While Bangladesh is paving the way towards a more advanced, secured and smarter future to boost exports and attract more foreign direct investments (FDIs), the country is facing repeated pressure to repeal all sorts of tax exemption on information technology-enabled services in the upcoming budget for FY25.
The International Monetary Fund (IMF) has proposed to withdraw the tax exemption facility for the information technology industry, which is scheduled to end in June 2024. Meaning there will be no scope to further extend this facility as per the global lender.
The National Board of Revenue (NBR) is okay with the IMF proposal, but it voiced dismay over the proposed withdrawal of facilities on all IT services, as it may disrupt the sector’s growth, said sources that attended the IMF and NBR discussion at the revenue building on Sunday.
Experts say that some facilities should be withdrawn from IT services, but a few facilities should continue on security services such as cloud computing and cyber security, because foreign companies are bringing significant amounts of money to Bangladesh for such services.
If the exemption is withdrawn, the respective IT services companies will be subject to pay a 27.5 per cent corporation tax on their income.
An analysis of the NBR shows that the government now gives exemption worth around Tk 1,477 crore annually to IT services. Insiders however say if the net profit is 10 per cent, then the local market should be around Tk 50,000 crore to get such amount of tax expenditure.
According to the Bangladesh Association of Software and Information Services (BASIS), the annual domestic market size in the ITES sector is around Tk 2,000 crore – Tk 2,500 crore, but contribution of the sector to the economy is invaluable and large, as agriculture, education, health, media and RMG sectors are using this technology.
Speaking on the issue, BASIS President Russell T Ahmed told The Business Post, “The sector is facing numerous challenges every moment. If the sector is taxed, it will be a disaster.
“IMF’s prescription is theoretical, but they do not understand the situation of our country. However, our government is pro-IT services to make the country smart and there is opportunity to make every sector smarter.”
He pointed out, “The sector does not get banking finance and its raw material is mostly talent. Besides, our talented ones do not get intellectual property.
“So, if such a move is executed, brain drain will be increased as our cost will be jumped up, and we will lose our competitiveness and imports will be raised.”
Terming NBR’s analysis as faulty, Russell said, “The NBR should be smarter in analysis. Several groups of companies are taking exemption facilities in the name of their small IT companies.
“It is the responsibility of the NBR to catch the loophole and evasion, and there is no scope to tax small and medium startups and IT service companies. The sector could be the most USD earning source after RMG.”
There are around 2,000 companies associated with BASIS, and there are 3 lakh employees and entrepreneurs. There are around 20 companies with a turnover of around Tk 50 crore annually. The sector’s operating profit is around 5 per cent – 6 per cent, according to BASIS.
IMF’s other proposals
The global lender seeks abolishing tax breaks on clothing, footwear, LPG, and mobile phones. With this move, the expected revenue impact will be 0.31 per cent of GDP.
It also recommended repealing the depletion allowance provided for mining and petroleum extraction, and eliminating or establishing caps on input VAT deductions for entertainment and VAT meals.
It also proposed to require all businesses with turnover greater than Tk 3 crore to be in the standard 15 per cent VAT with input tax credits, eliminating their option for truncated VAT.
The global lender proposed to reform revenue administration for all three wings. With this move, the revenue will be raised by 0.15 per cent of GDP, IMF expects.
NBR’s response
The revenue board has stressed more on enforcement. NBR officials told the IMF that they are now collecting revenue with just their provisions or laws, but enforcement is not sound yet.
The NBR wants to strengthen enforcement, which will enable it to meet the IMF revenue collection target. Because, the abrupt withdrawal of exemption could hit Bangladesh’s economy negatively, sources say.
In a bid to get the third tranche of a $4.7 billion loan from the IMF, the Bangladesh government should take these policy measures by June this year in line with the global lender’s recommendations. Besides, there are 38 conditions to get the full amount of the loan.
In terms of revenue, the IMF has stipulated conditions to increase the country’s tax-to-GDP ratio by 0.5 percentage points in FY24, followed by 0.5 and 0.7 percentage points in FY25 and FY26, respectively.
