One area of regular concern is the taxation of corporate profits
In the further course of budget preparation there are many proposals for appropriate changes in taxation.
One area of regular concern is the taxation of corporate profits.
By corporations here I mean those business organizations that were created as limited liability companies and protect owners from efforts to get their individual assets in the event of bankruptcy.
When a limited liability company makes a profit, that profit is usually taxed at a flat rate.
After paying this corporate tax, what happens to the remaining profits?
The company can distribute profits to its owners or keep the profits for future use.
Dividends distributed to the owners are in turn taxed by the authorities through individual income tax.
This double taxation increases the tax rate on capital gains, discourages investment and saves.
When corporate taxes are lowered, returns on capital are higher, which leads to savings, investment and growth.
Lower corporate taxes can also lead to higher wages: if the company is achieving a target return on investment, wages can increase if corporate taxes are lowered but profit levels remain unchanged.
However, double taxation remains for political reasons.
Many believe that this is a higher tax for the rich than for the poor.
However, owners can “pay” the tax through lower wages or slower economic growth (less investment).
Lower taxes, of course, mean less government spending.
When the limited liability company retains profits for future use, the value of the company increases.
The owners are richer now. For an unlisted company, these assets are not very liquid.
An owner could use the company’s increased value to borrow money, or they could sell their interest in the company to someone else.
Neither is really very useful for the owner to find liquid funds from his increased assets.
The shareholder of a publicly traded company should see the share price rise due to retained earnings. He can then sell his shares and receive his portion of the profit.
This requires taxing the capital gains from the sale of the shares.
The best way to tax companies is to not tax them at all, but to tax dividends and realized capital gains as individual income.
Of course, capital losses must be allowed as a deduction from taxable income when selling stocks at a loss.
However, it is unrealistic to expect such a tax system to be introduced and adjustments to the existing system will have to be considered.
Four questions are discussed:
1. Should there be a difference in corporate tax rates between listed and unlisted companies?
There’s no good reason for such a difference, so the short answer is NO.
It discriminates against small businesses that government policies seek to encourage.
It is argued that this will encourage more companies to get listed, but there is no evidence that this is true.
The one thing that is certainly true is that a lower tax rate for publicly traded companies makes the distribution of income less equal the richer the bigger the benefits get.
This comes from the simple observation that the high-income individuals own most of the share.
The common recommendation to increase the spread between listed and unlisted companies is exactly the wrong direction.
The gap should be reduced to zero. Proponents of a wider spread are likely looking to lower the rate for publicly traded companies.
2. Should different types of businesses have different tax rates?
Good tax systems are neutral; The tax rate should not be used to favor one sector over another.
Governments have not demonstrated the ability to predict successful industries in Bangladesh or anywhere else.
The reason for these different tax rates is the assumption that some businesses are making too much money and should therefore be taxed more heavily.
This is a completely wrong argument. Sectors that generate high competitive returns should be encouraged to expand.
There may be specific reasons for wanting to tax a company at a higher rate, but this should be done through a consumption tax rather than a profit tax.
Profitability when there is competition is a clear sign that more investment in a sector is warranted.
Look at the banking system: high tax rates result in insufficient investment in the bank’s own facilities: banks have weak, fragile IT systems and a lot of additional investment is required.
Better IT systems improve credit collection.
The continued profitability of the banks is often false and stems from the fact that BB does not enforce its own rules. High tax rates hurt weaker banks more than strong banks.
Agricultural lending deals are insufficient for the opportunities presented, but this type of loan is expensive to operate. Private banks need to invest more in this area.
Overall, more investment in financial institutions is needed. The high tax rate discourages investment.
On the other hand, excise taxes on tobacco sales have a clear social benefit in reducing tobacco consumption.
The telecommunications sector is particularly interesting. It is difficult to build competition because three companies have a head start that is very difficult to overcome.
As three companies and the BTRC policy try to move market shares towards equality, competition is restricted and not supported.
The government wants to invest more in telecommunications and public behavior shows that people want more services.
Taxes and fees are way too high. Apparently, the Bangladesh Telecommunications Regulatory Commission believes that it is their job to generate as much revenue as possible, not to improve and develop a better phone system.
That is bad public order.
For example, the speed of the internet is way too slow.
Certainly, telecommunications companies can be encouraged to invest in activities to speed up the Internet.
Fiber optic networks need to be expanded.
Rather than levying taxes and fees, not to mention audit conflicts, one wants profits to be spent in the sector as high returns can be made.
The general point is that corporate tax should be neutral.
I don’t expect the government to cut or remove the disparity in interest rates, but it should be understood that the result is an underinvestment in the IT and financial sectors.
Taxing the winners and subsidizing the losers was the motto of bureaucratic organizations everywhere.
All it does is reduce economic growth and harm ordinary people. It’s remarkable how power and stupidity go hand in hand.
The problem of the clothing sector is discussed in the next point.
3. Does Bangladesh need a lower corporate tax rate for export sectors in order to compete with other countries?
The clothing sector claims its profits are too small to be taxed at regular rates.
The structure of the sector is that there are many companies, many of which are quite small and their profits are low.
Applying standard corporate tax to unlisted companies would force many of these companies out of business.
But the bigger, more profitable companies could accept this. The reality is that the government is not very efficient in dealing with the RMG sector.
First, after a lot of paperwork, the export subsidies are paid out very slowly; This is strange as the shipping documents should be enough to verify actual exports and the value of the shipment.
If the BB is waiting for the receipts to be sent from the buyer it is ridiculous as it is easy to make adjustments for a quick payment.
There are still difficulties with customs that seem completely unnecessary.
In the age of powerful computer networks, everything to do with customs for the key sector should run smoothly.
The inability of customs to manage the clothing sector more efficiently is a very worrying phenomenon.
These are issues that need to be addressed by the Bangladesh Garment Manufacturers and Exporters Association.
Ultimately, however, the export sector pays most of the same corporate tax as everyone else.
A reasonable approach is to examine corporate tax policies on exports from competitors in Bangladesh, e.g. For example, if Vietnam does not levy a corporate tax on exports, it is a good reason for Bangladesh to do the same.
4. Is the corporate tax rate too high?
Yes! At the current level, it discourages foreign investors.
In many of the interviews we have conducted with domestic and foreign investors over the past 20 years, they always plead for tax leave as long as nobody wants to have anything to do with the NBR.
But tax breaks are dangerous incentives.
A new investment project will not be profitable in the first two or three years depending on the complexity of the technology. How long should a tax vacation be?
If you want to reduce the early tax burden, allow depreciation according to the schedule that the investing company wants to set.
This enables high early depreciation, which reduces the tax burden in the first few years.
on. Reduce the corporate tax rate for any listed or unlisted company to 15 percent and with no difference between sectors. [15 per cent is below most advanced country rates so should encourage foreign direct investment. Company tax rates have been declining among advanced economies and are now about 23 per cent.]
b. Allow the company to set the depreciation rates.
c. Bring all corporate tax rates to the standard of 15 percent within three years.
d. If necessary, introduce excise taxes to suck out excess profits in sectors where the government is trying to discourage investment.
e. For the calculation of the individual income tax, cash dividends can be increased by 20 percent and taxed according to the individual income tax bracket.
When a system of determining capital gains is in place, one simply adds actual dividends and capital gains to other income to determine the basis for individual taxation.
Then dividends and net capital gains are taxed as personal income.
f.Design a capital gains tax on stocks to be operational in three years. Extend this system to include land transactions.
G. Examine the treatment of corporate taxation on exports from competitor countries and determine how to treat corporate taxation of exporters on a competitor basis.
The author is an economist