Tax deduction at source: Bangladesh scenario
"Income tax" as it appears from its very name is a tax on income of a person. Time frame for determination of income is universally one year. Some elements of income like interest on loan or deposit or depreciation cannot be computed on a monthly or weekly basis. Further, big tax entities like companies need more time for mandatory audit of their yearly accounts and approval of such accounts in their annual general meeting of shareholders. Ideally tax is liable to be levied and collected after the yearly income is determined which is likely to happen after the end of the year.
Government needs revenue throughout the year even on a day to day basis to meet various public expenditures. Getting tax once a year makes it difficult for the government to meet the public expenditures within the year framework. So came the idea of quarterly advance tax, practised by most of the tax regimes.
Then came the idea of a more convenient mode of tax collection and payment by means of tax deduction at source. If paying or registration authority is given the authority and responsibility to collect tax at source at payment or registration point, tax collection becomes easy. Tax payers are also, to some extent, relieved in splitting their tax burden instead of paying a big amount at the end of the year.
The number of economic transactions and registrations are too large. Tax deduction or collection at source can neither be enforced nor can be administered on all of them. Moreover, many registrations or payments are not acquainted with element of income. Tax policy makers have to select rational items of payments or registration on which tax deduction at source is to be imposed. The second million-dollar question is the rate of tax deduction at source. There cannot be a unique rate. Each nature of payment or registration may result in different rate of income or profit. The tax policy planners assume a hypothetical income for such nature of payment or registration and determine the rate of tax deduction or collection applying existing tax rate on that hypothetical income from that source. It may also vary from person to person. To do justice and address the application of tax deduction rate for a certain payment or registration, it was designed by the tax policy planners that such tax deduction or collection at source is an advance payment of tax to be adjusted with tax liability of the person for that year. The tax payers will pay the balance amount of tax if the amount of such tax deduction or collection at source is less than the tax burden of that person for that year. On the contrary, the person will get a refund of tax if such tax deduction or collection at source is more than the tax burden of that person for that year.
Income Tax Act, 1922 was the tax law in force in Bangladesh till June, 1984. Section 18 of the erstwhile Income Tax Act 1922 dealt with tax deduction at source. Initially, there were two sub-sections for two different items. Namely, sub-section (2) for salary, and sub-section (3) for interest on securities. Later on, sub-section (2C) for lotteries and sub-section (3BB) for supply of goods, execution of contract, rendering of services, import, export was inserted from April 1, 1959. Subsequently, sub-section (3B) for interest other than interest on securities and sub-section(3C) for dividend was inserted on April 1,1961.
Income Tax Ordinance-1984 came into force from July 1,1984. Chapter VII of the Ordinance deals with tax deduction or collection at source. Initially, there were seven sections for different sources where tax deduction or collection at source is applicable. Since then its sphere was expanded almost every year. As of now, there are fifty-four sections of tax deduction or collection at source. Amongst them section 52AA has 17 sources while section 56 has 28 sources to deal with.
There are as many as 23 rates of tax deduction or collection at source ranging from 0.05 to 30 per cent. The rate of tax deduction is arbitrary. In some cases, the rate is far too high in comparison to the profit rate from that particular business. For example, the rate of tax deduction for commercial import is 5 per cent. At the present rate of tax on income an individual or firm has to earn a net profit of 20 per cent to match the rate of tax deduction. In the case of a company it requires rate of net profit of 18 per cent to match the tax deduction rate. Such a rate of profit in commercial import business is highly unlikely.
At the beginning, tax deduction at source was treated as advance tax. Tax payer was supposed to get refund of tax in case of excess deduction of tax. Getting refund is too difficult. Introduction of section 82C in 1999 and subsequent amendments to that section have practically and legally sealed the possibility of refund. Out of the 54 sections tax deduction at source, under 34 sections are treated as minimum tax payable, thereby keeps tax deducted amount out of the purview of refund. In the process equity principle of taxation has been sacrificed and direct tax is made de facto indirect tax.
The deduction of tax rate is arbitrary and on the higher side in comparison to applicable tax rate. Further scope of refund of excess deduction of tax is taken off. The deduction of tax has become a component of cost of business. As a result, our business is facing comparative disadvantage in comparison to other tax regimes.
So many items and so many rates have become compliant on the tax payer, enforcement and monitoring of which are difficult for the tax administration. According to the last published annual report of National Board of Revenue (for Financial Year 2019-20) amongst the total collection from tax deduction at source of Tk. 418.05 billion 20.36 per ent comes from contractors & suppliers, 20.18 per cent from import, 17.69 per cent from bank interest and 5.92 per cent from salary. The remaining 53 items contributed 35.18 per cent. Collection from several items are far too small. Even there was no collection from 6 sources. Deduction mechanism from these sources is far from justified.
Besides, so many rates and so many items have created huge burden on corporate bodies to deduct tax, deposit the same in the government treasury, issue certificate to the recipients on the amount on a day to day transaction basis. Further, they are also required to keep record of such tax deduction at source and submit several periodic returns containing the information to the tax authority.
We are contemplating to reach middle income country status by 2031 and high income country by 2041. To arrive at such goals, our fiscal system should be rationalised. As far as possible, we should be near to international best practice. Our business should be competitive in the global context. Tax deduction at source system should be reformed on the basis of systematic formal study.
Aminur Rahman is a former Member, NBR.