Flawed taxation on savings certificates  

Asjadul Kibria     | Published: July 05, 2019 21:55:39 | Updated: July 06, 2019 22:06:44

The increased rate of tax at source on yields or profits from all types of savings certificates came into effect on July 1, the first day of the new fiscal year (FY20).  The finance minister has increased the rate from 5.0 per cent to 10.0 per cent in the budget for FY20 in a bid to generate additional revenue from the popular savings tools. It is also a part of the government's move to streamline the investment in savings tools.

In fact, the government has initiated a number of reform measures in this regard. By making Tax Identification Number (TIN) mandatory to purchase savings certificates over Tk 1.0 lakh, it has virtually brought all the investors under income tax net. Mandatory bank account and only electronic transfer of profits and principals to the account of the bearer are also there now. No doubt that electronic transfer system will reduce the hassle of profit encashment procedure. Developing an online database of the purchaser is also under way.  This is the most important step to check whether any individual has breached the threshold of purchasing savings certificates.

No doubt that the reform measures were overdue and should have been started much earlier. Moreover, digital database should be the first step. Due to some unknown reasons, the government didn't move ahead for long and kept the room for misuse of savings certificates. Again, step to reduce yield rates always gets prominence as if it is the only reform to streamline the investment in savings certificates. The International Monetary Fund (IMF) has long been advising a cut on the yield rates and getting these on a par with long-term treasury bonds.  Currently, average yield rates of four types of savings certificates vary between 9.35 per cent (minimum one year) and 11.76 per cent (maximum five years). At the same time, yield rates of different treasury bonds range between 5.0 per cent (minimum two year) and 9.0 per cent (maximum 20 years).

Instead of reducing the yield rates further, the government now doubles the tax rate. Considered final settlement, investors will not be able to adjust it with their annual income tax returns.  But source tax on interest earnings from deposits in banks is withholding in nature. By not allowing such option to savings bonds holder, the government discriminates against them. 

Again, the increased rate of tax becomes effective from the first day of new fiscal year. It should also be deducted from the yields generated on July 01 and afterwards. Many have purchased savings certificates two or three years back. And some of them didn't draw their monthly and quarterly profits so far. They should not be taxed at 10 per cent for the portion of profits becomes due before July 01. Tax should be deducted at the previous rate of 5.0 per cent from such profits. It is because, profit is time-specific and bond holder is legally entitled to receive the specified amount whether s/he encashes it in time or later. Tax rate applicable for that time is also valid, not the rate changed later. By not doing so, the tax authorities are actually going to breach the principle of taxation.



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