The budget phobia that grips the educated section of the people every year before the month of June seems to have subsided with its announcement on June 05. There is a sigh of relief among the general people as the budget brings no major surprise to them.
One of the major challenges for the policymakers is to increase government revenue without increasing taxes. To meet this challenge, they have two alternative options- one is to bring into the tax net those who are outside and the other is to plug the holes that create opportunity for tax evasion. The lion share of our income tax revenue comes from income from businesses. Transparent and trustworthy financial reports prepared by businesses are the most important tools to determine appropriate business taxes and in that case, the attestation services rendered by the professional accountants are crucial. The proposed budget seems to have logically placed great importance to transparent auditing and accounting system to establish proper and systematic assessment of tax.
Over the years, transfer pricing manipulation has been an issue of great concern to the taxation authorities particularly in international transactions. International transfer pricing is cross-border supply of goods or services usually from parent company to subsidiaries or from one entity of a multinational concern to another entity situated in a different country. Multinationals often use the pricing tool to manipulate profitability at regional levels. Depending on the tax structure of the country in which an individual business subsidiary or related business unit operates, the transfer prices are set at high or low. This means that if the tax rate in importing country is high, the subsidiary of an MNC can reduce its local tax burden and thus can minimise the tax liability of the parent company as a whole if the transfer of goods or services is priced higher and vice versa. Such abuse of the transfer pricing tool would mean loss of revenue to the national exchequer of the concerned country.
Besides avoiding tax, there are some other motives as well for manipulation in transfer pricing. In cases where there is restriction on profit repatriation, transfer pricing is used as a tool to siphon off profit from one country to another.
COMPLEX AND CHALLENGING ISSUE: Transfer pricing has always been an issue of concern for the taxation authorities around the world. With increased globalisation of the economy, the issue has become more complex and challenging. Though late, the taxation authority in the country has finally come out to address the issue and in the current budget, the transfer pricing regulation has been proposed to be made effective from July 01, 2014. The regulation, among others, requires the international transactions between associated enterprises to be determined having regard to the arm's length price. The provision also requires that any such transaction above the value of Tk. 30 million should be certified by a chartered accountant or a cost and management accountant.
Countries around the world, including our neighbours, have adopted similar provision in their tax laws long back. Transfer pricing regulation in India, for example, was introduced in 2001. This scribe as back as 2005 wrote articles in a national daily calling for introduction of transfer pricing regulation. Although late, it is undoubtedly a welcome move of the government. The regulation will help check evasion of tax by multinational companies and siphoning off of funds abroad.
STOPPING LEAKAGE OF REVENUE: Another important budget measure proposed to stop leakage of revenue is introduction of the provision to submit certified accounts along with the income tax returns by sole proprietorship and partnership business firms. The new provision provides that "without prejudice to the preceding sub-sections, every person, not being a company as defined in Companies Act 1994, shall, with the return of income required to be filed under this Ordinance for any income year, furnish a copy of the trading account, profit and loss account and the balance sheet in respect of that income year certified by a chartered accountant or cost and management accountant, as the case may be, if his gross sales or receipts from business or profession in the income year exceed Taka five crore (50 million)."
Prior to introduction of this remarkable provision in the proposed budget, the income tax law required only limited companies- both private and public registered under the Companies act 1994, to submit certified annual accounts along with the tax returns regardless of their income. There was no provision of audit of accounts of sole proprietorship or partnership business. It is now required that these businesses will, if the revenue exceeds a certain threshold limit, have to submit the audited accounts along with tax returns. Enactment of this provision will help bring the vast majority of the business firms into a more transparent accounting and reporting system. The certified financial statements will give a valid basis of assessment and curtail the scope for subjective determination of income by the taxation authority in one hand while reducing the scope for manipulation of income by firms on the other. Penal provision has been proposed for the accountants certifying false statements.
A WELCOME MOVE: As the proposals try to bring more transparency in accounting and reporting systems, a breakthrough provision has been introduced in the budget wherein both the chartered accountants (CAs) and the cost and management accountants (CMAs) - two distinguished accounting professions of the country - have been given the right to certify the accounts of sole proprietorship and partnership business firms as far as the income tax assessment is concerned. This is a welcome move in line with global trend to get rid of the long-term monopoly of the CAs. Many countries around the world including Canada, Australia and the UK have given public practice rights to accounting professionals other than the chartered accountants. As far as tax revenue assessment is concerned, many of our neighbouring countries including India have given the right to the cost and management accountants along with the CAs.
Cost and management accountants like the CAs have long heritage of providing accounting service to the society. Both the professions pre-existed much before the independence of the country and both the professions were established by laws of this land and governed by the Ministry of Commerce. As regards global recognition, both the institutes got the membership of the IFAC (International Federation of Accountants), the SAFA (South Asian Federation of Accountants), the CAPA (Confederation of Asia Pacific Accountants) among others.
In case of promoting professional accountancy nationally and internationally, both the institutes work at similar status. But unfortunately, the cost and management accounting profession in the country has often escaped welcome glare of the policymakers and remained outside the media spotlight as well. Â
While empowering CMAs to certify the financial statements for tax purpose has got welcome nod in general, the vested quarters are, however, against the move. Such opposition is neither unexpected nor uncommon. When legislators in Canada placed the bill authorising CGAs (certified government accountants) to do public practice along with CAs, there was a huge opposition from the chartered accountant community against the move on the plea that such an authorisation will lower the standard of audit.
But today both CGAs and as well the management accountants are equally allowed to do public practice, not to talk of tax-related accounting practices along with CAs. In the UK since the enactment of the Companies Act 2006, ACCAs are allowed to do public practice along with the CAs of England and Wales. So the fact is that globally the CAs are not only the exclusive authority to do public practice. In India, the revenue authorities are increasingly relying on certification of the cost accountants in matters of revenue collection. Introduction of the new provision would mean that if you have a sole proprietorship or partnership firm and you require certified financial statements for tax purposes, you will have a choice. Â
Those who oppose the proposition incorrectly argue referring to the Companies' Act 1994, that audit is their exclusive right. But the fact is that the Companies Act applies to public and private limited companies only and both the CAs and CMAs have been given auditing rights of different nature under different sections of the law. The proposed budget provisions have nothing to do the companies act as it relates to business enterprises of sole proprietorship and partnership nature.
The argument that standard of audit will be lowered if CMAs are allowed to do certification of financial statements also is not justified. Globally as well as locally, both CAs and CMAs are considered to be of equal standard. The academic curriculum as well as qualification criteria is more or less similar. In addition to passing the qualifying examinations, one has to have at least 3 years of practical experience in accounting, finance and allied areas besides certain other requirements to become a member of the ICMAB. Both the ICMAB and the ICAB have international affiliation and are recognised bodies of the International Federation of Accountants (IFAC), the Confederation of Asia and the Pacific (CAPA) and the South Asian Federation of Accountants (SAFA) among others. Under provision of income tax law, both CAs and CMAs have been given right to do tax practice. The Companies Act has given exclusive rights to the CMAs to do cost audit. Recently introduced Corporate Governance Guidelines, issued by the Bangladesh Securities and Exchange Commission, which is applicable to the publicly listed companies, also gives right to the CMAs along with the CAs to do corporate governance audit. Therefore, the argument that the audit is not safe in the hands of the CMAs warrants little justification. Â
Unfortunately in the recent past, a good initiative of the government to introduce the Financial Reporting Council Act that provides for establishment of an oversight body to regulate the accounting profession stumbled due to opposition from a certain quarter. This time we hope the government's effort to expand the attestation rights of public accounting practice is not reverted. There is more competition now and competition never hurts anyone. Competition is healthy.
The writers are members of the Institute of Cost and Management Accountants of Bangladesh (ICMAB).
 chooudhuryjamal@yahoo.com and srshipon@live.com
Budget: Focus on accounting and auditing
Jamal Ahmed Choudhury and Saifur Rahman Shipon | Published: June 22, 2014 00:00:00 | Updated: November 30, 2024 06:01:00
Share if you like