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Tax on FIs initially cut to get ADB loan, only to be reversed

Fact-finding mission on $80m capital market dev loan says

M SHAMSUR RAHMAN
The government had reduced tax rate for financial companies (FIs) to get a tranche of US$80 million Capital Market Development Programme (CMDP) loan from Asian Development Bank, but the rate was reversed after receiving the amount, alleged an independent audit conducted by a team from ADB headquarters.
A three-member fact-finding mission of ADB during a wrap-up meeting with senior officials of Finance Division of the Ministry of Finance on Sunday last pointed out this saying such discriminatory tax policies are hurting the capital market of Bangladesh.
As per a tranche condition, the government was to introduce legislation to reduce the corporate tax rate for all listed banks, insur-
ance companies, financial institutions and non-resident companies to 35 percent to make it uniform with the rate then applicable to listed industrial companies.
But the rate was only reduced to 40 percent through the Finance Act 2002 and then again raised to 45 percent in financial year 2003-04. Besides, corporate income tax for non-listed companies was also enhanced to 37.5 percent from 35 percent.
"It appears that the tax rate for financial companies was initially slightly reduced to qualify with tranche release condition of CMDP but was later reversed," said the post-implementation programme audit report of the mission.
The team observed that the income tax regime in Bangladesh has inherent anti-corporatisation bias. While the minimum income
tax rate for companies is 30 percent the highest tax rate for individuals is only 25 percent.
"Therefore, many trade, business and industrial enterprises prefer to remain proprietary or partnership concerns. The corporate tax regime is also heavily biased towards dividends declared by companies," the report said.
It said that due to such a situation, reinvestment and plough back of profit by a company is being effectively discouraged.
The team observed that to encourage private companies to turn public and unlisted public limited companies to float shares, a 7.5 percentage points differential is maintained in income tax of the companies.
The current income tax rate for listed companies which declare 10 percent dividend is 30 percent
while it is 37.5 percent for nonlisted companies and listed companies other than banks, insurance, leasing and finance companies that do not declare 10 percent or more dividends in a year or fail to distribute the declared amount within a specified period.
Listed companies other than banks, insurance and lease finance companies declaring 20 percent dividend receive 10 percent tax rebate. On the other hand, financial companies including banks, insurance and lease finance companies are taxed at a different higher slab of 45 percent, the report observed.
It pointed out that these companies are also levied 'excess profit tax' at 15 percent on the portion of profit which in a year exceeds 50 percent of the aggregate sum of capital and reserve of that company.