Govt eases tax burden for company funds

Highlights:

• Source tax deducted from company funds to be treated as final settlement
• No need for annual tax returns and audits for these funds
• New measure to be effective from FY26
• Businesses welcome the move
• But experts raise concerns for potential irregularities

Source tax deducted from various company funds will be treated as final settlement effective from the fiscal 2025-26, eliminating the need for annual tax returns and audits for these funds. 

The Finance Ordinance announced by the government on Monday introduced the new provision, aimed at simplifying business operations.

Businesses have welcomed the move, but experts raised concerns that if the opportunity for auditing is removed, it could increase the risk of irregularities in the handling of these funds by companies.

Currently, companies, private, and autonomous institutions maintain various funds for their employees, including Provident Funds, Gratuity Funds, and Workers' Profit Participatory Funds. These funds are typically invested in savings instruments, bank Fixed Deposits, and other sectors. A single company may have three or four such funds invested across different areas.

Income generated from these fund investments is presently subject to a 15% tax. While source tax is usually deducted at a 10% rate at the time of investment, an additional 5% tax needs to be paid at the time of tax return submission at the end of the fiscal year, as the final tax rate on fund income is 15%. Furthermore, each fund requires a separate audit report and tax return submission annually.

Badiul Alam, a member of the National Board of Revenue (NBR), termed it a "business-friendly measure."

"The previous requirement for auditing each fund and submitting separate audit and tax returns at year-end increased companies' expenses. Those costs will now decrease. Additionally, in some cases, source tax is now deducted at a lower rate than the current tax, which will also slightly reduce companies' overall tax burden," he told TBS.

Rupali Chowdhury, managing director of Berger Paints Bangladesh Limited, also lauded the initiative, telling TBS, "Until two years ago, there was no requirement to submit returns for institutional funds, but this was introduced in the budget two years ago. This necessitated document verification system-supported audits and tax return submissions, incurring additional costs. 

"Treating source tax as final settlement and exempting return submission will reduce expenses, which is beneficial for compliant companies. This is a step forward in easing business."

Industry insiders say that these funds are currently invested in savings certificates, treasury bonds, or bank FDRs. While source tax is typically deducted at 10% on most income and 5% on treasury bonds, the 15% year-end tax rate meant additional tax payments were often required upon return submission. The new final settlement rule for source tax will eliminate these extra payments.

However, SK Zami Chowdhury, managing partner of Chowdhury Emdad and Company, a chartered accountant firm that audits around 150 companies annually, expressed concerns that waiving the audit requirement or return submission could increase opportunities for irregularities in the investment or management of these funds. 

He told TBS, "If audits are not required, the scope for third-party verification decreases, which will create opportunities for irregularities, mismanagement, and misuse of these funds."

Currently, approximately 25,000 companies in Bangladesh submit tax returns annually, in addition to other private institutions. Industry experts note that while most organisations have provident fund arrangements, only about 10% or fewer, typically the more compliant ones, also maintain gratuity funds and Workers' Profit Participatory Funds.