How 5%-10% source tax on suppliers’ revenue squeezing e-commerce

Infographic: TBS

The 5%-10% tax deducted at source on e-commerce companies' procurement value, imposed in July 2023, is squeezing online commerce platforms, according to industry insiders.

The e-Commerce Association of Bangladesh (e-Cab) has urged the National Board of Revenue (NBR) to simplify and rationalise the high source tax, arguing that it translates into an excessive effective tax burden.

The tax is non-adjustable if a company's final income tax liability is lower than the amount already deducted, Md Sayed Ali, deputy secretary at the Ministry of Commerce and administrator of e-Cab, told The Business Standard.

"Practically, other than a very few large manufacturers, all e-commerce suppliers end up paying double, triple, or even higher taxes," he said.

For instance, he explained that under the 25% corporate tax rate, a supplier must maintain at least a 20% profit margin on sales to qualify for an adjustment against the 5% source tax on gross turnover.

"The required profit margin increases to nearly 40% for suppliers facing a 10% source tax. This creates a disproportionate burden on smaller companies, while larger firms may eventually claim adjustments," he added.

In a letter to the NBR Member for Tax Policy, Sayed Ali elaborated on how the high source tax effectively imposes an "impractical minimum tax" and outlined its negative impact on the e-commerce industry.

e-Cab has demanded the removal of source tax on e-commerce suppliers until their transaction value exceeds Tk10 lakh, as small businesses are struggling under the burden, making them reluctant to work with online sellers.

Sayed Ali highlighted that while global e-commerce firms are earning substantial foreign currencies by expanding their businesses, Bangladeshi companies are continuously facing challenges.

He cited India as an example, which in October last year reduced the tax on e-commerce suppliers deducted at source from 1% to 0.1%. Following this precedent, e-Cab is seeking a flat 0.1% source tax for supplies exceeding Tk10 lakh.

"A firm facing a 10% tax deducted at source needs nearly a 40% profit margin to qualify for adjustment, which is unrealistic in any business," the deputy secretary argued.

Online grocery pioneer Chaldal CEO Waseem Alim echoed these concerns, saying, "With thin margins, traditional suppliers bargain over the high tax we deduct from their bills at source. Despite the struggle in business amid high inflation, we often need to pay the amount."

"NBR should encourage the reporting of transactions and digitizing them. We also need proper treatment for farmers and small manufacturers who usually lack tax documentation.

"E-commerce represents less than 1% of the consumer products market. Platforms need a level playing field with the offline market to grow," he added.

"Similar issues are being faced by e-commerce firms with value-added tax as well. Many suppliers, especially SMEs, have no VAT registration, and e-commerce firms are struggling to deal with them," said Alim.

Technology entrepreneur Fahim Mashroor, founder of BD Jobs, AjkerDeal, and Delivery Tiger, emphasised the long-term benefits of supporting e-commerce.

"The government should realise that e-commerce will lead to significant cost savings and unlock economic potential across the country, ultimately boosting government revenue," he said.

According to e-Cab, the high tax on turnover at source contradicts the government's mission to increase the tax-to-GDP ratio, as it may drive more businesses to operate outside the formal tax system.