No more waiver of income tax on loan interest

In the event of failing to repay bank loans, companies have so far enjoyed waiver of interest on that loan and tax exemption on the interest amount – a facility that may discontinue from next year.

The government is likely to bring such a proposal in the finance bill of the next budget. However, individual taxpayers will continue to get tax exemption on such waived loan interest as usual.

Businesspeople say the move will be effective in tackling irregularities of loan repayments. But for those who are not irregular and only defaulted in the face of business losses, this will create additional stress for them.

Business leaders say such an initiative would be "inhumane". Because, one has to understand at what stage a company goes bankrupt. Such an initiative would not be business-friendly at all, they add.

At present, under Section 19 (11) of the Income Tax Ordinance, no taxpayer will be subject to income tax if he has been waived a bank loan or interest. As such, both the individual and the company – the borrower – have been getting tax exemptions on such interests.

However, over the past few years, massive amounts of loans have been turning into defaults and most of the default loans are disbursed to companies rather than to individuals.

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

Often a company goes into default due to losses caused by factors beyond their control. However, in the last few years, the issue of defaulting intentionally has become common in Bangladesh. There are allegations that sometimes the bank also has a hand in this.

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

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

Now if that interest amount is considered as income and tax is imposed 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 that such a move would be positive. It will not be easy to make irregularities on the interest of the default loans. This will create an opportunity to get out of the defaulting 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 an initiative.

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 waived. Taxing it will be like slaughtering dead people.

He suggested increasing the tax collection.

Sources say, many times if the loan is not repaid, it goes on year after year. Sometimes it ends up in court. Sometimes the amount of interest becomes more than the principal amount. The interest on the loan can be easily waived as there is no accountability.

Exact figures on how much commercial banks have waived interest rates are not available.