Plastic packaging makers are in deep dilemma facing a disproportionate AIT deduction at 7% on their gross sales which is ultimately absorbed as 'minimum tax' etc. Repeated appeals by chambers & business representatives for redress of this crippling situation remains unheard.
In fact, plastic packaging industry is a relatively new sector, which grew over the last two decades to successfully emerge as a 100% import substitute sector drastically cutting strain on country's foreign exchange spending.
Income tax is tax on profit, not on sales or turnover. Strangely, the 7% AIT deduction is imposed on sales, NOT on profit. This means a plastic packaging manufacturer who can hardly make a net profit of 5 - 6% on turnover has to pay tax at straight 7% of its sales turnover as AIT upfront. This is unthinkable. No business can maintain sustainability under such tax regime as it will inevitably result in erosion of capital and equity of the entity.
It is simple arithmetic. As an example, if Tk. 1 lac is the annual turnover of an entity, AIT deduction alone amounts to Tk. 7,000 whereas, realistically, the entity's net profit on gross turnover is hardly Tk. 5,000 - 6,000 at most after all costs and expenses.
As per tax rules, the maximum corporate income tax for a business entity is 35% on net profit. Hence, on the net profit Tk. 6,000 in example, the maximum 35% tax on its turnover should be Tk 2,100 (whereas tax authority will have already deducted 7% at sales stage which equals Tk. 7,000). This scenario can never sustain a manufacturing business.
On top of that, the manufacturing concerns are being burdened with additional deduction of 5% AIT on imported raw material which in theory is adjustable but in reality is not.
Hence, presumably there are some gaps or abnormalities in our tax rules which the tax authority refuse to listen or understand. The honorable chairman of NBR, last year, on his rounds with various chambers expressed concern on the rationale of this seemingly abnormal taxation and assured to look into it. Unfortunately, no remedy to this burning issue has been proposed or done till date.
Strangely, if same goods are sold in retail mode no such AIT deductions are applicable. It's applied only in the case of 'business to business' sales, which seem to defy logic. Since the AIT rule is said to apply on "suppliers and contractors, this inevitably leads us to believe that tax system regards registered, licensed & genuine manufacturers as 'suppliers and contractors' which in fact we are not.
We strongly suggest that real licensed and asset based manufacturers be distinguished from the category of "suppliers and contractors" and the definition be duly amended. Because high AIT deduction may be applicable to suppliers & contractors who the tax system often says are not traceable. Well, in that case separating the manufacturers from 'suppliers and contractors' category may possibly help to eliminate the necessity of unduly taxing the genuine manufacturers.
Even in the proposed new Income Tax Act draft, soon to be adopted, we are bewildered to see the same irrational AIT deduction and minimum tax etc., on industries replicated almost verbatim with just change of clause/section numbers.
We believe honorable Chairman of NBR will revisit the above mentioned irrelevant and irrational provisions in taxing the genuine manufacturers and ensure sustainability of the entities which exists to contribute to National GDP growth & exit from the LDC status.
The writer is managing director of Astech Limited, Chittagong.
www.astechbd.com
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