The Metropolitan Chamber of Commerce and Industry (MCCI), Dhaka, a leading trade body, has suggested halving the tax deducted at source (TDS) on exports, describing it as a disincentive to export growth and tax compliance.
The trade body has also said the tax has emerged as one of the biggest roadblocks to growth of export and business.
"In reality, the TDS has turned to be an export sales tax rather than tax on anticipated profit on export," it said in a recent letter to the government high-ups.
The MCCI has suggested revising downward the TDS on exports to 0.25 per cent from existing 0.50 per cent for all the sectors and also keeping it unchanged for at least three years.
MCCI president Nihad Kabir sent the letter to National Board of Revenue (NBR) chairman Abu Hena Md Rahmatul Muneem on November 15 last.
The copies of the letter were also sent to finance minister AHM Mustafa Kamal, industries minister Nurul Majid Mahmud Humayun and commerce minister Tipu Munshi, adviser to the Prime Minister on private sector industry and investment affairs Salman F Rahman and principal secretary to the PM Ahmad Kaikaus.
The trade body said the existing TDS system on export sales is against the principle of income tax.
The way TDS is applied is not at all business-friendly and, regrettably, the rates are decided arbitrarily with no prior consultation with the stakeholders, it added.
"Most of the time the TDS rates are published in the Finance Act and with no prior idea what rate would be applied in the coming years, causing total uncertainty in its future application, and future financial planning for the businesses," said the MCCI president.
She said that reduction of TDS for export is very important issue for business sustainability across all export sectors in the country, especially in the manufacturing area.
The TDS has emerged as one of the biggest burdens for export business to run smoothly. It has turned out to be completely untenable for export growth in the country, particularly for the non-readymade garment (non-RMG) sectors, she wrote.
In this context, she referred to the domestic sales and export of a member company of MCCI in the leather and footwear sector that has business in the domestic as well as export market.
Export sales of the company in FY 2019-20 decreased by 1.44 million pairs to 3.527 million pairs as against 4.965 million pairs in FY2018-19 due to the negative effect of COVID-19 on its supply chain, production and export orders.
The tax expenses of the company increased by 111 per cent although its exports declined by 29 per cent in the fiscal year 2019-20 compared to that of the previous FY, the letter said.
"How is this possible? How can deducted tax be 111 more when the sale volume is 29 less in the same year?" the trade body sought to know.
Even, there has not been any example of refund of excess TDS paid by any exporter, which has made the TDS a major disincentive to export, it said.
The MCCI said the tax must be accepted as full and final settlement of all income tax on export earnings.
The TDS rate on export sales was 0.25 per cent in FY19 but was suddenly increased to 1.0 per cent, a 400 per cent rise, in the budget for FY20, it said.
The increased rate remained applicable until October 21, 2019 which is the peak period for export of leather and footwear items.
Though the rate was reduced to 0.50 per cent on October 22, the NBR did not give any retrospective effect from July 1 as had been the norms for the previous years, it said.
"In a clear and simple term, the manufacturers are being taxed on sales and not on profitability," the letter reads.
The trade body said that the businesses in almost all the sectors had faced severe challenges amid the current pandemic, where almost every sector and enterprise had moved towards negative growth and downward revenue generation, resulting in very significant adverse impacts on business continuity and employment generation.
This is not the case only in Bangladesh rather such situation exists all over the world. That also is having a ripple effect on particularly export-oriented industries in the country, it added.
The downward revision of TDS will help export growth and diversification both in terms of market and products as well as incentivise exports.
The MCCI also urged continuing with the reduced rates for three years for better business planning and also for attracting future investment.
It suggested initiating consultation with the exporters at the end of the second years before setting the rate of TDS for the next three-year term.
A positive decision on this issue in line with the recommendation will result in an enormous positive impact on the total export sector and improve the revenue collection, said the MCCI.