Income Tax Procedures for companies in South-East Asia

A generic approach for proactive knowledge and document management

Created byTariq Ali, Management Consultant

Haphazard Ltd. is a fictitious company, having its registered office in Bangladesh. This document can be used as a guide in other countries after taking into

account local laws and requirements.

Haphazard Ltd. and its group companies make up their books of accounts to June 30 of each year. That is, the income year is 12 months to June 30.

Therefore the companies are required to submit Income Tax returns by September 30 each year, unless the time is extended by the Government or upon application to the Deputy Commissioner of Taxes (from here referred to as DCT). However, just because the DCT can grant time extension by up to 3 months; it should not be the practice of the companies to submit the returns at the last stage. Rather the returns should be submitted within September 30.

Preparation of Income Tax return

• Close annual accounts for the finance year that is up to June 30 (look into instructions on closing financial year)

• Get bank statement for each of the bank account for the whole year• Appoint tax attorney (Income Tax Practitioner from here referred to as ITP) with a

Terms of Reference (TOR), signed by both parties (see Annex X1 for the standard TOR)• Appoint auditor with a Terms of Reference (TOR), signed by both parties (see Annex

X2 for the standard TOR)• Managing Director (from here referred to as MD) to sign the power of attorney in

favour of the ITP• Auditor to complete audit and offer observation, if any• Update the books of accounts on basis of observation, of the auditor, if applicable• Prepare the papers and documents for submission along with the return• Prepare the return• MD to sign the return• Submit the return

Responsibility of the Accounts and Finance department

The Finance department is responsible for preparing the income tax returns of the group companies.

After preparation is complete, the responsible manager will share it with the ITP and the two parties will jointly review it for any anomalies.

Responsibility of the ITP

The ITP is responsible for submission of the return and all contacts with the Income Tax department, whether they be DCT, appeal or revision authorities.

Then the ITP will from time to time discuss with the responsible manager regarding the progress of income tax cases or other routine matters like getting certificates, certified copies from the Income Tax department.

Income Tax return should be accompanied with the following

• Bank statements for the complete year• Reconciliation of bank statements with figures shown in the audited financial statement,

namely turnover, accounts receivable and accounts payable (See Preparation of Reconciliation of bank statements for Income Tax return)

• A breakdown of accounts receivable and accounts payable (other than to directors and share holders, which is to be shown separately) that is, sundry debtors and sundry creditors

• Proof of liabilities against directors and share holders– This should be validated by bank receipt in crossed checks and reflection of equal amounts in the

wealth statements of the directors (balance sheet in case the loans or liabilities are against group companies)

• A statement of salaries paid (name, designation, amount) for the employees

NB This is required under section 108 of the Income Tax Ordinance, 1984 (see Income Tax Rules, 1984 for the format of the statement)

(continued…)

Income Tax return should be accompanied with the following (continued from previous slide)

• A statement of tax deducted at source for the company, if any (a nil statement should be submitted when there is nil deduction)

• A statement of tax deducted at source by the company, against third parties, if any (a nil statement should be submitted when there is nil deduction)

Preparation of Reconciliation of bank statements for Income Tax return

• Turnover shown in the return needs to be reconciled to the bank statement

• The bank reconciliation of credits in the statement that is, deposits to the bank accounts should agree with the turnover and the opening and closing accounts receivable and liability

Knowledge management requirement• Income tax laws in general and tax rates, deduction at source requirements, treatment of taxes

deducted at source in particular change almost every year. It is required that the Manager (A&F) takes necessary steps to ensure that the relevant persons are updated in the changes in law. With this in mind, he or she will:

• At the start of a fiscal year, buy and file, or when available over the internet, download, print and file the following:– Summery or digest of the changes in tax law as made by National Board of revenue– Digest of the tax law as made by such reputable bodies like the Metropolitan Chamber of Commerce

and Industry, (MCCI)• Prepare a table of tax rates and cases where income tax needs to be deducted to payee’s• Distribute the table to the accountants who are responsible for making the deductions and /

processing payments• Conduct a meeting with accounts department operatives or make it part of monthly

departmental meeting to explain the changes in law that effects the accounts department’s workings and practices

• If there is a significant change in tax law, consult the ITP, auditor for clarifications on how the changes would affect the company

(continued…)

Knowledge management requirement(continued from previous slide)

• Based on updated or existing rates, as the case may be, make a table for income tax to be deducted for employees and directors from the payments on the existing salary and other benefits.

• Forward the table in writing to the Human Resource department manager and ask for his or her acknowledgment of the receipt of the table.

• From time to time, accounts department operatives should be asked to attend refresher trainings conducted by professional training companies for on-the –job employees.

Maintaining Income Tax file for internal filing, reference and knowledge management

Filing documents for Income Tax matters The main documents that need to be filed are: • Tax returns submitted along with all attachments submitted• Background calculation papers for computing total income, taxes payable, taxes

deducted etc.• Assessment orders, • Demand notices • Proof of payment of taxes However it is not uncommon that the Income Tax department will lose the file, or some part of the file. So it prudent to maintain the working papers as well so that the companies remain protected from the risk of missing or intentional disfigurement of papers. The papers are also needed to maintain consistency in the return from year to year.

Opening (Preliminary: one off that is, non-repetitive exercise)

• Copy of original submissions

– Application for TIN– Certificate of incorporation from Registrar of Joint Stock Companies

(RJSC)– Memorandum of Association– Articles of Association– Industry Association’s certificate of formation and registration

(example, BTMA)– Evidence of opening of bank accounts

• Granting of Tax Identification Number (TIN)• Application for Tax Holiday or Tax Exemption (where applicable)• Granting of Tax Holiday or Tax Exemption (where applicable)

Maintaining the file (for each assessment year, continuing exercise)

• Return for year 1, year 2, year 3 and so on; till the current year– Original of receipt of return signed by the DCT or his office, with seal, date and

number– Certified copy of tax return– Certified copy of audited financial statements– Originals of notices received– Copies of receipts or challans as proof of tax paid, whether deducted at source; for

company or third parties or paid at the time of submission or as advance tax, as the case may be

• For each year, certified copies of assessment orders and demand note (including nil demand note)

• For each year, a certification under the signature and letter head of the relevant DCT that the tax case for the company has been completed for the assessment year 20XX. The certificate should also mention that no demand against the assesse is outstanding as of xx day)/ xx (month)/ xxxx (year).

Responsibility for filing

• Overall responsibility for filing: Assistant Manager (A&F)• Responsibility for verifying (that the task has been properly

done): Manager (A&F)• Validation process: Through check list• Frequency of Validation: 2 or 3 times a year should be

adequate.• Access to file: Normal / Restricted / Confidential• Back up: Back up should be taken and saved as PDF documents. • NB Access to the electronic backup documents should be highly

restricted and is governed by the policy on Managing Electronic Archiving of Documents (see Chapter XYZ).

Check list of filing of documents on Income Tax return

The following documents have been filed:

File name: Income Tax X it (X is a two digit number, like 02. Each file will contain multiple years’ documents; to be separated by a leaf reading the year in question like “2010-2011”)

Check list Filing of Income Tax documents Code: CL/FIN/Itax/01

(continued…)

Check list of filing of documents on Income Tax return (continued from previous slide)

Serial Document Comments1 Original of receipt

of return signed by the DCT or his office, with seal, date and number

2 Certified copy of tax return

3 Certified copy of audited financial statements

4 Originals of notices received

1 2 3 5 Other 1 2 3

Duration of maintaining documents

• A. All documents need to be maintained at least till 5 years have elapsed from the time the income tax case has been settled at the DCT, appellate, tribunal or High Court level or till the time the Tax department has the authority to reopen a tax case.

• Illustration:• Documents for the tax year 2003-2004, were disposed of, following

appeal to the High Court on the fiscal year 2011, that is the year ending by June 30, 2011. They will have to preserved till fiscal year 2016, that is the year ending by June 30, 2016.

• Here the documents include working papers, all notices, agreements, communications with tax department, auditor, ITP and last but not least the accounting records including vouchers.

• (continued…)

Duration of maintaining documents (continued from previous slide)

• B. Some documents need to be maintained indefinitely. They include:• Original file opening papers and deliberations (like granting of TIN,

tax holiday etc.) by the DCT and / tax authorities• Certified Copies of returns• Audit reports• Certificate of completion of tax cases granted by the DCT• Certified copies of assessment orders for each assessment year

C. Vouchers and soft copies of accounting records are maintained as per Finance Manual, Chapter XYZ.

Income Tax CalendarTasks

July August September October November December January February March April May

Close yearly accounts XXXXX

Appoint auditor XXXXX

appoint ITP XXXXX

Collect bank statements

XXXXX

collect papers and documents

XXXXX XXXXX

Auditor carries out audit

XXXXX

Auditor's draft report at month end

XXXXX

Finalize Financial statements

XXXXX

Auditor's report delivered

XXXXX

Finance department makes draft return

XXXXX

Sharing draft return with ITP

XXXXX

Preparation of final Return

XXXXX

Submission of Return by ITP

XXXXX

Obtaining receipt of submission

XXXXX XXXXX

ITP delivers assessment order and certificates

XXXXX XXXXX

Update tax file XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX

Disclaimer

This document is meant for conversation on knowledge management and is not meant to offer practical guidance on tax matters.