International Islamic University Chittagong

8/3/2019 International Islamic University Chittagong

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Introduction

A country s tax administration is one of the few public sector organizations

which touches the lives of a country s citizens and businesses on a daily basis and,arguably has the greatest impact on their livelihood. Tax administration employees areamongst the most frequently contacted government officials and often represent to the

public what is right or wrong about their government. The responsiveness, integrity, and

quality of tax administration staff must therefore meet a very high standard. Revenue

collected from taxes along with customs collections represents the major funding sourcefor governmental expenditures.

An effective and efficient tax administration system is integral to any countryswell being. The proper amount of tax must be collected in a timely manner and the

enforcement powers of the tax administration must be applied judiciously and in an even

handed fashion. The tax administration must provide an even playing field for businessby ensuring that all taxpayers meet their tax filing and paying requirements. This requires

significant efforts to deal with the underground economy and to, therefore, increase the

tax base. Failure to bring business activity from the shadow economy into the tax systemputs compliant taxpayers at a competitive disadvantage, and ultimately leads to an

erosion of the tax base. The tax administration must balance its educational and

assistance role with its enforcement role. The overriding goal is to foster voluntary

compliance with the tax laws. This represents a significant challenge in a developingeconomy.

Private enterprises in developing countries often face difficulties when dealing

with the government in general and the tax administration in particular. Many of thedifficulties with the tax authorities are the consequence of poorly conceived tax policies

and a lack of certainty regarding future policy changes. It would be rare indeed to nothear complaints about the complexity and/or ambiguity of the tax laws, high tax rates,

and the lack of an integrated fiscal strategy that takes social taxes, and local taxes and

fees into account when determining the overall tax burden placed on the business

community.

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In carrying out their responsibilities, tax administrations can also create problemsfor the business community when they impose burdensome reporting and record keeping

requirements; conduct excessive inspections and audits; fail to deal with corrupt tax

administration employees; and, fail to provide transparency in tax administrationoperations. This type of environment harms individual businesses and the overall

economy. As a result, many in the business community react by taking steps which

adversely affect the tax base. This typically includes underreporting profits and turnover;

underreporting employee wages; and, by creating phantom employees. A significantnumber of businesses also fail to register or file tax declarations. This only increases the

burden on those taxpayers who try to comply with the tax law, and discourages their

future compliance. The result is a vicious cycle which tends to preserve the status quo.

Only meaningful reforms to the tax system can break the cycle and result in an

improved business climate which will stimulate economic growth.

According to the sec.-94: Limitation for Assessment:

(1) [(1) Subject to the provisions of sub-section (2) & (3), no order of assessment underthe provisions in respect of any income shall be made after the expiry of six months from

the end of the assessment year in which the income was first assessable.]

(2) [(1A) notwithstanding anything contained in sub-section (1), no order of assessmentunder sub section (2) of section 82B or sub-section (2) of section 83A shall be made

(a) After the expiry of two years from the end of the assessment year in which the incomewas first assessable; or

(b) After the expiry of the period of fifteen months from the end of the month in whichthe return is submitted, which ever is earlier.]

(2) Notwithstanding anything contained in sub-section (1), assessment under section 93

may be made-

(a) In the cases falling under section 93(3)(a) & (b),within (3) [two years] from the end of

the year in which notice under the said sub-section was issued ; &

(b) In the cases falling under section 93(3)(c) , within (4) [one year ] from the end of the

year in which notice under the said sub-section was issued .

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(3) Notwithstanding anything contained in this section, limiting the time within which

any action may be taken, or any order or assessment may be made, order or assessment,as the case may be, to be made on the assesses or any other person consequence of, or to

give effect to, any finding or direction contained in an order under sections 120, 121,

(5)[**] 156, 159, 161 or 162 or, in the case of a firm, an assessment to be made on a

partner of a firm in consequence of an assessment made no firm, (6) [shall be made

within sixty days] from the date on which the order was communicated] (7) [& such

revised order shall be communicated to the assesses within thirty days next following

8) [: Provided that where an order of assessment has been set aside by any authority in

that case the assessment shall be made within forty five days from the date on which the

order was communicated to him .]

(2) [ (4) Where the Deputy Commissioner of Taxes fails to give effect to any finding ordirection contained in an order referred to in sub-section (3) within the period stipulated

therein , such failure of the Deputy Commissioner of Taxes shall be construed as

misconduct .]

Limitation in Respect of Allowance for Depreciation.-

1. The aggregate of the allowance for depreciation allowed under this Ordinance or

the Income-Tax Act, 1922 ( XI of 1922 ), in respect of any asset, shall not exceed

the original cost of the asset .

2. Where full effect cannot be given to depreciation allowance under this schedule in

the year in which it is admissible, there being no income chargeable for that yearor such income being less than the allowance admissible, then, subject first to

carrying forward of the loss, if any, under section 38, the allowances or the part

thereof to which effect has not been given shall be added to the amount of the

allowance for the following year or, if no allowance is admissible for suchfollowing year, shall be deemed to be allowance admissible for such year & so on

for succeeding years till such time as the entire allowance on this account is

adjusted against the profits .

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Limitation for Claim.-

1. Subject to the provisions of sub-paragraph (2), any claim for an allowance by way

of credit for foreign tax in respect of any income shall be made to the Deputy

Commissioner of Taxes of the district in which the claimant is chargeable toincome tax not later than two years from the end of the year of assessment for

which that income falls to be charged to Bangladesh tax or would fall so to be

chargeable in respect thereof.

2. Where, the amount of any credit given under the agreement is rendered excessive

or insufficient by reason of any tax payable either in Bangladesh or under the law

of any other country, nothing in the Ordinance limiting the time for making ofassessment of claims for refund shall apply to any assessment or claim made not

later than two years from the time when all such assessment , adjustments & other

determinations have been made whether in Bangladesh or elsewhere, as arematerial in determining whether any, & if so, how much, credit falls to be given.

Conditions & Limitations of Carrying forward of Losses.-

1. The provisions of sections 37, 38, 39, 40 &41 shall have effect subject to theconditions & limitations set out in this section.

2. For firmthe firm itself is treated as an assesses & rules of section 37 isapplicable for such firm. So the partners shall not be entitled to set off & carry

forward of partnership losses against their own income.

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Progressively of Tax Rates:

This study has analyzed the tax liability and degree of progressiveness of differentlevel of income for personal income taxes since FY 1992- FY2002. It seems that both the

rates are decreasing over the years for the lower and middle-income earners but remain

static for the higher income groups. The results of periodic average of the two indicatorsalso resemble the same. The sudden shifting of income exemption limit for FY 2000 and

FY 2001 were very unusual that entirely escaped the lower income people that might lead

them to be out of the purview of taxation. Both the rates found zero at the initial level of

income, which will be thought to be far above the average tax exempted level even in

neighboring south Asian countries.The effect in the context of Bangladesh is twofold. First, it will obviously work

against broadening the much-desired income tax net. Second, it might lead to shift the taxliability only to a limited number of taxpayers of middle and higher-income groups. Since

FY 1992 to FY 1999 it seems there were always a common effort to reduce the average

tax rates for especially the lower income people but for the middle and high-incomeearners it affected too slowly. However for marginal rate of taxes it remains very

proportional for the middle and high-income earners. An effort has only been made in FY

2002 to reconsider the tax-exempted limit as earlier that might help the government to

keep those taxpayers within the ambit of taxation. It is thus recommended to soften thetax burden among all the taxpayers in such a manner that might reduce the average tax

rates of middle and higher income people.

Inequality of Taxing Urban and Rural Sectors:

There is a common belief that the tax structure in Bangladesh is biased against thepoorer class, especially in the rural areas. On the other hand, there is also the view often

expressed by a section of the community, particularly in the urban sector, that the present

tax structure weighs heavily against the business and entrepreneur class. It is due to thefact that the effective tax rate is higher in the urban sector than in the rural sector because

of the difference in the nature of tax and the intensity at which such tax is imposed on the

two sectors, and the structure of consumption and income between urban & rural sectors.

The commissions report presented the relative tax burden of the two sectors from directtaxes. The average burden of direct taxes on urban sector was 0.31 percent as against 0.14

percent in the rural sector. It shows that the effective tax rate in the urban sector was 2.21

times higher than that of the rural sector in 1979. Over the years the situation remains thesame and in fact still the extreme majority of taxpayers are urban people. This happens

because the urban sector is more monetized and the government has more control over

the urban sector. Such an inequality should be resolved and taken into account in futuretax reforms.

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Inequality in taxing Wages between Private and Public Sector:

In Bangladesh, income tax for government employees is deemed paid by their

employer that is government. However, if a private employer pays income tax for itsemployees, such payments are considered income, which creates additional tax burden

for the employee of the private firm. This seems discriminatory, that encourages

employees of private firms to avoid or evade taxes. Such discriminations create socialinequality and distortion in the tax system of the country with negative impact on her tax-

GDP ratio and hindering the expansion of tax base as well. Since governments of the

developing countries solely run the development activities, the bureaucrats hold extra

power that enhance abuse of power and lead them to corruption.The recent corruption index published by the UNDP (2002) resembles the same

for Bangladesh. When such public servants are kept outside the purview of taxation it

works as some sort of incentive for them to become corrupted. The problem obviouslylies unresolved due to the existing poor salary structure of the government employees that

usually not frequently adjusted with the current higher inflation rate. Improving existing

salary structure as a means to protect corruption has been adopted by many otherdeveloping countries as China and India (The Economist, May 2002). Government of

Bangladesh might have to coincide with the standard as to expect good governance and

transparency among civil servants. In that case rightsizing the government with

maximizing salary level is much desired.

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Characteristics of Tax Administrations in Developing Countries Prior to

Reform

Most or all of the following characteristics are present in countries before taxadministrations undergo major reforms. This is especially true in a country which is

transitioning from a command economy to a market-driven economy.

All registered taxpayers and all tax liabilities are controlled on a regular basis.

The reliance is on the known universe of taxpayers who are subjected to frequentand intrusive tax inspections regardless of their past compliance history or loss of

revenue risk they may pose. Little attention is paid to identifying non-filers and

bringing them onto the tax rolls. This is especially true with taxpayers operatingin the illegal, as opposed to the formal sector.

Most tax controls or inspections do not represent thorough or professional

financial audits practiced by modern tax administrations and do not meetinternational standards.

There is no limit on the total amounts of penalties that can be assessed in addition

to tax. The actual amount of tax due may be substantially less than the penalties

assessed.

There is limited interest in building a system of self-assessment and voluntary

compliance with the tax laws. A PAYE (pay as you earn-employee taxes withheldby an employer which are required to be deposited in the tax administration s

account on a periodic basis) system may not be in place and there is limited

withholding at the source by banks or other third part payers (interest, dividends,

etc.)

There is a lack of specialization in the tax administration. Prior to a tax returnbeing accepted for filing, a tax inspector pre-reviews the tax return for accuracy

and may provide advice to the taxpayer. The same tax inspector may then

assess the tax liability, subsequently be responsible for collection of any unpaidamount, and even determine if a control visit is necessary. This close relationshipwhere the tax inspector is responsible for a specific group of taxpayers can easily

lead to corruption.

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The emphasis of the tax administration is to meet a pre-determined revenue target

for which they have limited or no input.

There is a significant underground or grey economy with a high percentage of

unregistered and/or non-filing taxpayers as well as filers who underreport their

income, turnover, or profits.

There are inadequate controls to prevent external or internal corruption.

There are little or no written operating procedures to be followed by tax

administration staff either in the same tax office or in different tax office

locations.

Taxpayer education and assistance efforts are minimal. There is a limited effort tosolicit business or trade association input on tax administration requirements or

operations.

Tax administration internal communications are minimal and/or there is a topdown management approach which discourages employee suggestions or

feedback. Overall management practices are poor.

Training is considered an overhead activity which does not justify much attention

or resources. There are few or no training professionals on staff. The emphasis of

staff training is on teaching the contents of tax laws as opposed to applying thelaws. Little or no attention is paid to skills, techniques, procedures, customer

relations, or managerial training.

There is little interest in improving the overall image of the tax administration.Proper treatment of taxpayers and protection of taxpayer rights is not a major

concern.

There is limited use of computers. The emphasis is on the acquisition of hardware

as opposed to the development of an overall information system plan. Software

development is based on automating current operations as opposed to

reengineering the business processes of the tax administration to producemaximum effectiveness and efficiency.

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There is no centralized or unique numbering system used to identify all taxpayers.Therefore, the establishment of a taxpayer master file for the country is impaired.

There may also be different numbering schemes used by other government bodies

such as business registration, customs service, social taxes, etc. for the same

taxpayer. These multiple systems impair the tax administrations ability to obtainand match information on business taxpayers.

Taxpayers may be faced with multiple and uncoordinated audits and/or controls

from different organizational elements of the tax administration. They may, also,

face audits by the social insurance agencies that collect their own contributions

or taxes which are not coordinated with the tax administration.

The number of employees and/or skill sets of tax administration staff are not inbalance with organizational requirements.

The number and location of tax administration offices are not in balance withorganizational requirements.

PERSONAL INCOME TAXESIn case of personal income taxes this study has found a number of problems in

Bangladesh tax system and suggested measures are recommended as follows.

Bangladesh Income Tax RatesBangladesh personal income tax rates for assessment year 2010 - 2011 is

progressive up to 25%.

Bangladesh Income Tax Rates for individuals other than female taxpayers, senior

taxpayers of 65 years and above and retarded taxpayers - Assessment Year 2010 - 2011

First BDT 1,65,000 Nil Next BDT 2,75,000 10%

Next BDT 3,25,000 15% Next BDT 3,75,000 20%

Rest Amount 25%

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Bangladesh Income Tax Rates for female taxpayers, senior taxpayers of age 65 years and

above - Assessment Year 2010 - 2011

First BDT 1,80,000 Nil

Next BDT 2,75,000 10%

Next BDT 3,25,000 15% Next BDT 3,75,000 20%

Rest Amount 25%

Bangladesh Income Tax Rates for retarded taxpayers - Assessment Year 2010 - 2011

First BDT 2,00,000 Nil

Next BDT 2,75,000 10% Next BDT 3,25,000 15%

Next BDT 3,75,000 20%Rest Amount 25%

Minimum tax for any individual assesses is Tk. 2,000Non-resident Individual: 25% (other than non-resident Bangladeshi)

On Dividend income: 20%

Income tax is one of the main sources of revenue in Bangladesh. It is a progressive tax

system. Bangladesh Income tax is imposed on the basis of ability to pay. The more a

taxpayer earns the more tax he should pay. This is the basic principle of charging incometax in Bangladesh. The tax system aims at ensuring equity and social justice. Tax rates in

Bangladesh also differs between male and female individuals.

Time to submit income tax return: Unless the date is extended, by the 30th day of

September next following the income year.

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RECOMENDATION

CONCLUSIONS

Attaining an optimal income tax system is a difficult and unenviable task, but

nevertheless critical for revenue generation required for accelerating growth and to

improve the quality of life of the citizens. A long-term sustainable solution to enhance

transparency, promote growth, improve tax compliance and thus to increase tax to GDPratio is a much desirable issue in the context of Bangladesh. Historically Bangladeshs

direct taxes have been heavily skewed against salary-earners and corporate sector. Smallbusiness, services and farm incomes manage to slip through the tax net effortlessly. This

study unveils the present scenario of tax incidence among different income groups, in

case of personal and corporation income taxes in Bangladesh tax system. The findingsand policy recommendations presented here could be important to carry on future tax

reforms and to make Bangladesh tax structure more broad based, revenue buoyant and

equitable.

Reference:1. The Income Tax Ordinance, 1984 (XXXVI of 1984)

Income Tax Manual (part-I)

2. Dr. Mahmud Morshed Monjur &

Dr. Purohit Kumar Kanchan &

Dr. Bhattacharjee Kumar Milan

Income Tax, Ctg, BD

3. Internet

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International Islamic University Chittagong