Home Scholar's Advice Justification For Tax Exemption For Startups

Justification For Tax Exemption For Startups

Justification For Tax Exemption For Startups

Masud Khan
Chairman
Unilever Consumer Care Ltd

Independent Director
Berger Paints Bangladesh Ltd
Singer Bangladesh Ltd
Community Bank Ltd
Viyellatex Ltd

Chief Adviser
Crown Cement Group

Startups are making headlines across the globe and in Bangladesh. There are over a billion successful startups in the world, every startup strives hard to be successful and reach the top, but only a few make it to the list of most valuable startups in the world.

ByteDance is the most valued startup in the world, with a current valuation of $280 billion as of 2021. ByteDance Ltd. is a Chinese multinational internet technology company headquartered in Beijing; Zhang Yiming founded ByteDance in 2012. ByteDance operates a range of content platforms that inform, educate, entertain, and encourage people across languages, cultures, religions, etc.

ByteDance is the parent company of famous video-sharing social networking services TikTok, Vigo Video, and many more, where the infamous app Tiktok crossed 2 billion downloads globally on the App Store and Google Play. ByteDance is also the parent company of Toutiao, which is a news aggregator app that uses AI algorithms to track the habits of the reader and deliver relevant content.

In Bangladesh, startups such as Bkash, Chaldal, Shohoz, Daraz, Paper Fly, Pathao, ShopUp, HungryNaki, Truck Lagbe, Praava are some of the names that have attracted large amount of foreign investments.

COVID-19 has ushered in a range of possibilities that were not fathomed hitherto. Droves of young entrepreneurs are rushing to cash on to this opportunity. We now see online purchases of mangoes from Rajshahi and Chapai Nawabganj, honey from the Sundarbans, fruits from Rangamati, vegetables, fresh fish, meat, imported dry fruits, superior dates, Chamcham from Porabarir, curd from Bogra, Comilla rosomalai, Sadek Golla from Jamtola, sweets from Jessore, Rajshahi, etc., blended tea from Sylhet, fitness equipment, and books online, home essentials, etc. The list goes on. 

The online food business has also seen a spike during Covid. Apart from popular names such as hungrynaki.com, and Foodpanda, there are countless online sites on Facebook selling the entire range of cooked food. The online kitchens can cook for “kala bhuna”, “mezbani beef”, “taki macher or bele macher bhorta”, “loitkya shutki” or “beef with satkora” or any such food that are served in traditional restaurants.

Most startups across the globe and in Bangladesh end up being unviable!

Most startups in Bangladesh end up being unsuccessful. There are a couple of reasons. Most young entrepreneurs start without a solid business model. They fail to ascertain whether the consumers will see this as a value-adding service or product. One often makes the mistake of being sold in his idea that this is an excellent product without testing what the end consumer thinks. 

Young entrepreneurs today in Bangladesh want to become rich overnight. However, doing business is like running a marathon race. One needs to pace himself, be patient, be prepared to face adversities in today’s VUCA (Volatile, Uncertain, Complex, and Ambiguous) world, and doggedly stick to his game plan. 

Building trust is crucial. Building trust does not happen overnight but takes years by demonstrating through deeds and actions what one has committed. This can be garnered by living up to commitments made at the time of sale, selling quality products or services, and having a transparent refund policy. 

Finally, having a sound financial plan is crucial, along with sources of finance. Often, an entrepreneur starts a business with his own resources but soon finds out that the working capital requirement has shot up since customers are not paying on time. He then looks for external finance but does not find any. Having no other recourse, he is compelled to shut his doors. 

For all the above reasons, most startups perish. The others who survive have to wait for a long time before they start making profits. 

Income Tax Considerations

The fundamental principle of Income tax is that tax is payable once we have taxable income. Also, under Section 37 of the Income Tax Ordinance, 1984, if an organization incurs business losses, such losses can be carried forward for six years and offset against subsequent profits.

As most startups will incur losses in the initial years, the startups would not be subjected to tax in the years they incur losses. Even when they start making profits, they would be able to offset the earlier losses against profits that will facilitate their cash flow.

Unfortunately, in Bangladesh, with the promulgation of Section 82C, businesses making losses are subject to a minimum tax that will be either 0.60% of gross turnover or the advance tax deducted under Section 52 or 53 of the Ordinance. 

This effectively compels loss-making startups to pay tax despite making losses. This makes the business unviable at the outset.

Recommendation

So what is the solution? We are well aware of the enormous contribution of the SME sector in Bangladesh, which contributes to 25% of GDP and more than 90% of employment. However, this sector is now struggling with lack of access to organized finance and mostly has to manage with owner’s capital or capital crowdfunded.

The current Income Tax regulations are clearly acting as a deterrent for new entrepreneurs to enter the SME sector. For those who are already in the fray and making losses, the extra burden of minimum tax is like the proverbial last nail in the coffin.

There is, therefore, a clear justification for allowing this sector to be exempted from the provision of Section 82C of the Income Tax Ordinance. Furthermore, under the current definition of SME, enterprises with employees between 31 and 120 are classified as small, while medium enterprises constitute employees between 121 and 300, as per the 2016 national industrial policy. 

Once this provision is enacted, it will add as a fillip to the promising SME sector and usher new investments that will further propel the GDP growth.

To read more articles of Scholar’s Advice, Please Click Here!

NO COMMENTS

LEAVE A REPLY

Please enter your comment!
Please enter your name here