The Finance Act 2017 imposed a crippling burden on Company-to-Company (C2C) business with far-reaching consequences. It makes inter-company linkage transaction costlier that will ultimately force thousands of packaging and supporting industries to cut down their business as well as thousands of jobs. At the same time, it encourages imports of such intermediate manufactured goods at a cheaper price.
The imposition of 5 per cent so-called 'minimum tax' on transactions involving sales of one manufacturer's products to another manufacturer creates the problem. This makes the prices of goods costlier to the inter-dependent buyer in the linkage chain. This 'minimum tax' is not applicable to imported goods. Thus, entry of such goods from abroad in likely to ruin the supporting and linkage industries which are hugely contributing to the national economy.
Moreover, this minimum tax is being realised as a part of income tax although it is collected on sales proceeds (not on income or profit). By definition too, it is illogical because tax collected directly on sales cannot be termed as income tax.
Prior to 2016, this 5 per cent tax was collected as Advance Income tax (TDS) which was adjustable with the company's annual income tax return. But from July 2016, the 5 per cent deduction has been made non-adjustable and non-refundable under a new name "minimum tax".
The term minimum tax itself defies logic because no authority can determine the minimum tax of any entity until completion of the business year and until annual tax return is filed. Doing so is not only irrational but a violation of the basic principle of income tax law.
Again, realising the 'minimum tax' on sale proceeds is not adjustable with the company's assessment of income tax. Thus, effectively it is kind of 'sales tax' rather than income tax. Besides, the collection of arbitrary 'minimum tax' without allowing adjustment becomes a kind of 'double taxation' which is also a violation of taxation law.
It is difficult to comprehend why this 'minimum tax' has been imposed when the consequence is bound to make locally manufactured intermediate goods costlier than the imported ones.
Finally, a simple arithmetic shows that the 5 per cent minimum tax on sales, is equivalent to or higher than 50 per cent income tax on profit (assuming a manufacturer generally makes 10 per cent profit on sales) whereas the statutory income tax on net profit of company is 35 per cent. For manufacturers who make profit of 5 per cent or less, the newly imposed minimum tax represents 100 taxation of its profit. This is like giving away the entire profit as income tax.
If this unjustified minimum tax provision is not repealed, hundreds of packaging and backward linkage industries will be forced to close down resulting in a big dent on the C2C or B2B and linkage business supporting larger manufacturers. So, there should be a distinction between genuine manufacturers (creating substantial employment and adding value) and traders, most of whom may not yet be in the tax net. Hence, any income tax deducted either as minimum tax from a manufacturer should be made adjustable with their respective income tax assessment.
Eng. Ali Ahmed is Chairman & MD, Astech Limited, Chittagong, Bangladesh.