…as part of a move to encourage saving

Saving: The Cabinet yesterday approved the Central Bank’s proposal to waive taxes on interest earned from fixed deposits. It is now up to Parliament to endorse the move.

Prime Minister Tshering Tobgay said Cabinet approved the proposal to encourage people to save more. He said the government may have to forego some amount of tax revenue but it’s not substantial.

An official from the Central Bank confirmed that tax revenue from interest earned on fixed deposits are not sizable. Unconfirmed figures point to the tune of not more than Nu 8 million. “It does not add any meaning to the national revenue and it does not make sense for the government to tax fixed deposits,” he said. On the flip-side, the official said taxation on fixed deposits has deterred people from saving.

A private analyst pointed out that there is no benefit in having fixed deposits. For instance, if you save Nu 100 in fixed deposit with six percent interest per annum, accounting for inflation of six percent a year, the entire earning in interest is eroded. He added that the tax paid is a loss from the principal amount. “It doesn’t make sense to have fixed deposit then,” he said.

The RMA official said doing away with taxes is a “big move.” He said that it will stimulate savings and the money would be used for investment, which will drive the economic output of the country.

A banker said fixed deposits are good for banks, the more the fixed deposits, the more is the bank’s capacity to lend. Other deposits like savings and corporate deposits are unreliable because the depositors can withdraw any amount whenever they want. This, he said, puts the banks in an awkward situation to lend.

But fixed deposits are there for a certain predetermined time and the amount can be used to provide loans. In other words, fixed deposits are less risky for the banks.

Currently, corporate deposits dominate the deposit holding pattern of the banks. As a share of total deposits, demand deposits or money that can be withdrawn without prior notice including corporate deposits, hold a substantial share, accounted for 54.35 percent of the total deposits in the 2014-15 financial year.

In terms of customer holdings, out of total deposits of Nu 71 billion, retail deposits accounted for 49.27 percent (Nu. 34.98 billion) and the remaining 50.73 percent (Nu. 36.02 billion) constituted corporate deposits.

Time deposits, in the same year, increased from Nu 26.77 billion to Nu 32.41 billion out of which fixed deposits increased from Nu 25.79 billion in June 2014 to Nu 31.28 billion in June 2015.

The total deposit base of the banking sector increased from Nu 66.67 billion to Nu 71 billion indicating a growth of 6.50 percent during the period.

This was due to an increase in the saving, fixed  and recurring deposits by 15.36 percent, 21.31 percent and 14.81 percent respectively.

Lyonchoen said that the government will also start saving collectively. He announced that a stabilisation will be established within their tenure, where certain percentage of proceeds from the hydropower earning would be put in.

He said that the government need its savings to tackle problems it may face in the future. The finance ministry and the Central Bank is working on this and will recommend to the government the details of the fund, including the cuts from hydropower.

Tshering Dorji