Agencies executing the foreign-funded projects in Bangladesh will be liable to pay taxes from their own coffers if deduction of tax from the project funds is barred under deals signed with providers of funds, according to a latest government decision.
Under the existing rules, the implementation agencies of foreign-funded projects have to deduct taxes while making payments to any foreign contracting firms.
In some cases, there are few international agreements that incorporate tax-exemption clauses.
Accordingly, the local implementing authorities claim tax exemption on the foreign funds.
The decision on collection of taxes from all foreign-funded projects recently obtained the seal of approval from Finance Minister AMA Muhith.
The project-implementing authority, organisations or ministries concerned would be responsible for payment or deduction of income tax, customs duties and Value Added Tax (VAT) from the funds allocated by the development partners for implementation of projects.
International Agreement and Opinion wing under the National Board of Revenue (NBR) issued a letter recently to all the wings concerned to proceed on with the latest mode of taxing.
Earlier, an inter-ministerial meeting attended by officials of the NBR, Finance Division, Foreign Ministry, the Planning Commission, Implementation, Monitoring and Evaluation Division (IMED) and Science and Technology Ministry reached the agreement.
Abdur Rahman FCMA, first secretary of the income-tax policy wing of the NBR, confirmed the decision and clarified the process.
“According to the existing law, a project-implementation agency is required to deduct tax at source from the project funds provided by the development partners,” he said.
However, the authority will have to pay the taxes from its own coffers in case of international or bilateral agreement with provision barring deduction of taxes from project funds.
It has been alleged that many of such international agreements on mutual cooperation have been signed earlier incorporating provisions of tax exemption without obtaining vetting from the tax authority.
Under the existing tax rules, any tax-related matters in draft international agreements require vetting from the NBR prior to signing with the parties.
Tax officials said the field-level tax offices raised the issue when they faced complexities after claiming tax at source from the implementing authority against the foreign-funded projects.
Every year, the government is implementing a large number of projects with the joint funding of development partners’ loans or grants and local funds.
There are some 177 foreign-funded projects under the Annual Development Programme (ADP) for fiscal year (FY) 2014-15. Of the projects, the highest number is 36, in power sector, followed by 26 in transportation, 20 in rural development and rural institutions.
Earlier, Bangladesh Power Development Board (PDB), Power Cell, Bangladesh Telecommunications Company Limited (BTCL) had been asked to pay taxes from the projects that they were executing with foreign funding.
“In most of the cases, the authorities did not deduct the tax,” said a revenue official concerned.
The implementing agencies hire foreign firms for execution of large projects, either under conditions binding the use of foreign loans and grants or for technical know-how.
Tax officials said the implementing agencies claimed tax-exemption for the projects as those are being executed with foreign loans or grants.
They said the local contracting firms are paying taxes for implementing the projects and the tax rules made the provision equal for foreign contracting firms too.