“Forget ITES, Just Handle Your 15%” – E-commerce’s Budget Woes in Bangladesh

Every time I sit down to write about the national budget, a familiar story creeps into my mind. I don't know why, but it happens every year. This time, instead of narrating it myself, I asked AI—specifically ChatGPT—to retell it. I simply said, “Forget charity, just restrain your dog,” and here’s what it came up with:

A poor beggar once approached a wealthy house asking for alms. The door was opened by a man holding the leash of a dog. The beggar pleaded, “Sir, may I have something?” The dog lunged at him, and the beggar stepped back in fear. The man laughed and said, “Afraid of the dog, yet you want alms?” The beggar calmly replied, “Forget charity, just restrain your dog.”

The moral is simple: When dignity is compromised and safety is in question, even the smallest favor loses meaning. Dignity is the beggar’s true wealth.

E-commerce and IT/ITES: A Long-standing Dispute

Since 2016, e-commerce has been excluded from the IT/ITES category, even though tax exemptions under this bracket are extended till 2026. Back in 2018, e-commerce stakeholders accepted this separation with the hope of extracting even greater benefits. However, the COVID-driven boom followed by waves of fraud muted their voices. For the last few years, they have been lobbying to reintegrate e-commerce into the IT/ITES fold, as is the global norm.

The argument is that Clause 54(g) of the 2016 Income Tax Act modified Section 33, thereby excluding “e-commerce and online shopping” from ITES. As a result, income from e-commerce is now taxable, which seems unfair given that the sector is entirely dependent on digital infrastructure.

Similarly, the absence of a clear SRO exempting office rent from VAT—available to other IT businesses—places e-commerce at a disadvantage. Stakeholders argue that online sales companies should be eligible for rent-related VAT exemption just like their IT counterparts.

The 15% VAT Saga

Recently, Facebook and online advertising were granted relief from dual taxation. But now, a 15% VAT has been proposed for e-commerce, triggering widespread backlash. There is now a collective plea to reduce it to 5%, but simply abolishing this tax may now be the more formidable challenge.

According to SRO No. 240–Law/2021/163–VAT dated June 19, 2021, e-commerce-based delivery services are subject to a minimum VAT of 15% under service code S028.00. This, too, has been repeatedly proposed to be reduced to 5% during pre-budget consultations.

What’s likely to happen is this: the campaign to reclassify e-commerce under ITES will once again take a backseat, and the 15% VAT debate will dominate the conversation. If the government agrees to the 5% rate, the NBR will claim it has listened to stakeholders. Business leaders will celebrate this "achievement." Meanwhile, the bigger structural problems will remain unresolved.

Hence, the updated version of the story becomes: “Forget ITES, just handle your 15%.” And the demand for e-commerce to be recognized as a trade license category—though not directly a budget issue—will be shelved once more, despite falling under the purview of the Ministry of Local Government. That, too, deserves another story of its own.

Local Entrepreneurs vs. Foreign Investment

Another e-commerce proposal seeks to protect local entrepreneurs and suggests mandating local partnerships for foreign direct investment (FDI). However, this contradicts the government's current FDI policies and is unlikely to be accepted.

Marketplace vs. Online Retail Discrimination

Discontent also surrounds a discriminatory definition of online retail in the SRO No. 143/Law 2023/220 VAT, issued on May 21, 2023. It defines online retail as sales conducted via electronic networks of goods already purchased from a manufacturer or supplier with VAT paid, and that will again be supplied with VAT added—despite the seller having no physical outlet.

The issue lies in the redundancy: VAT is to be paid twice, which is not mandated in the definition of a marketplace. This clause should be eliminated to ensure consistency.

Minimum Tax Conundrum

For years, the e-commerce sector has been asking for a reduction in minimum tax from 0.6% to 0.1%, citing that most firms are not yet profitable. According to current law:

1. Tobacco manufacturers pay 1% of total receipts.

2. Mobile operators pay 2%.

3. Others earning over BDT 30 million pay 0.25%.

4. All other cases fall under 0.6%.

Despite being a promising and emerging sector, e-commerce still constitutes a minuscule portion of the retail economy and should be granted leniency.

Additionally, under Section 52(2)(xv) and Rule 16 of the 1984 Income Tax Ordinance, there is a demand to exempt e-commerce from source tax.

Export via E-commerce and Incentives

Under FE Circular No. 03 issued by Bangladesh Bank on February 8, 2018, a 10% incentive is provided to software and ITES exporters. There is now a growing call to include cross-border B2C e-commerce in this incentive framework as it also involves digital exports.

Perquisite Cap and Rent Proof Burden

Section 55(g) of the 2023 Income Tax Law caps perquisites at BDT 1 million. Given inflation, this is no longer a practical limit. This issue affects all limited companies, not just e-commerce.

Further, under Section 264(3)(42), tenants must collect a copy of the landlord’s income tax return as proof. If unavailable, the tenant is required to deduct a 7.5% tax at source instead of 5%. Non-compliance results in rental expenses being disqualified and a 30% tax applied to the unauthorized expenditure.

While such regulations may intend to plug tax leaks, their uneven implementation disproportionately burdens compliant companies. The NBR’s capacity constraints are at the root of these blanket approaches.

Staple Goods and First Schedule Inclusion

According to Section 126 of the VAT and Supplementary Duty Act, 2012, rice and fruits are exempt from VAT. However, this exemption is inconsistently applied in the e-commerce context. It is proposed that rice, pulses, essential and local fruits be explicitly included in the First Schedule to ensure uniform treatment.

Withholding VAT from VAT-Exempt Suppliers

According to SRO No. 240–Law/2021/163–VAT Rule 4(b), VAT must be withheld even from suppliers of VAT-exempt goods or services. This defeats the purpose of exemptions. Stakeholders argue that VAT should not be collected from suppliers of exempt goods or services, as this reduces costs and benefits consumers.

Withholding Agent Issues

E-commerce firms have long demanded exemption from being designated as withholding agents. Though applicable to all limited companies, these firms now ask for at least an extension of the VAT deposit timeline from 7 to 14 days, as seven days is often impractical. This is a reasonable and fair demand, especially for those willing to comply.

Advertising Expense Limits

As per Section 55(n) of the 2023 Income Tax Law, only 0.5% of a company's turnover is allowed as admissible promotional expenditure. This is impractical for e-commerce and startups, which rely heavily on digital promotions. They propose allowing up to 5% of turnover as legitimate promotional expenditure.

Unbanked Payments Limit

Section 55(dha) of the 2023 Income Tax Law disallows any payment above BDT 50,000 that isn’t made via banking channels, excluding salaries, rent, and raw materials. Raising this limit to at least BDT 500,000 would prevent companies from being forced into irregular practices to survive.

Final Thought: The Rule of 100 Hurdles

It is often said about Bangladesh that to earn BDT 100 legally, one must cross 100 regulatory hurdles. Yet, looting or laundering billions is seemingly effortless. Our laws appear to be crafted in a way that pushes businesses toward non-compliance, creating a tacit understanding—“you pay, we look away.” It’s a game of “tight lid, clever thief.”

Author: 

Jahangir Alam Shovon, Former Executive Director, e-Commerce Association of Bangladesh; General Secretary, Bangladesh Travel Writers Association

Disclaimer:
The views expressed in this opinion piece are solely those of the author and do not reflect the editorial stance of Digital Bangla Media. As a platform committed to pluralism, we publish diverse opinions without editorial alterations. Any discomfort or disagreement arising from this article is strictly the reader’s personal matter.