Will corporations actually benefit from a 2.5% tax cut?

The government is placing the National Budget for FY2022-23 in the parliament today. The way Bangladesh has managed its economic recovery during this pandemic is better than comparable economies. 

As per GDP forecasts for FY 2022-2023 Bangladesh is one of the fastest-growing nations. However, the tax-to-GDP ratio is still the lowest in the region and tax collections might not increase proportionately with economic growth. 

Corporations have long claimed that Bangladesh's tax rate is significantly higher than its neighbours and competitors. They demanded a further decrease in the tax rate this year as well. Higher tax rates create a reluctance on the part of corporations to pay taxes, which is considered one of the reasons for a lower tax to GDP ratio.

Currently the corporate tax rate for listed and unlisted companies stands at 22.5% and 30% respectively. Thankfully, the NBR has proposed another  2.5% tax cut in the coming budget. The question is, will the tax burden of corporations be reduced if the tax rate is reduced? Will Bangladeshi businessmen be able to compete with neighbouring and competing countries?

As per the latest annual report (AY 2019-2020) of the NBR, almost 60% (Tk41,804 crore) of income tax is collected by way of tax collection/deduction at the source. Out of this, approximately 60% of tax is collected under sections 52, 53 and 53F. 

The importer has to pay 5% income tax when importing goods, i.e., if the importer of the goods sells it ready-made and if the net profit is more than 16.67%, he can adjust the tax paid at the source.

In addition, if the company imports raw materials, and manufactures finished goods and supplies, its customer will receive a maximum 7% tax from the source as per section 52, which is the minimum tax as per section 82 (c). 

To adjust for the tax deduction, the company has to earn a further 23.33% net profit. In reality, most companies could not make such a profit under normal circumstances, and it is impossible in the case of Covid 19. An example will perhaps better illustrate the scenario:

Suppose a company imported raw material worth Tk30 crore in a year. At the time of import, the company had to pay a 5% import tax amounting to Tk50 lac. These products are manufactured and sold to its customers for Tk50 crore. Out of this sale, Tk20 crore is sold to corporate customers who are deducted at the source. Under the earlier provision, another Tk1 crore is deducted at source and according to the current provision, Tk1.4 crore will be deducted from the source. The remaining BDT 30 crore worth of products are sold normally. So, if the tax rate for such traders is reduced from 30% to 27.5%, will the tax burden of corporations be reduced? 

Table-01: Taxation for Import dependent and supplier 

It is evident from the table above that in the case of such corporations, if the sales and profits remain unchanged, their tax will not be reduced but the effective tax rate will be 58% because of a higher rate of withholding tax. The reverse tax burden is increasing due to unchanged source tax collection at the import stage and higher source tax rate at the supply stage.

Hence, the government needs to reduce the tax collection at source at import stage to at least 3% from 5%. Recently there is a significant increase in the cost of imported goods. There is also an upward trend of devaluation of the USD. Hence, overall collection from imports is unlikely to fall even if the tax at the source is reduced. This will give a big relief to the local manufacturer. 

Construction company

Suppose a company does construction work worth Tk100 crore a year. The cost of that company is Tk75 crore per year. According to the earlier provision, a withholding entity deducts Tk 5 crore from the source and according to the current, Tk7 crore will be deducted from the source. So, if the tax rate for such a construction company is reduced from 30% to 27.5%, will the company's tax be reduced? Let us have a look.

Table-02: Taxation for construction companies

It is evident from the table above that in the case of such a company, if the revenue and profits remain unchanged, their tax will not be reduced but the effective tax rate will remain as it is at 46.67% because of the higher withholding tax rate. However, due to the reduction in the tax rate, their tax burden should have been reduced. The reverse tax burden is increasing due to higher tax deductions at the source.

Service providers 

Now let us discuss the service providers from whom taxes are deducted at source by the service recipient withholding entity at 10-12%. In many cases, such a TDS is the minimum tax as per section 82 C. Suppose a company renders services worth BDT 10 crore a year. The cost of a service provider is BDT 8 crore per annum. As per law, the withholding entity deducted BDT 1 crore at the source. If the tax rate for such service providers is reduced from 30% to 27.5%, will their tax be reduced? Here, let us have a look.

Table-03: Taxation for service providers

It is evident from the table above that in the case of a service provider, even if their revenue and profits remain unchanged, their tax burden will not be reduced but will remain unchanged even though the proposed tax rate reduction should have reduced their tax burden.

The objective of tax deduction at the source is not only to collect revenue in advance but also to ensure traceability of the transaction. Such a high level of tax on transactions is not a direct tax rather it becomes an instrument of indirect tax. Hence, such an exorbitant rate of 5% tax under section 53, 7% tax under section 52 read with rule 16 of the ITR, 1984 and 10% tax under section 52AA must be rationalised. 

Currently, DVS (Document Verification Systems) has been introduced through a joint initiative by NBR and ICAB. The tax authorities can easily identify the profitability of the industry by analysing the income and profit before tax information available in DVS. 

Therefore, if the rate of collection and deduction at source, especially in sections 52, 52AA, and 53 of the Income Tax Ordinance, 1984, is not reduced, the corporate tax rate will not be reduced, and the tax burden of corporations will not be reduced even if the corporate tax rate is reduced.

Are we still comparable?  

Although the current corporate tax rate has been reduced, let us see what the difference is with neighbouring and competing countries:
 
Table-04: Corporate tax rates in neighbouring countries

The table above shows that our tax rates are still high, which reduces the net income of the companies and leaves them behind in the competition. Increasing incomes will increase investment which will create new employment in Bangladesh and will assist in generating revenue. 

Reducing tax rates will encourage companies and increase transparency in financial statements. As a result, it will help increase the revenue collection in Bangladesh. Many people think that reducing the tax rate will reduce the revenue collection. 

However, it can be seen that in the years 2013-14 to 2014-15, the tax rate was reduced from 37.5% to 35% but the revenue collection increased from Tk 125,000 crore to Tk 135,028 crore. Although the tax rate was reduced from 35% to 32.5% last year due to the prevalence of coronavirus, the revenue collection has increased by 12.87% from July 2020 to April 2021.

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.