The central bank has recommended the Ministry of Finance (MoF) not to impose the proposed source tax on the government securities, whose trading is set to start in the stock market within a couple of months.
If the proposed tax measure is executed, trading of the government-approved securities, particularly in the secondary market, may fall drastically. It will hamper development of the bond market in the country, the Bangladesh Bank (BB) said in its recommendations.
The government, in its Finance Bill 2020, has announced imposing a 5.0 per cent source tax on profit of investment in the government securities, covering both treasury bills (T-bills) and bonds, from the upcoming fiscal year (FY), 2020-21.
The central bank has already identified three adverse impacts, including squeezing investors' base along with complexity in calculation of such tax, in its two-page letter that has been sent to the finance secretary for consideration.
The BB said the calculation of tax contribution by the investors may become extremely complicated under the proposed tax framework.
Normally, any trade of a bond is settled by including the accrued interest amount to the principal value. Therefore, if the proposed source tax measure comes into effect, only the final holders of the securities concerned will bear the tax burden.
In contrast, the intermediate holders will not pay any tax on their accrued interest income, it explained.
"This tricky situation may potentially discourage trading of these securities, leading to impeding the development of an efficient bond market in Bangladesh," a senior official of the BB told the FE while explaining the possible complexity.
On the one hand, the government has planned to impose such tax, whereas a tripartite committee is working to include the securities on trading platform of the Dhaka Stock Exchange (DSE), he added.
The committee, consisting of representatives of the BB, the Bangladesh Securities and Exchange Commission (BSEC), and the DSE, has already submitted its recommendations to the authorities concerned.
Meanwhile, the central bank along with Tata Consultancy Services (TCS) is now working to modify the market infrastructure (MI) module, an automated trading platform, to facilitate trading of the government securities in the country's prime bourse.
"Our preparations are almost completed to start trading of the government securities on the DSE floor. But it's still dependent on lingering of the ongoing Covid-19 pandemic," a member of the committee told the FE.
He also said the work for MI module modification is going on with the help of TCS experts.
On the other hand, the Primary Dealers Bangladesh Limited (PDBL), a forum of 21 banks, has also urged the BB governor to take effective measures to withdraw the proposed tax on the government securities.
"Trading of the government securities, particularly long-term bonds, in the secondary market will drop sharply. It will also push up yields on the securities at primary auctions, if the proposed tax measure is implemented," a senior member of the PDBL told the FE.
He also said it will also hit the government's overall interest expense in the upcoming fiscal, as the finance minister has already announced higher bank borrowing.
The government's bank borrowing is set to climb 79 per cent to Tk 849.80 billion in FY 21 from Tk 473.64 billion a year ago, according to the budget document, unveiled on June 11.
Under the arrangement, the government will borrow Tk 536.54 billion by issuing long-term bonds, while the remaining Tk 313.26 billion will come through T-bills.
The government has increased its bank borrowing target by more than 74 per cent to Tk 824.21 billion in FY 20 from the original target of Tk 473.64 billion.
Currently, three T-bills are being transacted through auctions to adjust the government's borrowings from the banking system. The T-bills have 91-day, 182-day and 364-day maturity periods.
Furthermore, five government bonds with tenures of 02, 05, 10, 15 and 20 years respectively are traded in the money market.
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