Development of Cottage, Micro, Small and Medium Enterprises (CMSMEs) is envisaged as a key element in this development strategy in all categories of economies. CMSMEs can be called the heart of the business for their significant role in the supply chain, simultaneously helping in industrialisation. The development of entrepreneurship started with CMSMEs and leading to bigger ventures. All the large industrial conglomerates of Bangladesh also followed the same process of growth. Unfortunately, the development of CMSMEs is under threat of elimination due to the recently introduced policy of collection of Advance Income Tax and Advance Value added Tax at a higher rate. These advance taxes are non-refundable and non-adjustable in practice.
Industrialization through supply chain and CMSME is an established theory of the process of developing a robust industrial sector by strategically integrating CMSMEs into well-managed supply chains, allowing them to participate in larger production networks, which ultimately drives economic growth and industrial development within a country.
CMSMEs became less competitive and struggling to survive allegedly due to high advance taxes like the Tax Deducted at Source (TDS) and Advance Income Tax (AIT). These small units are buying raw materials from traders/ importers and due to taxation policy, these materials are subject to higher advance taxes at different stages like import, supply, etc. After imposition of 5.0 per cent AIT and 7.0 per cent TDS deducted a source on supplying such products to the multinational and local bigger industries are bound by law to deduct advance Income Tax and VAT to total invoice value. The process make the CMSMEs noncompetitive.
CMSMEsconstituting a significant portion of the industrial landscape. World Bank data (2022) has shown that SMEs represent about 90% of businesses and more than 50% of employment worldwide. According to the Planning Division, Bangladesh, CMSMEs make up 90% of industrial units and 80% of industrial employment and contribute 45% to manufacturing value added. CMSMEs in Bangladesh contribute only 25% to the GDP, whereas in countries like Indonesia, they contribute 59%, 52% in Sri Lanka, 45% in Vietnam, 58% in Cambodia, and 40 % in Pakistan (LightCastle).
The industries, known as business-to-business (B2B), used to supply small components, accessories, raw materials, packaging materials etc to local and Multinational industries. CMSMEs are considered as efficient and cost-effective production process and support bigger industries to be competitive.
CMSMEs are deeply integrated into the production and distribution of goods, particularly in export-oriented RMG sectors, where these small production units play a vital role in various stages of manufacturing, from fabric production to garment assembly etc. This sector also plays a vital role in the supply chain of many other goods and services and thereby helps to establish backward linkages for larger industries. Their total contribution of CMSMEs to export earnings is reportedly 80 percent as direct exporter, support industries or deemed exporters in RMG sector.
CMSMEs significantly contribute to the development of domestic industry by supporting both major and minor economic activities that generate employment. Those local manufacturers are usually the vendors of large industries and big conglomerates.Manufacturing all components of a finished product by a large company is not possible anywhere in the world. The contribution of this sector is more relevant in developing countries like Bangladesh as the production processes and products manufactured in this sector require lower investment relative to large-scale enterprises.
The CMSMSEs are now paying 7.0 percent AIT on gross sales not on net profit and also 5.0 percent VAT causing less competitive. Before calculating the net profit of a company, the government and big industrial enterprises are legally bound to deducts 5.0 per cent AIT at import stage and 7.0 per cent TDS as supply stage. These non-refundable and nonadjustable high tax unprecedented in the world.
On the other hand, the large companies do not need to deduct 7.0 per cent TDS and 5.00 percent VAT if they themselves produce secondary products. This type of tax has made them uncompetitive and diverted their business to the large conglomerates. Many companies have established their own production facilities diverting their capital and concentration from their basic products. Such a trend is killing the local SMEs sector.If they make such goods in their own factories, they do not have to pay the 7.0 per cent TDS, they explained, claiming that now their survival is at stake due to the irrational tax measures. The imposition of non-adjustable minimum AIT before finalisation of profit and losses in a business goes against the tax policy of other countries as well as Bangladesh.
Big industrial companies are now forced to set up their own small units to cater to their own demands of raw material and spare part etc. This is an ominous sign for the existence of backward linkage enterprises in the country's SME sector. It is unprecedented and against the CMSMEs development policy.
Considering the issue of survival of CMSMES, the National Board of Revenue (NBR) in 2017 exempted the businesses from deduction of the TDS for two years, reinstating it again in 2019.
The tax administrator has made the advance income tax (AIT) on the imports of raw materials and AIT deducted at source are non-adjustable in practice. Not only CMSMES, many businesses in the country, including companies listed on the stock market, face similar challenges. One example of payment of excessive tax has been reflected in the accounting of a publicly listed company. RAK Ceramics (Bangladesh) Limited, a multinational company in the ceramics sector, reported a pre-tax profit of BDT 51.6 million in the 2024 fiscal year. However, the company had to pay a total tax of BDT 78.9 million. Since advance income tax was set as the minimum tax, the company did not receive any refund at the end of the year. As a result, RAK Ceramics faced a net loss of BDT 27.3 million after taxes in the 2024 fiscal year.
When asked about advance tax adjustments, an NBR member, speaking on condition of anonymity, with a newspaper said that "For production companies exempt from customs duties, the advance tax paid on raw materials is later adjusted. However, advance tax paid on goods imported for resale is not refunded". CMSMEs cannot sustain by paying higher tax calculated on gross sales value rather than net profit.
The government has identified the development of the CMSME sector as the driving force of industrialization and a priority sector. But the taxation policy does not reflect the CMSME development policy. CMSMEs will not be able to survive since big industries are forced to start manufacturing the products that CMSMEs to make. CMSMEs will disappear from the market and big conglomerate will become more bigger.
The writer is a Former Non-Government Adviser, Bangladesh Competition Commission, Legal Economist & CEO, Bangla Chemical
