Bangladesh's new 1% minimum tax on small businesses threatens survival
Bangladesh's recent Finance Act of 2026 introduces a significant challenge for micro and small entrepreneurs by eliminating the previous tax exemption for annual turnovers up to BDT 4 crore. Instead, a mandatory 1% minimum tax on total sales or turnover will now be imposed on these businesses. This change, implemented through an amendment to Section 163(6) of the Income Tax Act, 2023, replaces the prior system where businesses with turnovers below BDT 4 crore paid income tax based on their net profit and applicable tax slabs. Previously, businesses incurring losses or low profits benefited from reduced tax burdens, but the new regulation prioritizes gross sales over profitability.
Analysis of recent data reveals a drastic increase in tax liabilities for small businesses. For instance, a business with BDT 50 lakh in annual sales and a taxable income of BDT 2.5 lakh (5% net profit) previously paid no tax due to the tax-free threshold. Under the new law, this business will owe a minimum tax of BDT 50,000. Similarly, a business with a BDT 1 crore turnover and BDT 5 lakh income, which previously paid BDT 10,000 in tax, will now pay BDT 100,000, marking a 900% increase. Businesses with BDT 2 crore turnover and BDT 10 lakh income will see their tax rise from BDT 67,500 to BDT 200,000 (a 196% increase). Even businesses with turnovers just under BDT 4 crore will face a 55% tax increase, paying BDT 400,000 on a BDT 3.99 crore turnover. The data indicates that smaller businesses face a disproportionately higher increase in their tax burden.
This policy shift poses substantial risks to the micro and small industry sector. It could lead to capital erosion, particularly for trading businesses with low profit margins (2-3%), where the 1% turnover tax could consume over half of their total profit. Businesses operating at a loss may need to use personal funds or business capital to pay this tax, potentially discouraging them from filing tax returns and driving them towards the informal economy. Furthermore, the increased tax pressure may incentivize tax evasion and under-invoicing, leading to a rise in cash transactions and hindering the government's digitalization and tax compliance goals. While the government has made positive strides in other areas, such as exempting certain businesses and startups from minimum tax, the 1% turnover tax on businesses below BDT 4 crore turnover directly impacts their viability. The provision to pay tax even during losses contradicts the principle of a fair, profit-centric tax policy, necessitating an urgent review to support the growth of small industries and the national economy.
The imposition of a 1% minimum turnover tax on small businesses in Bangladesh, irrespective of profitability, represents a significant shift in fiscal policy. While intended to bolster government revenue, this measure may inadvertently stifle the growth of the very sector crucial for job creation and economic diversification. The policy's impact on businesses with low profit margins or those operating at a loss could lead to capital depletion and a potential retreat into the informal economy, undermining broader economic objectives like digitalization and formalization. Future fiscal strategies might consider tiered minimum tax rates or alternative revenue-generating mechanisms that better align with the economic realities and developmental stage of micro and small enterprises, ensuring that tax policy acts as an enabler rather than a barrier to sustainable business growth in the digital era.
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