Deducting tax at source from unit-holders' absolute income from liquidated closed-end mutual funds (MFs) got caught in an impasse as the revenue authorities took the face value of the units as cost price in taxing, sources said.
The Large Taxpayers Unit (LTU) of the National Board of Revenue (NBR) has also said the unit-holders' accumulated profits that came from the liquidated MFs will also be treated as 'dividend'.
But Bangladesh Securities and Exchange Commission (BSEC) has strongly differed with the revenue board over taking into account the accumulated profit as dividend.
The situation evolves after the liquidation of two closed-end MFs -- AIMS First Guaranteed MF and the First Scheme of Grameen MF One.
The LTU instructed the trustee of the Bangladesh General Insurance Company, the trustee of AIMS First Guaranteed MF, to deduct tax at source from the unit- holders' accumulated profits considering the accumulated profit as dividend in accordance with the section 54 and 56 of the Income Tax Ordinance 1984.
On the other hand, as per the BSEC instructions the Trustee has set aside a portion of the funds while disbursing unit-holders' payments.
"The amount deducted for tax payment will not be handed over unless any satisfactory solution comes from the tax authority," said a senior BSEC official.
As per section 54, the companies pay 20 per cent tax on dividend income, whereas 10 per cent tax is imposed on the income of individuals having Taxpayer Identification Number (TIN) and 15 per cent on the income of individuals who have no TIN beyond their tax-free limit of Tk 250,000.
In case of capital gains, investors, other than individuals, have to pay 10 per cent income tax from their profits at the time of submission of tax returns.
According to the BSEC officials, in 2014 the accumulated profit from the liquidation of the BSRS 1st MF was treated as capital gains, although the LTU has instructed the trustee to deduct tax by taking into account the accumulated profits as 'dividend'.
"As per the section 31 of the Income Tax Ordinance 1984, capital gains come through the handover of assets. Unit-holders' incomes are not capital gains as their assets were not handed over during the liquidation of the funds," the LTU argued in the letter.
The securities regulator said in its letter sent to the tax authority and the trustee that the MFs are not companies and as per the Securities and Exchange Commission (Mutual Fund) Rules 2001 such fund is one kind of trust under which public funds are collected by distributing units.
"Company and trust are totally different as per the section 2(20) of the Income Tax Ordinance 1984 and the Trust Act 1882," the BSEC letter said.
The AIMS First Guaranteed Mutual Fund is not distributing its accumulated profits to the unit-holders as dividend. Moreover, the fund is distributing the unit-holders' due amount come through the sales of transferable assets, the BSEC said.
"So, the definition of dividend as mentioned in section 2(26) of the Income Tax Ordinance is not applicable in case of distributing the funds of MFs," the BSEC said.
The Net Asset Value (NAV) of the AIMS First Guaranteed MF was Tk 25.93 during the redemption of the fund. Some unit-holders said they purchased the units of the fund at the market prices which are above the units' face value of Tk 10 each.
"The face value is the cost value for the sponsors only. But the face value cannot be the cost price for the unit-holders, other than the sponsors, as they purchased units at the prices above the face value," said a unit-holder, preferring anonymity.
Asked how the actual cost prices of the MF's units will be determined, the BSEC official said it's very difficult job for the trustee.
"Market price, stock dividend and re-investment units will have to be taken into account in determining the cost price of the units purchased by a unit-holder," the BSEC official.
He said it would be easier if the accumulated profits of the MFs are considered capital gains.
"Then the unit-holders themselves will show the gain in their 'returns' and pay income tax."
Asked, an official of the Central Depository Bangladesh Limited (CDBL) said the depository organisation preserves only the information of shares and units.
A brokerage firm said it's very difficult to determine the cost prices of units purchased by the investors in different times.
The trustee of the AIMS First Guaranteed MF said they were looking for a solution from the authorities concerned.
"Otherwise we have to hand over the funds deducted as tax at source as per instructions of the LTU," said the Trustee.
The stock-market regulator has criticised the LTU letter regarding the deduction of tax at source from the unit-holders' accumulated profits.
"The letter was issued without considering the interest of thousands of small investors. The learned tax commissioner was misguided by unscrupulous persons to create negative environment on the capital market, including the sector of MFs," one of the sources said, mentioning the BSEC letter sent to the trustee.
The securities regulator has asked the trustee to submit a report on disbursement of unit-holders' dues by keeping aside the money deducted as tax.
The BSEC also said in its letter that the LTU letter was not sent in the light of objective information and proper clarification of the law.
"Any unauthorized tax deduction is prohibited as per the section 60 of the Income Tax Ordinance 1984. So, the deduction of tax at source as per the letter of the tax commissioner concerned will be considered 'unauthorized' deduction," the BSEC contended in its letter.
The regulator also asked the trustee to request the tax commissioner to withdraw his letter.
