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Law proposes cutting tax rebate by a third for investments in securities


 

The highest annual tax rebate on investments in listed securities of the capital market will be reduced by one-third, or 33 per cent, to Tk 1 million if the draft income tax act 2023 is approved by parliament.

In that case, the maximum investment will be Tk 6.67 million a year, 15 per cent of which will be rebated.

Hence, the proposed act will not have any impact on small- and mid-level investors who will not go beyond the investment ceiling.

At present, tax payers are allowed to invest up to 20 per cent of their taxable income or Tk 10 million, whichever is lower, to enjoy tax rebates as much as 15 per cent of the investment in listed securities. In this, the rebate is 3 per cent of the annual income.

The proposed act too says the amount of tax rebate will be 3 per cent of the taxable annual income, or 15 per cent of the total investment not exceeding Tk 1 million.

That means annual tax rebate for an investor having an annual income of Tk 33.3 million or less will remain unchanged; In the existing system, he/she is able to invest up to Tk 10 million, which should be cut down to Tk 6.67 million for the highest tax rebate if the new act takes effect.

For example, if a taxpayer’s annual income is Tk 0.6 million, he/she will be able to inject up to Tk 0.12 million in securities to have Tk 18,000 in tax rebated in the existing system and with the act in effect.

Md. Moniruzzaman, managing director of Prime Bank Securities, said a tax payer must have a monthly income of at least Tk 2.7 million to enjoy the highest tax rebate — Tk 1 million proposed by the draft act.

The number of tax payers earning more than Tk 33.30 million annually is very small, compared to those who earn less.

“Tax benefits of ultra-high net worth individuals will decline, but a majority of the taxpayers will not be affected,” said Mr Moniruzzaman.

In the proposed act, the government has also set an investment cap at Tk 0.5 million in mutual funds and in Treasury bonds.

However, the existing tax exemption on the dividend income from investments in mutual funds and in listed securities is expected to remain unchanged.

At present, tax free limit for dividend income from mutual funds is Tk 25,000 while it is Tk 50,000 for dividend income from listed companies.

As per another statutory regulatory order (SRO) issued in 2015, investors are exempted from capital gain tax.

The proposed law has not specified whether the benefits from the dividend income and exemption of capital gain tax will stay, but it says the SROs that do not contradict the bill will remain in effect.

Moreover, the finance bill keeps tax exemption on income of Alternative Investment Fund (AIF), Real Estate Investment Trust (REIT) and Exchange Traded Fund (ETF).

What experts say about MFs, T-bonds investment ceiling

If the new act is passed in parliament, it will discourage investors from parking funds in mutual funds since they will not be eligible for rebate if investment exceeds Tk 0.5 million.

It will rather encourage direct investments though most of the investors lack financial literacy.

“The government should encourage investments through professional fund managers. The investment cap is not mutual fund friendly,” said Md. Moniruzzaman.

“The [T-bonds] investment limit will also divert institutional investors from government securities, which could hurt the government’s deficit financing,” said Professor Dr. Subarna Barua, of the international business department at the University of Dhaka.

The same thing will happen to mutual funds whereas a majority of the clients of such funds are still big institutional investors in the country, he said.

Therefore, asset management companies will find it difficult to attract institutional investors to upcoming mutual funds, particularly open-end mutual funds, Mr Barua said.

The total number of mutual funds in Bangladesh is 119. Of them, 83 are open-ended and the rest closed-ended.

Mr Barua is not sure if the investment ceiling set for mutual funds and T-bonds will divert funds of institutional investors to stocks.

“As the lending rate cap is set to go next month, the rates of fixed deposit receipts or even the savings certificates are likely to go up to the previous level at above 10 per cent,” he said. If these rates cross 10 per cent, institutional investors would go for risk-free earnings, instead of highly unpredictable stocks.

Md. Moniruzzaman said the mutual fund industry could be benefited if the investment cap were not imposed.

 

Source: The Financial Express

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