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6 years ago

Towards simpler and effective tax laws

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The national budget for the fiscal year 2018-2019 is coming up. The National Board of Revenue has already initiated discussions with businessmen, traders, industrialists, professionals, institutions and associations about the budget as well as amendments to existing laws.

We have found that existing laws related to finance are either inadequate or complex in nature. The nature of statute in existing Tax law, VAT law etc. of the country needs immediate reform. Section-wise tax statute has been discussed below.

Section-2 of the Income Tax Ordinance, 1984 is related to definition of the words/expressions incorporated in the tax law of the country. Most words/expressions in the section have become outdated and are incompatible with present day requirements. As such, new words/expressions can be included in the Section.

Section-13 of the I. T. Ordinance, 1984 is related to decisions of the Tribunal Bench against Appeal Application submitted by the appellants. Very often, it has been found that members of the Bench deliver order without providing reasons. This is neither fair nor logical. Someone being assessed has the right to know the reasons for which his or her appeal is rejected.

Delivery of Tribunal Order to an appellant has a fixed time limit. But it is not followed by members of the Bench leading to unnecessary delay in delivery of the order. This delay can be avoided if the Bench attaches a note mentioning the delay in delivery of the order, which can help the appellant who is in turn answerable to higher legal forums.

Section-16 levies taxes on an income under any head of income under section 20 of the I T Ordinance, 1984. The tax rate needs to be clearly and distinctly mentioned under a schedule for various items like Capital Gain, Rental Income, Dividend Income, etc. Neither the assessing officer nor the tax payer should apply the wrong rate of tax on income.

Section 19 (28) says that an assessee who received "any sum or aggregate of sums exceeding Tk. 500,000 (Five hundred thousand) as loan or gift otherwise than by a crossed cheque or bank transfer, shall be treated as income in the hands of the recipient of the said loan or gift."

Last year, an amendment was made under which it was said that loan or gift from spouse or parents shall not be subject to tax if banking or formal channel is used in the process of giving such loan or gift.

It appears that through the amendment, a class of people is outside the tax net which is arbitrary and inconsistent. Every assessee should be allowed to enjoy such benefits provided transactions are made through banking or formal channels.

Section 24 is related to House Property income where the assessing officer exerts his power at will to estimate rental income of an assessee. The tax authority passed an amendment clearly and transparently for property income under new Rule 8A by SRO-216-Law/Income Tax/2014 dated 18-08-2014. Despite follow up of the Rule 8A by an assessee, the assessing officer has discretionary power to raise the house property income by three to four times higher over the actual rent shown by the assessee. The assessing officer does not like to consider location, size of the flats, conditions of the building, area where building is located and rent rates prevailing in the locality. Here, the assessing officer can violate the relevant law as he likes.

To remove the pain and hardship of the building owner (big and small) from the atrocities of the assessing officer, the tax authority may fix a rate on each square feet basis of the building considering its location, age and condition etc. When land valuation is possible by government on area basis, the rent of the House Property can also be fixed accordingly to help property owners from hardship, injustice and harassment.

Section 28(3) is related to consideration of interest suspense as income or no income for a year. Interest suspense is considered on defaulting amount of principal loan allowed to customers in banking sector, particularly when principal loan is stuck from recovery of advance from customers under some condition as per set rules of Bangladesh Bank. Interest on the defaulting advance is calculated and kept in a separate block account. This law was enacted through the Finance Act, 1996 in the interest of the banking companies. When a bank fails to collect principal loan, the recovery of interest on such loan is a remote possibility, and it is not reasonable to charge tax on such interest income.

As such, an amendment was made to section 28(3) under which an assessee may take the option either to credit the interest suspense as income in the P/L account of the relevant year or keep it separately until it is actually received, whichever occurs first.

Initially, this facility was allowed to scheduled banks, Bangladesh Development Bank (BSRS) and Investment Corporation of Bangladesh (ICB). Financial institutions, merchant banks and investment companies were left out from the above provision. Eventually, "Financial institutions" were included with effect from 2015, but other organisations like merchant banks and investment companies were left out.

Despite the inclusion of financial institutions, the statute did not mention whether the amendment of the law was prospective or retrospective, leading to confusion between the tax authority and assessee. Since the principle of interest suspense has been admitted and established, it may not be right to exclude "merchant banks & investment companies". 

Therefore, an amendment in the statute can be brought to remove the impediments for these two kinds of institutions with regard to interest suspense.

Section 29(1) (VIIIaa), read with Clause-(xv) (xvi) & (xvii) is related to the provision of bad and doubtful debt over advance portfolio and bad debt that is written off under different circumstances of the banking business. When an advance becomes bad, as  per Bangladesh Bank requirement an assessee bank needs to make provisions for Bad and Doubtful debts as expense. But the authority charges tax instantly from assessee. Huge tax on account of provision for bad debt is being accumulated in the hands of tax authority. It has been found that as much as Tk 10 billion per year is being collected as such tax from the banking sector simply because it is a provision claim on expense.

As a result, banks lose working capital every year and face more and more difficulties in continuing their operation. To save the banking sector, this situation needs to change immediately.

Depreciation allowance under Paragraph 4 of the Third Schedule: This is related to depreciation charged on leased assets; paragraph 4 of the Third Schedule allowed depreciation on leased assets. The tax officers disallow this claim from the viewpoint of ownership of the asset. The law needs to be amended properly so that no confusion exists.

Refund of Tax u/s 135 (1c) and section 152 adjustment of IT Ordinance, 1984: We have observed that tax refund is not allowed to the assessee by the NBR even when the assessee is entitled to receive tax refund. Rather the tax officials increase the income amount of the assessee to counterbalance the tax refund on a lump-sum basis without any legal consideration or explanation.

As per section 135(1A) where any amount of tax is refundable in consequence of any order, the Deputy Commissioner of Taxes (DCT) shall specify in the notice, the sum refundable to the assessee together with a copy of an assessment order and a refund voucher unless such refund is set-off against tax as per section 152 under section 135 (1B); the refund voucher for the amount due for refund, if any, shall be issued within a period not exceeding thirty days from the date of assessment.

It is also stated in section 135(1c), when the DCT fails to issue refund, vouchers for any refund due to an assessee within the time limit (30 days), such failure on the part of DCT shall be construed as misconduct.

However, nowadays, the DCT usually declines to allow the refund vouchers and adjust the entire refund by raising income to the extent of refund amount to the utter surprise of the assessee. This practice needs to be stopped.

Section 178: There were numerous instances where the assessee was declared ex parte merely on the ground that he never showed up for the appeal, when in reality the assessee never received the notice of appeal from the NBR.

The tax authority delivers notices either by registered post or through services of a summons issued by a court under code of civil procedure 1908 (Act of V of 1908). But the situation has not improved leading to harassment of the assesse most of the time.

The tax assessee in Dhaka is also available via telephone, internet, SMS, personal contact etc. But the tax officials do not try these modes.

Under the circumstances, the tax authority can take actions against officials who are found to be negligent in their duties. The delay in delivery of notice makes the appellant questionable before CT Appeal, Appellate Tribunal and Honourable High Court.

Section 82BB (universal self assessment): In fact this section was first introduced through the Finance Act, 2007 under the head - universal self assessment. Numerous changes over the next few years made the law clumsy. In order to avail tax concession, the assessee is required to submit twelve digit Tax payers' Identification number (TIN) in compliance with the condition and within time specified in section 75 and pay Tax u/s 74. All of these details have made the law complicated for the assessee. Therefore, the section may be deleted or an option may be offered to the assessee to use this section with minimum terms and conditions.

Section 82C: This section was first introduced in 1998, after which some changes were made to it almost every year. During the assessment year 2017-2018, the entire section was revised thoroughly with concept of minimum tax, under which an assessee will be required to pay minimum tax. This is a lengthy section containing as many as nine sub-sections with clauses, sub-clauses, 'provisos' attached with the sub-section. But surprisingly, minimum tax has not been defined directly. On the other hand, there are restrictions on the users.

If we sum up section 82C, we find that the section consists of nine sub-sections, 14 clauses and nine sub-clauses and provisos. This is the lengthiest section in the Tax Ordinance and is not easily comprehensible to the user. This needs to change for convenience of the users.

In conclusion, laws need to be easy to understand. They should be precise and free from complexities, so that the assessee can easily interpret the laws and abide by the rules. In recent years, we have observed that both the length and intricacy of tax laws are gradually increasing. But such changes cannot make laws any clearer or easier. Rather they increase controversy and create dissatisfaction among the assessee.

Therefore, we hope that the government will take necessary steps to reduce obscurity of the laws and ensure more transparency and simplicity in the whole taxation process.

Akhter Zamil FCA, a former Chairman of Karma Sangsthan Bank, is tax Adviser of Sonali Bank Ltd. [email protected]

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