NBR disapproves of tax exemption in offshore banking

Zarif Mahmud: No direct or indirect tax shall be levied on the interest or profit earned by banks through offshore banking business. Besides, there will be no tax or duty on the income earned by the depositors. The government is going to enact the ‘Offshore Banking Act’ for the first time in the country with such an opportunity to overcome the dollar crisis and strengthen the flow of foreign exchange.
Recently, the Financial Institutions Department of the Ministry of Finance prepared a draft of the ‘Offshore Banking Act, 2024’ and sent it to the Draft Scrutiny Committee of the Cabinet. It will come back to the Financial Institutions Department after the committee’s observation. Then it will be sent to the cabinet department for presentation in the cabinet meeting.
Sources related to NBR say that before drafting the new law, the Financial Institutions Department of the Ministry of Finance did not take into account the views of the stakeholders. The provision added that no income tax or any other direct or indirect tax shall be levied on the profit or interest earned by the offshore banking unit is inconsistent with the Income Tax Act-2023. The National Board of Revenue (NBR) drew the attention of the Finance Ministry in this regard but it was not taken into consideration. Stakeholders’ views have now been sought on the draft law.

According to sources, a representative of the National Board of Revenue (NBR) raised objections to tax and duty exemptions in the income tax proposal during a joint consultation meeting held with stakeholders before the draft was approved. That objection was accepted only as an opinion, not taken into account. Subsequently, the Financial Institutions Division of the Ministry of Finance asked the NBR for its opinion on the clause related to ‘exemption from taxes and duties’ of the draft law. After that the opinion has been sent by the Income Tax Division of NBR.
Referring to sub-section (2) of Section 76 of the Income Tax Act 2023, the NBR said in its opinion, ‘If any tax exemption is provided in any other law, the tax exemption shall not be effective until the NBR through a government notification provides for the exemption. NBR’s opinion states that there is no legal scope to override this Act.
The Ministry of Finance is further informed that, as per the new Income Tax Act, any person exempted from tax under the provisions of any statutory instrument other than the Income Tax Act, notwithstanding anything contained in any other law, unless the National Board of Revenue by notification in the Official Gazette grants exemption to any person or class. It will not work.
Clause 13 (a) of the proposed draft law states that no income tax or any other direct or indirect tax shall be levied on the interest or profit earned by the offshore banking unit in offshore banking business. NBR does not agree with this section of the law.
The NBR’s opinion clearly stated that such proposed legislation would have a major negative impact on revenue collection and weaken the existing tax base. All economic activities carried out within Bangladesh are taxable as per existing laws. All the banks in Bangladesh along with their offshore units have been paying taxes till now. Incidentally, such tax evasion will greatly damage revenue collection.
The opinion requested the replacement of the section “interest or profit payable by offshore banking units to depositors or foreign lenders in offshore banking business shall be exempt from direct or indirect tax” subject to issuance of government notification by NBR.
Earlier, the draft offshore law said, ‘Notwithstanding anything contained in any other law for the time being in force, no direct or indirect tax shall be levied on interest or profits paid by offshore banking units to depositors or foreign lenders in offshore banking business.’
What is offshore banking
Offshore banking is a separate unit of the bank operating in the country. An order in 1985 approved the formation of this unit to provide foreign currency loans to export-oriented companies only by collecting funds from outside the country. Offshore banking offers opportunities for lending to foreign companies and collecting deposits from foreign sources. Offshore banking accounts in foreign currency instead of local currency. No bank regulations apply to offshore banking. Only the profit and loss account is added to the bank’s core profit. In 2019, the central bank issued the Offshore Banking Policy. In the light of that policy, the activities of offshore bank units are being conducted in various banks. However, the provision of fines and penalties in that policy was weak. Now initiatives are taken to enact a full-fledged law.
Under the current policy, banking activities can be done with wholly foreign-owned institutions located in different economic zones of the country. In this case, loans can be distributed and deposits can be taken; But in case of jointly owned institutions, prior permission of Bangladesh Bank should be taken. Before 2019, in the absence of regulations, banks conducted offshore banking at will. It has been alleged that some banks have laundered money through this. Each bank has to formulate its own policy after getting approval from the central bank to start offshore banking activities. Now the Ministry of Finance is going to formulate a complete law.
When asked about this, a top official of NBR, who did not want to be named, told Jago News that the issue of tax exemption is clear in the Income Tax Act. Who will get tax exemption, who will not get it; It is stated in the law. Tax exemptions are available through the Income Tax Act. There is no exemption from tax under any other law. There is an opportunity to verify the matter.
On the other hand, the spokesperson and executive director of Bangladesh Bank Majbaul Haque told that besides joint consultative meetings, there will be meetings with stakeholders before it becomes law. Anyone who has an opinion will give it. A decision will be taken later. All stakeholders need to be consulted for a law to be passed. Only then will it be decided how. NBR and other representatives will be present in the meeting.
He also said that earlier after the introduction of public pension scheme, the tension started over tax exemption. As per the Pension Schemes Act, the scheme money is tax exempt. However, public pension schemes were not included in the list of exempted sectors under the Income Tax Act. Later NBR exempted public pension schemes by issuing SROs.
Financial Institutions Department Secretary Sheikh Mohammad Salim Ullah refused to comment on this.
The draft of the proposed offshore law also states that duties and levies will not be imposed on the accounts of depositors or foreign lenders of that unit. The draft law also states that if an offshore banking unit violates the law, that institution will be fined a maximum of $2,000 or its equivalent in Bangladeshi taka. A fine of $ 100 or local currency equivalent will be imposed for each day from the second day after the first day if the violation continues.
Restrictions in the draft law state that no person can do offshore banking business without being a scheduled bank. Offshore banks should start operations within six months of getting the license. Otherwise, the license will be cancelled. After cancellation or suspension, its operations shall cease. Offshore banks cannot use the word without a license. Failure to comply with license conditions and providing false information to concerned officials involved in offshore banking will result in cancellation of license. Can voluntarily surrender license with Bangladesh Bank’s permission.
Regarding the limitation of offshore banking activities, the draft states that no direct or indirect funded or non-funded banking transactions other than those prescribed by law shall be engaged in; Deposits or loans payable on demand against checks, drafts, pay orders or any other document drawn by the depositor in the name of the offshore banking unit shall not be made and funds shall not be transferred to the inland banking unit without the general or special approval of Bangladesh Bank. Apart from this, bank related persons have to follow the instructions of Bangladesh Bank in providing loan facilities from offshore banking units.