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Like goods, services are also importable items. There are different services like royalty, technical knowledge, technical know-how, engineering services, consultancy services and numerous more. Import of services does not require customs assessments as in the case of goods import. Remittance on account of services is payable abroad in terms of foreign exchange regulatory framework. Taxes at sources need to be deducted from the bill amount of services as per tax regulations. Taxes at sources are payable by foreign service providers. The payments received from Bangladesh can be shown in their statements of accounts as taxed income. In case of availability of double taxation avoidance agreement with the beneficiary country, no extra tax burden needs to be borne. But deduction of tax from service providers is opposite of goods import. In case of goods import, all government levies are borne by importers. For services imports, importers bear value added tax only which basically goes to the ultimate retail buyers.
This is observed from a recent notification of the central bank issued with reference to a letter from National Board of Revenue (NBR). According to the notification, tax is to be deducted on bill value. The notification allows remittances of full bill value. In that case, bill value needs to be grossed up in consideration of applicable rate of tax. The NBR letter contains an example which calculates tax of 25 Taka in case of remittance of full bill value of 100 Taka at 20 percent rate of tax. Tax of 25 Taka is to be paid on account of services providers. As a result, cost of 100 Taka for services importers becomes 125 Taka!
As per the notification, outward remittance is not considered as tax compliant payment if tax payment is made in favour of service importers. Tax deduction irregularly and payment therefrom can be recovered at any time with extra payment burden at simple rate of interest at 2 per cent per month, the NBR letter says.
Service is an invisible part of import. Even import of physical goods contains services in the form of technology. A capital equipment of 10 million US dollar may contain 1 million US dollar worth physical items, the rest is value for technology. On the other hand, imported equipment needs service for installation, commissioning, training, etc.
Bill value of services is allowed to be grossed up taking tax rates into consideration. The process facilitates service providers abroad to avoid payments of taxes in Bangladesh on the excuse of hassle in adjustment of such amount in their own countries. Inside information shows that service importers need to bear tax burden which leads to enhance capital expenditure and such burden needs to be borne by the government projects unless exemption is granted by NBR. The rate of tax deduction at sources from the bill value of services providers abroad is from 5.25 per cent to 30 per cent. The rate is set on the category of services. But the basis of determination is not stated. Maybe it is set in consultation with stakeholders.
The basic difference between import of goods and import of services is that goods are imported physically, and services in non-physical form. Both are used by importers as a part of capital expenditure or revenue expenses. But there is a conceptual difference. Importers bear all regulatory costs for import of physical goods. Advance tax paid at import stage is adjusted later with income tax assessment. On the other hand, importers need to bear value added tax for import of services. Tax deduction at source is in most of cases paid by importers in the name of service providers abroad. Such tax payments are higher; we have seen from earlier discussion that importers need to pay 25 Taka which is 20 Taka if paid by foreign service providers. As a result, the cost of services is increased up to the extent of tax amount.
Bangladesh has already graduated from LDC status. Huge investment is needed for moving to further level. Import of services will exceed import of physical goods in the age of 4th industrial revolution. Import needs to be cost effective to retain the growth path.
With regard to service imports, service payments cannot be presented in books of accounts without deduction of tax at sources from bill value of services providers. This will lead to increase in profit which results in extra tax burden. This tax burden may be more than source tax. As such, there is no scope to avoid deduction of tax at sources from the bill value of services providers.
It is known that insignificant duty is imposed on import of capital machinery and equipment. Import of services being of capital nature deserves such benefits at same rate so that importers can make payments on account of services providers. As an alternative way, import of capital goods may be in composite form containing both values of goods and services. Based on the both values, customs assessment needs to be made. This will definitely reduce extra cost for the projects concerned. Such proposition cannot be fit for import of services separately. In that case, the same rate as applicable for customs assessment needs to be applied on account of tax deduction at source from the bill value of foreign service providers.
Import of services needs to be cost effective for the industrial enterprises and the government projects. But under the present regulatory framework, extra cost against import of services in the name of tax is borne by importers without benefit since it is deposited on account of foreign services providers. As customs cost for import of goods is paid by importers, such procedure needs to be followed for import of services.
In accordance with the points highlighted above, import of services along with capital goods may reduce costs. This inclusion of services with import of capital goods should be allowed. For separate import of services, cost of customs assessment applicable for capital goods should be used as regulatory payments or in other names if deemed necessary for collection of such revenue. If the cost rate as per proposition is not possible to be used, tax deduction at source should be allowed on account of importers with adjustment facilities at year-end assessment. Service payments are remitted abroad through banking channel. Banks are not a regulatory authority. As such, there is the need for a clear-cut procedure for calculation of applicable government levies and payments thereof.