Firms unlikely to benefit from corporate tax cut

Most of the companies in Bangladesh may not qualify for the 2.5 percentage points cut in the corporate tax rate as proposed in the budget for the upcoming fiscal year owing to stringent conditions.

While unveiling the budget on June 9, Finance Minister AHM Mustafa Kamal proposed slashing the corporate tax for all listed and non-listed companies subject to fulfilment of two conditions.

In order to be eligible for a reduced tax rate, companies must use the banking system to accept incomes as well as all carry out expenses and investments of more than Tk 12 lakh.

For the listed companies, they have to offload more than 10 per cent shares in the market apart from meeting the banking transfer requirement.

Banks, insurance, non-bank financial institutions, tobacco and telecom companies will not benefit from the move as their corporate tax rates have remained unchanged.

Bringing down the corporate tax has been a long-standing demand of the business community in Bangladesh as the rate is one of the highest in the world and even higher than the average corporate tax rate in South Asia.

The government has, however, attached the conditions to ensure transparency and raise tax collection, which is the lowest in the world.

There are about 2.5 lakh registered companies in Bangladesh. Of them, less than 30,000 firms submit income tax returns.

They collectively paid corporate taxes amounting to Tk 37,086 crore in the fiscal year of 2019-20, the latest for which data is available.

Tax experts have praised the government decision as it will move transactions to the banking channel and cut the use of cash. They are, however, raised questions about whether it would be possible for companies to collect all sales proceeds using the banking channel.

Business leaders and top bosses of conglomerates think it would be quite impossible to benefit from the corporate tax rate cut under the present socioeconomic conditions.

M Anis Ud Dowla, chairman of ACI Group, said the government proposed a 2.5-percentage point corporate tax cut upon maintaining all expenditures over Tk 12 lakh through bank transfers.

"This is nothing but a mockery," he said at an event organised by the Centre for Policy Dialogue in Dhaka yesterday.

The government is showing that it has cut the corporate tax, but, in reality, it is actually depriving businesses of benefiting from it owing to the condition, he said.

He urged the government to work on advance income tax because people do not get the refund if their tax is lower than the advance tax paid.

The National Board of Revenue adjusts the tax instead of making the refund, he added.

"The corporate tax reduction will not benefit us," said Rizwan Rahman, president of the Dhaka Chamber of Commerce and Industry.

"More than 99 per cent companies will not be able to get the corporate tax cut benefits because fulfilling the conditions is absolutely impossible."

Rahman thinks a source tax cut could be more effective than the reduction in the corporate tax.

Sadhan Kumar Dey, chief operating officer and chief financial officer of RAK Ceramics, says it is quite tough to avail the corporate tax benefit for RAK Ceramics since it can't say that it will not sell on cash.

He says RAK Ceramics can ensure that it will not make any payment on cash. However, it can't give the same guarantee when it comes to receipts.

"A company needs to honour customers' preference whether they pay on cash or through banks."

As a construction-related products seller, RAK Ceramics also has to sell products even on Fridays or Saturdays when banks usually remain closed, Dey said.

"If transactions are made through the banking channel, it ensures transparency, so as an auditor, we can't appreciate cash transactions," said Muhammad Farooq, a former president of the Institute of Chartered Accountants of Bangladesh.

"However, it might not be convenient for businesses. But still, they should explore ways how they can carry out transactions through the banking system."

In Bangladesh, there are many companies that rely completely on cash transactions, so they will be in trouble if they want to comply with the conditions to qualify for the reduced tax rate, Farooq said.

"The socio-economic situation should be prepared step by step for a low cash transaction."

Earlier, Snehasish Barua, a partner at Snehasish Mahmud & Co, a chartered accountancy firm, said some big companies collect demand drafts or pay orders and then deliver their goods. For them, it is very easy to comply.

But most companies collect cash from customers whenever they can, depending on the credit period. "Sometimes, it is difficult to recover money, let alone bring it through the banking channel," said Barua.