Income tax in the Finance Ordinance 2007
Sunday, 15 July 2007
M. A. Baree, FCA
Finance proposals made by the Finance Adviser has been approved by the Hon'ble President on 28 June 2007 and from 01 July 2007 it is known as Finance Ordinance 2007. It incorporates numerous changes and amendments to Income Tax Ordinance 1984, Customs Act, 1969 and VAT Act, 1991. This writing is intended to comment briefly on the changes on the law of income tax in the following paragraphs:
Rate of income tax: Non-taxable limit of income has been raised to Tk 150,000 from Tk 120,000 i.e. 25% increase. This in a way fulfills the growing demand of a cross section of people, specially in a scenario of continuous rise in cost of living. If that determines mainly the threshold, then there may be a strong case for its adjustment in the budget in proportion to the rise in living cost every year.
Because of this and adjustments in tax slabs the estimated revenue loss is Tk 400 million. An assessee with a taxable income of Tk 5.0 lakh would have to pay Tk 5,750 less tax now. However, the minimum tax for an individual assessee at Tk 1800 remains unchanged which is grossly unfair and irrational when compared to two assessees: Assessee A, for example, has taxable income of Tk 149,900 and assessee B Tk 150,100. Here A does not have to pay any tax since it is marginally lower than allowable exemption limit of Tk 150,000. But what is about B. His taxable income exceeds the threshold of Tk 150,000 marginally by Tk 100 on which he would have to pay tax @ 10% i.e. Tk 10. But because of minimum tax condition he is now asked to pay tax of Tk 1800 on an additional disclosed income of Tk 100. This is unjust and unfair which also disturbs one of the basic principles of taxation, horizontal equity. Here in the example, income difference of A and B is only Tk 200 when B pays tax of Tk 1800 while A pays nothing. The impact of such anomaly could, perhaps be reduced by staggering the rate: say tax payable Tk 1000 for calculated tax of Tk 1 to 1000 and Tk 1800 for calculated tax of above Tk 1000 to Tk 1800.
Company tax rates are varied and conditional. Normally all listed companies other than bank, insurance and financial institutions are taxable @ 30% with the following further variations:
(a) Publicly traded companies declaring and paying more than 20% dividend on the paid up capital shall be allowed a 10% rebate on tax liability calculated normally.
(b) Rate of tax for publicly traded companies is 40%, when they either declare less than 10% dividends or declare 10% + dividends but fail to pay the above within time specified by the Securities and Exchange Commission (SEC) i.e. 60 days.
Here the fiscal imperative is well understood which is to encourage the listed companies through fiscal measures to declare and pay regularly handsome dividends to the shareholders. But what is about those traded companies who could not earn profits, for some reason or other, sufficient to justify a dividend declaration exceeding 10% or who failed to pay the declared dividend within 60 days, they are penalised by additional 10% tax. On genuine grounds, a traded company may earn less profit and may declare less than 10% or no dividend but have to pay more tax.
Though the condition has been included with the intention to revitalise the capital market, it is illogical to tax more when income is less. Forty five per cent tax rate for banks, insurances and financial institutions including leasing, irrespective of listed or not, is obviously high. In a scenario of high profits generally earned by these companies, revenue finds it safe and comfortable area to collect more revenue through higher tax. But at what cost ? Certainly these institutions recover the additional tax from the users through higher lending and other service charge. Indirectly, because of higher costs the economy -- the society -- at large suffers. They make higher profit and to tax them at a higher rate is a sub-optimal policy decision and to make it rational perhaps, Government should control, some way, pricing policies of various services and products offered by these institutions specially after careful and through consideration of the present high spread in the financial sector.
The rate of tax for mobile phone companies is 45%, which would, however, be 35% when some or all of them get listed by offering at least 10% of equities in the market. There are at present half a dozen of mobile phone companies in the country, doing good business with good growth potential but none of them is yet listed. Tax rate differential of 10% should be a strong incentive for them to be listed. While giving licence to operators in future, it could be a condition to be a publicly traded companies within say one or two years of commercial operation.
Let me now turn to some specific changes in various sections of the Ordinance.
Section 16CC: tax based on turnover: This section was introduced last year in the Finance Act 2006. The substance of the provision is to subject company assessee to pay tax higher of Tk 5000 or 0.25% of gross turnover. In other words, company assessee can not have loss assessment. The rate was 0.50 last year and has been reduced this year. However, it is not turnover tax as is differently known under VAT Act 1991. It is an income tax based on turnover reported by the company or determined by the assessor as the case may be. For this purpose turnover so determined is construed as income of the company.
Revenue's view is to tax numerous companies in the region of some 40,000 mostly private limited who are active in business, have good annual turnover but very thin or negative bottom line, net profit. It thinks that they all make profit but are reluctant to show it to avoid or to evade tax. Without directing efforts to face the challenge of such perceived tax avoidance or evasion through other regulatory measures, suddenly it found a simple solution that is to change the basis of income tax from universally and globally accepted net profit or net income to turnover. Who knows what next ! It may be purchases, salaries or any other expenses that could be treated as income by our revenue in future.
The provision to treat turnover as income is conceptually defective and legally vulnerable. Any law whether fiscal or otherwise, must be fair and must be seen to be fair. That is the essence of a civilised society. Compliance with laws is very difficult when such laws are illegal on moral and defective on conceptual grounds. Similar law existed some years back when income tax was collected on motor vehicles at the time of road tax and the law has been abandoned subsequently when the revenue finally agreed that expenditure incidental to the maintenance of cars can not be the basis of income tax collection and has been defective when so practiced.
Section 19: deemed income: SS(7): Under this, dividend declared or distributed by a company has been included as deemed income of the assessee in the income year of such declaration. Experience tells us about significant gap between such declaration and actual receipt thereof by the assessee and in extreme cases no receipt at all. To treat this on the basis of declaration as income has therefore been an unfair treatment to the assessee and to treat such dividend now an receipt basis is an appropriate and welcome step.
Sub-section 25 on taxation of company directors tour has been deleted.
Deletion of Sections 19B, 19BB and 19BBB: Above sections offered privilege to whiten black money on payment of tax at reduced rate through investment in house properties, lands and motor vehicles. It was mainly criticised by many informed quarters on fair and equitable grounds and deletion thereof certainly is a move in right direction.
Section 25: interest on capital borrowed for self occupied property as a forward looking provision has been introduced for the first time in Bangladesh and under this interest paid by an assessee in an income year on capital borrowed upto Tk 2.5 million for the acquisition, construction, renewal or reconstruction of a self-occupied property shall be deducted from total income.
Section 29(1)(iii): allowable deductions from business or professional income: Earlier proviso to this clause allowed interest paid or profit shared with a bank run on Islamic principles on capital borrowed for business or professional purpose but disallowed that part of interest when some part of the borrowed capital has been used in a newly industrial undertaking or to an extension of an existing industrial undertaking enjoying tax holiday/exemption.
A new proviso replaces the above making its scope wider by inclusion of such transfer of capital to any equity when lending of money is not the business of the transferor. It is a timely measure to control transfer of borrowed capital to other organizations through shabby deals and yet claiming full benefit of interest payments.
Clause (v): Transfer to special reserve by financial institutions: approved financial institutions have been allowed to transfer 10% of their total income every year to special reserve fund until it becomes equal to paid up share capital. Through amendment to this clause transfer to such reserve fund is now restricted to five per cent of total income. Since there has been a ceiling it would not have any substantive effect in the long run.
Section 30(h): Payment of royalty, technical services, technical know how and technical assistance fees: Two and a half per cent of profit has been allowed as admissible expenditure under this clause and the limit has been raised to 5.0% which would certainly fulfills the genuine demands of local entrepreneurs having technical collaborations with foreign partners.
Section 32(11A): Investment of capital gain: Under this clause capital gain arising out of transfer of capital asset to a new company registered under the companies Act 1994 and when such gain was invested in the equities of that company has been exempted from capital gain tax.
It was a good provision to roll over capital gain and certainly served as fiscal incentive to expand corporate activities but has been deleted now.
Section 37: Set off losses: Loss arising under any head of income in an income year other than speculative loss, capital loss, and out of any exempt source could be set off against income on any other head in the same assessment year.
Though inclusion of a new proviso to this section loss on business or profession can not be set off against property income.
Section 49(i): income subject to tax deduction/collection at source:
Clause (ZH): Through amendment to this clause income on export of any commodity has been included in the deduction list. Earlier exports of knitwear and woven garments were on the list.
Clause (ZL): Deduction on the use of credit card: The clause has been withdrawn since it did have some trade restrictive element in it.
Three new clauses have been added as follows: (Zm): Collection by City Corporations while issuing or renewing trade licence. (Zn): Collection on account of trustee fees. (Zo): Collection on account of freight forwarding agency commission.
Through this inclusion net of deduction/collection at source has been further widened.
Section 51: Deduction at source from interest on securities: Under this section collection of income tax @ 10% upfront i.e. at the time of issue or purchase, on interest receivable on all taxable securities, shall be made by the issuer. With a new proviso to this section however, treasury bond and treasury bills have been kept outside the net.
Section 52: deduction from contractors: As per earlier provision deduction was necessary while paying to the contractors but none was required for payment by the contractors to sub-contractors. Though amendment to this sub-contractors too have been brought into the deduction net. Here the main contractor would play the double role of both collector and payer of tax.
Section 52A: Deduction from professional and technical service fees:
Deduction under this section has now been made at 10% in place of earlier 5%.
Section 52AA: Deduction from the payment of certain services:
Under this section rate of deduction has been raised to 7.5% in place of earlier 5%.
Section 52AAA: Collection from clearing & forwarding agents:
The rate of deduction under this head has been raised to 7.5% from earlier 5.0%.
Section 52B: Collection from cigarette manufacturer.
This section applies to the sellers of banderols to cigarette manufacturers manually done where the rate of collection of tax was 4.0% of the value of banderols and the rate has been raised to 6.0%.
Section 52D: Deduction from saving instruments
The rate of deduction has been raised to 10% instead of earlier 5.0%. Besides first proviso to this section has been withdrawn and replaced by two new provisions as under:
· no tax under this section shall be deducted when total amount of interest during the income year does not exceed Tk 25,000.
· Tax shall be deducted @ 5.0% of the interest on instruments purchased before 01 January 2004.
Section 52F: Collection from brick manufacturers.
The rates of collection under this head have been raised to Tk 10,000, Tk 12,000 and Tk 18,000 for different sections in place of previous Tk 7,500, Tk 10,000 and Tk 15,000.
Sections 52K, 52L, 52M: new sections.
These have been introduced to specify the rate of deduction applicable to new clauses referred to in section 49.
S. 52K: City Corporations shall collect tax @ Tk 1000 while issuing renewing trade licence.
S. 52L: 10% deduction shall be made while paying trustee fees.
S. 52M: 7.5% deduction shall be made while paying freight forwarding commission.
Section 53AA: Collection from shipping business of a resident.
The rate of collection under this head has been raised to 5.0% from previous 4.0% on the total freight receivable.
Section 53BBBB: Collection from export of any goods except knitwears and hand woven garments dealt in section 53BB.
This is a new section and the rate of deduction is 0.25% of the export proceeds where concerned bank shall be responsible for such deduction. Incidentally this would be treated as a final discharge of tax liability regarding the concerned export.
However, such deduction or deduction at a lesser rate would not be required when the National Board of Revenue (NBR) upon application, issues a certificate stating that the export is partially or fully exempt from tax.
Section 53CC: Deduction from a non-resident courier business operator.
The rate of deduction under this section has been raised to 7.5% from 5.0%.
Section 53E: Deduction from commission, discount or fees to distributors etc.
The rate of reduction has been raised to 7.5% from 5.0%.
Section 53EE: Deduction from commission or remuneration paid to the agents of foreign buyers.
The rate has been raised to 4.0% from 2.5%.
Section 53F: Deduction from interest and saving and fixed deposits
Among banks, leasing companies, co-operative banks, financial institutions and house finance companies post office also has now been included in the list to deduct tax @ 10% on interest when paid.
Section 53FF: Collection from real estate and land developments.
The rate of collection for building or apartment has been raised to Tk 250 per square meter in place of Tk 175 and for land has been raised to 5.0% of the deed value in place of earlier 2.5%. Both these are collectible at the registration point.
Section 53G: Deduction from insurance commission
The rate of deduction has been raised to 7.5% from 5.0%.
Section 53GG: Deduction from fees of general insurance surveyors:
Here also the rate has been increased to 7.5% from 5%.
Section 53GGG: Collection on credit card
This section has been withdrawn.
Section 64(1): Advance payment of tax
The limit of total income exempt from advance payment of tax requirement has been raised to Tk 0.3 million from Tk 0.2 million.
Section 74: Payment of tax on the basis of return
Here the provision of section 16CC relating to minimum tax as calculated has been included for payment of tax along with the return.
Section 82BB: Universal self-assessment
This is a new section and under this -
(1) The DCT shall receive and issue a receipt thereon to the assessee on submission of a correct and complete return other than u/s 82, 83A or 83AA and such receipt shall be deemed to be the assessment order. In other words, no separate assessment order is required.
(2) However, the Board may select some of the returns filed under sub-section (1) above and refer these to the DCT for audit who if required will make the assessment under section 83 or section 84 as the case may be.
Provisions under this new section appear to simplify the assessment and tax payment procedures. The DCT must accept the returns as filed and can not raise any question unless he has strong evidence to justify. Even then, he can not reject/re-open. It is the board which when satisfied can direct for audit of returns filed under this section.
Section 121: Revisional power of commissioner:
The section has been withdrawn but with what intention is not understood. The provision to offer relief to an aggrieved assessee opting not to prefer appeal through this revisional power of the Commissioner has been in the fiscal laws of the sub-continent for almost a century. Under this the Commissioner exercises his revisional power in favour of the assessee and he, on an application of the assessee, can call for the records in which the order has been passed by any of his sub-ordinates i.e. AJCT, IJCT, DCT, TRO, ACT and EACT. Since it is a revision or review petition submitted by an aggrieved assssee, the Commissioner would not pass an order prejudicial to him.
Powers exercised by the Commissioner under this section are judicial and quasi-judicial which also provided first hand opportunity to an assessee aggrieved and agitated by the order of any officer, sub-ordinate to the Commissioner. The powers in the section though appears discretionary, were intended mainly to safeguard the interest of the assessees. Now with the withdrawal of the section that safeguard exists no more. The aggrieved assessee must now prefer appeal following the normal course of appeal procedures.
Section 121 has historical linkage with Section 120 which empowers the Inspecting Joint Commissioner to revise the assessment made by the DCT appeared to be prejudicial to the interests of the Revenue. The Department has no right to appeal to the AJCT against the order of the DCT. Therefore, this section has been enacted as a balancing force to provide the Department with an opposite but almost similar opportunity as is given under Section 121 for the benefit of the assessee.
It is clear that section 120 and section 121 are closely interlinked which ensure equity and fairness in fiscal law and administration thereof. Now one section being withdrawn, other remaining, the balance would be seriously disturbed in favour to the Department.
Section 124: Penalty for failure to file return
Minimum penalty to file return as required u/s 75, 77, 89(2), 91(3) and 93(1) has been reduced to Tk 1000 in place of Tk 2500 and for continuous default the penalty has been reduced to Tk 50 per day from Tk 250.
Section 158: Appeal to the Appellate Tribunal
Payment of undisputed tax to file an appeal to the Tribunal has been reduced to 10% instead of 15%.
The amendment obviously is in favour of the assessee having frequently changing history. In the last fifteen years, the rate has been changed at least 10 times perhaps, with unknown objectives.
Amendment to Third Schedule:
This schedule dealing with depreciation allowance has been amended to include sub-para 4 as follows:
No allowance under this paragraph shall be made for a leasing company on such machinery, plant, vehicle or furniture given to any lessee on financial lease.
As a matter of fact this has been the demand of the accounting profession for a long time to recognise the substance rather than legal form of the lease transactions. In a finance lease the substantive risk-reward or so to say, the ownership is essentially transferred to the assessee. Therefore, the argument was always to allow depreciation or capital allowances on the leased assets to the lessee and not the lessor. Revenue so long hanged on the idea of legal ownership of assets and allowed depreciation on that pretext to the lessor but finally now agreed to match its laws with one of the fundamental accounting concepts, substance over legal form. Leasing companies can not now include leased assets (finance) in their balance sheets and can not also claim depreciation on those assets. On the contrary, the lessees, though not owners of the leased assets in strict legal sense, is the substantive users of those assets would have to include those in their balance sheets on which they would now be allowed depreciation. The provision certainly is in line with the concept in IAS 17- leases.
To conclude, it can fairly be said that Hon'ble Finance Adviser has successfully done the best of the worst job. Without radically changing the structure of income tax law, he has utilised the scope to raise tax revenue relying basically on existing tax base. This has been widened a bit specially in the area of deduction and collection at source accounting for more than 70% of our tax revenue. In many areas the rates of collection/deduction at source have been substantially increased. Collection of tax @ Tk 1000 by the City Corporations while issuing trade licence could be one of the revenue boosters provided proper accounts and audit can be timely ensured in the Corporations. But why the scheme has been restricted to City Corporations ? Why not all Municipal Corporations or Poursavas?
The Adviser and other economists in the country often speak about our low tax-GDP ratio. This is a fact but the reason is not the usual number of TIN holders or assessees only, there are anomalies of tax rates within existing system too. One example of such anomaly is in the taxation of transport sector. Its contribution in our GDP is about 11%. But what is its contribution in our tax revenue ? Certainly it is not in proportion, may be 1.0% or 2.0%. The reason however, is not difficult to seek. The SRO No 221/99 imposing presumptive tax on a huge number of bus, truck, mini-bus, coaster etc., was issued in July 1999 according to which a 52 seater bus is annually taxed at Tk 2000 to Tk 5000 depending on the age and similarly a truck is taxed at Tk 2000 to Tk 4000. Let us imagine the depth of the base. It is huge and expanding but the rates of tax have not been revised since 1999.
A Volvo or Scannier bus costs about Tk 12 million but pays only Tk 5000 as income tax. Is it fair and justified ? Certainly not and its taxation should be Tk 5000 if not more per day. The transport operators or truck owners are the direct beneficiaries of our huge expenditure on roads, bridges etc., but they are subject to minimum or no tax. This is one of the answers to our law tax-GDP ratio. Whether Hon'ble Finance Adviser has looked into it or whether he merely avoided the sector on sensitive grounds is not known.
Lastly, during pre-budget discussions we heard a lot about reducing undesirable discretionary powers of the revenue officers but the Ordinance provided none. Moreover, whatever existed in favour of the assesses in Section 121 has now been withdrawn.
The writer is a partner, Hoda Vasi Chowdhury & Co, Chartered Accountants, & Past President, Institutue of Chartered Accountants of Bangladesh
Finance proposals made by the Finance Adviser has been approved by the Hon'ble President on 28 June 2007 and from 01 July 2007 it is known as Finance Ordinance 2007. It incorporates numerous changes and amendments to Income Tax Ordinance 1984, Customs Act, 1969 and VAT Act, 1991. This writing is intended to comment briefly on the changes on the law of income tax in the following paragraphs:
Rate of income tax: Non-taxable limit of income has been raised to Tk 150,000 from Tk 120,000 i.e. 25% increase. This in a way fulfills the growing demand of a cross section of people, specially in a scenario of continuous rise in cost of living. If that determines mainly the threshold, then there may be a strong case for its adjustment in the budget in proportion to the rise in living cost every year.
Because of this and adjustments in tax slabs the estimated revenue loss is Tk 400 million. An assessee with a taxable income of Tk 5.0 lakh would have to pay Tk 5,750 less tax now. However, the minimum tax for an individual assessee at Tk 1800 remains unchanged which is grossly unfair and irrational when compared to two assessees: Assessee A, for example, has taxable income of Tk 149,900 and assessee B Tk 150,100. Here A does not have to pay any tax since it is marginally lower than allowable exemption limit of Tk 150,000. But what is about B. His taxable income exceeds the threshold of Tk 150,000 marginally by Tk 100 on which he would have to pay tax @ 10% i.e. Tk 10. But because of minimum tax condition he is now asked to pay tax of Tk 1800 on an additional disclosed income of Tk 100. This is unjust and unfair which also disturbs one of the basic principles of taxation, horizontal equity. Here in the example, income difference of A and B is only Tk 200 when B pays tax of Tk 1800 while A pays nothing. The impact of such anomaly could, perhaps be reduced by staggering the rate: say tax payable Tk 1000 for calculated tax of Tk 1 to 1000 and Tk 1800 for calculated tax of above Tk 1000 to Tk 1800.
Company tax rates are varied and conditional. Normally all listed companies other than bank, insurance and financial institutions are taxable @ 30% with the following further variations:
(a) Publicly traded companies declaring and paying more than 20% dividend on the paid up capital shall be allowed a 10% rebate on tax liability calculated normally.
(b) Rate of tax for publicly traded companies is 40%, when they either declare less than 10% dividends or declare 10% + dividends but fail to pay the above within time specified by the Securities and Exchange Commission (SEC) i.e. 60 days.
Here the fiscal imperative is well understood which is to encourage the listed companies through fiscal measures to declare and pay regularly handsome dividends to the shareholders. But what is about those traded companies who could not earn profits, for some reason or other, sufficient to justify a dividend declaration exceeding 10% or who failed to pay the declared dividend within 60 days, they are penalised by additional 10% tax. On genuine grounds, a traded company may earn less profit and may declare less than 10% or no dividend but have to pay more tax.
Though the condition has been included with the intention to revitalise the capital market, it is illogical to tax more when income is less. Forty five per cent tax rate for banks, insurances and financial institutions including leasing, irrespective of listed or not, is obviously high. In a scenario of high profits generally earned by these companies, revenue finds it safe and comfortable area to collect more revenue through higher tax. But at what cost ? Certainly these institutions recover the additional tax from the users through higher lending and other service charge. Indirectly, because of higher costs the economy -- the society -- at large suffers. They make higher profit and to tax them at a higher rate is a sub-optimal policy decision and to make it rational perhaps, Government should control, some way, pricing policies of various services and products offered by these institutions specially after careful and through consideration of the present high spread in the financial sector.
The rate of tax for mobile phone companies is 45%, which would, however, be 35% when some or all of them get listed by offering at least 10% of equities in the market. There are at present half a dozen of mobile phone companies in the country, doing good business with good growth potential but none of them is yet listed. Tax rate differential of 10% should be a strong incentive for them to be listed. While giving licence to operators in future, it could be a condition to be a publicly traded companies within say one or two years of commercial operation.
Let me now turn to some specific changes in various sections of the Ordinance.
Section 16CC: tax based on turnover: This section was introduced last year in the Finance Act 2006. The substance of the provision is to subject company assessee to pay tax higher of Tk 5000 or 0.25% of gross turnover. In other words, company assessee can not have loss assessment. The rate was 0.50 last year and has been reduced this year. However, it is not turnover tax as is differently known under VAT Act 1991. It is an income tax based on turnover reported by the company or determined by the assessor as the case may be. For this purpose turnover so determined is construed as income of the company.
Revenue's view is to tax numerous companies in the region of some 40,000 mostly private limited who are active in business, have good annual turnover but very thin or negative bottom line, net profit. It thinks that they all make profit but are reluctant to show it to avoid or to evade tax. Without directing efforts to face the challenge of such perceived tax avoidance or evasion through other regulatory measures, suddenly it found a simple solution that is to change the basis of income tax from universally and globally accepted net profit or net income to turnover. Who knows what next ! It may be purchases, salaries or any other expenses that could be treated as income by our revenue in future.
The provision to treat turnover as income is conceptually defective and legally vulnerable. Any law whether fiscal or otherwise, must be fair and must be seen to be fair. That is the essence of a civilised society. Compliance with laws is very difficult when such laws are illegal on moral and defective on conceptual grounds. Similar law existed some years back when income tax was collected on motor vehicles at the time of road tax and the law has been abandoned subsequently when the revenue finally agreed that expenditure incidental to the maintenance of cars can not be the basis of income tax collection and has been defective when so practiced.
Section 19: deemed income: SS(7): Under this, dividend declared or distributed by a company has been included as deemed income of the assessee in the income year of such declaration. Experience tells us about significant gap between such declaration and actual receipt thereof by the assessee and in extreme cases no receipt at all. To treat this on the basis of declaration as income has therefore been an unfair treatment to the assessee and to treat such dividend now an receipt basis is an appropriate and welcome step.
Sub-section 25 on taxation of company directors tour has been deleted.
Deletion of Sections 19B, 19BB and 19BBB: Above sections offered privilege to whiten black money on payment of tax at reduced rate through investment in house properties, lands and motor vehicles. It was mainly criticised by many informed quarters on fair and equitable grounds and deletion thereof certainly is a move in right direction.
Section 25: interest on capital borrowed for self occupied property as a forward looking provision has been introduced for the first time in Bangladesh and under this interest paid by an assessee in an income year on capital borrowed upto Tk 2.5 million for the acquisition, construction, renewal or reconstruction of a self-occupied property shall be deducted from total income.
Section 29(1)(iii): allowable deductions from business or professional income: Earlier proviso to this clause allowed interest paid or profit shared with a bank run on Islamic principles on capital borrowed for business or professional purpose but disallowed that part of interest when some part of the borrowed capital has been used in a newly industrial undertaking or to an extension of an existing industrial undertaking enjoying tax holiday/exemption.
A new proviso replaces the above making its scope wider by inclusion of such transfer of capital to any equity when lending of money is not the business of the transferor. It is a timely measure to control transfer of borrowed capital to other organizations through shabby deals and yet claiming full benefit of interest payments.
Clause (v): Transfer to special reserve by financial institutions: approved financial institutions have been allowed to transfer 10% of their total income every year to special reserve fund until it becomes equal to paid up share capital. Through amendment to this clause transfer to such reserve fund is now restricted to five per cent of total income. Since there has been a ceiling it would not have any substantive effect in the long run.
Section 30(h): Payment of royalty, technical services, technical know how and technical assistance fees: Two and a half per cent of profit has been allowed as admissible expenditure under this clause and the limit has been raised to 5.0% which would certainly fulfills the genuine demands of local entrepreneurs having technical collaborations with foreign partners.
Section 32(11A): Investment of capital gain: Under this clause capital gain arising out of transfer of capital asset to a new company registered under the companies Act 1994 and when such gain was invested in the equities of that company has been exempted from capital gain tax.
It was a good provision to roll over capital gain and certainly served as fiscal incentive to expand corporate activities but has been deleted now.
Section 37: Set off losses: Loss arising under any head of income in an income year other than speculative loss, capital loss, and out of any exempt source could be set off against income on any other head in the same assessment year.
Though inclusion of a new proviso to this section loss on business or profession can not be set off against property income.
Section 49(i): income subject to tax deduction/collection at source:
Clause (ZH): Through amendment to this clause income on export of any commodity has been included in the deduction list. Earlier exports of knitwear and woven garments were on the list.
Clause (ZL): Deduction on the use of credit card: The clause has been withdrawn since it did have some trade restrictive element in it.
Three new clauses have been added as follows: (Zm): Collection by City Corporations while issuing or renewing trade licence. (Zn): Collection on account of trustee fees. (Zo): Collection on account of freight forwarding agency commission.
Through this inclusion net of deduction/collection at source has been further widened.
Section 51: Deduction at source from interest on securities: Under this section collection of income tax @ 10% upfront i.e. at the time of issue or purchase, on interest receivable on all taxable securities, shall be made by the issuer. With a new proviso to this section however, treasury bond and treasury bills have been kept outside the net.
Section 52: deduction from contractors: As per earlier provision deduction was necessary while paying to the contractors but none was required for payment by the contractors to sub-contractors. Though amendment to this sub-contractors too have been brought into the deduction net. Here the main contractor would play the double role of both collector and payer of tax.
Section 52A: Deduction from professional and technical service fees:
Deduction under this section has now been made at 10% in place of earlier 5%.
Section 52AA: Deduction from the payment of certain services:
Under this section rate of deduction has been raised to 7.5% in place of earlier 5%.
Section 52AAA: Collection from clearing & forwarding agents:
The rate of deduction under this head has been raised to 7.5% from earlier 5.0%.
Section 52B: Collection from cigarette manufacturer.
This section applies to the sellers of banderols to cigarette manufacturers manually done where the rate of collection of tax was 4.0% of the value of banderols and the rate has been raised to 6.0%.
Section 52D: Deduction from saving instruments
The rate of deduction has been raised to 10% instead of earlier 5.0%. Besides first proviso to this section has been withdrawn and replaced by two new provisions as under:
· no tax under this section shall be deducted when total amount of interest during the income year does not exceed Tk 25,000.
· Tax shall be deducted @ 5.0% of the interest on instruments purchased before 01 January 2004.
Section 52F: Collection from brick manufacturers.
The rates of collection under this head have been raised to Tk 10,000, Tk 12,000 and Tk 18,000 for different sections in place of previous Tk 7,500, Tk 10,000 and Tk 15,000.
Sections 52K, 52L, 52M: new sections.
These have been introduced to specify the rate of deduction applicable to new clauses referred to in section 49.
S. 52K: City Corporations shall collect tax @ Tk 1000 while issuing renewing trade licence.
S. 52L: 10% deduction shall be made while paying trustee fees.
S. 52M: 7.5% deduction shall be made while paying freight forwarding commission.
Section 53AA: Collection from shipping business of a resident.
The rate of collection under this head has been raised to 5.0% from previous 4.0% on the total freight receivable.
Section 53BBBB: Collection from export of any goods except knitwears and hand woven garments dealt in section 53BB.
This is a new section and the rate of deduction is 0.25% of the export proceeds where concerned bank shall be responsible for such deduction. Incidentally this would be treated as a final discharge of tax liability regarding the concerned export.
However, such deduction or deduction at a lesser rate would not be required when the National Board of Revenue (NBR) upon application, issues a certificate stating that the export is partially or fully exempt from tax.
Section 53CC: Deduction from a non-resident courier business operator.
The rate of deduction under this section has been raised to 7.5% from 5.0%.
Section 53E: Deduction from commission, discount or fees to distributors etc.
The rate of reduction has been raised to 7.5% from 5.0%.
Section 53EE: Deduction from commission or remuneration paid to the agents of foreign buyers.
The rate has been raised to 4.0% from 2.5%.
Section 53F: Deduction from interest and saving and fixed deposits
Among banks, leasing companies, co-operative banks, financial institutions and house finance companies post office also has now been included in the list to deduct tax @ 10% on interest when paid.
Section 53FF: Collection from real estate and land developments.
The rate of collection for building or apartment has been raised to Tk 250 per square meter in place of Tk 175 and for land has been raised to 5.0% of the deed value in place of earlier 2.5%. Both these are collectible at the registration point.
Section 53G: Deduction from insurance commission
The rate of deduction has been raised to 7.5% from 5.0%.
Section 53GG: Deduction from fees of general insurance surveyors:
Here also the rate has been increased to 7.5% from 5%.
Section 53GGG: Collection on credit card
This section has been withdrawn.
Section 64(1): Advance payment of tax
The limit of total income exempt from advance payment of tax requirement has been raised to Tk 0.3 million from Tk 0.2 million.
Section 74: Payment of tax on the basis of return
Here the provision of section 16CC relating to minimum tax as calculated has been included for payment of tax along with the return.
Section 82BB: Universal self-assessment
This is a new section and under this -
(1) The DCT shall receive and issue a receipt thereon to the assessee on submission of a correct and complete return other than u/s 82, 83A or 83AA and such receipt shall be deemed to be the assessment order. In other words, no separate assessment order is required.
(2) However, the Board may select some of the returns filed under sub-section (1) above and refer these to the DCT for audit who if required will make the assessment under section 83 or section 84 as the case may be.
Provisions under this new section appear to simplify the assessment and tax payment procedures. The DCT must accept the returns as filed and can not raise any question unless he has strong evidence to justify. Even then, he can not reject/re-open. It is the board which when satisfied can direct for audit of returns filed under this section.
Section 121: Revisional power of commissioner:
The section has been withdrawn but with what intention is not understood. The provision to offer relief to an aggrieved assessee opting not to prefer appeal through this revisional power of the Commissioner has been in the fiscal laws of the sub-continent for almost a century. Under this the Commissioner exercises his revisional power in favour of the assessee and he, on an application of the assessee, can call for the records in which the order has been passed by any of his sub-ordinates i.e. AJCT, IJCT, DCT, TRO, ACT and EACT. Since it is a revision or review petition submitted by an aggrieved assssee, the Commissioner would not pass an order prejudicial to him.
Powers exercised by the Commissioner under this section are judicial and quasi-judicial which also provided first hand opportunity to an assessee aggrieved and agitated by the order of any officer, sub-ordinate to the Commissioner. The powers in the section though appears discretionary, were intended mainly to safeguard the interest of the assessees. Now with the withdrawal of the section that safeguard exists no more. The aggrieved assessee must now prefer appeal following the normal course of appeal procedures.
Section 121 has historical linkage with Section 120 which empowers the Inspecting Joint Commissioner to revise the assessment made by the DCT appeared to be prejudicial to the interests of the Revenue. The Department has no right to appeal to the AJCT against the order of the DCT. Therefore, this section has been enacted as a balancing force to provide the Department with an opposite but almost similar opportunity as is given under Section 121 for the benefit of the assessee.
It is clear that section 120 and section 121 are closely interlinked which ensure equity and fairness in fiscal law and administration thereof. Now one section being withdrawn, other remaining, the balance would be seriously disturbed in favour to the Department.
Section 124: Penalty for failure to file return
Minimum penalty to file return as required u/s 75, 77, 89(2), 91(3) and 93(1) has been reduced to Tk 1000 in place of Tk 2500 and for continuous default the penalty has been reduced to Tk 50 per day from Tk 250.
Section 158: Appeal to the Appellate Tribunal
Payment of undisputed tax to file an appeal to the Tribunal has been reduced to 10% instead of 15%.
The amendment obviously is in favour of the assessee having frequently changing history. In the last fifteen years, the rate has been changed at least 10 times perhaps, with unknown objectives.
Amendment to Third Schedule:
This schedule dealing with depreciation allowance has been amended to include sub-para 4 as follows:
No allowance under this paragraph shall be made for a leasing company on such machinery, plant, vehicle or furniture given to any lessee on financial lease.
As a matter of fact this has been the demand of the accounting profession for a long time to recognise the substance rather than legal form of the lease transactions. In a finance lease the substantive risk-reward or so to say, the ownership is essentially transferred to the assessee. Therefore, the argument was always to allow depreciation or capital allowances on the leased assets to the lessee and not the lessor. Revenue so long hanged on the idea of legal ownership of assets and allowed depreciation on that pretext to the lessor but finally now agreed to match its laws with one of the fundamental accounting concepts, substance over legal form. Leasing companies can not now include leased assets (finance) in their balance sheets and can not also claim depreciation on those assets. On the contrary, the lessees, though not owners of the leased assets in strict legal sense, is the substantive users of those assets would have to include those in their balance sheets on which they would now be allowed depreciation. The provision certainly is in line with the concept in IAS 17- leases.
To conclude, it can fairly be said that Hon'ble Finance Adviser has successfully done the best of the worst job. Without radically changing the structure of income tax law, he has utilised the scope to raise tax revenue relying basically on existing tax base. This has been widened a bit specially in the area of deduction and collection at source accounting for more than 70% of our tax revenue. In many areas the rates of collection/deduction at source have been substantially increased. Collection of tax @ Tk 1000 by the City Corporations while issuing trade licence could be one of the revenue boosters provided proper accounts and audit can be timely ensured in the Corporations. But why the scheme has been restricted to City Corporations ? Why not all Municipal Corporations or Poursavas?
The Adviser and other economists in the country often speak about our low tax-GDP ratio. This is a fact but the reason is not the usual number of TIN holders or assessees only, there are anomalies of tax rates within existing system too. One example of such anomaly is in the taxation of transport sector. Its contribution in our GDP is about 11%. But what is its contribution in our tax revenue ? Certainly it is not in proportion, may be 1.0% or 2.0%. The reason however, is not difficult to seek. The SRO No 221/99 imposing presumptive tax on a huge number of bus, truck, mini-bus, coaster etc., was issued in July 1999 according to which a 52 seater bus is annually taxed at Tk 2000 to Tk 5000 depending on the age and similarly a truck is taxed at Tk 2000 to Tk 4000. Let us imagine the depth of the base. It is huge and expanding but the rates of tax have not been revised since 1999.
A Volvo or Scannier bus costs about Tk 12 million but pays only Tk 5000 as income tax. Is it fair and justified ? Certainly not and its taxation should be Tk 5000 if not more per day. The transport operators or truck owners are the direct beneficiaries of our huge expenditure on roads, bridges etc., but they are subject to minimum or no tax. This is one of the answers to our law tax-GDP ratio. Whether Hon'ble Finance Adviser has looked into it or whether he merely avoided the sector on sensitive grounds is not known.
Lastly, during pre-budget discussions we heard a lot about reducing undesirable discretionary powers of the revenue officers but the Ordinance provided none. Moreover, whatever existed in favour of the assesses in Section 121 has now been withdrawn.
The writer is a partner, Hoda Vasi Chowdhury & Co, Chartered Accountants, & Past President, Institutue of Chartered Accountants of Bangladesh