Taxing turnover, not income: A risky move for Bangladesh's advertising industry

As Bangladesh works to expand its tax base and strengthen revenue collection, policymakers must remain guided by one fundamental principle: tax should be imposed on income and economic gain, not on money that merely passes through a business's accounts.

This distinction is especially important for commission-based and intermediary businesses, including advertising agencies, travel agents, freight forwarders, payment facilitators, brokers, agents, and digital service intermediaries. These businesses often handle large transaction values, but they do not own the full amount they process. Their real income is limited to the commission, agency fee, or service charge earned for facilitating transactions between clients, suppliers, platforms, media owners, and end customers.

The issue has become particularly urgent for Bangladesh's advertising and communication industry. Modern advertising agencies are no longer limited to creating advertisements. They provide integrated services covering brand strategy, campaign planning, content creation, media buying, digital marketing, analytics, event management, activations, exhibitions, public relations, influencer marketing, social media management, SEO, SEM, programmatic advertising, OTT advertising, mobile marketing, email and SMS campaigns, and technology-driven solutions involving AI, AR, and VR.

In doing so, the industry supports business growth, consumer engagement, innovation, and market expansion. It helps Bangladeshi brands compete both locally and globally. It is also an important part of the country's emerging creative economy. The government of Bangladesh has rightly recognised the potential of the creative economy and has reportedly set a target for the sector to contribute 1.5% of GDP, supported by a 10-year investment strategy and time-bound action plans aimed at creating 500,000 new jobs. 

The national budget for FY2026-27 also emphasises support for artisans, designers, performers, and cottage industry entrepreneurs through financing, skills development, branding assistance, and access to digital marketplaces. Advertising and communication agencies are central to this ecosystem, as they connect creativity with commerce. However, the requirement to deduct substantial tax at source is already creating pressure on the sector. The recent reported changes in the withholding tax structure have deepened these concerns.

Under the Withholding Tax Rules, 2026, issued through SRO No 210 dated 8 June 2026, the withholding tax rates applicable to advertising business operations are understood to have been significantly increased with effect from 1 July 2026. For ATL and BTL advertising services, the TDS rate has reportedly increased from 2% to 4%. More concerningly, for media buying and media placement services, the rate has reportedly increased from 0.65% to 4%.

This turnover-based approach raises serious concerns. Advertising agencies typically operate on thin margins. In many cases, they receive funds from clients and pass most of the amount to television channels, newspapers, digital platforms, outdoor media owners, event vendors, production houses, influencers, and other suppliers. The agency retains only its commission or service fee.

Consider a simple example. A media buying agency may manage advertising placements worth Tk100 million on behalf of a client. But the agency does not earn Tk100 million. Most of that money is paid onward to media owners and platforms. If the agency earns a 2.5% commission, its actual revenue is only Tk2.5 million.

If a 4% withholding tax is applied on the gross transaction value of Tk100 million, the tax deducted at source would be Tk4 million. In other words, the tax deduction would exceed the agency's total revenue by Tk1.5 million before the agency pays salaries, rent, technology costs, financing expenses, utilities, compliance costs, or any other operating expenditure.

No business can remain viable under such a framework

The problem is not merely one of cash flow, although the cash flow impact would be severe. The deeper issue is that the government would effectively be taxing money that does not belong to the taxpayer. Client funds and pass-through payments intended for media owners or suppliers would be treated as if they were the agency's own income. This contradicts both economic logic and the basic principle of tax fairness.

The concern extends beyond advertising agencies. Across modern economies, commission-based businesses play a crucial role in facilitating trade and services. Their business model depends on high transaction volumes and low margins. Taxing gross transaction values rather than actual commission income creates a serious mismatch between taxable turnover and real profitability.

International accounting standards recognise this distinction through the concepts of "principal" and "agent". A principal records the gross value of a transaction as revenue because it controls the goods or services being supplied. An agent, by contrast, records only the commission or fee earned for arranging or facilitating the transaction. This reflects the true economic substance of the business.

Tax policy should follow the same logic. A transaction worth Tk100 million may appear large on paper, but if the intermediary earns only Tk2.5 million, then Tk2.5 million is the relevant measure of its economic activity, taxable capacity, and ability to pay.

If Bangladesh moves toward taxing gross transaction values in commission-based industries, the broader consequences could be damaging. Excessive turnover-based taxation would discourage investment in service-oriented businesses, weaken industry competitiveness, increase disputes between taxpayers and tax authorities, and place smaller firms under extreme pressure. Many small and mid-sized agencies already operate with limited working capital and narrow margins. A high source tax on gross billing could push them into financial distress.

Such a policy could also create unintended behavioral consequences. Businesses may be encouraged to restructure contracts, reduce formal billing, shift transactions outside regular channels, or limit the scale of their operations simply to survive. These outcomes would undermine, rather than strengthen, the Government's long-term revenue objectives.

A more balanced solution is both possible and necessary

For commission-based industries, tax deduction, turnover calculations, and compliance requirements should be based on commission income, agency fees, or service revenue actually earned. Pass-through funds/Costs belonging to clients, customers, media owners, platforms, vendors, or principals should not be treated as taxable turnover of intermediaries.

For advertising and communication services, the applicable source tax rates should be rationalised. For creative, ATL, BTL, and other commission-based services, tax deduction could be applied at 10% on commission income or 2% on the gross bill amount where commission is not separately shown. For digital and electronic media agency services, the deduction could be 10% on commission income or 0.65% on the gross bill amount where commission is not separately shown.

This approach would allow the government to collect tax in a fair, transparent, and administratively workable manner while protecting the financial viability of advertising agencies and other commission-based businesses. It would also encourage proper documentation, formalisation, and compliance, instead of penalising businesses for handling client funds transparently.

Bangladesh's tax system should support growth, investment, innovation, employment, and formalisation. Taxing actual income supports these goals. Taxing pass-through funds does not. As policymakers consider future tax reforms, they must ensure that the pursuit of higher revenue does not come at the expense of fairness, economic reality, and business sustainability. A modern service economy cannot grow if intermediaries are taxed on money they do not earn. For Bangladesh's advertising industry, and for many other commission-based sectors, the principle is simple: tax income, not turnover.

The author is a financial sector analyst.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.