Published in The Financial Express on Saturday, 10 May 2014.
Corporate income tax: Should it be reduced or not?
One of the first lessons taught in Economics is to distinguish between a positive and normative statement. The example of a positive statement would be, ‘the temperature today is 30 degree Celsius’, and the example of a normative statement would be ‘nobody should go out in this temperature.’ Any economist must be factually correct in making positive statement. If today’s temperature is 30 degree Celsius, it will be 30 degree Celsius no matter who makes the statement. However, whether one should go out in this temperature or not, is a normative statement. People may differ in their normative statement but not in the positive statement.
Very recently, the Centre for Policy Dialogue (CPD), a local think tank, presented their recommendations for the upcoming budget to the media. One of their recommendations was not to reduce corporate income tax, which contradicts with the recommendations made by many economists in the recent past. This is one example how economists differ in their normative statements.
The basis of CPD’s normative statement – corporate income tax in Bangladesh should not be reduced – is a cross-country comparison of corporate income tax. According to CPD, ‘The average corporate tax of Bangladesh is one of the lowest in South Asia which is close to the average corporate tax rate of South Asian countries’ – a positive statement. One may differ with CPD’s position arguing that South Asia, which is also struggling to promote investment, should not be the example for us to follow. Any economist or organisation has the right to make any normative statement leaving it to others to judge or to follow.
But partial or wrong presentation of information – a wrong positive statement – contradicts with professionalism, and therefore should not be made by anyone. In the current context, it is important whether the information provided by CPD is correct or not.
The cited source of this information is KPMG, one of the largest professional services companies in the world and one of the big four auditors of the world. KPMG provides cross-country information on the corporate income tax in their website: http://www.kpmg.com/Global/ en/services/Tax/tax-tools-and-resources/ Pages/corporate-tax-rates-table.aspx. This website has open access.
No country applies a uniform corporate income tax. Acknowledging this, KPMG attached a short note providing full information about corporate income tax in case of all countries. One should look into this complete information to make policy recommendation. Unfortunately, this has not been done in opposing reduction of corporate tax in Bangladesh.
One can easily verify from the above link that the information provided by CPD is wrong. Although CPD says Bangladesh has one of the lowest average corporate tax in South Asia, the cited 27.5 per cent is not the average rate. Rather it is the lowest rate, applicable only for companies which are listed in stock exchange (except banks and other financial institutions). The number of total companies that pays corporate income tax varies from 25,000 to 30,000 in Bangladesh. There are about 270 companies enlisted in stock market, out of which some are banks and financial institutions. So, what CPD cited as the average rate of corporate income tax – the 27.5 per cent – is applicable to less than 1.0 per cent of total corporate tax-payers in the country. For other companies, the corporate tax rate is high and shown in Table 1.
It is wrong to consider the lowest rate of corporate income tax as the average rate. It is even more misleading to draw a policy implication on the basis of the tax rate paid by less than 1.0 per cent of companies.
Other South Asian countries also apply different rates of corporate income tax, which are provided in KPMG’s website. A review of those rates will give us an idea whether Bangladesh has one of the lowest corporate income tax in South Asia. Let us see what KPMG says in the short note about the South Asian countries.
EXTRACTS FROM KPMG WEBSITE:
Bangladesh: The corporate income tax rate is 27.5 per cent for corporations (except banks and other financial institutions) listed at a stock exchange. If such listed corporation pays a dividend that exceeds 20 per cent of the paid-up capital for a taxable year, it receives a 10 per cent rebate on the tax payable. In cases where the dividend is lower than 10 per cent of the paid-up capital, the corporate income tax rate is increased to 37.5 per cent. Should the dividend amount be less than 15 per cent in spite of having sufficient distributable profits, the company is subject to an additional 5.0 per cent tax on the undistributed profits. Banks, insurance companies and other financial institutions are taxed at 42.5 per cent, and mobile phone operators are taxed at 45 per cent.
All other companies including branches of foreign companies are taxed at 37.5 per cent; however, if a mobile phone operator company converts itself into a publicly traded company by offering a minimum of 10 per cent of its shares on the stock exchange through initial public offer, the applicable tax rate for such organisation will be 35 per cent. If the profit earned by a bank exceeds 50 per cent of its capital and reserves, the bank is subject to a 15 per cent excess profits tax on the additional profit.
India: The corporate tax rate is 33.99 per cent. The corporate tax rate for domestic companies is 30 per cent. Foreign companies are taxable at 40 per cent. A minimum alternate tax (MAT) is levied at 18.5 per cent of the adjusted profits of companies where the tax payable is less than 18.5 per cent of their book profits. The rate of tax on profits from life insurance business is 12.5 per cent.
Pakistan: For tax year 2014 tax rate for companies other than banking companies shall be 34% and for banking companies it will be 35%. Previously, from 1 July 2006 to 30 June 2013, the tax rate for all companies including banking companies was 35%. Small companies may be taxed at a rate of 25%, subject to specified conditions.
Sri Lanka: The corporate income tax rate is 28%. Small companies (with turnover not exceeding LKR 500 million and not belonging to a group of companies) are taxed at a lower rate of 10%. Certain sectors enjoy concessionary rates, such as exports (other than traditional products), tourism and construction which are taxed at 12%, and agriculture which is taxed at 10%, with an exemption on offshore services. Companies engaged in liquor or tobacco products are taxed at a higher rate of 40%. The social responsibility levy of 1.5% on income tax was rescinded effective 1 April 2011. A deemed dividend tax at 15% is applicable for non-declaration of at least 10% of distributable profits.
As one can easily see from the information provided by KPMG in their website that Bangladesh has in fact the highest corporate income tax among the South Asian countries. Among the different rates currently applied in Bangladesh, one should not use the lowest one, which is applied to less than 1.0 per cent of companies to draw any policy conclusion. Unfortunately this is exactly what has been done in arguing against any reduction of corporate income tax. Wrong number leads to wrong policy, and wrong policy hurts national development. This is why the recommendation not to reduce corporate income tax needs to be revisited.
Abul Basher, PhD is Researcher at Bangladesh Institute of Development Studies (BIDS), former economist, World Bank, and former faculty, Willamette University, USA. cccg67@yahoo.com