No more retroactive taxes. NBR plans for forward looking tax system

The National Board of Revenue (NBR) is considering implementing a prospective tax system, which will levy taxes on incomes of the coming fiscal year – instead of the current one, as it is now – allowing individuals and businesses to better plan their finances.

The existing retrospective system, an unpopular method of assessment, allows the government to levy taxes on earnings that occur before any changes are made to the tax rates.

The prospective tax system will build confidence among taxpayers including investors, according to sources involved with fiscal policy-making.

"In the upcoming budget, we are planning a transition towards a prospective tax system instead of the existing retrospective system," a senior NBR official told TBS, on condition of anonymity.

"Under this new system, any alterations in the finance bill, such as adjustments in tax rates, will take effect from the subsequent year, unlike the current practice where changes are retroactively applied to the previous year's income," he said.

"We have scheduled meetings with the finance minister on 12 May and the prime minister on 14 May to discuss the proposed fiscal policy changes. Upon approval, the plan will be integrated into the next finance act," said the NBR official.

Business leaders and experts welcome the NBR's plan, saying a prospective tax system will boost investor confidence in the country's tax system, encouraging local and foreign investment.

Businesses have long been criticising the country's long-standing retrospective taxation system, arguing that it undermines investor confidence and disrupts business planning by infusing unpredictability into the tax framework. 

They advocate for tax laws to be prospective, applying to future transactions rather than retroactively to those already completed.

How a retrospective system affects businesses, individuals, govt

In FY17, the government raised the minimum tax on the annual turnover of mobile phone operators from 0.6% to 2%.

Shahed Alam, head of corporate and regulatory affairs at Robi Axiata Limited, told TBS, "Despite having already closed our accounting books, we were required to retroactively pay taxes, resulting in triple taxation on our previous earnings and substantial losses."

"This tax should have been implemented prospectively, as is the norm worldwide," he added.

The adverse effects of the present retrospective tax system aren't solely borne by companies; individual taxpayers are also impacted. 

Consider the scenario of an individual earning TK1 crore in FY24. However, if in the following fiscal year (FY25), the government raises the tax rate by five percentage points in the highest tax bracket from 25% to 30%, this results in an individual tax increase of about Tk3 lac retroactively, despite it being expected to commence from the next fiscal year.

Likewise, the government incurs losses due to retrospective effects. In FY21, the government reduced tax rates by five percentage points in two brackets for individual taxpayers. Consequently, the government suffered a substantial revenue loss that fiscal year due to the retrospective application of these changes.

Snehasish Barua, a tax expert and founding partner of Snehasish Mahmud & Co, provided an example to TBS. 

"Let us consider a private limited company that earned a profit of Tk500 crore for FY2020-21 (assessment year 2021-22). The tax rate under the Finance Act 2020-21 was 32.5%, indicating that the company was prepared to pay Tk163 crore as income tax. However, with the rate reduced to 30% through the Finance Act 2021-22, the company ended up paying Tk150 crore instead of Tk163 crore, resulting in a revenue loss for the government," he said.

"The issue is about fairness, prediction, and international best practices. There is no justification for applying any fiscal change to the previous year's income, regardless of whether it benefits the government or the taxpayer," Snehasish added.

Apurbo Kanti Das, a former NBR member (income tax policy), said the prospective tax regime will benefit both taxpayers and the government by removing tax-related uncertainty.

Business leaders welcome NBR's plan

Rupali Chowdhury, managing director of Berger Paints Bangladesh Limited, a multinational company said,"Any progressive change in fiscal policy is always welcomed by us. If the NBR introduces a prospective tax system, it will send a positive signal to investors, building confidence in a predictable tax environment," 

Highlighting the negative impact of current retrospective tax policies, she said, "If the budget includes a tax rate increase, it is imposed on the previous financial year's income of the assessees even though companies may have already declared dividends and closed their books."

"This system forces companies to pay additional taxes, which reduces their income or dividend for the next year, creating significant problems and triggering loss of competitiveness. This system reflects Bangladesh's fiscal policy uncertainty, undermining investor confidence," she added.

Mohammad Zaved Akhter, president of the Foreign Investors Chamber of Commerce and Industry (FICCI), told TBS, "We have long been demanding that fiscal policy be prospective rather than retrospective. No other country in the world has the retrospective tax policy."

"Why should a change in the coming year affect the previous year's income and expenditure? Companies make their investment or business decisions based on tax expectations," he said. 

"We would welcome this move of a predictable tax system as it would help increase local and foreign investment," Zaved added.

NBR mulls withdrawal of tax exemption of failing sectors

How NBR plans to implement the new system

NBR officials said the upcoming finance act will contain the tax rates for the next fiscal year applicable for income of FY25. These rates will be announced for the assessment for the income year 2024-25 and hence taxpayers will know their tax rate in advance, providing more predictability.

Former NBR member Apurbo Kanti Das said, "If the NBR wants to implement this system, it will require changes to existing income tax laws."

A field-level NBR officer said, "Implementing the prospective tax system should not lead to revenue loss or create complexity in field-level operations, rather the current system causes problems during assessment."

Businesses unhappy with unpredictable tax regime

Both domestic and international investors have voiced apprehensions regarding Bangladesh's volatile tax system, attributing it to reduced investment levels.

During a discussion at a city hotel on 6 May, Debabrata Roy Chowdhury, director of Nestlé Bangladesh Ltd, said, "When a foreign company asks about Bangladesh's tax rate, we cannot give them a clear answer. We tell them we will know in June when the government announces the national budget."

Shubhasish Bose, chief executive officer of the Institute of Chartered Accountants of Bangladesh (ICAB), said foreign investors are concerned about the stability of tax rates over a longer period.

Zaved Akhtar, also chairman and managing director of Unilever Bangladesh Limited, said, "Investors tend to choose countries with predictable fiscal policies. We suggest the government establish a long-term, predictable tax regime to help investors make better decisions. An unpredictable tax regime creates hesitation among investors."

Bangladesh's foreign direct investment (FDI) level falls short of expectations. Official data shows that in FY23, FDI dropped to $3.25 billion, comprising only 0.72% of GDP, down from $3.44 billion in the preceding fiscal year.

Bangladesh has about three lakh registered companies with the Registrar of Joint Stock Companies and Firms but less than one-sixth of them submitted tax returns, NBR data shows. 

Additionally, the number of tax identification number holders now exceeds one crore, but only one-third of them submitted tax returns in FY24.