Fiscal incentive in zero coupon bonds restored

Fiscal incentive for the investors of zero coupon bonds has been restored, according to the amended Finance Bill 2020.

The bill turned into the Finance Act on Monday, with adoption of the amendments after the announcement of the proposed budget earlier this month.

The Bangladesh Securities and Exchange Commission (BSEC) in its budget proposal had requested the government for some fiscal incentives that would inspire issuance of and investments in bonds so that the capital market can popularise the debt securities and reduce the burden on the banking system.

Income or discounts from zero coupon bonds have been subject to no income tax for all investors other than banks, insurance and financial institutions.

The capital market regulator before the budget had requested the government to extend the same incentive to all kinds of bonds as the capital market institutions are seriously trying to build a vibrant bond market.

In the initially proposed budget, the government rather had withdrawn the facility instead of responding to the new pro-bond market proposals.

However, the BSEC had written again to the National Board of Revenue after budget announcement for extending the facility to all kinds of bonds alongside restoring the same for zero coupon bonds.

Finally, the government only restored the existing incentive and did not extend it for other types of bonds.

Zero coupon bonds are a type of bonds where investors buy the bond at a discount and receive the face value after maturity, where coupon bearing bonds pay a periodical interest after investors buy the bonds at face value initially.

The BSEC had made another important proposal before the budget announcement, but had not received any response yet.

It prescribed to reduce corporate tax by 5 percentage points if a company collects at least half of its long-term liabilities from bonds.

If the government would respond positively, the policy would inspire bond financing in Bangladesh to offer the banking industry a breathing space, believe experts.

"The lack of a secondary market for corporate bonds is a key weakness of our capital market and it should be addressed soon," said Shahidul Islam, the president of CFA Society Bangladesh and also the managing director of VIPB Asset Management. 

According to bond expert Ershad Hossain, the managing director of investment bank City Bank Capital Resources Ltd, "Without fiscal incentives for issuers, investors and the groups engaged in making bonds tradable, a vibrant bond market would be impossible."

"Many peer countries offered a mid- or long-term full tax waiver for income from bonds and got the result," he added.

Sri Lanka had offered a complete tax waiver on income from corporate bonds for five years.  After a good response and having a stronger bond market ecosystem, now they are taxing some.

"Our bond market needs a jumpstart, it is a long-pending task," said Ershad, who had served in international investment banks in Singapore for more than a decade prior to joining the local merchant bank.