Changes in tax imposition on retained earnings, reserve, stock dividend likely

Changes may come to the tax proposal, made in the proposed budget, on dividend payment in the form of additional shares instead of cash – or stock dividend – and retained earnings and reserve of companies listed with the stock market.

A decision to talk to the government on the issue has been made at a meeting between businessmen and the National Board of Revenue (NBR).

The meeting was organised on Tuesday by the Foreign Investors’ Chamber of Commerce and Industry (FICCI) at a city hotel where businesspeople expressed concerns over the issue.

At the meeting, NBR Chairman Mosharraf Hossain Bhuiyan gave a hint that 15 percent tax imposition on the declared stock dividend of listed companies might be dropped after consulting the government, said sources.

Besides, the NBR chief opined that a change might also be brought to the taxation on retained earnings – net income of a company after paying out dividends to its shareholders – and reserve.
The changes may be brought by June 30.

In the proposed budget for the upcoming fiscal year, Finance Minister AHM Mustafa Kamal on June 13 suggested imposing 15 percent tax on retained earnings and reserve exceeding 50 percent of paid-up capital – the amount of money earned from shareholders in exchange for shares – of companies.

The finance minister also proposed 15 percent tax imposition on stock dividend to encourage cash dividend by the companies to their shareholders.

Stakeholders concerned said the listed companies would have to pay more than Tk10,000 crore in additional taxes, and as a result, their profit making and financial capabilities would weaken.

Amid such concerns, indices of the two stock markets of the country – Dhaka Stock Exchange and Chattogram Stock Exchange – fell sharply on Sunday and Monday following the budget proposal.

However, both the bourses on Tuesday signalled to recover as discussions were all around that the government would change the decision of the fresh tax imposition.

“The proposed tax is illogical as almost all listed companies have a large amount of reserve which is not in liquid form but in assets,” said FICCI President Shehzad Munim.

“Tax imposition will go against good governance in a company as tax has already been paid while converting its net profit into assets. This also does not go with the tax laws,” he added.

Osama Taseer, president of Dhaka Chamber of Commerce and Industry, opined that bonus shares of a company are announced under the condition of business expansion, factory modernisation and fresh investments.
“Imposing fresh tax on bonus shares will discourage investments,” he said.

Meanwhile, the Association of Bankers Bangladesh Limited (ABBL) on Sunday urged the government to revoke the tax proposal, saying it would hinder the banks’ mandatory capitalisation.

“Banks pay dividends and set aside reserve after paying corporate tax on their profits. Hence, the proposed 15 percent tax on both stock dividend issuance and excess reserve balances will be double taxation,” said the association in a letter to the NBR.

There are 30 banks listed in the local capital market, and each of them is in a continuous need of strengthening individual capital base as recommended by the Bangladesh Bank as per the Basel III guidelines, bankers said.

The third instalment of the Basel Accords is an international regulatory accord introducing a set of reforms designed to improve regulation, supervision and risk management within the banking sector.

“Stock dividend and reserve help banks build their capital base that determines their ability to absorb shocks arising from financial and economic stresses,” bankers said, adding that a bank, under the Basel III guidelines, should maintain 12.5 percent of its Risk Waited Assets as total regulatory capital.

“Besides, there is a restriction on cash dividend payments by a bank if it fails to maintain regulatory capital,” the ABBL added.

“Hence, the imposition of tax on retained earnings limits a bank’s ability to occur regulatory capital and restricts it from achieving the milestones set by the Basel III guidelines,” said the ABBL.

The bankers’ association, in the letter, also mentioned that Section 24 of the Bank Company Act makes each bank transfer 20 percent of profit per annum to the Statutory Reserves – a certain amount of profit set aside by a bank in order to meet immature obligations – in Bangladesh Bank.

The central bank also requires banks to enhance their capital base through creating reserves, the ABBL said.

“Proposed taxes will also weaken banks’ fundamentals like Net Asset Value per share. That might reduce investors’ confidence and vibrancy of overall capital market,” added the association.