Governments impose charges on their citizens and businesses as a means of raising revenue, which is then used to meet their budgetary demands. This includes financing government and public projects as well as making the business environment in the country conducive for economic growth. Taxation is one of the major revenue sources of the Bangladesh government as well.
Every year revenue is generated from direct taxes and indirect taxes under National Board of Revenue (NBR), which was Tk2,59,881.80 crore in FY 2020-21 even in the Covid-19 pandemic. The direct taxes are: income tax, corporate tax, wealth tax, gift tax, travel tax etc. which generated Tk85,224.17 crore in FY 2020-21.
Unlike other developed countries, Bangladesh is still dominated by indirect taxes, which are: excise duty, value added tax (VAT), turnover tax, supplementary duty (SD), advance tax (AT), customs duty (CD), regulatory duty (RD) etc, which generated Tk1,74,657.63 crore in FY 2020-21. These are usually imposed on importers, manufacturers or suppliers or service renderers or traders, who then pass on the tax to the consumer or service recipient. So, ultimately it has a direct impact on the public.
'Taxation' is important for the economy of a country, but it should be rational, timely, and of course business friendly and pro-people. A high tax regime can hamper the growth of an industry or business of a sector, which will ultimately slow the economy down.
We applaud the government's recent decision of reducing corporate tax - considering the state of businesses during the Covid-19 pandemic. But we observed no major change in the indirect tax policy, as the situation demands now.
Consumer-centric businesses, such as the beverage industry, continue to bear the excess burden of indirect taxes, especially SD, at the local manufacturing level. The government can reduce this sort of excess burden by withdrawing VAT exemption given to several items and extending the VAT net and get the eligible 80 lakh affluent people under income tax net and have them file returns.
Currently, the beverage industry is paying SD and VAT together at the rate of (25% and 15%) 43.75% for carbonated soft drinks (CSD) and (35% and 15%) 55.25% for energy drinks, which is the highest in its history in Bangladesh. It is even higher and heavier than other neighboring countries - i.e. India 40%, Nepal 38.43%, Bhutan 30% and Maldives 6%.
Multinational companies (MNCs), local industries and businesses have been long requesting for the reduction of domestic tax levied on the beverages and food industry. CSDs should get a level playing field with other food items like: sweetmeats, biscuits, cakes, chocolates, cards, borhani, matha, even in restaurant and 5 star hotel foods etc, which are not under SD.
The beverage industry is one of the ten major items that contributed revenue worth Tk1,071.77 crore in the FY 2020-21, under the VAT system of NBR. It is worth mentioning here that the government of Bangladesh is not even gaining any benefit out of the present high rated SD on beverages, judging by the revenue from beverages for the previous 10 years.
In FY 2009-10, it was Tk158.05 crore including SD and VAT, in FY 2014-15 it was Tk625.67 crore and in FY 2019-20 it was Tk733.75 crore. The growth in the first five years was four times higher, and in the next five years was only 1.17 times higher. Ever since SD was hiked in 2014, the growth of the beverage industry has gone down to a minimum, although three new big industries entered into the sector. As a result, the companies are not going to make any further investments.
However, most of the businesses, especially consumer-oriented companies, were struggling to sustain operations in 2020 due to the unprecedented outbreak of Covid-19, and this is still relevant today. To whatever limit these industries are able to sell, the burden of direct and indirect taxes has made it even difficult for them to generate revenue, pay salaries, expenses and resultantly incur massive losses. Even if this trend continues, the question of their survival, let alone its growth, remains a burning question.
Now, with more than 40 million youth being unemployed, if big companies including the beverages industries continue to incur losses, then there is a huge chance that the unemployment problem will intensify, impacting the socio-economic graph of Bangladesh.
Considering all the facts and circumstances, if no reasonable changes are brought in the tax policy and system, one thing can be easily predicted that the survival of the beverage industry is at stake. And the low prospect of growth of such an important industry due to lack of proper policy and system is something that should be avoided, as this will dent economic progress.
The government should revise its tax policy and system for industries and businesses, which are contributing to the wellbeing of the economy. They can implement a short-term interim local tax regulation policy by keeping the duty-tax to a bearable limit during the trying times of Covid-19.
The pandemic has already negatively impacted our economy. To revive our economy, the government should take quick initiatives to reduce the imposed duties and bring taxes down to a minimum at this particularly difficult period for all the enterprises.
The reduction of SD rate on the CSD at the local level can be a step towards that. Cutting the rate of duty-tax will assist companies in reviving their operations and increasing revenues. The earned profit will be re-invested to expand the business, which means more economic activities, more revenues for the government, and more jobs creation.
Moreover, the establishment of a business-friendly climate will encourage existing and attract potential foreign corporations to invest in Bangladesh, thereby positioning the nation as an investment-friendly economy.
Abdul Kafi has worked in various work stations of the Customs, Excise & VAT Department including the Policy & Budget Desk at the National Board of Revenue (NBR).
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.