End of zero tax!

The government is considering a minimum Tk2,000 tax on individuals who will file tax returns even if they do not have taxable income. But, analysts argue that such a move would burden low-income people and contradict the concept of tax-free income thresholds.

According to finance ministry officials involved in the process, the budget proposals for the fiscal year 2023-24 are expected to incorporate the new rule regarding the minimum tax and the provision for deregistering from TIN in the event of death or no income.

Officials said there is a possibility that the minimum tax could be gradually imposed on all TIN holders.

Currently, there are around 86 lakh individual TIN holders, but only 32 lakh of them submit tax returns, indicating that they declare their income, expenses, and pay taxes accordingly.

Among the individuals who submit tax returns, approximately eight lakh do not have taxable income. If these eight lakh individuals are made to pay the minimum tax of Tk2,000, the government will generate an additional revenue of Tk160 crore.

If the minimum tax rule is applied to all TIN holders, it would be imposed on 62 lakh individuals (86 lakh minus 24 lakh), resulting in an additional revenue generation of Tk1,240 crore.

Officials said the National Board of Revenue (NBR) intends to make tax return submission mandatory for individuals seeking both public and private services in an effort to encourage tax compliance.

Last year, the NBR made tax return submission mandatory for 38 different services, including obtaining loans exceeding Tk5 lakh, trade licences in city corporations, and export-import permissions.

The proposals were recently discussed at a meeting chaired by Finance Minister AHM Mustafa Kamal and subsequently presented to Prime Minister Sheikh Hasina for approval last week. Currently, the proposals are undergoing a thorough legal review by the law ministry before being incorporated into the upcoming budget. The budget is scheduled to be presented in the parliament on 1 June.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, opposed the government's move to impose minimum tax as low-income people will be in trouble.

"If there is no taxable income, there will be no tax and there is nothing wrong in it," said Mansur, also a former senior official of the IMF.

Muhammad Abdul Mazid, a former chairman of the NBR, said the decision, if implemented, would increase administrative complexity.

According to NBR officials, the government is going to take this decision aiming at more tax collection to improve the tax-GDP ratio, which stands at below 8%, as per the suggestion of the IMF.

According to a senior official of the finance ministry who spoke on condition of anonymity to TBS that this minimum tax may not affect individuals as a cup of tea currently costs Tk6-7.

People may sacrifice a cup of tea daily for the sake of the country, he added.

He further said the minimum tax Tk2,000 will not be a big amount for taxpayers to prove their return submission, considering the services given by the tax officials.

Tax-free income limit may expand

The government may also increase the tax-free income threshold to Tk 3,50,000 from Tk300,000 considering the current inflation situation.

If the income exceeds the prescribed limit of individual taxpayers, they will have to pay income tax at the prescribed rates.

Over the last ten fiscal years, the tax-free income limit has gradually increased from Tk220,000 in FY14-15 to Tk2,50,000 in FY16 and Tk3,00,000 in FY21.

The NBR did not increase the tax-free income limit in the last two years despite demands from various businessmen, economists, and social organisations.

At present, the annual income of a male individual taxpayer is Tk3 lakh, Tk3.5 lakh for female or taxpayers above 65 years of age, Tk4.5 lakh for disabled taxpayers, and Tk4.75 lakh for war-wounded freedom fighters.

Currently, if the income is below this limit, a taxpayer could submit a return showing zero income only and, in this case, no tax would have to be paid. Even if the income is Tk1 more than the tax-free ceiling, a taxpayer has to pay a minimum income tax depending on the areas they live in.

The minimum tax rate for taxpayers registered in Dhaka North and South and Chattogram City Corporation areas is Tk5,000. The minimum tax rate for taxpayers located in other city corporation areas is Tk4,000. And the minimum tax rate for taxpayers located outside city corporation areas is Tk3,000.

If one submits a return showing zero income in the next budget, one will have to pay a minimum tax of Tk2,000 to get proof of tax return submission.

Snehasish Barua, a tax consultant, said if a person has to pay tax despite not having taxable income, it goes against the spirit of "no income, no tax".

Major services require proof of tax return submission

Currently, 38 services require proof of tax return submission, which include taking a loan of more than Tk5 lakh from a bank or financial institution, being a company director or shareholder, obtaining an Import-Export Registration Certificate, obtaining a trade licence from a city corporation or municipality, registering cooperative societies, being a surveyor for insurance companies, deeding land or flat worth more than Tk10 lakh, applying for credit cards, becoming a member of professional bodies, obtaining licences such as drug licence, fire licence, environmental clearance, BSTI licence, and clearance, applying for gas-electricity connection, enrolling children in English medium schools, taking distributorship of a company, applying for an arms licence, opening a LC in a bank, purchasing savings papers above Tk5 lakh, participating in elections, government employees with a salary of Tk16,000 or more,  MPO teachers receiving a salary of more than Tk16,000, submission of the bill of entry for import-export goods.

Why minimum tax?

The reasons for implementing minimum tax provisions vary, but they generally aim to achieve fairness in the tax system and prevent high-income individuals or corporations from exploiting loopholes to avoid paying a significant amount of taxes.

By setting a minimum tax, these provisions ensure that even after taking advantage of deductions, exemptions, and credits, taxpayers still contribute a minimum share of their income or assets towards taxation.

The other countries with minimum tax provision

Here are a few examples of minimum tax provisions in different countries:

The USA has a minimum tax provision known as the Alternative Minimum Tax (AMT). It was designed to ensure that high-income individuals, corporations, and estates pay a minimum amount of tax, regardless of deductions or credits. The AMT primarily targeted taxpayers who have a high level of income but use various deductions and credits to significantly reduce their regular tax liability.

In Canada, there is a minimum tax provision called the "Minimum Tax on Large Corporations." It applies to Canadian-controlled private corporations (CCPCs) that have taxable capital employed in Canada above a certain threshold. The minimum tax ensures that large corporations with significant taxable capital pay a minimum amount of tax. It is also present in Bangladesh as a company has to pay 0.6% tax on its turnover even after making losses.

Germany has a minimum tax provision known as the "Minimum Tax on Capital." It applies to corporations and partnerships with limited liability that have a certain level of equity capital. The purpose of this tax is to prevent profit shifting and tax avoidance strategies by imposing a minimum tax based on the equity capital of the company.

France introduced a minimum tax provision called the "Minimum Tax on High Income" until 2017. It applied to individuals with a high net worth and aimed to ensure that wealthy individuals paid a minimum amount of tax regardless of deductions or exemptions. However, the ISF was replaced by the "Wealth Tax on Real Estate" in 2018, which focuses specifically on taxing real estate assets.

Argentina implemented a minimum tax provision called the "Minimum Presumed Income" that applies to individuals who have a certain level of assets. It establishes a minimum taxable income based on the value of their assets, regardless of their actual income. Individuals are required to pay taxes based on this presumed minimum income, ensuring they contribute a minimum amount of tax.

In India, the income tax system is primarily based on progressive tax rates like in Bangladesh, where individuals are taxed based on their income slabs, and various deductions and exemptions are available to reduce their taxable income. There is no minimum tax system in India.

Provision to be made to deregister TIN

The government is set to introduce a new provision for the deregistration of TIN for the first time.

Currently, there is no way to release a deceased taxpayer from the obligation of tax return submission, as stated by officials from the NBR. However, a senior NBR official, seeking anonymity, revealed that under the new provision, taxpayers will have the opportunity to apply for the de-registration of their TINs by providing valid reasons to the tax authority.

The official further emphasised that there is a significant disparity between the number of TIN holders and actual tax return submissions. The implementation of this provision will assist in determining the accurate count of taxpayers and active TIN holders. The provision will be included in the upcoming income tax law (Bangla version), which will be presented before parliament on 1 June 2023, along with the new budget.

Former NBR chairman Muhammad Abdul Mazid highlighted the existing gray areas concerning the payment of taxes.

He stated that the new provision will offer a way out by requiring beneficiaries or successors to provide valid proof of the deceased taxpayer's death. Upon verification, the tax authority will proceed with the de-registration of TINs, relieving the individual from the tax obligations.

To illustrate, consider the case of a housewife who possesses a savings certificate worth Tk5 lakh but does not have any taxable income. Two years ago, she acquired a savings certificate using a TIN certificate. However, starting this fiscal year, submission of the tax return has become mandatory instead of a TIN certificate.

Alternatively, there is a provision for a 15% tax deduction at source on the interest income of the savings certificate. If the housewife submits a copy of her tax return, the tax rate will be reduced to 10% at source. To avoid an additional 5% tax deduction at source and provide evidence of tax return submission, the housewife will be required to pay Tk2,000 as the minimum tax from the next fiscal year.