Islamic Finance

Bangladesh: Sukuk investors may be offered fiscal benefits

Published 01 Jun,2021 via The Financial Express - The government is likely to offer fiscal benefits in order to attract investment in Sukuk, a bond-like instrument used in Islamic finance.

The existing gain tax at a rate of 4.0 per cent might be waived on transfer of asset to the Special Purpose Vehicle (SPV) in the Finance Bill-2021, officials said.

Finance Minister AHM Mustafa Kamal may propose the tax waiver while placing the national budget for fiscal year 2021-22 on June 03.

A Sukuk is an Islamic financial certificate, akin to a treasury bond, which complies with the shariah laws.

A senior Bangladesh Bank (BB) official said the move would help attract investment in Sukuk.

Due to higher taxes, investors will have to pay higher at the time of leasing assets to the SPV, although it is not like sale of other properties.

"Sukuk is a real asset-backed security and its issuing company will get back the asset after expiry of the leasing time or end of the term," he said.

Industry insiders said existing taxes on asset transfers are one of the main obstacles to creating a vibrant Sukuk market in the corporate sector here.

Sukuk represents the claim on revenues generated from an underlying asset as well as the ownership of that said asset while abiding by sharia laws.

The product requires the ownership of an asset covered by Sukuk to be repeatedly transferred from one party to another.

"Imposition of gain tax on registration increases the cost of Sukuk," the BB official said.

Registration of assets, transferred or leased to a SPV, should be free of cost since they are not its end user, investors said.

In the income tax law, transferring underlying assets to the SPVs are considered as normal asset transfers.

Industry insiders said applicable rate of taxes or tax incidence stood up to 9.5 per cent for Sukuk while its secured annual return to the investors is 9.0 per cent.

According to tax officials, the government is likely to offer tax benefit to the asset-backed security following request from stakeholders like Bangladesh Securities and Exchange Commission, and Beximco Pharmaceuticals Ltd.

BSEC chairman Shibli Rubayat Ul Islam said the stock market regulator has proposed the NBR to offer tax benefit to Sukuk similar to Zero coupon bond.

The BSEC has also sought tax benefit for all other types of bond to make the market vibrant for financing large infrastructure project of the government, he said.

Last April, Beximco as a maiden Bangladeshi company decided to issue the first-ever private-sector Sukuk 'Al Istisna' for Tk 30 billion.

It is the largest-ever issuance of securities in the private sector of Bangladesh.

When asked, Beximco Pharmaceuticals chief financial officer Ali Nawaz said the demand for Sukuk is increasing in Bangladesh as many sharia-compliant investors do not want to receive interest.

The waiver of taxes will attract investors in this instrument, he told the FE.

Unless tax exemption, Mr Nazaw said, Islamic finance would not be workable.

"Retired person won't be able to carry out their family expenses with 1.0-2.0 per cent return that they get currently from deposits in Islamic bank."

The Beximco official has sought fiscal policy support for Sukuk to help such investors get higher return.

Islamic banks cannot buy traditional bonds like their conventional counterparts since bonds are interest-based.

The market size of Islamic banks is an estimated 35 per cent of the total banking sector.

In December 2020, the government issued the first-ever Tk 80-billion Sukuk for a safe water supply project.

During auction, investors submitted bids worth Tk 151.53 billion for this project.

Sovereign Sukuk is the main contributor of the global sukuk market.

According to the IMF Sukuk database, the amount of sovereign Sukuk reached $606.3 billion, or around 55 per cent of Sukuk issued globally, by the end of 2018.

As per the City Bank Capital Resources data, the country's bond market size is $37.5 billion. Of that amount, corporate bonds account for $2.5 billion.

In Malaysia, Sukuk is a popular investment instrument where 50-60 per cent of the transaction is conducted through the instrument.

Industry insiders said fiscal benefits could attract the investors from Malaysia to look into Bangladesh as another potential investment destination.

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