Under the income tax law, companies deduct interest on loans as an “expense” from their annual profit and report a net profit. A provision changing how that interest is treated for tax purposes has been placed before parliament. Finance Minister Amir Khasru Mahmud Chowdhury tabled it in parliament on June 11.
Officials familiar with the matter said the main aim is to stop companies from repeatedly claiming loan interest as an “expense” to avoid tax. If a company does not actually pay the interest it claims as a cost within three years, the government will treat it as income that was never an expense, but a profit, and tax will then be due on it.
A senior National Board of Revenue (NBR) official told Amar Desh that, under international accounting standards, accounts are kept on an accrual basis. But the provision in the income tax law had been framed on a cash basis. By adding the new clause, the accounting of company expenses has also been brought onto an accrual basis to align with the International Financial Reporting Standards (IFRS). The provision is correct in the English version of the income tax law, the official said, but had somehow gone missing in the Bengali translation, so the clause is now being re-inserted.
The difference between accrual-basis and cash-basis accounting can be illustrated with the following example. Suppose a company takes a loan of Tk 1 crore from a bank, with annual interest of Tk 10 lakh.
Accrual basis: Under accounting rules (IFRS), even if you do not pay the money this year, that Tk 10 lakh is this year’s “expense.” This is because the interest relates to this year and the company is obliged to pay it. So in the financial statements you will show Tk 10 lakh as an expense.
Cash basis: Under the income tax law, the NBR previously held that “if the money does not leave your pocket (or is not paid), it will not count as an expense.” So even if the company showed that Tk 10 lakh as an expense, in its tax return the NBR would disallow it and impose tax on that amount.
Where was the problem?
This created a difference, or a timing gap, in a company’s books. Accounting says it is an expense, but tax law says it is not. The new clause means the NBR is now saying: “All right, since you are showing this as an expense on an accrual basis, we will allow it. But this concession cannot continue indefinitely.”
In other words, if the interest is not paid within three years and the money is added to the loan principal or otherwise rolled over, the government will, in the fourth year, treat it as income and demand tax on it.
বাংলায় মূল প্রতিবেদন পড়ুন · Read the original Bengali report