High taxes on asset transfers act as the main obstacle to creating a vibrant Sukuk market in the corporate sector, according to market intermediaries.

Sukuk is a real asset-backed security which represents the claim on revenues generated from an underlying asset as well as the ownership of that said asset while abiding by sharia laws.

Although there have been some complexities given the tax issues, the latest initiative taken by the government and the central bank is expected to speed up the process.

The central bank will roll out a Sukuk bond next week in order to raise Tk 8,000 crore for the implementation of a government project that will ensure supply of safe water in every upazila. 

The sharia-compliant product required the ownership of an asset covered by Sukuk to be repeatedly transferred from one party to another.

So, a high tax regime on registration increases the cost of Sukuk, which will create a roadblock to get momentum the shariah-compliant securities in the private sector, analysts say.

At present, there is a 1.5 per cent stamp duty on the registration of trust deeds while the fee for assets is 1 per cent.

Besides, local government tax, value added tax and gain tax are also included for Sukuk.

As per the present tax structure, the applicable cost varies from 8 to 9.5 per cent for the sharia-compliant investment tool.

"We have already met with government officials and informed them about the tax issues and so, the government was convinced too to work on it," said Ershad Hossain, CEO of City Bank Capital Resources.

To popularise Sukuk bonds, the tax issue should be resolved since it is the main issue.

For example, asset backed securities face the same issue and so they requested a reduction in tax as well.

"Governments from all over the world consider the tax realising its nature of transferring ownership," Hossain said.

"It is hopeful though that the government plans to issue sovereign Sukuk bonds. After their issuance, the problem will be eventually solved since they will face the same problem," he added.

Sovereign Sukuk is the main contributor of the global sukuk market. The amount of sovereign Sukuk issued stood at $606.3 billion, or around 55 per cent of the Sukuks issued worldwide, by the end of 2018, according to the IMF sukuk database.

In Bangladesh, the bond market size is $37.5 billion. Of that amount, corporate bonds account for $2.5 billion, according to data from City Bank Capital Resources.

Sharia based banks and many entrepreneurs have demanded a Sukuk bond market for many years in order to meet their financing demand and have a sharia-compliant tool to invest with.

The Bangladesh Securities and Exchange Commission (BSEC) formulated the rules regarding Sukuk bonds in 2019 but there are still problems related to the tax regime, which is preventing the product from flourishing.

Moin Al Kashem, managing director and CEO of the Prime Finance Asset Management Company, echoed the same but added that when the asset is transferred to a Special Purpose Vehicle (SPV), then registration should be free of cost since they are not its end user.

As is the case with Islamic banks in other countries, asset ownership changes without any registration, he said.

"And so, Sukuk needs the same policy to avoid double taxation while the stamp duty should be waived to popularise the bond," Kashem added.

If the Sukuk can be used to its full extent, then local Islamic financial institutes and fund managers will have the opportunity to invest as well.

"So, if the cost for Sukuk comes down to around 9.5 per cent, then what would be the yield rate and how would investors make profits from the Sukuk," Kashem said.

Islamic banks cannot buy traditional bonds like their conventional counterparts since bonds are interest based.

So, they have a huge demand for Sukuk, according to Md Moniruzzaman, managing director of IDLC Investments.

"Sharia-based products have inherent demand in our country as evinced by Islamic banking, he said, adding that many people with a high net also seek such investment tools.

Islamic banks have a market size of about 35 per cent of the total banking sector.

Out of the 57 banks operating in Bangladesh, eight private commercial banks are full-fledged Islamic banks with a total of 1,273 branches as of December 2019, according to data from City Bank Capital Resources.

Besides, nine conventional banks operate 19 Islamic banking branches collectively and eight conventional banks have 88 Islamic banking windows in total, the data shows.

Due to its convenience and popularity, Sukuk is witnessing a higher growth rate worldwide. In 2018, the cumulative issuance of Sukuk crossed the $1 trillion mark since the first issuance in 1996.

Global Sukuk issuance has shown a modest increase of 5 per cent from $116.7 billion in 2017 to $123.15 billion in 2018, according to data from the Islamic Finance Development Report 2019.

BSEC Spokesperson Rezaul Karim said the stamp duty has been waived but registration fees for transferring underlying assets to the SPVs are still considered as normal asset transfers.

"But we need to address the gain tax, registration and other costs just as Malaysia, Indonesia and other countries have," he said.

The BSEC has already informed the National Board of Revenue about the costing issue as if it is left the way it is, Sukuk will not gain significant popularity in the country, Karim added.