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A FAR-SIGHTED BUDGET WITH EVERYONE UNDER THE TAX BASE, BUT FOREIGN INVESTORS NEED MORE ACCESS

In a post-budget analysis session, PwC, one of the global ‘big four’ auditors and professional service providers, communicated its analysis and observations on the national budget for the fiscal year 2017-18, which Finance Minister AMA Muhith placed before the parliament on June 1.

The press event was attended by journalists from the leading newspapers and media. Mamun Rashid, PwC Bangladesh managing partner; Sushmita Basu, PwC Partner and Leader – Bangladesh Tax and Regulatory Service; and Prabir Mitra, PwC Manager – Tax and Regulatory Services spoke at the event. PwC Director of Tax and Regulatory Services Kapil Basu was also present during the briefing.

Fintech is exclusively publishing in detail the speeches and presentations given by these leading officials of PwC (PricewaterhouseCoopers Pvt. Ltd.) Bangladesh.


Mamun Rashid


FOREIGN INVESTORS NEED TO HAVE BETTER STAKE IN THE ECONOMY

We have found repeatedly through many studies that there should be more foreign investments in the RMG sector. Many more big corporations should be brought on board for investment so that they can advocate for Bangladesh. It shouldn’t be just the buyers, but all the stakeholders, foreign or local, should work in our favour.

One of our recommendations to the Finance Minister was to see that if more foreign investment can be attracted for the RMG sector. If they have more stake in the country, then there would not be the kind of uncertainty we see now. H&M, for example participate directly in Sri Lanka or JCPenney participate in Vietnam or in Cambodia, and consequently they advocate for the workers in that country. So, our recommendation was to take steps to expedite joint venture or to open up international factories here. We are happy though, that this has been taken into account.

One of our grievances, however, has been that there are always anomalies in the finance bill, because they are drafted in a rush. Sometimes the recommendations are implemented but much later than it had been proposed. May be a recommendation was to waive tax or import duty on a raw material and by the time it was waived six years later that raw material is being produced in the country and no longer imported.

You must have noticed that India has become a completion of Bangladesh recently in the RMG sector. You have to look into what incentives made it possible for India to compete with Bangladesh successfully. If we blindly work with the tax deducted source, then our RMG sector will not progress.

That’s why we think Tariff Commission and the National Board of Revenue should work together. The new emerging sectors in our economy must be fostered. Like the RMG sector, telecom is also a major sector. There is a perception that that the foreign investors make money and send them abroad. But with revenue sharing and other things the international investors are ending up paying over 50 percent. As a result, they are finding it difficult to introduce better services and latest technological features for the consumers.

The same is true for the pharmaceutical sector, IT export and big sectors like that. How we can encourage them? There is a lacking in reviewing the imported raw materials and reconciling HS Code for expediting these big sectors.

BETTER COORDINATION NEEDED BETWEEN THE NBR AND BTC

However, it is satisfying to see that the budget is much bigger now. And there is an effort to include the stakeholders. That is great. But at the same time we must ensure that there is no anomaly in the Finance Bill. It must not have contradictions.

Also we need to make Bangladesh Tariff Commission a research based body and make sure that the National Board of Revenue interacts regularly with the Tariff Commission. If this reconciliation doesn’t happen then one good law will be spoiled by two other contradicting laws.

Recently, we have noticed a lack of proper diligence in presenting the budget. I was quite baffled by the fact that the budget speech for 2016-17 was almost exactly reproduced in the 2017-18 speech. May be it happened because some of the high ranking officials were appointed at the last minute.

The foreign investors are interested to know about corporate tax. Even if you want to open up a pharmaceutical company the EPC contractor will be international. Every one of our power plants had EPC contractor. So, they want to know from the budget where will they stand. They are interested to know if they will be able to return their investment.

MODERNISING THE LEGISLATIONS

Bangladesh is getting more international investors, the economy is growing but our rules and regulations are not being restructured accordingly. So, not only on the budget or Finance Bill, we have to focus our attention to these matters. Now, big businessmen from our country look to go abroad. Many businessmen, you have seen, want to open up business in Singapore, India and other places to get benefit of the laws of those countries. That is why the most important issue is updating our laws. We have really outdated laws.

All we want is to benefit the consumers by creating an investment friendly environment. We have to increase investment, whether local or international.

PwC has been in Bangladesh for about two years. I have been working in the finance sector and foreign investment in Bangladesh for about 32 years. The amount of enthusiasm I am seeing now from big foreign investors about Bangladesh, even from local investors in how they are adapting new technologies, how they are bringing in engineers and project managers from abroad, signals a historic transformation into a new era that is about to happen.

And all these investors want is sensible legislations. They want to know the amount of tax they will be paying. Most of the embassies have become commercial embassies; especially Indian, Chinese, Indonesian, Malaysian, British embassies have engaged a large portion of their resources for commercial purposes. They know that Bangladesh is ready for big investments.

PAVING THE WAY FOR BIG INVESTMENTS

We cannot take every investor to the NBR or to BOI or to the office of the Registrar of Joint Stock Companies. That is why we want modernization of the laws, so that we don’t have to go to anyone.

So, we are actually more concerned about Bangladesh’s preparedness for big game and less concerned about the budget. Recently, we lost a big investor to Vietnam, as you know. The relevant minister of Vietnam came to the airport to greet that Korean company and travelled with them. We want to see the same in Bangladesh.

Lots of licenses have been granted to locals who had political closeness with the government. But not even one institution developed from that. What happened as a result? Legitimate international and national investors got discouraged.

The biggest tax paying organisatoin in Bangladesh, we are its tax advisor, lamented to me that if they could know the tax payment information online and if they could find out how much tax they have in each quarter then they could plan around that. It would have been so much easier and you could just press a button and the amount would be deposited to Bangladesh Bank. Why can’t we do this? Indonesia has done it, Singapore did it long time ago.


Sushmita Basu


A BUDGET FOCUSED ON GDP GROWTH

If you analyse the budget you see that many things were considered in constructing it. But one of the main considerations has been GDP growth. The GDP rate this year is 7.24 percent. The target for next year’s GDP has been set to 7.40 percent. Last year it was 7.11.

So, you can see that there is a growth in the GDP. And the growth has been there from previous budgets. The budget is being approached from that perspective, with the anticipation of when the GDP growth will enter double digit.

The budget also aims to get a lot more from taxes. Tax from NBR will be 2,48,190 crores. This figure alone tells us that the goal is to get a lot more from taxes, because last year this amount was one lakhs 85 thousand crores. Clearly, tax collection will be increased significantly and this is just from NBR.

Fiscal deficit in this budget is 1,12,275 crores. Despite the deficit the goal is to maintain that GDP growth at the same time. So, with so many to factors consider, it is only natural that everyone’s expectations will not be met.

So, the question is from where the tax will be collected? The budget has objectives and the first objective is, we think, is widening of the tax base. It’s not meant to get more tax from already taxed sources.

MANDATORY TIN FOR A BROAD TAX BASE

You will see that TIN has been made mandatory. What does it mean? This simply means that if you are within the scope of the TIN then you are in the tax net. According to a survey the population in the country is around 16.4 crores, 28.5 lakhs has TIN. If you look at the number of mobile collection, 13 crores have mobile connection and 7 crores surf the Net. So, there is a mismatch. And TIN has been made mandatory to address this mismatch.

For example, employees with 16 thousand taka basic salary must have a TIN. So, what happens if they don’t have a TIN? Employers will be penalized.

In some instances return filing has been made mandatory. If the employee doesn’t do the return file, what will happen then? The salary in the profit and loss account of the employer, from which taxable income is paid, will not be released.

The budget also intends to intensify digitization. More digitization means more simplification of the process. VAT registration, payment as well as return file – everything – is going to be online. This will increase transparency.

Another aspect of this budget is that it purports to simplify laws. For example, previously VAT rate varied across various fields. This has been made uniform – it’s all 15 percent now, as you know.

We know that the new VAT law is going to come into effect from July 1, 2017. And it will impose one uniform rate – 15 percent. Question may arise about where prices will go up and where prices will come down. It also abolished what was called ‘package VAT’. Turnover of up to 36 lakhs would not be charged VAT or turnover tax.

VDS (VAT Deduction at Source) application has been restricted. It will be applicable only to some PSCs (public sector company).

So, two main objectives of the budget are widening the tax base and the simplification.

BOOSTING LOCAL MANUFACTURING, THE IT AND RMG SECTORS

This budget encourages local manufacturing. It is not stated explicitly of course, but there is more import duty on trading items compared to components that are imported unassembled for assembling locally. So, there is a thrust for local manufacturing or assembling. The specific sectors that have been chosen for this thrust are mobile, computer, laptop, motor cycle. For these commodities a lot of exemptions have been provided if manufactured locally.

2.5 percent surcharge has been imposed on cigarette and tobacco products. A differentiation has been made between local and international branding. If a cigarette has an international branding, then it will get an increased supplementary duty compared to local branding.

IT and ITES sector enjoyed special privilege before. These privileges were available non-residents as well. This has been withdrawn. Now the question is if this is a strategy to attract FDI (foreign direct investment).

The budget focuses to boost the RMG sector. Import duty has been reduced in many places. The reason is clear. Bangladesh’s place is second in the RMG sector. The RMG sector is one of the sectors where FDI is very high. The RMG sector provides nearly 42 lakhs employments. Women employment is very high here too.

Ultimately, the budget has been devised with a long term vision. It doesn’t have short term objectives. It tries to focus on things that are important for economic growth, which are capital, manpower, infrastructure, and IT for a digital Bangladesh.

BRINGING IN MORE FDI

One of our recommendations was regarding dividend taxation. There is a multi-layer taxation on dividend. So, for example companies in the power sector gets government subsidies for the whole profit. And policy dictates that if someone lends money they don’t pay interest. But the investors don’t get subsidy on the dividend. So, our recommendation was to ease taxing on the dividend. It was put in our pre-budget memorandum. But now it is probably not possible, considering the economy.

Another point is that the subsidy is given to companies. But the companies do not do the business. There are promoters above the company. They create more companies when there is growth. So, the company in the lowest tier has to pay tax when it pays the dividend to the company in the upper tier and then when that company gives the dividend to the promoter then the tax has to be paid again against the same dividend. So, the same income is being taxed multiple times. We think this should change and it would help bring more FDI.

If repatriation is made easier that will definitely invite more FDI. When transfer pricing is in place, a 6 percent cap on sending money to head office doesn’t make sense. So, if the regulatory obstacles are lifted then FDI will come.


Prabir Mitra


THE FLAT 15 PERCENT TAX IS NOT MEANT TO HURT THE CONSUMERS

The law coming into effect from July 1 will simplify the tax rate. Tariff value, standard VAT rate etc all have been merged into a single VAT rate. All the tariff based produces, mainly biscuit, handmade cake, newsprint, transformer etc had higher sale price but lower tariff value. As a result, the VAT for these were relatively low. So, there will be an immediate impact here.

But the impact would not be very big after imposing that rate if the businesses register and come into the credit system mechanism. The government wants everyone to come under the tax net so that they can later get credit. If the credit mechanism prevails from the manufacturing to the consumer stage, then consumers will not be paying effective tax that much, despite the removal of the tariff value base and increasing of the VAT.

A lot has been said about bank deposit. There was an excise duty of Tk150 for 1 lakh taka. But that has been waived. So, the excise duty has been raised from Tk500 to Tk800 for up to 10 lakh taka deposit. So, excise duty has been raised for the rich. But people with average 1 lakh taka deposit will not be charged. Excise duty on airline ticket has been increased. So, airline tickets are going to be costlier.

MOBILE AND COMPUTER MANUFACTURE GIVEN HUMONGOUS OPPORTUNITY

Ceramic industry will be benefitted from this budget, because custom duty for raw materials for ceramic has been reduced from 10 to 5 percent.

Battery industry will be benefitted too. Coated zinc and other materials for this industry have also been granted reduced custom duty.

One major impact is that the government is specially wanting mobile and computer manufacture industry to develop here. You need at least 40 to 45 items to build a mobile phone. Custom duty was on average 25 percent on all of these item. This has been reduced to one percent.

The real estate sector will have a negative impact. The commercial areas will be most affected, as there are no exemptions for commercial areas. For residential areas 50 percent concession has been given. Bricks and iron will get costlier too. But the impact will not be quite as big if the companies go through the credit mechanism properly.

Similarly, sim cards, colour televisions, motor cycle tires, detergents etc will be costlier. The supplementary duty for these has been increased.

A LAW FOR THE ENTREPRENEURS

The main objective of the law is to benefit the entrepreneurs. The law is not for the general public. So, the main focus was to simplify the law, because the original law of 1991 is so complex and inconsistent that it is difficult to comply with. So, the law will definitely help business, which is its objective. Now entrepreneurs will be able to do everything from registration to return filing from home.

Other than that provisions for a number of incentives and exemptions and have been provided, especially for the nuclear power project and hi-tech parks. VAT has been exempted for all the procurements and other needs in these fields.

But at the same time the export industry will no longer be exempted. Previously exporters got exemption in the services they needed, like port service, shipping agent, clearing-forwarding etc. That is no longer that case. The new law changes this. The reason is to bring everyone inside the tax mechanism and take them to a credit mechanism subsequently. Even though this may be troublesome for exporters at first, it is congruent with the overall system.

There has been a lot of procedural simplification. Previously people were terrified to get into the credit mechanism. But now that complexity will be gone.

So, our overall observation is that the 15 percent VAT will not be borne by the consumer if everyone comes under the tax base.

 

 

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