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The government is likely to impose fiscal measures in the upcoming budget that is expected to compel the contractors to become tax-compliant in case of realizing their bills, sources said.
The contractors would have to receive the payments through banking channel or mobile financial services from the fiscal year (FY) 2021-22.
If they have to make cash transactions in case beyond the restriction, a penal tax of 50 per cent would be applicable on top of the existing source tax that currently ranges between 2.0 per cent and 7.0 per cent.
The National Board of Revenue (NBR) may also increase the source tax, known as withholding tax, of contractors that is deducted by the contract-awarding entities at the time of payment of bills.
The major changes in the Income Tax Ordinace-1984 would be proposed in the National Budget for FY 2021-22, scheduled to be placed in parliament next Thursday.
Sources said the services-recipient entities will have to deduct the tax at the enhanced rate while making cash payment to the contractors.
As per the income tax law, the authority that is deducting the withholding taxes are held responsible in case it does not collect taxes at applicable rates from the contractors.
Official sources said the source tax or Tax Deducted at Source (TDS) on the contractors' bill is a major source of direct tax
that contributes more than 50 per cent of the total withholding tax collection.
Upward adjustment of the taxes on contractors' bills would help increase revenue significantly in the next FY.
Recorded transactions of the contractors' bills through banking channel or MFS would also help thwart tax evasion.
Meanwhile, the NBR would not allow financial transaction of businesses above Tk 50,000 without banking channel or MFS from the next FY.
The tax authority would consider the income of businesses as taxable if they could not furnish bank documents or statement of MFS along with their tax returns in case of exceeding the allowable limit for cash transaction Tk 50,000.
Tax officials said the measures would help checking the growth of black economy in the country and prevent informal financial transaction.
Currently, cash payment is allowed for the contractors who mostly implement the government development programmes and provide services like security, manpower and cleaning to the private sectors.
Talking to the FE, a former tax official, preferring anonymity, said contractors of the large projects, including the mega projects, have to participate in the tender process for winning the contract and that they all have bank accounts.
He said a minimum ceiling of Tk 50,000 for cash transaction would help receive the bills of small purchase by the contractors.
He, however, said that it would not be wise to revise the withholding tax on contractors' bills upward as it would escalate the costs of all the existing projects. The existing rate of withholding tax on contractors' bills is 'ideal', he added.
The government is the main collector of withholding taxes from contractors' bills as it is implementing a number of mega projects in the recent time, he added.
In most cases of the projects being implemented by the foreign contractors, the government has to pay the withholding tax of the contractors from its own coffer due to agreement signed with the development partners, he added.
"It is not an ideal policy to increase the revenue collection. The government should focus on enforcement of existing law and check tax evasion," he added.