Companies can spend slightly more on promotion

The National Board of Revenue (NBR) is going to relax the limit on promotional expenses a little by fixing it at 1% from the existing 0.5% in the next budget to draw foreign investment, encourage new entrepreneurs and give some relief to the fast-moving consumer goods sector.

Companies – new and small ones in particular – that need to spend more on promotional activities to drive sales, even if they make a low profit, are suffering the most for the low cap on promotional expenditure.

For example, an FMCG manufacturer has made a Tk2 crore profit against its turnover amounting to Tk100 crore in the current fiscal year.

The company's corporate tax at a rate of 32.5% stands at Tk65 lakh. But the business entity has now found itself in hot water as it expended 6% of its annual turnover on promotion, exceeding the 0.5% allowable tax-free limit.

According to the National Board of Revenue's Income Tax Ordinance, the promotional expenditure is limited to 0.5% of a company's annual turnover.

As a result, the company has to pay an extra Tk1.79 crore. Thus, its total income tax amounts to Tk2.44 crore – which is more than its profit in FY21.

Businesses, however, say such a little increase in the cap on promotional activities is not enough for FMCG manufacturers, telecom operators, the apparel industry, pharmaceutical and multinational companies.

A promotional expense is a cost that companies spend to market their products or services to consumers. Such expenses range between giveaways, free samples, and other promotional gimmicks to help boost sales and revenue.

TIM Nurul Kabir, general secretary at the Bangladesh Foreign Investors' Chamber of Commerce and Industry (FICCI), said companies in the FMCG sector spend 5%-6% of their turnover on promotional activities, which has long been established as a key driver of consumer goods sales. Pharmaceutical companies need to spend more on marketing. 

Even if the allowable promotional expenditure is increased to 1%, the cost of doing business will still remain high in Bangladesh, he added. 

In the last fiscal year's budget, the NBR decided to tax promotional expenses exceeding 0.5%. The additional expenditure beyond the cap is listed as income and, therefore, companies need to pay for it at a corporate tax rate as a penalty.

At present, corporate tax is levied at 32.5% for general companies and it can go up to 47% depending on the types of businesses. Companies pay corporate tax on their profits but in case of paying tax as a penalty, it will not be applicable.

According to NBR sources, the government has taken initiatives to offer tax concessions to businesses in several sectors in the forthcoming pandemic budget. 

As part of this, there might be a waiver on the cap on companies' promotional and travel expenses. The existing ceiling of travel expenses is likely to increase from 0.5% to 0.75%.

Snehasish Barua, a founding Partner at Snehasish Mahmud & Co, said companies expend on travels to look for new markets and contact buyers. The promotional expenditure is also for similar reasons.

That is why by offering a waiver in the sector, it is possible to bring transparency in companies' expenditure with various initiatives, including the strengthening of valuation, he added.

Wishing to be unnamed, an official at the NBR's income tax department said the NBR set companies' promotional expenditure at 0.5% to rein in excessive spending and prevent money laundering. But, the cap is going to increase to 1%, because of losses that businesses suffered from it.

Pharmaceutical companies are most affected by the cap on promotional costs. 

A recent study conducted by the Bangladesh Institute of Development Studies shows that local pharmaceutical companies spend about 29% of their turnover on marketing. A large portion of it goes to promotional expenses. 

Abdur Rouf Khan, managing director at Opsonin Chemical Industries Ltd, said, "The cap was imposed to stop the progress of the pharmaceutical industry. We have to spend a lot on drug samples. Many companies are now not able to do so because of this provision."

He proposed withdrawing the cap on promotional expenses.

Companies in the FMCG industry are also suffering as they spend up to 6% of their turnover on advertising and branding of their products to boost sales. Even if the companies that make good profits can make up for it, small and new ones have to suffer.

Seeking anonymity, a top official of a multinational FMCG company said their sales rely on advertising and branding. Increasing the cap to only 1% is not acceptable for this. There is no such bar in our competitor countries. This hinders market expansion."

Rizwan Rahman, president of the Dhaka Chamber of Commerce and Industry, said not pharmaceutical and FMCG companies alone, all have to suffer because of the cap on promotional expenses. 

If the limit is increased to 1%, there will be some relief, he said, demanding that the bar be withdrawn. 

All registered companies in the country have to submit their returns to the NBR at the end of a year. The companies give a full account of operating costs, including administrative and business expenses, while filing the returns. 

At present, there are 1.79 lakh registered companies in the country. The government received taxes amounting to Tk20,180 crore from these companies in the fiscal 2019-20.