A couple of much-debated fiscal measures taxing private provident fund and foreign-debt payments may soon be recast, officials said, as the former is dubbed "discriminatory" and the latter burdensome on debt servicing.
Considering demands from both individual and corporate taxpayers, the National Board of Revenue (NBR) recently made the decision to backtrack on the two measures.
A decision waiving the source tax on foreign loans is expected soon. However, the exemption will be valid only until January 31, 2024, and will be subject to certain conditions.
On the other hand, the revenue board is also actively considering reducing taxes on provident fund, according to official sources, as the heavy taxation of annuity of retired private-sector employees has drawn widespread criticism.
In the current fiscal year, the revenue board imposed 20-percent tax on the interest component of foreign-loan payments by offshore banking units and on buyer credit from corresponding banks and financial institutions.
This fiscal measure has increased the cost of loan repayment by 25 per cent.
Officials said the Bangladesh Bank's offshore banking unit and the Association of Bankers, Bangladesh (ABB) have raised concerns over the high source tax on Usance Payable at Sight (UPAS) loans as there is no tax-credit facility for these loans.
UPAS is an import financing scheme that provides financing to importers for goods, services and other trade-related transactions.
The central bank has said interest rates on foreign loans have reached record highs and the high tax would discourage foreign-loan seekers amid volatile currency-exchange rates.
"Eventually, this would put pressure on the liquidity in local currency as well as exchange rates," Md Sarwar Hossain, director of the Bangladesh Bank, wrote in a letter to the revenue board on August 8, 2023.
Officials said the NBR will issue soon Statutory Regulatory Orders (SROs) amending the fiscal measures incorporated into the new Income Tax Act 2023.
They said the revenue board has sent a summary to the finance minister for his approval on tax waivers on foreign loans.
Many banks have licences to operate offshore-banking units as foreign financing has become popular with businesses.
Association of Bankers Chairman Selim RF Hossain, in a letter to the revenue board, the central bank, finance ministry and the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), said the source tax on foreign financing would aggravate the existing foreign-exchange crisis and escalate the cost of doing business, affecting the macroeconomy.
On provident fund, business chambers and tax experts have found the high tax on private-sector employees to be burdensome and discriminatory. Government officials are exempt from paying taxes on their provident funds.
Until June 30, 2023, the tax rate on provident funds for private employees was 10 per cent, but it was increased to 27.5 per cent in the new fiscal measures.
A senior tax official says the NBR is actively examining the actual tax incidence on provident fund to rationalise it.
Naser Ezaz Bijoy, chief executive officer of Standard Chartered Bank and president of the Foreign Investors Chamber of Commerce and Industry (FICCI), thinks both issues are important to investors.
"We, from the Board of Directors of FICCI, recently had engaging discussions with the respected chairman and member, policy, of the NBR, wherein we explained the rationale for waiver of these two provisions along with a few other points. Subsequently, we have also summarised the discussions in a letter to the NBR," he told the FE writer.
"Imposing withholding tax on interest on foreign loans increases the cost of foreign credits, which discourages access to those and further increases the deficit in the already-challenged financial-account balances for the country," said Mr Bijoy.
He notes that tax on incomes from provident fund will adversely impact the savings meant to be used by people at the end of their careers when their income prospects are lower.
"It also has a retrospective aspect, which is rightly not applicable to government officials or the new universal pension scheme. We have requested the NBR to withdraw this new tax to bring about appropriate uniformity in tax applicability," he said.
FICCI believes that the revenue board will consider "the justifications and provide appropriate guidance".
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