Advance tax hits construction sector hard: Entrepreneurs

The construction sector in the country is facing huge losses due to the deduction of advance income tax (AIT) during the import of raw materials leading to a large amount of capital being stuck in payments even before production starts, said entrepreneurs in a post-budget discussion organised by The Business Standard.

They said companies have to pay 2% AIT for importing raw materials such as steel while the amount is even higher for cement.

Additionally, the AIT is again deducted as the minimum tax of a company, as a result, forcing the company to pay more than the existing corporate tax.

The entrepreneurs demanded the withdrawal of advance tax to establish tax justice for the sake of the industry.

Talking about the proposed budget's impact on businesses, Rupali Chowdhury, managing director of Berger Paints Bangladesh, said, "There are some specific problems for specific sectors. On the other hand, some problems are common for all businesses. The effective tax rate for businesses will increase for a number of reasons including tough conditions for corporate tax deductions, disallowing of workers' profit participation fund (WPPF) expenses etc."

She said, "Companies have to keep 5% of their profits in WPPF, which has so far benefited companies as an allowable expense. The proposed budget has considered this fund as disallowable. So, the companies now have to pay tax on these expenses for complying with the labour law.

"The budget has proposed cash transactions of less than Tk12 lakh as a condition for getting tax benefits. It is not possible in an SME dependent informal economy like ours. It is also not realistic for the companies that transact thousands of crores of taka," she added.

Rupali Chowdhury also demanded the withdrawal of supplementary duty on paints and designating it an essential construction material rather than a luxury one.

"There is no supplementary duty on paints in any country in the world. This product is now very important for construction," she said.

Md Shahidullah, managing director, Metrocem Cement & Metrocem Steel, and secretary general of Bangladesh Steel Manufacturers' Association, said there was a strong demand from businessmen to withdraw the source tax for importing raw materials in the new budget as both the rod and cement sectors are suffering because of this.

"We have to import 90% of our raw materials and 30% of those come from Europe. There has been a raw material crisis since the Covid-19 pandemic. Now, the war in Ukraine has increased the freight charges," he said.

Masud Khan, FCA, FCMA, advisor, Crown Cement PLC, said that the cement sector is currently facing many problems. "The price of clinker crossed $70 per tonne several days ago which was $45 at the same time last year. On the other hand, the slag prices have increased by about 50%. Meanwhile, the industry saw a negative growth of more than 6% in May 2022 compared to the previous year. As a result, the companies are counting losses due to these crises.

"Advance tax is a much bigger problem for us than these. The NBR deducts this tax at the time of importing raw materials. At present, the tax is 2% on clinker, 5% on gypsum and 3% on slag and fly ash. However, it becomes a minimum tax later because it is not refunded. As a result, the corporate tax is effectively going up to 40%-45% instead of 22.5%, which is an injustice," he added.

Masud Khan mentioned the obligation of file returns when purchasing goods and services from suppliers as another big problem. "Producers will now have to act as unofficial tax collectors as the tax deduction rate has been increased if they cannot collect returns," he noted.

Ahmed Pasha, chief business officer of the Edison group, said many companies in the housing sector, which employs more than 40 lakh people, are going through a negative growth.

"In this situation, we had high expectations for this year's budget. But we didn't get anything," he said.

He said, "The price of construction materials has been rising for the past one year. Now, a stricter tax burden has been imposed on all the construction materials including rod, cement, paints and cables etc. As a result, the construction cost of flats would increase by up to Tk500 per square foot."

Shekhar Ranjan Kar FCA, head of finance & accounts and company secretary, BSRM Ltd, said that a fine of Tk10 lakh has been imposed for the noncompliance of any of the company's expenses. "This is not possible in an informal economy like ours. I would not be able to maintain this because of the suppliers even if I am compliant."

Asked what changes need to be made before the budget is passed, Rupali Chowdhury said, "The tax on WPPF and the tax on promotional expenses need to be withdrawn. Taxes should be levied on businesses so that companies can make some profits. There should also be VAT exemption for the SME industry."

Answering the same question, Masood Khan said that the NBR's tax-related changes every year are having a negative impact on the investment plan. It must have a consistent tax policy.

The webinar was conducted by Sharier Khan, executive editor of The Business Standard. During the introductory remark, he said, "The NBR wants to collect tax from the big taxpayers as they are easily available. However, it should collect taxes after ensuring the business opportunities of the entrepreneurs. For this, the tax net should be expanded."