IT is surprising that Advance Income Tax (AIT) on credit card has been included as a new fiscal measure under the proposed national budget for fiscal 2006-07. Credit card is a technology based and also the globally practised most modern payment system. While we are on the way to flourish in this sector, imposition of AIT is another impediment to its growth even after compulsion of TIN Certificate made under the national budget for fiscal 2002-03.
The AIT on credit card bill has been included in the Tax Ordinance under proposed annual budget for fiscal 2006-07. It reads as under:
"Any person responsible for collecting the credit bill amount resulting from the use of credit cards shall collect tax in advance at the rate of three per cent on the amount so payable by the credit card holder."
For the benefit of the readers, a few key points concerning the possible impact of this change on the future of the credit card as a financial product in Bangladesh as well as on the country's overall economy is highlighted here:
Credit card transactions can be accounted for vis-à-vis Cash: With a primarily cash-based economy, most of the domestic transactions in Bangladesh are currently in the form of cash and, hence, are not accounted for. We believe that there is a greater need to foster transparency and accountability of transactions occurring outside the banking/financial system across different businesses.
Globally credit card is a mass-market product substituting cash for all types of consumer payments. It also motivates people at large to adopt safe and convenient payment practices, helping countries in their efforts to move from cash to card where every single transaction is tracked and recorded. In the Bangladesh context, advance income tax will act as a disincentive for credit cards and would only favour and promote the cash economy.
Credit card enhances the purchasing power of low-income-group (LIG) consumers: Across the world, the credit card industry has significantly contributed to the national economies by enhancing the purchasing power of the consumers and promoting consumerism in the country. Breaking the myth of being a product for the social elite only, credit card has now become a mass-market product in Bangladesh. This product has gained greater acceptance at consumer level not only due to the wide acceptance at thousands of retail outlets across the country but also because of the higher purchasing power and the security it offers against carrying cash. In this context, imposition of AIT will inevitably mean card-holders who do not fall under the minimum taxable income criteria due to low annual income will close their credit cards to avoid AIT and thus also be deprived of this consumer financing scheme.
Impact of TIN as a requirement for credit card: In the budget for fiscal 2002-03, the TIN certificate was introduced as a mandatory pre-requisite for any credit card application regardless of the financial status of the applicant. While a credit card can be issued to individual having a monthly income as low as Tk. 4,500 per month, due to TIN certificate requirement the low income group consumers can no longer apply for a credit card. This had actually inhibited the growth of credit card industry as well as deprived the deserving individuals from availing a credit card due to low income.
Inconsistency in tax policy: It is to be noted that in FY 2001-02 budget, TIN certificate was made mandatory for consumer loans above BDT 500,000; whereas in fiscal 2003-04 budget, TIN certificate has been made mandatory for all credit cards, irrespective of their credit limits. For example, a credit card-holder with a limit of as low as BDT 10,000 has to have a TIN certificate, which is not consistent with the same standard for consumer loans.
Moreover, the new tax system enhances the level of this discrimination towards the credit card-holders as no other financial product has been brought under such taxation.
Global best practices to encourage credit cards: Furthermore, AIT on credit cards to the best of our knowledge is not practised anywhere in the world. On the contrary, there are examples of many countries where payments through credit cards are encouraged to avoid cash transactions. For example, in South Korea the policies were changed to promote spends through credit card by denying tax deductions for expenses that are paid by any other mean (such as cash) which can not be tracked or recorded. The tax authorities in South Korea even went to the extent of awarding prizes to the taxpayers who were good credit card users.
Credit card and NBR's revenue opportunity: The growth in the credit card industry translates into a number of revenue opportunities for the National Board of Revenue (NBR).
a) VAT on credit card fees & charges: The NBR receives VAT @ 15% on the fees and charges applicable to credit cards. It is already being deprived of approximately BDT 14.4 million (i.e. VAT @ 15% on Tk. 2,000 as annual fee per card multiplied by 48,000 cards less issued per year due to implementation of TIN annually in terms of VAT payments from the credit card industry. The imposition of AIT will result in further erosion in this revenue opportunity.
b) VAT on the retail usage of credit cards from the retailers; The NBR receives VAT on the payments made through credit cards at nearly 5,000 retail points across the country. Credit card actively brings a larger volume of retail transactions under banking channel thus significantly, improving the VAT collection for the NBR from these retail outlets and also improving the overall management of cash-flow for retailers. Besides, higher purchasing power of the customers increases sales at the merchant outlets. We are afraid that imposition of AIT will not only adversely affect consumerism in the country but will also affect the growth of small & medium enterprises (SMEs) due to a sudden decrease in their sales volume.
c) AIT & opportunity loss regarding revenue for NBR; Though AIT is being proposed to increase government revenues, the same possibly may have an adverse effect on the revenue potential for the NBR as the AIT will surely discourage people from using credit cards and encourage them to pay in cash for purchases. This will deny the NBR of the earning in terms of VAT both from the issuer of the card and the retailer accepting the card.
AIT-risking banks' investment in credit card: The banks in Bangladesh have made substantial investment in this technology-based sector. Imposition of AIT will hurt the growth of the industry and there will be sudden fall in the revenue for the banks. The banks will take unusually longer time to recover their investments.
Conclusion and recommendations: The credit card industry is at the nascent stage of development in this country compared to other neighbouring countries. If such taxation system is introduced now, this modern mode of payment system will not develop any further in the country. We would also like to highlight that credit card is a mass-market product and it has all the potential to attract and grow the market. This in turn, will help bring a larger population under the tax net. Imposing advance income tax on credit cards at this stage will discourage its use and will impede the growth of this market.
In the light of the above, the following recommendations are being made: a) The proposed advance income tax (AIT) of 3.0% on credit card spending should be omitted; b) Considering the smaller loan size of credit cards in comparison with general consumer loans, the mandatory TIN requirement for all credit cards should be revised as mandatory for credit cards with a minimum limit of BDT 100,000 and above only; and c) NBR and other tax authorities should start accepting tax payments through credit cards, which is practised in other countries.
The writer is Managing Director, National Bank Ltd. and Chairman, Association of Bankers, Bangladesh