Bangladesh National Budget 2019-20 is build on the slogan on that “Bangladesh On A Pathway To Prosperity; Time is Ours, Time for Bangladesh”. 

The Government of the People’s Republic of Bangladesh has passed a budget of about BDT 5.23 trillion- ie Taka 523,190 core  (approx. USD 62 billion) for fiscal year 2019-20.  In a decade 2005-06 to 2019-20, the budget grew from a mere 64,000 crore Taka to 523,190 crore Taka.

 

The size of Bangladesh economy is growing day by day.  By next two decades, Bangladesh will become one of the top thirty economies of the world. Integration with global economy is also increasing. Overall development indicators are positive.

Summary of the budget is that TAX RATES are almost UNCHANGED.  VAT and Supplementary Duty Act 2012 is effective from 01 July 2019 with an aim for widespread application of 04 (four) VAT rates: 5%, 7.5%, 10% and 15%.  The finance bill has put importance on WIDENED TAX NET and AT SOURCE TAX.

As of Income Tax, the changes are proposed and approved with the expectation to facilitate growth and ease of doing business.  Therefore, Personal Tax rates are same with no changes in income threshold.  Corporate tax rates remain unchanged too.  However, by introducing 02 (two) new sections 16F and 16G (as a matter of fact section 16 under CHAPTER IV is reserved for CHARGE OF INCOME TAX) in the Income Tax Ordinance 1984 (ITO 1984), it is approved that 10% (ten per cent) tax is to be charged on full amount of dividend declared if Stock Dividend is Higher than Cash Dividend to ensure that the ratio of stock dividend and cash dividend will be same, as said by the Prime Minster while Her Excellency moved the finance bill at the parliament according to the wish of the Honorable Finance Minister. On the Retained Earnings, the premier said listed companies can transfer up to 70% (seventy per cent) of their net profits as reserve or surplus.  From the remaining 30% (thirty per cent) the companies will have to pay a 10% (ten per cent) dividend, failure of which shall cause the company liable to a 10% tax each year.

Therefore, Dividend declared by a listed company in Bangladesh shall be minimum of 5% Cash dividend and 5% Stock Dividend with a preference to 10% Cash Dividend.  Otherwise there will be a 10% additional tax on the total amount of dividend declared if cash dividend is less than minimum 5%.  By inserting this marvelous section, thanks to the Prime Minister and our Finance Minister, general investors hopefully can have some cash return on their hard earned investment money in the shares of any listed companies in Bangladesh.

As for Retained Earnings, ie distributable profit (PAT- profit after all charges and taxes) of say 100 m Taka:

70% to reserves for supposed further investment	30% ideally for dividend pay out
Say 70 m Taka of PAT	30 m Taka of PAT to distribute as dividend to maximize tax benefits of the company

Any shortfall in dividend payout as suggested above will be reckoned as elusive and the shortfall will be automatically added to the excess retained earnings, which itself attracts another additional 15% tax.  Literally, excess retained earnings’ tax is tantamount to thin capitalization tax, as the bill said, there will be a tax of 15% (fifteen percent) on excess reserves including retained earnings. That means in any income year the total of retained earnings, any reserve or other equity except paid up capital in excess of 50% (fifty per cent) of the paid up capital of a Bangladeshi registered and Listed company shall be liable to a 15% tax on the amount of such excess of the company in the aforesaid income year.

For clarity, in fact, as per the Companies Act 1994 Paid up capital is the capital shown as duly paid by the Shareholders/ subscribers upto which their liabilities are limited (Corporate Veil).  Any surplus or reserves are the accumulated profits of the corporations over years on which the shareholders have residual rights.  Unfortunately, in our country’s context, there are plenty of companies with low paid up capital base, which means company owners’/ promoters’ liabilities are limited to a very negligible amount.  Paid up capital is deemed as the real money invested by the promoters of a company.  In this regard, to ensure cash injection by promoters there is already a tax rule in place to prove that paid up capital is paid from the bank accounts of the promoters.  Ref: Section 19(24) of the ITO 1984 says, “Where a company, not listed with any stock exchange, receives paid up capital from any shareholder during any income year in any other mode excepting by crossed cheque or bank transfer, the amount so received as paid up capital shall be deemed to be the income of such company for that income year and be classifiable under the head “Income from other sources”.

On the other hand, Retained earnings and surpluses as shown as Shareholders’ equity on the face of the Statement of Financial Position (Balance Sheet) are the seedbeds for Earnings Manipulation through creative and aggressive accounting. The curse of creative accounting is widespread disbursement of debts by financial institutions that rely heavily on the size of shareholders’ equity including the accounting reserves and surpluses because these are recognized by Basel as Tier 1 capital. Accordingly, most of the companies in Bangladesh are Thinly Capitalized. Thin capitalization refers to the situation in which a company is financed through a relatively high level of debt compared to equity. Thinly capitalized companies are usually highly leveraged or highly geared resulting in rampant bad loans.  And it’s not a surprise that our banking sector has Trillions of Taka classified as doubtful.

Therefore, when there is low amount of paid up capital but higher amount of Reserves and Surpluses, we will keep on classifying more and more loans as bad and doubtful of recovery.  Considering the above analogy and realities, tax authorities’ attempts to curb the bad loan culture is promising.  We should await the Paripatra to have a clear view to calculate the “Charge of tax on retained earnings” under section 16G of the Income Tax Ordinance 1984.

About the writer of this Article:

Tofazzul Hussain FCA- Lead Consultant & Chairman of HUSSAINS Business Consultants Ltd, a business, tax and investment advisory firm.

 tofazzul@hussainsbd.com; +88 01714132212

Mohammed Tofazzul Hussain FCA, CMC

Lead Consultant & Chairman

HUSSAINS Business Consultants Ltd.

Call us for an appointment at +88 02 55013590; + 88 01714 132212

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