Loan interest

No more income tax exemption on loan interest

In the event of non-repayment of bank loans, companies have so far benefited from an exemption from interest on this loan and from a tax exemption on the amount of interest – a facility which could cease from the year next.

The government should make such a proposal in the finance bill for the next budget. However, individual taxpayers will continue to benefit from a tax exemption on this forgiven loan interest, as usual.

The businessmen claim that this decision will be effective in combating irregularities in loan repayments. But for those who are not erratic and only default in the face of trading losses, this will create additional stress for them.

Business leaders say such a move would be “inhumane”. Because, you have to understand at what stage a company goes bankrupt. Such a move would not be business-friendly at all, they add.

Currently, under Section 19(11) of the Income Tax Ordinance, no taxpayer will be liable to income tax if a loan has been waived bank or interest. Thus, both the individual and the company – the borrower – benefit from tax exemptions on this interest.

However, over the past few years, massive amounts of loans have turned into defaults, and most defaulted loans are disbursed to businesses rather than individuals.

Sources say banks cannot waive the principal amount of a loan. If a borrower defaults, he can obtain a waiver on all or part of the interest at the end of the process.

Often a business defaults due to losses caused by factors beyond its control. However, in recent years, the problem of intentional default has become common in Bangladesh. There are allegations that the bank sometimes has a hand in this as well.

In such cases, the banks waive the interest on these loans. As there is tax exemption on this money, it becomes very easy.

A Deputy Commissioner for Taxes (DCT) in the Income Tax Department of the National Board of Revenue (NBR) told The Business Standard on condition of anonymity that sometimes banks waive interest. It is also possible that they are sometimes behind the company themselves.

Now, if that amount of interest is treated as income and taxed on it, it will work to some extent to prevent irregularities, the official said.

Snehasish Barua, tax law expert and partner at Snehasish Mahmud and company, NBR thinks such a move would be positive. It will not be easy to make irregularities on overdue loan interest. This will create an opportunity to break out of the failing culture.

However, Mostofa Azad Chowdhury Babu, senior vice president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), said it would be inhumane to take such a step.

He told The Business Standard that a company becomes a defaulter due to losses. Even after that, the bank never waives the principal amount. At the end of various processes, the amount of interest can be canceled. To tax it would be to slaughter the dead.

He suggested increasing tax collection.

Sources say that often if the loan is not repaid, it continues year after year. Sometimes it ends up in court. Sometimes the interest amount exceeds the principal amount. Interest on the loan can be easily waived as there is no liability.

Exact figures on the number of commercial bank interest rate waivers are not available.