Of gross profit and tax exemption ceiling
Shamsul Huq Zahid | Monday, 2 June 2008
"It is a progressive tax system. Income tax is imposed on the basis of ability to pay. The more he earns the more he pays as income tax. It ensures the equity and social judgment", reads the first paragraph of the information available on income tax on the National Board of Revenue (NBR) website.
The Board religiously follows the line, 'the more he earns the more he pays as income tax' while collecting income tax from a company. But it conveniently ignores the question of 'equity and social judgment' if company earns less than that of the previous year for justifiable reasons.
The existing tax rate for privately owned and unlisted companies is 45 per cent and for listed companies barring banks the rate is 35 per cent. The rate for listed banks is 40 per cent.
In a particular year, it is not unusual for a company to earn a gross profit lower than that of the previous year. This may happen because of many factors, domestic and external. But the taxmen have always been extremely rigid while making their estimate of gross profit in proportion to gross turnover of a company.
Business circles allege that they, in the past, failed to get justice even after bringing the issue to the notice of the high level tax officials and tax appellate tribunals comprising officials of the taxation department. The decisions of such tribunals, in most cases, have been always in support of the arbitrary fixation of gross profit by tax officials.
There is no denying that the propensity among most taxpayers to evade tax-tax evasion is also nothing unusual in the developed countries-in a developing country like Bangladesh is very high. This observation is true in case of individuals as well as companies. However, it would be unfair to fully blame the taxpayers. The department of taxation would have to share a part of it. For decades after decades, the authorities concerned had preferred to project themselves as dreaded objects and never tried to make both tax rates and tax collection taxpayer-friendly. Until recently, there were frequent changes in tax rates. However, the situation has been changing for the better. Tax rates have become less punishing and less frequent. Yet the National Board of Revenue-NBR-is still trying to maintain a sort of secrecy as far as tax changes are concerned. But the idea of such secrecy in the most developed countries has lost relevance to budget making.
Coming back to the issue of the fixation of profit margin in relation to gross turnover of companies it would not be unfair to request the government to look at the issue rather dispassionately. Besides, there are some valid points if one feels like arguing with the taxmen on the issue.
For instance, if an individual salaried taxpayer loses his or her job or go for retirement, do the taxmen ask his/ her to pay the same amount of tax that he or she had paid earlier? Certainly not.
Similarly, it is nothing unusual for an individual or a company to experience fluctuations in income/ profit. The taxmen are, thus, needed to apply to their judgment if any company reports reduced profit or loss in a given year. Besides, the tax officials are free to go through the audited financial statements and other documents of the companies concerned. The tax officials, for obvious reasons, are not supposed to accept claims made by any company unless those are adequately supported by valid documents. The NBR does need to be flexible--- only in case of companies that have enough documentary evidence in support of their claims- in accepting lower profits in relation of gross turnover.
There is yet another issue-the income tax exemption ceiling-- that deserves attention of the government and the finance adviser in particular. The NBR chairman while talking to the FE late last week, in a way, made it clear that any change in tax exemption ceiling is most unlikely in the national budget for the next financial year. If the government finally decides not to make any change in the exemption ceiling for fear of a decline in its tax revenue income, it would cause harm to the interests of the taxpaying fixed income people and also to its own interests.
The NBR chairman's reference to the tax exemption ceiling in last ten years, no doubt, has some relevance to the largest ever jump in the ceiling put into effect in the budget for the outgoing fiscal. But while doing so, the taxpayers would expect the NBR chief to take into cognisance the plights of the taxpayers in an economic situation where food inflation, on-point-to point basis has hit a record level-more than 15 per cent. Though the Bangladesh Bureau of Statistics-BBS-estimates the average annual inflation rate at little over 9.0 per cent, the consumers are, apparently, not ready to accept it. They feel that the inflation has gone well beyond the double digit. However, the government can well reject such claims for the consumers are neither economists nor statisticians.
But for fair judgment's sake, the taxpayers do deserve a better deal in terms of tax exemption ceiling because of the erosion caused to their nominal income by soaring inflation. Neighbouring India in its budget presented in February last for the current financial year has fixed the tax exemption ceiling well above our existing ceiling. The rate of inflation in India was around 5.0 per cent at that time. Had the Indian finance minister presented his budget now-the inflation rate has soared to above 7.0 per cent over a period of next three months, he would have been under tremendous pressure to fix the ceiling at a higher level.
There is a feeling that if the tax exemption ceiling is maintained at the current level, particularly when the prospects for inflation coming down to a reasonable level appear remote, the propensity among the taxpayers to evade tax would be stronger. A taxpayer would naturally attach priority to meeting his or her own needs than paying tax to the government in right amount.
.................................
[email protected]
The Board religiously follows the line, 'the more he earns the more he pays as income tax' while collecting income tax from a company. But it conveniently ignores the question of 'equity and social judgment' if company earns less than that of the previous year for justifiable reasons.
The existing tax rate for privately owned and unlisted companies is 45 per cent and for listed companies barring banks the rate is 35 per cent. The rate for listed banks is 40 per cent.
In a particular year, it is not unusual for a company to earn a gross profit lower than that of the previous year. This may happen because of many factors, domestic and external. But the taxmen have always been extremely rigid while making their estimate of gross profit in proportion to gross turnover of a company.
Business circles allege that they, in the past, failed to get justice even after bringing the issue to the notice of the high level tax officials and tax appellate tribunals comprising officials of the taxation department. The decisions of such tribunals, in most cases, have been always in support of the arbitrary fixation of gross profit by tax officials.
There is no denying that the propensity among most taxpayers to evade tax-tax evasion is also nothing unusual in the developed countries-in a developing country like Bangladesh is very high. This observation is true in case of individuals as well as companies. However, it would be unfair to fully blame the taxpayers. The department of taxation would have to share a part of it. For decades after decades, the authorities concerned had preferred to project themselves as dreaded objects and never tried to make both tax rates and tax collection taxpayer-friendly. Until recently, there were frequent changes in tax rates. However, the situation has been changing for the better. Tax rates have become less punishing and less frequent. Yet the National Board of Revenue-NBR-is still trying to maintain a sort of secrecy as far as tax changes are concerned. But the idea of such secrecy in the most developed countries has lost relevance to budget making.
Coming back to the issue of the fixation of profit margin in relation to gross turnover of companies it would not be unfair to request the government to look at the issue rather dispassionately. Besides, there are some valid points if one feels like arguing with the taxmen on the issue.
For instance, if an individual salaried taxpayer loses his or her job or go for retirement, do the taxmen ask his/ her to pay the same amount of tax that he or she had paid earlier? Certainly not.
Similarly, it is nothing unusual for an individual or a company to experience fluctuations in income/ profit. The taxmen are, thus, needed to apply to their judgment if any company reports reduced profit or loss in a given year. Besides, the tax officials are free to go through the audited financial statements and other documents of the companies concerned. The tax officials, for obvious reasons, are not supposed to accept claims made by any company unless those are adequately supported by valid documents. The NBR does need to be flexible--- only in case of companies that have enough documentary evidence in support of their claims- in accepting lower profits in relation of gross turnover.
There is yet another issue-the income tax exemption ceiling-- that deserves attention of the government and the finance adviser in particular. The NBR chairman while talking to the FE late last week, in a way, made it clear that any change in tax exemption ceiling is most unlikely in the national budget for the next financial year. If the government finally decides not to make any change in the exemption ceiling for fear of a decline in its tax revenue income, it would cause harm to the interests of the taxpaying fixed income people and also to its own interests.
The NBR chairman's reference to the tax exemption ceiling in last ten years, no doubt, has some relevance to the largest ever jump in the ceiling put into effect in the budget for the outgoing fiscal. But while doing so, the taxpayers would expect the NBR chief to take into cognisance the plights of the taxpayers in an economic situation where food inflation, on-point-to point basis has hit a record level-more than 15 per cent. Though the Bangladesh Bureau of Statistics-BBS-estimates the average annual inflation rate at little over 9.0 per cent, the consumers are, apparently, not ready to accept it. They feel that the inflation has gone well beyond the double digit. However, the government can well reject such claims for the consumers are neither economists nor statisticians.
But for fair judgment's sake, the taxpayers do deserve a better deal in terms of tax exemption ceiling because of the erosion caused to their nominal income by soaring inflation. Neighbouring India in its budget presented in February last for the current financial year has fixed the tax exemption ceiling well above our existing ceiling. The rate of inflation in India was around 5.0 per cent at that time. Had the Indian finance minister presented his budget now-the inflation rate has soared to above 7.0 per cent over a period of next three months, he would have been under tremendous pressure to fix the ceiling at a higher level.
There is a feeling that if the tax exemption ceiling is maintained at the current level, particularly when the prospects for inflation coming down to a reasonable level appear remote, the propensity among the taxpayers to evade tax would be stronger. A taxpayer would naturally attach priority to meeting his or her own needs than paying tax to the government in right amount.
.................................
[email protected]