The central bank has sought revenue board's direction in resolving complexities over deduction of upfront tax on proceeds from Islamic bond, as the authorities are caught in a quandary in deciding the calculation methodology.
Officials said the debt-management wing of the Bangladesh Bank (BB) found it difficult to deduct the tax as estimation of profit gains on the bond at the time of its issuance is not possible as the investment is based on sharing profit and loss both.
Islamic bond is a Sharia-based investment scheme governed in the light of the religious tenets and financial rules.
The government imposed 5.0 per cent upfront tax on all government bonds in the budget for 2014-15. Later, the tax has been withdrawn from the Treasury bond and Treasury bills in the current budget for 2015-16.
However, the advance income tax or upfront tax on the Islamic bond remained in place as nobody raised demand for waiver, sources said.
In a recent letter, the BB said nature of the Islami bond issuance, investment of its funds and process of payment of profit gains after maturity is completely different from that of other regular bonds.
The BB forms a fund with the money earned through sale of Islami bond and invests the money accordingly.
Profit gains on the fund are initially distributed between bond-holders and bond fund. The BB follows the Profit Sharing Ratio (PSR) of the bond concerned at the time of profit distribution. By March 31 of next calendar year, the BB will finalise the accounting of profit and loss on the bond fund and adjust it with the accounts of bond-holders.
"It is not possible to deduct advance income tax on Islami bond as ascertaining its profit is difficult," the BB said in the letter.
In view of the complexities, the BB sought clear direction from the National Board of Revenue (NBR) on deduction of advance tax from Islami bond.
According to the Islamic Investment Bond Rules 2014, the BB issues the bond and only Sharia-based banks and financial institutions are entitled to buy or hold the instruments.
Both resident and non-resident Bangladeshis and organisations, ready to receive both profit and loss, can invest in the bond through those banks.
The BB issues two Islamic bonds worth minimum Tk 100,000 with maturity period of three and six months.
Investment by the banks and financial institutions in Islamic bonds is considered fulfillment of statutory liquidity requirement (SLR).
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