Home ›› 30 Nov 2022 ›› Editorial
The income tax law introduced in 1922 and it attains 100 years by this year. Time has come to assess what we achieved from this law. Taxes are levied to attain certain economic and social objectives, such as redistribution of income, elimination of economic discrimination, price stabilization, preventing public profligacy and bringing about social cohesion. Over the years, fiscal policy has been used to distribute tax burden among individuals or entities involved in taxable activities, encourage private savings, reduce disparities of income and wealth and promote investment in specific priority areas and sectors.
The tax department is a quasi-judicial body and have the responsibility of fair and judicious assessment of tax. It is often criticized that income tax laws of Bangladesh are opaque, convoluted and full of exemptions and allowances. Non-compliance and non-enforcement of taxation rules by both the taxpayers and the tax department have very tantalizing effects on the steady collection of income tax. The Income Tax Ordinance provides excessive discretion to the tax authorities for determining tax liabilities. Allegedly, the assessing officers in most cases want the assesses to show higher income than that of previous years. The national board of revenue has imposed a target of increasing the collection of tax upon individual official for subsequent years. The tax officials have no alternative to assess higher tax without considering the market situation and market situation.
Financial Transparency Coalition defined Tax policy as a good taxation policies should be characterized by the following (1) Raise revenue; (2) Reprice goods and services considered to be incorrectly priced by the market such as tobacco, alcohol, carbon emissions etc. and by providing tax reliefs e.g. for childcare; (3) Redistribute income and wealth; (4) Raise representation within the democratic process because it has been found that only when an electorate and a government are bound by the common interest of tax does democratic accountability really work; and finally to facilitate to Reorganization of the economy through fiscal policy. For a healthy and rational taxation system, it is essential to determine some core issues, such as, the distribution of tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent. While taxes are presumably collected for the sake of the welfare of taxpayers as a whole, the liability of the individual taxpayer is independent of any benefit received. The trends and issues of taxes is a fundamental question in determining fiscal policies of a country.
The corporate tax rate is very high in Bangladesh causing disincentives for the investors. On the other hand, informal sector is out of preview of the tax net. An excessive tax exemptions and incentives for certain sectors of business, poor tax base, inequality in taxing urban and rural sectors, special privileges to the public sectors and chronic tax holiday etc. Unsteadiness of income tax rates is another incidence of loophole in the taxation system. It is evident that tax liability and the extent of progressivity of income tax rates in Bangladesh have been swinging over the years for lower and middle-income individuals and have remained static for the higher income groups. The effects are twofold: first, it impacts negatively on expanding the income tax net, and secondly, it leads to shifting the tax liability only to a limited number of taxpayers.
According to the Income Tax Ordinance 1984, a corporate assesses must submit, along with the return, books of accounts and true audit reports. Interestingly, assessing officers, who are mostly graduated with non-accounting background, cannot understand the books of accounts. They tend to complete the assessment without considering the nature of business, volume of business, books of accounts, audit reports etc. submitted by the assesses. In an income tax case, the tribunal rightly observed, “an income tax officer is to act judicially in a particular assessment proceeding solely guided by the provisions of law.” Therefore, it is expected that income tax officers should lay efforts to ensure tax justice whilst dispensing their duties.
The assessing officers with their discretionary authority directly dismiss the taxpayers’ statements of accounts and it is immaterial how genuine those documents may be. As a result, assesses seem to adopt different means to avoid taxes or pay lower taxes than that they are liable to pay. Tax practitioners and taxpayers complain that the assessing officers do not act judicially and there is sheer absence of justice, equity and good conscience in their decisions. According to them, if the taxing officers act in a judicious manner in assessing the tax files, the people will be more tax compliant.
The tax law allows all the different forms of tax incentives such as tax holidays. Tax holiday is a kind of tax amnesty scheme granted by a government to newly set up industries in order to promote long-term industrialization and generate capital investments in the country. The opportunity cost of the incentive has been high compared to the objective for which it was introduced. The existing tax law of Bangladesh permits industrial undertakings, tourist industries or any physical infrastructural facility (including ‘expansion unit’ thereof to enjoy ‘tax holiday’ for 5 to 10 years subject to fulfillment of certain conditions. Alternatively, they can be allowed ‘accelerated depreciation’. There are various shortcomings of tax holiday arrangements. It is alleged that the current facility of granting tax holiday has been grossly abused. An extensive use of tax exemptions, incentives and special provisions also limited revenue collection, narrowed the tax base, eroded tax equity and created distortions in the economy. The extensive use of the so-called ‘infant-industry theory’ also made many entrepreneurs in this country lazy to stay away from global competition.
Another unethical and illegal black money whitening scheme encourage corruption and evasion of tax since persons having illegally earned money make the money white only paying tax of 10 while corporate tax rate is minimum 27.5 percent. It is also distorting the moral of the society.
The urban community often criticize that the present income tax structure weighs heavily against the business and entrepreneur classes in the municipal area. The lion share of tax collected from urban area although now the growth centers are around Upozila level. This is due to the fact that the effective tax rate is higher in the urban sector than in the rural sector and poor tax net trough out the country. A Tax Inquiry Commission’s report presented the relative tax burden of the two sectors from direct sources. The average burden of direct taxes on urban sector was 0.31 percent as against 0.14 percent in the rural sector. This happens because the urban sector is more monetized and the government has better control over this sector.
During the 100 years of journey of the law, it has drastically changed the definition of the Income ignoring the accounting principles gross receipt, gross profit or net profit etc. such as:
1. Any amount may be treated as income under any head.
2. Any sum received on which tax deduct as source (TDS) will be applicable.
3. Any amount the tax is imposed.
4. Any amount of TDS is mean for final settlement of the tax.
5. Minimum tax Gross receipts irrespective of loss and profit.
And roughly 94 per cent of income-tax revenue comes from tax deducted at source. The Tax deduct as source (TDS) has been imposed at border during release of imported goods and services, supply of goods and services to government and corporates entities. This deduction is on gross sales value but not on net profit. The advances taxes are non-refundable and considered as tax on income. In many cases the tax burden are more than 100 percent of the net income of the business enterprises.
The MSMEs are primitive stage of industrialization and industrial and taxation policy of many other countries encourage and promote the MSMEs. MSMEs in Bangladesh are subject to TDS causing the payment of very high AITs and TDS. In contrast the big conglomerates are forced to set up backward linkage business units to get inputs at competitive rates. The tax should be totally overhauled to establish tax justice in order to gain optimum benefit of our tax system.
The writer is Non-Government Adviser, Bangladesh Competition Commission and CEO, Bangla Chemical. He can be contacted at [email protected]
