, collecting minimum tax on turnover has driven the effective tax rate even higher."

Dr Syed Md Aminul Karim, former member of the National Board of Revenue (income tax policy), says taxing companies that make no profit, or imposing higher effective tax rates due to minimum tax policies, sends a negative message to foreign investors.

Companies grappling with high tax

Crown Cement, in its financial report for the first quarter of FY25, disclosed that the effective tax rate in the cement sector has surged to 83.61%, compared to 28.13% in FY24.

Meanwhile, another multinational cement manufacturer, Heidelberg Cement Bangladesh, reported Tk3.99 crore profit before tax in the July-September quarter this year. But it counted Tk6.95 crore as corporate tax, which was 174% of the profit. However, the corporate tax rate for the company is 22.50%. This is why the company incurred a loss during the quarter.

Md Shahidullah, managing director of Metrocem Group, said, "Key raw materials for cement, such as limestone, gypsum, fly ash, and clinker, are subject to a 2% to 5% advance income tax at the import stage. From July to October, sales dropped by 30% compared to the same period last year, while overhead costs have not decreased proportionately.

"As a result, with the final settlement of advance tax – and no adjustment option – our balance sheet has turned negative."

Titas Gas, the state-owned gas transmission company, reported a loss of Tk58.48 crore during the July-September period. However, due to the imposition of minimum tax, it was required to pay Tk132 crore in corporate tax, pushing its total loss to Tk188 crore.

Currently, a 2% tax is deducted on the overall services provided by mobile telecom operators. Under the Income Tax Act, 2023, companies are required to pay this tax even if they do not generate profits. If profits exceed the tax deducted at this rate, the remaining tax must also be paid, but if profits are lower or losses occur, no refund is provided.

Shahed Alam, head of regulatory affairs at Robi Axiata Limited, one of the country's largest operators, told TBS, "Our corporate tax rate is currently 40%. However, the tax deducted from us has led to an effective tax rate of nearly 70% for FY24. It was as high as 76% in FY22."

In the first nine months of this year, Robi Axiata reported a pre-tax profit of Tk948.63 crore. Based on the corporate tax rate of 40%, the company's tax liability stands at Tk379 crore. However, due to the minimum tax requirement, the company had to pay Tk545.80 crore in corporate tax.

Some companies, even while incurring losses, are still required to pay tax. For example, Banglalink Digital Communications Limited is paying tax at the same rate despite operating at a loss, which is eroding their working capital.

Entrepreneurs say that in some cases, the amount of paperwork required to claim tax refunds is so burdensome that many businesses are unable to receive the refunds. Even when they do manage to claim them, there are allegations that businesses have to pay bribes to tax officials.

Bangladesh Steel Re-rolling Mills Limited (BSRM), one of the country's leading steel mills, claims it is owed over Tk100 crore by the NBR. However, the company has yet to recover the amount, according to Tapan Sengupta, deputy managing director of BSRM.

FICCI Executive Director TIM Nurul Kabir said, "We have already informed the NBR about the matter, but no positive steps have been observed so far."

Snehasish Barua, a tax expert and partner at Snehasish Mahmud and Company Limited, told TBS, "While some countries do impose minimum tax, it is typically adjustable. To my knowledge, there is no country other than Bangladesh that doesn't allow adjustments for minimum tax."

According to sources, countries like the United States, India, France, and Germany have minimum tax policies but allow for subsequent adjustments. In member countries of the Organisation for Economic Co-operation and Development (OECD), minimum taxes may not be refundable but are often adjustable.

Exporters face trouble

RMG exporters say nearly half of the factories are struggling to make profits due to rising production costs and stagnant global apparel prices. In this situation, the 1% source tax has further worsened their challenges.

Mohammad Hatem, president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told TBS that a garment factory from Narayanganj paid Tk40 lakh in source tax last year. However, upon annual calculation, the actual tax liability amounted to Tk3 lakh, leaving Tk37 lakh eligible for a refund. Since the law currently prohibits refunds, this amount effectively reduced the factory's working capital.

The corporate tax rate on garment export income is currently 12%. However, the 1% source tax is deducted on the export value, not on the income. This effectively requires companies to earn a profit margin of around 8.5% to align with the 12% corporate tax rate.

Garment exporters say very few factories are achieving such profit margins at present, meaning they are effectively paying more tax than the government's calculation assumes.

Blanket punishment due to tax evasion prevention failures

Officials at the NBR have stated that the minimum tax policy was introduced to curb tax evasion. Many companies were avoiding taxes by underreporting profits or declaring losses despite being profitable. To address this, the NBR imposed a minimum tax and gradually increased its rate.

A senior NBR official told TBS that advance income tax on company turnover was introduced in the 1980s to prevent tax evasion by importers and contractors. After its success, the measure was gradually extended to other sectors. However, the practice of final settlement based on turnover began in 2011 and was later renamed minimum tax around 2016.

Luftul Hadee, vice president of the Institute of Chartered Accountants of Bangladesh (ICAB), told TBS, "The NBR should target tax evaders through audits or other assessment mechanisms. However, due to a lack of capacity, compliant businesses are also being penalised. This is not an ideal solution."

Robi Axiata's Shahed Alam said, "It's an established legal principle that corporate tax should be imposed on profit. However, corporate tax collected on the gross revenue, known as minimum turnover tax, is against this legal tax principle.

"The practice is highly demotivating for businesses as well as for future investment prospects. We believe the government will consider either complete withdrawal or refund of minimum turnover tax in near future."