Post Finance Act – Some reflections

The Finance Bill has just been passed in the Parliament on Wednesday with some amendments. It is heartening to note that a number of key changes proposed have been accepted by the Government. These include:
Tax at source on exports: In the proposed Finance Bill, tax at source was proposed to be increased from 0.60 per cent to 1.5 per cent. Facing stiff opposition from trade bodies, this amount has been brought down to 0.7 per cent. There is no denying the fact that the readymade garments sector is playing a pivotal role in the country’s economic development when we consider the number of jobs created and the amount of foreign currency earned. In recent years, this sector is plagued with rising costs mainly arising from energy costs. To add to their woes, the Bangladeshi taka is constantly appreciating against the currencies of major exporting countries. With Brexit, importers in UK, which is a major exporting country, are demanding a price cut. This cut in export tax will partially assist in the exporters remaining competitive although the tax at source has increased from 0.60 per cent to 0.70 per cent.
Deposit of VAT on appeal: The Finance Bill had proposed an increase from 10 per cent to 50 per cent. This proposal was highly unjustified. Current VAT audits are extremely arbitrary in nature and often big demands are raised either to increase government revenue or for unethical reasons. Increase of tax amount from 10 per cent to 50 per cent would have severely strained the cash flow of the companies. Such high increase would also have led to increase in unethical practices.  Also, filing of appeal is a fundamental right that was being stifled with this proposal. It is heartening to note that Government has withdrawn this proposal.
Base value for tax deducted at source: The Finance Bill had proposed to add the VAT on the price and income tax at source to be calculated on the higher amount. This proposal would have amounted to tax on tax. Both income tax and VAT should be calculated on the price to be paid. Much to the relief of the corporate taxpayers, this provision has been withdrawn
Higher rate of tax on distributors’ commission:  The Finance Bill had proposed to increase the rate of tax deduction for distributor commission. Earlier, the rate was 3per cent of the amount representing the difference between the retail selling price and the invoice price to the distributor. The Finance Bill had proposed to increase the rate to 5per cent with a flat margin of 12per cent. 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 12per cent has got no relationship with the market reality where the distributors get much less commission. Finally, the value addition has been brought down from 12per cent to 6per cent that will reduce the cost of doing business for corporate.
Financial year for multinational companies: In the Finance Act 2015, the definition of “income year” was changed and a uniform income year was imposed for all companies running from July to June. In line with the change in income year for tax purposes, the financial year was also made uniform for all companies. Imposition of this provision would have rendered the consolidation of accounts for multinational an impossible job since globally all multinationals follow a calendar year for financial year. The Government has realized the problems that multinationals would have faced and changed the definition of income year to exclude multinationals.
Limit for investment allowance for individual taxpayers: The government had proposed to reduce the investment allowance from 30 per cent to 20 per cent and has also proposed to reduce the tax rebate on investment allowance from the current rate of 15 per cent  to mostly 10per cent . All taxpayers would have been impacted by this change with the highest impact on low income earners. For example, an individual with total income of BDT 40,000 per month would need to higher tax by 521per cent ! In a country where income levels rise between 5 to 10 per cent and inflation running in the range of 6 to 7per cent , this increase is regressive. Reduction of investment allowance will reduce levels of investment in a situation where the economy desperately needs to raise the level of investment as a percentage of GDP to raise GDP levels and alleviate poverty. Faced with a strong demand from all sections of society, the investment ceiling has been raised by 5per cent  from the proposed 25 per cent . This will increase the disposable income of individuals and provide greater fillip to consumer spending and the economy.
Major customs duty changes: Customs duty on raw materials imports for smart card, sever card, fibre optic cable and SIM card has been cut in the amended budget. Also customs duty on raw materials of drugs has been rationalized. Tariff value for urea resin has been fixed at $900 but import duty for the product has been cut from 25per cent to 15per cent. This will help the fertilizer industry but the tariff value is high compared to international transaction price. Tax on boulder stone has been waived that should assist the construction industry to reduce costs.
Despite these changes, a number of measures proposed in the budget remain unchanged. This will have a profound impact on the individual as well as corporate houses. Some of these measures are discussed below:
Workers Profit Fund: The Finance Act proposes to tax this receipt with an exempt amount of BDT 50,000. For salaried employees who receive Workers Profit Fund, this receipt has been tax free since the time the Act has been enacted in 1968. Bangladesh Labour Law mentions this income as tax free. Taxability of this income will create industrial unrest among the workers who have never paid tax on this income and destabilize operations. This proposal needs to be withdrawn in the interest of salaried employees.
Tax at source on income of Provident Fund, Gratuity and Workers Profit Fund: The Finance Act proposes to deduct at source at the rate of 5per cent  from the above funds. Income from the funds form a part of retirement scheme. Rates of government sanchapatra have been coming down in recent years. This has decreased the income of the funds. In the case of Gratuity Fund, no investment is possible in sanchayapatra and only investment in TBill is possible which has a very low yield.  Under this circumstance, further deduction of 5per cent will be very damaging to the retirement benefits of retirees. In Bangladesh, there is no state administered pension fund. This reduction will strain the already beleaguered retirement benefit amounts. Income from funds is exempt under the Sixth Schedule of Income Tax Manual. Also, payment received against provident fund and gratuity is exempt. There is therefore no rationale to deduct tax at source against these heads of income.
Higher rates of tax deduction at source: The Finance Act proposes to increase the rates of tax deduction at source. Both income tax and VAT deduction at source increases the cost of doing business. Most suppliers refuse to accept tax deduction at source and ask the company to bear this amount. Increase of rates will add to the costs which are already high. There is no doubt that private companies are doing a great service to the government acting as tax collectors for which they do not receive any payment. Hence, such increases should not be done in the interest of business.
Amendment of Section 82C: The Finance Act has proposed a major change in the manner tax deduction at source should be dealt with.  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. In other words, there will be no refund. This proposal goes against the fundamental principle of Income tax which is to pay tax on the income. Under this proposal, if the tax deducted at source is higher, the income relating to this tax is treated as “deemed income” which will have no relationship with the actual income.
Unless the tax authorities prove that the actual income is higher, payment of higher tax is clearly unjustified
and unlawful.
Also the rates of deduction at source are clearly unjustified. For example, tax deduction at source from suppliers is at the rate of 7 per cent . The supplier would need to have a net margin of 28per cent  on his sales which is clearly not tenable in the current competitive scenario where suppliers struggle to make a margin of 10per cent .
Audit of return relating to tax deduction at source: The Finance Act proposes to have the above returns audited. This proposal is highly unjustified. Annual tax returns are audited. In addition, if such half yearly returns are audited, tax payers will face unnecessary harassment.
Minimum tax for companies filing tax returns with loss: The Finance Bill proposes to raise the minimum tax for above companies from the current rate of 0.3per cent  to 0.6per cent , 0.75per cent  and 1per cent  depending upon company category. 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.
Higher tariff value for many imported items: The government has fixed tariff values for 102 items. Apart from the fact that most of these items carry the highest rate of customs and supplementary duty, the tariff values are much higher than the international transaction prices. There are many instances of companies importing raw materials, the tariff value of which is 6 times higher than the international transaction price.
This will definitely increase the cost of production and will discourage investment in these sectors. In its place, there will be higher imports of finished products that will usher a trading economy.  For example, the tariff value for billet, a key raw material for steel mills, was proposed to increase to USD 400 per ton that has been reduced to USD 380 per ton in the budget. This figure is still considerably higher than international prices.
Investment Allowance: The rate of investment allowance is still lower by 5per cent  compared to last year. In addition the rebate has been lowered from 15per cent  to an average of about 11per cent. Individual tax payers, already reeling under high taxes, will still suffer from this unjustified decrease in investment allowance that is reducing their disposable income that will have a detrimental impact on their disposable income as well as further investment.
Concluding remarks: There is no doubt that the Government needs increasing revenue to fund the desperately needed development needs. However, the answer is not to continue to increase the tax burden of those who are paying taxes. It is estimated that around 1 million out of a potential 10 million taxpayers pay taxes. This in effect means 1 million taxpayers are paying the taxes for the 10 million potential taxpayers. If the Government can increase the tax dragnet for the people who are not paying taxes, the tax rates will automatically come down that will enhance the compliance culture. For example, when NBR fixes revenue targets for individual tax circles, there should be more focus
on increasing number of non
taxpaying entities as opposing to increasing revenue.
Private sector investment as a per cent of GDP continues to be very low at a figure of 22per cent. This will deter the objective of the Government to accelerate GDP beyond the 7per cent mark on a sustaining basis. The Finance Minister, in his concluding speech, has identified three reasons for the sluggish private sector investment. These relate to lack of energy, land and infrastructure. However, these are just the tip of the iceberg. The deeper malaise lies elsewhere. I would like to point out that the measures of the government to continuously increase taxes and customs duty are significantly increasing the cost of doing business. At the same time, energy costs are spiraling.  Borrowing costs are coming down but are still high. In such a situation where the entrepreneurs face a great deal of uncertainty in recovering their investment particularly when the future is uncertain and import of goods can be done freely at a price that could be significantly lower than that domestically produced.
The problem is that Government does not really understand the problems faced by private companies. There should be more empathy from their side and much more dialogue to address the needs of private sector. This will usher a better economic climate where private sector can flourish that is currently the desperate need of the hour.

The writer is the chief financial officer of Lafarge Surma Cement Ltd.

Post Finance Act – Some reflections

The Finance Bill has just been passed in the Parliament on Wednesday with some amendments. It is heartening to note that a number of key changes proposed have been accepted by the Government. These include: Tax at source on exports: In the proposed Finance Bill, tax at source was proposed to be increased from 0.60 per cent to 1.5 per cent. Facing stiff opposition from trade bodies, this amount has been brought down to 0.7 per cent. There is no denying the fact that the readymade garments sector is playing a pivotal role in the countrys economic development when we consider the number of jobs created and the amount of foreign currency earned. In recent years, this sector is plagued with rising costs mainly arising from energy costs. To add to their woes, the Bangladeshi taka is constantly appreciating against the currencies of major exporting countries. With Brexit, importers in UK, which is a major exporting country, are demanding a price cut. This cut in export tax will partially assist in the exporters remaining competitive although the tax at source has increased from 0.60 per cent to 0.70 per cent. Deposit of VAT on appeal: The Finance Bill had proposed an increase from 10 per cent to 50 per cent. This proposal was highly unjustified. Current VAT audits are extremely arbitrary in nature and often big demands are raised either to increase government revenue or for unethical reasons. Increase of tax amount from 10 per cent to 50 per cent would have severely strained the cash flow of the companies. Such high increase would also have led to increase in unethical practices. Also, filing of appeal is a fundamental right that was being stifled with this proposal. It is heartening to note that Government has withdrawn this proposal. Base value for tax deducted at source: The Finance Bill had proposed to add the VAT on the price and income tax at source to be calculated on the higher amount. This proposal would have amounted to tax on tax. Both income tax and VAT should be calculated on the price to be paid. Much to the relief of the corporate taxpayers, this provision has been withdrawn Higher rate of tax on distributors commission: The Finance Bill had proposed to increase the rate of tax deduction for distributor commission. Earlier, the rate was 3per cent of the amount representing the difference between the retail selling price and the invoice price to the distributor. The Finance Bill had proposed to increase the rate to 5per cent with a flat margin of 12per cent. 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 12per cent has got no relationship with the market reality where the distributors get much less commission. Finally, the value addition has been brought down from 12per cent to 6per cent that will reduce the cost of doing business for corporate. Financial year for multinational companies: In the Finance Act 2015, the definition of income year was changed and a uniform income year was imposed for all companies running from July to June. In line with the change in income year for tax purposes, the financial year was also made uniform for all companies. Imposition of this provision would have rendered the consolidation of accounts for multinational an impossible job since globally all multinationals follow a calendar year for financial year. The Government has realized the problems that multinationals would have faced and changed the definition of income year to exclude multinationals. Limit for investment allowance for individual taxpayers: The government had proposed to reduce the investment allowance from 30 per cent to 20 per cent and has also proposed to reduce the tax rebate on investment allowance from the current rate of 15 per cent to mostly 10per cent . All taxpayers would have been impacted by this change with the highest impact on low income earners. For example, an individual with total income of BDT 40,000 per month would need to higher tax by 521per cent ! In a country where income levels rise between 5 to 10 per cent and inflation running in the range of 6 to 7per cent , this increase is regressive. Reduction of investment allowance will reduce levels of investment in a situation where the economy desperately needs to raise the level of investment as a percentage of GDP to raise GDP levels and alleviate poverty. Faced with a strong demand from all sections of society, the investment ceiling has been raised by 5per cent from the proposed 25 per cent . This will increase the disposable income of individuals and provide greater fillip to consumer spending and the economy. Major customs duty changes: Customs duty on raw materials imports for smart card, sever card, fibre optic cable and SIM card has been cut in the amended budget. Also customs duty on raw materials of drugs has been rationalized. Tariff value for urea resin has been fixed at $900 but import duty for the product has been cut from 25per cent to 15per cent. This will help the fertilizer industry but the tariff value is high compared to international transaction price. Tax on boulder stone has been waived that should assist the construction industry to reduce costs. Despite these changes, a number of measures proposed in the budget remain unchanged. This will have a profound impact on the individual as well as corporate houses. Some of these measures are discussed below: Workers Profit Fund: The Finance Act proposes to tax this receipt with an exempt amount of BDT 50,000. For salaried employees who receive Workers Profit Fund, this receipt has been tax free since the time the Act has been enacted in 1968. Bangladesh Labour Law mentions this income as tax free. Taxability of this income will create industrial unrest among the workers who have never paid tax on this income and destabilize operations. This proposal needs to be withdrawn in the interest of salaried employees. Tax at source on income of Provident Fund, Gratuity and Workers Profit Fund: The Finance Act proposes to deduct at source at the rate of 5per cent from the above funds. Income from the funds form a part of retirement scheme. Rates of government sanchapatra have been coming down in recent years. This has decreased the income of the funds. In the case of Gratuity Fund, no investment is possible in sanchayapatra and only investment in TBill is possible which has a very low yield. Under this circumstance, further deduction of 5per cent will be very damaging to the retirement benefits of retirees. In Bangladesh, there is no state administered pension fund. This reduction will strain the already beleaguered retirement benefit amounts. Income from funds is exempt under the Sixth Schedule of Income Tax Manual. Also, payment received against provident fund and gratuity is exempt. There is therefore no rationale to deduct tax at source against these heads of income. Higher rates of tax deduction at source: The Finance Act proposes to increase the rates of tax deduction at source. Both income tax and VAT deduction at source increases the cost of doing business. Most suppliers refuse to accept tax deduction at source and ask the company to bear this amount. Increase of rates will add to the costs which are already high. There is no doubt that private companies are doing a great service to the government acting as tax collectors for which they do not receive any payment. Hence, such increases should not be done in the interest of business. Amendment of Section 82C: The Finance Act has proposed a major change in the manner tax deduction at source should be dealt with. 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. In other words, there will be no refund. This proposal goes against the fundamental principle of Income tax which is to pay tax on the income. Under this proposal, if the tax deducted at source is higher, the income relating to this tax is treated as deemed income which will have no relationship with the actual income. Unless the tax authorities prove that the actual income is higher, payment of higher tax is clearly unjustified and unlawful. Also the rates of deduction at source are clearly unjustified. For example, tax deduction at source from suppliers is at the rate of 7 per cent . The supplier would need to have a net margin of 28per cent on his sales which is clearly not tenable in the current competitive scenario where suppliers struggle to make a margin of 10per cent . Audit of return relating to tax deduction at source: The Finance Act proposes to have the above returns audited. This proposal is highly unjustified. Annual tax returns are audited. In addition, if such half yearly returns are audited, tax payers will face unnecessary harassment. Minimum tax for companies filing tax returns with loss: The Finance Bill proposes to raise the minimum tax for above companies from the current rate of 0.3per cent to 0.6per cent , 0.75per cent and 1per cent depending upon company category. 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. Higher tariff value for many imported items: The government has fixed tariff values for 102 items. Apart from the fact that most of these items carry the highest rate of customs and supplementary duty, the tariff values are much higher than the international transaction prices. There are many instances of companies importing raw materials, the tariff value of which is 6 times higher than the international transaction price. This will definitely increase the cost of production and will discourage investment in these sectors. In its place, there will be higher imports of finished products that will usher a trading economy. For example, the tariff value for billet, a key raw material for steel mills, was proposed to increase to USD 400 per ton that has been reduced to USD 380 per ton in the budget. This figure is still considerably higher than international prices. Investment Allowance: The rate of investment allowance is still lower by 5per cent compared to last year. In addition the rebate has been lowered from 15per cent to an average of about 11per cent. Individual tax payers, already reeling under high taxes, will still suffer from this unjustified decrease in investment allowance that is reducing their disposable income that will have a detrimental impact on their disposable income as well as further investment. Concluding remarks: There is no doubt that the Government needs increasing revenue to fund the desperately needed development needs. However, the answer is not to continue to increase the tax burden of those who are paying taxes. It is estimated that around 1 million out of a potential 10 million taxpayers pay taxes. This in effect means 1 million taxpayers are paying the taxes for the 10 million potential taxpayers. If the Government can increase the tax dragnet for the people who are not paying taxes, the tax rates will automatically come down that will enhance the compliance culture. For example, when NBR fixes revenue targets for individual tax circles, there should be more focus on increasing number of non taxpaying entities as opposing to increasing revenue. Private sector investment as a per cent of GDP continues to be very low at a figure of 22per cent. This will deter the objective of the Government to accelerate GDP beyond the 7per cent mark on a sustaining basis. The Finance Minister, in his concluding speech, has identified three reasons for the sluggish private sector investment. These relate to lack of energy, land and infrastructure. However, these are just the tip of the iceberg. The deeper malaise lies elsewhere. I would like to point out that the measures of the government to continuously increase taxes and customs duty are significantly increasing the cost of doing business. At the same time, energy costs are spiraling. Borrowing costs are coming down but are still high. In such a situation where the entrepreneurs face a great deal of uncertainty in recovering their investment particularly when the future is uncertain and import of goods can be done freely at a price that could be significantly lower than that domestically produced. The problem is that Government does not really understand the problems faced by private companies. There should be more empathy from their side and much more dialogue to address the needs of private sector. This will usher a better economic climate where private sector can flourish that is currently the desperate need of the hour. The writer is the chief financial officer of Lafarge Surma Cement Ltd.