Income tax accounts for 27 per cent of the total revenue of the country. In the budget speech of FY18, the Finance Minister contemplated on raising this share to 50 per cent -- a difficult task and ambitious target but not impossible. In that speech he also stated a three-prong strategy. These are: (a) continuity and stability of tax policy, (b) transparent enforcement procedures, and (c) simplified business operations.
Enhancing income tax share means increasing direct tax and ultimately making it much higher than indirect tax. The current 35:65 ratio of direct and indirect tax needs to be gradually reversed to uphold the interest of the consumers and the productive sectors. The upcoming budget for FY20 needs to address the issue with transparent measures.
Broadening the tax net is essential to generate more revenue. A new section may be inserted in the Income Tax Ordinance which will empower tax authority to collect particulars of the members of the trade organisations and professional bodies through their licensing and regulatory government agencies and banks. This will help widen the tax net. Simplification of the tax adjustment procedure and removal of inconsistencies will reduce cost of doing business and generate more revenue compliance.
TAX ON INDIVIDUALS: Income tax on individuals needs to be adjusted with the inflation rate from time to time. In this connection, tax free limit of Tk 250,000 (for male) continued for last three years may be enhanced to Tk. 350,000 considering the escalation of price of essential goods and services. Lowest rate of income tax should be lowered to 5 per cent from existing 10 per cent to encourage and motivate low income segment of the population to be a tax payer duly acknowledged by a tax identification card. Minimum payable income tax should also be reduced to Tk 3,000 from existing Tk 5,000. Wage board salary structure should be harmonised with tax measures. The government also needs to make the educational expenses of the children tax free.
Income tax rate on listed companies should be 10 percentage point lower than the non-listed companies.
CORPORATE TAX: Corporate tax rate on Small and Medium Enterprises (SMEs) manufacturing sector needs to be lowered from existing 35 per cent for balanced growth of all areas of the country. For instance, annual income up to Tk 20 million may be subject to 20 per cent corporate tax in Dhaka and Chottogram city corporation areas, 18 per cent in other city corporation areas and 15 per cent in less developed areas.
There are some incongruities in determining the applicable tax base rate for companies, such as (a) tax payable on applicable rate in accounting profit, (b) tax deducted or collected at source, and (c) 0.60 per cent or 1.0 per cent of gross receipt or sale. This is a basic deviation from the principle of tax on income and needs to be corrected.
To do this, accounting profit may be made as the basis to apply tax rate for companies wherein tax deducted or collected at source and on gross receipt or sale will be adjusted. Tax rate on sale or receipt may be lowered to 0.25 per cent while tax deducted at source may be made the final discharge of tax liability at the option of the taxpayer on certain sources like commercial import, supply of goods, contract work business.
Digitisation of tax system and procedure is now the order of the day. It will make the overall tax structure transparent and smooth. In this connection, simplification of online tax return filing is essential. Full-fledged online filing of tax returns may be set up immediately. On payment of fixed charges private internet service providers may be allowed to file online tax returns. Online filing of withholding tax return may also be introduced.
SOURCE TAX: Rationalising the tax deduction at source is another important thing. At present there are many rates of tax deductions ranging from 0.5 per cent to 30 per cent which is complex. To avoid complexity, the rates of deduction at source, imposed without taking into account the profit element in the transaction, should be fixed between 0.5 per cent and 5.0 per cent.
Currently, there is a legal restriction on refund of tax deducted or collected at source. It [section 82C (5)] may be removed. Similarly, Section 53E regarding tax deduction on distributors' commission may be abolished.
Goods imported by VAT registered industries may be placed outside the purview of advance income tax. Deduction at source for inland letter of credit under section 52U may also be abolished.
Credit of tax deducted at source [section 62] is given only when proof of deposit of tax to the government exchequer is provided. The responsibility of depositing tax lies with the deducting authority, not the recipient. This section may be amended enabling credit of tax on the basis of payment certificate issued by the tax deducting authority.
FOREIGN SERVICE: The government is being deprived of huge amount of money as pay channel businesses remain unregulated. E-tax practices may be adopted in Bangladesh to take into account taxable sales whether on the internet or outside the internet. Tax payable by local suppliers shall also be paid by the external suppliers. All foreign service providers including foreign TV channels, FacebBook, YouTube should only operate in Bangladesh through respective local establishment represented by an authorised agent.
Each foreign service provider must obtain income tax and VAT registration and pay AIT and VAT on all collections from Bangladesh and payments made to the respective foreign service provider. For proper functioning of the Bangladesh internal market and in order to ensure elimination of distortion, taxes including value added tax applicable to local radio and television broadcasting services and electronically supplied services must also be applied on external suppliers to ensure GATS National Treatment clause (not to discriminate against foreign products and services). If any tax, including VAT, is charged on local services products, it must be imposed on foreign services also.
The amount paid by the local agent to the respective foreign service providers should also be subject to AIT and VAT.
Bangladesh Bank should provide for electronic transactions through credit and debit cards to exclusively facilitate and monitor online export and import. AIT and VAT may be deducted at source when online import transactions take place.
The electronically supplied services from outside Bangladesh should be charged 10 per cent AIT and 15 per cent VAT against on-line payments through Bangladesh Bank. The services may include: advertisements and entertainment broadcasts and events; supply of software and updating thereof; supply of music, films and games etc. However, educational, sports, news channels etc should be taxed at much reduced rates or may be exempted.
OTHER AREAS: Gross profit (GP) practised widely in assessment is done without taking into account the element of profit in the respective sectoral business process. Sector-wise study by joint team of NBR officials and professional accountants may be made to find out sector- specific periodical scale of gross profit.
Tribunal is the last appeal forum for disputes. Members of tribunal benches are in service senior officials of the tax department. As a result, there is basically no difference between first appeal and second appeal. As in India, one of the members of tribunal bench may be a judge or a chartered accountant or a senior lawyer.
Manzur Ahmed is Member, Investment Promotion Team (IPT) of NBR;Advisor BEI , BCI, BPGMEA and FBCCI (2005-March 30, 2017).
