Review the corporate tax hike for MFS

MFS has indeed succeeded in bringing the massive population of Bangladesh to the formal payment channel. Star / file


MFS has indeed succeeded in bringing the massive population of Bangladesh into the formal payment channel. Star / file

Mighty river bridges seamlessly connected Bangladesh, the world’s largest naturally fragmented delta. He prompted the rapid construction of highways and road networks to speed up the national movement of passengers and goods.

Incentive education has increased the literacy rate while universal immunization discourages maternal and infant mortality. The invention of high-yielding rice varieties exiled famine. Nationwide electrification has made rural homes and businesses lighter.

The mobile phone has injected a magical rhythm and spread to personal and business communications. And Mobile Financial Service (MFS) has added unprecedented ubiquity, frequency, and security to people-to-people and small business transactions.

All of them combined write the country’s secret recipe for impressive economic growth.

It could have been brighter if Bangladesh had implemented predictable regulation to boost investor confidence. Policymakers should pay attention to the regulatory fragility of these engines of economic growth. The principle of taxation of juvenile MFS, as proposed in the current budget, should be reviewed.

Mobile technology democratized telephony, which was new. Launched in 1997, the mobile phone primarily saved the urban middle class, then saved rural lives from the monopoly of state-owned telecommunications companies. Money does not move, information does. Therefore, every mobile phone became involuntary cashiers by the MFS outfits run by the bank in 2011.

Since then, it is the large number of money transfer instruments preferred by unbanked citizens, mostly rural. With the “scary” account opening procedures, banks cannot match the ubiquitous, secure, and after-hours operations of MFS outlets in terms of cash transactions.

Currently, over 60 percent of disbursements are made in villages. No wonder the government uses the MFS as a preferred vehicle for disbursing its social safety net payments and scholarships.

Such a particularly effective small step of SFM for gigantic financial inclusion in Bangladesh’s cash economy requires careful regulation.

Unlike the 2.5 percentage point reduction for all other corporations, this year’s budget proposes an increase in corporate tax on MFS from 32.5% to 40%. It’s like hooking up a bomb with the altimeter that explodes once the plane climbs to cruising altitude.

Since no MFS business makes a profit, corporate tax does not apply to it either. They collect 10 percent withholding income tax (ACI) from their agents and 12 percent ACI from distributors on behalf of the government. In addition, there is a 15 percent value added tax on the withdrawal fee.

According to bKash, the dominant MFS, Tk 638 crore was paid as taxes while it suffered a Tk 81 crore loss in fiscal year 2019-2020. Yet bKash and its 14 other rivals continue to invest in their long quest for profit. But taxpayers want to count the chickens before they hatch.

This sends a frightening signal to existing and potential investors in the nascent, tech-centric MFS industry. Continued investment in technology to execute secure digital payment transactions consumes rising MFS returns. This seems incomprehensible among policy makers.

The tax authorities have wrongly bracketed the MFS sector with listed banks. Banks make money from mammoth loan products that are decades, if not centuries old. MFS companies are, however, mostly money movers using mobile phone technology.

Unlike banks, MFS companies process a negligible number of very old-fashioned retail banking products with minimal return. Some of them, like the handling of remittances, are strictly asymmetric as they only issue converted inbound cash. Basically, the structural difference and the huge operational disparity between banks and MFS should be the guiding principle of taxation.

The authorities should appreciate that the MFS companies, and not the traditional banks, have succeeded in bringing the mass population of Bangladesh to the formal payment channel.

The journey is far from over, however, as only 20 percent, or 37 million people, actively manage MFS accounts, according to the central bank. The growth potential of the MFS market, with 15 providers, is based on 174 million mobile phone users.

Therefore, the MFS market should be allowed to grow, while the premature and counterproductive 40 percent corporate tax awaits everyone’s interest.

The author is a senior policy fellow at LIRNEasia

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