Changes in the Income Tax Act 2023 which might adversely impact the business

The draft Income Tax Act, 2023 carries substantial importance for our nation, given the ongoing changes in global and local economic conditions. The ramifications of this Act will have a profound impact on the trajectory of our country's future. Following the announcement of the Act, a multitude of fiscal policies are currently being extensively discussed and disseminated through diverse mediums such as print publications and electronic media platforms. These channels serve as platforms for deliberation, allowing for a widespread exchange of ideas and viewpoints regarding the proposed fiscal measures. Such discourse plays a crucial role in shaping public understanding and awareness of the potential effects and implications of the budgetary decisions being made.

The upcoming Act has sparked a lot of discussion. We expected gradual withdrawal of minimum tax provisions in the new law which was not withdrawn rather re-instated to the full extent. One of the key concerns is about the proposed enactment of a minimum tax requirement for carbonated beverage industries. The government of Bangladesh is planning to increase the turnover tax from 0.6 per cent to 5.0 per cent on the total gross receipt for a fiscal year. This is a significant increase, as it is more than eight times the current rate. This will drive the company to a price hike which will ultimately reduce demand for the product. If demand falls, total revenue collection might drop too since a significant portion 43.75 per cent is collected through VAT and SD. This increase in taxes is expected to hinder the growth of the industry. The minimum tax on telecom is expected to remain at 2 per cent, while the minimum tax on tobacco is expected to increase from 1.0 per cent to 3.0 per cent.

Under the proposed act, incentive bonuses have been classified as perquisites, resulting in an augmented tax liability for companies. A company will have to pay tax for perquisites above Tk 1.0 million. The inclusion of incentive bonus in the perquisite will raise the total perquisite expense and company will have to pay tax when it crosses the limit.

The government's proposal to implement an environmental surcharge for a tax payer having multiple motor vehicles is a commendable measure. This surcharge serves as a deterrent to discourage the ownership of multiple cars, which directly contributes to air pollution. However, it is crucial to recognize the potential adverse effects on businesses. Numerous companies rely on owning multiple cars for their operations, and subjecting them to the surcharge may lead to increased expenses. If a company owns 101 vehicles over 1500 cc but less than 2000 cc they will be required to pay an additional tax of Tk 5.0 million which is not adjustable against corporate tax liability. A company cannot claim depreciation on a car over Tk 2.50 million (Increased to Tk 3.0 million) and also need to pay taxes if cost exceeds certain percentage of capital. Consequently, it would be prudent for the government to explore the possibility of exempting businesses from this surcharge.

The proposal to limit the adjustment of losses with other sources of income has generated considerable debate. Previously, companies were permitted to offset losses from their business against income from other sources, leading to reduced tax liabilities. However, the current proposition aims to restrict the adjustment of business losses solely within the same income category. If implemented, this proposal could impose a burden on companies, as they will be required to pay tax despite having business loss.

Now a company is required to deduct tax at source, and deposit to the government exchequer within stipulated time. They need to submit withholding tax return on a monthly basis. The withholding tax increases by 50 per cent if a company cannot collect proof of submission of return. Now this new law requires a company to collect from eight (8) categories of suppliers and service providers. Failing to which business expenses will be disallowed. Already a company is burdened with discharging a lot of responsibilities on behalf of the government. Now these additional responsibilities with a potential disallowance will become more burdensome for a company.

It has also been observed that the proviso under a withholding tax section has been withdrawn. We are not sure whether this will be covered under the rule. It is strongly recommended to formulate necessary rules for clarification as certain provisions will create ambiguity in the absence of rules and guidelines. The lack of guidelines in the Act will increase the cost of doing business due to higher WHT compared to the legitimated tax liability. The government may follow the structure of VAT rules 2016 wherein one can easily find the rules in the respective chapter.

Consequently, the implementation of the act will impose a higher financial burden on businesses operating in Bangladesh. This increase in taxes is expected to contribute to elevated costs associated with conducting business activities within the country. As we are aiming towards graduation from LDC, our businesses must remain competitive. The increased cost will pose a threat to competitiveness. Hope our policy maker will look into these measures while enacting the law in the parliament.

Snehasish Barua, FCA

Director, SMAC Advisory Services Ltd

ctgsnehasish@gmail.com