BB bats for sukuk investors

The central bank has proposed the National Board of Revenue (NBR) to consider the profits earned by individual investors from their investment in the Islamic bond as tax-free income.

The banking regulator has also suggested the NBR withdraw the 5 per cent source tax on the investment in the Shariah-compliant bond, known as sukuk.

The Bangladesh Bank wrote a letter to the NBR on March 4, requesting it to take measures so that clients get inspired to purchase Sukuk certificates in the secondary bond market.

A sukuk is an Islamic financial certificate, similar to a treasury bond, which complies with Shariah laws.

The Bangladesh Bank issued a sukuk on December 28, the first of its kind in Bangladesh, to raise Tk 8,000 crore for the implementation of a nationwide safe water supply project.

The government initially raised 50 per cent of the targeted amount, and the rest Tk 4,000 crore will be mobilised in May.

Thirty-seven banks, including eight Islamic lenders and two individual investors, took part in the first auction.

Investors will enjoy a profit of 4.69 per cent on their investment in the Islamic bond.

The sukuk will mature in five years, and the government looks to implement the safe water supply project by June 30, 2025. 

Investors now pay tax annually against the income from traditional treasury bills and bonds. In addition, they face a 5 per cent source tax when profits are distributed to them periodically.

The NBR calculates the amount of annual income tax for an individual or institution after deducting the source tax, a central bank official said.

The taxes are discouraging people from parking their funds in the Shariah-compliant bond.

These have created a roadblock to buying and selling the sukuk in the secondary bond market, the official said.

If an individual or institutional investor sells the sukuk certificate in the midway of earning the profit, they will have to pay the source tax as per rules. Similarly, the person or institution that intends to buy the tool will have to face the same amount of source tax.

An agreement is needed between the buyer and seller to split the source tax proportionately in order to avoid double-taxation.

Profits will be paid to investors of the sukuk on a half-yearly basis.

Against this backdrop, investors now face complexities regarding buying and selling of the Islamic certificate, the BB official said.

The NBR imposed the source tax on the investors of T-bills and bonds at the beginning of the current fiscal year.

The central bank has already sent two letters to the NBR, suggesting it withdraw the source tax on the profits made on the investment in T-bills and bonds.

The NBR has not responded yet.

The central bank has urged the NBR to treat Sukuk like three other bonds the government has introduced for expatriate Bangladeshis.

The Bangladeshis investing in the US Dollar Premium Bond, the US Dollar Investment Bond, and the Wage Earners Development Bond do not face any tax.

"The NBR should follow the same method to make sukuk attractive," the central bank said.

Countries including Malaysia, Pakistan and Turkey have offered tax rebate to the investors of sukuk by drawing up a separate tax policy, a central bank letter said.

The initiative taken by the countries has made sukuk attractive, the BB official said.