The government is poised to unveil forward-looking tax rates for a minimum of two fiscal years in the imminent budget, a strategy crafted to entice foreign direct investment (FDI), as outlined by finance ministry officials. Additionally, affluent individuals will confront a 30% tax hike from the current 25%, a strategic step aimed at mitigating income inequality, bolstering public services, and fostering a more equitable distribution of resources.
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This bold initiative introduces a ‘predictable tax regime’ by the next fiscal year, poised to galvanize FDI, as prospective investors prioritize tax predictability. Moreover, it will empower local individuals and enterprises to meticulously strategize their financial affairs, armed with foresight regarding their forthcoming tax obligations.
Transition to Prospective Tax Regime Promises Clarity for Taxpayers and Investors
According to National Board of Revenue (NBR) officials, the nation presently adheres to a ‘retrospective tax regime’, perpetuating ambiguity for taxpayers regarding their tax liabilities. In contrast, the transition to a prospective tax framework aligns with global norms observed by nearly all developed nations.
The proposed system has the potential to furnish clarity for tax and investment planning, contrasting the prevailing opacity that often compels taxpayers to scramble for funds to settle their dues at year-end.
Retrospective vs. Prospective Tax Regime:
- Retrospective: Tax liabilities determined after the fact, leading to uncertainty and last-minute payments.
- Prospective: Tax policies set in advance, providing clear expectations for businesses and investors.
The forthcoming budget envisages revisions to corporate tax structures, extending a 2.5% reduction for companies embracing cashless operations to advance a cashless society. This strategic maneuver aims to standardize tax rates, leveling the playing field between compliant non-listed firms and non-compliant listed entities commencing the next fiscal year.
Moreover, this week, during a press briefing, DSE Chairman Professor Dr. Hafiz Md Hasan Babu emphasized the necessity of increasing the disparity in corporate tax rates between listed and unlisted companies to a range of 10%-12.5%. Currently standing at 7.5%, the Chairman, echoing sentiments from NBR sources, hinted at a potential further reduction in this gap, subject to certain conditions, in the upcoming budget. Dr. Babu underscored the importance of a wider tax divergence as a means to incentivize reputable companies to seek listing.
- Current Disparity: 7.5%
- Proposed Disparity: 10%-12.5%
As part of the prospective tax regime, the NBR is self-assured to institute a specific timeframe for Statutory Regulatory Orders (SROs) on the importation of goods and raw materials. Notably, concessional duty privileges for paper imports are slated to lapse on June 30, 2027. Similarly, concessions for raw materials utilized in computer and lift manufacturing are slated for expiration within the same timeframe. Moreover, by June 30, 2026, concessional duty facilities for essential raw materials like prefabricated building materials, refrigerators, washing machines, LPG cylinders, auto tanks, valves, and coal for electricity generation are set to conclude.
Why Prospective Tax Measure?
Government authorities are spearheading a groundbreaking ‘prospective tax measure’, dignified to establish consistent tax rates over multiple years to facilitate longer-term business planning for investors. This provision, anticipated to be enshrined in the new income-tax legislation, underscores the revenue authority’s contemplation of instituting stable tax measures for an extended duration within the new legal framework. The slated enactment of the new income-tax law, slated to supplant the existing income-tax ordinance of 1984, is earmarked for the forthcoming fiscal year, 2018-19.
Drafted in Bengali and English, the new income-tax legislation is currently in its formative stages, with plans for public dissemination of the draft on the official website in December. The NBR has embarked on a series of consultation sessions with key stakeholders to solicit and integrate their feedback into the forthcoming law. This collaborative approach aims to ensure a comprehensive and inclusive legal framework conducive to confident investment planning by entrepreneurs, alleviating uncertainties regarding future tax liabilities.
Repeated appeals from chambers of commerce and trade leaders underscored the urgent need for a steadfast tax policy framework to foster an investor-friendly environment. Emphasizing the government’s strides in this regard over recent years, the official cited instances of providing tax holidays and exemptions to industries within defined timeframes. Despite prevailing corporate tax rates ranging from 25% to 45% and an unchanged tax threshold for individual taxpayers at Tk250,000 over the past three years, the imperative for consistency in tax policies remains paramount for attracting both local and foreign investment.
Balancing Tax Predictability with Prevention of Tax Avoidance
Experts articulated the long-standing demand of investors for a prospective tax regime conducive to robust investment planning. They underscored the adverse ramifications of annual tax law amendments, particularly for corporate taxpayers, citing the potential disruptions to tax planning strategies.
However, the authorities should be cautioned against potential tax avoidance tendencies if corporate taxpayers possess prior knowledge of forthcoming tax rates. Acknowledging the government’s prerogative to enact fiscal changes in pressing circumstances such as financing food imports or disaster management, experts emphasized the pivotal role of stability and predictability in fostering a conducive investment climate, marking a decisive step towards the climax of investor confidence and economic prosperity.
Moreover, the finance minister emphasized enhancing the capacity and automation of tax administration, expanding income tax and VAT coverage, and eliminating tax exemptions. To create fiscal space for social spending, he advocates for aligning fuel oil and electricity prices with the market and clearing subsidy arrears in installments. He also aims to strengthen monitoring for full implementation of the Annual Development Program (ADP).
Revenue and Budget Goals
Revenue Target:
- Target: Tk5.41 lakh crore.
- Increase: 14%.
- Budget: Tk7.97 lakh crore.
NBR’s Role:
- Match income tax revenue (Tk1.77 lakh crore) to VAT collections.
- Revenue Target: Tk4.80 lakh crore.
Setting the bar higher than ever, he aims to generate Tk5.41 lakh crore in revenue, a staggering 14% increase from this year’s revised target, to fuel the Tk7.97 lakh crore budget for the upcoming year. To achieve this ambitious goal, he must break away from the National Board of Revenue’s (NBR) conventional reliance on easy targets, instead exploring untapped avenues of direct taxation.
The burden falls heavily on the NBR, tasked with equaling income tax revenue (Tk1.77 lakh crore) to VAT collections, aiming for the coveted Tk4.80 lakh crore target. Plans are afoot to compel high-income groups to contribute more and revoke tax exemptions from certain businesses. Meanwhile, taxes on sugary foods, beverages, tobacco, and mobile phones are slated to rise, while import tariffs for raw materials in select industries like steel and healthcare may be reduced.
