Changes in Section 52 of the Income Tax Ordinance will have major adverse impact on corporates

Section 52 of the Income Tax Ordinance enjoins withholding entities to deduct tax at source on supply of goods at the time of making payment. This has already placed an onerous burden on withholding entities since they are operating as tax collectors for the government.

On top of this, in most cases, the withholding entities are burdened with this tax deduction at source since the payee normally ask the company to bear the tax as they are unable to adjust this tax deduction against the actual tax payable on income arising out of the provisions of Section 82C. This has significantly increased the cost of doing business.

The Finance Bill 2022 has proposed major changes to this requirement. As a result, of the change in definition of “supply of goods”, all purchased including cash or spot purchase is now under the purview of this section. Two other conditions have been imposed. Tax rate shall be 50% higher if the payee fails to submit proof of return or payee does not receive payment through bank transfer.

It is extremely unjust to subject the withholding entities to ensure proof of submission of return that is clearly the domain of the tax authorities. The tax return acknowledgment contains confidential information about the payee such as income, tax payable and tax paid. It is clearly an infringement of fundamental right of a payee not to disclose such personal information. Also, it will be a nightmare for the withholding entities to do business since a large section of suppliers may not be submitting tax returns.

Also, the requirement to make payment through bank transfer is totally impractical in our current eco system of cash transactions. Many suppliers do not have bank account. Emergency cash purchases are often required for factory spares and other supplies that are not stock items. This is a common practice across both locals and to some extent, multinationals. It is highly impractical to insist that our business ecosystem has to transform overnight from a cash society to a cash less society.

As a result, in most cases, the tax deduction rate will shoot up by 50% that will again have to be borne by the withholding entities since suppliers will refuse to bear this incremental cost since they will be unable to adjust the tax deduction at source for reasons explained above.

It is also ironical that the requirement for making all bank transfers goes against another proposal in the current Finance Bill where a concessionary rate of tax has been proposed for companies who make all payments exceeding Tk 36 lacs per annum through bank transfer. Even this number is practically unworkable since factory salaries for daily labour is paid in cash. Most RMG factories pay salaries in cash. In addition, petty cash expenses are a normal phenomenon all across Bangladesh.

Before I conclude, Section 44(5) has been replaced introducing two sections that states that tax exemptions will be withdrawn unless the company receives all payments through bank transfers, which means, no cash sales. Is this practical in the current context of Bangladesh.

While appreciating the intention behind such proposals by the revenue authorities, I would emphasize that this needs to be done gradually. Initially, a large exemption can be allowed for cash transactions that can gradually be reduced with increase of financial inclusion.

At the end of the day, such draconian measures lead companies to find means to evade tax by having separate undisclosed records of cash transaction. This will surely defeat the purpose of the revenue authorities.