Advance tax weighs heavy on businesses amid pandemic
The government's decision to slash the advance tax (AT) when importing raw materials from 5 per cent to 4 per cent for the upcoming fiscal year will encourage local manufacturers by reducing their financial burden.
However, even with reduced rates, the tax will still block a portion of working capital and increase operating costs.
Businesses belonging to sectors with low-value addition will get refunds on the tax as the amount of AT paid during import will be higher than the total payable amount of value-added tax (VAT) on final products.
"But getting refunds is a lengthy and cumbersome process," said various industry insiders.
The government's decision to decrease AT comes at a time when companies from various industries, such as steel and shipbreaking, are pressing for refunds on the excess amount of VAT paid.
The AT related refund claims amount to nearly Tk 800 crore as disbursements have remained stuck at the National Board of Revenue's (NBR) field offices due to bureaucratic tangles.
As per a previous NBR directive, field offices dealing with VAT were supposed to open accounts with the Bangladesh Bank through the Office of the Controller General of Accounts (CGA) to receive cheque books.
The NBR offices would then be required to disburse AT refunds by issuing cheques to the respected taxpayer.
However, months after this decision was made, the field offices are yet to open their central bank accounts because of administrative issues, said two VAT commissioners yesterday.
As a result, businesses are suffering from a lack of working capital and increased operation costs, according to numerous entrepreneurs and business executives.
"We wanted a full exemption from AT for the next fiscal year along with waivers for advance income tax during imports and sales as the flow of funding is becoming seriously narrow," said Manwar Hossain, chairman of the Bangladesh Steel Manufacturers Association (BSMA).
The association represents Bangladesh's steel manufacturing industry, which produces 60 lakh tonnes of the product annually.
The NBR had initially introduced a 5 per cent AT charge under the new VAT laws on importing goods for fiscal 2020-21 to encourage businesses to keep proper and updated records of their accounts.
The idea behind the move was to widen the VAT net and curb the scope for money laundering through trade misinvoicing.
The new AT would be adjustable with the total payable VAT in their returns and the tax paid in excess would be refunded to the taxpayer.
However, steel manufacturers already have to invest huge sums of money to import raw materials and with the new AT, which was first introduced under VAT law in fiscal 2019-20, firms will have to pay a considerable amount of AT, which exceeds the actual VAT payable, the BSMA said.
Manufacturers suffer financially while taking the hassle to get refunds, blocking their working capital and increasing costs in the process, the association added.
Following their demands to withdraw AT completely, it was only reduced by a single percentage.
"This one per cent reduction is not enough. While the COVID-19 crisis has induced a capital shortage, steel millers will only incur more losses due to the imposed AT," the BSMA said.
Aside from those in the steel industry, manufacturers in other sectors who sell their products in the domestic market will face similar difficulties.
"We kept our factory shut for two months because of the coronavirus outbreak and are now suffering from liquidity shortage. At this time, it would have been very helpful had AT been exempted," said Abu Sufian Chowdhury, managing director of Modern Poly Industries.
Modern Poly Industries, a producer of yarn and other man-made fibres used in clothing, imports PET chips to make drawn textured yarn, also known as polyester textured yarn.
Up until fiscal 2018-19, AT was not levied on the import of PET chips while cotton or staple fibre imports remain exempt from the charge for the upcoming fiscal year, beginning on July 1.
Therefore, it is justifiable to exempt AT on similar products like PET chips, Chowdhury said.
AT charges are comparatively higher for Modern Poly Industries as the customs authority assess the value of ingredients needed to make polyester yarn to be higher than its invoice value, he added.
Besides, although the 1 per cent reduction in AT rates is a welcome change, most manufacturers were hoping for a complete withdrawal of the provision.
The managing director also demanded similar VAT rates for cotton yarn and man-made fibres.
Echoing Chowdhury's sentiment, Md Shafiul Ather Taslim, director for finance of TK Group, said that the change in AT to 4 per cent comes as a relief.
"There will be some savings at the least even though we still have to bear interest on bank loans while waiting for a refund," he said.
TK Group, a company that caters to diversified sectors such as commodity importing and processing, has been waiting for a refund amounting to about Tk 100 crore for several months now.
"But there is still no update," Taslim added.
Refunds are generated in sectors with low-value addition and so, if the government wants to levy AT, it should be industry-specific, according to the director.
An official of the VAT Commissionerate in Dhaka said that the issue of blocked working capital would be eased once the refund process is streamlined.
However, others remain adamant about the tax being a bane on the production process.
"AT should be eliminated. It is a very inefficient system for doing business as it increases costs at a time when we are seeking to build an investment-friendly environment," said Abul Kasem Khan, chairman of the Business Initiative Leading Development (BUILD).
On the other hand, the government could levy advance tax and corporate tax if it increases investment in productive sectors and job creation, he added.
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