Is the minimum tax – unconstitutional and unfair?

In this year’s budget, expectations were high that the government would repeal the draconian provision of minimum tax under Section 163 of the Income Tax Act. Instead, the minimum tax rate on gross receipts has increased from 0.6 percent to 1 percent.

The introduction of minimum tax under Section 163 is not only ultra vires but also in contravention of the constitution of Bangladesh. It undermines the fundamental principles of income taxation as defined in the Income Tax Act, which stipulates that tax is to be levied on gains or profits, not on gross turnover.

Under this provision, even companies that incur losses are required to pay tax, which can result in an effective tax rate exceeding 100 percent of profit before tax (PBT). This is not only illogical but also contrary to the spirit of income taxation.

The industry most affected by this law is businesses with high volumes and low margins. Sectors such as grocery retail, where the primary focus is on increasing topline revenue, are particularly hard hit.

For low-margin businesses with high operating costs, this provision is draconian, as any increase in topline can turn into a disaster rather than a benefit — which should never have been the case.

Rather than enforcing such a punitive measure, the tax authorities should focus on improving corporate governance, auditing standards, and financial transparency. Tax should be assessed based on actual profits, not arbitrary turnover figures.

The current law places undue pressure on cash flow and penalizes legitimate businesses that may be temporarily loss-making. While the intent may have been to target tax evasion by unscrupulous entities, the result is a blanket punishment that harms genuine enterprises.

Legal and Constitutional Concerns

(a) By definition, minimum tax does not qualify as Value-Added Tax (VAT) or Customs Duty, yet it is categorized under income tax. According to Section 2(a), read with Sections 2(b–g) of the Income Tax Manual, income tax is chargeable only on gains or profits, not on gross receipts. Therefore, minimum tax cannot be deemed a legitimate form of income tax.

Income tax law allows for deductions of expenses incurred in generating income. In contrast, minimum tax is levied on gross turnover, including losses, without any allowance for deductions. This contradiction highlights the inconsistency and unfairness of the provision.

(b) The Constitution of Bangladesh, under Part II: Fundamental Principles of State Policy, promotes equal opportunity and a fair distribution of the burden of taxation. Imposing minimum tax on gross turnover violates these principles by requiring even loss-making entities to pay tax from their capital, thereby undermining the principle of economic capacity.

(c) The principle of economic capacity in taxation dictates that tax should be proportionate to the taxpayer’s ability to pay. Minimum tax disregards this principle entirely. Moreover, it creates a risk of double taxation: if a company pays minimum tax during a loss-making period and later becomes profitable, the earlier tax paid is neither deductible nor creditable, resulting in an unfair financial burden.

The minimum tax provision under Section 163 is unconstitutional, economically punitive, and legally inconsistent with the principles of income taxation. It penalizes businesses regardless of profitability and threatens the sustainability of genuine enterprises. This arbitrary provision should be urgently repealed to restore fairness and integrity in the tax system.