Most businesses in Bangladesh may miss out on the 2.5 percentage point reduction in corporate tax rate proposed in the budget for the coming fiscal year due to stringent conditions.
During the budget presentation on June 9, Finance Minister AHM Mustafa Kamal proposed to significantly reduce corporation tax for all listed and unlisted companies subject to two conditions being met.
In order to be eligible for a reduced tax rate, businesses must use the banking system to accept income as well as all make expenses and investments above Tk 12 lakh.
For listed companies, they must offload more than 10% of market shares in addition to satisfying the bank transfer requirement.
Banks, insurance companies, non-banking financial institutions, tobacco and telecommunications companies will not benefit from this decision because their corporate tax rates have remained unchanged.
Corporate tax reduction has been a long-standing demand of the business community in Bangladesh, as the rate is one of the highest in the world and even higher than the average corporate tax rate in Asia from South.
However, the government has set the conditions to ensure transparency and increase tax collection, which is the lowest in the world.
There are around 2.5 lakh of registered companies in Bangladesh. Among them, less than 30,000 companies submit tax returns.
They collectively paid corporate taxes amounting to Tk 37,086 crore in the financial year 2019-2020, the latest for which data is available.
Tax experts hailed the government’s move as it will shift transactions to the banking channel and reduce the use of cash. They wonder, however, if it would be possible for businesses to collect all sales proceeds using the banking channel.
Business leaders and big bosses of conglomerates believe that it would be quite impossible to benefit from lower corporate tax rates under current socio-economic conditions.
Mr. Anis Ud Dowla, Chairman of ACI Group, said the government is proposing a cut of 2.5 percentage points in corporation tax by keeping all expenses above Tk 12 lakh per bank transfer.
“It’s nothing but a mockery,” he said yesterday at an event organized by the Center for Policy Dialogue in Dhaka.
The government is showing it has cut corporate tax, but in reality it is actually depriving businesses of benefiting from it because of the condition, he said.
He urged the government to work on withholding tax on income because people do not get the refund if their tax is lower than the withholding tax paid.
The National Revenue Council is adjusting the tax instead of issuing the refund, he added.
“The corporate tax cut will not benefit us,” said Rizwan Rahman, president of the Dhaka Chamber of Commerce and Industry.
“More than 99% of companies will not be able to benefit from the benefits of the corporate tax reduction because it is absolutely impossible to meet the conditions.”
Rahman thinks a withholding tax cut could be more effective than a corporate tax cut.
Sadhan Kumar Dey, COO and CFO of RAK Ceramics, says it is quite difficult to avail the tax benefit for RAK Ceramics as he cannot say that he will not sell for cash.
He says RAK Ceramics can guarantee that he will not make any cash payments. However, he cannot give the same guarantee with regard to receipts.
“A business should respect the preference of customers, whether they pay in cash or through banks.”
As a seller of construction-related products, RAK Ceramics must also sell products even on Fridays or Saturdays when banks generally remain closed, Dey said.
“If the transactions are done through the banking channel, it ensures transparency, so as an auditor, we cannot appreciate the cash transactions,” said Muhammad Farooq, former president of the Institute of Chartered Accountants of Bangladesh. .
“However, this might not be convenient for businesses. But they should still explore ways to transact through the banking system.”
In Bangladesh, many businesses rely entirely on cash transactions, so they will have problems if they want to comply with the conditions to benefit from the reduced tax rate, Farooq said.
“The socio-economic situation must be prepared step by step for a low-cash transaction.”
Earlier, Snehasish Barua, a partner at Snehasish Mahmud & Co, an accountancy firm, said some big companies collect drafts on demand or pay for orders and then deliver their goods. For them, it is very easy to comply.
But most companies collect money from customers whenever they can, depending on the credit period. “Sometimes it’s difficult to get money back, let alone get it through the banking channel,” Barua said.