Tax Act 2023 to reduce cost of doing business

The Tax Act 2023 is expected to be placed in Parliament this week. The Act has been written in a very simple language of Bangla, and all sources of income have been consolidated chapter-wise. This will allow a user to find out all relevant income from a source and deduction from that chapter.

The simple formula has made calculation easier for everyone. For example, determining income from salary will be simple math. The explanation at the end of each chapter will enable one to understand the meaning easily. Then the concept of grossing up will make anyone understand how to calculate a base when a transaction is settled on a net basis.

Efforts have been made to reduce the arbitrary power of the officers and reduce the cost of doing business in Bangladesh, especially the list of expenses has been thoroughly covered in expenses deductible from business income. The conflict with International Financial Reporting Standard (IFRS) also has been adequately addressed, especially treatment of foreign currency gain/loss, impairment loss, treatment of Right to Use asset, gain on revaluation of asset, investment property, etc. Contribution to Workers Profit Participation Fund (WPPF) is now on the list of admissible expenses, the limit of certain expenses has been increased, the amortisation schedule includes expenses that are disallowed due to capital in nature, the limit of cost of motor vehicle has been increased to Tk 3.0 million. Income of certain special purpose vehicles has been exempted for development of alternative sourcing vehicle. The number of withholding tax returns has been reduced from 29 to 12.

Most of the returns will be filed on universal self-assessment. So, very few assessees will be required to face audit unless the file is selected for audit. The audit process has been made transparent too. A separate chapter has been introduced for digitisation but its benefits cannot be reaped unless a comprehensive IT strategy is implemented with a proper budget.

Bringing Partnership firms, Association of Persons, a fund whose turnover exceeds Tk 20 million under mandatory filing of audited financial statements, de-registration of ETIN, and six more services under the mandatory submission of Proof of Submission of Return (PSR) will create/enhance actual tax net.

The Act has aligned with international best practices. Share-based payment, demerger-related provision, thin capitalisation, and General Anti Avoidance Rule (GAAR) have been introduced. Moreover, the refund process has been made simpler which will significantly enhance the ease of doing business in the country and will expedite the return of funds to taxpayers. This not only improves the liquidity for individuals and businesses but also enhances overall trust in the tax system. The incorporation of these features emphasises the Act's focus on transparency, accountability, and fairness. Taxpayers will be encouraged to pay taxes. These changes, especially the introduction of GAAR and the measures to curb thin capitalisation, reflect the global efforts to prevent tax evasion and avoidance. Consequently, the Act now provides a more comprehensive, fair, and internationally compliant framework for taxation.

On the flip side, no initiative has been taken to reduce the rate/s of tax deducted at source (TDS), rather it has been increased to some extent. Thus, businesses would not be able to adjust this tax which will increase costs to the company. We proposed rationalisation of the TDS rate, as now it is easier to identify the profit/sales ratio through the Digital Verification System (DVS). It is understood that a radical change in TDS is not expected keeping in mind the government's huge dependence on TDS. Large corporate entities are now forced to produce on their own since the cost of sourcing from SMEs increases due to higher amounts of TDS. With regard to minimum tax provision, increasing the minimum tax on carbonated beverages by 830 per cent is really surprising. This will require this industry to borrow funds to settle minimum tax liability.

The proposed Act will also not allow a loss-making entity to set off business loss with other income which departs from the general principle of setting of loss.

The imposition of a limit to investment in government securities must be looked into since an individual has limited options for investment in eligible instruments. Thanks for keeping investment in shares as it is, but we must not introduce limits to investment in mutual funds since we want more corporate investors to participate in the capital market.

We are still not sure when the rules will be enforced and the English version of the Tax Act published which is important for our Foreign Direct Investment (FDI) partners.

This progressive tax law will hopefully help Bangladesh expand its tax net substantially provided the challenges mentioned above are well addressed.

Snehasish Barua FCA is Director SMAC Advisory Service Ltd