THE Finance Act 2006 introduced several changes in our income tax law. Some of them are indeed timely and need-based for which the Finance Minister and Nation Board of Revenue (NBR) deserve sincere appreciation. This write-up is purported to discussing those changes with the sole aim of promoting better understanding of our changed tax provisions by the tax administrators, tax professionals, tax payers and learners in general.
Definition of perquisite, S2: Cl. 45: For a long time, area of perquisite was a battle ground for assessees and assessors. In the absence of a precise definition in the Income Tax Ordinance, both used mostly court cases decided within Bangladesh and outside mainly India as precedents which however, were not uniform and which in fact, led to further complication and desettlement of the subject. The Finance Act 2005 though amended the definition, lacked in certain aspects like inclusion of incentive bonus, contribution to a recognised provident fund, approved pension fund, approved gratuity or superannuation fund as perquisites.
Since perquisite is a two-pronged object on which both the employees and employers are subjected to tax, it was all rational to redefine it on a fair basis and the Finance Act 2006 has really done it and eventually litigations arising out of the confusion or contradiction would be reduced.
Perquisite as it stands today means any payment made to an employee by an employer in cash or in any other form excluding basic salary, arrear salary, advance salary, leave encashment, leave fare assistance, overtime, festival bonus, incentive bonus not exceeding 10 per cent of disclosed profit of relevant income year. Ten per cent is a new introduction and appears quite sensible.
Incentive bonus is an optional extra and generally paid by the employers to motivate the employees towards greater productivity and better results, some part of it has been shard with the employees that sounds fair and logical and on that score assessees with declared losses or paying incentive bonuses in excess of the 10 per cent cap would, by this provision, be penalised by way of addition of excess perquisite.
In the other part, definition of perquisite includes all benefit whether convertible into money or not provided to an employee by an employer, called by whatever name but specifically excludes contribution to a recognised Provident Fund (PF), approved pension, gratuity or superannuation fund.
Charge of minimum tax, S. 16CC: This is a new section and introduced mainly to oblige numerous company assessees who allegedly do not pay any income tax for years together on the strength of fiscal loss. This new section imposes yearly tax of Tk 5,000 or 0.5% of annual turnover of the company whichever is higher.
The provision surely would enhance tax revenue substantially provided the companies are presently outside the tax net because of administrative lapses or because of earlier provision, and the measure can be followed up subsequently. Out of present member of about 60,000 registered companies, only 25% have been careful of tax requirements, the rest remain off limit for years together. The assessed turnover will be deemed to be the income of the company for charging of income tax and turnover will mean -
(a) gross receipts derived from the sale of goods;
(b) gross fees for rendering services or giving benefits including commission or discounts;
(c) gross receipts derived from any heads of income other than from capital gains or speculation business; and
(d) the company's share of the amounts stated above of any association of persons of which it s a member.
Perhaps another provision could be made to compel a couple of thousand of companies registered newly every year to pay at the time of incorporation income tax in advance for say five years at the minimum of Tk 5,000 per year and such a provision can generate significant tax revenue annually without much side effects.
Equity money received from any shareholder or director, S. 19(24): Under this new provision equity money not received by crossed cheque or bank transfer by a private ltd or unlisted public limited company from a shareholder or director of the said company will be deemed as income of the company from other sources.
It is deemed to be a check on unbridled or unfounded equity contribution of the shareholders or directors but to make this effective care should also be exercised to see that money received by crossed check or bank transfer to merely comply with this sub-section are later on taken away by the directors through some means or other.
Tour expenses of the company directors S. 19(25): This is also a new sub-section and is intended to limit the overseas tour expenses of company directors as allowable expenditure claimed by the concerned company.
Under the provision, there would not be any disallowance in the assessment of the company but 50% of such expenses on foreign tours by any director exceeding twice in any year will be deemed to be the income of the director arising from other sources. However, expenses on first two such tours are excluded from the treatment. This appears to be a fair provision to deal with disproportionate personal tour expenses on account of the company and to make the provision effective extreme care must be exercised by the assessing officers to see that two or three or more tours are not conjured up as one. To check, the date and purpose of each individual tour together with boards resolution even post facto, may be relevant.
Special tax treatment in respect of investment in house property S. 19B : This is an old section and now through amendment its scope has been further widened and in some cases the areas in Dhaka and Chittagong have also been specified with enhanced rates.
Under the provision of this section no question as to the source of any amount invested by any person in the construction or purchase of any building or apartment will be raised by the tax authority when the assessee pays before the completion of assessment for the relevant assessment tax @ following rates:
(a) Tk 300 pr square meter (1 square - 11.5 SFT) on building or apartment within plinth area of 200 sqm. for the area of Gulshan Model Town, Banani, Baridhara, DOHS, Dhanmondi R/A, Lalmatia Housing Society, Uttara Model Town, Basundhara R/A, Dhaka Cantonment, Motijheel C/A, Dilkusha C/A, Kawran Bazar C/A of Dhaka and Khulshi R/A and Panchlaish R/A of Chittagong.
(b) Tk 500 per sqm. on building or apartment exceeding 200 sqm plinth area for the areas mentioned in (a) above.
(c) Tk 200 per sqm. on building or apartment within plinth area of 200 sqm. for the areas other than mentioned in (a) above.
(d) Tk 300 per sqm. on building or apartment exceeding plinth area of 200 sqm. for the areas other than mentioned in (a) above.
For revenue purpose, the above provision appears simple and straightforward but on ethical grounds it has been severally criticised by many quarters since it is discriminatory favouring those acquiring buildings or apartments with undeclared and untaxed money whereas in normal course under our tax law, tax rate on such unexplained instruments is much higher and can be 25% at the maximum. Let us clarify the matter further. Suppose, an assessee buys or constructs a building and shows the investment thereon in his wealth statement. The tax officer can ask him about the source of such investment. It can be out of valid overseas remittance or out of past accumulated taxed income. If the assssee can not satisfy the tax officer about any of these, the part or full unexplained investment would be assessed as his income from other sources under concerned provisions of S. 19 and in that case the assessee may be taxed at the maximum personal tax rate of 25%. On the other hand, there would not be any tax when the assessee can offer explanations about the source of investment which are accepted by the tax officer.
Now the question can be and in fact has been raised quite vociferously about the moral and ethical aspects of these two different tax treatments of the same object. However, keeping aside the moral argument, for the sake of equity and fairness, the treatments should be alike; otherwise, honest taxpayers would be penalised which can not be desired by a good tax regime. To make it fair and equitable to all assesses, perhaps amendments to concerned provisions of S. 19 making tax payments on unexplained investment in buildings and apartments on the basis of S. 19B i.e. plinth area wise could have been more appropriate.
Special tax treatment of investment in land S. 19BB: The section has been amended to include investment in land any where in Bangladesh for which no question about the source of such investment would be raised by the tax authority when 7.5% tax on the deed value is paid by the assessee at the time of registration of such land.
Critics argued heavily against this old provision on the same moral ground and to make it at least equitable if not totally acceptable on ethical ground, the rate of tax should have been 7.5% when tax officer raises questions on any assessee about his investment in land. If the assessee can offer satisfactory explanation it is all right, but when he can not, the unsatisfied investment either part or full, should be taxed at 7.5% and not at 25%.
Investment in motor vehicle S. 19 BBB: This is also an old section now being amended with enhanced rates which are:
(a) 15% of purchase value of car or jeep exceeding 1500 cc (not for hire)
(b) 10% of purchase value of car or jeep upto 1500 cc (not for hire)
Upon payment of tax at the aforesaid rates no question as to the source of investment would be raised by the tax people. However, the assessee has the option to show this in his normal tax return when he can satisfy about the source thereof.
Earlier provision of this section for first time registration of the car in Bangladesh has now been deleted and as such there is no restriction on the second or any subsequent registration.
Provision for bad and doubtful debt including interest S. 29(1)(XVIIIaa): This has been amended to include Karma Shongsthan Bank entitled to claim a maximum 1.0% of the outstanding loan including interest thereon as allowable expenditure.
Inadmissible deductions S. 30: Clause (e): Allowable perquisite to an employee has been raised to Tk 0.2 million (2.0 lakh) from earlier Tk 192,000. Moreover three new clauses have been introduced.
Clause (i): Under this, salary or remuneration paid to an employee earning gross monthly amount of Tk 15,000 or more otherwise than by crossed cheque or bank transfer would be disallowed. This provision obviously intends to put a check on false or unverifiable claim on salary or remuneration as business expenditure and in the case of disallowance for payment by cash, the employees too may not be justifiably subjected to tax and any payment made as deduction at source may be refunded otherwise effectively it would amount to double taxation.
Clause (j): under this incentive, bonus exceeding 10% of the disclosed net profit will be disallowed.
Clause (k): it restricts overseas traveling expenses upto 1.0% of disclosed turnover.
Capital gain on the transfer of capital asset to a new company S. 32(11A): This is a new sub-section. However, similar provision exists under sub-section (11) exempting capital gain arising from the transfer of capital asset of a firm to a new company formed under the Companies Act 1913 or 1994 when such gain is fully invested by the partners of the firm in the equity of the company under sub-section (11A) the whole provision remains but capital asset of a firm has been replaced by an assessee who can be an individual, a firm or a company. It also introduces a new provision to determine the capital gain arising from the transfer of shares or stocks of a company holding stock exchange membership. Since stock exchange membership is now a days held by a corporate body i.e. limited company, question arises about the determination of capital gain when any shareholder transfers his share or stock in the company. It was though obvious, the new sub-section makes it clear stating that the cost for the purpose of capital gain of such transferred shares or stocks will be proportionate to the cost of membership.
Exemption and allowances S. 44(3) : Under amended clause (a) of sub-section 3 the aggregate allowances admissible under all paragraphs of the Sixth Schedule excluding paragraphs 15 and 16 of part B of the same Schedule has been raised to Tk 250,000 from Tk 200,000.
Furthermore, earlier clause (b) allowing Tk 225,000 where investment is made in the primary acquisition of shares in a listed company has been deleted.
Exemption from tax of newly established industrial undertakings S. 46A: Sub-section (1) has been slightly modified clarifying profits and gains as determined under 28 (income from business or profession).
Income subject to deduction of tax at source S. 49: Three new clauses have been added under this section as follows:
(Zj) income derived on account of courier business of a non-resident.
(Zk) income derived on account of export cash subsidy
(Zl) on account of use of credit card by a credit card holder.
Deduction or collection of tax at source from courier business of a non-resident S. 53CC: This is a new section that brings the non-resident courier companies operating in Bangladesh under the fold of tax deduction at source. The local agents of foreign courier companies will have to deduct advance income tax @ 5.0% of gross amount received from the shipment of goods, documents, parcels or any other things outside Bangladesh. The tax is deductible by the local agents while periodically remitting money to the non-resident principals through the Bangladesh Bank.
There are at least 14 foreign courier companies operating in Bangladesh through local agents and they were required to deduct tax @ 3.0% on foreign remittances not directly as a fiscal provision or statutory regulatory order (SRO) but by some form of office note and such deduction has now been given proper legal backing.
It is alleged that only four or five local agents of courier companies deducted and paid taxes on a regular basis and it is a mystery to be unearthed how the rest managed their remittances, may be through informal channel i.e. Hundi.
Other interesting thing is the existence of agreements between local agents and non-resident principals under which agents are obliged to perform principals' duties locally and vice-versa -- one is the consideration of other like back to back L/C and question of remittance can not thus legally arise. It is to be seen how the NBR and the Courts respond to this issue subsequently. However, it may well be understood that the agencies are a sort of franchise for which payment is logical and any mutuality agreement without further clause for payment may be somewhat a sham.
Deduction of tax at source on export cash subsidy S. 53DD: This is a new section under which the banks while paying export cash subsidy to the exporters shall have to deduct advance income tax @ 5.0%.
From a macro-perspective view, it is a useless exercise for the government to give cash subsidy in one hand and withhold some part of it in another. The hidden accounting and administrative costs involved in the exercise would be substantial. However, the NBR would be able to show more revenue collection without corresponding efforts and, perhaps, this has been a motivating factor behind the provision.
Collection of tax on the credit bill of credit cards S. 53GGG: This is also a new section intended to collect advance income tax on the expenditure met initially by the users through burgeoning credit cards issued by various local banks. The rate is 3.0% on the bills to be collected by the card issuing banks or other financial institutions.
Here the expenditure is taken as income and whether conceptually sound is another matter but how credit cards of foreign banks or financial institutions operating outside Bangladesh issued to and used by many local Bangladeshis abroad, can be brought into the fold remains to be seen.
Tax deducted or collected at source to be treated as final settlement of tax liability S. 82C: Sub-section (2); when tax is deducted or collected at source under the provision of sub-section (1) of S.82C the whole amount received by or accrued to an assessee is deemed as income and sub-section (2) provided a list of such income with which following have been added:
Clause (If): the amount received on account of courier business of a non-resident under new section 53CC and
Clause (Ig): the amount of export cash subsidy under the new section 53DD.
Sub-section (4): with the list of items on which deduction or collection of tax at source has been made under various sections which are to be treated as final discharge of tax liability, above two items have now been added.
Revisional power of Commissioner S. 121(2): Application to the Commissioner to exercise his revisional power under this sub-section is now to be made within 60 days in place of earlier 90 days of the date of communication of the order to the concerned assessee.
Limitation (time) of appeals. 154(2): Appeal against the order of the DCT and IJCT under the above sub-section will now has to be filed within 45 days (earlier 60 days) of the date of communication of such order to the concerned assessee.
Disposal of appeal by the Appellate Tribunal S. 159(6) : The sub-section has been amended under which appeal filed with the Tribunal shall be deemed to have been allowed when the Tribunal fails to make an order within a period of four months (earlier six months) from the end of the month of filing of such appeal.
Appearance by authorised representative S. 174: A new provision has been included at the end of sub-section (2) as: provided that such an income tax practitioner shall be a member of any registered Taxes Bar Association.
The First Schedule, approval of gratuity funds: Sub-para (1) of para 2, part C has been amended under which NBR has to accord approval to an appropriate gratuity fund application within three months (earlier six months) of such application.
The Third Schedule, accelerated depreciation allowance: Sub-para (1) of para 7 has been finally recast as follows:
(1) In the case of machinery or plant other than office appliances and road transport vehicles, previously not used in Bangladesh has now been used as such in an industrial undertaking set up between July 01, 1977 and June 30, 2008 (both days inclusive) the rats of allowable accelerated depreciation will be:
Rates of Taxes: These have been kept similar to the Finance Act 2005 however, with one significant addition as follows:
Persons paying taxes at the maximum rate of 25% in the tax year 2006-07 when declares minimum 10% more income in the assessment year 2007-08, will be entitled to 10% rebate of tax due on such more income declaration.
Example: Mr. X, an individual assessee has the total income of Tk 1,200,000 for the assessment year 2006-07 (Income year 2005-06) and paid tax at the maximum rate of 25% on some part of this income. In the assessment year 2007-08 (Income year 2006-07) be declares total income of Tk 1,380,000 which satisfies the 10% increase criteria for rebate entitlement. Under the new provision his tax liability would be calculated as under:
On the additional income declared for the assessment year 2007-08 of Tk 180,000 tax at the maximum rate of 25% is Tk 45,000 on which a rebate of 10% would be allowed.
Therefore, tax liability of Mr. X for the assessment year 2007-08 would be Tk (230,000 - 4,500) = Tk 225,500.
The minimum tax for persons is Tk 1800 as was last year. For this purpose persons include individual assessees including non-resident Bangladeshis, Hindu individual families, partnership firms, association of persons and individuals treated as such by legal fiction.
The writer is Partner, Hoda Vasi Chowdhury & Co