With a view to extending investment and credit support for Bangladesh in the era of free-market economy across the globe to increase the flow of foreign currency, the government has recently framed the draft offshore banking act.
The government is going to formulate the law to keep pace with the international financial system and ensure long-term benefits by conducting the banking activities in foreign currency.
In the draft of Offshore Banking Act-2024 formulated by Financial Institutions Division under the Ministry of Finance, it exempts income tax, and other direct or indirect taxes on profits and interest earned from offshore banking business.
However, such provision has raised questions among stakeholders regarding the availability of tax exemptions against the businesses as the sixth schedule of Income Tax Act-2023 does not mention offshore banking as tax waiver.
Earlier, such questions and controversy have been raised among the stakeholders regarding the universal pension scheme and later, the National Board of Revenue (NBR) issued an order on November 5 stating that the pension scheme is now tax-free.
According to Section 76(2) of Income Tax Act-2023, an individual's tax exemption, granted through any other legal provision, must also be officially recognised and endorsed by the NBR gazette notification.
Failure to obtain such recognition through the gazette notification renders the exemption provision insufficient. The offshore banking has not yet been vetted by tax department which creates confusion.
However, the draft of offshore banking law states that whatsoever any other existing law mentions, income tax or any direct or indirect tax shall not be imposed on interest or profits earned through offshore banking business by offshore banking units
“Lenders or foreign creditors will not be subject to income tax or any direct or indirect tax on interest or profits earned and no duties or levies will be imposed on the accounts of lenders or foreign creditors,” the draft law reads.
There is no scope to exempt any tax by other laws except existing income tax law.
If the government thinks to provide tax-free support for offshore banking, they will proceed with same facility within the incumbent income tax provision. Otherwise, it would be taxable, say NBR officials involved in the policy matter.
Talking about the issue, Dhaka Chamber of Commerce and Industry (DCCI) advisor to the standing committee on customs, VAT, taxation & NBR Snehasish Barua said, “The matter of imposing or exempting taxes should be centralised in NBR. Otherwise, any ministry or entity can take such measures by its convenient which will impede increasing tax collection.”
“Exemption is required to boost our economy but it should be examined where it requires and where is not required now,” he recommends and addressing “unexamined exemption is playing a major role for our lower tax-to-GDP ratio, which is the lowest in South Asian nations.”
Commenting on the matter, Policy Research Institute (PRI) Executive Director Ahsan H Mansur told The Business Post, “We have to keep offshore banking and Bangladesh requires it. So, the related act is required too to increase foreign currency.”
“It can play a pivotal role in attracting investments and boosting remittance which in turn helps reduce forex crunch,” he opined.
The economist said, “Earlier, the NBR had abruptly introduced a 20 per cent source tax on the interest of foreign loans, applicable to foreign entities, effective from July 1 of FY24, which did a lot of losses. This was avoidable.”
“So, NBR withdrew withholding tax and this facility extended to December 31, 2024 by issuing two different notifications as the burden of this taxation ultimately falls on borrowers. It results in an increase in the cost of loans, then why do customers borrow?” he questioned.
“The government should impose taxes on offshore banking in consultation with stakeholders instead of taking measures abruptly,” he recommends.
In a letter sent to the NBR on August 31 last year, the central bank mentioned that a circular issued on November 29, 1976 had previously exempted tax on the interest of foreign loans.
However, in a circular issued on May 23 in the previous year, this exemption was revoked.
The Bangladesh Bank clarified that borrowers will bear this additional cost until the end, not foreign lenders. As a result, considering the grassroots level, the tax rate is expected to increase by 25 per cent.
So, if NBR takes liability of imposing or withdrawing taxes according to the existing income tax, customs or VAT laws, the revenue board should have to consult first with stakeholders regarding the matter, experts suggest.
In 1985, offshore banking was introduced in Bangladesh through a circular from the Bangladesh Bank, primarily aimed at enhancing financing opportunities in Export Processing Zones (EPZs).
Since its inception, offshore banking has gained popularity among businesses and banks in Bangladesh, as it has the ability to attract international settlements and provide foreign currency financing facilities.
Currently, about all large banks engage in offshore banking, with a predominant focus on discounting import and export bills and offering long-term foreign currency financing to corporations.
At present, offshore entities hold approximately $6 billion in funds from Bangladeshi banks. If these funds are repatriated, it will contribute to a boost in the domestic dollar liquidity of the banks.
Traders benefited from buyer's credit facility for short-term foreign loans, amounting to $9.56 billion in 2022. However, the outstanding balance of this loan had dropped to $6.47 billion at the end of November 2023, says a central bank report.
