NBR finds irregularities in tax payment from profits thru\\\' placement shares sales

The National Board of Revenue (NBR) has identified irregularities in payment of tax from the profits through sales of placement shares as a section of companies are showing inflated purchase prices to evade tax at source.

The board issued a letter to all relevant stakeholders including Securities and Exchange Commission (SEC), Stock Exchanges, and brokerage houses Monday clarifying the existing income tax rules following the practice.

The issue came to light after the Dhaka Stock Exchange (DSE) sent a letter referring to a company's issuance of placement share after expiry of lock in period.

Under the existing Section 53M of the income tax ordinance 1984, the SEC and bourses deduct 5.0 per cent tax at source on sales or transfer of listed securities or mutual funds by sponsor share holders, directors or placement share holders. The 5.0 per cent tax at source is deductible on the amount that is earned from differences between transfer value and acquisition cost.

The NBR in its clarification, signed by Income Tax (Policy) First Secretary Md Abdur Rahman Khan FCMA, said under the income tax law, permissible "issue price" of share should be considered as acquisition cost.  

"Permissible issue price will be considered as acquisition cost even though sponsor share holders, directors or placement shareholders pay higher prices for sales of securities and mutual fund," the letter said.

On collection of tax at source, acquisition cost cannot be considered if actual purchase value is shown higher than that of issue prices, including the approved premium.

Talking to the FE Monday, Md Abdur Rahman said taxmen have found placement share holders are claiming higher purchase price of share and showing loss when they sold those with an intention to evade tax.

"As allowable issue price is lower than that of the purchase price it cannot be accepted by the taxmen as purchase price," he said.

He expressed doubt about going the rest of the money in informal sector as 'black money'.

To clarify the matter, he cited an example, if a placement share holder shows purchase price of placement share at Tk 60 and sells it at Tk 55, he can claim Tk 5.0 as loss on sale of each share. But, it cannot be accepted as per income tax law as approved issue price for the share is Tk 30 (including premium of Tk 20). Tax authority will claim 5.0 per cent tax at source on the balance amount of Tk 25 considering it as profit on the issue price.  

Referring to complexities on tax deduction of a company, Global Heavy Chemical Limited, DSE Chief Executive Officer (CEO) Dr Swapan Kumar Bala wrote that lock in period for placement shares of the company has already expired.

"The placement shareholders are selling their shares and when the Exchange is collecting tax on sale of these shares, some placement shareholders have submitted documents claiming that they paid Tk 60.0 for each share to the company and they have submitted the money receipts issued by the Global Heavy Chemical Limited for Tk 60 per share," he wrote in the letter.

He wrote the DSE is collecting tax under section 53M of the income tax ordinance on the basis of declared acquisition cost.

Talking to the FE, Mr Bala said that they will have to comply with the clarification made by the revenue board.

"The NBR letter is one kind of directive for us. So, we have nothing to do but to abide by the letter," Mr Bala said.