Pros and cons of the new income tax law

New Income Tax Act 2023 has been passed repealing the old Income Tax Ordinance, 1984. One of the objectives was to make the new Act updated and appropriate considering the current economic condition of the country. As a concerned citizen of Bangladesh, we all should consider the pros and cons of the new Act and identify the anomalies affecting taxpayers.

ADDRESSING THE BAD PROVISIONS OF ACT: The Act has been introduced on June 23, 2023 with immediate effect without considering the implication on businesses, who maintaining their financial statements from July to June cannot follow the new law since old Ordinance has been followed for 11 (eleven) months or in some cases 6 (six) months.

The law suggests that the provisions of Act will prevail in case of contradiction with other laws. Income Tax Act should be in uniform manner without any contradiction with other laws. But contradictions within the provisions of Income Tax Act have made the law more complicated. There is no clarification available from the NBR. Such contradiction should be removed. For example, when the companies are bound to follow the IFRS and IAS in preparation of Financial Statements following Sections 72 & 73 of Income Tax Act 2023, there remains no applicability of section 49 in assessing the income of an assessee. Expenses allowed in one Section cannot be restricted or curtailed through application of another section of the Act. Expenses incurred by a business are being restricted by the application of provision of section 49 of the Act since the law provides specific list of expenses which is not fully viable for a business. In conducting business activities there may be expenses incurred which do not fall within the category provided in Section 49.

Another issue to consider is that when the law has allowed exemption to certain companies and other taxpayers, what is the necessity of obtaining exemption approval certificate from the NBR? If it is mandatory to get approval from NBR for tax exemption, there remains no applicability of law.

The provisions of new Income Tax Act 2023 have been carried forward from old Income Tax Ordinance 1984. And as a result, several bad and unconstitutional provisions have been included in the new Act.

One of the examples is "double taxation". Double taxation refers to income tax being paid twice on the same source. This can occur when one particular head is taxed at both the corporate level and the personal level, as in the case of excess perquisite.

Perquisite paid to an employee is an expense of the company and income of the individual employee. As per Income Tax Act 2023, there is a limit to payment of excess perquisite by a company. Any amount exceeding such limit will be taxable for the company and at the same time full amount of perquisite is subject to tax for individual employee receiving the perquisite giving rise to question of double taxation.

Calculation of special business income u/s 55 of the Act is another bad provision. In assessing the income of a company any amount disallowed for non-deduction of tax at source will be taxed separately at a regular rate. There is a separate Section (143) for realisation of tax not deducted at source including 2 per cent interest. Why the company should be punished for the same mistake twice?

The most important issue is that minimum tax is being charged under Section 163 of the Act on the assessee which is actually higher than tax deducted at source, tax calculated on income on regular basis and turnover tax on gross receipt. This is a bad provision of law. Because, as per the said section any tax deducted at source is not refundable and any loss calculated subjected to minimum tax is not adjustable.

For simplification and in consideration to increase the business activities tax should always be imposed on total income at a regular rate. Any tax deducted at source should be allowed as tax credit and any loss should be allowed to set-off against income and if not, carried forward.

The rate of tax to be deducted at source should be adjusted in comparison to income of the assessee. A large sum of money being deducted from income of the assessee in the form of TDS in the end becomes refundable which as per current provision of Act is not refundable. This is discouraging for businesses and should be reformed in a manner leaving the company/business with expected profit margin.

Income of recognised provident fund, approved superannuation fund/pension fund and approved gratuity fund have been made taxable at the rate of 15 per cent. This is illogical and will discourage private sector organisations from operating provident funds which will certainly not facilitate, and rather hinder, the governments declared objective of expanding its social safety net programme. Such taxes should be withdrawn/eliminated. The income of these private sector funds, like funds in the government sector, should also be tax-exempted.

BOXED-IN APPROACH: Assessing officers tend to bunch-up cases for assessment at the end of the deadline. This takes a toll on the quality of assessment. As a result, the assessment order drawn up is often found to have failed to consider relevant evidences or deal adequately with evidences on record, the accounting system.

Assessment orders and appeal orders often lack judicial discipline (on pretexts such as the department has decided to file an appeal with the Supreme Court), or misinterpreting judicial precedents, case references, etc. Lack of specialisation among assessing officers often adversely affects the quality of the decision.

Assessing officers often need adequate access to proper and practical knowledge of the accounting system, case references etc. Lack of specialisation usually adversely affects the quality of the decision.

It is a common practice for the appeal authorities to avoid responding to the legal grounds raised by the assessee at different stages of an appeal. In order to eliminate/reduce such malpractices, it is essential to introduce provisions in the Act, making it mandatory for the Appeal Authorities to respond to all grounds raised in an Appeal.

UNWRITTEN LAW OF TAX AUTHORITY: Several unwritten laws exist within the tax department. Necessary steps must be taken to remove such glitches for smooth application of the law. One example is  the tax authority's reluctance in not allowing tax refund. Application made to DCT for any amount of tax refund exceeding Tk. 5,00,000 has to seek approval of the Inspecting Range. There should not be any requirement of any approval for any amount of tax refund since the Act states clearly about tax refund. Certain unwritten laws and forceful activities of tax department are resulting in the harassment of assessee discouraging them to make payment of tax on income.

DISCRETIONARY POWER OF THE DCT: The new law is said to reduce the discretionary power of tax authority. But several contradictions of law still exist which give rise to discretionary action of the DCT resulted in the time consuming and arbitrary assessment of income.

DOCUMENTS VERIFICATION SYSTEM (DVS): Introduction of DVS has made it easier to verify whether there exists any anomaly in the financial statements of the assessee. DVS provides clear authentication through certification by Chartered Accountants of the Financial Statements which, if disregarded by the tax authority, loses the effectiveness. What is the point of having Documents Verification Code (DVC) generated through DVS if it has no applicability in the tax department?

UNNECESSARY DOCUMENTS REQUIREMENT: The assessee is often being asked for unnecessary documents by the tax department. There should be restriction to call for any documents and evidences from the assessee which already exists electronically before the tax authority. For faster and timely completion of assessment procedure, electronic service of notice through e-mail or other electronic means of communication may be encouraged. Assessments should be made using the digital platform. This is necessary in order to remove the anomalies and irregularities exist in the Tax/Revenue Department. [Circular of Ministry of Finance in the Nothi # 07.081.032.05.00.005.2014-562 dated 18/12/2016]

Finally, given the vast scope of taxation, the authority should look into the various provisions of the Income Tax Act 2023 and take necessary steps for correction, modification and amendments of the Act.

KM Hasan FCA is a Managing Partner of K.M Hasan & Co Charterd Accountants.
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