Spl rate withdrawal to encourage tax evasion by apparel exporters

The withdrawal of special tax rate for apparel exporters is likely to hurt the sector and encourage further the tax dodging through cooked financial statements, experts said.   
And such tax dodging would help greater accumulation of black money in the economy, they expressed the fear.
Financial analysts said exporters would be discouraged from showing actual income due to contradictory provisions in the tax rules that imposed higher tax on profit while lessened the tax at source.  
The National Board of Revenue (NBR) discontinued the special tax rates in the budget for current fiscal year. Under such rate cuts the apparel exporters had enjoyed a ten-percent special tax rate at the time of annual tax assessment instead of a steep 37.5 per cent corporate tax.
Apparel exporters' annual tax liability would be assessed at 35 per cent corporate tax rate, in case of company, in FY 2015-16 on their income from export earnings in the current FY.
A senior tax official said the NBR discontinued the facility after having found a big chunk of money being shifted in export-oriented companies from other ventures to enjoy the reduced tax rate.
The tenure for the special tax rate for readymade garment and knitwear exporters expired on June 30, 2014.
Since 2005 until June 30, 2014, taxmen had calculated tax at an estimated rate of 10 per cent at the time of annual tax assessment.
The apparel exporters recently expressed their concern about the impact of the withdrawal of the reduced tax facility through a letter to the National Board of Revenue (NBR). They sought continuation of the tax rebate.
Bangladesh Garment Manufacturers and Exporters Association (BGMEA) president Md Atiqul Islam, in a recent letter to the NBR, sought continuation of the special tax rate until June 30, 2019.
Chittagong Metropolitan Chamber of Commerce and Industry (CMCCI) also urged the government to continue the special tax rate at 10 per cent for exporters.
Former vice-president of ICAB (Institute of Chartered Accountants of Bangladesh) Md Shahadat Hossain FCA said withdrawal of the facility would fuel the false financial reporting by the exporters.
"These two contrary provisions will tremendously lead to preparing incorrect financial statement showing less net profit compared with previous year, which will be complicated for the auditor to detect because of planned and intentional misstatement," he said.
"The provision may generate a large volume of black money as it will discourage companies from showing actual profit due to high rate of taxes on them," he added.
Mr Hossain said tendency of tax evasion is increasing due to such faulty provisions.
Tax deduction at source from export bill has been brought down to 0.30 per cent from 0.80 per cent in April 2014 while the special tax rate for 100 percent apparel exporters has been discontinued in the budget for the current FY.
"If we consider the impact of two issues, it may be observed that completely contradictory decisions have been taken by the NBR," he said.
According to the tax law, the tax authority receives at source tax from the exporters as finally paid tax on their incomes from exports. Ultimate tax liability is determined on the basis of yearend net profit of the company.
In a circular, the NBR withdrew the special tax at the rate of 10 per cent on net profits from July 1, 2014.  On the one hand, the amount of tax deduction at source has been reduced and, on the other hand, final tax liability has been increased. This is contradictory, Mr Hossain said.
"Rate of tax deduction has been reduced 2.67 times (rate reduced to 0.30 per cent from 0.80 per cent) and final tax liability has been increased 3.50 times (final tax rate increased to 35 per cent as against special tax rate 10 per cent). So, as a whole, tax liability has been increased 9.3 times compared with previous correlation between amount of tax deduction at source and final tax liability," he said.
Abdus Salam Murshedy, president of the Exporters Association of Bangladesh (EAB), said the apparel-export sector is facing challenges on the international market while competitors attaining impressive growth.
"Government policy support is needed to face the challenges that are turning acute with the compliance requirement of buyers, fire-safety issues, wages, increase in utility bills and transportation cost," he said.
Mr Murshedy urged the government not to impose any new tax burden on exporters and continue its ongoing fiscal support for survival of the sector.
The RMG and knitwear exporters are enjoying a reduced rate of 0.30 percent tax at source on their export earnings. The taxmen consider it as finally paid tax, known as final settlement, on their entire income from export. However, the facility is tagged to certain conditions.
According to the tax officials, there was scope to show higher income from apparel export in the tax file by transferring income from other businesses.
Taxmen smelt that a large volume of undisclosed money was whitened by taking advantage of the provision.
Adeeb H Khan FCA, Chairman of the Metropolitan Chamber of Commerce and Industry (MCCI) taxation and tariff subcommittee, however, differed with the claim.
He said exporters have to maintain a recorded transaction through banking channel in every stage of export processing, starting from procurement of raw materials under bonded warehouse facility.
He said preparing cooked financial statement is quite difficult in the apparel-exporting sectors and there is low risk of concealment of financial transaction.
A former member of the income tax wing also supported the withdrawal of the special tax rates.
"The tax would be imposed on profit of companies; losing companies will not be affected with the measure," he said.
"It is a simple rule--that if a taxpayer gains profit, he will have to pay tax on it. I wonder why this special tax rate is needed," he argued.

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