Source tax on export may double in upcoming budget

Exporters feel raising source tax will put more pressure on the RMG sector

The government is again planning to double the source tax on export earnings. 

At present, source tax is being levied at the rate of 0.5% from the export income of all types of goods, which will expire on June 30.

According to the sources of the National Board of Revenue (NBR) and the Ministry of Finance, a proposal to increase this tax rate to 1% may come in the upcoming budget.

Economists feel the idea of raising source tax on export is one of the plans of the National Board of Revenue (NBR) or the government to increase revenue.

Regarding the matter, exporters said that raising the source tax would put more pressure on the RMG sector and at the same time, on remittances.

More than 80% of Bangladesh's export income comes from the readymade garment sector alone. Accordingly, entrepreneurs in this sector become the most vocal against attempts to hike the source tax on exports. 

Asked about this, Bangladesh Garment Manufacturers and Exporters Association (BGMEA) President Faruque Hassan, who is now in Geneva, Switzerland to attend the ILO (International Labour Organization) meeting told Dhaka Tribune: “We are in crisis with foreign currency. To increase this (foreign currency), I think exporters need to be further encouraged. During this time, the decision to raise source tax will really put the opposite pressure on the whole sector. At the same time, it will discourage importers.”

He further said, "In FY19-20, our exports were 28 billion and in the 10 months of the current FY21-22, it has reached $44 billion. It will increase further in the next fiscal year. In that case, the NBR's income from 0.5% tax is now doubling. So I don't think it is the right time to rise it up."

“This is not the right time to raise source tax. The effect of Covid-19 didn’t wear off yet. Besides, a kind of recession has started in the world and sales outlets are closing in many places. 

“Production costs have increased, the cost of transporting other goods including ship freight has also increased. There is also the possibility of raising gas prices soon as well and now on top of that raising source tax on export will create huge pressure on the readymade garment industry. There will be a crisis in the management of the organizations,” said Shahidullah Azim, vice-president of BGMEA. 

According to the Export Promotion Bureau (EPB), in the first 10 months of the current fiscal year (July-April), the export revenue was $43.34 billion. EPB is expecting that by the end of FY22, the total export earnings will touch $51 billion. 

In 10 months, the export income has increased by more than 35%. The NBR expects that around Tk250 crore will come from taxes on the source of export earnings in the current fiscal year. 

However, in the next financial year, the export sector is not likely to grow much. The finance department estimates that export earnings could grow by 20% in FY23.

Renowned economist Debapriya Bhattacharya, a distinguished fellow at the Centre for Policy Dialogue, thinks that the NBR, out of its revenue mobilization compulsion, is choosing to raise income tax at the source as it is the most efficient tax collection tool. 

He, however, said: “We hear about problems which transpire during the final tax adjustment of the amount deducted at source. This process should be made more transparent based on documentation and has to be specific to the performance of the taxed entity.”

He pointed out that the tax rate should be applied to all exporters equally, and that no discrimination should be made between RMG and non-RMG exporters. 

The noted economist and public policy analyst also suggested that if the export-oriented sectors, including the RMG, feel that they need additional policy support to retain their competitiveness, they should approach other relevant agencies including the Ministry of Commerce, not necessarily the NBR. 

“Like earlier, the proposed increase in advance income tax on export revenue may be an opening gambit for the NBR. This rate may get negotiated downward – keeping it above the current rate – through discussions,” he said.

The government imposed the source tax on exports for the first time in 2005. Initially, the rate was 0.25%. Later, it was raised at different times and was set at 1% in fiscal 2014-15.

For the last two years, the government has been levying a 0.5% source tax on export earnings considering the pandemic situation.

Though source tax is equal for all export-oriented sectors, non-RMG sectors have to pay taxes at a rate almost 2.5 times as high as that applicable for the RMG sector.

The Exporters Association of Bangladesh (EAB) has already urged the government to continue 0.5% tax deducted at sources, widely known as source tax, on exports for at least five years in a bid to keep up Bangladesh's export competitiveness amid the ongoing crises – soaring production costs, falling rates of taka against the dollar and surging freight charges.

EAB President Abdus Salam Murshedy recently submitted the proposals to the National Board of Revenue (NBR) seeking its attention in formulating the national budget for the upcoming FY23.