Bangladesh’s parliament is poised to pass a new income tax law this year with the aim of simplifying the taxation system, boosting investment and broadening the nation’s tax base.
The draft bill will be submitted to the Cabinet for approval in the coming months. If passed, it will replace both an ordinance from 1984 and a 100-year-old law.
‘The Income Tax Act was passed 100 years ago, and it was intended to cover the whole of British India,’ says Shamol Sarker ACCA, chairman at Tax House Bangladesh, who has provided his feedback on the draft law to the National Board of Revenue (NBR). ‘Bangladesh lacks a clear and comprehensive income tax law,’ he says, adding that the existing laws are in English rather than the national Bangla language, whereas the proposed law would be available in both.
‘We have to simplify tax so that lay people aren’t scared of it’
In its current form, the proposed law removes a number of ambiguities. This includes defining all forms of income and creating a clear distinction between gross and basic salary.
It is also more streamlined, as Mohammed Salauddin Hassan, managing partner at NexaLegal, explains. ‘The concepts in the ordinance are scattered all over the place,’ he says. ‘By assimilating the same subject matter under common provisions, it will make the law simpler, more accessible and easier to navigate.’
‘It will make life easier for people entering the accounting profession, as they won’t have to rummage through hundreds of pages of laws,’ says Sarker. ‘We have to simplify tax so that lay people aren’t scared of it. If it is accessible, there will be more interest in it.’
A wider net
With a few exceptions, the rates of applicable taxes will remain unchanged. Nonetheless, the new law aims to widen the tax base. This is important because Bangladesh is on track to graduate from least developed country (LDC) to developing country status by 2026. The United Nations gave Bangladesh clearance for the process last November, giving it a period of five years to prepare instead of the usual three, due to the widespread challenges caused by the ongoing Covid-19 pandemic.
This change in status will result in the loss of duty-free access to various international markets, a reduction of import duties and fewer opportunities for cash assistance on exports.
‘Ever since its inception 50 years ago, Bangladesh has been heavily reliant on concessional foreign grants,’ says Hassan. ‘A sudden and drastic fall in them will absolutely have an impact on the economy.’
‘A sudden and drastic fall in concessional foreign grants will absolutely have an impact on the economy’
To compensate, Bangladesh’s government will need to mobilise resources domestically, as well as attract foreign direct investment by improving the ease of doing business.
‘The draft law may be seen as a positive indicator towards achieving clarity and greater efficiency in the taxation system, as Bangladesh ushers in a new era of development,’ says Mohammed Rakinul Hakim (Alvi), a partner at NexaLegal.
Transparency push
The draft law takes important steps towards curbing the discretionary powers of tax officials.
‘Sometimes officials select a file to be audited arbitrarily. Under the new law, files would be selected according to set criteria,’ says Hassan.
According to NBR figures cited by the media, out of a population of 164 million, there are only six million people with a tax identification number (TIN) and just over 50% of those submitted a tax return in 2019/20.
‘Any person earning an annual income of more than 3.5 lakh taka (£3,000) is supposed to have a TIN number and pay taxes to the government,’ says Hassan. ‘However, many people in our country do not register because they think that once they have a TIN, they will be under the purview of the government and come within the tax system.’
Under the draft law, anyone who does not have a TIN and seeks to make a tax deduction will receive 50% less than if they do have one.
‘This is an indirect way of getting more people to register for a TIN,’ says Sarker.
The executive director of the Policy Research Institute, Ahsan H Mansur, told The New Age that many people are afraid of submitting a return and that the NBR should adopt a ‘harassment-free policy’ to incentivise people to fulfil their income tax obligations.
‘International investors want to be compliant but there are no proper guidelines’
‘If there is a police-and-thief relationship between the people and tax authorities, the situation cannot improve,’ says Dipu Barua FCCA, an associate director at Snehasish Mahmud & Co.
‘Unless and until there is trust, and the people can see the infrastructural developments being made or pensions being paid on retirement, they will not be motivated to pay tax.’ He expects the new law will also be effective in curbing discretionary powers.
Investor guidance
Almost 95% of Barua’s clients are foreign companies, and he believes that a number of legal ambiguities need to be cleared up.
For a start, it is difficult to utilise double tax treaty benefits, despite the fact that Bangladesh has signed these with a number of countries. He recently spent eight months seeking an exemption from the NBR so that his client could avoid paying double tax.
Barua has also raised his concerns with the NBR about the lack of clarity around mergers and acquisitions, as well as income generated from a joint venture or operation between a local and foreign company.
‘International investors want to be compliant but there are no proper guidelines,’ he says. ‘They don’t want to risk getting a fine for non-compliance, so they often come to us with a lot of questions.’
During a meeting with the NBR concerning the draft law, Barua pointed out that while the corporate tax rate had fallen over a period of years from 37.5% to 30%, some businesses were finding a hike in the overall tax rate due to certain expenses failing to qualify as tax admissible.
‘The cost of doing business is high and this will become acute as Bangladesh graduates from LDC status in the next few years,’ adds Barua, pointing to the need for parliament to consider the impact of tax reform on investment and how companies will fare under a new tax regime as Bangladesh emerges as a developing economy.
