Several tax measures, including capping of promotional expenses, increase in effective deposit for VAT appeal and partial VAT rebate based on actual usage of raw material, in the proposed budget for FY2020-21 have left foreign investors in a state of anxiety.
They think these measures will impede their business growth and also obstruct the inflow of foreign investments into the country.
The government has sought to tax companies' promotional expenditure exceeding 0.50 percent of their turnover from next fiscal year.
Consequently, this may increase the effective tax rate from 6 percent to 36 percent depending on a profit base ranging between 5 and 30 percent. Currently, promotional expenses are considered as admissible expenses as long as those are spent for the purpose of business.
"This provision of the tax system will hurt foreign investors," said Rupali Chowdhury, president of the Foreign Investors' Chamber of Commerce and Industry (FICCI), in a letter written to Finance Minister AHM Mustafa Kamal last week. She urged the finance minister to remove the proposed cap.
The letter was also forwarded to National Board of Revenue Chairman Abu Hena Md Rahmatul Muneem, prime minister's Private Industry and Investment Adviser Salman F Rahman, and Bangladesh Investment Development Authority Executive Chairman Md Sirazul Islam.
The FICCI president argued if the proposed measure is passed in the parliament, it will give a wrong signal to all potential foreign direct investors, making investments in Bangladesh look "very unattractive" to them.
"If fast-moving consumer goods (FMCG) and other industries want to minimise their taxes on promotional expenses, more than 90 per cent of their promotional activities will be reduced, which will significantly hinder business growth," she said.
Besides, the revenue authority increased effective deposit for VAT appeal to 50 percent from existing 30 percent at the High Court level.
FICCI said this provision may be misused under the pretext of collection of revenue. Apart from the negative perception of foreign investors, companies hit by this will have their huge capital amounts blocked, preventing investment in building capacity, generating employment, and innovation.
The FICCI also claimed that the NBR's introduction of partial VAT rebate based on actual usage will create huge unmanageable complexities in the operation of businesses and may put a firm into a rebate loss situation as all the materials may not be used in production within four months, as specified by the revenue authority.
Limiting the scope of input VAT credit provides a restrictive definition, now VAT paid on numbers of input will not be allowed as input tax credit, resulting in a huge increase in cost of doing business.
The FICCI claims this provision was not there when the new VAT law was introduced in 2019 and that it goes against the basic principles of the VAT system.
According to the Income-tax Ordinance 1984, companies must pay a minimum tax on turnover even if they are in losses. The FICCI wants a change to this provision.
The FICCI said this provision that severely impacts foreign investment climate and also creates a perception of disproportionately targeting profitable and highly taxation compliant foreign investor companies will be detrimental to ensuring a level playing field.
ATM Nurul Kabir told The Business Standard, "There are many provisions and changes which are positive and will help our economy and wellbeing of all our citizens. We would like to draw the government's attention to provisions that would have significant adverse impacts."
"We believe the revenue generated by the government through actual higher economic growth and foreign investment will be far higher than theoretical reduction by addressing these provisions," he said.
"The revenue authority is seeking to fix a maximum ceiling on promotional expenses to discourage certain malpractices among firms, particularly a section of pharmaceuticals companies that claim various benefits provided to their physicians as promotional expenses", said a senior taxman.
He said the proposed changes in the Finance Bill have been aimed at increasing tax collection. However, if any party suffers more, the government will look into their problems.