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OP-ED: Tax in the budget

  • Published at 08:14 pm June 20th, 2020
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How will the budget affect the country? BIGSTOCK

Taking a keener look at what the various taxes and duties could mean for people and companies

We must appreciate the NBR, finance division, and finance ministry for their tremendous efforts to prepare a full budget during this most challenging Covid time, when many were suspecting a delayed budget or at least an interim budget. 

Despite 66 days of government holidays and health threats, a few long-awaited changes have been proposed in the budget. However, some necessary amendments before the finance bill is approved in the parliament would have made their efforts even more praiseworthy. I would try to highlight some important aspects regarding personal tax, corporate tax, and VAT, hoping that those could be addressed while passing the finance bill.

Personal tax

Marginal tax-payers falling in the rate range of 0%-15% would now get the highest benefit in terms of net tax savings, people staying in the 20% slab would be least benefited, and higher income earners would now enjoy the maximum benefit. 

The principle behind taxing the rich (once, tax on income and then surcharge on net wealth once the threshold level goes beyond Tk3 crore) opens up the debate when measures taken contradict with each other. Looks like two balancing/adjustments to this effect has been tried by proposing incremental tax (AIT) on registration or renewal of motor cars and by proposing to bring in minimum tax implication for individuals having gross receipts of Tk3cr or more.

The budget proposes that pension due or received or gratuity to the extent of Tk2.5cr received from other than government or an approved pension/gratuity fund is to be taxed, which ultimately means persons who have served the firms/companies, other than the aforementioned ones, will now be taxed post-retirement on such receipts. 

So, now on one hand companies/firms will be forced to get their fund approved from NBR to enjoy relief from excess perquisite tax, and on the other hand employees will no longer be outside the ambit of tax if their employer intends, not to get their fund approved. 

Corporate tax

Even though a reduction in corporate tax rate (32.50% from previous 35%) for companies (other than publicly traded companies, banks, insurance and financial institutions, merchant banking companies, and cigarette, tobacco, and zarda manufacturing companies) has been proposed, since threshold for admissibility of certain items like promotional expense and travelling expenses have been proposed to be decreased at the same time, ultimately, effective tax rate would increase which would be clear from Table 1. Consequently, industries with higher promotional expenses and foreign travel expenses would be adversely impacted. Existence of the companies or branch offices of foreign companies heavily dependent on promotional activities will now be under serious pressure, if it stays as proposed.

Benefit has been proposed again for disclosing undisclosed income with a view to bring the money into the mainstream; now time has come to reconcile how much benefit it can reap in the real sense against what has been expected. If it is really so important, then comes the question: Why should that not be encouraged to come through priority sectors. More importantly, such measures have been consistently practiced over the years with no visible outcome and at the same time it hurts the honest taxpayers.


Table 1

 

 

Assessment Year

 

 

Assessment Year

 

Particulars

 

2019-20

Remarks

 

2020-21

Remarks

Business Turnover

  100,000,000 

  100,000,000 

 

  100,000,000 

  100,000,000 

 

Estimated Net profit (5% of Turnover)

       5,000,000 

       5,000,000 

 

       5,000,000 

       5,000,000 

 a 

Estimated Promotional Exp. (1.5% of Turnover)

       1,500,000 

       1,500,000 

 

       1,500,000 

       1,500,000 

 b 

Estimated Foreign Travelling exp (1% of Turnover)

       1,000,000 

       1,000,000 

 

       1,000,000 

    1,000,000 

 c 

Promotional Exp admissibility threshold (threshold-% of Turnover)

at actual

 

admissible 

0.50%

   500,000 

admissible 

Foreign Travel Exp (threshold-% of Turnover)

1.25%

        1,250,000 

expenditure is within admissible threshold 

0.50%

     500,000 

 admissible 

Taxable Income

 

  5,000,000 

 

 

   6,500,000 

 a+(b-d)+(c-e) 

Income Tax

35%

  1,750,000 

 

32.50%

 2,112,500 

 

Effective Tax Rate

 

35%

 

 

42%

 


VAT

A very surprising proposal has come in with respect to claiming VAT rebate. Earlier, companies were eligible to claim VAT rebate at the time of purchase, which is now proposed to be claimed only at the time of actual consumption. Since the time frame for claiming rebate is within the next four tax periods of purchase, industries that hold its inventory for longer periods might lose input credit, which ultimately will increase its cost. Moreover, how far tracking the consumption with purchase can be done practically merits question. A big challenge would be how consumption of service can be defined or clarified within the existing VAT law. 

Deposition of disputed tax has been proposed to be increased from 10% to 20% in case of filing an appeal to both appeal commissioner and tribunal reasoning to check unnecessary filing of appeal. Seeking for justice will be costlier now. Unnecessary filing of appeal can in no way be generalized when aggrieved parties have the right to seek justice, and it is directly related with cash flow at a certain point of time when everyone is passing the difficulties Covid-19.

Does it give us the sense that we are going back to VAT Act 1991, with some measures like proposing to introduce VDS (VAT deducted at source) on some 15% rated services while proposing to eliminate VDS on some 5%, 7.5%, 10% rated services. 

Some say, it is just like trial and error efforts, with purpose being unclear to businesses. Adopting a new process aligning with a new law, leaving earlier law behind and then again coming back to the older processes to re-align with the proposed changes, seems to be mere waste of time when we are in need of making VAT and Supplementary Duty Act, 2012 more clear and concise for the businesses.

It is proposed to amend the definition of “company” to include a company incorporated under any prevailing law of any country. Consequently, even a branch registered in Bangladesh with the BIDA would be considered as a company under the Act, and therefore, such a branch would now be considered a “withholding entity.” Accordingly, their compliance activity will be widened, and it will be very interesting to see how it contributes to the “ease of doing business in Bangladesh” index. 

Supplementary duty 

SD rates for services provided through mobile phone SIM/RIM card have been proposed to be increased from 10% to 15%. This process will ultimately increase all costs related to mobile-phone services. It is undeniable that a greater portion of the population have reliance on digital communication during the shutdown and social distancing measures enforced due to the coronavirus pandemic. 

Imposing more duties (SD) during this time will certainly have an adverse effect on this trend. Now the question is: Does it go in any way with the Digital Bangladesh vision of 2021? On a side note, allowing to grow the sectors that are at the introduction stage or at a growing stage should be given significant priority.

Excise duty

A proposal has been made for hiking excise duty on bank accounts with large balances. The big hike is proposed for bank accounts with a balance of more than Tk5 crore from Tk25,000 to Tk40,000. Is it a move towards discouraging the rich to keep such balances in their bank accounts when the banking sector itself is passing a very crucial time with regard to core liquidity, or is it something else that worked in the minds of the government think tanks? 

Mamun Rashid is an economic and public finance analyst.

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