The revenue board's existing electronic system has yet to incorporate any option to register private-sector provident funds as taxpayers even though 27.5-percent tax levied on them since June 22, 2023.
Although private provident funds are considered separate taxpayers, they are unable to obtain an electronic Taxpayers Identification Number (e-TIN) or tax registration due to the absence of a mechanism in the current system linked to the National Identification Number (NID) servers.
As the deadline for submitting tax returns by individuals including private funds is set to expire tomorrow (November 30, 2023), many private companies are in limbo.
Without a TIN against the funds -- the first step towards becoming a taxpayer, the firms are confused about submitting returns for the retirement savings schemes voluntarily established by the private sector employer and employee.
While talking to The Financial Express, accounts department officials of several private companies and firms said that they have prepared the audited financial statements in accordance with the new Income Tax Act-2023 but are yet to submit tax returns.
Due to the absence of a registration mechanism, field-level tax officials said that private sector provident funds have been filing tax returns under the category of 'Trust' or 'Association of Persons'.
Masud Rana, deputy managing director and chief financial officer (CFO) at BRAC Bank, said that the tax measures on provident funds have created big challenges in the private sector, due mainly to grey areas of the new tax law and confusion stemming from it.
"Such regulatory changes in fiscal measures require rigorous consultations with stakeholders prior to implementation," he added.
BRAC Bank had to modify its financial statements for the provident fund as it was previously based on the calendar year, he added.
"We are anticipating a favourable modification in PF [provident fund] taxes, as previously mentioned," he said, adding that the high tax on the retirement schemes would reduce the actual earnings of private sector employees.
Industry insiders said that the government had made tax return submissions for provident funds in the private sector mandatory without adequate preparation. Many corporate taxpayers have adopted a wait-and-see attitude following the government's move to reduce tax rates.
Pointing at the lack of coordination within the National Board of Revenue, an accounting professional said that the fiscal measure had been enforced by the income tax wing while the IT wing of the same entity had yet to integrate its support system.
He said that the private sector provident fund had been classified as an individual taxpayer under the new tax law, while its tax rate and compliance requirements were akin to those of corporate taxpayers.
The measure is also discriminatory as government employees are exempt from paying taxes on provident funds, he added.
Earlier, the provident fund tax was 10 per cent and was payable at source along with the interest rates of securities.
Debabrata Roy Chowdhury, director (Legal, RSA, Corporate Affairs) and company secretary at Nestlé Bangladesh Ltd, welcomed any initiative from the government to review the imposition of tax under the new Income Tax Act 2023 on trust funds, including recognised provident fund and approved funded gratuity, managed by private organisations.
"We should maintain tax exemption on trust funds managed by private organisations to support retired employees as there is no such social security for these individuals due to limited public resources," he said.
Some confusion has arisen regarding the 5.0 to 10 per cent tax already applicable to such funds, which is incorrect. This was a withholding tax, introduced for the first time in 2016, which chamber leaders have been requesting to be withdrawn as it was fully exempted under the Income Tax Ordinance 1984 (until June 21, 2023, before it was repealed on June 22, 2023, by the new ITA 23), he added.
He demanded the withdrawal of withholding tax and the requirement to file income tax returns on such funds to ensure parity between private and public employees.
"This would align with the government's approach to introducing a Universal Pension Scheme for employees working under private organisations, for which the government has already declared full tax exemption," he added.
"Any attempt to impose even a reduced tax on such funds managed by private organisations will not only harm the poor retirees working for private organisations, but it will also remain as a discrimination, which should be avoided," he added.
A senior tax official said that the tax on provident funds was introduced to ensure transparency in corporate taxpayers' financial accounts as many claim workers' benefits without proper documentation.
He said the tax authority planned to bring public employees' provident funds under the tax net in the near future.
He said that a Statutory Regulatory Order (SRO) reducing the tax on private provident funds from 27.5 per cent to 15 per cent was currently awaiting the law ministry's vetting.
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