Every State remains eager to attract foreign direct investment (FDI). The taxation policy is one of several key determinants that encourage FDI.  Therefore, developing countries have adopted a more positive attitude about taxation on profit and facilitate easy and profitable exit to gain confidence of the overseas investors.

In contrast, the tax regime in Bangladesh is the strictest among the South Asian countries. The income tax in other countries is around 25 percent while it is around 35 – 45 percent in Bangladesh. Other taxes such as value added tax and capital gain tax, which are around 15 percent, are also considered higher. The credit of VAT and the application of laws are complicated. Taxpayers often complain of complexity of the laws and rules. The Capital gain Tax (CGT) has also been introduced from the year 2010. There remains a confusion among the the stakeholders including the National Board of Revenue (NBR), Bangladesh Bank, Bangladesh Security Exchange Commission, local and overseas portfolio investors about the rate of capital gain tax.

The CGT has been introduced in the financial year of 2009-10 on primary issue of share to promoters and subsequently on sale of primary share. The Finance Act of 2010 has imposed CGT on the basis of section 37(7) of Income tax ordinance 1984 by inserting Section 53L for collection of 3 percent tax from issue of primary share at a premium price or raises of share capital through book building or public offering or rights offering or placement or preference share or in any other way at the value in excess of over face value. However, the CGT on issue of primary share has been omitted in the Finance Act, 2013. The same FA, 2010 inserted another clause, section 53M giving the responsibility to the Security Exchange Commission or Stock Exchange during the transfer of share for collection of CGT 5 percent on the difference between transfer value and cost of acquisition of the securities or mutual fund units.

The rate of advance collection of CGT fixed at 10 percent for the sponsor shareholders in case of companies or firms is imposed irrespective of status of residency of assesses. The rate will be 5 percent for sponsor shareholders of the Bank, financial institute, insurance, leasing companies, portfolio management companies. 

There is an exemption for non-resident foreign national subject to the condition that such assesses is entitled to similar exemption in the country in which he is resident as inserted in the 6th schedule, part A, manual 1 (as per SRO no 59 Law/income tax/2012 dated 28th February 2012). 

Capital gains from disposal of government securities are not subject to tax. The amounts received for goodwill and termination of contracts are not capital gains, but taxed under the "other income" head.

Subsequently, by another SRO no 196- Law/income tax/2015 dated June 30, 2015 has exempted the CGT on all categories of assesses except the income specified in the Section 53M. The footnote 2(s) of Income tax manual Part -1 clarifies that section 53M shall be applicable for income derived from transfer of securities or mutual funds by sponsor shareholders of a publicly listed company.

The laws and rules give idea that the CGT is either 5 or 10 percent for different categories of assesses. The rate of CGT creates some confusions in the mind of different stakeholders. The rule and policies have been changed and the SROs are so confusing that the global research organisations also became puzzled on rate of CGT.

KPMG, the largest audit and consulting firm in a policy paper dated January 2020, mentioned that the CGT for non-resident shareholder is 10 percent in Bangladesh for (capital gains on sale of shares of listed companies). Tax rate from capital gain received from selling capital asset (other than securities of listed companies) is 15 percent. Another advisory and consulting company Seloitte in a paper dated September 24, 2010 mentioned that the Bangladesh Finance Act (No. 33) 2010 introduced a new capital gains tax regime that applies to gains arising on the sale or transfer of non-government securities, including stock and shares of public companies listed on the Bangladesh stock exchanges. The regime, which imposes a general 10 percent tax or a reduced rate of 5 percent, took effect on July 1, 2010. Previously, gains on the sale or transfer of such listed securities were not subject to tax.

Bangladesh Bank (BB) and NBR are interpreting CGT for non-resident placement holders and trying to establish tax rate at 15 percent as per section 56 of IT Ordinance 1984. BB has claimed from some Banks for 15 percent CGT based on sec 56-I of Income Tax law of some overseas investors. According to Income tax ordinance 1984, this clause made the regulating authority to deduct the tax from non-residence assesses. Instead of asking the withholding authorities- the BSEC or Stock exchanges, the central bank and revenue department are chasing commercial bank to collect the "evaded" tax from their account holders.

Recently, Bangladesh Securities and Exchange Commission (BSEC) has requested the government to reduce the CGT from capital market investment by the foreign and institutional investors. The commission urged the government to waive the 10 per cent tax on capital gain for the institutional investors or at least reduce it to 5 per cent in the upcoming national budget to encourage institutional investment on the country's capital market.

There is no CGT gains tax from trading in the secondary market for any individual. Despite the exemption, some investors complained that Dhaka Stock Exchange (DSE) and Chattogram Stock Exchange (CSE) have been collecting CGT at 5% for few years.  BSEC has also confirmed that the local investors do not have to pay any tax on capital gain from listed securities.

The writer is a Legal Economist.