taxation -course outline and materials

BBA program Course title: Taxation

Course code: A408

Course Outline

Introduction of faculty: Name: Aminur Rahman

Education : B.A (Hons) in Economics from Dhaka University; MBA from IBA (1980).

Service career: Joined BCS (Taxation) service in 1982 & retired as Member , National Board of Revenue in 2011.

Contact address : E-mail: [email protected] Cell No: 01715 021791

Purpose : Tax plays an important role in post tax profit of an enterprise. It also has an important bearing on cash flow of a business. The purpose of this course is to introduce business graduates with the philosophy , rational, economic implication as well as application of tax. This will help business executives in better management of the enterprise.

Course material & reference: (1) Handout provided by the faculty (2) Modern Public Finance: Bernerd P. Herber (3) Public Finance A Normative Approach: S.Ganguly (4) Income Tax Ordinance,1984 (5) Income Tax Rules,1984 (6) Value Added Tax Act

Grading Criteria: 2 Quiz: 10 % marks Attendance: 10 % marks 2 Assignments : 10% marks Mid term: 30 % marks Final: 40 % marks Total : 100% marks

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Definition of tax

Tools of Govt. to influence the economy

How tax influences business

Type and classification of tax

Difference between types of taxes

Authorities of tax

Legal foundation of income tax

Some concepts of income tax

Heads of income

Computation of total income and calculation of tax

Filing of income tax return

Tax concessions

Assessment of income

Tax deduction at source

Accounting profit vs. Fiscal profit

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Course Outline:

Role of Government in the Economy

1. Allocation of resources between different lines of production in a way that economic welfare of the community is maximized [allocation].

2. To distribute national income in side a way that it leads to maximum total satisfaction of the community [distribution].

3. To maintain the total volume of effective demand and thus national income at such a level that there is full employment without either deflationary or inflationary tendency [stabilization].

Explanation :1. Allocation:

How much resource is to be allocated by the government for the provision of social goods for which there are no market eg. defence, flood control, highways etc.

&How to distribute the cost of provision of the goods among the individuals in an optimum manner (by means of to taxation). Individuals do not reveal their preference for social goods they do not bid for such goods. Since the preference remains indeterminate, allocation also become indeterminate.

attempts made to determine preference :(i) benefit approach(ii) process of voting.

Once the preference is determined then allocation can be done.

2. Distribution:Use the government revenue expenditure to bring about 'ideal' distribution of economic welfare.

'Ideal' generally means equality between man to man. What is equality after all ?

Whether equality of income or equality of wealth or equality of welfare or equality of opportunity.

Since others are difficult to determine equality of income is being pursued.

3. Stabilization :(i) when private investment + consumption inadequate to full employment state

increase its expenditure or induce private sector to increase expenditure by tax reduction.

(ii) when private investment + consumption cause inflation state decreases expenditure or induce private sector to cut expenditure.


Tools of government to influence the economy

Fiscal policy -Tax

Monetary Policy - Money supply.

Essence of Monetary Policy:

Exchange rate

Interest rate

Money supply

Essence of Fiscal Policy:

Tax

Subsidy

Tax: a: When employment is low:

Tax is reduced on business which are labour intensive.

b. When wealth is concentrated: Incremental tax rate on high income groups or high property tax.

c. When economic activity is skewed between places: Tax holiday for less developed areas and high rate for developed areas.

d. When balance of payment is in disfavor: High tax on import, low tax or tax free on export.

Money Supply:a. When there is inflation:

Increase interest rate, squeeze credit.

b. When there is recession: Reduce interest rate, liberalize credit.

c. When gap between export & import : Devalue currency or increase L/C margin high import duty, tax free export.

How tax influences business

1. In attaining growth : Tax collected is spent for payment of salary, bills to contractors who spent this money to buy goods & services. In other words creates effective demand. Thus indirectly it creates market for the tax payer


and enlarges its business.

2. In redistribution of income : If income is concentrated in few hands large majority will have no money to buy goods. As a result traders will have inadequate sale. By taxing rich it also creates business for rich people.

3. Facilitate utility : Tax money is used to build roads, bridges, water & electricity supply thereby easing access to market, or supply of run the machinery.

4. Set priority : Vary tax rates to encourage or discourage some sector of economy.

Definition of tax :

Oxford dictionary: Money compulsorily levied by state on person, property or business.

Collin’s dictionary: Money we pay to the government so that it can pay for public goods and services.

Mitra’s legal Dictionary:`Tax’ is not correlated to a particular service rendered but intended to meet the expense of the government.

Justice Oliver Wendal Homes:Chief Justice, USA: Tax is what we pay for a civilized Society.

Hugh Dalton: "A tax is a compulsory contribution imposed by a public authority, irrespective of the

exact amount of service rendered to the taxpayer in return, and not imposed as penalty for any legal offence."

Every type of tax has defined its our arena in the law.

For example in the Income Tax Ordinance, 1984 tax was defined tax as follows :

[Section 2(62) "tax" means the income tax payable under this Ordinance and

includes any additional tax, excess profit tax, penalty, interest, fee or other charges

leviable or payable under this Ordinance;]

From the definition the following aspects are revealed:-


(a) Tax is not voluntary contribution. The payer does not have the option of not paying or paying at lower rate. It is a compulsory levy.

(b) It is levied by the state or local authority

(c) It is levied on goods, services, person or property

(d) Tax so collected is used to pay for public service.


What are Canons of Taxation ?

Canons of Taxation are the main basic principles (i.e. rules) set to build a 'Good Tax System'.

Canons of Taxation were first originally laid down by economist Adam Smith in his famous book "The Wealth of Nations".

In this book, Adam smith only gave four canons of taxation. These original four canons are now known as the "Original or Main Canons of Taxation".

As the time changed, governance expanded and became much more complex than what it was at the Adam Smith's time. Soon a need was felt by modern economists to expand Smith's principles of taxation and as a response they put forward some additional modern canons of taxation.

Adam Smith's Four Main Canons of Taxation ↓

A good tax system is one which is designed on the basis of an appropriate set of principles (rules). The tax system should strike a balance between the interest of the taxpayer and that of tax authorities. Adam Smith was the first economist to develop a list of Canons of Taxation. These canons are still regarded as characteristics or features of a good tax system.

Image Credits © Washuugenius.

Adam Smith gave following four important canons of taxation./tt/file_convert/563dba15550346aa9aa28696/document.doc 7

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1. Canon of Equity

The principle aims at providing economic and social justice to the people. According to this principle, every person should pay to the government depending upon his ability to pay. The rich class people should pay higher taxes to the government, because without the protection of the government authorities (Police, Defence, etc.) they could not have earned and enjoyed their income. Adam Smith argued that the taxes should be proportional to income, i.e., citizens should pay the taxes in proportion to the revenue which they respectively enjoy under the protection of the state.

2. Canon of Certainty

According to Adam Smith, the tax which an individual has to pay should be certain, not arbitrary. The tax payer should know in advance how much tax he has to pay, at what time he has to pay the tax, and in what form the tax is to be paid to the government. In other words, every tax should satisfy the canon of certainty. At the same time a good tax system also ensures that the government is also certain about the amount that will be collected by way of tax.

3. Canon of Convenience

The mode and timing of tax payment should be as far as possible, convenient to the tax payers. For example, land revenue is collected at time of harvest income tax is deducted at source. Convenient tax system will encourage people to pay tax and will increase tax revenue.

4. Canon of Economy

This principle states that there should be economy in tax administration. The cost of tax collection should be lower than the amount of tax collected. It may not serve any purpose, if the taxes imposed are widespread but are difficult to administer. Therefore, it would make no sense to impose certain taxes, if it is difficult to administer.

Additional Canons of Taxation ↓


Activities and functions of the government have increased significantly since Adam Smith's time. Government are expected to maintain economic stability, full employment, reduce income inequality & promote growth and development. Tax system should be such that it meets the requirements of growing state activities.

Accordingly, modern economists gave following additional canons of taxation.

5. Canon of Productivity

It is also known as the canon of fiscal adequacy. According to this principle, the tax system should be able to yield enough revenue for the treasury and the government should have no need to resort to deficit financing. This is a good principle to follow in a developing economy.

6. Canon of Elasticity

According to this canon, every tax imposed by the government should be elastic in nature. In other words, the income from tax should be capable of increasing or decreasing according to the requirement of the country. For example, if the government needs more income at time of crisis, the tax should be capable of yielding more income through increase in its rate.

7. Canon of Flexibility

It should be easily possible for the authorities to revise the tax structure both with respect to its coverage and rates, to suit the changing requirements of the economy. With changing time and conditions the tax system needs to be changed without much difficulty. The tax system must be flexible and not rigid.

8. Canon of Simplicity

The tax system should not be complicated. That makes it difficult to understand and administer and results in problems of interpretation and disputes. In India, the efforts of the government in recent years have been to make the system simple.


9. Canon of Diversity

This principle states that the government should collect taxes from different sources rather than concentrating on a single source of tax. It is not advisable for the government to depend upon a single source of tax, it may result in inequity to the certain section of the society; uncertainty for the government to raise funds. If the tax revenue comes from diversified source, then any reduction in tax revenue on account of any one cause is bound to be small.

Requirement of a Good Tax Structure / System ↓

The tax structure is a part of economic organisation of a society and therefore fit in its overall economic environment. No tax system that does not satisfy these basic condition can be termed a good one.

However, the state should pursue mainly following principles in structuring its tax system :-

1. The primary aim of the tax should be to raise revenue for public services.

2. People should be asked to pay taxes according to their ability to pay and assessment of their taxable capacity should be made primarily on the basis of income and property.

3. Tax should not be discriminatory in any aspect between individuals and also between various groups.


Types & classification of tax

Classification of tax

Direct/Indirect tax:

Sl. No. Difference factor Direct tax Indirect tax 1. levied on person goods, services2. Incidence cannot be shifted is shifted3. Examples income tax, gift tax, foreign

travel taxvalue added tax, customs duty

4. Enforcing agency Income tax department Customs, Excise &VAT department

5. Purpose Equity Protection of domestic industries

Personal income tax/Corporate tax:

Sl. No.

Difference factor Personal income tax Corporate tax

1. levied on individuals, partnership firm Companies2. Tax rate Calibrated Flat rate3. Threshold level

(Tax free limit)Exist Does not exist

4. Purpose Revenue, Equity Revenue priorities

Types of tax in Bangladesh :

Non-NBR tax NBR tax

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FY Tax revenue(bl tk)

NBR tax(bl tk)

Non-NBR tax(bl tk)

2008-09 555.3 530.0 25.3 2009-10 639.6 610.0 29.6 2010-11 790.5 756.0 34.5 2011-12 952.28 915.95 36.332012-13 1,074.10 1,033.39 40.71 2013-14 1,160.36 1,14.26 46.10

Items of NBR tax:

Income tax Value added tax Import duty Export duty Excise duty Supplementary duty Foreign travel tax

Composition of NBR tax: (figures in billion taka)FY Income

tax VAT Import

duty Export duty

Excise duty SD Others

2008-09 135.38 201.16 95.70 - 2.37 91.21 4.18 2009-10 165.60 227.95 104.30 - 2.61 104.85 4.69 2010-11 221.0 282.74 108.88 0.27 2.75 135.54 4.77 2011-12 280.61 343.04 126.34 0,30 4.50 162.20 6.712012-13 377.10 396.26 132.93 0.40 9.97 161.89 9.592013-14 438.48 445.43 152.19 210.14

Items of Non-NBR tax:

Non-judicial stamp Motor vehicle tax Land revenue Liquor duty

Structure of direct tax administration:

1 (a) Ladder of tax offices

NBR


Tax Zones (31) Headed by Commissioner

Tax Ranges (127) Headed by Joint Commissioner or Additional Commissioner.

Tax Circles (649) Headed by Deputy Commissioner / Assistant Commissioner / Extra Assistant Commissioner


(b) Support structures:

i. Appeals [7 Zones].ii. Training.

iii. Survey.iv. Internal Control (Inspection).


2 (a) Job of zone office: Administration of Zone;Monitor tax collection;Dispose revision application of taxpayers.

(b) Job of range office: Supervise of circle office; Re-assessment of erroneous assessment. (c) Job of circle office: (i) Receive income tax return ; (ii) Assessment of income & levy of tax; (iii) Recovery of tax; (iv) Action against non-filers & tax evaders. (d) Type of Circles (on the basis of class of taxpayers): (i) Companies Circle (for Companies & its Directors); (ii) Salaries Circle (for salaried persons); (iii) Contractor’s Circle (for contractors); (iv) Business Circle (for territory based business).



3. Composition of NBR:

Chairman (1): Grade -1 Member(16): Grade -2 1st Secretary() Grade-4 2nd Secretary () Grade-6


4. Ladder of post in taxation cadre: Member, NBR (8) Grade-2 Commissioner of Taxes ( ) Grade -3 Additional Commissioner of Taxes ( ) Grade -4 Joint Commissioner of Taxes ( ) Grade -5 Deputy Commissioner of Taxes ( ) Grade - 6 Assistant Commissioner of Taxes ( ) Grade - 9 Extra Assistant Commissioner of Taxes ( ) Grade Inspector of Taxes ( ) Grade.

5. Total manpower: 8,932


Tax theories

Basis of tax:

Whom to tax At what rate

Two basic principles:

Benefit approach Ability to pay approach

Benefit Approach: The benefit approach or its variant, the voluntary exchange principle, as developed by De Viti de Marco and Erik Lindahl.

Hypothesis: The state should supply social goods up to that point where the people’s total demand for

such goods is equal to the total supply The cost of provision of the social goods is fully covered by the prices. The goods should be paid for by their users in proportion to the benefits they derive from

such goods.


The result is plotted in above graph 3.1 in which the amounts of social goods which might be

provided by the state are measured on the horizontal axes, the aa curve shows on the left vertical

axis the percentage share of the cost which individual A is willing to bear as larger amounts of

social goods are provided and the bb curve shows on the right inverted vertical axis the

percentage share of the cost which individual B is willing to bear as larger amounts of social

goods are provided. The curves have been drawn on the usual assumption of diminishing

marginal utility which an individual derives from successive increments of the consumption of

any commodity. Supposing that initially AB amount of social goods are provided by the state

and individual A is being made to continue BJ percentage share of the cost and individual B

is being made to contribute HJ percentage share of the cost, both A and B under the

circumstances would vote for a large amount of social goods, since at AB amount of social

goods A is actually willing to contribute a higher percentage share of the cost, viz, BC and B

is also willing to contribute a higher percentage share, viz, HD. If, on the other hands, AI

amount of goods are provided A will be willing to contribute only IM percentage share of the

cost and B will be willing to contribute only LK percentage share of the cost so that their

total voluntary percentage share of the contribution, IM + LK, will be less than 100% of the cost

by KM. Thus by a process of trial and error it will be found that only at AE amount of social

goods the percentage share of the cost willingly contributed by A and B, i.e., EF+GF will be

exactly equal to 100% of the cost, or, in other words, only at AE output the total cost of

provision of the social goods would be just (and only just) covered by the contributions(in the

form of tax payments) willing made by A and B who derive benefit from the social goods in

question. Hence AE will be the optimum amount of social goods and EF and GF percentage

share of the cost would be the optimum tax liability of A and B respectively.

Ability to Pay Approach:

J.S. Mill rejected the benefit principle of taxation as it would mean that the poor would have to pay most of the taxes Stated alternatively, the ability to pay principle requires that the sacrifice made by all the individuals while paying taxes should be equal.

Hypothesis:I. The marginal utility of income is cardinally measurable.

II. The marginal utility of income decreases as income increases. III. All persons have the same relationship between their units of income and units of

marginal utility whatever by their levels of income. IV. If assumption (III) is not correct, then interpersonal comparison of utility can be made.


Suppose that the MU and TU schedules show respectively the marginal and total utilities derived

by two individuals(who would be called “ri

ch

man” and “poor man”, the former having an income larger than the latter) which they derive

from income, the same schedules, by assumption, applying to both. Suppose further that, to

begin with, the rich man has an income of OR, and the poor man has an income of OP, the total

utility derived by them from their income being respectively AB and CD. Let us assume that the

state has decided to raise from the two individuals a total sum of Rt in tax. Under equal absolute

sacrifice principle, the tax liability of the rich man

will be RR¹ and that of the poor man will be PP₁ (note, RR₁ + PR₁= Rt), for in that case the

absolute loss of sacrifice made by the two individuals (defined as the absolute reduction in the

total utility derived by the individuals from their income) will be the same, the reduction of total

utility from income of the rich man in the post-tax situation being BE, the corresponding amount

of the poor man being DF; and BE=DF. But note that though BE=df, BE/BA≠DF/DC. In other

words, in this method of distribution of the tax burden though the equal absolute sacrifice

principle is being satisfied, equal proportional sacrifice principle is not being fulfilled. In order,

therefore, to raise the same amount of tax according to equal proportional sacrifice principle, the

rich man’s tax liability should be increased to RR₃ ,and the poor man’s liability should be

reduced to PP₃, (note, RR₂+ PP₂= Rt), so that in the post-tax situation BG/BA (i.e., the rich

man’s proportional sacrifice)= DH/DC (i.e. the poor man’s proportional sacrifice). But, again, /tt/file_convert/563dba15550346aa9aa28696/document.doc 17

note that in this distribution of the tax share though the equal proportional sacrifice

principle is being satisfied, the equal marginal sacrifice principle (and ipso facto the least

aggregate sacrifice principle) is not being satisfied, for in the post-tax situation the

marginal utility of income of the rich man is not equal to that of the poor man . Therefore, if

the equal marginal sacrifice principle is accepted, the rich man’s tax burden should be increased

further to RR₃ and the poor man’s share should be reduced further to PP₃ (note, RR₃ + PR₃ =Rt)

so that in the post-tax situation the marginal utility of income of both the individuals becomes

equal, namely R₃P₃.

Tax shifting and incidence:

Major criteria influencing tax shifting:a. Market structure.b. Unrealized profitsc. Industry cost conditionsd. Price elasticitye. Type of tax &f. Political jurisdiction.

Market structure

Pure (Perfect) Competition. The purely competitive (Perfectly competitive) market is characterized by:

Large Number of buyers and sellers. Goods are humongous. Individual buyers and sellers can’t influence price.

The, purely competitive (perfectly competitive) market is characterized by many sellers and

buyers of homogeneous (non differentiated) goods.$ Figure 7-1 indicates the initial pretax

equilibrium for a purely competitive firm and for a purely competitive industry, at point a for the

firm, in Figure a, and at point a' for the industry, in Figure b. The firm is producing an output of

25 units and selling at a price of $10, as determined by the intersection of its marginal cost curve, /tt/file_convert/563dba15550346aa9aa28696/document.doc 18

MC, with marginal revenue (MR) and price (AR), as the latter is set by the industry. v. Then,

assume that an excise tax of $5 per unit is imposed on the good.

The individual firm can initiate no effort on its own to shift the tax forward via a higher selling

price, since it has no control over price. It completely lacks -power due to the homogeneity of its

product and the fact that it is one of many sellers. Thus, any forward shifting which may occur

can take place only through industry forces. In the immediate or market period this will not

occur. Industry forces, however, may allow partial shifting of the tax in the short run, though.

The overall possibility of shifting is reduced by the inability of the individual firm to influence

price. Any shifting which does occur through industry forces in the short run would not involve

the exit of hunts from the industry. Yet. In the long run, under constant-cost supply conditions,

the tax %- be fully shifted forward to the consumer, due to the action of industry forces in the

form of an exodus of some firms from the industry.

Thus, over the long run, some marginal firms will leave the industry because the industry

determined short-run price increase is not equal to the new excise tax burden. When this occurs,

the industry supply schedule will shift upward until market price has risen sufficiently so that the

representative firm again can earn a normal profit. This is demonstrated for the industry in

Figure, at point V where the industry supply Curve-, S, has shifted upward by file amount of the

tax to become due to post tax supply schedule, St. Industry price increases from $IO to $ 15, and

the firm can now sell all of its output 11 the higher price. The burden of the tax has thus been

fully shifted forward though, significantly, this has .not occurred through monopoly power by the

individual firm, but instead through the operation of long-run competitive industry forces. For

the purpose of the example. Such To ward shifting assumes constant factor prices and hence the

impossibility of backward shifting. The final equilibrium price ($ 15)

Tax shifting and incidence (in monopoly)


As depicted in Figure, the pure monopoly firm, which is identical with the industry since no

competitors exist, is in pretax equilibrium, producing output OX, charging price OP, and caring

monopoly profits PABC. Assume first that an excise tax is imposed on the economic good

produced 1.y the monopoly. As a result, the marginal cost curve, MC, and the average cost

curve, AC, shift upward and become MC' and AC1, respectively. Thus, a new post tax

equilibrium is set at output OX' and price OP1, which yields monopoly profits equal to the

rectangle P'DEF. This profit rectangle is smaller than the profit rectangle PABC which existed

before the excise tax was imposed. Hence, the pure monopoly firm in this case does not fully

shift the excise tax. In fact, the extent to which it can shift any part of the tax will be determined

by numerous factors (some of which will be discussed below), such as industry cost conditions

and the price elasticities of product demand and resource supply. Importantly, however, the pure

monopoly firm could initiate a price change on its own due to the absence of competitors, and it

could do so in any time period, which will tend to enhance its forward tax.

Shifting potential since tax shifting can be attained only through a price change? In Figure 7-2,

the portion of the tax home by the monopolist is equal to the difference between the larger pretax

and the smaller post tax profit rectangles. Meanwhile, the upward movement in absolute price

from P to P' is an indicator of the amount of tax per unit chat is shifted forward.

Tax shifting & unrealized profit:Next, assume that a corporation (business) income tax is imposed on the profits of a pure

monopoly firm. In this instance. The tax is levied on a surplus or residual amount, that is, on the

profits of the

I the comparative shift ability of an excise tax by a pure competition Am as opposed to a pure

monopoly rim. In different time periods. May be summarized as follows.


Time period

Short-run ..........

Long-run................

Pure competition Little, if any shitting and through industry forces only

full shifting, and through industry forces only(Constant cost conditions)

Pure monopoly Shifting, to varying degrees Possible through firm monopoly power

Shifting, to varying degrees Possible through firm monopoly power

The long run apart from the MC MR point due to the possible presence of monopoly profits.

Thus, an imperfectly competitive firm which is not operating at the profit-maximizing point will

be in a position to possibly shift a corporation (business) income tax, if there exists a buffer area

of unrealized profits within which price-output rearrangements cart be made. Figure 7-3, which

is described later, demonstrates this phenomenon.

First, however, the critical question must be asked: Why would a firm choose not to maximize

profits at the MC = MR point? Such considerations as imperfect market and production

knowledge, the fear of antitrust action, the fear of an unfavorable public image, the fear of

attracting new entrants two the industry, the Fear Of Stimulating union wage demands, and

public utility regulation may prevent a fine or benchmarks as: maximization of gross receipts

(sales); achievement of a target rate of return on investment; maintenance of stable prices on

goods produced by the firm; application of a percentage markup price over

Figure 7-3 Unrealized profits as a necessary contrition for shifting a business income tax by a firm in impeded competition

Explanation: Rectangle PABC= Maximum profits where MC = MR at output X Rectangle P’DEC= profits at output X1 which is a position of suboptimal profits.

The excess of PABC over PVEC - Unrealized Prate. thus allowing the possibility of shifting the

burden of a profits tax as price is increased toward P and output is decreased toward the profit

maximization output X


Price elasticity Price elasticity of product demand.

In Figure 7—5, the S curve represents the supply and curve D represents the demand for the

good. Constant-cost conditions of supply are assumed. In Figure 7-5a, demand is relatively

elastic throughout the relevant portion of the demand curve, while in Figure 7-5b demand is

relatively inelastic throughout the relevant portion. In Figure 7-5c, the demand for the good is

perfectly (completely) inelastic throughout the entire curve. When the excise tax is imposed, the


price of the good is initially increased by

the amount of the- tax -‘The most likely occurrence of tax shifting is shown in Figure 7-5c, where the demand is perfectly inelastic, since there is no quantity reaction as the price increases from p to p. The initial quantity. X, and the post tax quantity.

Tax shifting and elasticity

In Figure 7—5, the S curve represents the supply and curve D represents the demand for the

good. Constant-cost conditions of supply are assumed. In Figure 7-5a, demand is relatively

elastic throughout the relevant portion of the demand curve, while in Figure 7-5b demand is

relatively inelastic throughout the relevant portion. In Figure 7-5c, the demand for the good is

perfectly (completely) inelastic throughout the entire curve. When the excise tax is imposed, the

price of the good is initially increased by the amount of the- tax .

The most likely occurrence of tax shifting is shown in Figure 7-5c, where the demand is perfectly inelastic, since there is no quantity reaction as the price increases from p to p. The initial quantity. X, and the post tax quantity.

Tax shifting and type of tax:

characteristics as

(1) whether it is direct or indirect and (2) broad


based or narrow based,

Generally speaking the more direct the tax, the more

difficult shifting becomes.

Hence, direct taxes such as the personal income tax

are not especially conducive to the rather market

transactions that are necessary for the successful for

ward shifting of a tax. In contrast, indirect taxes such

as general retail sales and excise taxes are more

closely associated with further market transactions

and are thus more conducive to forward shifting.

In terms of the extent of the tax base, the more broad

based a tax, the easier it tends to be to shift the tax.

Oppositely, the more narrow based the tax, the more

difficult tax shifting becomes.

Tax shifting and political jurisdiction:

The geographical nature of the political unit which levies a tax also helps to determine its shiftablity. In this context, a political unit may be a local, state, national, or even international government. /tt/file_convert/563dba15550346aa9aa28696/document.doc 24

Generally, the narrower the geographical limits of a political unit, the more difficult it is to shift a tax. For example, a new (or increased) general retail sales tax in a city may lead to consumption readjustments.

Legal Foundation of Income Tax

(i) Income Tax Ordinance, 1984

(ii) Income Tax Rules, 1984

(iii) Avoidance of Double Taxation Treaty (with 27 countries)

(iv) SRO’s

(v) Finance Act/Ordinance

Income Tax Ordinance, 1984 comprises – Substantive Law- 23 Chapters- 7 Schedules- 295 Sections

Income Tax Rules, 1984 (Forms & Procedures) – Subsidiary Law- 97 Rules

SRO’s tax concessions –

Double Taxation Avoidance Agreements – 33 Countries.


Some concepts of income tax

Taxpayer’s Residential Status

Resident conditions Individual 182 days (Respective year) or 90 days

(respective year) +365 days ( Previous 4 years)HUF, Firm, AOP Control & Management wholly or partly in Bangladesh in the

year.Company Control & Management wholly in Bangladesh in the year.

Taxpayer’s Status and ResidenceImplication of Residential Status

Type of Income Resident Non -resident Domestic income

Taxable Taxable

Foreign income Taxable Not taxable Tax rate for other than companies

Nil, 10%, 15%, 20%, 25%,30%

30%

Investment tax rebate for individuals

Available Not available

TIN:Stands for Tax payers Identification Number. According to section 184B every tax payers will be given a TIN. This is actually registration number of taxpayers. It is a 10 (ten) digital number.

Basic Principles of Charging Income Tax

Income tax shall be imposed on total income of the income year of any person and payable in the assessment year at the tax rate determined by the Finance Act.

Taxpayer : Assessee-every personTax-base : Total incomeTax Period : Income yearTax rate : Prescribed at Finance Act and 2nd schedule of income Tax

Ordinance, 1984


Person [section 2(46)]

Person includes: Individual

Firm (partnership firm)

Association of Person (AOP)

Hindu Undivided Family (HUF)

Local authority

Company

Every other Artificial Juridical Person.

Tax Period

Income year [section 2(35)]:Income year is the year used to determine the tax-base of income tax (for separate source of income). Following are the provisions. Normally this is the financial year (1st July of one year to 30th June of next year).

Any year (not exceeding 12 month) as opted by the assessee.

For a newly set up business, it may less than 12 months for the first year of business.

For any person or a class of persons as may be prescribed.

For share of income from a partnership firm, firm’s income year is applicable.

Tax Period

Income year [section2(35)]/ assessment year {section 2(9)} :

Income year ended on Income year Assessment year 30.06.2015 1.07.2014 to 30.06.2015 2015-201631.12.2014 1.1.2014 to 31.12.2014 2015-2016 13.04.2015 Bengali year 1421 2015-2016 21.11.2014 22.11.2013 to 21.11.2014 2015-2016


Heads of Income

Heads of income [section-19]

(i) Salaries [Sec.-21](ii) Interest on securities [Sec.-22](iii) Income from house property [Sec.-24](iv) Agricultural income [Sec.-26](v) Income from business or profession [Sec.-28](vi) Capital gain [Sec.-31](vii) Income from other sources [Sec.-32]

Tax is levied on sum of income from all sources in a year. The sum amount is known as total income.

Income form salaries [Section-21]

Includes - arrear salary- advance salary

Includes - Benefit paid in kindfor example: (i) leave fare assistance(ii) free transport(iii) free accommodation.

Includes (i) leave encashment(ii) pension(iii) gratuity(iv) fees, commission, allowances, profit in addition to salary(v) Director's remuneration/fees


Some components of salary income

(i) Basic salary

Festival(ii) Bonus Incentive

Profit

(iii) House Rent allowances

(iv) Medical allowances

(v) Batman allowances

(vi) Hill allowances

(vii) Gas allowances

(viii) Conveyance allowances

(ix) Entertainment allowances

(x) Companies contribution to provident fund

(xi) Foreign allowances

(xii) Leave encashment

Computation of salary incomeBasis : (i) Some income of salary partly/ fully exempted

(ii) Notional income is taken for some benefits

Exemptions

Medical allowance 10% of basic

salary or Tk.

120,000 ,whic

hever is lower

Servant allowance

Leave allowance

Honorarium / Reward/ Fee

Overtime allowance

Bonus / Ex-gratia


Other allowances Car allowance

Employer’s contribution to

Recognized Provident Fund

Interest accrued on Recognized

Provident Fund

Deemed income for transport

facility

5% of basic

pay or Tk.

60,000

whichever is

higher

Deemed income for free

furnished/unfurnished

accommodation

25% of basic

pay

Other, if any (give detail)

Net taxable income from salary XXXXXXXXXX

Notional income:

Free accommodation - 25% of basic salary. Free transport - 5% of basic salary.

Income from house property [section-24]:

Characteristics (i) Recipient is the owner of the property . (ii) Irrespective of commercial/residential use commercial/residential . (iii) Property is to be a building . (iv) Property is let out . (v) Let out may be partial (partly self occupied). In such case ,rent of partial

building. (vi) Let out for a part of the year in such case rent is to be taken for the part

period.

Rental receipt Monthly rent ´ period for which rented. Expenses against rental receipt (section 25)


(i) Repair and maintenance (residential: 25% of gross rent; commercial: 30% of gross rent)

(ii) Interest on loan for construction/reconstruction/renovation [Note: interest not principal]

(iii) Municipal/City Corporation holding tax (iv) Land rent (khajna) (v) Insurance premium (if any) [Note: (a) Depreciation not admissible.

(b) In case of partial let out other than repair & maintenance ala expenses are to be calculated proportionately]

House property income = Rental receipt - Expense. Schedule-2 (House Property income)

Location and

description of

property

Particulars Tk. Tk.

1. Annual rental income

2. Claimed Expenses :

Repair, Collection, etc.

Municipal or Local Tax

Land Revenue

Interest on Loan/Mortgage/Capital Charge Insurance Premium

Vacancy Allowance

Other, if any

Total =

3. Net income ( difference between item 1

and 2)

XXXXXXXX

Agriculture income [section-26]:

Value of yield = Yield per acre of crop ´ Area (acre) ´ Price of crop


Cost of yield = 60% of valueNet income from agriculture = value of yield - cost of yield.

Income form business or profession [Section-28]

Admissible expenditure against receipt or sale [sec. 29]: Office/factory rent Repair and maintenance Interest on loan (project/working capital) Insurance premium Transport/freight Trade license/renewals/municipal tax Salary to staff Bad debt written off Other business related expenditure. Restriction of business expense: Tax to be withhold while making payment for expanses; Depreciation declining value method rate as per 3rd schedule Maximum limit for-- entertainment- leave fare assistance-perquisite (benefit paid to an employee)- head office expenses (10% of net profit)- incentive bonus(10% of net profit)- overseas travelling (1% of turnover)

Capital gain [Section-31]

Capital gain (sec. 31) = receipt form sale of capital asset - (cost of acquisition = development cost)

Income form other sources [Section-33]

Income form other sources(a) Dividend(b) Interest from bank deposit.

Tax is levied on total income which is the sum of income from all sources

Present tax rate


(b) Interest from bank deposit.

Investment tax rebate[section 44(2) and 6 th Schedule Part B] : A resident individual can get a tax rebate @15% on certain investment. Rebate is available for investment up to 30% of total income subject to a

maximum of Tk 15 million. The prescribed area of investment are –

Schedule-3 (Investment tax credit)

(Section 44(2)(b) read with part ‘B’ of Sixth Schedule)

1. Life insurance premium Tk ........................................

2. Contribution to deferred annuity Tk ........................................

3. Contribution to Provident Fund to which Provident Fund Act, 1925 applies

Tk ........................................

4. Self contribution and employer’s contribution to Recognized Provident Fund Tk ........................................5. Contribution to Super Annuation Fund Tk ........................................6. Investment in approved debenture or

debenture stock, Stock or SharesTk ........................................

7. Contribution to deposit pension scheme Tk ........................................8. Contribution to Benevolent Fund and Group Insurance premium

Tk ........................................

9. Contribution to Zakat Fund Tk ........................................10. Others, if any ( give details ) Tk ........................................ Total

Tk ........................................

Present tax rate:(a)For companies:

Mobile Phone 45%

Cigarette Manufacturer 45% Banks, Leasing, Insurance,NBFI 40%Merchant Bank 37.5%Private Limited 35% Listed with Stock Exchange 25%


Inter corporate dividend 20%

(b) For others (individual, partnership) being resident:

Ladies & senior citizens:First tk 3,00,000 – NilNext tk 4,00,000 - 10%Next tk 5,00,000 - 15%Next tk 6,00,000 - 20%Next tk 30,00,000-25%Balance - 30%

Others:First tk 2,50,000 – NilNext tk 4,00,000 - 10%Next tk 5,00,000 - 15%Next tk 6,00,000 - 20%Next tk 30,00,000 -25%Balance - 30%

Minimum tax : Tk. 4,000.

(c ) For individual being non-resident -30%.

Calculation of tax: Company( considering Bank ,NBFI) :

Net profit as per P&L A/C Deduct: (a) Depreciation

(b) Excess perquisite(c) Excess claim of Head Office Expense(d) Other inadmissibles , if any

Resultant income:Add: Depreciation as per Third Schedule

Income subject to tax:Tax @40% :

Individual (considering employee) :

Income from salary: Tk 9,58,000Income from house property : Tk .332,000Income from other sources:(a) Dividend Tk. 81,500

Less:Exempted Tk. 25,000 Tk.56,500

(b) Bank interest Tk. 17,570 Total income : Tk. 13,64,070Tax on first Tk. 2,50,000 @ 0% = NilBalance : Tk. 11,14,070Tax on next Tk. 400,000 @10% = Tk. 40,000Balance : Tk. 7,14,070


mailto:[email protected]%25

Tax on next Tk. 500,000 @ 15% = Tk. 75,000Tax on balance Tk. 2,14,070 @ 20% = Tk. 42,814Gross tax = Tk. 1,57,814 Less : Investment tax rebate(a) Employers contribution to P.F : Tk. 38,600(b) Employees contribution to P.F : Tk. 38,600(c) Life insurance premium : Tk. 18,280(d) Sanchaypatra purchase : Tk. 80,000(e) Investment in share of listed company: Tk.1,12,000

Total investment : Tk. 2,87,480 (This is within Tk. 1.50 crore & 30% of total income of Tk.13,64,070 i.e Tk.4,09,221) Tax rebate @ 15% on Tk 2,87,480 = Tk. 43,122Net tax = Tk. 1,14,692Less: Tax deducted at source on –

Tax concessions01. Purpose:

(a) Encourage savings; (b) Encourage investment ; (c ) Encourage export; (d) Encourage certain sectors of the economy; 02. Type of concessions: (a) Rebate in tax payable; (b) Exemption from tax; (c) Exemption from tax deduction at source; (d) Reduction in rate of tax.

03. Legal instrument for tax concession:(a) Chapter VI of the Income Tax Ordinance,1984;(b) Part A of the 6th schedule of the Income Tax Ordinance,1984;(c) Part B of the 6th schedule of the Income Tax Ordinance,1984;(d) Income Tax Rules,1984;(e) Statutory Rules& Orders (SRO).

04. Revenue loss due to such tax concessions:According to annual reports of NBR loss of revenue due to tax concession were as follows:Financial year Rev loss from tax

holiday(in billion taka)

Rev loss from concession by SRO(in billion taka)

Total rev loss(in billion taka)

2011-12 2.6068 1.0385 3.64532012-13 1.9759 2.3621 4.3380

05. Some items of tax concession/tt/file_convert/563dba15550346aa9aa28696/document.doc 35

(a) Tax rebate.- - Available to resident individuals- Maximum limit on which tax rebate is available is minimum of the following: Actual investment 30% of total income Tk. 15 million- Items illegible for investment

Schedule-3 (Investment tax credit)(Section 44(2)(b) read with part ‘B’ of Sixth Schedule)

1. Life insurance premium Tk ……......................

2. Contribution to deferred annuityTK.............................

3. Contribution to Provident Fund to which Provident Fund Act, 1925 applies

Tk …….....................

4. Self contribution and employer’s contribution to Recognized Provident Fund

TK..........................

5. Contribution to Super Annuation FundTk ...........................

6. Investment in approved debenture or debenture stock, Stock or Shares

Tk ...........................

7. Contribution to deposit pension scheme Tk .......................8. Contribution to Benevolent Fund and Group Insurance premium

Tk ....... ................

9. Contribution to Zakat FundTk ...........................

10. Others, if any ( give details ) Tk.......................... Total

Tk ........................

(b) Tax holiday.-- Has to be a company registered in Bangladesh.

- Has to be a newly set up industry in prescribed 18 sector.

- Paid up capital not less than Tk. 2 million.

- Period of holiday

Located in Dhaka or Chittagong Division

Located in other division

Period of exemption Rate of exemption Period of exemption Rate of exemption1st & 2nd year 100% of income 1st & 2nd year 100% of income3rd year 60% of income 3rd year 70% of income4th year 40% of income 4th year 55% of income5th year 20% of income 5th year 40% of income

6th year 25% of income7th year 20% of income

- Has to be a company registered in Bangladesh.

- Has to be a newly set up physical infrastructure industry in prescribed 16 sector.


- Paid up capital not less than Tk. 2 million.

- Period of holiday

Period of exemption Rate of exemption1st & 2nd year 100% of income3rd year 80% of income4th year 70% of income5th year 60% of income6th year 50% of income7th year 40% of income8th year 30% of income9th year 20% of income10th year 10% of income

(c) full exemption from tax.-(i) service charge of micro credit operation of NGO[ para 1A part A of 6th Schedule].(ii) Income of local government[ para 3 part A of 6th Schedule].(iii)TA, DA[ para 5 part A of 6th Schedule].(iv) Foreign employees in Embassy[ para 7 part A of 6th Schedule].(v) Pension[ para 8 part A of 6th Schedule].(vi) Dividend up to Tk. 25,000[ para 11A part A of 6th Schedule].(vi) Gratuity up to Tk. 25 million[ para 20 part A of 6th Schedule].(vii) Provident Fund[ para 21 part A of 6th Schedule].(viii) ) Dividend up to Tk. 25,000 of mutual Fund Unit[ para 22A part A of 6th Schedule].(ix) Income of indigenous Hillman[ para 27 part A of 6th Schedule].(x) 50% of export income[ para 28 part A of 6th Schedule].(xi) Agriculture income upto Tk 0.2 mollion[ para 29 part A of 6th Schedule].(xiii) Income from certain software business[para 33 part A of 6th Schedule].(xiv) Income of SME[para 39 part A of 6th Schedule].(xv) Foreign income of a Bangladesh citizen brought in through banking channel[para 48 part A of 6th Schedule].(xvi) Income of coal based Private power generation company for 15 years(SRO No 213 of 01/07/2013).(xvii) Income from capital gains from transaction of shares of listed companies by individuals(SRO No 217 of 18/08/2014).(d) Reduction in rate of tax,-(i) 5% on Income from capital gains from transaction of shares of listed companies by companies/partnership firms(SRO No 217 of 18/08/2014).(ii) Any new industry setup outside city corporation 20%concession in rate any old industry relocated outside city corporation 20% concession old industry located outside city corporation 10% concession (SRO No 185 of 01/07/2014).

(f) Exemption from tax deduction at source.-

On import of 217 specific items [Rule 17A of Income Tax Rules,1984].

06. Evaluation of tax concession: NBR made an evaluation of tax holiday in 1998. Where in it is found that(a) The priority of tax holiday in investment decision is much lower in the order. Investor is

more concerned about infrastructure, availability of gas/electricity, law & order etc.


(b) Though Dhaka & Chittagong Division gets less concession than other Divisions, still investors are investing more in Dhaka/Chittagong Division.

(c) During tax holiday period , taxpayers have a tendency to show inflated income.(d) Some taxpayers swap income of non-tax holiday income to tax-holiday income.(e) Some tax concession do not reach intended person. For example tax waiver on seeds did

not reach farmers.

Submission of Income Tax Return 1. Who is required to submit income tax return ?

Ans: (a) all companies (whether having any business in the year or not).

(b) (i) all individuals, firms etc, having income over tax free limits.

(ii) persons residing in a City Corporation, Pourashava, divisional headquarter or district headquarter & - owns a building which is more than one storied & plinth area

exceed 1600 sft. - owns a motor car- member of a club registered under

(iii) runs a business or profession having trade license and operates bank a/c.

(iv) registered professional (doctors, lawyers, chartered accountant);

(v) member of chamber of commerce or trade association;

(vi) a candidate for election of, union parishad. Pourashava & City Corporation or MP;

(vii) participant of a public tender;

(viii) surveyors of a general insurance;

(ix) opens a letter of credit;

(x) owns a credit card;

(xi) sponsor director of a company;

(xii) marriage registrar,

(xiii) ISD telephone holder.

(xiv) sanction a loan exceeding TK 5,00,000 by commercial Bank or leasing company.


2. Where to submit the income tax returns ? Ans: In respective tax circles

or Taxpayers Service Wing (in case of L T U)

3. Type of circle: Companies CircleSalaries Circle Business Circle Contractors Circle

4. When to submit income tax return ? Ans: In case of company-

Year ending on 31st December-by 15th july(example 31-06-2004 by 15-7-2005)Year ending on 30th June-by 31st December(example 30-6-2005 by 31-12-2005)In case of individual, firm etc. (other than company) by 30th September

5. Whether time for submission of return car be extended On application DCT can extend time up to 3 months & with permission of Joint/Additional Commissioner further 3 months.

6. What should accompany the income tax return ? Ans : (i) In case of company-

Audited statement of accounts.Evidence payment of admitted tax

(ii) In case of individual-Statement of assets & Liabilities (part of return)life style form (part of return) Evidence payment of admitted tax

7. Is the return submission acknowledged ? Ans : Tax authority will sign & affix seal the acknowledgment receipt

(part of return-0 tear it and hand it over to tax payer or his authorized representative instantly.

8. Whether revised return can be submitted ? Ans : Tax prayer is entitled to submit revised return ay time before assessment (u/s 78).

This will result cancellation of the original return.

9. Where the return is available ?Ans : At your respective tax to office or NBR website www.nbr-bd.org

10.. What is the price of the return ?Ans : Free

11. What is the consequence of failure to file return in time ?


Ans : Penalty u/s 124 amounting Tk 1000+50 for each day of default.

12. Filing up of income tax return; Ans : Income Tax return has been revised. The new return comprises of 3 parts, 5

schedules.

The salient items are- Page-1: [ part-1]

Identification, particulars, namely photograph name address, father's/ husband's name, mother's name, status, date of birth, TIN, circle-7. one assessment year etc.

Page-2: List of documents enclosed Page-3: [part-11]

Summary of income from different source, total income, tax payable, tax paid, exempted income, tax paid last year,

Page-4: [part-111]Schedule-1: Details of Salary income including exempted items.Schedule-2: Details of house property income.

Page-5: Schedule-3: Details of investment tax credit Acknowledgement Slip.

Page-6: verification (Declaration of correctness) and signature. Acknowledgement Slip.

Page 7-8: Statement of assets & liabilities.

Page-9: Life style form.

Page-10: Instructions.

Procedure of assessment of income

1. “Assessment” means determination of income & tax payable by a taxpayer.2. The matter of assessment is incorporated in Chapter IX of the Ordinance .3. There are as many as 17 sections of assessment . Some commonly used assessment methods are discussed below:- (a) Universal self assessment (section 82BB):

Assessment made by taxpayer himself . Return to be correct ,complete and signed by taxpayer. Return to be filed within stipulated time . Tax payable on the basis of income disclosed paid on or before submission . Receipt of return is treated order of assessment . Tax authority may select some returns for audit . In such case DCT will issue notice ,examine accounts and assess income after audit .


(b)Final discharge of tax liability (section 82C ): Tax deducted or collected in certain cases is the final discharge ; no further demand

or refund . Income is computed at tax deducted and tax rate ratio. 20 items of deducted tax is under this purview. Major items are : supplier &

contractor , commercial import , stock exchange members ,real estate , transfer of property .

(a) Spot assessment ( section 82D ): Fixed tax for small business & professionals. Tk 3, 000 for capital upto Tk 5,00,000. Tk 5, 000 for capital. between Tk 5,00,00 to Tk 8,00,000. Simplified form of return. One stop service made on the spot.

(b) Assessment after hearing[section 83(2)]: DCT examines return. Calls for hearing to explain return. Calls to produce books of accounts & evidences. After hearing & examining books of accounts & records assess income.

(c) Best judgement assessment (section 84): No return has been filed. Taxpayer or his representative did not appear for hearing . DCT makes the assessment of income on the basis of records available to him

and local enquiry.

(d) Income escaping assessment (section 93): It has been previously assessed. Any income has escaped assessment; or Any income has been under assessed ; or Has been assessed at too low rate ; or Excessive relief or refund has been made . Definite evidence any of the above is in the possession of DCT. DCT will reopen the case & make reassessment.


Tax deduction at source1. Tax deduction law is available in :

(a) Chapter VII of the Income Tax Ordinance

(b) SRO's (i) Registration & renewal of fitness of car Jeep (new)

(ii) Registration & renewal of vehicles for carrying goods and people

(iii) Registration of renewal of fitness of inland water transport.

2. Tax deduction under chapter VII(a) Section 49 states the list of tax deductions

(b) Tax deducted of source is treated as advance tax.

(c) Three parameters of tax deduction (i) Deducting/collecting authority (who has the responsibility)

(ii) When to deduct/collect

(iii) Rate of deduction/collection

3. Consequence of failure to deduct tax of paying authority (a) The respective expenditure of paying authority is disallowed & added to profit

(sec- 30)

(b) The paying authority is treated as assessee in default. Tax + penalty @ 2% per month can be recovered from him (sec - 57)

4. Some items of tax deduction :(a) salary : Employer will deduct tax on probable salary income of the year. Tax

on such salary is divided by 12 and deducted from each months salary [sec-50]

(b) supplier/contractor : (i) Threshold : 2,00,000

(ii) rate : Rate 1% - 5%

(iii) rate applicable on cumulative amount

(iv) the computation is confined by each paying authority.

(v) The computation is confined in a financial year. [section 52A, Rule- 16]

(c) Professional to Technical service(i) Rate: 10%

(ii) Professional services means legal, engineering, architectural, accounting, technical consultancy, interior decoration, advertising.


(iii) Technical serves means managerial, technical on consultancy service (does not include construction, assembly, mining). [section 52A].

(d) Import: (i) rate 5%

(ii) withholding authority: Customs authority

(iii) A list of exempted items

(iv) on application board my reduce or waive tax deduction [section 53, rule- 17A]

(e) Interest on Bank deposit: rate: 10%

(f) Rented property (i) Threshold : Tk 20,000

(ii) rate :Tk 20,001 --- Tk 40,000 : 3%Tk 40,000 + & above : 5%

7. Time limit for tax deduction at source (rule-13)(i) To be deposited to good exchequer with in 3 weeks from deduction

(ii) DCT, in case of salary, with permission of IJCT may allow payment of tax deducted on 15 September, 15 December, 15 March, 15 June.

8. Manner of payment of tax deducted at source (rule- 14) by treasury challan in Sonali/Bangladesh Bank

Accounting profit:Is the profit as per books of accounts which is maintained according to accounting principles. It comes from Profit & Loss Account.

Fiscal profit :Is the profit according to tax law.

Operating profit :This is the profit for operates before changes.

Why accounting profit varies from fiscal profit.(i) Depreciation rate & perquisite

(ii) Restriction in some expenditure

- Royalty

- Head office expenses


- Perquisite

- Free sample

- Entertainment.

- Incentive bonus


taxation -course outline and materials

Documents

income tax ordinance

income tax rules

equality of income

application of tax

national income

post tax profit

tax actgrading criteria

tax influences business