Adverse impact of finance bill on corporates

The Finance Bill 2016 that has been placed in Parliament brings little cheer to the corporate houses that are already reeling under the onslaught of escalating input costs of which energy costs are material. The tax measures that have been proposed will significantly increase the cost of doing business. Let us examine some of these measures.
A major impact that will be felt by corporate is the escalation in tax deduction at source under sections 52 and 53 of the Income tax manual. These have been increased across the board. In addition to tax deduction at source, VAT is also deducted at source. The question that may come to one’s mind is so what? These tax deductions will be made from suppliers’ bill; hence is there any impact on the company’s expense?  The answer lies in the fact that in almost all cases, suppliers quote their prices “net of tax and VAT”. Tax and VAT is on company’s account and it becomes a cost for the company.  Let us take a simple example to illustrate the point. The current applicable rate for supply of goods is 5 per cent tax and 5 per cent VAT at source totaling 10 per cent. The Finance Bill proposes to increase the same to 7 per cent   for income tax that will bring up the total to 12 per cent. Hence, there will be an increase of 20 per cent on the cost of supply of goods. For transport providers, the existing rate is 7.5 per cent income tax and 5.5 per cent VAT at source totaling 13 per cent. Tax at source is now proposed to be increased to 10 per cent that will bring up the total to 15.5 per cent i.e. an increase of 20 per cent.
Another major impact will be felt due to the amendment of Section 82C. The change proposed under this section has shaken the foundations of edifice on which the principles of taxation have been built. Let us try to understand this through a simple example. Let us assume that a supplier has made an invoice for Tk 100 from which 7 per cent tax (BDT 7) has been deducted at source. Normally for suppliers, the margin is wafer thin due to the intense competition. Let us be generous and assume a profit margin of 10 per cent. Hence, his final profit would be BDT 100 x 10% =BDT 10. Assuming his personal tax rate is 25 per cent, he would need to pay BDT 10 x 25% = BDT 2.5. An amount of BDT 7 has already been deducted at source. So he should get back BDT 4.5 (BDT 7 less his final tax liability of BDT 2.5) Right?
Well guess what? This was the case until last year. Earlier, if the actual tax based on the return was lower than the tax deduction at source, the excess income tax paid was refunded under the law. The new amendment proposes that the tax payable will be higher of the two amounts. The new law is saying that whatever tax has been deducted is minimum tax irrespective of what is the actual tax based on income. The government is effectively saying "Heads I win, tails you lose"!!
To put the above calculation in a different vein, we assumed that an amount of BDT 7 has been deducted from the above supplier. In order to have a tax payable of BDT 7, he will have to have a profit before tax of BDT 28 (7 / 0.25) assuming a tax rate of 25%. In other words, the supplier will have to earn a margin of 28% on his sale (BDT 28 divided by the sale value of BDT 100). Ironic, isn’t it? It will be hard to find a supplier who makes a margin of 28% on supplies especially in such highly competitive environment.
The situation will exacerbate in subsequent years when the tax deduction at source is increased further to quench the insatiable thirst of government to increase revenue at the expense of the hapless compliant taxpayers.
If a corporate has made losses, woe betide. Not only would you lose the tax deduction at source, you will also have to pay a minimum tax on sales ranging from 0.6% to 1% depending upon the type of industry.  Making profit or loss is a natural business phenomenon. No company can guarantee that it will always make profit. The above tax is being charged on the premise that companies are not declaring their true income. The onus of proving lies in the Income tax authorities and unless this is done, the tax loss should be accepted. The Indian Income tax recognizes this fact and allows this payment to be adjusted in subsequent years. Notwithstanding what has been stated above, the increase in rates will put further burden on loss making companies who are already struggling with big debt burdens and is clearly unjustified.
Another major impact will be felt by the increase of tax deduction at source from distributors’ income. The Finance Bill proposes to increase the rate of tax deduction for distributor commission. Earlier, the rate was 3% of the amount representing the difference between the retail selling price and the invoice price to the distributor which in a majority of case was 4%. Hence, for an invoice value of BDT 100, the rate of deduction was BDT 0.12. The Finance Bill proposes to increase the rate to 5% with a flat margin of 12 per cent. This will bring the amount of deduction to BDT 0.60 which represents an increase of 5 times!!
In the first place, the tax should be applicable only on distributors’ income. Tax on retailers income should not be included which is not being earned by distributors.  Secondly, the flat margin of 12% has got no relationship with the market reality where the distributors get much less commission.
The government has fixed the tariff value for 102 items including some raw materials. The tariff value has been in most of the cases at a rate which is much higher than the transaction value as quoted under international arms length pricing. Also, most of the rates attract the highest rate of duty and supplementary duty. Consequently the effective duties and taxes will increase substantially leading to cost increase. This will make local manufacturing of such products uncompetitive compared to imported products and will usher a trading economy. There are examples of highly compliant companies where the tariff value of some of their raw material imports have been fixed at 6 times higher than the international price.
It is indeed unfortunate that this insatiable quest for raising revenue is leading the government to impose taxes that will take a heavy toll on business. Most of companies have shown marginal growth this year and in some cases degrowth. The latest measures may be the last straw that will break the proverbial camel’s back.

The writer is the chief financial officer of Lafarge Surma Cement Limited

 

Adverse impact of finance bill on corporates

The Finance Bill 2016 that has been placed in Parliament brings little cheer to the corporate houses that are already reeling under the onslaught of escalating input costs of which energy costs are material. The tax measures that have been proposed will significantly increase the cost of doing business. Let us examine some of these measures. A major impact that will be felt by corporate is the escalation in tax deduction at source under sections 52 and 53 of the Income tax manual. These have been increased across the board. In addition to tax deduction at source, VAT is also deducted at source. The question that may come to ones mind is so what? These tax deductions will be made from suppliers bill; hence is there any impact on the companys expense? The answer lies in the fact that in almost all cases, suppliers quote their prices net of tax and VAT. Tax and VAT is on companys account and it becomes a cost for the company. Let us take a simple example to illustrate the point. The current applicable rate for supply of goods is 5 per cent tax and 5 per cent VAT at source totaling 10 per cent. The Finance Bill proposes to increase the same to 7 per cent for income tax that will bring up the total to 12 per cent. Hence, there will be an increase of 20 per cent on the cost of supply of goods. For transport providers, the existing rate is 7.5 per cent income tax and 5.5 per cent VAT at source totaling 13 per cent. Tax at source is now proposed to be increased to 10 per cent that will bring up the total to 15.5 per cent i.e. an increase of 20 per cent. Another major impact will be felt due to the amendment of Section 82C. The change proposed under this section has shaken the foundations of edifice on which the principles of taxation have been built. Let us try to understand this through a simple example. Let us assume that a supplier has made an invoice for Tk 100 from which 7 per cent tax (BDT 7) has been deducted at source. Normally for suppliers, the margin is wafer thin due to the intense competition. Let us be generous and assume a profit margin of 10 per cent. Hence, his final profit would be BDT 100 x 10% =BDT 10. Assuming his personal tax rate is 25 per cent, he would need to pay BDT 10 x 25% = BDT 2.5. An amount of BDT 7 has already been deducted at source. So he should get back BDT 4.5 (BDT 7 less his final tax liability of BDT 2.5) Right? Well guess what? This was the case until last year. Earlier, if the actual tax based on the return was lower than the tax deduction at source, the excess income tax paid was refunded under the law. The new amendment proposes that the tax payable will be higher of the two amounts. The new law is saying that whatever tax has been deducted is minimum tax irrespective of what is the actual tax based on income. The government is effectively saying Heads I win, tails you lose!! To put the above calculation in a different vein, we assumed that an amount of BDT 7 has been deducted from the above supplier. In order to have a tax payable of BDT 7, he will have to have a profit before tax of BDT 28 (7 / 0.25) assuming a tax rate of 25%. In other words, the supplier will have to earn a margin of 28% on his sale (BDT 28 divided by the sale value of BDT 100). Ironic, isnt it? It will be hard to find a supplier who makes a margin of 28% on supplies especially in such highly competitive environment. The situation will exacerbate in subsequent years when the tax deduction at source is increased further to quench the insatiable thirst of government to increase revenue at the expense of the hapless compliant taxpayers. If a corporate has made losses, woe betide. Not only would you lose the tax deduction at source, you will also have to pay a minimum tax on sales ranging from 0.6% to 1% depending upon the type of industry. Making profit or loss is a natural business phenomenon. No company can guarantee that it will always make profit. The above tax is being charged on the premise that companies are not declaring their true income. The onus of proving lies in the Income tax authorities and unless this is done, the tax loss should be accepted. The Indian Income tax recognizes this fact and allows this payment to be adjusted in subsequent years. Notwithstanding what has been stated above, the increase in rates will put further burden on loss making companies who are already struggling with big debt burdens and is clearly unjustified. Another major impact will be felt by the increase of tax deduction at source from distributors income. The Finance Bill proposes to increase the rate of tax deduction for distributor commission. Earlier, the rate was 3% of the amount representing the difference between the retail selling price and the invoice price to the distributor which in a majority of case was 4%. Hence, for an invoice value of BDT 100, the rate of deduction was BDT 0.12. The Finance Bill proposes to increase the rate to 5% with a flat margin of 12 per cent. This will bring the amount of deduction to BDT 0.60 which represents an increase of 5 times!! In the first place, the tax should be applicable only on distributors income. Tax on retailers income should not be included which is not being earned by distributors. Secondly, the flat margin of 12% has got no relationship with the market reality where the distributors get much less commission. The government has fixed the tariff value for 102 items including some raw materials. The tariff value has been in most of the cases at a rate which is much higher than the transaction value as quoted under international arms length pricing. Also, most of the rates attract the highest rate of duty and supplementary duty. Consequently the effective duties and taxes will increase substantially leading to cost increase. This will make local manufacturing of such products uncompetitive compared to imported products and will usher a trading economy. There are examples of highly compliant companies where the tariff value of some of their raw material imports have been fixed at 6 times higher than the international price. It is indeed unfortunate that this insatiable quest for raising revenue is leading the government to impose taxes that will take a heavy toll on business. Most of companies have shown marginal growth this year and in some cases degrowth. The latest measures may be the last straw that will break the proverbial camels back. The writer is the chief financial officer of Lafarge Surma Cement Limited