27 IT services likely to come under tax-net from FY25

The National Board of Revenue (NBR) is planning not to extend tax exemptions beyond June for 27 information technology-enabled services in the upcoming budget, which means companies offering these services could be taxed on their income starting next fiscal year.

Top IT-related organisations wrote to the finance minister, expressing concern that the sector's growth, investment, and export might dwindle if the exemption is withdrawn. 

NBR sources involved in budget planning said since 2011, the revenue authority has been granting tax exemptions on IT-enabled services, with the period extended every three to five years. However, there are currently no intentions to extend the exemption beyond its expiration on 30 June, the last day of the current fiscal year.

If the exemption is revoked, the income of the respective IT companies should be subject to a 27.5% corporation tax.

However, NBR sources said the initial tax rate on these IT services may be minimal, with potential increases over time. The tax department is analysing the amount of tax to be levied, or the potential impact on the sector after the withdrawal of exemption is lifted.

An official of NBR's income tax department, on condition of anonymity, told TBS, "Tax exemption on IE-enabled services is due to expire by the end of this fiscal year. There are plans to scrap exemption on these services while reducing exemptions on some other sectors."

The finance minister is scheduled to present next year's budget in parliament in June.

Apart from tax exemptions, companies in the IT sector also benefit from reduced VAT rates. While the standard VAT rate stands at 15%, the IT sector currently enjoys a reduced VAT rate of 5%. However, no alterations to the VAT rate have been reported at present.

The Bangladesh Association of Software and Information Services (BASIS), representing entrepreneurs in the IT services sector, expressed concern that the sector's investment, growth and export might dwindle if the exemption is withdrawn. 

On 10 March, leaders from five IT-related organisations, including BASIS, penned a letter to Finance Minister Abul Hassan Mahmood Ali, urging the extension of the tax exemption facility until 2031.

According to industry insiders, the annual domestic market size in the ITES sector is around $1.5 billion, while exports reach $1.9 billion. Current investment within the sector stands at around $600 million, with around $72 million in new investments in 2023.

BASIS boasts a membership exceeding 1400, inclusive of associate members. The total employment within this sector amounts to around 10 lakh, with 300,000 individuals employed in organisations which are BASIS members.

In the 2020-21 fiscal year, the tax exemption for this sector lapsed. However, it was subsequently extended for an additional four years, with the extension set to expire on 30 June this year.

Currently, the range of companies benefiting from tax exemption includes those involved in software development, software or application customisation, nationwide telecommunication transmission network (NTTN), digital animation development, website development, website services, web listing, IT process outsourcing, website hosting, digital graphics design, digital data entry and processing, digital data analytics, graphics information service (GIS), IT support and software maintenance service, software test lab service, call centre service, overseas medical transcription, search engine optimisation service, document conversion, imaging and digital archiving, robotic process outsourcing, cyber security service, cloud service, system integration, e-learning platform, e-book publication, mobile app development service, and IT freelancing.

BASIS Secretary Hashim Ahmed told TBS, "We have heard that tax exemption may not be extended next year. However, the rate at which the tax will be levied is not yet clear."

Syed Almas Kabir, former president of BASIS, told TBS, "There will be a huge setback for the industry if the exemption is lifted. Our industry is aiming to increase exports to $5 billion, it will not be possible to meet that target, instead costs will rise, and the software supply to the local market may shrink, increasing the dependence on foreign software."

"I think this facility should be extended at least till 2031. After that a little tax can be levied," he added.

Experts also believe that the removal of the exemption could potentially disrupt the advancement of this sector.

Dr Syed Md Aminul Karim, a former NBR member, said it would not be prudent to entirely eliminate the exemption and impose taxes. Such a move could impede the sector's progress and export activities.

"If there is a consideration to remove the exemption from this sector, it may be more reasonable to begin by implementing a nominal tax rate," he told TBS.