Tax small taxpayers but let the giants go? We can do better

For decades, the regulatory authorities in Bangladesh have opted for the easiest path of collecting revenue by imposing additional taxes on existing products or services enjoyed by people in their everyday life. Therefore, it was no wonder when most of the credit and debit cardholders started receiving a text message from their respective banks saying “As per a regulatory guideline, 15 percent VAT (incorporated in the VAT Act) will be added with payments to Netflix and other international online services using your card.” The message started popping up in mid-June after the proposed national budget for FY 2020-21 was placed in parliament.

To be clear, no additional or new taxes have been imposed on international online transactions in the budget proposal. Rather, it is an outcome of a “rule nisi” against the writ petition no. 5227 of 2018 (dated April 12, 2018), calling upon the respondents to show cause as to why they should not be directed to take immediate necessary steps to realise appropriate tax, VAT or any other government charges from the revenue earned by internet companies such as Google, Facebook, Amazon, Yahoo, YouTube, etc.

Like most other countries in the world, Bangladesh is also struggling to combat the Covid-19 pandemic and its impacts including, but not limited to, economic shocks. Revenue from corporate income tax is likely to be far below that of the previous financial years. So to combat the potential decline in tax revenue, the authorities have chosen the easiest way by imposing additional taxes on the existing tax structure. For instance, the telecom sector has been slapped with an additional 5 percent supplementary tax which now makes it the priciest service sector, with a 33 percent tax entirely borne by the users. A user will need to pay extra for talking over phone, or using data used for watching streaming services like Netflix, or enjoying videos on Youtube, or any other use of the internet.

It’s important to note that use of mobile data has grown exponentially as the ongoing pandemic has forced people to take shelter at home, with many things being done through different online platforms. The education sector, for example, is now seriously considering a transition to virtual learning until the pandemic is over. Experts are, therefore, advocating for reduction of charges on data usage to effectively help the people and the government in digitising services to tackle Covid-19 side-effects. But the regulatory authorities have rather chosen to target the online community as a source of additional revenue to counter possible tax deficits. Undoubtedly, the lower-middle and middle class of the country will have to bear its brunt.

The fight against Covid-19 has exposed how ill-prepared we have been. Those responsible for advising the government have clearly failed to do their job. The proposed budget, which should have given a strong emphasis on cutting down unnecessary government spending and increasing cash flow in the economy, is but a reflection of this failure.

As regards the 15 percent VAT on online international transactions, the National Board of Revenue (NBR) and Bangladesh Bank have instructed all scheduled banks to start deducting the applicable VAT from the service recipients for online payments made to international markets located outside the geographical boundary of Bangladesh. These include Netflix and various other online platforms. Netflix’s name has been mentioned in particular as it has become a household name in the world as well as in Bangladesh. In the face of lockdowns across cities and countries, people who can afford internet are now glued to their TV set watching Netflix, Amazon Prime and other streaming services.

The regulators have listed 76 online and digital services and a 15 percent VAT will be levied on online transactions for payment made at any of these merchants with effect from June 17, 2020. There is a possibility of charging 15 percent VAT in the future on similar payments made since July 1, 2019. If this happens, it will be a major blow to the government’s digitalisation efforts, and cloud hosting dependent services like the online news portals. As it is, the newspaper industry (both online and print) is already struggling to survive as there has been a drastic fall in revenue earning from advertisements in the wake of the Covid-19 pandemic.

Was there any other alternative? Yes, there was, and it was advocated by the industry stakeholders like the Newspaper Owners Association of Bangladesh (NOAB). The association has long been advocating bringing the internet giants under the purview of national legislation and extending its tax collection efforts. The Daily Star published an opinion on November 23, 2017 that showcased how countries across Asia and Europe are ramping up their efforts to force internet giants to conform to local legislation and pay taxes. The writ petition in question was filed a few months later.

In April 2020, Netflix reported a total revenue of USD 20.2 billion in 2019—a 27.6 percent year-over-year rise. Since 2015, its revenue has nearly tripled with a net income growth by more than 14 times. The company’s revenue and net income are likely to surpass all other previous records in 2020 as there has been a surge in subscriptions. Other companies like Amazon Prime and Disney have experienced a more or less similar growth.

Not only the streaming ones, there are also different kinds of companies that are doing internet-based businesses, starting from digital communications to cloud hosting to digital marketing to e-commerce and other internet-enabled services. For instance, Google and Facebook do almost all these businesses and their mammoth revenue and net income can be totally attributed to third-party content (e.g. online news portals). They do not own this content and their third-party partners are kept in the dark about the revenue they earn from using different services. Countries like Bangladesh can demand a fair share of the revenue from such internet-enabled services.

As we can see, the writ petition backfired for the consumers—instead of taxing the internet giants, the regulatory authorities have slapped a 15 percent VAT on the consumers. Well, this was not unexpected. In November 2018, soon after filing the writ petition, Google appointed a multinational consulting and tax services firm in Bangladesh to protect its business interests in the country. The regulators, too, cared little to bring the technology giants under the tax net but rather happily imposed VAT on them thereafter.

Taxing the technology giants is not an easy task. However, Bangladesh could learn from the experiences of the European and Asian countries and join the global initiatives of making the technology giants financially accountable. A huge opportunity lies before the government to collect tax in foreign currency from the tech giants. By doing so, the government can somewhat counter the budget deficit and finance its ambitious infrastructure projects in the future. At a time when we are going through a Covid-19 fuelled economic meltdown, such a move can rescue the country to some extent. But this will only be possible if those who are bestowed with the power of making relevant policies do so.

This was first published in the Daily Star on 19 June 2020. Click Here to read on the site.

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