Basics of Taxation

BASICS OF TAXATION

(Income Tax Ordinance, 1984):

Updated till Finance Act. 2011

Of all the direct taxes, Income Tax ranks foremost. By nature and heritage, many of us tend to be just “free riders” in the society. We are little emotional and sometimes unreasonable in demanding more and more state services without the mentality to yield our due share to the cost of the exchequer. Tax laws and personnel connected therewith are many often thought to be inimical by the taxpayers. But it’s a reality that to safeguard our existence and interest in the society, every one of us must pay tax according to our abilities to keep the statecraft running.

Taxation is not only a major means of public finance but also it plays a crucial role in ensuring a social and economic justice. The incidence of direct taxes Viz. Income-Tax, gift-tax cannot be shifted on others and it has to be borne by the person on whom it is levied. My efforts today will be to enlighten the participants of this course on the different aspects of the direct taxes. We shall confine ourselves to the contents only without going into the details of relevant sections of the laws which can be had from the IT. Ordinance, 1984 as amended from time to time through annual Finance Act.

Income-Tax:

Income Tax is a dynamic but mostly a practical subject. It is indeed a difficult task to acquire within this short time at least a working knowledge of income tax specially when the laws of it originate from more than one source, such as:

1. Income-Tax Ordinance, 1984 as amended from time to time through annual Finance Act.

2. Income-Tax manual.3. Supplementary Regulatory Order (SRO), Circulars, Notifications etc.4. Precedents of decided Case laws.

Classification of Taxpayers: Corporate and Non-Corporate

For the purpose of socio-economic stabilization, taxpayers have been classified either as corporate or non-corporate. Companies, banks, corporations and other statutory bodies have been taken as corporate and the rest e.g. Individuals, firms, H.U.F, A.O.P are designated as non-corporate.

Tax rates, residential status, tax exemptions, rebates etc. and in many other areas, the two groups of taxpayers also differ.

Tax is levied on income. But what is income? The term “income” is easy to understand but difficult to define in view of the complexities of tax laws. For our discussion today, we shall confine it to any sort of receipts in the form of money or money’s worth chargeable to tax under any provision of the “IT. Ordinance.”

Prof. Mahbubur Rahman, Ex-Commissioner of TaxesManna Mahadi, Jr. Business Consultant, Octokhan

Otherwise, anything that comes in except those which are excluded by tax laws are included in income.


Sec. 2(34): Income includes-

a) Any income, profits or gains, from whatever source derived, chargeable to tax under IT Ordinance; 84;

b) Any loss of such income, profits or gains;c) The profits and gains of any business of insurance carried on by a mutual

insurance association computed in accordance with the IT Ordinance; 84:d) Any sum deemed to be income, or any income arising or received or deemed to

accrue or arise or be received in Bangladesh.

New provision; 2002: Provided however, that Bonus or Bonus Shares issued / declared by a company shall not be included as income of the recipient shareholder.

Income may be “assessable” or “non- assessable”. Non-assessable are totally ignored by tax laws Viz. pension income, receipts of accumulated balance from recognized provident fund etc. as have been declared as non-assessable income by the Govt. from time to time. Assessable income is again divided into taxable and non-taxable income. Non-taxable income is taken into total income for taxation rate purpose but no tax is to be paid on this part of income, rather, a proportionate rebate is allowed on this income as is included in the total income. Non-taxable income like share income of partnership firm, share income from Hindu Undivided Family etc. (Salary income of Govt. servant was deemed to have been tax paid till 30.06.2010 but it has been made taxable by Finance Act. 2011) are included in the total income of the tax payers only to raise the income ceiling and the tax rates as and when applicable. For example, a tax payer with an income of Tk.1,50,000/- would not be at all taxable (below taxable ceiling) but it shall be taxable due to inclusion of his/her share income of a firm (already taxed at firm’s stage), say another Tk.1,50,000/-. But with the inclusion of his non-taxable income (taxed share income), the total income works out Tk.300,000/- and the tax as per Finance Act., 20011 is Tk.12,000/-. But he/she has not to pay Tk.12,000/-rather, a proportionate rebate for this inclusion of the said non-taxable income (12,000/300,000) X 1,50,000/ = 6,000/- is to be deducted from the tax payable i.e. net tax Tk.(12,000-6,000)=6,000 remains to be payable instead of Tk.12,000/- as calculated above on his total income of Tk.300,000/-. Who is to pay tax? Sec. 2(55)

Taxability of a person is determined on the basis of his residential status. Anyone staying in the taxable territory for 182 days or more in the income year or 365 days at a time or consecutively within 04 years immediately before the income year just preceding the assessment year plus a minimum of 90 days in the income year, shall be deemed to be resident. Otherwise, a non-resident. Non-resident except a Bangladeshi non-resident has to pay tax at the maximum rate of 25% irrespective of total income. Moreover, a Non-Resident shall not be entitled to any sort of tax rebate like investment tax rebates etc. Companies and other statutory bodies shall be resident if their control and management is wholly situated in Bangladesh. HUF, firms or other Association of


Persons shall be resident in Bangladesh if its control and management is situated wholly or partly in Bangladesh in that year.

Assessment year means the Govt. financial year just following the income year when the assessment is to be made.

Who and when to submit return & where?

Any assessee being taxed at any time within the last 03 years and assesses having got taxable income for the current year shall have to submit I.T. return. Admitted tax has to be deposited along with return (Sec. 74). A person owing a building of more than one story and with a plinth area of more than 1600 sft. Or a motor car or having an ISD telephone connections, contesting the elections of local bodies or of the Parliament or being a member of a club registered under VAT ACT, 1991, has also to submit IT return (Sec.75 (1)/(75)(1A). In the case of an individual, such returns including the returns under Universal Self Assessment, shall be accompanied by particulars of his personal and family expenditures as per the prescribed form – IT-10BB.

Penalty for non-submission of return (Sec.124):

Any person failing to file the return within time may have to pay a penalty of 10% of the last assessed tax but in no case it shall be lesser than Tk.1000/- plus in cases of continuous defaults, a further sum of Tk.50/- per day till the default continues.For assesses other than companies and statutory bodies, the last date fixed by law for submission of return is 30th September each year. The companies, banks and other statutory bodies like TCB, BCIC, Grameen Bank etc. have to submit their returns within 06 months from the end of its income year or within the next 15th

July, whichever is later. Non submission of returns within due date unless extended by the NBR or by the Dy. Commissioner of Taxes in individual cases for a maximum periods of six months, shall entail a mandatory penalty as stated before and in addition, a summary assessment by the Deputy Commissioner of Taxes (DCT) may be made u/s 84 ex-parte to the best of his judgment. However, the DCT shall not extend any time in case of a return under Universal Self Assessment u/s 82BB. The return has to be submitted to the income tax circle concerned. The whole of the taxable territories have been divided into Zones, Ranges and Circles. For example, Dhaka Zones 1 to 8, Chittagong Zones 1 to 3, Rajshahi & Khulna Zones etc. Zones and Ranges are headed by Commissioners and Addl./Joint commissioners and the Circles by Deputy/ Asst. Commissioners on the basis of its revenue importance. An assessee has to file the return to the concerned income tax circle under whose jurisdiction the assessee falls as per order of the Tax Authorities.

Total Income and its Sources (Sec.43)

Any income subjected to tax must fall within a definite source as defined U/S 20 of IT Ordinance, 84. These are income from salaries, profession or vocation, interest on securities, house property income, agriculture, capital gains and income from


other sources. Except the last two heads, all others are more or less self-explanatory. An income from other sources is one, which cannot be attributed to any of the defined sources as above. For example, income from gambling, lotteries, dividends, royalties or any income deemed to be as such for reasons of investments and expenses not being adequately explained. Trading liabilities and personal loans not being paid off within three years are also be deemed to be income on the 4th year.

Interest received from Fixed Deposits in Postal Savings Banks or any other scheduled Banks, Dividend income are also specified as income from other sources u/s 33.

Sec. 43(2):All non-taxable income shall be included in total income but not the non-assessable income. Non-assessable income is totally ignored for tax purposes.

Sec. 43(4):Income of wife or minor children shall have to be included in total income of the husband or father unless it can be reasonably explained. The only exception is in the case of wife or minor child when such income arises from assets transferred by way of gift by the husband or father.

Capital Gains (Sec. 31):Capital gains arise as a result of disposal of capital assets except personal effects like wearing apparel, jewellery, furniture, equipments and vehicles. It also does not include gains from agricultural lands beyond five miles of the radius of an urban area, call it municipality, city corporation or otherwise. The law provides that if the sale value shown falls short of the fair market value by more than 15%, the DCT may, with prior approval of his joint commissioner, estimate the fair market value. If this difference goes further to more than 25%, the Govt. may opt to buy it as per the provisions of Income Tax Ordinance 1984. All these are there just to check the gross under valuation of properties so sold off.

The rates of capital gains tax have also been simplified. Capital gains arising out of disposal of assets within five years of acquisition shall fetch tax at normal rate along with other income. If the gains as such, accrue after five years the tax payable by an individual shall be the normal tax along with other income or the normal tax on other income if there be any, plus 15% on the portion of capital gains, whichever is beneficial for the tax payer. A company shall pay tax on capital gains @ 15%. It has been also provided that tax deducted at source @ 2% on the “Deed Value” at the time of registration of the sale deed shall be deemed to be a final discharge of tax liability u/s 82C under this head except where the same capital gains have been reinvested under sub section 10 of section 32 in the equity of a new industry.

a. If the sale proceeds of the scrapped assets fall below the written down value, the deficiency shall be deemed to be obsolescence allowance u/s 19(16).

** The excess of sale proceeds over the written down value, subject to deduction of a maximum depreciation amount allowed so far, shall be taken to be the capital


gain u/s 31 and the deducted amount of depreciation shall be deemed to be a business income u/s 28.

** Capital gains arising to an individual from the transfer of Govt. securities and stock and shares of public limited companies listed with the stock exchanges of Bangladesh are exempted from tax. This exemption shall also be available to a “Non-resident” if similar benefit is available for him in his home country. Sec.32(7): Capital gains arising from transfer of shares and stocks to a company shall be however, taxed at a concessional rate of 10% from assessment year 2010-2011.

Total Income:

Tax is levied on the basis of total income of an assessee i.e. taxpayer. For individuals, Firms etc., the minimum ceiling for taxable limit has been now fixed at Tk.1,80,000/- from the asst. year of 2011-2012. For companies, banks and other statutory bodies, there is nothing like minimum tax ceiling, which means otherwise that these bodies will have to pay tax for any amount of income. The rate is also different as is prescribed by annual Finance Act. Taxability of a resident shall be determined on the basis of his total world income; and it’s the local income only for a non-resident taxpayer. From 2008-2009 to 2010-2011, the minimum ceiling for tax exemptions for a non-corporate tax payers was Tk. 1,65,000/- and for Ladies and senior persons aged over 65 years, it was Tk.1, 80,000/-. But from 2011-2012 assessment year the two groups as above shall enjoy the minimum tax exemption ceiling at Tk.1,80,000 & Tk.2,00,000/- respectively. The next slabs for calculation of taxes for these tax payers shall be Tk.3,00,000/-, 4,00,000/-, 3,00,000/- and maximum rate of 25% thereafter.

Total world income means any income arising to a Resident anywhere in the world

Tax rates have been given at the end of this write up.

Assessment year is the year when the assessments are made. Assessment year must conform to a govt. financial year. It is the year just following the income year.

Income year is the year when the income is earned. Different tax payers may have different income year but each tax payer must fall within a particular assessment year. Income year is otherwise the year just preceding the assessment year.

Assessment:

Section 81: Provisional assessment may be made by the Dy. Commissioner of Taxes on the basis of return submitted or where no return has been submitted, on the basis of the latest assessed income. Regular assessment in such cases shall have to be made subsequently.


Section 82: Where the Dy. Commissioner of Taxes has the reason to believe that the return submitted is correct and complete, he may assess and accept the total income shown as per return.

Section 82B: Assessment as per IT return if the Boards so directs the Deputy Commissioner of Taxes to do.

Section 82BB: Universal Self Assessment - if the return submitted by an assessee appears to be correct and complete, the DCT shall accept it as it is and the receipt given as acknowledgement to the submission of the said return shall be deemed to be as an assessment order of the DCT. However, such returns are also subjected to audit only on the prior approval of the NBR.

Section 83: Assessments after hearing of cases: notices are issued, compliance is asked for, accounts and evidences are verified and the assessments are finally made subject to other norms and procedures.

Sec. 84: Best judgment assessment: For non-submission of returns or for non-compliance of notices after the assessment proceedings began, the DCT shall complete the assessment to be the best of his judgment and determine the total income and tax payable.

If the “best judgment” assessment of the DCT lacks of proper evaluation of legal and factual aspects in the opinion of the Board, the actions of the DCT shall be construed as misconduct. [Sec. 84(2)]

Sec.30A: The DCT cannot disallow any claim of the assessee without ascribing specific reasons for any such disallowance of any item of expenditure. (Finance Act, 2002.)

Sec.93: For concealment of income /underassessment or for undue relief having been enjoyed in the past, the Deputy Commissioner of Taxes, subject to certain conditions and restrictions may start penal proceedings within 05 years from the year of completion of the assessment and determine the income of that year and may further impose penalties as per law.

Sec.94: Assessments shall be made within 02 years from the end of the assessment year in witch the income was first assessable or after the expiry of 09 months from the end of the month in witch the return is submitted, which ever, is earlier.

Sec. 94(4): If the DCT fails to give effects to appellate decision within 30 days, it shall be construed as misconduct.


Sec. 123 to 131:Sec. 164 to 171:

These sections deal with the penalties and prosecutions for various offences and irregularities committed by the taxpayers in respect of their income tax assessments.The punishment ranges between monetary penalty to 05 years imprisonment but in no case, the minimum imprisonment shall be less than 03 months. Appeals by aggrieved tax payers:

An aggrieved assessee, other than a company, may prefer an appeal to the appellate Joint/Addl. Commissioner of Taxes within 45 days from the date of receipt of the impugned assessment order. ( Sec.153)

An appeal fee of Tk.200/- Finance Ordinance, 2007 to be deposited to govt. a/c under code no.1-1143-0010-1876 and the admitted liability U/S 74 shall have to be paid before filing the appeal. A company will file the appeal direct to the Commissioner of Appeals with similar conditions. Sec. 153(1A) The aforesaid appeals shall be deemed to have been accepted unless an order is passed by the appellate authorities within 150 days from the end of the month in which the appeal was filed [sec.156(6)]

Sec. 121A: Revisional powers of the Commissioner

This section was deleted by Finance Ordinance, 2007, but again reintroduced by Finance Act. 2009. The Commissioner may call for any case record wherein the order has been passed by any officer subordinate to him and may pass an order as he deems fit. On the other hand, the tax payer may also file a revision petition to the Commissioner of Taxes within 60 days from the date of receipt of the impugned order along with a fee of Tk.200/-. The undisputed tax under sec. 74 has also to be paid before filing the petition.

The aforesaid review petition shall be deemed to have been accepted unless an order is passed by the Commissioner within 60 days from the date of filing the review petition. This revision petition is subject to the condition that the applicant has to forgo the right to further appeals to Appellate Joint/Addl. Commissioner of taxes or the Commissioner of taxes (Appeals) or to the Taxes Appellate Tribunal as stated earlier.

Taxes Appellate Tribunal: (Sec.158)

Taxes Appellate Tribunal shall be constituted by members being recruited from amongst retired members, NBR, retired Commissioners of Taxes, existing Commissioners of Taxes, Chartered Accountants & ICMA’s with at least 08 years practice, retired District and session Judge and practicing Tax Lawyers of enormous experience. Subject to norms, procedures and limitations, an assessee


can appeal to Tribunal within 60 days and on payment of an appeal fee of Tk.1000/- to be deposited to govt. a/c against the orders of the Appellate Commissioners/Additional commissioners/Joint commissioners of taxes. The appeal shall be deemed to have been accepted unless any order is passed on such appeal by the Tribunal within 06 months from the end of the month in which the appeal was filed.

Provided however, that no appeal shall lie to the Tribunal unless 10% of the amount representing the difference between the tax as determined on the basis of the order in the 1st appeal (revised assessment u/s156) and the tax payable u/s74 as per return is paid. It is further provided that the Commissioner of Taxes may however, waive such payment of taxes u/s 158(2) in a manner as he deems fit on cogent grounds (F. Act. 2011).

Reference to the Hon’ble Supreme Court. (Sec.160, 162)

Such references only on questions of law may be made within 90 days and on payment of a fee Tk.2,000/-Provided however that no reference under sub sec. 01 shall lie against the order of the Taxes Appellate Tribunal unless the following taxes have been paid.

a. 25% of the difference between taxes payable under sec. 74 and the taxes due after the disposal of the case by the Tribunal (taxes u/s. 159) when such taxes does not exceed Tk.10,00,000/-,

b. 50% of the difference between taxes payable under sec. 74 and the taxes due after the disposal of the case by the Tribunal when such taxes exceeds Tk.10,00,000/-

Conclusion:

Tax laws are highly cumbersome and full of juggleriess of repetitions and renewals, which have made it difficult for a commoner to understand. A BCS (Taxation) Cadre officer has to undergo 02 years probation before being posted to the charge of assessments. Therefore, I have no reason to be very much enthusiastic as to the sort of ongoing knowledge the participants may gather from this sort of short lived course so hopefully organized by the management of this great institute.

Rates of Taxes as per Finance Act, 2009.Individual / Firm / Hindu Undivided Family / Association of Person (AOP)

First Tk.165,000 -----------------------------------NilNext Tk.275,000 ---------------------------------@ 10% Next Tk.325,000-----------------------------------@ 15%Next Tk.375,000-----------------------------------@ 20%On the balance ----------------------------------@ 25%


Provided however, that a lady tax payer or a Senior person over 65 shall enjoy the initial exemption of Tk.180,000/- Provided further that an assessee who paid taxes in the maximum rate in the last year shall get a rebate @ 10% on the additional tax attributable to any excess income shown at more than 10% this year over last year.

Rates of Taxes as per Finance Act, 2011.Individual / Firm / Hindu Undivided Family / Association of Person (AOP)

First Tk.180,000 ----------------------------------------NilNext Tk.300,000 -----------------------------------@ 10% Next Tk.400,000-------------------------------------@ 15%Next Tk.3000,000------------------------------------@ 20%On the balance ------------------------------------@ 25%

Provided however, that a lady tax payer or a Senior person over 65 shall enjoy the initial exemption of Tk.200,000/-, the other slabs shall remain as aforesaid.

Non-residents except a Bangladeshi Non-resident, (NRB) shall be charged to tax at the maximum rate of 25%. The NRB shall be taxed at normal rates as applicable to a resident of Bangladesh.

But in no case, tax shall be lesser than Tk.2,000/- for any particular assessment year.

Tax Rates for Corporate Tax payers as per Finance Ordinance, 2011

Public Ltd. Companies listed with the Stock Exchange 27.5% Private Ltd. Companies 37.5% Banks, Insurance Companies and other Financial Institutions 42.5% Mobile Phone Operators Companies 45%

But if any Mobile Company offers at least 10% of its shares in the Stock Market as IPOs, in that case, tax rate shall be @35% Dividend income shall be taxed @ 20% (for the corporate assesses) other conditions remain unaltered as last year.

As per Finance Act. 2011, every company irrespective of shown Profit or Loss, shall pay a minimum tax of 0.50% of the amount representing such company’s gross receipts from all the sources for that year.

An investment tax rebate @10% on 20% of the total income excluding the employers contribution to Provident Fund (Part B of First Schedule) or Tk.100,00,000/- whichever is less, shall be enjoyed by an individual taxpayer. But a corporate Tax Payer is not eligible for any such benefit of investment tax rebate.

Wealth Tax had been abolished (Finance, Act, 1999) and instead, a surcharge had been introduced @10% of the income tax payable for the year if the total wealth, subject to exclusion of a residential house, exceeded Tk.10 Lac and @15% if the same exceeded Tk.30,00,000/-. This surcharge had again been abolished by Finance, Act, 2002.

But the same surcharge has again been introduced through Finance Act. 2011 whereby a surcharge @ 10% shall be imposed on a person whose total wealth as per wealth statement exceeds taka 02 crore.


The income earned abroad by a Bangladeshi citizen and the same being remitted through proper banking channel is totally tax exempted vide SRO. 216-Laws/Income tax/2004 dated 13.7.2004.

Public Ltd. Companies listed with the Stock Exchange will enjoy a rebate of 10% from tax payable if it declares dividend of 20% or more in any year.

Provided further that if a Public Ltd. Co. does not declare a minimum of 10% dividend, it will pay tax @ 37.5%.

Public Ltd. Company declaring dividend of less than 15% of the paid up capital in any year shall fetch an additional tax of 5% on the reserve so made with undistributed profit of the year.

Corporate rates of income tax for ready-made garments industries has been reduced from 30% to 10% by Finance Act, 2003.

Tax rate for textile industries: @ 20%. Assesses other than the above i.e. individuals firms etc. used to get an initial

exemption of Tk.40000/-(non-assessable) from dividends and the balance was to be taxed at normal rate applicable to that assessee. This ceiling of exemption had been raised to Tk.100000/- by Finance Act, 2001. And again reduced to Tk.25000/- by Finance Act, 2002. Again total exemptions of dividend has been allowed by Finance Act, 2003.

However, there is no tax exemption now for Dividend income except that the Companies shall be taxed @20% and an individual shall be taxed at normal rates as applicable to him/her.

50% of income earned through export business shall be non-assessable. Income from Software development is exempted up to 30 June, 2013

Taxability of interests on saving Certificates

Interests credited/paid to the holders of Saving Certificates of any category other than Wage Earners Development Bond, USD premium bond etc. were subjected to 05% deduction of tax at source till 31.12.2003 and the taxes so deducted were considered to be the final discharge of tax liability u/s 82c(4).

But Certificates purchased after 31.12.2003 were immuned from such deductions of taxes at source till 30.06.2007. The interests earned therefrom were as usual added to total income and taxed accordingly.

Finance Act. 2011 had brought another amendment to sec. 52D whereby intersts on any saving instruments including Wage Earners Development Bond, USD premium bond shall be subjected to a 5% deduction of tax at source and the provision for final discharge of tax liability u/s 82C was also withdrawn. Even the interest from pensioners’ savings certificate shall be taxed as usual with 5% tax deduction as aforesaid. But no tax is deductable u/s 52D if the savings instruments is purchased by an approved superannuation fund or pension fund or gratuity fund or a recognized provident fund or a workers profit participation fund.


Henceforth, all such interests shall face tax deductions@5% for onward credit from the tax payable.

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Basics of Taxation