Bangladesh’s source tax riddle. Was it reduced or raised in new budget?

Finance Minister AHM Mustafa Kamal has sought to fix the withholding tax at 0.5 percent for all export oriented sectors, including the readymade garments, to mitigate the impact of the slowdown in global trade due to the coronavirus pandemic.

In his Tk 5.68 trillion budget for fiscal year 2020-21, Kamal proposed to amend the Income Tax Ordinance and cut by half the 1 percent tax deduction at source it stipulates on all sorts of export proceeds.

Last year, the finance minister had proposed a 1 percent source tax for all export sectors in the current fiscal year.

The rate was subsequently revised down to 0.25 percent through a statutory regulatory order issued by the National Revenue of Board, which will remain in effect until Jun 30. However, the latest proposal would effectively double the existing 0.25 percent withholding tax rate, drawing mixed reactions from exporters.

Bangladesh Garment Manufacturers and Exporters Association has urged the government to reverse the latest decision and leave the rate at 0.25 percent for the next five years.

"Exports of goods and services, including that of RMG, have faced a downturn due to the outbreak of the COVID-19 pandemic. I, therefore, propose to reduce the rate of withholding tax on export proceeds as a part of extending overall support to our export sector," Kamal said.

All categories of RMG exports have been enjoying an additional 1 percent cash incentive from FY20 and will continue to do so in the next fiscal year as well, the finance minister added.

"The government has kept on providing all kinds of benefits, including cash incentives, to the readymade garments (RMG) industry as it is the principal export sector of the country. However, due to the growing trade tensions and the recession in world economy, a downturn in global goods trade in 2019 and 2020 has been forecasted.

"Therefore, overall exports from Bangladesh, including that of RMG, have continuously been declining. Due to a reduction in demand in developed countries, RMG export this year is showing a negative trend compared to the previous year."

However, Kamal expects the RMG industry to rebound with the support from the stimulus package and other incentives being offered by the government to counter the COVID-19 pandemic.

At present, RMG factories with green building certification enjoy a special tax rate of 10 percent, whereas units without such certification pay taxes at a rate of 12 percent. The facility is set to expire on Jun 30 but Kamal has proposed to extend it by another two years.

"I hope our taxpayers in the RMG sector will be greatly benefitted from this tax rate reduction."

In an effort to encourage local textile industries, Kamal announced plans to introduce a fixed value added tax rate of Tk 6 per kg on polyester, rayon and all other synthetic yarn, replacing the existing 5 percent ad valorem VAT on these materials.

He also proposed to reduce the VAT to Tk 3 per kg on all kinds of cotton yarn, from the existing rate of Tk 4, while retaining the duty exemption on raw cotton imports.

The budget seeks to lower the existing duty rate on the import of certain products such as RFID tag and industrial racking system to 15 percent, from 25 percent, to promote export-oriented garment and textile industries.

"In addition, the existing provisions of bonded warehouse licensing rules will be rationalised to ensure proper utilisation of bond facilities," said Kamal.

BGMEA lauded the decision to keep the additional 1 percent cash incentive in the upcoming fiscal year.  It also believes that the tax exemption for synthetic fiber production

The plans to slash the import duty on products such as RFID tag and industrial racking system as well as the duty exemption on raw cotton imports were also positively received by the garments exporters' lobby.

However, BGMEA urged the government to consider exempting the garments industry from VAT and return filings on locally procured goods and services. It also called on the government to revoke the 5 percent source tax on cash incentives.