Income tax on waived interest raises questions among corporates

"Where any interest or part thereof is waived by a scheduled bank or a financial institution in favour of a company registered with the RJSC, such waived amount shall be deemed as income of the company and shall be taxable in an assessment year in which such waiver is made," reads Section 67(8) of the Income Tax Act-2023 (Bangladesh).
Interest is being waived by commercial banks in favour of non-performing corporate borrowers who have faced colossal business losses over the past one decade. These losses stem from factors like Covid-19 pandemic, Russia-Ukraine war, steep fall in the value of taka against dollar and inconsistent utility support from the government. The waiver is considered a measure to provide financial relief and support business recovery due to prolonged economic challenges.
As lenders, banks extend loans to borrowers by mobilising funds from depositors. The cost of such deposits typically ranges from 3 per cent to 12 per cent per annum, depending on the nature and tenure of the deposit. On average, the overall cost of funds stands between 7 per cent and 9 per cent per annum. Additionally, with rising reliance on technology-driven operations, banks incur an operational cost averaging between 1.5 per cent and 3 per cent per annum.

Non-performing loans (NPLs) put a significant cost burden on banks and financial institutions. Even after considering the value of underlying collateral, impairment of the asset is often required, resulting in a direct charge against a bank's regular income. This negatively impacts a bank's profitability, leading to a decline in earnings per share. Consequently, shareholders feel the pinch as they are directly affected through reduced returns. By the same token, the bank's ability to declare or distribute dividends may also be impacted.
The recovery of non-performing loans under the Special Asset Management Division (SAMD) functions as an intensive care unit for distressed assets, focusing on the recovery of overdue loans along with accrued interest up to the current date. However, so many borrowers are currently unable to settle their dues due to ongoing liquidity constraints, making recovery efforts challenging and requiring tailored restructuring or legal action strategies.
A waiver of interest may now serve as a key component in the recovery strategy of SAMD. This approach offers an amicable solution for both a borrower and a bank, potentially facilitating faster resolution of a non-performing loan. It also presents an opportunity to avoid prolonged legal proceedings, thereby saving significant legal costs and time, while improving the chances of partial recovery and maintaining business relationships.
Commercial banks, in strict compliance with regulatory guidelines issued by the Bangladesh Bank, are allowing interest waivers upon obtaining approval from their respective boards of directors. This process ensures that such waivers are granted transparently, within the legal framework and also in alignment with risk management and recovery policies.
The waiver of interest granted by banks is either set off against financial expenses or presented separately as 'waiver of interest' in the face of an audited income statement of a borrower (company). However, during income tax assessment, the tax authorities treat the waived interest as "other income" under Section 67(8) of the Income Tax Act-2023, making it taxable in the year of waiver, regardless of a borrower's financial hardship or accumulated losses.
As a result, regular corporate tax rate is imposed on the waived interest amount to determine the tax liability, which varies between 22.5 per cent and 27.5 per cent, depending on the nature and category of the company as per the applicable provisions of the Income Tax Act-2023.
This is raising genuine concern among corporate taxpayers whether taxing waived interest, especially in cases of financial distress, is justified. There is a growing expectation that the tax authorities may revisit this position, considering economic realities and intent behind such waivers, towards adopting a more rational or relief-oriented approach to make the treatment fair and justified.

Obaidur Rahman FCA is a managing partner of C-Net (Consultant Network). obaidur126@yahoo.com