Corporate Tax

Revision of corporate tax improve for MFS

Bridges over the mighty rivers have seamlessly connected Bangladesh, the naturally fragmented largest delta in the world. It prompted the rapid expansion of motorways and road networks in order to accelerate the nationwide movement of people and goods.

Educational incentives have increased literacy rates, while universal vaccination has prevented maternal and child mortality. The invention of high-yield rice varieties has exiled a famine. Nationwide electrification has brightened rural households and businesses.

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The mobile phone has picked up a magical pace and spread into personal and business communications. And mobile financial services (MFS) have added unprecedented ubiquity, frequency, and security to human and small business transactions.

It all adds up to the country’s secret recipe for impressive economic growth.

It could be more glitzy if Bangladesh had applied predictable regulations to build investor confidence. Policy makers should consider the regulatory fragility of these growth engines. The principle of taxing juvenile MFS proposed in the current budget should be reconsidered.

Cellular technology has democratized telephony, which was a novelty. The mobile phone, introduced in 1997, primarily saved the urban middle class and then saved rural life from the monopoly of state telecommunications companies. Money doesn’t move, information does. Therefore, every mobile phone in 2011 went from the bank-run MFS outfits to unintentional pay machines.

Since then it has been the preferred means of payment for predominantly rural citizens without bank details. With the “scary” process of opening accounts, banks cannot keep up with the ubiquitous, secure and after-hours operation of MFS branches when it comes to cash transactions.

Currently, more than 60 percent of cash-out payments are made in the villages. No wonder the government uses MFS as the preferred vehicle for providing their social security network payments and educational grants.

Such a uniquely effective small step by the MFS towards gigantic financial integration into the cash-powered economy of Bangladesh requires careful regulation.

In contrast to the 2.5 percentage point reduction for all other companies, this year’s budget provides for an increase in corporate tax on MFS from 32.5 percent to 40 percent. It’s like plugging an altimeter into a bomb and exploding as soon as the plane ascends to cruising altitude.

Since no MFS company makes a profit, they do not have to pay corporate income tax either. They collect 10 percent AIT from their agents and 12 percent AIT from distributors on behalf of the government. In addition, there is a 15 percent VAT on the withdrawal fees.

According to bKash, the dominant MFS, Tk 638 billion was paid as taxes, while it posted a loss of Tk 81 billion in fiscal year 2019-20. Yet bKash and its 14 other competitors continue to invest in their long pursuit of profit. But the tax officials want to count the chickens before they hatch.

It sends a chilling signal to existing and potential investors in the technology-oriented, emerging MFS industry. Continuous investments in technology for secure digital payment processes are consuming the earnings of increasing MFS. It seems incomprehensible among politicians.

The tax authorities wrongly put the MFS industry in brackets with the planned banks. Banks earn their money with loan products that are decades old, if not centuries old. However, the MFS companies are mostly cash movers using cellular technology.

Unlike banks, the MFS outfits deal with a negligible number of very old fashioned retail banking products with minimal return. Some of them, like wire transfer processing, are strictly asymmetrical as they only deliver converted incoming funds. In principle, structural differences and large operational differences between banks and MFS should be the guiding principle of taxation.

Authorities should recognize the fact that MFS companies, rather than traditional banks, have succeeded in getting the mass population of Bangladesh onto the formal payment channel.

The journey is far from over, however, as only 20 percent, or 37 million of the population actively operate MFS accounts, according to the central bank. The growth potential of the MFS market with 15 providers is 174 million mobile phone users.

Therefore, the MFS market should be allowed to grow while the premature and counterproductive corporate tax of 40 percent awaits everyone’s interest.

The author is a Senior Policy Fellow at LIRNEasia

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