Possible impact of sudden rise of minimum tax

Fiscal budget of 2023-2024 budget is of utmost important for the nation. The global and local economic conditions are both in flux, and the budget will have a significant impact on the future of our country. Before the advent of the announcement of the national budget a lot of prospective fiscal policies are being discussed and disseminated through various print and electronic media.

The buzz surrounding the impending national budget centers on the proposed implementation of a minimum tax requirement, both at the import stage of the carbonated beverage industry and on gross receipts. This measure has sparked intense discussions and speculation, capturing the attention of stakeholders across the board. The government of Bangladesh is planning to impose a turnover tax at 5 per cent which previously was 0.6 per cent on the total gross receipt on a fiscal year. Such a proposal to increase the minimum tax is more than 8.3 times as compared to current rate of minimum tax. Moreover, the advance tax paid at the import stage by the beverage companies will now be regarded as minimum tax which previously was not in the list of the minimum tax. Such stride in taxes hike will pose hindrance to the growth of this industry. Minimum tax on telecom is expected to remain as it is at 2 per cent and tobacco is expected to increase from 1 per cent to 3 per cent as per the reports published in media.

The food and beverage industry is poised for growth, thanks to the twin forces of rapid urbanization and rising disposable incomes. As more and more people move to cities, they are demanding more convenient and affordable food options. This is creating a major opportunity for food and beverage companies to innovate and meet the needs of this growing market. In addition, rising disposable incomes are giving people more money to spend on food and beverages. This is leading to an increase in demand for premium and specialty products. The food and beverage industry are already responding to these trends by expanding into new markets, developing new products, and investing in marketing and advertising. As these trends continue, the industry is expected to grow at a rapid pace in the years to come. This growth will create new jobs and opportunities, and it will help to boost the economy. It will also make it easier for people to access healthy and affordable food, which is essential for a healthy population. The growth of the food and beverage industry is a positive development that will benefit people all over the world.

The beverage industry in Bangladesh is booming. According to the Bangladesh Beverage Manufacturers’ Association, the industry has an annual turnover of about Tk. 8,000 crore ($900 million). Some major market players have already invested about Tk10,000 crore ($1.1 billion) in the industry for manufacturing beverages. Currently the beverage sector of the country has employed about 3.5 lakh people at production and distribution level.

Imposing such stringent fiscal policy will leave the growth of the beverage industry at a stake which is untoward given the present situation of our economy. Let me walk through an analysis to assess the impact on the carbonated beverage industry. Say for example currently the Government of Bangladesh is collecting 2,486 Crores as revenue from the beverage industry. Due to the imposition of the minimum tax the price of the beverage product will increase. A study has shown that demand for goods and commodities falls as prices rise. This could have a significant impact on the beverage industry, as companies may be forced to reduce production, leading to job losses and a slowdown in economic growth.

If due to the decline in demand the annual turnover comes down to 6,000 cores the total revenue will be reduced by 433 crores. Contrary to expectations, the imposition of such policies, instead of bolstering government revenue, may inadvertently lead to a decrease in overall fiscal intake.

If average net profit margin of this volume driven industry is Tk 2 for against sale of Tk 100 beverage goods, tax liability will stand at Tk 0.60 and profit after tax will be Tk 1.40. Now, if the proposed provision is implemented, they will be required to pay tax of Tk 5 as minimum tax. The company will end my making loss of Tk 3 against sale of Tk 100 beverage goods. This means the company will have to borrow funds to settle its tax liability which will effectively erode the equity of the company. Recently appellate division of the Supreme Court of Bangladesh has decided in favor of minimum tax although it goes against the fundamental spirit of taxation. Many countries across the world have also implemented it as a tool for revenue collection. But in anyway, it should not be imposed to create negative net worth of a company.

It is pertinent to mention that the beverage industry in Bangladesh has attracted foreign direct investment (FDI) based on the potential of the Bangladeshi market. However, the recent imposition of an exorbitant and abrupt tax on the industry will have a negative impact on the industry and deter other potential investors. In fact, this change may also go against the essence of Sustainable Development Goal (SDG) 9, which comprises of building resilient infrastructure, promoting inclusive and sustainable industrialization, and fostering innovation.

Therefore, in order to ensure sustainable growth of our economy the current provision should be kept as it is which will ultimately help flourish the economy of Bangladesh. Moreover, with the introduction of Digital Verification System, policy department can easily find out the PAT to sales ratio of an industry in Bangladesh to determine the minimum tax rate.

The writer is a faculty member, ICAB