After the recent proposal to raise the tax-free income ceiling and other reforms in the tax policy, it is the right time to ponder if Bangladesh has come to a point where it can be called a tax-friendly country.
There is no definitive scale or measurement tool to quantify ‘tax-friendliness.’ It is highly contextual based on a country’s tax policies, financial situation and countless other factors. One thing needs to be mentioned here is that no country has a flat tax rate for all of the principal taxes. Contrasting different factors like the tax policies, tax rates of the principal taxes, incentives etc. with well known ‘tax-friendly’ countries may give a presentable answer.
The new tax-free income limit will work as a relief to low-income people. In the 2020-21 fiscal year, it was proposed to be fixed at Tk 300,000. Also, for women and taxpayers above 65 years of age, the proposed limit was raised to Tk 350,000 from Tk 300,000; for physically challenged people to Tk 450,000 from Tk 400,000.
While the new proposals might seem kinder to low-income individuals, it wasn’t always rosy. For five years since 2015, the NBR did not pay heed to economists’ suggestions for change in tax exemption threshold and tax rate, fearing that a large portion of taxpayers will go out of the tax net which might result in a fall in revenue collection. Compare it to neighbouring India that has doubled its tax-free income limit to Rs 500,000. Doesn’t it seem so ‘tax-friendly’ when considering NBR’s narrative?
The income taxes increase progressively with the individual’s income. From Tk 400,000, a 5.0-per cent tax is imposed, and it goes up to 25-30 per cent at maximum. Lowest marginal rates for individuals alleviated to 5.0 per cent from 10 per cent will surely give respite to low-income individuals, and enhance their purchasing capability.
But, compared to other tax-friendly countries with progressive policies though, Bangladesh doesn’t seem to give the rich enough incentive to keep their money in the country. Bangladesh is not Tax haven for the high-income individual, something the Paradise Paper leaks made very clear. The highest marginal rate of income taxes in Bangladesh is 30 per cent, whereas United Arab Emirates (UAE) has a flat income tax rate of 0 per cent, Switzerland 11.5 per cent, Hong Kong, Hungary, Iraq, and even Bangladesh’s neighbouring Sri Lanka and Maldives with 15 per cent -- have friendlier tax rates in the higher margin.
Corporate taxes are 25 per cent for listed or public entities and 32.5 per cent for non-listed entities. There are no social security taxes imposed, but the amount can vary based on different industries and conditions. The corporate taxes are quite high in Bangladesh. In contrast, UAE imposes 0 per cent corporate taxes. Ireland, Lithuania, Romania have 8-12 per cent, Hong Kong, Singapore, Poland, Czech Republic, UK have 15-19 per cent in corporate taxes at most -- a world of difference from Bangladesh’s corporate tax rates.
But the Small and Medium Enterprises (SMEs) have laxer turnover tax rates, making it easier for entrepreneurs and small business owners to grow their businesses. The turnover tax for any businesses that registers annual turnover of Tk 5,000,000 to Tk 30,000,000 has to pay 4.0 per cent in turnover tax. For the fiscal year 2020-21, the turnover tax may be curtailed to 3.0 per cent due to the damage in business because of Covid -19 lockdown; surely a great relief for small business owners and entrepreneurs.
The country's annual budget largely depends on Value Added Tax (VAT). The standard rate of VAT is maximum 15 per cent of the transaction value on imports and supplies. The VAT situation in Bangladesh has always been haphazard and subject of public scrutiny. Recently, low and middle-income groups have been hit hard by the imposed VAT on essential commodities including rice, pulse and edible oil, while broadband internet services and value chain services have been waived down.
15 per cent might seem a rather mild VAT rate compared to other countries with higher rates, such as India with as much as 28 per cent VAT on certain commodities. Not to mention countries like Brazil, Hungary, and the infamously tax heavy Scandinavian countries like Sweden, Norway, and Denmark, where 20-27 per cent VAT is imposed. Bangladesh has a seemingly tolerable VAT policy in comparison. But the problem arises in mismanagement like abrupt imposition of VAT on any commodities without prior consideration and situation analysis. But even excluding these factors, Bangladesh cannot be considered to have a consumer-friendly VAT policy.
The United Arab Emirates, Hong Kong, Switzerland, Australia, Japan and the United States are some of the countries that have friendlier consumer VAT policies, excluding the special territories and tax havens. Some of them are VAT paradises with as low as 0 per cent VAT rate and some like Japan and the United States impose only 8.0 per cent -10 per cent VAT on commodities. Bangladesh’s VAT policies are far from friendly, taking these high consumption countries into account.
The tax policy also includes tax holidays and incentives for specific sectors such as industries built in the EPZs and investment in EPZs, industrial, infrastructure, development ventures and power generation mostly help the wealthy business tycoons only who dominate these sectors and also have a colourful track record of tax evasion already. Newly formed or smaller sized corporations seldom enjoy good tax incentives or holidays. Compared to Bangladesh’s situation, India and China have implemented tax holidays for SMEs, software industries, corporations that meet environmental protection standards and conservation projects, which are much more sustainable fields for incentivising.
Looking at the world’s most tax-friendly countries, Bangladesh in no way can be called a tax-friendly country. But there are some leverages for low and mid-income individuals, SMEs and some tax loopholes for the rich. To be truly considered a tax-friendly country, just lowering tax rates in all principal taxes won’t help. Rather, smooth implementation, better incentives and many other factors need to be improved drastically.
The writer has completed his MSS from Dhaka University and currently working as an independent researcher. He can be reached at [email protected]