Provident Funds In Private Sector To Pay 27.5 Percent Tax

Companies and organizations will now be obligated to submit tax returns for the income generated from employee welfare funds starting in the current fiscal year. They will also need to pay a 27.5 percent tax on their earnings. 

The 2023 Income Tax Act incorporates this provision, removing the tax exemption and amnesty previously enjoyed for funds like provident funds, gratuity funds, and workers' profit participation funds maintained by private sector entities.

However, government-managed provident funds remain exempt from taxation, a decision that has raised concerns.

Nurul Kabir, the executive director of the Foreign Investors Chamber of Commerce & Industry, pointed out that there are alternative methods to collect taxes and suggested that taxing retirement benefits from provident funds is not advisable.

He argued that the government's approach to taxing provident funds in the private and public sectors is discriminatory, and he expressed the intention to appeal to the tax authority to reconsider taxing income from provident funds.

Private sector employees and an analyst emphasized that provident funds and gratuity payments are crucial retirement benefits for private sector workers. Taxing such funds could reduce retirement benefits, especially since they serve as a form of social protection.

Debabrata Roy Chowdhury, director for legal, regulatory, and corporate affairs at Nestlé Bangladesh PLC, warned that introducing income tax on trust funds would negatively impact the overall income generated from such schemes. He urged the authorities to address this issue in line with the government's efforts to ensure social security for private sector employees, such as the recent introduction of the universal pension scheme.

An anonymous senior official of the National Board of Revenue (NBR) explained that government-managed provident funds were exempted from taxation in accordance with the Provident Fund Act of 1925. Provident funds in the private sector have historically enjoyed tax exemptions, and there was no requirement to file tax returns, leading to uncertainty about their proper utilization. The official indicated that this change would now ensure proper disclosure.

Regarding the taxation of provident and employee welfare funds, Md Shahadat Hossain, a former president of the Institute of Chartered Accountants of Bangladesh, suggested that it aligns with the taxation of income from investments in savings certificates, which are considered a source of future earnings.

However, Towfiqul Islam Khan, a senior research fellow at the Centre for Policy Dialogue, expressed concern about the low level of social protection for private sector employees. He argued that taxing provident and other workers' welfare-related funds could exacerbate inequality. Khan also emphasized that there should be no discrimination in taxation between private and government provident funds.

Khan noted that the new income tax law aimed to identify new avenues for increasing tax revenue to improve the nation's revenue-to-GDP ratio, which was among the lowest in the world. However, he criticized the tax authority for its inability to effectively tackle tax evasion and illicit financial activities.