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Addressing anomalies in the tax regime

A F Nesaruddin | Published: June 14, 2017 20:56:29 | Updated: October 17, 2017 23:51:45

Addressing anomalies in the tax regime

Among other things, two fundamental factors are pivotal to the sustainable growth of Bangladesh economy - investment (both domestic and foreign) and employment generation. The largest budget in terms of its size in the history of Bangladesh has recently been announced. The long-serving and experienced finance minister has also expressed his great satisfaction claiming the budget FY18 as one of the best budgets in his life and is confident that it is achievable. We welcome the Finance Minister for his determination in raising domestic revenue introducing various steps, including implementation of new VAT and SD (supplementary duty) Act. 
The main sources of government revenue are generated from indirect taxes and corporate taxes apart from foreign loan and domestic borrowings. When corporate tax constitutes a major source of direct taxes, there is a huge gap in the expectation and the ground reality. One important point is that corporate tax rate in Bangladesh is very high compared to the neighbouring countries. The businessmen resent trhis, foreign investors are discouraged and foreign direct investment (FDI) level is not getting any momentum. FDI has remained stagnant for some years registering less than 5.0 per cent growth and hovering little over USD 2.0 billion. 
TAX RATE: A review of corporate tax reveals that in Asia, tax rate is 25 per cent on an average as opposed to 35 per cent in Bangladesh, except for listed entities and few other selected sectors. In India, tax rate is 30 per cent with a proposal to bring it down to 25 per cent in the next five years. President Trump in USA has announced to bring down tax rate to 15 per cent from 35 per cent. UK has successfully brought down corporate tax rate to 20 per cent. 
Further, because of the arbitrary nature of taxation, effective tax rate in Bangladesh in many cases goes up even to 50 to 60 per cent, if not more. High tax rate, no doubt, leads to tax evasion and corruption. In Bangladesh, regular tax payers are paying higher rate of taxes, and still becoming subject to harassment. It is also important to note that out of 3.0 million Taxpayer Identification Number  (TIN) holders only 1.5 million file tax returns. The National Board of Revenue (NBR) has a very good record of raising revenue over last few years but due to lack of monitoring and adequate resources, a large portion of the income earners remain out of the tax net. If majority of these income earners could be brought under the tax net, there would not have been any problem of expanding tax net to keep the revenue stream growing as expected. 
Filing of tax returns showing business losses is another phenomenon affecting tax revenue.  In spite of best intentions, it is not possible for the tax department to verify records, and audit each and every taxpayer's books of account. Such tax returns with business losses should be accompanied by separate tax audit report preferably in the prescribed format by outside professionals, namely chartered accountants in keeping with bank statements, revenue assurance, certification of business and non-business expenses and finally, analysis of reasons for losses with supporting documents. This procedure, if adopted, will in no way, hold back the authority of the tax officials who can revisit or review those tax returns on a sample basis. Further, this process has no cost on the part of the tax department and can make their work transparent and conducive to revenue growth. 
WITHHOLDING TAX ON SUPPLIER'S BILLS: Higher tax withholding from supplier's bill is another impediment to business and increased cost of business. Five per cent of income tax withholding on supplier's bill is too high as it requires profit of 20 per cent which is very high in a competitive scenario. Because the rate is too high for supplier, it is shifted to business houses resulting in the increase of business cost and ultimately, it no longer remains a direct tax. In many cases, suppliers are manufacturers as well. In addition to five per cent, they also pay around 3.5 per cent income tax on raw materials at import stage totalling 8.5 per cent that need a margin of 34 per cent which is apparently impossible. Further, with the amendment of Section 82C, they will not be entitled to refund either. So ultimately, cost of business will go up. 
ROYALTY & TECHNICAL KNOWHOW FEES: In case of foreign investment, repatriation of royalty and technical fees is an internationally accepted business practice, and in Bangladesh, too, this practice is in place for many years. The Board of investment (currently Bangladesh Investment Development Authority (BIDA) has allowed 6.0 per cent of the turnover while recently introduced income tax laws allow 8.0 per cent of net profit. It cannot in any way be linked with profit, obviously it should be linked with sales as practised internationally. Further, 20 per cent tax and 15 per cent VAT withholding are also applicable. In reality, recipients do not pay such tax and VAT-remitter has to take care of it that increases cost of business as well. It is pertinent to note that Double Taxation Avoidance Agreements are not respected in many cases and no effective and clear-cut instructions are issued from the NBR to tax officials resulting in annoyance of foreign investors and discouraging FDI. 
EXCESS PERQUISITES: Perquisites over 50 per cent of salary are inadmissible in the hands of the Company. This is being taxed doubly in the hands of employer as well as employees. In fact, this practice is no longer in existence anywhere in the world. Even recent court cases/rulings direct that perquisite should be part of salary and allowed fully. This needs to be addressed properly. 
MINIMUM TAX FOR COMPANIES: Making profit or loss is a business phenomenon. Charging minimum tax contradicts the philosophy of imposition of income tax - income tax is charged on income, not on losses. It is the responsibility of tax personnel to look into the reasons for losses. Separate revenue audit report by CAs as mentioned above should accompany tax returns to get rid of any untoward situation. In fact, this is an important area where revenue leakage happens and it should be stopped. 
CSR EXPENSES: Current tax laws discourage corporate social responsibility (CSR) expenses and in case of banks, there is a limit as well. It should be recognised that this type of expenses is part of sustainable development. In India, as per Companies Act, 2.0 per cent of revenue is mandated for CSR expenses. There should not be any requirement of prior government approval in this regard. This needs to be dispassionately reviewed. 
ASSESSMENT PROCEDURES: There is strong reservation in the assessment process because of lack of transparency, selection of tax returns for audit without the basis provided in tax law, arbitrary disallowance of genuine business expenses without any basis, rejection of audit reports unlawfully even without showing any reason and many other issues. Recently, most of the files are sent to the Joint Commissioner and Commissioner of Taxes involving 3-tier explanations and furnishing documents by the tax payers apart from other hassles and involvement of incidental expenses by the tax payers. In the Finance Bill 2017, reopening file of tax returns under 82BB has been extended to five years (with the permission of Commissioner of Taxes, it  can be reopened even within six years) instead of two years and accordingly, tax payers have to preserve all records for five to seven years increasing cost of business for corporate tax payers. 
This year, a new proposal has been introduced proposing disallowance of salary payments made after Tax Day in case an employee defaults in filing tax returns within the Tax Day or extended time granted by the revenue authorities. It will definitely increase cost of business. At present, employer's obligation is to withhold tax from salary and no obligation about filing or monitoring of tax returns by the employees. Monitoring of filing of tax returns is the responsibility of the tax department. If the proposed amendment is enacted, employer will have to monitor filing of tax returns by employees. If any employee fails to file return on the tax day or within extended period, any payment made thereafter for his/her salary will be inadmissible expenses in the hands of employer. 
In other words, payment of salary in such cases has to be suspended to avoid disallowance. No doubt, this is an illogical provision and very difficult to implement. For example, a RMG group having over 3,000 employees (with Tk 16,000 basic salary per month) will face a big problem to comply with this regulation; they can withhold salary which will antagonise the employees and create chaos in the business. Fundamentally, monitoring the filing of tax returns is the responsibility of NBR, not the employers. In fact, there are numerous instances where NBR is shifting its responsibility to tax payers due to lack of their capability. The NBR needs capacity building, otherwise implementation of any big budget will not only be difficult but also impossible. 
The Budget should create an environment to boost investment for creating adequate employment opportunities especially to achieve the target growth rate of the economy. In the absence of this all efforts for reaching the status of a middle-income country will be a futile exercise.  

A F Nesaruddin, FCA is a practising chartered accountant and a senior partner of HodaVasi Chowdhury & Co. 
nesar@hodavasi.com

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