Tax rise plan for high earners faces backlash

Salaried taxpayers have seen their tax liabilities increase over recent years, due mainly to a high rate of inflation that has outpaced wage growth.

A proposal to raise the tax rate by 5.0 percentage points in the next financial year (FY 2024-25) has been met with criticism from high earners.

They argue that the increase unfairly burdens existing taxpayers, especially when a large number of potential taxpayers -- who are estimated to be more than 30 million -- remain outside the tax net.

According to the critics, the government should focus on improving efficiency in spending taxpayer money to address the country's growing income inequality, rather than simply raising tax rates.

A recent study by the Policy Research Institute (PRI) suggests that around 43 per cent of taxpayer money is spent on salaries, pensions and other benefits for government officials.

For many years, the highest tax slab rate for individuals in Bangladesh was 25 per cent. This rate was increased to 30 per cent in 2014.

However, due to concerns about the burden placed on existing taxpayers and the impact of Covid-19, the rate was reduced back to 25 per cent in 2020.

Now, the government is considering raising the highest tax slab rate back to 30 per cent in the next fiscal year.

According to Bangladesh Bureau of Statistics (BBS) data, the inflation rate has increased from 5.65 per cent in 2020-21 to 9.69 per cent in 2023-24. During the period, wage growth has seen a slight increase -- from 6.12 per cent in 2020-21 to 7.8 per cent in 2023-24.

However, GDP growth has decreased from 7.03 per cent in 2020-21 to 6.4 per cent in 2023-24, with a further projected decrease to 5.4 per cent in 2024-25, according to the statistics bureau data.

Md Anisuzzaman, chief financial officer of LafargeHolcim Bangladesh, has voiced concern about the proposed increase in the highest tax slab rate to 30 percent.

"It is simply not justified considering the current economic climate in the country, largely characterised by high inflation, rising interest rates and utility price hikes," he commented.

"The proposed tax increase would seriously affect individuals who fall under the highest bracket," said Md Anisuzzaman. "The combination of a rising cost of living, lower salary growth and the withdrawal of previous tax exemptions in the new income tax law would lead to a significant decrease in real income compared to previous years."

For example, under the new law, previously tax-benefited items like Leave Fare Assistance (LFA), dividend income and Workers' Profit Participation Fund (WPPF) are now fully taxable.

According to Mr Anisuzzaman, the government should focus on expanding the tax net rather than raising the tax rate for specific income brackets.

Debabrata Roy Chowdhury, company secretary and head of legal & taxation at Nestlé Bangladesh Ltd, said the salary situation in 2024 has worsened compared to 2020 due to high inflation, currency depreciation and macroeconomic stress.

Companies struggling with these factors are offering minimal salary increases, which are then eroded by high inflation, he said. "Raising the highest tax slab rate would further burden individuals."

Economist Dr Ahsan H Mansur agreed with concerns raised by high-income earners, commenting that high tax rates incentivise tax evasion rather than reduce income inequality.

"Given existing tax, VAT rates and advance taxes, a salaried individual can take home a maximum of Tk 35 out of every Tk 100 earned," said Dr Mansur, executive director of PRI.

Talented young people could become demoralised and less likely to work in the country if their efforts result in a poor return, said Dr Mansur, calling for focusing on property taxes instead of raising tax rates for corporations or individuals.

Former income tax member Aminur Rahman, however, supported raising tax rates for the high-income group.

However, he called for reducing government spending and cuts to expenses for government officials.

"The concept of a super tax is gaining popularity worldwide and we need to consider it as a way to reduce income inequality," he added.

Salaried taxpayers at large corporate houses said their disposable income would decrease due to a higher tax burden, leading to a decrease in consumer spending -- a key component of economic growth.

Individuals may also cut back on consumption or savings, leading to lower demand for goods and services. Reduced savings could have a negative impact on investment rates.

There are also fears that the tax rate change could be applied retroactively next year, as has happened in the past. This could force salaried employees to surrender a substantial amount of their salary in the form of taxes.

Taxpayers have suggested that the government promote cashless transactions and enforce mandatory linking with National Identification Numbers (NID) and Tax Identification Numbers (TIN) to improve tax collection.

Currently, individuals with an annual income above Tk 1.6 million pay tax at 25 per cent. According to the National Board of Revenue's (NBR) annual report data, in 2020-21, there were 89,290 taxpayers in this high tax bracket who paid a total of Tk 19.63 billion in income tax.

This translates to an average annual tax payment of Tk 220,000 per taxpayer in this bracket. These high-income taxpayers contribute nearly 31 per cent of the total revenue collected from direct taxes.

Data from numbeo.com, recently compiled by Max Bramwell, the founder of FounderPass, reveals a ranking of countries with the highest and lowest average salaries. Bangladesh is among the countries with a lower salary base.

The monthly average net salary after tax in Bangladesh is $246.95 -- lower than in Algeria, Tunisia and Libya.

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