Currently, an unlisted company has to pay 32.5 percent corporate income tax, while its publicly traded counterparts have to pay 25 percent
As with all previous budgets, talks about corporate tax cuts are on the table before the budget for fiscal year 2021-22.
Although companies say lowering corporate tax rates would bring more investment and create jobs, the tax rate in Bangladesh is still higher than the regional and global averages.
Currently, an unlisted company has to pay 32.5 percent corporate income tax, while its publicly traded counterparts have to pay 25 percent in the country.
However, the global average corporate tax rate is 23.8 percent, while that in Asia is 21.1 percent, according to the Dhaka Chamber of Commerce and Industry (DCCI).
According to the DCCI, companies in Vietnam, Indonesia and Myanmar pay an average of 20 percent corporation tax, in India 25.2 percent, in Pakistan 29 percent and in Sri Lanka 28 percent.
If the government were to gradually reduce tax rates, it would not affect the collection of revenue. Rather, it would boost investor confidence, AK Khan Telecom’s chief executive Abul Kasem Khan told Dhaka Tribune.
It’s a good sign that the government cut the corporate tax rate by 2.5 percentage points this fiscal year. Further cuts in the next budget could bring it down to 25 percent within the next two or three years.
“A flexible tax system and an appropriate tax rate increase a country’s international competitiveness and attract investors.”
If the government continues to cut corporation tax, it would act as an incentive for investors, which would also help increase labor cash flow, Khan said.
To ensure investment, the government can set conditions under which an entrepreneur must invest the money saved as a result of the waiver.
This could be invested in human resource development and improving training, research and development, Khan added.
And the attracted investments would come from both domestic and foreign countries, said DCCI President Rizwan Rahman.
Rahman proposed a progressive tax rate for the next few fiscal years, calling for corporate tax cuts for listed and unlisted companies by 2.5%, 5% and 7% over the next three fiscal years.
“Higher corporate tax rates have a negative impact on new investments,” said Abdul Kader Khan, general manager of Khan Accessories and Packaging Co.
Likewise, business-friendly interest rates encourage more investment. If Bangladesh is to attract foreign investment, it must provide incentives.
He also called on the government to give small and medium-sized entrepreneurs an equal tax rate so that they can stay competitive.
However, experts have also called for clarification of the effective tax rate, stating that just a reduction in corporate tax cannot be the sole indicator of attracting investment.
“We should think about the effects of tax cuts on the overall economy as well as revenue generation,” said Towfiqul Islam Khan, senior research fellow at the Center for Policy Dialogue.
Companies are calling for interest rate cuts for the unlisted companies, but are ignoring tariffs in the apparel sector.
The country’s export-oriented apparel sector pays 12 percent corporate tax and 10 percent for the garment factories that manufacture goods in certified green factories.
“Corporate tax is not the only barrier to investment – more issues need to be addressed.”
To attract investment, Bangladesh needs adequate infrastructure for which the country needs taxes to meet the funds requirements.
“We only consider the tax rate compared to competing countries, but there are other problems. We should think about the other derogations and special benefits offered to certain sectors. “
There are also differences in rates and different types of exemptions, Islam said, urging that the arbitrary rates offered to different sectors be redefined.
The other economists have called for reforms of the tax system and a rationalization of the tax rate, which they find very complex and unfriendly.
“Our tax system and our tax policy are very complex. There are different rates for different sectors, ”said Zahid Hussain, former chief economist with the World Bank office in Dhaka.
Compared to other South Asian countries and competitors, the corporate tax rate in Bangladesh is higher.
But there’s a loophole in the system that creates opportunities for the outliers, Hussain said.
In order to eliminate systematic errors and stop tax collection, the government should reform the system and streamline the tax rate.
There would be no benefit if the government cut the tax rate on an ad hoc basis. Rather, this would have a negative impact on revenue generation.
To achieve the most benefits, the tax system should be changed and made more business-friendly. When that is done there will be more investment, added Hussain.