Corporate tax cut on the cards for banks

The government may offer banks a cut to their corporate tax rate in a bid to give the lenders respite from a number of recent measures that have affected their profits.

According to officials of the finance ministry and the National Board of Revenue (NBR), the tax rate for banks could be reduced to 35 percent from the present 37.5 percent.

The move will help banks – especially 30 listed ones – increase their profits, after paying tax, by Tk15 crore to Tk20 crore.

However, it will cause the national exchequer a loss of Tk600-Tk800 crore a year.

"Banks have an important role to play in recovering the economy. They should have adequate liquidity to support the government efforts for the recovery," said a senior finance ministry official, explaining the tax cut move.

Bankers also said they need the tax cut privilege as some recent measures – including lowering the lending rate of all loans to nine percent, suspending the interest rate for two months and a moratorium on loan collection – have impacted them negatively.

"The reduction in the corporate tax rate will help some banks make some profits and strengthen their capital bases slightly," said Ali Reza IIftekhar, managing director of Eastern Bank Limited.

Iftekhar, who is also the chairman of the Association of Bankers Bangladesh, said the lending rate cap at 9 percent from April will reduce banks' operating profits by around Tk15,000 crore.

Bangladesh has different corporate tax structures for different industries. A publicly listed bank or a non-bank financial institution (NBFI) must pay 37.5 percent corporate tax – which is 40 percent for non-listed banks.

Other than financial institutions, the corporate tax rate is 25 percent for publicly listed companies and 35 percent for non-listed firms.

The rate is 40 percent for listed mobile phone operators and 45 percent for non-listed companies. Meanwhile, tobacco producers have to pay 45 percent tax.

The banking industry in Bangladesh is already saddled with nonperforming loans, declining demand and liquidity concerns in the wake of global supply chain disruption. Yet, banks here pay higher taxes than those of many other countries.

In our neighbourhood, financial institutions in India pay 30 percent tax while the rate is 25 percent in Singapore, 35 percent in Pakistan and 28 percent in Sri Lanka.

Khandker Golam Moazzem, research director of the Centre for Policy Dialogue, however, said a reduction in the corporate tax rate for banks would only increase shareholders' margins.

"In the present context, banks need to increase their cash flow to meet additional demands from borrowers, but a tax cut is not the right instrument here," Moazzem told The Business Standard.

He said banks' earnings have been impacted by some measures locally, and supply chain disruption globally, for which banks can be given extra time to pay taxes, if needed, in installments.