SME Foundation seeks tax cut in upcoming budget

Highlights:

• SME Foundation calls for preferential tax regimes for SMEs
• Suggests elevating tax-free income limits for entrepreneurs
• Proposes transitioning to quarterly VAT returns
• Proposes decrease in advance tax rate on import of raw materials for SMEs

The SME Foundation has proposed abolishing the 2% source tax on agricultural produce and fish supplied to small and medium enterprises (SMEs) by marginal farmers and fishermen with an annual supply worth up to Tk25 lakh in the budget of the 2024-25 fiscal year.

The foundation has additionally proposed that the National Board of Revenue (NBR) implement Preferential Tax Regimes for SMEs, transitioning to quarterly VAT returns instead of monthly ones for entrepreneurs with an annual turnover of Tk5 crore.

It also recommended increasing the tax-free income limit for male entrepreneurs from Tk3.5 lakh to Tk4.5 lakh and for women from Tk4 lakh to Tk5 lakh.

Officials say a total of 34 recommendations have been submitted by the foundation to the National Board of Revenue (NBR) for the development of the SME sector.

Some of the proposals are slated for implementation in the upcoming budget, while others have been forwarded to the NBR for the formulation of regulations pertaining to duties, taxes, value-added tax (VAT), and tariffs aimed at fostering the development of the sector.

Salahuddin Mahmud, managing director (additional charge) of the SME Foundation, told The Business Standard that the proposals are aimed at fostering a supportive environment to enhance government revenue while ensuring a budget that is friendly to SMEs.

A proposal has also been made for increasing the tax rebate on taxable income of SME entrepreneurs from 3% to 5%, sources related to the foundation say.

The current provision permits the use of VAT accounting software for SME entrepreneurs with an annual turnover exceeding Tk5 crore. The foundation has proposed raising this threshold to Tk20 crore.

Salahuddin Mahmud said many SMEs, typically managed by five to ten workers, surpass the Tk5 crore turnover mark annually. These establishments often employ a significant number of low-educated, daily wage-based workers, making it challenging for them to utilise VAT accounting software effectively.

He said the development of this sector will expedite the achievement of the Sustainable Development Goals by 2030 and contribute to the realisation of a developed Bangladesh by 2041.

Proposals for lower taxes, higher thresholds

Officials say the SME Foundation has made the proposals to ensure that the upcoming budget is more favourable to entrepreneurs in a sector that contributes around 28% to the country's GDP. In contrast, the industrial sector contributes around 37.56% to the GDP.

To support SME entrepreneurs, the foundation has suggested increasing the investment limit for them in government securities from Tk5 lakh to Tk10 lakh.

The proposal also includes reducing duty on raw materials used in the manufacture of electrical components from 15% to 5%, and eliminating regulatory duty from 5% to 0%.

Currently, excise duty is exempted if the bank account balance is up to Tk1 lakh for SMEs. The foundation proposes to increase this limit to Tk5 lakh. Officials suggest that this adjustment aims at excluding very small SMEs from taxation.

Currently, there are VAT exemptions on rent for commercial spaces up to 150 sq ft. Proposals have been made to extend this limit to 300 sq ft for SMEs located outside city corporation areas.

At present, there is a 15% VAT on toys and certain household products made from recycling plastic waste. The foundation proposes to reduce VAT on these products to 5%.

The foundation has proposed decreasing the rate of advance tax on the import of raw materials for SMEs whose annual import value does not exceed Tk5 crore to 1.5%, down from the current rate of 3%.

Additionally, it has suggested reducing the rate of deduction of source tax to 1% instead of 3% for the supply of goods or execution of contracts worth up to Tk25 lakh per annum.

However, the rate of source tax for transactions worth up to Tk25 lakh per annum in respect of supply of goods or execution of contracts to the government or any public institution has been proposed to be reduced to 0%.

There have been proposals to reduce source tax on cash incentives received against exports from 10% to 5%.

In consideration of the interests of SMEs, a proposal has been made to reduce source tax on exports from the current 1% to 0.25% if the annual export value is up to Tk5 crore.

The SME Foundation has also proposed providing bond facilities for export-oriented fish processing plants.

According to the SME Foundation, there are around 78 lakh micro, small, and medium enterprises (MSMEs), including cottage industries, in the country. This sector accounts for 70% of the country's economic activity, directly and indirectly employing about 2.1 crore people.