Finance Bill 2021 - The good, Bad and The Ugly

Mamun Rashid | 16 June 2021
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The agenda for diverting little more liquidity in the hands of middle and lower-middle class was not handled well through the budget, i.e. finance bill

Along with the budget presentation for fiscal year 2022, came the finance bill 2021. 

Bangladesh being increasingly getting focused on numbers and business focused, finance bill tells you more re: where is the shoe pinching then the budget itself. 

While the overall tone of the budget was to put little bit more disposable income in the hands of business and entrepreneur community, we guess the agenda for diverting little more liquidity in the hands of middle and lower-middle class was not handled well through the budget, i.e. finance bill.

The Good

Like last year, this year’s budget is once again a business friendly one. 

The tax rate for unlisted companies have been proposed to be cut from 32.5% to 30% and for listed ones the rate is to be slashed from 25% to 22.5%. 

The business turnover tax rate for individual taxpayers has also been proposed to be reduced to 0.25% from 0.50%. 

Furthermore, the current budget proposes to provide tax exemptions for companies which are engaged in the manufacturing of automated vehicles, three and four wheelers, home and kitchen appliances and engineering products if certain conditions are met. 

There is also a five-year extension for the exemption from VAT for motor vehicles makers.

The finance minister also proposed a 10-year tax exemption for certain IT hardware manufacturersif they are produced in Bangladesh. 

The term “made in Bangladesh” has been a key focus of the current budget with the intention of boosting local manufacturing and discouraging imported products.

These rate cuts and exemptions are a very welcome follow-up from the previous year’s finance bill which had also extended similar tax cuts for business enterprises. 

Such cuts are certainly highly welcome by the corporate sector and by cash rich potential investors, especially foreign ones. 

These cuts come at a time when the nation is experiencing price stability, moderate levels of exports, high inward remittance, record high foreign reserves and stable exchange rates. 

Therefore, these corporate tax rate cuts and exemptions are well timed and are expected to further boost economy during a period when the Covid-19 pandemic has slowed it down compared to the pre-pandemic days.

The Socially Progressive

There is also a special tax exemption for SMEs which are owned by women entrepreneurs with the primary goal of encouraging and motivating more women to become involved in business ventures. 

Additionally, the enactment of special tax incentives has also been proposed in the budget with the view of increasing work opportunities for transgender employees. 

The current budget proposes to put forth the necessary provision in the nation’s tax ordinance whereby there would be a rebate of 75% of the total salary paid to employees from the third gender or 5% of tax payable, whichever is lower. 

Such a rebate would be available to those employers who employ at least 10 percent of their total workforce or have higher than one hundred workers, who are from the third gender. 

Similar provisions have been kept for intellectually and physically challenged ones.

Such inclusionary fiscal policies will certainly put Bangladesh on a praiseworthy list of highly progressive nations. 

The Not So Good

Although the current budget provides for certain tax cuts, exemptions and various beneficial treatment for businesses and manufacturing, there are still areas where it is lagging and even contradictory and there are important sectors which did not get the attention that was necessary and widely expected.

Even though there is a proposed 2.5% cut in the corporate tax rate for both, listed and non-listed companies, it is possible that such entities might ultimately end up having to pay more taxes than the previous year because there is a new plan to hike up the TDS (tax deducted at source). 

The NBR is currently attempting to increase the TDS rate from 5% to 7% for local supply while not changing the already high rate of 5% for imports. 

This matter was specifically pointed out by The Institute of Chartered Accountants of Bangladesh (ICAB). 

If this contradicting issue is not also considered and fixed, then it may not accomplish the foundational targets of increasing industrialization and attracting more foreign direct investments. 

Many business enterprises are still significantly dependent on imported materials and products because many such items simply cannot be produced locally and continuing to require such a high percentage TDS for imports may end up increasing the overall effective tax rate for many companies despite the reduction in the statutory income tax rates. 

The 2021 finance bill also proposes a 37.5% tax on publicly traded providers of Mobile Financial Services (MFS), which is a 5% hike from the existing rate of 32.5%. 

Furthermore, for non-publicly traded MFS the rate has been proposed to be increased from 32.5% to 40%. 

If such drastic tax rate hikes are eventually enacted, then it would have negative impact to this vital sector. 

The demand for mobile based financial transactions is expected to keep on rising and further migration towards it is critical from the perspective of customer convenience, efficiency and satisfaction. 

The availability of such services has drastically changed the financial and economic landscape of the country over the past several years and a significant amount of the population avails such services on a regular basis. 

Such a major hike in tax for these companies would inevitably translate into higher costs for the customer, many of whom are from poor backgrounds and it would negatively impact their livelihoods. 

Maintaining the same way Cap on promotion cost of the fast-moving consumer goods (FMCG) companies is also deemed to inhibit their growth potentials, as they mainly thrive on right promotion or market awareness building.

The Ugly

This budget has been presented in a period when the nations education institutes have been closed for almost a year and a half and a majority of these institutions do not have the digital or technological infrastructures in place to accommodate online learning which few high priced private educational institutions could implement. 

As a result, a very large portion of the population has been left behind from an academic progression perspective. 

Unfortunately, the proposed budget does not put forth any actionable agenda to ease this loss in learning or a plan to restart or revitalize the educational institutes. 

Such a lack of focus on this sector would only further challenge the already stressed educational infrastructure of the country. 

On the contrary levying 15% charge on the private educational institutions is really discouraging. 

First, while the public university teachers and staffs are being regularly paid, private ones are struggling and more so, since the public universities are failing to impart quality education, even the common people’s sons and daughters are enrolling with private universities even at the cost of adversities to their families.

Budget is still being discussed in the parliament. 

The more our honourable members discuss the number side of the budget and get the ugly proposals removed by the end of the month, good for this highly potential nation.

 Mamun Rashid, Economic analyst. 

This article was originally published on Dhaka Tribune.
Views in this article are author’s own and do not necessarily reflect CGS policy.