Expert Insight into… Tax – A.S & Associates

Over the recent years, one of the most densely populated countries has developed drastically and rises to become more economically prevalent. This month we hear from A.S.A Bari, who gives deep insights into tax in the aforementioned country, Bangladesh, and it is continuing to develop and help encourage citizens to pay tax; he also touches on the new regulations imposed that should positively affect and widen Bangladesh’s economy.

                                                                                         

In a bid to improve tax awareness and compliance, Bangladesh underwent different changes, such as implementing ‘National Income Tax Day in 2008’; have these changes proven a positive outcome?

For the first time in Bangladesh, the ‘National Income Tax Day in 2008’ was held to encourage the responsible citizens of Bangladesh to pay tax. Subsequently, on 31 August, 2008 the Advisory Council of the then caretaker government had decided to observe the 15th September as National Income Tax Day as they thought that such an initiative would bridge the gap between the taxpayers and the tax administration. In fact, from 2010 onwards, National Board of Revenue (NBR) has been organising weeklong income tax fair across the country every year.

Since the beginning of the fair in 2010, its popularity has been rising. This year, taxpayers’ crowd at the annual event broke all past records. NBR collected BDT 21.30 billion from the weeklong event, which is 4.63% higher than last year.

According to the statement of NBR, in 2016, a total of 928,973 persons received different tax related services and, 194,598 tax payers submitted their tax return. On the other hand, in 2015, 757,754 taxpayers got various services from the fair, whereas 161,060 taxpayers submitted their income tax returns in the fair. The number submission of returns during the fair in 2014 was 149,309, whereas the number was 52,544 in 2010.

It is pertinent to mention that from 2008 onwards, the Tax-to-GDP ratio in Bangladesh has been increasing with a positive gradient from 8% to 10.3%. In light of the growing trend of the economy, the veteran finance minister of Bangladesh, Mr. AMA Muhith, has come up with a target of increasing the Tax-to-GDP ratio to 15.3% by the Income Year 2018-2019.

To encourage people to be compliant and create a culture of paying tax, the National Board of Revenue has honoured more than 100 taxpayers, including companies, with tax cards. Among them 7 tax cards have been awarded to new tax payers which will encourage young citizens to pay tax. Until last year, top 10 individual taxpayers and 10 companies were honoured with tax cards.

 

What new and upcoming regulatory changes and developments should business keep an eye out for?

Recently, Parliament has brought about numerous changes in the Income Tax Ordinance 1984. It will be cumbersome to discuss, highlight or, even mention, all changes or development. Therefore, only few of them, which are of substantial importance, shall be discussed.

Firstly, pursuant to the substitution of definition of “income year” (section 2(35) of the Income Tax Ordinance) by Finance Act 2015 and further amendment made by Finance Act 2016, all entities, except for bank, insurance or non-banking financial institution and their respective subsidiaries, are required to have a unified financial year commencing from the first day of July and ending on the last day of June of the next year. Due to this change, any entity having a financial year from January to December is required to switch July-June. In order to implement this, a company having January-December Financial Year must prepare audited half yearly financial statement for the period commencing on 1 January 2016 to 30 June 2016.  For the assessment year 2016-17, the company needs to submit two income tax returns. The return covering twelve months of January-December 2015 must be submitted before 15 July 2016. The other return relating to the half yearly period of January-June 2016 must be submitted before 31st December 2016. In case of subsequent financial years, the Company shall cover July-June period and must submit the return on or before the next Tax Day (a concept introduced by Finance Act 2016), which is the 15th January of the next year.

 

Another substantial change relating to minimum tax has been brought about by Finance Act 2016. The new provision has two-fold implications. Not only the previous section on minimum tax (section 16CCC of the Income Tax Ordinance 1984) has been repealed, but also the previous provision relating to final discharge of liability (section 82C) has been substituted with new section 82C on minimum tax.

Previously, under the repealed section 16CCC a firm having gross receipts of BDT 5 Million or every company, irrespective of profitability of the company in a given financial year, had to pay a minimum tax at the rate of 0.30% of its gross receipts under any heads of income. In contrast, under the sub-section (4) of new section 82C, a manufacturer of tobacco products, a mobile phone operator or all other cases has to pay a minimum tax at the rate of 1%, 0.75% or 0.60%, respectively, of their respective gross receipts.

Under previous section 82C, tax deducted or collected at source in respect of certain circumstances or events (including, but not limiting to, supply of goods, payment of royalty, fees for technical services, sale of rental power, shipping business of a resident, and, transactions of a member of a stock exchange) had been deemed to be the final discharge of liability from that source and, income for such source had been determined on the basis of the tax deducted or collected. Since, under previous section, the income from such source was deemed as income, even though an entity had higher income, the tax deducted or collected at source would be the highest tax that they had to pay.  On the other hand, sub-section (1) to be read with sub-section (2) of the new section 82C says that such tax deducted or collected at source, shall be minimum tax and income shall be determined in regular manner and tax shall be calculated by using higher rate on such income. It further says, if the tax calculated is higher than the minimum tax, the higher amount must be paid by the business entity.

Any taxpayer including an entity, should also watch out for areas or businesses, which are incentivized by the government. Such sectors includes Information Technology Enabled Services which includes, but is not limited to, e-commerce business and animation (both 2D and 3D), power, jute, knitwear and woven garments, or any other manufacturing entity.

For example, any income derived from the business of software development or information technology enabled services for the period from 1st July 2008 to 30th June 2024 shall be excluded while computing total income of an entity.

In case of power sector, income tax payable on the income derived from sale of electricity by a private power generation company (except a coal based power generation) shall be exempted for fifteen years from the date of commercial operation, provided that the commercial operation date has been achieved before 31 December 2019. Moreover, tax on income of foreign personnel employed by such power generation companies, will also be exempted for three years from the date of arrival in Bangladesh. Tax on interest payable to foreign lenders, technical know-how and assistance fee and capital gain shall be exempted too.

In order to promote investment in the capital market, the government has also reduced tax on capital gain received from sale of securities of a listed company.  For a company, tax rate on such capital gain shall be 10%. In case of sponsor shareholders or directors of a bank, non-banking financial institutions, merchant bank, insurance company, stock broker etc. or a shareholder holding more than 10% of paid up capital on a listed company, tax rate on capital gain shall be 5%. It shall be pertinent to mention here that in other cases, tax on capital gain received from sale of securities of a listed company has been entirely exempted.

Additionally, a newly established industrial undertaking or infrastructure facility will enjoy tax holiday for a period of five to ten years upon fulfilling certain conditions prescribed in section 46B (Industrial Undertaking) or 46C (infrastructure facility) of the Income Tax Ordinance 1984.

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