Tax and Legal

An overview of the corporate Tax structure in Bangladesh

The tax structure in Bangladesh plays an important role in ensuring and shaping the growth of the economy and financing public expenditure, witnessed through 80% of the total contribution of taxes towards the internal revenue generated in the nation. The tax structure in Bangladesh applies to the laws dealing with personal income as well as business or corporate income under the head principal direct taxes in Bangladesh. The corporate tax structure in Bangladesh is backed by various reforms for designing and administering an appropriate base for the tax structure in Bangladesh. Bangladesh’s tax structure is considered to be a progressive and regressive tax system, both defined based on the ability to pay as ‘the more a taxpayer earns, the more he should pay’.

Highlights of the corporate tax structure in Bangladesh

Tax structure in Bangladesh establishes a pecuniary burden or enforced contribution on the individuals, property owners, and corporate legal entities (businesses) to support the government in establishing an economy favorable for all aspects of growth. In simple terms, the state government or other functional government levies a financial charge on the assessment year for the income earned, which is termed a tax in Bangladesh. It is mainly categorized as direct taxes and indirect taxes. As per the readings of Article 152(1) of the Constitution of Bangladesh, the tax structure in Bangladesh attributes the imposition of any tax, rate-local tax, duty-tax on commodity, or impost-tax for entry into a country.

The corporate tax structure in Bangladesh is also known as the corporation tax, the company tax, or the business tax, a direct tax levied over the net taxable income and capital earned by the business entities in Bangladesh. The corporate tax structure in Bangladesh applies to:

1. Corporations registered their business in Bangladesh;
2. Corporations or legal entities carrying their business in Bangladesh on income earned from the country;
3. Foreign legal entities permanently established in Bangladesh;
4. Legal entities deemed to be residents for tax purposes in Bangladesh;
5. Any nationalized banking or financial institution established in Bangladesh;
6. Every branch office, liaison office, or representative office registered in Bangladesh;
7. The joint venture company (JV) is registered and is carrying out its business in Bangladesh.

The tax structure in Bangladesh is considered to hold the reflection on the values of those in power with 4 supportive objects as provided below:

1. Revenue, to raise money for the development of schools, army, hospitals, and other government initiatives for legally regulating the market in Bangladesh;
2. Redistribution, with the main aim to transfer wealth to the poorer or under-developed section of the society;
3. Reprising, with the main aim to control and discourage the market for externalities like tobacco, cigarettes, and other carbon-based fuels;
4. Representation, with the object of generating accountability in exchange for taxes charged, is based on the American slogan: ‘no taxation without representation’.

Taxes in Bangladesh

The tax structure in Bangladesh is considered progressive as it allows a pattern where the burden of taxation proportionally increases with the increase in income until the bar limits the rate of 30%.

1. Direct taxes in Bangladesh

Direct tax is classified as tax directly collected by the government of Bangladesh. The taxpayers are authorized to file the tax returns directly with the Bangladeshi government. Some examples of direct taxes in Bangladesh include corporate tax and Income tax.

• Indirect taxes in Bangladesh

An indirect tax is a tax that is charged through a mediator appointed by the government for a purpose. Some examples of Indirect tax in Bangladesh include VAT.

Types of taxes in Bangladesh

The corporate tax structure in Bangladesh defines different kinds of taxes that are filed with the National Board of Revenue (NBR), such as:

• Corporation tax:

The corporate tax is a form of direct tax applicable to the profits and income of the business (es), corporations, and companies registered in Bangladesh. The corporation tax applies to the residents of Bangladesh for carrying the business throughout the world, while the corporation tax for the non-residents is limited to only Bangladesh-based income.

• Value-added tax:

The value-added tax, i.e., VAT, is a form of indirect tax, also known as the consumption tax, charged by the end user for the value of goods and services, which most companies can refund.

• Custom duty:

It is known as the import duty or tariff, which applies a governmental financial fee for imported goods, products, raw materials, machinery, and consumer services within Bangladesh. The customs authority controls and manages the customs duty rate required for generating income, controlling commerce, and safeguarding the corporate environment for domestic business.

• Excise duty:

It is a sales tax charged for specific goods or services produced and utilized domestically, like alcohol, gasoline, or tourism. It is held to be a direct tax imposed by the government of Bangladesh for raising funds and controlling the production, importation, and consumption of these particular goods and services.

• Social Security and Medicare tax:

The Social Security tax is an initiative designed by the government of Bangladesh to benefit retired and disabled workers and their families, family members of deceased workers, etc. Similarly, Medicare taxes, or healthcare taxes, are designed to provide medical services to individuals above the age of 65.

• Sales tax:

It is also known as the local taxes charged at the time of sale for the cost of the items to provide funds to maintain the roads, the police, and the firefighters by the local and state governments of Bangladesh.

• Payroll tax:

The companies pay No payroll taxes from the employees’ salaries withheld in Bangladesh.

• Stamp duty tax:

The government of Bangladesh charges stamp duty for governing and holding financial instruments, real estate, and certain transactions under the provision of the Stamp Duty Act of 1899.

Tax rates in Bangladesh

The corporate tax structure in Bangladesh ensures corporate or business tax rates that vary based on the type of legal entity established and carrying business in Bangladesh. The competitive corporate tax rates are as provided below:

1. A corporate tax rate of 20% is attracted for industrial companies having more than 10% paid-up capital whose listed shares are publicly traded.
2. A corporate tax rate of 22.50% is attracted for listed industrial companies having less than 10% of paid-up capital;
3. A corporate tax of 37.50% is attracted for the listed banking, insurance, non-banking financial companies and institutions;
4. A corporate tax of 40% is attracted for the non-listed banking, insurance, non-banking financial companies and institutions;
5. A corporate tax of 22.5% is attracted for the registration of the one-person companies after July 1, 2022;
6. A corporate tax of 37.5% is applicable over the merchant banks;
7. A corporate tax rate of 45% (plus 2.5% as the surcharge tax) is applied to the tobacco manufacturers dealing with cigarettes, bidi, zarda, etc. in Bangladesh;
8. The ready-made garment manufacturers and exporters are taxed at 12%. If the manufacturer or the exporter is a green building certificate holder, then the corporate tax rate reduces to 10% (apply up to 30^th June 2024);
9. A tax rate of 12-10% is charged for the companies enrolled in the export activities holding a green building certificate;
10. The tax rate for the unlisted mobile phone operators is 40%, and the corporate tax rate for the unlisted mobile phone operators stands at 45%;
11. The corporate tax rate of 15% (till 20^th June 2025) is applied for the companies registered and carrying their business in the textile industry;
12. The rate of 10% is applied to the exporters of jute goods;
13. A tax rate of 15% is attracted to private medical, dental, and engineering universities and colleges imparting knowledge, information, education, and communication technology;
14. The corporate tax rate of the cooperative society registered under the Cooperative Societies Act of 2001 is 15%.

Tax Compliance in Bangladesh

Every company or legal business entity in Bangladesh needs to file their income tax returns within the Tax Day of the company, i.e., every 15^th of the 7^th month following the end of every income year. A smooth and efficient tax structure in Bangladesh requires the fulfilment of tax compliance in Bangladesh, ensuring certain requirements, as provided below:

1. A company or legal entity registered under the Companies Act of Bangladesh;
2. Every company to have its registered e-TIN;
3. The company registered in Bangladesh is considered to be a resident of Bangladesh for tax purposes, including business income, capital gains, and other incomes;
4. The company must reach the taxable income limit from all sources calculated after all the relevant deductions. Corporate taxable income refers to all income arising from the Bangladeshi source like income from employment, exercise of profession, property, capital gains, interest on securities, and other income;
5. The company must have income deemed to accrue or arise in Bangladesh;
6. The income year, also known as the standard tax year, stands from July to June for filing the corporate tax return;
7. Relevant deductions must be made during the calculation of the taxable income of the company;
8. The penalty is applied if the business entities fail to file the corporate tax return within the stipulated time, in case of concealment of income, failure to maintain proper records, etc.

Challenges of the Corporate Tax Structure in Bangladesh

The issues and challenges observed in the corporate tax structure in Bangladesh depend upon the incorporation of the business entities. Some of the issues are discussed below:

1. Observed the issue of tax evasion and avoidance promoting corruption, weak rule of law, illicit wealth, and black money;
2. Low corporate tax collection observed;
3. The application of turnover tax, which is an indirect tax, is similar to VAT in Bangladesh.
4. The increasing level of corruption observed in the tax administration system.
5. Lack of accountability, monitoring, and supervision in the tax structure of Bangladesh.
6. The monopoly of the tax authorities and officials.
7. Higher corporate tax rates.

Planning Corporate Tax Structure in Bangladesh

The challenges faced in the corporate tax structure in Bangladesh need proper tax planning for Bangladesh including policies, reforms, and rules to maximize the tax benefits.

Tax Reforms and Rules in Bangladesh

Bangladesh stated certain reforms to broaden the tax base, enhance equity, increase direct tax to indirect tax ratio, and improve tax administration’s decentralisation. Some of the tax reforms are:

1. The first initiative was towards setting up a Taxation Enquiry Commission in  October 1976, which led to the establishment of the Ministry of Finance in 1979 for reviewing the taxation laws, broadening the tax base, increasing the tax-GDP ratio, ending the provision for the super-tax on the companies;
2. The next step was toward the administration of taxes in Bangladesh through the World Bank’s report on tax reforms of 1986 to identify the weaknesses and strategize the tax structure of Bangladesh by increasing the tax-GDP ratio, the share of direct tax to total tax, etc.;
3. The next step introduced the setup of the Revenue Reform Commission in 2002, aiming to improve the quality of revenue administration, broaden the tax base, reduce the corporate tax rate, etc.;
4.  Another initiative, namely Reforms in Revenue Administration 2002, mainly aimed at increasing communication with the taxpayers, reducing the level of corruption and tax evasions, and lastly, improving the level of professionalism among the tax officials;
5. The next initiative, named Modernization and Automation Project, mainly aimed at improving the functioning of the tax administration and led to the induction of the VAT policies in Bangladesh.
6. Other reforms also applied in the area of VAT, introducing the removal of the truncated-based system to make the VAT system efficient, expansion of the VAT base in Bangladesh, a single VAT rate, etc.
7. Other reforms in the area of corporate income tax include harmonizing and promoting corporate income tax rates and eliminating corporate income tax holidays and exemptions.

Tax Exemptions in Bangladesh

The government of Bangladesh recently introduced a crucial initiative for boosting the tax economy of Bangladesh in the form of tax exemptions like tax rebates, tax deductions, and tax incentives and ensuring a flawless corporate tax structure in Bangladesh.

Tax withholding in Bangladesh

Tax withholding or tax deductions must be filed by the taxpayers filing for the TDS (Tax deduction at source). It is commonly known as the tax deduction or tax collection at source wherein every legal entity registered and carrying their business in Bangladesh is authorized and bound to the tax deductions or withholding half-yearly, including:

1. All expenses related to the business operations of the legal entity arising in the relevant income year;
2. Tax depreciation on fixed assets of the legal entity;
3. The cost of free samples and entertainment expenses;
4. Liabilities for unpaid expenses, etc.

Tax incentives/rebates in Bangladesh

Tax fiscal tax incentives or rebates available to the taxpayer in Bangladesh are as provided below:

1. A corporate tax holiday of 100% allowed for industrial undertakings (including the automobile manufacturing industry, bio-fertilizers, basic ingredients of the electronic industry, tyre manufacturing industry, textile machinery, pharmaceuticals, etc.) established between 1^st July 2011 to 30^th June 2019 for a period of 10 years ;
2. A corporate tax holiday or partial exemption for the physical infrastructure facilities (including deep sea ports, export processing zones, gas pipelines, flyovers, Information Technology (IT) parks, toll roads or bridges, mono-rails, waste treatment plants, etc.) incorporated their business between 1^st July 2011 to 30^th June 2019;
3. Tax rebate or exemption for a period of 15 years on income arising in the power sector from the coal-based power generation companies and the private power generation companies;
4. Tax rebates for the manufacturing companies to ensure sustainable industrialization;
5. Tax holidays are offered to the industrial undertakings or developers established in Economic Zones and Special Economic Zones like tax exemption for 10 years for any investment in the special economic zones, tax exemption for 10 years for the developing units established in the Special Economic Zones, tax incentives for 10 years to the high-tech park zones,
6. Tax rebates for public-private partnerships (PPP) projects, including national highways or expressways and related service roads, flyovers, airports, subways, railways, bus depots, bus terminals, seaports, foreign technicians employed in PPP, etc.;
7. Tax exemption on the 50% of income earned from the exports for a company not incorporated in Bangladesh or a company paying tax at a reduced rate;
8. Tax rebate at the income accrued from the businesses involved in the information technology-enabled services like software development, website development, website hosting, digital data analytics, call centre services, cyber security services, national telecommunication transmission network (NTTN), etc.

Conclusion

A famous saying is that ‘every tax reform must go hand-in-hand so that the taxpayers never feel ripped off the exchequer’. Hence, a sound tax structure in Bangladesh means creating an economically neutral tax environment that is transparent and ensuring any uncertainties to the taxpayers. The tax structure of Bangladesh also ensures and reflects the socio-economic and cultural values, targeting the equitable distribution of the tax burden and collection after all the relevant deductions to the taxable income of the legal business units.

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