Resolving Capital Gains Tax Confusion

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Each state remains keen to attract foreign direct investment (FDI). Tax policy is one of the many key determinants that encourage FDI. Therefore, developing countries have adopted a more positive attitude towards taxation of profits and facilitate easy and profitable exit to gain the confidence of foreign investors.

In contrast, Bangladesh’s tax regime is the strictest among South Asian countries. Income tax in other countries is around 25 percent while it is around 35 to 45 percent in Bangladesh. Other taxes such as value added tax and capital gains tax, which are around 15%, are also considered higher. VAT credit and law enforcement are complicated. Taxpayers often complain about the complexity of laws and rules. The Capital Gains Tax (CGT) was also introduced from 2010. Confusion remains among stakeholders including National Board of Revenue (NBR), Bangladesh Bank, Bangladesh Security Exchange Commission, local and foreign portfolio investors on the capital gains tax rate.

The CGT was introduced during the 2009-10 financial year on the primary issue of shares to promoters and subsequently on the sale of primary shares. The 2010 finance law imposed the CGT on the basis of article 37 (7) of the 1984 ordinance on income tax by inserting article 53L for the collection of a tax of 3 per cent on the issue of primary shares at an increased price or capital increases by constitution of books or public offer or offer of rights or placement or preferred share or in any other way at a value greater than the nominal value. However, the CGT on the issuance of primary shares was omitted in the finance law, 2013. The same finance law, 2010 inserted another clause, article 53M giving responsibility to the Commission de la Bourse or of the Stock Exchange during the transfer of shares for the collection of the CGT. 5% on the difference between the contribution value and the acquisition cost of UCI securities or units.

The rate of advance collection of the CGT fixed at 10 percent for the limited shareholders in the case of companies or enterprises is taxed regardless of the residence status of the contributors. The rate will be 5% for the sponsoring shareholders of the Bank, financial institute, insurance, leasing companies, portfolio management companies.

There is an exemption for the non-resident alien on the condition that this assessment is entitled to a similar exemption in the country in which he resides, as inserted in the 6th annex, part A, manual 1 (in accordance with the SRO law n ° 59 / income tax / 2012 of February 28, 2012).

Capital gains on the sale of government securities are not taxable. The sums received for goodwill and breaches of contracts are not capital gains but taxed as “other income”.

Subsequently, by another OAR n ° 196-Law / income tax / 2015 of June 30, 2015 exempted the CGT on all the categories of base except for the income specified in article 53M. Footnote 2 of Part -1 of the Income Tax Handbook specifies that section 53M will apply to income derived from the transfer of securities or mutual funds by the sponsoring shareholders of a listed company.

The laws and rules give the idea that the CGT is either 5 or 10 percent for different categories of assesses. The CGT rate creates some confusion in the minds of the various stakeholders. The rule and policies have been changed and SROs are so confused that global research organizations have also become perplexed about the rate of CGT.

KPMG, the largest auditing and consulting firm in a guidance document dated January 2020, mentioned that the CGT for non-resident shareholder is 10% in Bangladesh for (capital gains on sale shares of listed companies). The tax rate on capital gains from the sale of fixed assets (other than securities of listed companies) is 15%. Another consultancy and consultancy firm, Seloitte, in a document dated September 24, 2010, mentioned that the Bangladesh Finance Law (No. 33) 2010 introduced a new capital gains tax regime which applies to gains from the sale or transfer of non-government securities, including stocks and shares of public companies listed on the Bangladesh stock exchanges. The regime, which imposes a general tax of 10% or a reduced rate of 5%, came into force on July 1, 2010. Previously, gains made on the sale or transfer of these listed securities were not taxable.

Bangladesh Bank (BB) and NBR interpret CGT for non-resident investment holders and attempt to set the tax rate at 15% in accordance with section 56 of the 1984 Ordinance on ‘computer science. BB claimed 15% CGT from some banks on the basis of section 56-I of the income tax law of certain foreign investors. According to the 1984 Income Tax Ordinance, this clause required the regulatory authority to deduct tax from non-residence contributions. Instead of asking the authorities responsible for withholding tax – the BSEC or the stock exchanges, the central bank and the revenue department chase after the commercial bank to collect the “evaded” tax from their account holders.

Recently, the Bangladesh Securities and Exchange Commission (BSEC) called on the government to reduce the CGT of capital market investments by foreign and institutional investors. The committee urged the government to waive the 10 percent capital gains tax for institutional investors or at least reduce it to 5 percent in the next national budget to encourage institutional investment in the market. of the country’s capital.

There is no tax on CGT gains from secondary market trading for any individual. Despite the exemption, some investors have complained that the Dhaka Stock Exchange (DSE) and Chattogram Stock Exchange (CSE) have been charging CGT at 5% for a few years. The BSEC also confirmed that local investors do not have to pay any tax on capital gains on listed securities.

Law, rule and policy should be free from confusion and ambiguity, and the language of law should be easy to interpret. BNR can clarify some of the issues related to the CGT rate on the primary share subscribed by local and non-resident investors and subsequent sales. Policy transparency encourages FDI in Bangladesh. The CGT rate on secondary market transactions should also be clarified.

The writer is a legal economist.


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