Large manufacturers fear complexities of their taxation following a recent clarification of the income tax wing, which instructs paying tax on same transactions by both producers and distributors.
The recent Income Tax Circular-2024 has come with the clarification where national distributors, distributors and sub-distributors (considered as withholding entities) need to deduct tax at source (TDS) from their respective payees and deposit it to the exchequer.
Currently, only manufacturers are paying TDS on their transactions at the time of importing raw materials.
However, industry insiders fear a possibility of double taxation and harassment with this new provision.
Tax expert Dr Syed Aminul Karim, former member of the income tax wing of the revenue board, said such differences in provisions between the income tax law and its circular might make the tax collection system extremely complex.
"It won't be double taxation but is contradictory to the provisions of the law."
Debabrata Roy Chowdhury, director (Legal, RSA, Corporate Affairs) and company secretary of Nestle Bangladesh, said distributors should not be held accountable for determining retail prices of products as they were not responsible for fixing prices (rather done by manufacturers or importers).
"Compliance with this requirement will be practically impossible for distributors given the current infrastructure and the clarification in the latest circular may result in significant harassment in the field."
In the tax law, a withholding entity means a taxpayer authorised to deduct tax from its procurement and deposit it to the exchequer. Withholding tax (WHT) is a concept of collecting tax in advance where risk factors exist.
"Most distributors, who are withholding entities, were not deducting tax u/s 89, rather manufacturers were collecting taxes u/s 94 of the ITA 2023," wrote chartered accountant Snehashish Barua in his LinkedIn post.
The tax-deduction section of the law is considered as minimum tax, a non-refundable and non-adjustable provision.
Manufacturers have to pay tax on behalf of distributors too but will not be able to claim refund of their paid taxes under the provision.
Two tax deductions would be applicable to the same transaction as per the new clarification imposing heavy tax burden on taxpayers, cited Mr Barua.
According to large multinational manufacturers like Nestle and Unilever, such clarification contradicts the legal provision.
"It's imposed non-compliance as distributors, not consumers of the goods, won't be able to deduct taxes from numerous retail outlets across the country," continued Mr Roy of Nestle.
The TDS is payable only to those legally responsible for fixing retail prices of products in Bangladesh.
"Manufacturers are responsible for setting retail prices of manufactured goods and importers are responsible for setting retail prices of imported goods as per the Package of Commodities Rules 2021 issued under the Standards of Weights and Measures Act 2018."
Mr Roy said distributors and sub-distributors, who were not responsible for setting retail prices, should not be held accountable for the collection of withholding taxes as per provisions of the income tax law.
In Bangladesh, most distributors/sub-distributors (excluding large companies or firms) do not maintain proper record-keeping. It is not feasible for them to use sophisticated accounting software or administer a withholding tax mechanism for a large number of customers.
This mechanism involves tasks like collecting taxes, depositing them, submitting returns and issuing certificates to thousands of customers.
Additionally, a company collects more than 100 per cent of distributors' legitimate taxes and they are unable to claim refunds as these withholding taxes fall under the minimum tax liability.
If such distributors are made responsible for collecting taxes from customers and suppliers, it will not only complicate matters, but also be practically impossible for them unless they have a substantial setup, according to Mr Roy.
"… Imposing such non-compliance would lead to increased harassment, even though there may be no issue with tax collection on their income," he said.
Another top official of a multinational company said maintaining the record of tax collection by distributors or dealers would be difficult to comply with for their lack of capacity in the process, systems and understanding of people.
"They don't have accounting and proper bookkeeping and tax records maintenance systems due to an immature organisational structure to deal with huge amounts of government revenue."
The official also feared operational complexities to monitor this large number of distributors or dealers by the tax authorities.
"Since many manufacturers are paying advance income tax at import stage, application of WHT at selling on the same business will in most cases lead to higher deduction of tax than the actual tax liability of companies or firms."
As such taxes would be categorised as minimum tax liability, the effective tax rate would significantly be higher than the corporate tax rate, he said.
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