Banking companies and tax law

The national budget of Bangladesh the fiscal 2011-2012 will be announced within the next couple of months. In the budget session of the Jatiya Sangad (JS) members of parliament (MPs) are expected to approve it for the fiscal beginning in July. Different forums, trade bodies promotion chambers and business communities will place proposals of their interest. Meanwhile, the National Board of Revenue (NBR) have invited public opinion on the proposed Direct Tax Act prepared by it with a view to making it business friendly. The proposed Act 2011-2012 will include Tax Act Wealth, Tax Act, Gift Tax Act and Travel Tax. Act and the relevant sections of these Acts are now being redrafted to bring some changes therein in the light of the long expected desires of the different forums. The new draft of the Direct Tax Act 2012 is under the study of the interested quarters and they are to express their opinions on it in order to protect their interest rightfully. In the past, we observed that trade promotion bodies did not raise their demands properly and failed to assess the situation in their true perspective. Consequently, some undesirable laws were enacted by the Govt., which did not suit the interest of the members of business community as a whole. The existing VAT Act is a glaring example. Now, the VAT Act has become a concern for the members of the business community. Government had also to issue innumerable circulars, statutory regulatory order (SRO), office orders to classify and amend the sections, but the said amendments proved to be futile attempts and useless to address the situation. This time, we expect that all quarters will be alert to place their proposals carefully to protect their interest without any confusion. All proposals should be made very clear, distinct, and free from ambiguity. Now, we put up some proposals, which appear to be incongruous from the viewpoints of its applicability in practice. Lower Income Tax bracket individual: Every year on placement of the budget proposals in Parliament, different section of people particularly service holders and small and marginal tax payers, appear to be eagerly looking about the taxable limit, and the personal income tax exemptions to be considered by the government. But in no way they are found to be happy over tax, taxable limit, tax exemptions and allowances. According to them government should take the price index, inflationary trend about the prices about the essentials -- and the capacity of the tax payers before fixation of the tax-related criteria. In order to satisfy the marginal tax payers, the government may classify such people into a few groups considering their income status, nature of services, personal status in the society etc. The taxable limit may be fixed, considering their status of the service and nature of business and income sizes. The group may broadly be divided into (a) general individuals having small business entity in the form of proprietary concern, partnership, AOP, HUDF, and persons residents in Bangladesh over the age of 65 years, (b) professional groups, who include doctors, engineers, lawyers, educationists, professional accountants, economists, consultants, salaried persons having medium range of income etc. (c) persons having annual income of Tk. 35,00,000- or above in Bangladesh. Tax structure may be based on "tax proportionate to income". General Individuals having small entities, proprietary assesses, partnerships, AOPs & UDPs, persons resident in Bangladesh over 65 years of age and government employees of lower income groups may be considered at a lower rate of tax, being incapable of more earning. The taxable limit for professional groups and government employee may be fixed at an amount, which may help them to pay tax rationally, depending on the income earned by them. The higher tax payers may be allowed taxable limit up to a somewhat higher amount which seems to be rational with reference to their income and ability to pay taxes on the balance amount, after enjoying taxable limit. The higher tax payers may further be allowed an incentive to pay tax at a reduced rate of 5.0% tax for willful declaration of suppressed income in any form, in addition to normal and regular income. This may help the government to earn more revenue to execute its various development programmes. For the above proposals, we recommend the following tax structure for three groups as under: (a) Present annual income up to Tk. 5,00,000- (b) Present annual income up to the limit of Tk. 15,00,000- (c) Present annual income up to Tk. 35,00,000- and above Proposal for insertion of a new clause and amendment to the existing clauses to help overcome the problem for doubtful debates: Section 29(1) (xviiiaa) related to "provision for doubtful debts" in case of banking companies is a perplexing section for the tax officials. They appear to be predetermined not to allow any claim in this connection when put by the assessee. In fact, provision for doubtful debts is nothing but a reserve created by the banking companies against the possible loss on account of "Loans and Advances" for future. This is also a requirement of the Bangladesh Bank for the banking companies, according to BRPD Master Circular No. 5 dated June 05, 2006. Bad Debt Written off is nothing but internal adjustments with the provision of Doubtful Debts taxed earlier at the time of creation of such reserve. Bad Debt Written off means setting off the advance with that of provision for doubtful debts. Recovery of Bad Debt Written off needs to be credited to income as tax free if tax is once paid on the related provision for doubtful debts against which such Bad Debt was adjusted earlier. Adjustments of Bad Debt Written off are not recovery to be treated as income. It is simply book adjustments of entries against the provision of Bad Debts. Since tax is paid on the said "provision" earlier by the assessee, and as such the assessee claims it as expenses in the computation sheet of tax liability filed along with Tax Return for the concerned year. It is disgusting and abnoxus not to consider such claims of deduction of the recovered amount of bad debt from calculation of the assessee's total income by the tax officials and is unnecessarily creating disputes leading to court cases delaying the collection of revenue for the government. In view of the above attitude of the tax authority, some amendments to the relevant section are immediately required by the NBR in the best interest of collection of revenue. Proposed Amendment: Section 29(1) (xviiaa) should, thus be replaced by inserting a new clause as under with effect from July 01, 2011 incorporating the following paras: "The existing section 29(1) (xviiaa) prevailing during the assessment year 1990-1991 to 2006-2007 is hereby deleted but any recovery out of the amount allowed as tax free during the said period is ultimately recovered, the same shall be deemed to be income of the year in which it is recovered." In respect of claim of "provision for Bad and Doubtful Debts" by any banking companies shall be subject to tax in the year of claim but recovery of Bad Debt Written off against such taxed "provision for Doubtful Debts" shall be treated as non-taxable income of the assessee in the year of recovery from the assessment year 2007-2008 onwards. "Provided that this claim of recovery of Bad Debt Written offadjustment of Bad Debt Written off shall apply only in respect of such loans and advance being verified either by the statutory auditors or by the Bangladesh Bank as the case may be. But in no way, the claim of Bad Debt Written off or recoveryadjustments of Bad Debt Written off related to assessment year 2007-2008 onward (if tax paid earlier) be adjusted by the tax authority against provision for Doubtful Debts for the assessment year 1990-1991 to 2006-2007. Proposal for overcoming the problem relating to 'Bad Debt Written Off': The section 29(1) (xv), (xvi) & (xvii) includes some conditions whereby tax authority insists for establishment of the debt amount or part thereof to have become irrecoverable by the assessee. This section was introduced as far back as in the year, 1922, for all classes of assessees in case of claim of Bad Debt Written off. The application of such section may be possible, in case of small number of defaulters of any transaction in private sector. But in case of banking companies such application is an impossible task where the defaulters of banking companies are large in number. Besides, the banking business now a days have become totally different from that of past banking business. Banking companies are empowered by the Bangladesh bank to recover the defaulting loan by way of compromise with the Debtors, waiver of interest, revision of principal loan etc. Accordingly, the bank management enters into some sort of arrangement with the Debtors to allow some concessions to ensure the recovery of the principal amount of the loan. Consequently, the banking companies had to concede some losses in the form of Bad Debt Written off and this is the reality, prevailing always in the banking business. In order to resolve the issue, some amendments are to be made in the existing section specially for banking sector. Amendment Proposed: Under this section, a new "provision" may be inserted as follows to help the banking sector and to avoid litigation and court cases by the banking companies and to collect revenue quickly in the interest of the government Provision: "Provided that in case of banking companies all claims of Bad Debt Written off or recovery adjustments of Bad Debt Written off be allowed as loan loss subject to valid documents issued by the Bank management in this respect and duly certified by the statutory auditors of the bank and as classified by the Bangladesh Bank". The writer is Senior Audit & Tax Partner, Howlader Yunus & Co., Chartered Accountant.