Where amendments to income tax law are needed

Financial Institutions are being harassed by tax authority to pay tax unnecessarily on the amount of fund' kept as "interest suspense". Section 28(3) of the existing Income Tax Act is related to claim of interest suspense by the erstwhile Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha, the two banks that are now merged into one bank i. e. Bangladesh Development Bank Ltd. -- investment Corporation of Bangladesh and all other commercial banks including Krishi Bank and Rajshahi Krishi Unnayan Bank are allowed by the tax authority not to treat interest suspense as income of the year under consideration. Unfortunately, Other financial institutions have been kept outside the purview of this section (may be inadvertently) for such consideration. As such, amendment of this section is urgently required to establish for the sake of equity and natural justice. Under section 28 (3) -In the 4th line, the words Bangladesh Shilpa Bank, Bangladesh Shilpa Rin Sangstha is hereby substituted by the words, "Bangladesh Development Bank Limited" and after the words, 'Investment Corporation of Bangladesh', the new words "and other Financial Institutions" be and is hereby inserted. Excess Profit Tax: Section 16C of the existing Income Tax Act is related to charging of additional tax on the banking companies which, had shown profit in its return for an income year an amount exceeding fifty per cent of its capital as defined under the Act, together with reserve (without explanation of the word reserve), the company, in addition to tax payable under the Ordinance, shall pay an excess profit tax for that year at the rate of 15% on so much profit as it exceeds fifty per cent of the aggregate sum of the capital and reserve as aforesaid. This is injustice for a banking company when it pays the tax liability on the profit as well as on the amount of disallowance by tax authority for invoking more tax from banking companies. The banking companies create reserves out of the taxed profit. Then charging tax on excess profit can not have any sense at all. It can be regarded as justified if the banking companies are allowed to increase its reserve corresponding to the extent of amount on which excess tax is paid by the bank as intangible income. If this section is continued further, the banking companies will be required to pay more tax every year on the same amount, which under no circumstances can be said to be fair and justified. In view of the above situation, either the above section be deleted in full or alternatively, a new section be inserted in the existing section. Proposed Amendment: After the words "as aforesaid" the new words are hereby inserted" the banking companies on payment of additional tax are allowed to create intangible income corresponding to tax paid amount being addition to reserve which may be utilized for declaration of dividend in the form of Bonus shares or against the unforeseeable events leading to losses in future. Explanation: For the purpose of this section, the word 'Reserve' means Statutory Reserve, Revenue Reserve, General Reserve and any Other Reserve including retained profit of the year. Payment of tax on the whole amount of disallowed expense for filing reference application: Under the section 158(2) of existing Income Tax Act an assessee is required to pay 5.0% (in case of reference application to High Court it is 10%) of the demanded tax, which includes tax on the amount of disallowed expenses-out of the claims of expenses by the assessee. Until such payment is made, High Court or the Tribunal Authority shall not admit the appeal for final hearing. But the High Court has the option to waive such tax u/s 160 (1). It is experienced while in practice, that an assessee may file a reference case to High Court for total disallowance and if subsequent to some reason only one ground is taken to file appeal in the Tribunal in that case tribunal authority asks for payment of 5.0% tax on the whole amount of disallowances. Tribunal authority does not take hearing unless an assessee has paid the amount of requisite tax equivalent to 5.0%. As a result, it becomes a hardship for the assessee to pay full amount of demanded tax and appeal remain pending until payment of full demanded tax. But if the assessee is allowed to pay tax groundwise of the appeal, the case may be finalized and settled at any time by the Tribunal. In view of the above, situation, necessary amendments may be made with section 158(2), the problem may be resolved and more revenue may be collected earlier, before the case is disposed of by the Honourable High Court. Alternatively, the Tribunal authority may accept the waiver if allowed by relevant Commissioner of Taxes. Proposed Amendment: "A new provision is inserted to admit the appeal for hearing either on receipt of waiver from the relevant Commissioner of Taxes or accepting the payment of Tax (5.0%) on the basis of grounds of appeal for disallowances against which appeal is filed by the assessee u/s 158(2) with the Tribunal. "1st Proviso": "Provided that an application made in this behalf by an assessee, the President of the Tribunal is authorized to accept either the waiver application issued by the relevant Commissioner of Taxes or the amount of Tax as may be paid by the assessee on the basis of amount related to grounds of appeal" made in the Tribunal. Carry forword of loss under the head, Capital Gain: This section 40 is related to carry forward of loss under the head, "Capital Gain". Bangladesh Bank in its circular No. BRPD No. 32 dated October 27, 2010 directed the scheduled banks and non-banking companies to make provision of the loss of shares, stocks, and securities etc., by charging such loss in the profit and loss account. But the tax authority does not allow such claim of loss and banking companies are paying huge tax on the said loss. In fact, the very next year the value of those shares may increase and the loss may be changed to a profit in the next year's accounts. This way the bank is paying tax on the amount of gain as well as on the loss amount in two different situations of two years. In order to avoid the above situation, the tax authority should keep a separate record in the assessment order for both the transactions of shares on account of "Loss" and "Gain", and these should be adjusted against each other and if the surplus results in gain, it should be taken into income and be taxed for the cause of justice and equity. Amendment Proposed: The existing law is suitably amended for the actual loss or income under the head "Capital Gain" u/s 31 in the profit and loss account and if loss arises, it should be adjusted and carried forward as per section 40. The loss against gain under the head "Capital Gain" be shown separately in the Assessment Order from year to year for adjustments of loss with that of gain. In case of gain over loss, it should be considered as income under the head "Capital Gain" in the year under consideration. Treating all expenses incidental to banking business at par: Recently, the tax authority are disallowing Reuter fee charges claimed by the banking companies on the ground of non-deduction of tax from the non-resident. Reuter organization is considered as non-resident. But in case of "Swift charge", tax authority is accepting the claim of expenses of the banking companies. The attitude of tax authority appears to be discriminatory in this respect. The existing clause 29(1) & (xviii) needs to be amended or a new clause u/s 30 needs to be inserted to allow such expenses which are very much incidental to banking business. 29(1), (xviii) or section 30 is amended to insert a new clause as under: "Any fees paid by Scheduled Banks or Financial Institutions etc. on account of "Reuter Fees" be allowed without deduction of tax from the fees claimed by Reuter until otherwise directed by the Board". Depreciation allowance: It has been observed that tax officials while considering the depreciation allowance under 3rd Schedule to an assessee, follows some peculiar idea to ignore the claim of depreciation allowance by referring clause No. 3(4) of the Third Schedule. Clause 3(4) of the 3rd Schedule is related to leasing companies who are debarred from enjoying depreciation allowance with effect from fiscal 2007-2008, but misapplication of such clause is injustice to the assessee who are running companies other than leasing companies. Therefore, clause 3(4) of the Third Schedule be amended as under: "3(4) No depreciation allowance under this paragraph shall be made to any leasing company (not the banking companies allowing loan for acquiring capital assets) on machineries, plant, vehicles or furniture but depreciation be allowed to such assessee taking bank loan under normal banking procedures" for acquiring such assets. Provident Fund Trust & Gratuity Fund: Treatment of investment of provident fund (PF) contribution under P. F. Trust under the present-day circumstances has to be realistic. According to section on 2(52) read with Rule 49 (1) or (2) of the Income Tax Ordinance 1984, it requires that P. F. contribution and interest, if any, to be invested in a post office savings bank account in Bangladesh. In fact, the amount of P. F. contribution and accumulated interest balance are so voluminous that the big companies and banking companies who maintain such balances have found it difficult to keep the said amount in the postal savings account, other than accounts of scheduled banks. In order to remove such difficulties, the National Board of Revenue (NBR) may kindly review the situation and allow the Trustee Board to keep such amount in any bank account as may be approved by the authority. As such an amendment may be made to the existing rule 49 (1), (2) of the I T Ordinance 1984 so as to enable the Trustee Board to keep the fund in a secured position. In the existing rule 49(1), (2), after the words "invested either in securities of the nature specified in clause, (a), (c), (d) or (f) of section 20 of the Trust Act 1982 (11 of 1982), the new words may be inserted that" in no case, in the shares of the publicly listed companies, but in the form of fixed deposits with a bank other than, the contributory bank in Bangladesh in the name of the "P. F. Trust". Similarly, the contribution of the Gratuity Fund to be invested in a manner as prescribed by the Rule 58D by following the rule 49(1), (2) of the I T Ordinance 1984 for the purpose of investment. In conclusion, it is to be noted that any change or future amendments in the existing sections of Income Tax Ordinance should be made through coordinated efforts by the Ministry of Finance, NBR, Bangladesh Bank and the members of the business community. This will be helpful to enact the law properly and without any ambiguity and for its Wider acceptability by the civil society. The writer is Senior Audit & Tax Partner, Howladar, Yunus & Co., Chartered Accountants