The state coffer's receipts from the banking sector, which accounts for about one-third of the National Board of Revenue's Large Taxpayers Unit's collections, are likely fall in the wake of interest rate caps on loans and deposits, said taxmen and bankers.
"This is going to reduce banks' operating profits," said Trust Bank Managing Director Faruq Mainuddin Ahmed, adding that the decline in banks' income will invariably lead to a reduction in tax collection.
Banks accounted for 35 per cent of tax collection of Large Taxpayers Unit, the main tax collector for income tax under the NBR, in the first half of the current fiscal year.
One of the reasons banks' profits will shrink is because of inclusion of consumer loans to the 9 per cent interest rate bracket, he said.
Consumer loans do not require any security and the recovery process is cumbersome and requires more manpower for supervision.
"If the interest rates on consumer loan are reduced to 9 per cent, no bank will be able to manage. This is why bank's income will drop and so will their profits," he said, while welcoming the lessening of interest rates for industrial credit for giving a boost to industrialisation.
All the banks have downsized their budgets to cope with the new interest rates, Ahmed added.
Taxmen said the effect of interest rate reduction and subsequent drop in profitability of banks are likely to be visible in the next fiscal year as banks will pay tax based on their incomes in the 2019 calendar year.
The LTU is responsible for collecting tax from 439 big companies, including banks and insurances, along with 720 individuals.
Its total collection was nearly one-fourth the total income tax of Tk 73,000 crore collected by the NBR in fiscal 2018-19.
The LTU logged in Tk 17,420 crore last fiscal year and the amount of collection from the banking sector was 38 per cent of its total receipts.
Between July last year and February this year, the LTU collected Tk 10,200 crore and the contribution of banking sector continued to remain more than one-third of its total tax receipts, according to taxmen.
On the surface it seems banks' income will decline for interest rate cuts, said a senior official of LTU seeking to remain unnamed.
But if the demand for loans increases because of the lower interest rates and the amount of defaulted loans improves, there would be no effect on tax collection, he added.
Tax collection from the banking sector will definitively reduce if there is no improvement in default loan situation, said Towfiqul Islam Khan, senior research fellow at the Centre for Policy Dialogue.
"If banks do not improve their efficiency, the new interest rates may affect profitability of the banking sector and the collection of corporate income tax from the sector," he said.
"It needs to be seen how the move impacts the overall economy of the country," he said, adding that if the economy is benefitted by the interest rate cuts, revenue collection is expected to rise.
The reduction of deposit rate though will hit the tax receipts on interest earnings from savings and fixed deposits.
Deposit growth in banks saw a steep decline in January, in a development that can be viewed as the direct impact of the capping of interest rate on savings to 6 per cent.
"Tax will decline proportionately in line with the drop in deposit rate," said a senior official of Tax Zone-1 that looks after collection of the withholding tax from interest incomes on depositors.
The NBR collected Tk 6,577 crore tax on interest income of saving and fixed deposits last fiscal year, up 9 per cent year-on-year, according to data from the field office.
The tax authority collects 10 per cent tax on interest earnings of depositors with Taxpayers Identification Numbers (TINs) and 15 per cent from those who do not have TINs.
Banks deduct the tax on behalf of the NBR while crediting the interest income to savers.