Corporate tax cuts needed for financial sector

The financial sector is going through a challenging situation owing to a surge in the borrowing cost and its impact on profitability, so a cut in corporate tax rates may help the sector gain momentum and boost the economy, said a top executive of a non-bank financial institution.

"This is because the sector's profitability is dependent on businesses, and businesses are suffering tremendously due to lower demand," said M Jamal Uddin, chief executive officer and managing director of IDLC Finance Ltd.

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"This lower demand has been caused by higher inflation, which is ultimately the result of the Russia-Ukraine war," he said in an interview with The Daily Star while sharing his observations about the proposed budgetary measures for the next fiscal year of 2023-24.

The top executive said banks and NBFIs have not seen any direct policy-level changes in terms of tax measures. At the same time, there are no significant changes that may influence the banking habits of individuals or corporate customers.

"However, a slight decrease in the corporate tax rate for banks and NBFIs may help the sector."

In the proposed tax measures, the National Board of Revenue (NBR) has sought to continue the corporate tax rates for listed banks and NBFIs at 37.5 per cent. The rate for non-listed financial institutions is 40 per cent, the second-highest after mobile phone operators and tobacco companies.

Jamal said one of the major concerns of the financial sector is the ailing capital market, which has been bearish for a while due to macroeconomic adversities.

But there have been no significant fiscal measures for the capital market in the proposed budget, he said.

The CEO praised a government initiative that has reduced the number of tax-related reports that are required to submit every year to 12 from 29.

"It will reduce the operational expenses that are needed to prepare them."

Another good initiative is the move to expedite transactions through mobile financial services and the focus on cashless transactions, according to Jamal.

"This may increase transactions through formal channels and liquidity in the market."

However, there is no measure that directly impacts the banking and the financial sectors, he said.

One of the major tools in meeting the budget deficit is bank borrowing and the government plans to take on Tk 132,395 crore from the banking system.

"This may have an impact on the private sector credit growth and the overall liquidity in the sector," Jamal said.

"The increase in the borrowing from the banking sector may create a crowding-out effect on the economy and lead to fund shortages in the private sector, which will raise the cost of borrowing. Ultimately it can impact the profitability of the banking sector."

Furthermore, the environmental surcharge, another praiseworthy initiative of the government, will impose a higher effective corporate tax and bring down the disbursement of car loans, he said.

"The rise in the prices of various essential products, along with the travel tax increase, will raise the general and administrative expenses."