Some thoughts on downside of proposed income tax law

A long-sought-after law on income tax is up to get through parliament, evidently leaving some lacunae unplugged. The proposed "Aikor Ain 2023 (Income Tax Act 2023)" was endorsed in principle by the cabinet on 23rd January 2023. It is aimed at addressing the shortcomings of the existing tax system in Bangladesh. However, several important factors need to be reviewed before its implementation.
This article brings in focus the implications of legal verdicts, changes in accounting practices, tax potential and gaps, taxpayer grievances, tax- administration structure, treatment of charitable organizations, procedural matters, and the need for comprehensive rules and manuals.
The High Court, in its verdict on August 26, 2010 on a writ petition, No. 696 of 2010, declared void the 7th Amendment of the Constitution and all the ordinances promulgated between March 24, 1981 and November 11, 1986. The Appellate Division, in its verdict on May 15, 2011 (Civil Appeal No. 48 of 2011), upheld the High Court decision. As a result, the Income Tax Ordinance 1984 became invalid. The subsequent Act No. 7 of 2013 provided temporary validity to the ordinance, as a stopgap measure based on the doctrine of necessity.
Besides, the Income Tax Ordinance 1984 was drafted in English, while the "Bangla Vasha Procholon Ain 1987" requires all laws to be made in Bengali. Thus, the need for a new tax law in Bengali has arisen.
With the shift from paper-based accounting to computerized systems, accounting practices have evolved significantly. The introduction of International Financial Reporting Standards (IFRS) aimed to raise the quality of financial reporting to international standards. The Financial Reporting Act, effective from September 2015, made DVC numbers mandatory in audited financial statements. The restrictions on cash transactions have steadily been extended. This has almost diminished the possibility of making multiple or untrue audited financial statements for businesses. These changes need to be considered in the new tax law.
No study has been undertaken from any quarter to find out tax potential and tax gaps. According to the monthly fiscal report of the Ministry of Finance tax-GDP ratio during the financial year 2021-22 was 7.56 per cent. The share of income tax in the total tax was 32%. According to the same source income-tax collection for the financial year 2021-22 was Tk 916.98 billion, while the GDP by official count was Tk 39,760.45 billion. By all standards, the tax-GDP ratio is low.
One reason stated is that the network of tax is small. In a population of 170 million, the number of individual registered TIN-holders is 8,506,611(as on April 13,2023). However, the number of taxpayers from whom tax is deducted in some sources is much higher than the number of TIN-holders. For example, according to Bangladesh Bank's quarterly report of December 2022, there are 110,222,505 numbers of interest-bearing savings account-holders. Tax is deducted at 10 per cent or 15 per cent from interest paid to the account- holders. The number of fixed-deposit holders in the same period was 5,026,273. In that sense the low tax network does not appear to be correct.
The number of registered-company TIN-holders is 175,080 (as on April 13, 2023). According to RJSC, as the end of March 2023, the number of companies incorporated is 207,711. Considering the possible dormant companies and newly set-up companies yet to commence commercial operations the network-coverage gap does not seem to be high.
These figures indicate that the low collection is basically due to the failure to collect due tax from big-or middle-level taxpayers.
Another tax-gap source remains in the existence of huge underground economy. According to an econometric-analysis study conducted by the Ministry of Finance in 2010 the size of underground economy is 62.75 per cent of GDP. Recent increase in flight of funds further aggravated this arithmetic.
Bringing these sources under tax net is a huge challenge. Unless ways of extracting revenue from these sources is found out, substantial increase in tax- revenue collection will be difficult. The new tax law should find out effective mechanism to bring them under tax net.
Stakeholders have raised concerns about the complexity in the tax law and discretionary powers vested in tax authorities. The wide-ranging discretionary power is often enforced arbitrarily. The practice of standard gross profit of various types of business is impractical. Rate of tax deduction at source is arbitrary and high. RIRA project of NBR conducted a taxpayer survey in 2002. Again in co-operation with the NBR, IFC of the World Bank conducted another taxpayer survey which was published in April 2013. While framing the new law the taxpayer survey reports do not appear to have been examined or considered.
The current system of tax appeals consists of two stages, with the first appeal heard by the Commissioner of Taxes (Appeals) and the second appeal heard by the Taxes Appellate Tribunal. However, the discontinuation of the "Judicial Member" in the Tribunal resulted in a loss of judicial expertise. Reinstating this position would enhance the fairness of the Tribunal's decisions. Additionally, the underutilization of revisional orders by the Commissioner of Taxes should be examined to understand the reasons behind it.
Regarding alternate settlement of tax disputes several systems introduced and then discontinued for unknown reason. Tax Settlement Commission was introduced in 1994 and abolished in 2002. Tax Ombudsman was introduced in 2005 and discontinued in 2011.
Alternative Dispute Resolution (ADR) mechanisms were introduced in2011 but have seen a decline in utilisation. The effectiveness of the ADR system should be assessed to identify any barriers and make necessary improvements.
The revisional power of the Commissioner of Taxes and the effectiveness of alternative dispute-resolution mechanisms need to be examined for improved taxpayer satisfaction.
In 2002 a group of experts comprising experts from the World Bank, the IMF and the NBR made a study of functions performed by field- level tax offices. They diagnosed four basic functions, namely, taxpayer service, audit, revenue accounting, tax collection, enforcement and appeal
It is necessary to examine the business process of each of these functions with a view to reforming and standardizing the process.
The structure of tax offices should align with the functions performed. The Large Taxpayers Unit (LTU) office, which separates taxpayer services, audit, revenue accounting, tax collection, and enforcement, has demonstrated success. Expanding this model and standardizing processes in other tax offices could enhance revenue collection and taxpayer satisfaction.
The legal position of charitable or religious entities running on a non-profit basis requires clarification and proper clustering. There remained some unresolved issues in the existing tax law. The new tax law should incorporate a separate chapter compiling all provisions related to charitable organisations.
Procedural matters should be primarily addressed in rules rather than in the Act itself. However, the proposed Act includes certain procedural matters that were previously covered by rules. This deviation from legal jurisprudence may limit flexibility and create operational difficulties. Furthermore, outdated notices should be redesigned to ensure clarity, courtesy, and decency.
To implement the new tax law effectively, comprehensive rules, manuals, and notices need to be prepared. These documents should cover record-keeping, audit, revenue accounting, and collection. Additionally, as international transactions increase, an authentic English version of the new tax law is necessary.
Before implementing the proposed Income Tax Act, careful consideration must be given to legal verdicts, changes in accounting practices, tax potential and gaps, taxpayer grievances, tax- administration structure, treatment of charitable organizations, procedural matters, and the availability of comprehensive rules and manuals. By addressing these aspects, the new tax law can be refined and improved to meet the evolving needs of Bangladesh's tax system.

The writer is former Member, NBR.
amin_iba_tax@hotmail.com