With over 650,000 freelancers in the country, the popularity and freelancing as a full-time profession have been on the rise in Bangladesh. The process got even more traction due to the pandemic and people losing jobs. For many, using their skills on an online platform has made way for an extra earning scope and in some cases, the only source of income. But with all that said, taxation is something that many freelancers do not consider while getting started on with freelancing. From the context of Bangladesh, freelancing doesn’t guarantee you a stable income and the job you’re going to get isn’t also regular. So, do Bangladeshi freelancers need to pay tax in 2021? Let's find out.
Taxation Law in Bangladesh
Before we dive into the details of the taxation law, the answer is no, freelancers in Bangladesh don’t need to provide tax against their income in Bangladesh as of right now. But the situation is soon going to change and it's something that you should prepare for.
The scope of taxation is huge and multidimensional. For relevancy, we will take into consideration the individual income tax that is in place in Bangladesh. Bangladesh has a no-tax threshold of up to 300,000 BDT and the minimum tax rate over the threshold amount is 5% going all the way up to 25%. So does the individual tax law apply to freelancers?
State of Freelancing Earning
The individual taxation law doesn’t apply to freelancers in Bangladesh. Diving into the matter, we found two root causes.
First, most of the freelance work in Bangladesh happens through a middleman. That is, an established freelancer often outsources jobs to the relatively inexperienced freelancers in the country from freelancing platforms. There is often no proper official contract for this type of freelancing work. The jobs are also not listed as the outsourcers aren’t listed as an organization or a company. As a result, it becomes difficult to trace these incomes and bring them under taxation.
The second issue has to do with job regularity. Of the 650,000 freelancers in Bangladesh, some 200,000 of them gets the regular job. Even beyond that, only a handful of established and successful freelancers earn a taxable amount. In addition to that, the lack of a proper framework regarding freelancing has also been one of the reasons behind the proper estimation of freelancers and their earnings in Bangladesh.
Taxation Law for Freelancers
In the income tax ordinance of 1984, it was clearly stated that if anyone who’s a Bangladeshi citizen provides service to a foreign organization or a person and receives monetary compensation, a 10% income tax will be imposed on the said earning. But according to the money law of 2018, anyone providing software or online service to any foreign entity or individual will not have to pay any tax. This applies to all the Information Technology Enabled Services or ITES. Almost all of the freelancers of Bangladesh are ITES providers in different freelancing platforms.
However, that isn’t the end of the problem. Due to the absence of PayPal, most of the freelancers of Bangladesh are forced to take their payment in dollars to their bank account through wire transfer. This is done through the Payoneer platform. However, since the bank doesn’t treat these transactions as service earnings from foreign entities, a 10% source tax is applied to them. As a result, even though the government has tax exemption in effect for the freelancers, the source tax still applies which ultimately drives down the earning of the freelancers.
The situation has been like this for quite some time now but due to exponential growth in the sector, and the growing surge of freelancers in the country, the government has decided to bring the freelancers under taxation. However, the move isn’t drastic and the entire sector will have tax exemption till 2024. That is, the freelancers will not have to provide any tax until 2024.
Future of Freelance Taxation
To make the process of listing freelancing easier as well as get proper certification, the government has decided to introduce smart ID for freelancers. The smart ID feature, which is the first of its kind in Bangladesh will enable the government not only to track the earning but also bring all the freelancers into a single platform. The government plans on various developmental opportunities for the freelancers as well as skill generation to better compete in the international market.
Another scope of the ID is that from this year, the government would require freelancers to get a TIN certification. A TIN certification enables the freelancers to be government enlisted as well as legalize their earning. Even though the freelancers aren’t required to pay tax up until 2024, they will need to submit returns to the income tax division.
A comparative study found that the pay gap between freelancers depending on experience and the service sector is very high. Some freelancers may earn more than a million BDT in a single month whereas some can’t manage 10,000 BDT even. The case of high earners in Bangladesh is very low with the majority of the freelancers earning less than 15,000 BDT per month on average. Since there isn’t any proper framework regarding taxation rates for freelancers, it can be expected that the non-taxable ceiling of income should be higher than the individual income tax ceiling in existence.
Near about 65% of people in Bangladesh are below the age of 25. With a young population like ours, the scope of skill development and outsourcing the skills can be a promising end to reduce economic disparity in the country. Rather than going after traditional jobs, the youths can be encouraged to develop skills and start freelancing. With experience and proper skills, it is possible to earn a huge amount to address personal needs as well as contribute to the economic development of the country.