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5 years ago

Rationalising tax provisions on amortisation

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The country's investment promotion agency -- the Bangladesh Investment Development Authority (BIDA) -- has sought rationalisation of the tax provisions on amortisation to attract more investors from both home and abroad. 

It says the existing tax provisions on depreciation of intangible assets are not investor-friendly. The third schedule of income tax ordinance that deals with how assets are recognised and categorised for fiscal depreciation is complex and requires additional documentation.

Currently, fiscal depreciation is applied to written down value at a fixed rate throughout the life of an asset which in turn assumes an arbitrary life of all assets falling in the class. The industries can enjoy 20 per cent depreciation on written down value of machinery. This means a little more than 21 years is required to reach negligible written down value, which is highly unrealistic.

In such a situation, BIDA proposed incorporating the required provision in the third schedule. In a recent meeting with the officials of the National Board of Revenue (NBR) and other stakeholders, the BIDA urged the authorities to update the schedule in question.

Mention may be made that the third schedule contains provisions relating to computation of depreciation allowance and amortisation facility. Depreciation and amortisation constitute a form of tax incentive provided to the investors to reduce tax liability on their profit gain.

The fact remains that the NBR updates the income tax provisions through Finance Act every year to align those with the international best practices. According to its review, agriculture sector enjoys the highest 33.3 per cent deprecation facility on its machinery. Some other industrial sectors also enjoy depreciation facility for payment of tax at reduced rates.

The revenue board needs now to follow revaluation method for determining the value of property, plant and equipment, which will reflect economic reality. The current 'fiscal depreciation' system is largely based on historical cost and discourages investment.

The investment-promotion body has also proposed the revenue board to incorporate fiscal depreciation into the existing tax laws for property used for rental income. As of now, such depreciation is not entitled to property used for rental income. This is an obstacle to the development of real estate companies engaged in development and management of real estate for the rental purpose.

There is no denying that some tangible and intangible assets are entitled to enjoy the depreciation facility as per tax law. But, in actual sense, they are unable to enjoy this due to lack of updated provisions in the tax law. Furniture, real estate, tanker, ship, software businesses are the worst sufferers as depreciation facility is not determined in the tax law as per commercial reality of those products.

For example, the furniture industry enjoys depreciation facility at the same rate irrespective of their categories -- wood, steel, iron or cane-made. In fact, the economic life of the products, both tangible and intangible, should be considered for the depreciation facility.

BIDA's proposal should be considered seriously to make the third schedule of the ordinance investor-friendly. The existing provision of depreciation facility in tax laws needs an amendment in line with the suggestions of the investors. The current depreciation facility in the tax law, as has been said, does not consider the nature and actual life of assets. The present legislation is also not following the financial accounting and reporting standards.

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