Finance Minister AMA Muhith placed the budget proposals for fiscal year (FY) 2016-17 in Parliament on June 02. Although some of the proposals may appear innocuous, a deeper analysis indicates that these will have a profound impact on both individuals and business houses as well as on some fundamental legal principles.
INDIVIDUAL TAX: CHANGE IN INVESTMENT ALLOWANCE (CLAUSE 25 OF FINANCE BILL): The government proposes to reduce the investment allowance from 30 per cent to 20 per cent and has also proposed to reduce the tax rebate on investment allowance from the current rate of 15 per cent to mostly 10 per cent.
Without going into the details of the calculation, here is a summary of the impact below:
Monthly taxable income of BDT 40,000 tax increase of 514 per cent
Monthly taxable income of BDT 50,000 tax increase of 113 per cent
Monthly taxable income of BDT 60,000 tax increase of 60 per cent
Monthly taxable income of BDT 100,000 tax increase of 27 per cent
Monthly taxable income of BDT 500,000 tax increase of 12 per cent
Monthly taxable income of BDT 1,000,000 tax increase of 11 per cent
It is important to note that this increase impacts all individual tax payers. It is disappointing that such a major change has not been covered in the Finance Minister's budget speech.
Assuming income levels rise at the rate of 10 per cent against inflation of 6-7 per cent, the real income is around 3.0 to 4.0 per cent. In this backdrop, increase of tax at such astronomical level is clearly unjustified and is regressive. All tax payers, especially those with low levels of income will be hit hard. Reduction of investment allowance will reduce levels of investment in a situation where the economy desperately needs to raise the level of investment as a percentage of GDP to raise GDP levels and alleviate poverty.
WORKER'S PROFIT FUND: The new Finance Bill proposes to tax this receipt with an exempt amount of BDT 50,000. For salaried employees who receive Workers Profit Fund, this receipt had been tax-free since the time the Act has been enacted in 1968. Bangladesh Labour Law mentions this income as tax free. Taxability of this income will create industrial unrest among the workers who have never paid tax on this income and destabilise operations. This proposal needs to be withdrawn in the interest of salaried employees.
TAX AT SOURCE ON INCOME OF PROVIDENT FUND, GRATUITY AND WORKERS PROFIT FUND (CLAUSE 29 OF FINANCE BILL): A proposal has been placed to deduct at source at the rate of 5.0 per cent from the above funds. Income from the funds form a part of retirement scheme. Interest rates of government savings certificates have been coming down in recent years. This has decreased the income of the funds. In the case of Gratuity Fund, no investment is possible in 'sanchayapatra' and only investment in T-Bill is possible which has a very low yield. Under this circumstance, further deduction of 5.0 per cent will be very damaging to the retirement benefits.
Income from funds is exempt under the Sixth Schedule of Income Tax Manual. Also, payment received against provident fund and gratuity is exempt. There is therefore no rationale to deduct tax at source against these heads of income.
CORPORATE TAX: HIGHER RATES OF TAX DEDUCTION AT SOURCE (CLAUSE 27OF FINANCE BILL): The Finance Bill proposes to increase the rates of tax deduction at source. Both income tax and VAT deduction at source increases the cost of doing business. Most suppliers refuse to accept tax deduction at source and ask the company to bear this amount. Increase of rates will add to the costs which are already high. There is no doubt that private companies are doing a great service to the government acting as tax collectors for which they do not receive any payment. Hence, such increases should not be done in the interest of business.
VAT TO BE INCLUDED IN PRICE ON WHICH INCOME TAX AT SOURCE TO BE COMPUTED (CLAUSE 27 OF FINANCE BILL): The Finance Bill proposes to add VAT on the price and income tax at source to be calculated on the higher amount. Other than the point raised above regarding the cost of doing business, this will amount to tax on tax. Both income tax and VAT should be calculated on the price to be paid.
AMENDMENT OF SECTION 82C (CLAUSE 49 OF FINANCE BILL): The Finance Bill has proposed a major change in the manner tax deduction at source should be dealt with. Earlier, if the actual tax based on the return was lower than the tax deduction at source, the excess income tax paid was refunded under the law. The new amendment proposes that the tax payable will be higher of the two amounts. In other words, there will be no refund.
This proposal goes against the fundamental principle of Income Tax which is to pay tax on the income. Under this proposal, if the tax deducted at source is higher, the income relating to this tax is treated as "deemed income" which will have no relationship with the actual income. Unless the tax authorities prove that the actual income is higher, payment of higher tax is clearly unjustified and unlawful.
HIGHER TAX AT SOURCE ON DISTRIBUTOR COMMISSION (CLAUSE 35 OF FINANCE BILL): The Finance Bill proposes to increase the rate of tax deduction for distributor commission. Earlier, the rate was 3.0 per cent of the amount representing the difference between the retail selling price and the invoice price to the distributor. The Finance Bill proposes to increase the rate to 5.0 per cent with a flat margin of 12 per cent.
In the first place, the tax should be applicable only on distributors' income. Tax on retailers income should not be included which is not being earned by distributors. Secondly, the flat margin of 12 per cent has got no relationship with the market reality where the distributors get much less commission. It is recommended to withdraw this proposal for flat margin and impose tax at 2.0 per cent on the actual distributor margin (not including retail margin)
AUDIT OF RETURN RELATING TO TAX DEDUCTION AT SOURCE (CLAUSE 45 OF FINANCE BILL): The Finance Bill proposes to have the above returns audited. This proposal is highly unjustified. Annual tax returns are audited. In addition, if such half yearly returns are audited, tax payers will face unnecessary harassment.
MINIMUM TAX FOR COMPANIES FILING TAX RETURNS WITH LOSS (CLAUSE 49 OF FINANCE BILL): The Finance Bill proposes to raise the minimum tax for above companies from the current rate of 0.3 to 0.6, 0.75 and 1.0 per cent depending on company category.
Making profit or loss is a natural business phenomenon. No company can guarantee that it will always make profit. The above tax is being charged on the premise that companies are not declaring their true income. The onus of proving lies on the Income Tax authorities and unless this is done, the tax loss should be accepted. The Indian Income Tax recognises this fact and allows this payment to be adjusted in subsequent years. Notwithstanding what has been stated above, the increase in rates will put further burden on loss making companies who are already struggling with big debt burdens and is clearly unjustified.
The government should withdraw this proposal or modify the provision in line with Indian Income Tax laws that treats this payment as advance tax to be recovered when the company makes profit in subsequent years.
VALUE ADDED TAX: PRICE APPROVAL: Under existing rules, VAT regulations require price approval. The new proposal is to eliminate the need for price approval but the Commissioner has the right to challenge the same. The earlier time limit of 15 days for price approval by concerned VAT official has been withdrawn.
This change has been proposed in line with the new VAT law that will be implemented from July 01, 2017. The new law does not give any discretionary power to the Commissioner. We fear that such power will be exercised often and hence defeat the purpose for which this change is being proposed.
Also, the withdrawal of time limit for approval will create further uncertainty and increase the discretionary power of the VAT authorities that will be subject to misuse. Such discretionary power of the Commissioner should be withdrawn in line with the new VAT Act.
INCREASE OF TAX TO BE DEPOSITED FOR VAT APPEAL (CLAUSE 71 OF FINANCE BILL): The Finance Bill proposes to raise the tax to be deposited at first appeal stage from 10 to 50 per cent.
This proposal is highly unjustified. Current VAT audits are extremely arbitrary in nature and often big demands are raised either to increase government revenue or for unethical reasons. Increase of tax amount from 10 to 50 per cent will severely strain the cash flow of the companies. Such high increase will also lead to increase in unethical practices. Also, filing of appeal is a fundamental right that is being stifled with this proposal.
CONCLUDING REMARKS: A recent study shows that less than 1.0 per cent of the total population in Bangladesh pays taxes. It is estimated that about 1.0 million assessees submit tax returns out of a potential 7.0 million who earn taxable income. This year's budget has raised the revenue requirement by a staggering 37 per cent fuelled by the need for financing mega infrastructure projects and non development expenditure arising out of increase in salary of government servants.
There is no choice but to widen the tax net. It is easy to tax people who are paying taxes. The difficult job for the National Board of Revenue (NBR) is to increase the number of tax payees and spare the people paying taxes from additional burden. There is a proverbial saying "do not kill the goose that lays the golden egg". Equity and fairness should prevail in the interest of the honest tax payers who should be rewarded instead of being penalised with further taxes.
The writer is CFO of Lafarge Surma Cement Limited. [email protected]