Covid-19 has rattled the fiscal strata of almost every nation on earth. Stimulus packages are being rolled out to help the battered and bruised economies around the world.
The government of Bangladesh has also introduced several stimulus packages in recent times. But one striking feature of these measures is that no tax incentive program has yet been implemented by the government, although some relaxation is hinted by a potential amendment in the tax laws recently approved in the cabinet.
It is undeniable that an acute cash flow shortage is the biggest problem in any financial crisis scenario. One way to tackle such economic stress is to roll out cash subsidies or low-interest loans.
Another way is to tweak the existing tax structure and give taxpayers extended time through deferrals and postponements of their tax and VAT payment obligations. Many Covid-19 affected countries including the United States of America, Canada, the United Kingdom, and India have already implemented the extension of tax returns and payment deadlines to help struggling businesses.
Research by the Reserve Bank of Australia suggested that tax breaks provided by the government during the 2008 global financial crisis had a “strong effect on business level investment” (The GFC Investment Tax Break, June 2018).
The research concluded that tax breaks are “more effective during financial downturns when financial constraints are more binding”. There is another benefit of tax breaks during the financial crisis. Tax breaks have the effect of fiscal stimulus which can act as an aid to the government’s existing stimulus package (for example, the United States’ Economic Stimulus Act (ESA), which provided tax rebates to low- and middle-income households during the 2008 financial crisis).
So what can the Bangladesh government do within our existing legal regime to design an effective tax-based stimulus package? Literature suggests that an efficient tax management system during a financial crisis should ensure, among others:
(a) assistance to the taxpayers
(b) legislative reforms to facilitate taxpayer assistance and tax administration
(c) establishing communication with the taxpayer
(IMF Staff Position Paper (2009) on Collecting Taxes During an Economic Crisis)
Based on the above, the following tax incentives could be introduced by the Bangladesh Government to tackle Covid-19-related economic downturn on an urgent basis.
Deferral of the payment of employees’ tax liability for tax compliant businesses
Section 50 of the Income Tax Ordinance, 1984 (the Ordinance) makes provisions for an employer to deduct employees’ tax from remuneration paid to its employees. In addition, the employer must submit a return and the payment of tax withheld and paid to the National Board of Revenue (NBR) within two weeks from the end of the month pursuant to section 75A of the Ordinance read with rule 13 of the Income-tax Rules 1984.
Penalties may be imposed in terms of section 124 of the Ordinance for violation of these provisions. During Covid-19, businesses should be allowed to defer the transfer of salary taxes to the NBR. Several countries have initiated it during Covid-19 (for example, Australia, Canada, China, Germany, among others).
This can be in the form of a temporary suspension of payment of taxes for a fixed period (for most countries the suspension period is between 3 and 6 months), or by allowing businesses to pay taxes in instalments.
Such measures will help businesses with liquidity during Covid-19 induced lockdown and decline in turnover. Businesses will have access to immediate cash flow (which was otherwise earmarked for tax purposes) that could enable them to survive.
Deferral of the payment of provisional tax liability for tax compliant businesses
According to section 66 of the Ordinance, the advance tax shall be payable in four equal instalments on the fifteenth day of September, December, March, and June of the financial year for which the tax is payable.
The provisional tax payment for the annual tax liability is based on an estimate by the taxpayer of total taxable income. Failure to pay advance tax attracts interest under section 70 of the Ordinance.
As a tax measure, businesses should be allowed for deferred payment of advance tax. For example, deferral can be allowed of a portion of the payment of the first and second instalments to NBR (June and September) for a period of two months for each instalment (August in place of June and November in place of September) without the NBR imposing interest for the late payment of the deferred amount.
Also, the tax benefit could stipulate a fixed rate of payment for these two deferred periods (eg 15% for each deferred instalment), and the remaining two instalment periods (December and March) can proportionately bear the remaining 70% advance tax.
Such a measure should assist these businesses by providing additional cash flow during the crisis.
Special tax treatment for funds established to assist with Covid-19 relief efforts
Presently, the Sixth Schedule (Part A) of the Ordinance allows tax exemption of donation received by charitable or religious institutions. An exemption circular could be issued under section 44 of the Ordinance allowing tax relief for any Covid-19 relief activity organized by a qualified disaster relief organization (whether incorporated or not).
The NBR can define the qualified disaster relief organization to include fundraising activities of professional organizations, any bank, NBFI, or any other organization. Furthermore, the appropriate circular should also be issued by the NBR to exempt any donation by persons from the gift tax regime or increase the already exempted donation threshold, which currently stands at Tk20,000 under the Gift Tax Act, 1990.
Use of zakat as corporate tax incentive
Currently, the Ordinance allows tax exemption for zakat payment for a resident or a non-resident Bangladeshi under section 44(2) read with paragraph 13 of the Sixth Schedule (Part B).
An incentive should be introduced whereby payment of zakat by companies or other business entities should be allowed as a deductible expense under the Ordinance. For example, the Zakat Fund Ordinance, 1982 allows tax exemption to any person in respect of any sums paid by him as zakat to the zakat fund or as donation or contribution to the charitable fund established under section 12.
A similar tax incentive should be given to companies for payment of zakat. In this regard, a theological problem may arise about a company’s standing towards payment of zakat since as a matter of law, it could be argued that a company has no religion and does not ever profess the religion.
In fact, there is a judicial announcement in Bangladesh that supports such a view. However, such an argument could be dispelled by an enactment allowing corporate zakat and related deductions. In Malaysia, for example, the 31st Conference (Muzakarah) of the Fatwa Committee National Council of Islamic Religious Affairs on December 9, 1992 resolved that a company (registered under the then Malaysian Companies Act 1965) could pay zakat fulfilling certain conditions, viz:
(a) The company was completely owned by Muslims
(b) The amount of wealth reached the minimum zakatable limit (nisab)
(c) The wealth possessed was for one lunar year (hawl).
Similar enactment could be introduced in Bangladesh allowing companies to pay zakat during Covid-19 and claim deductions against such zakat payment or exempt such zakat payments under the Ordinance.
Deferral of VAT payment
Under the Value Added Tax and Supplementary Duty Act, 2012 (VATSD Act), VAT is to be paid within 15 days of the end of each tax duration in the manner set by the NBR. An incentive should be introduced allowing deferral of VAT payment and submission of VAT return for a period of 3-6 months.
Similar steps have been taken by many countries including India, Malaysia, Austria, Belgium, the UK, and Vietnam. Under the current VATSD Act, there appears to be no statutory avenue of extending the return filing period beyond a month (section 65). Therefore, an enactment may be required for introducing these VAT incentives during the Covid-19 period.
The above suggestions are achievable under our legal landscape and should be considered by the government keeping in mind that the World Health Organization (WHO) has recently declared that Covid-19 may not go away anytime soon.
Therefore, it could be anticipated that the ongoing lockdown may linger for a while or may resurface even if lockdown restrictions are eased in the foreseeable future. If Covid-19 is here to stay, then the Bangladesh government must rethink the existing taxing structure and allow some incentives for businesses to survive these turbulent times.
Junayed Ahmed Chowdhury is Managing Partner of Vertex Chambers and Vertex International Consulting.
