M. S. Siddiqui
Income tax is a levy on income, but Bangladesh taxpayers pay advance income tax (AIT) and tax deduct at source (TDS) under the Income Tax Act and both the AIT and TDS are imposed on total revenue and not on profits. In case of B-to-B supply, products and service buying enterprises are required to deduct tax at source from specified payments against supply and deposit to NBR. AIT and TDS at any point of transactions are additional burden of higher requirement of working capitals particularly for CMSMEs.
Furthermore, the lack of efficient refund and adjustment mechanisms for AIT and TDS adds to the financial strain on taxpayers, as they face challenges in claiming overpaid taxes. The cost of products increases, ultimately burdening the consumers. This situation substantiated the need for comprehensive tax reforms to ensure a more balanced and fair tax policy that promotes business growth, compliance, and encourages taxpayers.
Contrary to the dependency on direct tax, which is about 30% of total tax presently, the tax regime has a greater reliance on indirect taxes (67.1%) for generating government revenue. The Tax-GDP ratio in Bangladesh is only 7.49% because of a low tax net. Both income tax and corporate tax suffer from very low compliance. About 3 to 3.5 million people submit income tax returns out of about 10 million TIN, and only 24,381 companies/institutions out of 2.88 lakh submitted returns. About one-third of the income tax revenue comes from the Large Taxpayers Unit (LTU), consisting of major mobile phone operators, tobacco companies, private banks, and high earning individuals.
Over 80% of tax collected are deducted at source (TDS), and gradually, the scope of TDS has been increasing. However, tax deducted at source is mostly treated as a final tax. Thus, taxpayers try to get rid of paying tax, and once tax at source is deducted consider it as final, they do not show their willingness to submit Tax Return and avail the benefits of adjustments.
On the other hand, section 163 of ITA 2023 states the provision of minimum tax, where forty-one sections of TDS have been identified as minimum tax. Sub-section 5 of the minimum tax provision identifies five specific industries that are liable to pay a certain percentage of minimum tax on turnover irrespective of profit or loss. TDS and AIT collected as tax deducted at sources, which are collected at the entry port or at the delivery to the end customers/ industries of various products from vendors gross bill amounts act like an indirect tax. It ultimately be passed on to the end users. This non-refundable and non-adjustable system discourages investment and deviates from global tax standards.
In the 2025-26 fiscal year’s budget, the government raised the AIT rate for commercial importers from 5% to 7.5%, while reducing the rate for industrial importers of raw materials from 3% to 2%. The government’s decision to raise the AIT rate from 5 pct to 7 pct for importers, excluding industries, to recover revenue lost to VAT evasion, could fuel inflation.
Taxpayers often face challenges when seeking refunds for excess AIT and TDS. As per the latest available data of NBR, TDS was about 87.40% of the total income tax in FY23. The sub-heads under TDS increased to 111, which were 107 before 2020. Moreover, the space for TDS has been increasing over the years, creating a bearing on business.
A study of Centre for Policy Dialogue (CPD) in the FY 2022-23 on 103 profitable companies also reveals that several sectors in Bangladesh face very high effective tax rates — reaching up to 73%, posing significant equity and competitiveness concerns.
TDS share in income tax revenue has risen to 87.40% from 84.6% which is incremental in immediate past year 2024-25. The percentage of refunds has decreased from 0.35% to 0.24% of total TDS collected. The maximum refund was given in FY2019 where the refund was 3.02% of TDS collection for that year. TDS becoming Final Discharge of Taxes due to Calibration in Law.
Around 300,0000 entities are paying TDS in Bangladesh (Local Suppliers, Contractors, Commission Agents, Local and International agencies etc.). An estimated tax collection from TDS entities (57 heads) was BDT 171327.16 crore in FY 2023 (based on the information of NBR Annual Reports). The actual Tax collection from TDS was BDT 72,604.92 crore in FY 2023 (NBR data).
Bangladesh’s revenue mobilization is very low by international and peer standards, constraining essential public investment and contributing to fiscal vulnerability. Such excess advance payments (1) lock up working capital, (2) Delayed/no refund mechanism, (3) Overpayment reduces liquidity for operations, (4) Creates financing pressure on low-margin sectors, (5) AIT at import stage if can be termed as ODC, will not be possible to impose at the post-LDC graduation.
A business-to-business (B2B) used to supply small components, accessories, raw materials, packaging materials etc. to local and Multinational industries by cottage, medium, small enterprises (CMSMEs). CMSMEs are considered as efficient and cost-effective production process and support bigger industries to be competitive. CMSMEs became less competitive and struggling to survive allegedly due to high advance taxes like the Tax Deducted at Source (TDS) and Advance Income Tax (AIT). CMSMEs are considered as first step of budding entrepreneurs to grow business conglomerates.
These small units are buying raw materials from traders/ importers and due to taxation policy, these materials are subject to higher advance taxes at different stages like import, supply, etc. After imposition of 5.0 per cent AIT and 7.0 per cent TDS deducted a source on supplying such products to the multinational and local bigger industries are bound by law to deduct advance Income Tax and VAT to total invoice value. The process makes the CMSMEs noncompetitive. Their total contribution of CMSMEs to export earnings is reportedly 80 percent as direct exporter, support industries or deemed exporters in RMG sector.
Large companies do not need to deduct 7.0 per cent TDS and 5.00 percent VAT if they themselves produce secondary products. This type of tax has made CMSMEs non-competitive and diverted their business to the large conglomerates. Many companies have established their own production facilities diverting their capital and concentration from their basic products. Big industrial companies are now forced to set up their own small units to cater to their own demands of raw material and spare part etc. This is an ominous sign for the existence of backward linkage enterprises in the country’s SME sector. It is unprecedented and against the CMSMEs development policy.
This kind of practice does not exist anywhere else in the world. Bangladesh must raise its competitiveness and productivity to drive economic diversification, stronger growth and job creation. But the AIT or TDS will offset the programs and initiatives. This high AIT and TDS reduce reinvestment, competitiveness, and job creation.
The writer is CEO, Bangla Chemical
