The revenue authority has sought to tax companies' promotional expenditure exceeding 0.50 per cent of their turnover, an unprecedented move that has left firms flustered.
Promotional expenses exceeding the proposed cap would instead be listed as income and therefore, companies will have to pay tax on the expenditure from the upcoming fiscal year.
In turn, this may increase the effective tax rate from 6 per cent to 36 per cent depending on a profit base range between 5 and 30 per cent, Rupali Chowdhury, president of the Foreign Investors' Chamber of Commerce and Industry (FICCI), told Finance Minister AHM Mustafa Kamal last week in a letter seeking the cap's removal.
Due to the increase in effective tax rates, non-listed companies, the country's biggest taxpayers, will not be able to take full advantage of the proposed reduction of corporate tax from 35 per cent to 32.5 per cent.
"This will subside the government's initiative to reduce corporate tax rates," said a top executive of a multinational company operating in Bangladesh for many years requesting anonymity to speak candidly on the matter.
The FICCI also said that fast-moving consumer goods (FMCG) and similar industries spend between 5 to 10 per cent of their turnover on promotional activities, a long-established practice that drives sales.
The proposed cap on such expenditures means that the cost of doing business will increase.
This will also likely force companies to cut down on promotional activities at a time when the economy needs more investment to make a speedy recovery from the pandemic fallout.
The coronavirus pandemic has devastated incomes and both domestic and global demand. This means that companies are struggling to generate enough income to pay salaries and meet operating expenses amid a lack of sales.
Due to this unprecedented situation, many industries are currently running at minimum capacity, the industry insiders said.
Under these circumstances, if various industries have to decrease their promotional activities then business growth, and, in turn, the government's revenue, will be affected.
"This will create a chain reaction in the economy," said Abul Kasem Khan, chairperson of the Business Initiative Leading Development (BUILD), a joint initiative of leading chambers.
The cap might be introduced to curb the misquoting of expenses. However, a stronger audit system would be more beneficial to that end than the proposed cap.
"This will disincentivise large companies," said Khan, also a former president of the Dhaka Chamber of Commerce and Industry.
Along with the FICCI, the Metropolitan Chamber of Commerce and Industry (MCCI) also demanded the removal of the provision, said its Secretary General Farooq Ahmed.
The FICCI said that if the measure is passed, it will give the wrong signal to all potential foreign direct investors as an investment in Bangladesh will look 'very unattractive'.
If the FMCG and other industries want to minimise their taxes on promotional expenses, more than 90 per cent of those activities will be reduced, which will significantly hinder business growth, read the FICCI president's letter, which was also forwarded to the National Board of Revenue.
The revenue authority is seeking to fix a maximum ceiling on promotional expenses to discourage certain malpractices among firms, particularly a section of pharmaceuticals companies that claim various benefits provided to their physicians as promotional expenses, said a senior taxman.
"We did this for the betterment of consumers. This will help improve product quality and enhance competition in product promotion between domestic and foreign companies," he said.
The cap on promotional expenses will have serious implications for the advertisement industry as well as revenue for print and electronic media, said Ahsan H Mansur, executive director of the Policy Research Institute (PRI).
"This will affect marketing activities for not only existing companies but also new entrants."
The government should not discriminate between local and foreign companies or interfere with market competition.
If there is any malpractice in any specific sector, such as pharmaceuticals, the NBR can consider imposing a ceiling on that particular sector, Mansur said, adding that another option would be to have the tax authority audit firms that claim exorbitant expenses.
If enacted, the measure will only increase the companies' sufferings amidst the pandemic, said Mamun Rashid, a senior partner at PwC Bangladesh.
"The cost of doing business will certainly increase," he said, adding that branch offices of foreign companies dependent on promotional activities will be at risk.