Tax measures anti-savings

Interest income of savers is not taxed everywhere in the world. Vietnam, a Southeast Asian country, does not slap taxes on interest income from bank deposits, life insurance and government bonds.

Neighbouring India exempts tax interest income of Rs 10,000 (Tk 12,280) from savings. In the UK, up to £5,000 (Tk 523,713) of interest earned from savings is tax-free.

Here, in Bangladesh, any sum of interest income from savings, fixed or term deposits in banks or cooperatives, on deposits of savings in post office and on national savings certificates is subject to at least 10 percent tax.

It is deducted at source, meaning banks deduct the tax on behalf of the state during payment of the interest to savers. If the savers fail to furnish Taxpayers Identification Number (TIN), they face deduction of 15 percent tax.

If they can furnish the TIN, they face 10 percent TDS (tax deducted at source) on interest earning from deposits—a measure introduced by the government in the 90s to increase tax collection and bring more people under the tax net.

And, tax on interest income from deposits is charged from every account irrespective of whether the account holder has taxable income or not, which raises some questions as it is difficult for small and marginal savers to file income tax returns and claim refund from tax offices.

Getting refund is also not easy.

Taxing on savers and account holders in banks does not end here.

The National Board of Revenue (NBR) collects excise duty in case balance in any bank account exceeds Tk 100,000 at any time in a year. Beginning from Tk 150 per account for balance over one lakh taka at any time, the rate of excise duty goes up to Tk 25,000 per account if balance, whether credit or debit, exceeds Tk 5 crore at any time during a year.

Finally, an account holder faces 15 percent VAT on account maintenance fee. The person also has to pay VAT on charge of any other services from bank.

The taxes are levied at a time when the government aims to increase national savings to support higher investment to accelerate economic growth.

The government’s Seventh Five Year Plan FY2016-FY2020 set the target of increasing national savings to 32.1 percent of GDP by the end of fiscal 2020. The ratio of gross national savings to GDP was 28.41 percent in fiscal 2018-19, according to data of the Ministry of Planning.

Analysts said one of the reasons behind imposition of tax on interest earnings from savings by the government is to increase tax collection to finance public expenditure of the state, and to expand the tax net.

Bitheeka Nipty, who works at a private firm, said levying tax on interest earnings in not right.

“I save from my small income by cutting expenditure in other areas. It hurts if the government taxes on those savings. I have to pay while many well-off people do not pay taxes properly,” said Nipty, who maintains a deposit pension scheme at Shahjalal Islami Bank. She deposits Tk 3,200-plus monthly for the scheme.

Bangladesh Bank data showed that there are 9.52 crore accounts having deposits worth Tk 10,81,541 crore. And, Nipty’s accounts is one of them. She represents holders of 98 percent accounts, having up to Tk 10 lakh in deposits.

Snehasish Barua, partner of chartered accountancy firm Snehasish Mahmud and Co, said individuals’ incomes would increase directly, if taxes on interest income from savings and other deposits are reduced.

“An individual would be interested to bring the funds into the banking channel. The banking sector will be benefited by the influx of funds,” he said.

Syed Mahbubur Rahman, chairman of Association of Bankers, Bangladesh (ABB), said marginal and small savers are deprived and they are being charged as they do not have taxable income and TIN. 

“It may not be right to charge somebody extra because they don’t have a TIN. The government should consider whether it can encourage people to obtain TIN through other ways,” he said.

He said the government should analyse how much money it will lose if it exempts a certain amount of interest earnings of deposit holders.

If it finds that the impact of tax waiver for a certain amount of interest earnings is low, the government may consider offsetting the revenue loss in other areas, he said.

“In the process, inclusive banking will expand. Many people will feel encouraged to deposit in banks. As a result, the formal economy will get a boost,” he said, suggesting waiving tax for a certain amount of interest earnings from deposits, especially for those who do not have taxable income.

“As a result, these sections of people will be more inclined towards savings,” said Rahman. “You might lose some money in the short-term. But in the long-term, you can bring more people into the banking industry, and more of the informal economy will become a part of the formal economy.”

Of the total accounts, 8.56 crore accounts have up to Tk 1 lakh as deposits, accounting for 5.31 percent of total deposits, according to Bangladesh Bank data.

Khondaker Golam Moazzem, research director of Centre for Policy Dialogue (CPD), said alternative investment opportunities for savers are limited given the sluggish trend of the stock market. So, scope for them to switch is limited, he said.

The government can categorise depositors based on the amount of their deposits, and see the contribution of each group in total tax collection from interest incomes from savings and other deposits.

“From a social justice and equity point of view, the government can waive tax on interest earnings of small savers. It can also consider imposing higher tax on interest income on large deposits,” he said.

The NBR is yet to release the latest data on collection of withholding tax from interest income of depositors’ savings, fixed and other deposits and national savings certificates. The tax collector got Tk 5,947 crore tax from interest income of savers in the fiscal 2016-17 up 5 percent from Tk 5,677 crore the previous year, according to NBR’s annual reports.

Moazzem said the government can easily identify small and big savers through bank accounts and collect tax on progressive rates.

“The excise duty, which is levied in balances in bank accounts, can also be reduced to improve the liquidity situation in the banking sector,” he said.

Zahid Hussain, former lead economist at the World Bank Dhaka office, said income, be that corporate, personal income or other, is generally taxed worldwide. 

“The point is whether people are benefiting from the expenditures in terms of improvement in public service delivery. Public policies can incentivise saving by taxing consumption through a well-designed value added tax,” he said.

“However, he said, tax deduction at source of interest income on accounts of students, and women who are not part of the labour market should be exempted.”

On excise duty on bank account, Hussain said excise taxes are sometimes used to implement the “ability to pay” approach to taxation. By taxing items consumed disproportionately by the affluent, excise taxes can help make the taxation system progressive, he said.

Other uses of excises include discouraging consumption of sin products such as alcohol or tobacco, mitigate negative externalities such as pollution and congestion, and apply the benefit principle such as taxing gasoline to link taxes with benefits received from roads, he added.

“Excise tax on bank accounts in Bangladesh has some progressivity but only weakly so. But it is subversive to the financial inclusion agenda and a disincentive for channelising small savings into large investments through the formal banking system. The costs far outweigh the benefits,” said Hussain.

On taxing savings, NBR Chairman Md Mosharraf Hossain Bhuiyan said tax on interest earnings has been there for a long time and there is no plan at this moment to waive tax on interest income from deposits of small and marginal savers.

He said tax on interest on savings certificates has been increased to 10 percent from 5 percent in the current fiscal year to discourage purchase and keep the government’s borrowing from this high-interest-bearing instrument within target.