Plan to restructure source tax rates to aid manufacturers, traders

Infographics: TBS

The government is likely to reduce the rates of tax deduction at source on the supply of raw materials to manufacturers and finished products to retailers in the next fiscal year, aiming to provide them with a breathing space.

According to finance ministry officials with knowledge of the matter, the rate will be reduced to 3% from the current 4% for supplying raw materials, and to 4% from the existing 5% for supplying trading goods.

The FY25 budget is also expected to see a major change in the source tax rate for contractor payments as the government is setting a single rate of 5% instead of the current 3%, 5%, and 7% depending on volumes.

The finance ministry officials further said the government is going to provide comfort to local manufacturers and traders as their source tax deduction will be treated as the minimum tax and will be considered final settlements if their income does not exceed the amount.

Officials at the National Board of Revenue (NBR) said the changes will close loopholes for tax evasion during contractor payments. They explained that currently, many contractors enter into separate contracts to reduce the rate from 7% to 3%.

However, finance ministry officials said the new initiative to establish a single rate may affect small contractors who currently benefit from a 3% source tax rate.

Abul Kashem Khan, former president of the Dhaka Chamber of Commerce and Industry, told The Business Standard, "We have been opposing the idea of AIT [advance income tax] for a long time, but any move to reduce taxes is always welcome."

He also said if the government reduces any tax by 1% or 2%, it would be very helpful for local businesses and traders.

The government should introduce a refund policy for taxes deducted in excess of the actual amount, he suggested, adding, "Otherwise, the tax burden will exceed the profit."

Abul Kashem said, "If the government is unable to refund the excess amount, it should be adjusted in the following fiscal year."

He also mentioned that it is right for the government to take measures to prevent misuse of any facility.

"If the source tax deduction rate increases by 2%, small contractors may be affected," he said, proposing the introduction of solutions to protect them.

Snehasish Barua, a partner at Snehasish and Mahmud Co, a leading chartered accounting firm, said a reduction in the tax deduction at source rate by the government would be beneficial for businesses.

However, he noted that an increase in the rate would significantly impact small enterprises as, in some cases, their profit margins are lower than their taxes.

Abu Motaleb, a director of the Federation of Bangladesh Chambers of Commerce and Industry, pointed out that the government has not been able to collect taxes efficiently from goods supplied to retailers.

"If the government provides electronic fiscal devices to all wholesalers, it would be a solution to collect taxes at the source," he added.

Currently, some wholesalers are paying source tax while others are not, he said, adding, "Those who are paying taxes are facing difficulties. Those who avoid paying this tax can manage NBR officials with less cost than paying the taxes, which creates discrimination among traders."

The FBCCI director also suggested that if the government reduces the rate to 0.50%, it would be easier to collect taxes compared to a higher rate. "Before doing that, the government should provide EFDs [electronic fiscal devices] to all traders."

Mohammad Ali Khokon, president of the Bangladesh Textile Mills Association (BTMA), said, "This move is better than nothing."

He elaborated that their initial demand was for a 4% source tax to be applied across the entire process, from yarn to finished fabric.

However, he expressed dissatisfaction with the current structure, where a 4% tax is imposed separately on the supply of yarn, dyeing, finishing of fabrics, and supply of fabrics. This cumulative tax burden totals 16%, which, he added, becomes a significant financial burden for local textile manufacturers.

Mohammad Ali Khokon highlighted that local textile manufacturers are currently facing challenging times in opening LCs to import cotton due to the dollar crisis.

Additionally, he mentioned that smuggled fabrics pose another challenge to their survival.