Budget analysis of FY21-22
Bangladesh has announced budget FY 2021-22 with a 10-year tax exemption for 'Made in Bangladesh' brands to speed up the establishment of mega industries and production of import-substitute industrial goods in Bangladesh.
The exemption will apply to manufacturers of three- and four-wheelers, home and kitchen appliances and light engineering products under condition that their local value addition will be 20%-40%, local employment and promoting the "Made in Bangladesh" brand.
During the last one decade, locally-manufactured household equipment have taken up 90% of the total market. Apart from local entrepreneurs, foreign companies such as Samsung and LG have set up factories in the country.
The budget also proposed to withdraw AIT on certain raw materials of iron products, scrap vessels. The AIT on import of ocean-going ships and raw materials of cement has been reduced by one percentage point. Finance minister also proposed VAT exemption facilities be extended for manufacturers of LPG cylinders by another year, and for refrigerators, freezers and their compressors by one more year, polypropylene staple fibre by two more years, air conditioners and their compressors by three more years, and motor cars and motor vehicles by five more years.
The existing VAT exemption facility on the manufacturing and assembling of mobile phones will continue for two more years in order to develop local mobile handset industries and Information Technology (IT) sectors. Besides, the government is extending the tax exemption facility to five new IT sector services in the new fiscal year and a 10 years tax exemption on the production of ICT components and spare parts. A proposal for a 10-year tax holiday to encourage investment in the hardware industry to produce different components and spare parts of ICT related equipment were also made.
RMG sector is set to continue to get the benefit of 1.0% additional export incentive for the next FY22. The health sector investment will also receive similar benefits if they establish hospitals outside Dhaka, Chattogram, Gazipur, and Narayanganj districts. Such hospital must have facilities of Women and Maternal Health, Oncology and Well Being and Preventive Medicine. Every hospital must have at least 5% ICU beds.
This budget provides several tax waivers and holidays for domestic industries and one-person owned companies, including women entrepreneurs who will enjoy Taka seven million as the threshold for turnover taxation.The woman entrepreneurs will enjoy tax-free turnover from businesses run by women up to Tk 70 lakh.
A major tax reform proposed is2.5 percent point cut at tax rates. Finance minister proposed a reduction of tax for non-listed companies to 30 per cent from 32.5 per cent and the rate for listed companies to 22.5 per cent from 25 per cent and 25 percent tax rate for One Person Company (OPC).The companies must get registered with the Bangladesh Investment Development Authority (Bida) to avail this tax facility.
The proposed increase in TDS rates up to 7.0 per cent on the bills of contractors and suppliers may escalate the effective rate or actual payable amount of income tax even after reduction of the corporate tax by 2.5 per cent for both publicly listed and non-listed companies.On upward adjustment of TDS for suppliers of goods and construction, he said that if a manufacturing (import and supply) company pays Tk 10-12 on every sale of Tk100; it will have to earn a profit of 33.33 per cent or 40 per cent on the sale.
According to the Income Tax Ordinance-1984, the TDS on the bills of contractors and suppliers is considered as minimum tax, under section 82 C, and it is non-refundable. The government is also offering 10-year corporate tax exemptions for investments made in training institutes for about 25 types of skill development, to achieve the Sustainable Development Goals (SDGs) by 2030.To get this facility, an institute must register under the Companies Act 1994, its minimum investment must be Tk. 5 crore.
As per the proposed measures, taxpayers are going to face tougher scrutiny of their transactions. Transactions through mobile financial services (MFS) and other digital means have been acknowledged as bank transfers along with transactions through crossed cheques.
The proposed transactions through bank transfers, including MFS have been made mandatory for payment of over Tk 50,000 made by businesses. This applies to purchase of raw materials too.MFS has also been included in the modes of payment for rent for use of commercial or residential space and salary payment of above Tk 15,000.
The other side of the budget proposal that will increase the tax liability of most businesses would go up, especially in the case of import-dependent companies and suppliers, due to certain fiscal measures proposed in the new budget.The budget proposes to increase the rate of tax deduction at source (TDS) for the contractors and suppliers of goods.
The budget proposed reducing the rate of depreciation for ordinary buildings to 5 percent from 10 percent and to 10 percent from 20 percent for factory buildings. This is likely to erode the gains businesses are going to make from the 2.5 percent tax cut. The budget has not proposed any direct cash support to revive the cottage, micro, small and medium enterprises (CMSMEs) sector, where millions of workers lost jobs.
It has no incentive for SME sectors for creating job opportunity and more investments. The budget is set to bring informal economic activities toformal economy offering budgetary incentive for formalization and mandatory transaction through financial institution. The widely talked reduction of income tax will off-set by increased and non-adjustable advance income tax at different level. The budget must reduce AIT and reduce all sorts of taxes at import stage to prepare for LDC graduation.
The writer is a legal economist