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Dhaka Tribune

Budget FY25: Tax cuts for traders but concerns linger for contractors

The proposed tax reforms in Budget FY25 have the potential to alleviate some financial burdens on businesses, particularly struggling traders

Update : 30 May 2024, 03:55 PM

The upcoming national budget for FY25 presents a mixed picture for businesses. While local traders and manufacturers may see some relief through proposed reductions in source tax deductions, concerns are mounting about the potential impact on small contractors.

Finance Ministry officials said there are plans to lower source tax rates, aiming to ease the financial burden on businesses struggling in the wake of the pandemic, global turmoil, and rising input costs. 

The rate will be reduced to 3% from the existing 4% for supplying raw materials, and to 4% from the existing 5% for supplying trading goods.

In order to provide local manufacturers and traders some relief, the government would treat their source tax deduction as the minimum tax and, if their income does not exceed the amount, as final settlement.

Traders applaud but seek more

Mahbubul Alam, president of the Federation of Bangladesh Chambers of Commerce and Industries (FBCCI), welcomes the proposed reduction but emphasizes the need for a more efficient tax system. He highlights two key issues, delayed refunds and abolishing source tax.

“We have been demanding a reduction of tax at source for a long time. If the government reduces the tax by 1%-2%, it will be helpful for the traders. We want such a decision in the next budget,” he said.

He also said that after deduction of tax at source, there is a provision to adjust it at the time of final tax calculation and according to this, companies should get a refund of the deducted tax if they incur losses. But the reality is different. Moreover, in the case of the organizations that have less profit, they have to adjust.

However, in the context of Bangladesh, it does not work on time, he went on suggesting that as part of improving the business environment, the system of deducting tax at such sources should be abolished.

Welcoming the move, Abul Kashem Khan, former chairperson of Business Initiative Leading Development (BUILD), supports the tax reduction but also emphasizes the importance of timely refunds for any excess tax withheld. 

He suggests implementing a reliable refund program for overpaid taxes and allowing adjustments in subsequent fiscal years if immediate refunds are not feasible.

“If the government is unable to refund the excess amount, it should be adjusted in the following fiscal year and it is appropriate for the government to take action to stop any facility from being misused.” He also said that they have been opposing the idea of AIT [advance income tax] for a long time. 

Mohammad Ali Khokon, president of the Bangladesh Textile Mills Association (BTMA), acknowledges the potential benefit of the tax reduction for businesses but calls for a unified tax system within the textile sector. 

Currently, separate taxes are levied at each stage of production, leading to a cumulative 16% burden. Khokon proposes a single 4% source tax on all materials used, from yarn to finished cloth, to simplify the tax structure and potentially reduce costs for textile manufacturers.

He also said that another obstacle is the use of smuggled textiles in the country’s apparel industry.

Trade bodies advocate for broader tax reforms

Several trade bodies are pushing for a more comprehensive tax reform package that goes beyond the proposed source tax reductions.

They said that although there is a provision for coordination of tax at source with final tax, it is not possible in time in the current tax structure of Bangladesh. 

Moreover, in order to adjust the applicable tax rate at the source, listed companies have to make net profit at the rate of 31.11% and unlisted companies at the rate of 23.33%, which is quite a tough task. 

The trade bodies said that the traders are struggling due to the post-Covid situation, global geopolitical issues, and economic turmoil, hike in prices of raw materials, fuel and energy. In this situation, high tax at source is a big impediment to their survival. 

Government considers unified rate for contractors

In a separate initiative, the government is planning to establish a single 5% source tax rate for contractor payments in FY25. Currently, the rate varies depending on contract volume (3%, 5%, or 7%). This change aims to:

Eliminate opportunities for tax evasion through contract manipulation. Simplify tax administration for both the government and contractors.

However, concerns have been raised about the potential impact on small contractors.

Their lower profit margins may not readily absorb a 2% increase in source tax deduction.

Abul Kashem Khan, also former president of the DCCI, suggested introducing measures to safeguard small contractors as when the source tax deduction rate increases by 2%, they may be affected.

Measures should be implemented to safeguard the interests of smaller businesses that could be disproportionately affected by the new rate.

Striking a balance

The proposed tax reforms in Budget FY25 have the potential to alleviate some financial burdens on businesses, particularly struggling traders. 

However, ensuring a smooth implementation process and mitigating potential negative consequences for specific sectors like small contractors will be crucial. 

Striking a balance between promoting business growth and ensuring tax compliance will be vital for the long-term health of the Bangladesh economy.

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