Harmonising income from employment and non-employment in the tax law

To begin with, our tax-GDP ratio is one of the lowest in the world. It is less than 10 per cent here, 13 per cent in India, 11 per cent in Indonesia, and more than 30 per cent in the western countries. There is pressure for a long time from national and international bodies to increase tax revenue. Various discriminated exemptions and allowances (tax free income) are one of main causes of low tax revenue.

INCOME OF AN INDIVIDUAL: In Bangladesh, according to Income Tax Act 2023, an individual may have seven categories of income like income from employment, income from agriculture, income from rent, interest income, income from business, capital gain, other income such as dividend and royalty. These incomes except capital gain (capital gain being taxed at a separate rate of 15 per cent) are added and after deducting some exemptions (tax free income) taxable income is determined and tax is charged at slab rates from 5 per cent to 25 per cent. From this gross tax, credit is given for allowable investment, advance tax paid and tax deducted at source.

TAX FREE INCOME: Developing countries have some amount of tax free income. Widespread unemployment and lack of decent work and pay are the reasons for this tax provision. Developed countries do not have this provision for tax free income. Here all incomes are taxable except only a few.

FOR EMPLOYED PEOPLE (IN JOBS): Income from employment is excluded from taxable income up to TK. 450,000 or one-third of this income whichever is lower (Income Tax Act 2023, Sixth Schedule, Para 27). In addition to that, general exemption is available up to minimum TK. 350,000 from taxable income. For female and freedom fighters this general exemption is higher. So for employed people, a total of TK. 800,000 minimum is tax free. That is, a person in employment, earning a monthly salary of TK. 66,667 does not have to pay tax on his employment income. This amount is too high if we consider per capita income of TK. 300,000 in recent times.

FOR NON-EMPLOYED PEOPLE: Non-employed people (who are not in jobs) get TK. 350,000 as tax fee income. Farmers get TK. 550,000. Some of them may live on rental income, some may live on just interest income, or they may have other categories of income.

THE LOGIC OF TK.450,000 AS TAX-FREE: TK.450,000 has been taken considering TK. 300,000 for house rent, TK. 120,000 for medical, and TK 30,000 for conveyance. These have been assumed as essential on which tax should not be payable. On top of that Tk. 350,000 is also considered survival amount needed for basic necessities like rice and lintels. For a long time, this provision of the tax law is seriously discriminatory. For employed people one amount of tax free income (TK. 800,000) and for non-employed another amount of tax free income (TK. 350,000) is unacceptable. If medical, house rent, and conveyance (altogether TK. 450,000) is considered necessary for employed people, this should similarly apply to the non-employed people. The non-employed people also must set aside some amount from their income (other than employment income) for medical, house rent, and other bare minimum necessities. Think about a citizen who lives on interest income alone. Does he and his family not need minimum necessities like housing? Or, think of a person who lives on rental income (house property) alone. Does he not need necessities like medical and conveyance? Therefore, if there is provision for some tax free income for essential necessities (survival needs), that should be given to all citizens equally irrespective of whether they earn from employment or rental income or interest income.

TAX-FREE INCOME ON TOTAL TAXABLE AMOUNT AND NOT ON PARTICULAR CATEGORY OF INCOME: Tax-free income is based on total taxable income. However, if a particular income has tax-free component, it shall not exceed the total (genera) tax free income for all categories of income together. In our country, a citizen who has only agricultural income and interest income of maximum TK. 20,000 gets an additional tax-free income of TK. 200,000, i.e., a total TK. 550,000 tax-free income.

Then why did the government do it? The government did not think about the difference seriously. Second, the policy makers are mostly employed people who thought of their own interest. Third, most people have some sort of employment. People who live by income other than employment income are minority.

To conclude, the amount of tax-free income should be equal for all people in the country. Tax-free income of TK. 800,000 is high and TK. 350,000 is low in the country's recent context. A midpoint like TK. 500,000 appears suitable for all people irrespective of employed and non-employed. Tax law also indirectly considers this amount a reasonable amount of tax-free income (tax free income for agricultural income up to TK. 550,000, maximum investment of TK. 500,000 in government securities to qualify for tax credit on investment etc.)

Dhiman Chowdhury, PhD is Professor & Chairman Department of Accounting & Information Systems, University of Dhaka