Exporters write to finance minister to backtrack on source tax hike

• BGMEA, BKMEA, EAB have sent a letter to the finance minister
• They are trying to meet the PM
• They want source tax rate kept unchanged at 0.5% for 5 years 
• They argue that raising source tax may eat into working capital
• Economists say proposal to raise source tax is logical

Exporters have reiterated their call to the government to keep the advance source tax on export proceeds unchanged at 0.50% for the next five years instead of raising it to 1% as proposed in the national budget for the fiscal 2022-23.

An increase in the tax rate, especially at a time when the cost of production has surged amid the current global as well as national perspectives, might make a dent in their working capital, reducing the sector's competitiveness in the global market, said the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), and the Exporters Association of Bangladesh (EAB) in a letter sent to the finance minister on Thursday, according to sources.

The sources also said entrepreneurs in the RMG sector are engaged in efforts to meet the prime minister next week and inform her about the current situation.

Abdus Salam Murshedy, president of the EAB and former president of the BGMEA, told The Business Standard that the Russia-Ukraine war has caused more harm to Bangladesh's exports than the Covid-19 pandemic.

Creating jobs is the biggest challenge for the country right now, he pointed out, adding that many sectors, including banks, insurance, and clearing and forwarding (C&F) agents are linked to the export sector.

"Therefore, considering the overall situation, it would be logical to hold the rate of advance source tax at 0.5% in order to help exporters stay competitive by retaining the existing markets," Murshedy said.

Economist Ahsan H Mansur has, however, disagreed with the argument. He thinks the proposal to increase the source tax rate is reasonable as Bangladesh's exports, including readymade garments, are in a somewhat advantageous position at present.

Ahsan H Mansur, executive director of the Policy Research Institute (PRI), said the government is offering incentives for exports. Besides, exporters are earning more because of the recent depreciation of the local currency against the US dollar.

In these circumstances, raising the source tax is logical, he told TBS.

The economist also mentioned that the rate of advance source tax was previously fixed at 1% and was raised to 1.25% in one year, but the government had to bring it down in the face of pressure from businesses.

According to the latest data released by the Export Promotion Bureau (EPB), Bangladesh's export income stood at over $47 billion in the first 11 months of FY22, with a year-on-year growth of 34%.

Exporters and the EPB expect that the figure will cross the $50 billion mark by the end of the year.

From that count, the source tax collection from the export sector could be around $250 million or around Tk2,200 crore ($1 = Tk86).

The Ministry of Finance has projected a 20% year-on-year growth in exports in the upcoming fiscal 2022-23.

If this projection turns out to be true, the country's export income will stand at $60 billion next year. In that case, if the source tax is collected at the rate of 1%, total revenue collection from this sector could be around $600 million or Tk5,100 crore.

In FY21, Bangladesh's total export income was $38.75 billion, while $193.7 million or Tk1,666 crore was collected in advance income tax on export revenue.

The rate of income tax is not the same for all exporters, but the source tax is levied at the same rate on all sectors in the current financial year.

According to the existing Income Tax Ordinance, the corporate tax rate on export income in the RMG sector currently stands at 12%, while the rate is 10% for green factories and 30% for non-RMG sectors. The finance minister in his budget proposal said all other exports will enjoy the same corporate tax rate as the RMG.

Exporters have to pay 0.5% advance tax on the proceeds of their exports, but they have the scope for adjusting it as their final income tax while submitting the tax returns.

After speaking with income tax officials and exporters, TBS has learned that almost all exporters show their income in proportion to the amount deducted as tax at the source. As a result, even if they have extra income, they do not pay tax on that, and even if they incur a loss, they do not get back the already deducted amount.

Exporters do not think it is possible for everyone to get refunded by complying with the conditions set by the tax authorities.