Rationalising corporate tax in 2017-18 budget

Dhaka,  Sat,  29 July 2017
Published : 20 May 2017, 18:02:12 | Updated : 20 May 2017, 18:06:48
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Rationalising corporate tax in 2017-18 budget

Masud Khan
The placing of the budget for 2017-18 fiscal year in the parliament is just a few weeks away.  It will be tabled in the legislature amid income tax issues that plague the corporate sector. All over the world, corporate tax rates are coming down. In the USA, President Trump has declared to bring it down from 35 per cent to 15 per cent and the rate has been brought down to 20 per cent in the UK. In Asia, the rates are generally below 25 per cent.  This is because reduction of corporate tax rate encourages investment. Also, in general, high rates of tax attract evasion while lowering of tax rates encourages more taxpayers into the net.

The Finance Act 2016 made a major change in the manner tax deduction at source should be dealt with.  Earlier, if the actual tax based on the return was lower than the tax deduction at source, the excess income tax paid was refunded under the law. The new amendment proposes that the tax payable will be higher of the two amounts. In other words, there will be no refund. This proposal goes against the fundamental principle of income tax which is to pay tax on the income. Unless the tax authorities prove that the actual income is higher, payment of higher tax is clearly unjustified and unlawful.

The Finance Act 2016 increased the rates of tax deduction at source. Both income tax and VAT deduction at source increases the cost of doing business. Most suppliers refuse to accept tax deduction at source and ask the company to bear this amount. Increase of rates will add to the costs which are already high. 

As introduced by the Finance Act 2016, Section 52 of the ITO 1984 stipulates that tax rate shall be applied on base amount. The base amount is defined as higher of contract value or bill or invoice amount or payment. Further clarifications were made by the NBR through 'Paripatra' regarding payment. The payment means a sum of all payments during a financial year to the payee. 

      As per Rule 16(b) of the Income Tax Rule 1984, there is no exemption threshold limit for tax deduction in respect of payment for supply of goods or manufacturer, process or conversion or printing, packaging or binding. It is not practical to implement cumulative impact both for base value and payment amount using IT systems. Manual calculation is tedious and error-prone.

      There should be a threshold limit for withholding tax. Otherwise for every single purchase (even if it is Tk 1.00), tax has to be deducted at source, which will be a huge task and will increase complexities. For small suppliers, such withholding tax may be exceeding  legitimate tax liability as their income level is very low.

  The following recommendations are worth considering:

n Review the rate of withholding taxes so that it is realistically based on the income profile of the payee;

n Payment should be considered on the basis of single payment irrespective of cumulative payment; and

n Fix an exemption threshold of Tk. 5,00,000 for tax deduction at source.

Following representation from various quarters, the proposed deemed margin of distributors at 12 per cent in the Finance Bill 2016 has been reduced to 6 per cent.  Unfortunately, this issue has been partially redressed since the amount of 6 per cent is still very high compared to the slim margins of the distributors who often end up with lower tax liability. With the amendment of Section 82C, they will not be entitled to any refund.

Under Section 30(e), perquisite exceeding 50 per cent of salary (excluding perquisites) are taxable in the hands of a company. This section is a contradiction of Section 2(58) that defines salary to include perquisites. To our knowledge, this practice is not followed in any other jurisdiction across the globe. It is also important to note that recently there have been a number of High Court rulings that clearly state that perquisite should be a part of salary and there is no scope of disallowance based on a legal interpretation.

As amended by FA 2014, current provision in the field of royalty and technical know-how fees is as follows: "Any payment by way of royalty, technical service fee, technical know-how fee or technical assistance fee exceeding 8 per cent of the net profit disclosed in the statement of accounts" shall not be admissible as deduction on account of allowance form income from business or profession.

The existing provision for disallowances basis "8 per cent of the net profit disclosed in the statements of accounts" should be changed to "at least 6 per cent of sales" to align with the BOI guidelines and actual commercial situation as these expenses are based on sales value.

MNCs are commonly required to make payments to non-residents relating to technical assistance fees or royalty. Such payments attract a deduction of 20 per cent of tax at source. In addition, another 15 per cent VAT has to be deducted at source.  These payments increase the cost of doing business since MNCs are not receiving any certificate under proviso 2 of this section and the cost has to be borne by the remitter.  It is unfortunate that the double taxation agreements between Bangladesh and other countries are not being respected. This issue needs immediate redressal.

The Finance Act 2016 has imposed a requirement to deduct tax at source at the rate of 5 per cent from income of Provident Fund, gratuity and workers' profit funds. Income from the funds form a part of retirement scheme. Rates of government sanchaypatra have been coming down in recent years. This has decreased the income of the funds. In the case of Gratuity Fund, no investment is possible in sanchayapatra and only investment in TBill is possible which has a very low yield.  Under this circumstance, further deduction of 5 per cent will be very damaging to the retirement benefits of retirees. In Bangladesh, there is no state-administered pension fund. This reduction will strain the already beleaguered retirement benefit amounts. Income from funds is exempt under the Sixth Schedule of Income Tax Manual. Also, payment received against provident fund and gratuity is exempt. There is, therefore, no rationale to deduct tax at source against these heads of income.

 The Finance Act 2016 has raised the minimum tax for companies filing tax returns with loss from the current rate of 0.3 per cent to 0.6 per cent, 0.75 per cent and 1 per cent depending upon company category. Making profit or loss is a natural business phenomenon. No company can guarantee that it will always make profit. The above tax is being charged on the premise that companies are not declaring their true income. The onus of proving this lies with the income tax authorities and unless this is done, the tax loss should be accepted. The Indian income tax recognises this fact and allows this payment to be adjusted in subsequent years. Notwithstanding what has been stated above, the increase in rates will put further burden on loss-making companies which are already struggling with big debt burdens and is clearly unjustified.

As per current provision, 20 per cent tax rebate is applicable for non-listed companies which started their commercial production within July 1, 2014 to June 30 2019 in city corporation areas and thereafter shifted their premises outside the city corporation and 10 per cent rebate for those companies which have already started their commercial production outside the city corporation areas. On the other hand, this tax rebate is not applicable for listed companies. The government should always encourage listing of companies that will make the capital market vibrant and allow the public to participate in the corporate sector. But if the listed companies establish industries outside the city corporation or start their commercial production after shifting their existing industries, they are not getting the tax rebate. The facilities should be extended to all the companies irrespective of whether these are listed or not listed to encourage listed companies to move out of city corporation area.

Current provisions of tax laws discourage CSR spending by companies. There are numerous restrictions. In case of banks, there is a limit to CSR spending. There is no denying the fact that CSR is an indispensable part of sustainable development of a country. CSR expenditure does not give direct business benefit and hence companies are reluctant to spend money in this area. In India, Section 135 of the Companies Act recognises this issue and has mandated companies to spend 2 per cent of their revenue for CSR expenses. The government should encourage spending by companies in this important area and allow the full CSR expenditure for tax purposes. There should also not be any requirement for prior approval from the government for CSR spending.

Currently there are no incentives (tax rebate) for payment of higher percentage of dividend. Tax rebate @ 10 per cent for publicly-traded companies if anyone pays very high dividend e. g. above 20 per cent dividend was allowed prior to Finance Act 2016. Dividend is a fundamental criterion for investment decision. In order to strengthen capital market, the government should encourage listed companies to pay more dividends.  The earlier provision allowing 10 per cent rebate on declaration of 20 per cent more dividend should be reinstated.

There is no doubt that the government needs increased revenue to fund the desperately needed development projects. However, the answer is not to continue to increase tax burden of those who are paying taxes which are fast becoming regressive. It is estimated that around 1.2 million out of a potential 8 million taxpayers pay taxes. 

The measures of the government to continuously increase taxes and customs duty are significantly increasing the cost of doing business. Energy costs are spiralling.  Borrowing costs are coming down but are still high. In such a situation, entrepreneurs face a great deal of uncertainty in recovering their investment particularly when the future is uncertain and import of goods can be done freely at a price that could be significantly lower than that of domestically-produced products. 

If the government can increase the tax dragnet for the people who are not paying taxes, the tax rates will automatically come down. This will enhance the compliance culture.  In this culture, compliant companies are facing an uneven playing field. Business-friendly tax laws are a crying need of the hour to bolster business confidence and investment which will auger well for generating higher revenues for the government. The answer is, therefore, not to keep taxing the compliant taxpayers but rather increase the tax dragnet and increase the capacity of the taxpayers to pay higher taxes through increased profits generated from the business.

The writer is CFO, LafargeHolcim Bangladesh Limited.

masud.lafarge@gmail.com

 
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