Chittagong, Bangladesh

Navigating the Capital Gains Tax (CGT) Legislation in Bangladesh

By Ishtiaque Shaan and Moshiur Rahaman, Ahmed Zaker & Co. Chartered Accountants

As is the norm globally, capital gains arise following the transfer of “capital assets”, which within The Income Tax Ordinance, 1984 (ITO, 1984) in Bangladesh has been defined as property of any kind held by an individual or
business except the following:

  1. Inventory, comprising of raw materials, work-in-progress, finished goods, and consumables; and
  2. Personal effects, i.e., movable property which have been held exclusively for personal use and not within the scope of business, with examples including wearing apparel, jewellery, furniture, fixtures, equipment, and, notably, motor vehicles as well.

However, when any of the items listed within personal effects, in point 2 above, are used by a business (regardless of their legal form), then they will fall within the scope of CGT. Additionally, shares of companies also fall within the definition of property and therefore fall within the scope of CGT.

In order to keep things simple while navigating the CGT landscape, we divide up the content of the legislation in the following manner:

1. CGT on Sale of Shares of Listed Companies

Capital gains from the transfer of shares of public limited companies listed with stock exchange except government-issued securities (see table).

2. Capital Gains Tax Other Than Sale of Shares of Listed Companies

Capital gains arising from the transfer of all other items of property by both individuals and businesses alike are eligible for CGT at the rate of 15%, regardless of the period of holding of the asset from the date of its acquisition.

We have provided some illustrative examples.

Example 1 – CGT Implications for Individuals

Individual A purchased an apartment in 2015 for BDT 1.5m. Additionally, he incurred the following expenses shown in TABLE A below.

In 2018, he entered into an agreement to sell the property to Individual B for a consideration of BDT 5m, which is consistent with the fair market value of the property. Prior to the sale, Individual A had received an advance of BDT 800,000 in accordance with the terms of the agreement that they had decided upon (see TABLE B below).

Rollover Reliefs

As per Section 32 (5) of ITO, 1984, businesses (both incorporated and unincorporated) are also eligible to claim a form of “rollover relief” once a capital gain has risen from the transfer of a plant, machinery, equipment, motor vehicle, furniture, fixture and computer provided that they were being used by the business immediately before the date on which the transfer took place and the business has within a period of one year before or after that date, purchased a new plant, machinery, equipment, motor vehicle, furniture, fixture and computer.

Once eligible, the business will have to subsequently calculate the relief in the following manner:

  1. If the amount of the capital gains > cost of acquisition of the new asset: The capital gains up to the extent of the cost of acquisition of the new asset shall be exempt and the balance shall be charged to CGT (15%).
  2. If the amount of the capital gains = cost of acquisition of the new asset: No CGT shall be charged on the asset.
  3. If the amount of the capital gains < cost of acquisition of the new asset: The cost and subsequently the written down value of the new asset can be reduced by the amount of the capital gains.

Additionally, the legislation allows the transfer of buildings and lands to a new company for setting up an industry provided the whole amount of the capital gain arising from the transfer is invested in the equity of the said company. Subsequently, the capital gains shall not be charged to tax in the year of transfer as per Section 32. The same facility is available when a partnership firm transfers capital assets to a new company.

However, it is crucial to note that the individual or business will need to file or apply for an exemption prior to the assessment of CGT in order to be eligible to claim this relief.

The following example illustrates the CGT application for companies themselves as well as the rollover relief application:

Example 2 – CGT Implications for Companies and Rollover Relief Application

Company X sold a machine in early 2018 for BDT 21m. It had purchased the machine five years ago at a cost of BDT 4m, with set up costs amounting to BDT 590,000. In late 2018 (and therefore within a period of one year), Company X decided to purchase another machine at a cost of BDT 30m and has duly informed the relevant tax authorities about its aim to apply the rollover relief onto the purchase price. Normally, the capital gain would be as shown in the TABLE C. However, if Company X applies for rollover relief on a timely basis and tries to utilise this in a tax-effcient manner:

  • Company X will not have to pay the CGT of BDT 2,461,500; and
  • It will be able to reduce the cost of the new asset by the chargeable gain amount of BDT 16,410,000 for the purposes of tax depreciation calculation and gain or loss on disposal of that asset for tax purposes; effectively pushing the gain forward into future years.

Differences between Fair Market Value and Declared Value

As a means of preventing tax evasion, differences of 15% and/ or 25% between the Fair Market Value determined by the income tax authorities and that which has been declared by an individual or an organisation, are subject to further scrutiny and approval and where applicable, strict measures.

Conclusion

In conclusion, the topics discussed above aptly cover the salient features of the CGT legislation in Bangladesh and despite its relative simplicity, we strongly believe that developing a strong understanding of the tax legislation and adopting a proactive attitude in planning, designing and implementing an appropriate set of procedures will help both individuals and organisations alike to ensure that they are taking CGT-affecting decisions in the most tax-effcient manner.


Ishtiaque Shaan

Ishtiaque Shaan

GGI member firm
Ahmed Zaker & Co. Chartered Accountants
Advisory, Auditing and Accounting, Corporate Finance, Tax
Chittagong, Dhaka, Uttata, Bangladesh
T: +88 02 8300504-8, +88 02 8300503 (Dir)
E: This email address is being protected from spambots. You need JavaScript enabled to view it.
W: ahmed-zaker.com
Moshiur Rahaman

Moshiur Rahaman

GGI member firm
Ahmed Zaker & Co. Chartered Accountants
Advisory, Auditing and Accounting, Corporate Finance, Tax
Chittagong, Dhaka, Uttata, Bangladesh
T: +88 02 8300504-8, +88 02 8300503 (Dir)
E: This email address is being protected from spambots. You need JavaScript enabled to view it.
W: ahmed-zaker.com


Publshed: GGI Insider, No. 105, January 2020 l Photo: hit1912 - stock.adobe.com

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