Changes brought in by the new Income Tax and Finance Bill for capital market

The corporate tax rate for publicly traded companies remained unchanged. However, there have been reduced tax rates applicable to publicly traded companies based on the percentage of shares floated through an initial public offering (IPO).

For publicly traded companies that transfer shares worth more than 10% of their paid-up capital through an IPO, the tax rate is 20%. Otherwise, the tax rate will be 22.5%.

The Bangladesh Securities and Exchange Commission (BSEC) has instructed the listed companies to ensure that at least 10% of their shares are available for general investors in the stock market. Public issue rules of 2015 also made it mandatory for the companies to offload at least 10% of their shares. But after an IPO, a company cannot make another IPO. Rather, it can make a follow-on public offer (FPO) which is not included in the conditions. We expected some modification in this regard.

To enjoy the reduced corporate tax rate, these publicly traded companies must fulfil certain conditions. Firstly, all receipts and income must be transacted through bank transfers. Any single payment above Tk5 lakhs must be done through a bank transfer. Secondly, cash payment for investment and expenses must not exceed Tk36 lakhs. Failure to meet these conditions will result in an additional 2.5% tax burden.

Now since each company differs in size, this one size does not fit for all. We sincerely appreciate this move of the National Board of Revenue towards a cashless economy though. Our neighbour India made 78% of their transactions cashless in 2023, compared to over 4% in 2016. Our central bank and other stakeholders must work together to formalise the economy to a great extent.

The scope of tax exemption for investment opportunities in Special Purpose Vehicles (SPVs) has been expanded to encompass a wider range of options. This expansion now includes not only Alternative Investment Funds, but also income from mutual funds, real estate investment trusts and exchange traded funds (ETFs). By incorporating these additional investment vehicles, the tax exemption aims to encourage greater participation and investment in SPVs. This broadening of tax exemptions is expected to stimulate increased investment volumes in the coming years.

For an individual, income from mutual funds up to Tk25,000 and income from dividends up to Tk50,000, have been removed from the list of exemptions. Amidst the prevailing circumstances where inflation is already placing significant strain on individuals, the tax burden on low-income taxpayers who have investment in the capital market is being amplified rather than alleviated. Usually, tax is deducted at source from dividend income irrespective of this exemption. As such, no major cash outflow is expected for these marginal investors. 

Investment in the capital market by individual assessee will still be considered as an eligible instrument which has no limit. However, a limit of maximum Tk5 lakh has been proposed for investments through unit certificates, mutual funds, ETFs, collective investment schemes (CIS). Hence imposition of such a limit for these unit certificates managed by professional fund managers might discourage corporate investments in the capital market while keeping the limit of retail investments open-ended.

An individual, except for sponsor shareholders, is not required to pay tax on gains from sale of shares of a listed company as per SRO 196 dated 30 June 2015. The SRO 196 issued under ITO 1984 should prevail, until a new SRO repeals the same as long as it does not contradict with the proposed Income Tax Act 2023.

--The author is a Chartered Accountant and a director at SMAC Advisory Services Ltd