Bangladesh
4 years ago

Tax could be slapped on gratuity fund from FY'20

NBR may target private staffers' nest egg

Critics call measure 'unfair' and 'irrational'

Illustrative photo
Illustrative photo

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Private sector employees, who have received gratuity as retirement benefit in the outgoing fiscal year, may have to pay taxes on it.

The National Board of Revenue or NBR has imposed taxes on retirees according to the proposed Finance Bill-2020 if the gratuity fund of a company is not approved by the board.

This highlights the tax collector's desperate attempt to plug revenue shortfall in FY 2020.

With the changes, retired private sector employees, who have already received gratuity from July 1, 2019 to June 30, 2020, would have to pay tax on the amount in case their employers do not secure clearance for the fund.

Tax analysts said such measures would force the individual taxpayers to pay taxes at higher rate at a time on their life time savings.

They said almost 80 to 90 per cent of the private companies' gratuity funds have remained unapproved.

Companies who run business with loans or have not sufficient cash in hand to pay their employees retirement benefit at a time rather than setting it aside in a fund to pay up when due.

Talking to the FE, former president of the Institute of Chartered Accountants of Bangladesh or ICAB Mohammad Humayun Kabir said it is a "discriminatory" measure for the private sector employees.

"The gratuity is considered substitute of the pension scheme for private employees," he said.

Despite several assurances, the government could not introduce universal pension scheme for all sectors. Currently, only government employees enjoy the pension benefit.

Mr Kabir said there is no other scheme to support the private sector employees after retirement.

He said such tax measures should be made as a potential way to encourage companies to comply with the laws.

"Retired private employers have to pay tax with their returns on the amount they have received since June 30, 2019," he added.

Before imposing such measures, the tax authority should give the companies wiggle room for getting approval, he said.

Many companies are not even aware of the requirement or reluctant to get the approval of employee's gratuity funds, he added.

"It is unfair to impose tax on the retired private employees. They have to pay taxes at higher slab on their savings for the entire service period," he added.

Under the existing income tax ordinance-1984, income from the gratuity fund was exempted up to Tk 25 million from the payment of taxes.

In the finance bill, the finance minister has made gratuity fund approval a condition for enjoying the exemption irrespective of ceiling.

Employees will suffer for mistake or failure of their employers to get approval for the gratuity fund, said Snehasish Barua, a fellow member of ICAB and partner with Sehasish Mahmud and Co.

He said such measures should be revisited in the final approval of budget as it is "irrational" to tax the end-benefit of an employee.

"It is hard-earned money of a person after his life-long service period," he added.

Pension is uncommon for private companies, but some local and multinational companies pay gratuity as per the labour law, he said.

In Labour Law 2016, there is no provision for forming a fund and get it approved.

When it is an unfunded gratuity scheme, as per the existing provision of income tax ordinance, a company does not get the gratuity expenses as allowable expenses until it is paid, he said.

"So, the employers keep on paying taxes and get the tax benefit only when the employee is separated. This means employers are already burdensome for unapproved gratuity fund," he said.

Many companies currently do not pay gratuity to employees and this provision in the Income Tax Ordinance may dissuade them from offering such benefits to staffers, he said.

A senior NBR official said they are looking into the issue and it might be clarified in the income tax circular or Finance Act-2020.

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