Will taxpayers have to pay for the banking crisis too?

For many taxpayers in Bangladesh, this is no longer a theoretical question; it has become a harsh financial reality. For those holding deposits in financially distressed or liquidity-strapped banks, the situation is deeply uncomfortable – and raises a troubling question about tax fairness.

When interest or profit is credited to a bank account on paper, but the depositor cannot actually withdraw or otherwise access those funds, how should that taxpayer pay tax on income that has not effectively reached their hands? This is no longer merely an accounting issue. It is a question of tax fairness and public interest.

Under Section 62 of the Income Tax Act, 2023, interest or profit from bank deposits falls under income from financial assets. Section 63 provides that such income is included in the income year in which it is received or accrues, whichever occurs first. Therefore, where interest has accrued or been credited, failing to disclose it in a tax return may expose the taxpayer to legal and compliance risks.

Yet tax law operates on legal principles, while taxpayers live in a cash economy. Recent financial distress and prolonged liquidity pressures affecting some banks and financial institutions have demonstrated that money reflected in a bank account is not always equivalent to immediately usable cash.

Consider a taxpayer who invests Tk1 crore and earns a profit of Tk12 lakh at maturity, from which Tk1.20 lakh is deducted as tax at source. Because of the bank's liquidity constraints, however, the depositor is unable to withdraw the amount when it becomes payable. If the Tk12 lakh is nevertheless included in the taxpayer's return, it may increase the taxpayer's total taxable income and create an additional tax liability after crediting the tax already deducted at source.

This creates a fundamental mismatch between income recognition and ability to pay.

The tax system determines liability according to legally recognised income. But a taxpayer's ability to discharge that liability ultimately depends on available cash. The problem becomes particularly acute for retirees, small business owners, middle-class depositors and individuals who depend substantially on interest or profit from their savings.

When income exists on paper but cannot be converted into usable cash, where is the taxpayer expected to find the money to pay the resulting tax?

The core crisis

Income may exist on paper, but there may be no corresponding cash in the taxpayer's hands. The taxpayer may therefore be forced to dip into other savings, borrow money or liquidate other assets simply to pay tax on income that remains inaccessible.

Should the financial consequences of a bank's liquidity crisis ultimately fall on the personal assets of its depositors?

This is not an argument for tax evasion. On the contrary, taxpayers should be required to disclose such income transparently. But there should also be a legally recognised mechanism to address genuine cases where credited or accrued income subsequently becomes partially or wholly unrecoverable.

The National Board of Revenue should consider issuing clear and uniform guidance on this emerging issue. A structured framework could allow taxpayers to separately disclose interest or profit that has accrued or been credited but remains genuinely inaccessible, submit supporting documentation from the relevant bank, and seek appropriate tax adjustment where that income subsequently becomes irrecoverable.

The treatment of tax deducted at source is particularly important. Banks may deduct tax at source when interest or profit is credited or paid, while the same income may also increase the taxpayer's overall tax liability when the annual return is filed. If the underlying principal or interest subsequently becomes inaccessible or unrecoverable, taxpayers need clarity on how the tax already paid will be treated.

What happens if a bank ultimately fails to pay the interest that has already been reported as income? What happens to the tax already paid on that income? Without a clear mechanism for adjustment, taxpayers may face prolonged disputes with tax authorities and significant financial hardship.

A transparent framework is needed

A practical framework could follow a simple sequence: Disclose the Credited/Accrued Income → Document Its Inaccessibility → Determine the Tax Liability → Provide for Legal Adjustment if the Income Becomes Unrecoverable

Under such a framework:

- Taxpayers could be permitted to attach bank certificates or other documentary evidence confirming that credited or accrued interest or profit remains inaccessible because of genuine liquidity constraints.

- The NBR could establish a specific procedure for verifying such claims and maintaining supporting records.

- Where the income subsequently becomes partially or wholly unrecoverable, taxpayers could be provided with a clearly defined legal mechanism for appropriate tax adjustment, subject to verification.

- Consideration could also be given to mechanisms through which the relevant bank's records and the taxpayer's tax records are reconciled, reducing disputes over tax deducted at source.

Such an approach would not weaken tax compliance. Rather, it would strengthen it by encouraging taxpayers to disclose income while providing a lawful remedy for circumstances beyond their control.

Ordinary depositors did not create the banking crisis. If they comply with the law by declaring income, it is difficult to justify making them bear the entire financial consequence when that income subsequently proves inaccessible or unrecoverable.

The State has the legitimate right to collect tax. But tax justice also requires a fair and predictable mechanism for dealing with income that is taxed when recognized but later becomes genuinely unrecoverable.

Ultimately, the question is simple: If the money exists on a bank's books, but the bank cannot pay it, who should bear the additional tax?

The author is an income tax practitioner (ashishghosh382@gmail.com).