Tax waiver for audit firms
Saturday, 25 April 2009
Masih Malik Chowdhury
LAWYERS and chartered accountants depend on personal wisdom and prudence in providing professional service. Law and audit firms have been enjoying tax waiver from the National Board of Revenue (NBR). This means if the bill for professional services is Tk 100, the whole amount used to be pocketed by the firm for the service, although deductions at source at rates, ranging from one to 10 per cent is applicable to other service providers.
The waiver is applicable to partnership firms, because advance income tax deduction at source is difficult to appropriate from partnerships. Besides, after the payment of levies, charges, utilities and so on, the profit available to the partners is not substantial. The nominal profit does not justify high tax deduction at the source. The net profit of these firms drawn by the partners are taxable as drawings. However, the partners in many cases are not allowed any remuneration or allowances from the firms for the service they provide. They, with their professional knowledge, qualification and experience, provide the service to the firm, free of charge. It means they render the service in the hope of getting the net profit at the end of the fiscal year.
In many countries, lawyers form limited liability companies, as the liabilities of the partners are unlimited. Because of this professional indemnity, insurance is available for these firms in many countries. In the UK, the USA and a few Asian countries, such professionals have formed limited liability companies. The private or public limited companies can pay salaries to directors and promoters, who possess share capital and render full or part time service to the company. This is because they have professional expertise in business, trading or manufacturing. The companies owned by them, in this arrangement, get tax exemption for their salaries and allowances, reported as their own income in their personal income tax returns.
These returns allow these promoters and directors to pay tax at the rate of 10 to 25 per cent while the company tax rate in 37.5 per cent. Just because of charging directors' salaries and allowances, the payment of tax at the rate of 12.5 to 27.5 per cent can be avoided. For example if a company pays taka one million as salary and allowances to two directors, it means its net profit is reduced by the same amount. The related payment of income tax, considering its rate at the rate of 37.5 per cent, can be proportionately saved by the company. Again, if the directors received Tk 500,000 each as salary and allowances, that is Tk 150,000 as allowances and Tk 350,000 as remuneration, the tax payable would exclude the amount exempted from tax. It may be a just that their paid-up capital is only Tk. 100k but they together only pay Tk. 37k as income tax while the company would have had to pay Tk. 375k had not this amount been allowable as company account expense. Because of their investment of only Tk. 100k as share capital, the fiscal regime provides them such a large scope for tax exemption.
However, the chartered accountants and lawyers are not allowed to form a limited company. Therefore, whatever they take from the firm is their income and drawings. No salary is allowable to partners of a firm. Neither can they divulge their professional liabilities by forming limited liability companies. Therefore, either they should be allowed to form limited companies or their partnership firms should be allowed to pay salaries and allowances as expenses of the firms. The income tax rates for firms and individuals are 10 per cent, 15 per cent, 20 per cent and 25 per cent, depending on the income slab. Therefore, when the partners are allowed salaries, the tax liability for the firm could shift as applicable. The two waiver should, therefore, be restored for professional partnership firms. As a better alternative, the chartered accountants and lawyers should be allowed to form limited liability companies for providing their service.
The waiver from tax deduction at source should be restored because such deduction at the rate of 10 per cent of the gross fee appears to be exorbitant. The government should, for its upcoming fiscal regime: a) continue with tax waiver certificates to the partnership firms and allow them 1.0 to 3.0 per cent tax deduction at source for proprietorship firms, b) allow the partnership firms to form limited liability companies with the due fiscal treatment of the partners as directors of a limited liability company and, c) allow VAT, which is a tax on beneficiary of a service, to be payable by those who take the service of the chartered accountants. But the fallacy is that the government deducts VAT at the rate of 4.5 per cent from the fees of the chartered accountants. Indeed a fee of Tk. 100k is to be paid with VAT at the rate of Tk. 4.5 per cent for Tk. 104.5k. However, the government agencies or projects pay the chartered accountants Tk. 95.5k. The government needs to rectify this in the coming fiscal regime.
The writer is a senior partner of Masih Muhith Haque and Co, Chartered Accountants and council member of the Institute of Chartered Accountants of Bangladesh
LAWYERS and chartered accountants depend on personal wisdom and prudence in providing professional service. Law and audit firms have been enjoying tax waiver from the National Board of Revenue (NBR). This means if the bill for professional services is Tk 100, the whole amount used to be pocketed by the firm for the service, although deductions at source at rates, ranging from one to 10 per cent is applicable to other service providers.
The waiver is applicable to partnership firms, because advance income tax deduction at source is difficult to appropriate from partnerships. Besides, after the payment of levies, charges, utilities and so on, the profit available to the partners is not substantial. The nominal profit does not justify high tax deduction at the source. The net profit of these firms drawn by the partners are taxable as drawings. However, the partners in many cases are not allowed any remuneration or allowances from the firms for the service they provide. They, with their professional knowledge, qualification and experience, provide the service to the firm, free of charge. It means they render the service in the hope of getting the net profit at the end of the fiscal year.
In many countries, lawyers form limited liability companies, as the liabilities of the partners are unlimited. Because of this professional indemnity, insurance is available for these firms in many countries. In the UK, the USA and a few Asian countries, such professionals have formed limited liability companies. The private or public limited companies can pay salaries to directors and promoters, who possess share capital and render full or part time service to the company. This is because they have professional expertise in business, trading or manufacturing. The companies owned by them, in this arrangement, get tax exemption for their salaries and allowances, reported as their own income in their personal income tax returns.
These returns allow these promoters and directors to pay tax at the rate of 10 to 25 per cent while the company tax rate in 37.5 per cent. Just because of charging directors' salaries and allowances, the payment of tax at the rate of 12.5 to 27.5 per cent can be avoided. For example if a company pays taka one million as salary and allowances to two directors, it means its net profit is reduced by the same amount. The related payment of income tax, considering its rate at the rate of 37.5 per cent, can be proportionately saved by the company. Again, if the directors received Tk 500,000 each as salary and allowances, that is Tk 150,000 as allowances and Tk 350,000 as remuneration, the tax payable would exclude the amount exempted from tax. It may be a just that their paid-up capital is only Tk. 100k but they together only pay Tk. 37k as income tax while the company would have had to pay Tk. 375k had not this amount been allowable as company account expense. Because of their investment of only Tk. 100k as share capital, the fiscal regime provides them such a large scope for tax exemption.
However, the chartered accountants and lawyers are not allowed to form a limited company. Therefore, whatever they take from the firm is their income and drawings. No salary is allowable to partners of a firm. Neither can they divulge their professional liabilities by forming limited liability companies. Therefore, either they should be allowed to form limited companies or their partnership firms should be allowed to pay salaries and allowances as expenses of the firms. The income tax rates for firms and individuals are 10 per cent, 15 per cent, 20 per cent and 25 per cent, depending on the income slab. Therefore, when the partners are allowed salaries, the tax liability for the firm could shift as applicable. The two waiver should, therefore, be restored for professional partnership firms. As a better alternative, the chartered accountants and lawyers should be allowed to form limited liability companies for providing their service.
The waiver from tax deduction at source should be restored because such deduction at the rate of 10 per cent of the gross fee appears to be exorbitant. The government should, for its upcoming fiscal regime: a) continue with tax waiver certificates to the partnership firms and allow them 1.0 to 3.0 per cent tax deduction at source for proprietorship firms, b) allow the partnership firms to form limited liability companies with the due fiscal treatment of the partners as directors of a limited liability company and, c) allow VAT, which is a tax on beneficiary of a service, to be payable by those who take the service of the chartered accountants. But the fallacy is that the government deducts VAT at the rate of 4.5 per cent from the fees of the chartered accountants. Indeed a fee of Tk. 100k is to be paid with VAT at the rate of Tk. 4.5 per cent for Tk. 104.5k. However, the government agencies or projects pay the chartered accountants Tk. 95.5k. The government needs to rectify this in the coming fiscal regime.
The writer is a senior partner of Masih Muhith Haque and Co, Chartered Accountants and council member of the Institute of Chartered Accountants of Bangladesh