Tax collection from interest earnings slows sharply

Although banks are registering increased deposits, tax collection from interest earnings of savers has slowed down significantly amid the fall of the interest rate.

The National Board of Revenue (NBR) logged Tk 7,486 crore as withholding or advance income tax on interest earnings of savers in fiscal year 2020-21, according to the revenue authority's latest provisional estimate.

The amount was only 1.25 per cent higher than that of fiscal year 2019-20, when depositors started to see a decline in the interest rate on savings offered by banks and its resultant reduction of incomes.

The weighted average interest rate on deposits, meaning the average of all the rates of financial instruments such as savings and fixed or term deposits, fell from 5.56 per cent in July 2019 to 5.06 per cent in June 2020, showed Bangladesh Bank data.

The rate declined further in the subsequent months to 4.13 per cent in June 2021.

National Board of Revenue logged Tk 7,486 crore as withholding or advance income tax on interest earnings of savers in fiscal year 2020-21

However overall deposits in banks grew 14 per cent year-on-year to Tk 14,39,760 crore at the end of June 2021.

This provided the NBR a marginal growth in tax collection from savers interest income at a time when depositors' overall real income from savings in formal financial institutions was in the negative as inflation surpassed interest rate on deposits.

Bangladesh has been collecting advance tax on deposits through banks and from interest of the state's savings instruments since the 1990s in order to increase tax collection and bring more people under the tax net.

However, the initiative drew criticism as people with no taxable income also have to pay the tax once their deposits reach maturity.

At present, any sum of interest income from savings, fixed or term deposits in banks or cooperatives or deposit of savings in post offices is subject to at least a 10 per cent tax.

It is deducted at source, meaning banks deduct the tax on behalf of the state during payment of the interest to savers. If the savers fail to furnish their taxpayer identification number (TIN), they face a deduction of 15 per cent tax.

From the current fiscal year, submission of acknowledgement receipts of tax return submission, or proof of income, has been made necessary to prevent the 15 per cent tax deduction on interest income from deposits.

Even after the new measure came into effect, the NBRs tax collection from depositors' interest incomes may not grow to that extent as the interest rate has been very low.

Total deposits in banks grew 9 per cent year-on-year to Tk 15,73,820 crore as of June 2022.

But weighted average interest rate dropped to 3.97 per cent in June this year from 4.10 per cent a year ago.

This tells that overall income of savers may decline while the NBR is unlikely to see an increase in tax collection from savings and fixed deposits in banks.

Towfiqul Islam Khan, senior research fellow of the Centre for Policy Dialogue, said tax collection from savings certificates may have declined last fiscal year too as its sales had reduced.

"Rising prices have a detrimental effect on savings. So, although overall tax receipts by the NBR have increased, source tax collection from deposits in banks and from savings instruments does not bode well," he said.