MCCI for lifting of increased income tax
Wednesday, 22 August 2007
FE Report
Imposition of increased income tax on interests/profits of savings certificates under the recent budget will discourage investments, particularly from small investors in savings certificates, the Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI) observed in an editorial comment in its latest tax monthly, the Tax News.
The Chamber pointed out that interest on savings certificates was subject to deduction of tax at the rate of 5.0% under section 52D "which has been increased to 10% and made applicable on the savings certificate purchased on or after the January 01, 2004 by newly amended provision of section 52D by the Finance Ordinance, 2007."
"Increase in tax deduction rate on savings certificates purchased on or after January 01, 2004 is unethical and violation of contractual obligation. Investors have made investments in fixed term savings certificates on the basis of certain terms and conditions which should not have been changed giving retrospective effect. The increased rate of tax deduction should have been applied on savings instruments purchased on or after July 01, 2007."
The MCCI stated that the new rate of tax deduction would be effective on the interest/profit thereof accruable only on or after July 01, 2007. "This increased rate of tax deduction will hard hit the small investors in savings certificates. Ours is a society dominated by people with meagre per capita income having low propensity to save. To add to low propensity to save, the price spiral of almost all essentials has put a setback to the people's capacity to save. To tide over these deterrent factors for savings, the government has been endeavouring hard to motivate people for savings for which a Directorate of Savings under the Ministry of Finance has been established to create awareness and augment savings through observance of long cultured "savings week" every year with wide use of both print & electronic media. As against this, such indiscriminate increase in tax deduction rates on the interest/profit on savings instruments and backdating its applicability to instruments purchased in earlier years will work as disincentive to investors in purchasing savings instruments.", it pointed out
According to the MCCI, the imposition of increased rate of 10% tax deduction has come at a time when reduced rate of interest/profit is gradually made applicable on savings instruments. "Previously such income was tax free even though high rate of interest/profit was paid, but now the position is reverse -- very low rate of interest/profit is paid on the savings instruments and yet the burden of higher rate of tax deduction falls on the small investors. The low income earners, middle class families, fixed income groups and the pension holders find something to fall back upon whatever they derive as income from interest/profits of savings instruments. Besides, the savings of so many people when put into a pool of resources make a good fund for the government to channelise the same through productive investment."
"The imposition of tax deduction and doubling of the rate of deduction at 10% vide the Finance Ordinance 2007," according to the chamber, "has put a setback to such an endeavour which is likely to cause scarcity of resources both for the government and the small investors out of savings certificates."
"This is not commensurate with a prudent policy of savings and investment for a developing country like ours where per capita income of the people is still below optimum level lagging behind that of many of our neighbouring countries", it added.
The MCCI mentioned that there "is another important feature which has to be reckoned with, in respect of savings certificate scheme. This is linked with social security aspect. The middle class and low income groups are not usually prone to take unforeseen risk in investing their limited resources. On the other hand, they need provision against rainy days. These two factors can be reconciled with investment in savings certificates. Developed countries have comprehensive social security schemes and hence savings and investment for them are not that important. But in developing countries like ours people have to provide for their own security. The savings certificates scheme in our country acts as a substitute for social security scheme on which the investors can fall back upon during any difficulties requiring readily available fund out of savings certificate."
It observed: "The less well-to-do people of our society can invest their savings in the savings certificate as a provision of security during any unforeseen calamities, apart from meeting their day-to-day necessities. A scheme with such noble ideas is now threatened because of a significant slice of their earnings out of savings certificates being taken away in taxes due to an increased rate of tax deduction under section 52D. This is bound to dampen the spirit of small investors in investing their resources in savings certificates as a comfortable and long cherished culture of income generation. The increased rate of tax deduction will, therefore, cause damage to the foundation of such social security scheme and induce lower and middle income groups to invest in risky ventures. As a result, incentive for investment in savings certificate is likely to come down gradually due to increased rate of tax deduction under section 52D, coupled with reduced rate of out-turn than in the past. The situation thus calls for immediate halt to increased tax deduction on the earnings of savings certificates."
The Chamber suggested that increased rate of tax deduction under section 52D should "be withdrawn or its original rate of reduced tax deduction be restored at the earliest and the new rate of tax should apply on savings certificates purchased on or after July 01, 2007."
Imposition of increased income tax on interests/profits of savings certificates under the recent budget will discourage investments, particularly from small investors in savings certificates, the Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI) observed in an editorial comment in its latest tax monthly, the Tax News.
The Chamber pointed out that interest on savings certificates was subject to deduction of tax at the rate of 5.0% under section 52D "which has been increased to 10% and made applicable on the savings certificate purchased on or after the January 01, 2004 by newly amended provision of section 52D by the Finance Ordinance, 2007."
"Increase in tax deduction rate on savings certificates purchased on or after January 01, 2004 is unethical and violation of contractual obligation. Investors have made investments in fixed term savings certificates on the basis of certain terms and conditions which should not have been changed giving retrospective effect. The increased rate of tax deduction should have been applied on savings instruments purchased on or after July 01, 2007."
The MCCI stated that the new rate of tax deduction would be effective on the interest/profit thereof accruable only on or after July 01, 2007. "This increased rate of tax deduction will hard hit the small investors in savings certificates. Ours is a society dominated by people with meagre per capita income having low propensity to save. To add to low propensity to save, the price spiral of almost all essentials has put a setback to the people's capacity to save. To tide over these deterrent factors for savings, the government has been endeavouring hard to motivate people for savings for which a Directorate of Savings under the Ministry of Finance has been established to create awareness and augment savings through observance of long cultured "savings week" every year with wide use of both print & electronic media. As against this, such indiscriminate increase in tax deduction rates on the interest/profit on savings instruments and backdating its applicability to instruments purchased in earlier years will work as disincentive to investors in purchasing savings instruments.", it pointed out
According to the MCCI, the imposition of increased rate of 10% tax deduction has come at a time when reduced rate of interest/profit is gradually made applicable on savings instruments. "Previously such income was tax free even though high rate of interest/profit was paid, but now the position is reverse -- very low rate of interest/profit is paid on the savings instruments and yet the burden of higher rate of tax deduction falls on the small investors. The low income earners, middle class families, fixed income groups and the pension holders find something to fall back upon whatever they derive as income from interest/profits of savings instruments. Besides, the savings of so many people when put into a pool of resources make a good fund for the government to channelise the same through productive investment."
"The imposition of tax deduction and doubling of the rate of deduction at 10% vide the Finance Ordinance 2007," according to the chamber, "has put a setback to such an endeavour which is likely to cause scarcity of resources both for the government and the small investors out of savings certificates."
"This is not commensurate with a prudent policy of savings and investment for a developing country like ours where per capita income of the people is still below optimum level lagging behind that of many of our neighbouring countries", it added.
The MCCI mentioned that there "is another important feature which has to be reckoned with, in respect of savings certificate scheme. This is linked with social security aspect. The middle class and low income groups are not usually prone to take unforeseen risk in investing their limited resources. On the other hand, they need provision against rainy days. These two factors can be reconciled with investment in savings certificates. Developed countries have comprehensive social security schemes and hence savings and investment for them are not that important. But in developing countries like ours people have to provide for their own security. The savings certificates scheme in our country acts as a substitute for social security scheme on which the investors can fall back upon during any difficulties requiring readily available fund out of savings certificate."
It observed: "The less well-to-do people of our society can invest their savings in the savings certificate as a provision of security during any unforeseen calamities, apart from meeting their day-to-day necessities. A scheme with such noble ideas is now threatened because of a significant slice of their earnings out of savings certificates being taken away in taxes due to an increased rate of tax deduction under section 52D. This is bound to dampen the spirit of small investors in investing their resources in savings certificates as a comfortable and long cherished culture of income generation. The increased rate of tax deduction will, therefore, cause damage to the foundation of such social security scheme and induce lower and middle income groups to invest in risky ventures. As a result, incentive for investment in savings certificate is likely to come down gradually due to increased rate of tax deduction under section 52D, coupled with reduced rate of out-turn than in the past. The situation thus calls for immediate halt to increased tax deduction on the earnings of savings certificates."
The Chamber suggested that increased rate of tax deduction under section 52D should "be withdrawn or its original rate of reduced tax deduction be restored at the earliest and the new rate of tax should apply on savings certificates purchased on or after July 01, 2007."