Income generated from private sector employee's retirement benefit funds is about to go down significantly as a result of the current fiscal year's taxation policy at a whopping rate of 27.5%.
The Income Tax Act 2023 has removed the tax exemption and amnesty on the compulsion to file returns for funds such as provident funds, gratuity funds and workers' profit participation funds.
Not only private sector employees will get less benefits than before when they withdraw the provident fund but the cost of establishing the gratuity fund will also go up for organizations.
How provident funds work
Suppose you work in a private company, and you deposit Tk3,000 from your monthly salary into the provident fund.
The organization also keeps Tk3,000 for you, so that makes Tk6,000 a month and Tk72,000 annually.
Now, if your organization deposited this amount with a bank or NBFI as FDR with 10% interest then the interest rate will be Tk7,200 per annum.
Earlier, Tk720 was deducted as source tax on this investment, at the rate of 10%. With the new 27.5% tax, the government will take Tk1980 to its state coffers -- that is, the government will deduct an additional Tk1,260 every year from your retirement benefit, starting from this fiscal year FY24.
The entire amount of the gratuity fund is paid by the organization, when the employee quits or retires.
Then he gets one basic salary (last basic salary) for each year of his service. Now this increased tax will increase the cost of the organization.
So, the gratuity may not have a direct impact on employee's retirement benefits, but experts believe it may discourage the company from investing in employee's retirement benefits.
Although this does not apply to government employees. The question on many people’s minds now is why was it suddenly decided to collect tax from the retirement benefits of private sector employees?
Will it benefit state coffers?
According to National Board of Revenue (NBR) data, the contribution of payroll tax is about 3% of the total income tax.
According to income tax experts, not everyone's income from provident funds is the same. But according to this rule, everyone's provident fund income will be taxed at the rate of 27.5%, which is not logical.
Snehasish Barua, an Income tax law expert, and Managing Director, SMAC Advisory Services Ltd told Dhaka Tribune: “Some employees' incomes are below the threshold, and some pay taxes at lower tax rates 5%,10%, 15%, 20% or 25%. Funds (provident) could have been exempt from taxation and interest income could have been taxed as an individual in order to achieve justice. The law should have been aligned for both private and public sector employees.”
He also said that earlier, a 5%-10% tax deducted by the payer on income of provident funds and gratuity funds was also taxed, but in a slightly different way, such as investing in bank or NBFI's fixed deposits (FDR) or in various profitable sectors, including National Savings Certificates.”
“According to the new law, the income of these funds will be taxed at 27.5%. In this, private sector employees will get less when they withdraw this money when they retire or quit their jobs or dissolve the provident fund,” he elaborated.
However, no tax will be levied on withdrawal of provident fund after retirement or after leaving the service, even if the provident fund is withdrawn any time during the working period if required, no tax will be levied.
Apart from this, there is no tax on withdrawal of gratuity money. This money is tax-free income, as always.
Former lead economist at the World Bank Dhaka office, Zahid Hussain told Dhaka Tribune: “It is hard to fathom the logic behind this policy. Why is it not taxed under the regular income tax rate structure? Why are government provident funds exempted?”
This will certainly discourage provident funds in the private sector, he added.
TIM Nurul Kabir, executive director at the Foreign Investors' Chamber of Commerce & Industry (Ficci), told Dhaka Tribune: “On one hand, deducting tax from the pension of private employees when the government is doing the Universal Pension Scheme is against the basic policy of the government. It must be withdrawn.”
Employees put money in provident funds like saving with a single penny throughout their lifetime. It acts as social security after retirement. Those employees will be affected if the tax is increased now, Kabir also said.
“At the same time, if the government wants to increase its revenue collection, then we can show other sectors,” he also suggested.
Nazmunnahar Happy, an employee of an insurance company, told Dhaka Tribune: “Benefit money in the forms of provident fund and gratuity during retirement is not only useful, but also act as last resort of hope for us (private sector employees) even though it's not as much as government employees.”
“Generally, the government collects taxes for the welfare of the people. But now, tax is being taken from the public welfare fund. It is against progressive taxation and against equality of justice,” she said.
Sams Uddin Ahmed, member on tax policy at NBR, could not be reached for comments despite multiple attempts over phone and messages.