Bangladesh – 2016 budget raises spending and broadens tax net

Bangladesh – 2016 budget raises spending

KPMG in Bangladesh provides updates on corporate tax rate changes for certain companies, tax holidays for industries and investments, and the country's new VAT Act.

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Bangladesh has shown remarkable economic performance, achieving GDP growth of 6 percent on average over the last decade and of 7.1 percent in its fiscal year 2015/16. To sustain this performance, the government of Bangladesh passed a budget on 30 July 2016 of 43 billion US dollars (USD), which would see government spending rise by 15.42 percent over the previous year’s budget and comprise 17.37 percent of the country’s GDP.  

About 59 percent of this outlay will be met from tax revenue, with income tax and value added tax expected to contribute approximately 35 percent each and the balance coming from customs duties and other taxes. As a result, the government intends to broaden the tax net on the income tax and value added tax system in the current and future fiscal years. 

The country is focused on developing its infrastructure and improving its energy sector. It has recently signed memorandum of understandings with China, Japan and Russia to increase foreign investment in these areas, and the tax authority has already initiated the process of issuing formal gazettes, orders or notifications.

Corporate tax rates

The parliament amended several tax laws by enacting Finance Act 2016. The amended law generally maintains the previous corporate rate structure under which listed entities are taxed at 25 percent and non-listed entities are taxed at 35 percent. However, certain companies are taxed at different rates, such as:

  • banking companies, insurance companies and non-banking financial institutions, which are taxed at 40 percent if they are listed and 42.5 percent if non-listed
  • cigarette manufactures and mobile phone operator, which are taxed at 45 percent
  • companies engaged in production and export of knitwear and woven garments or of jute products, which enjoy reduced corporate tax rates of 20 percent and 10 percent respectively.

Generally, a company’s export earnings are 50-percent exempt. 

Tax holidays

The current tax legislation provides tax holidays for:

  • industries established in export processing zones (5 to 7 years depending on location)
  • investment in economic zones (10 years) and development of economic zones (12 years) 
  • industrial undertakings (5 to 10 years depending on location 
  • physical infrastructures (10 years) 
  • coal-based power generation companies (15 years)
  • non-coal-based private power generation companies (10 years) 
  • companies engaged in information technology enabled services (until 2024). 

Idustries set up in economic zones enjoy duty-free imports of raw materials, finished goods, construction materials and other goods. These industries also enjoy tax exemption on dividends. 

Most imports of capital machinery into Bangladesh enjoy zero/reduced customs duty and tax exemptions.

The government of Bangladesh allows investors an exemption from capital gains arising from a stock market in Bangladesh if the investor is entitled to a similar exemption on capital gains in their resident country. 

Other notable changes

Other changes in the budget of special interest to international investors include the following:

  • Entities other than banks, insurance companies or financial institution (and subsidiaries thereof) are required to have their accounting year, for tax filing purposes, as July to June. For Multinational companies, Deputy Commissioner of Taxes (DCT) may allow a different financial year for an entity which is a subsidiary or holding company of a parent company incorporated outside Bangladesh if such entity is required to follow a different accounting year for the purpose of consolidation.
  • The current tax legislation no longer imposes additional tax on public companies other than banking and insurance companies for not declaring dividend of at least 15 percent. The excess profit tax for banking companies has been eliminated. 
  • Manufacturer of cigarettes are required to pay a monthly advance tax at 3 percent of net sales. 
  • The tax legislation incorporates a list of withholding tax rates on categories of services rendered by non-residents; these rates vary from 5.25 to 30 percent.
  • Businesses are subject to transfer pricing regulations requiring international transactions to be conducted at arm’s length pricing. Companies are also required to comply with rules for reporting international transactions and for keeping documentation of arm’s length price determinations.
  • The concept of minimum tax has been updated. Section 82C “final discharge of tax liability” of ITO 1984 has been replaced with the new section “82C minimum tax”. As per the new 82C section, minimum tax would be higher of: 
    • Withholding tax on certain sources of income and
    • minimum tax calculated on the basis of overall gross receipts regardless of sources of income.

New VAT law takes effect 1 July 2017

Bangladesh enacted new VAT and Supplementary Duty Act 2012 to modernize its current VAT Act, which was introduced in 1991. The new VAT Act, which is expected to take effect on 1 July 2017, eliminates the truncated VAT system currently in place for certain services and supplies and introduces a single standard VAT system applying at the rate of 15 percent on all goods and services.

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