Personal income tax
Personal income tax is the tax
paid on one's personal income that is distinct from the tax paid on the firm's earnings.
In an incorporated firm, the owners pay taxes on both of
their income and firm's income. In partnership and sole-ownership business, the tax is paid only once on the
firm's profits.
Personal
taxation scenario of Bangladesh
There are some salient features in the contemporary
personal taxation in Bangladesh as follows
·
If annual income of
any individual other than female, retired person or cripple exceeds Tk. 200000
needs to pay tax.
·
If total income
of any female assesses or the aged person with 65 years old exceeds Tk. 225000
then he /she needs to pay tax.
·
For the disabled
person tax payable limit is Tk. 275000.
·
Person whose
wealth exceeds Tk. 2500000 needs to pay wealth tax.
·
Person who
provides gift to another person having worth over Tk. 20000 needs to pay gift
tax.
·
Any person who lives
in a city corporation/ divisional head quarter (HQ)/district HQ and owns a building
of more than one storied building with a plinth area exceeding 1600 sq feet and
let out then he should pay tax.
·
Person who owns a
motor car and drives on city road should pay vehicle tax.
·
Person owing a
membership of a club registered under value added tax (VAT) law should pay tax.
·
Person who
subscribes a mobile operator needs to pay tax according to the amount of
service he has gotten.
·
If there is death
of a person with left property worth of Tk. 200000 needs to pay estate duty.
Personal
income from salary
ü House rent allowance (HRA): Amount chargeable to tax
1. Where HRA paid in cash: 50% of basic salary or min
Tk.15000
2. When rent free accommodation is provided: lower of
annual value of the house or 25% of basic salary (BS) will be added to the
salary
ü Convenience allowance: Amount chargeable to tax-
1. When paid in cash: up to Tk. 24000 is exempted
2. When vehicle is provided: an amount of 7.5% of BS of
employee without any exemption.
ü Entertainment allowance: full amount is taxable
ü Medical allowance : actual expenditure is exempted but
excess amount of actual expenditure is taxable
ü Interest on recognized provident fund (RPF): interest
exceeding 14.5% rate or 1/3 of basic salary is added to salary.
Income from
house property
Expenses will be allowed as deduction to determine the
value of house property subject to tax-
ü Repair and collection of tax: 25% of annual value
ü Land revenue: fully deductible.
ü Insurance premium: deducted as a whole.
ü Mortgage interest: deducted as a whole.
ü Interest on borrowed money: interest taken for the
purpose of repair, acquiring, and constructing etc of residential house is deductible up to Tk. 2000000
ü Vacancy allowance
ü Non allowable expense: salary of gardener , cost of
appeal against house property, expense for the house are not taxable under the
head of “ income from the house property”
ü House property is exempted from tax when
1. It belongs to religious and charitable institution
2. House constructed is used by refugee
3. Income from any residential building owned and used by
owner himself
4. House used by owner for his own business purpose
5. Used in agricultural purpose by owner
Personal
income from agriculture
Taxable income in agricultural sector is given bellow-
ü Partly agricultural or partly business income:
1. Income from tea garden(60% agricultural and 40%
business income),
2. Income from sugar mill (cost of sugar cane treated as
agricultural income but the difference between sale value of sugar and market
value of sugar cane is considered as business income)
3. Income from plantation of rubber (60% agricultural and
40% business income)
4. Tobacco plantation (same to the law of sugar mill)
ü Some typical agricultural income that is considered
under taxation policies-
1. Income from cattle rearing land collected from cowboy
2. Income from flower cultivation
3. Income from cultivation of tobacco and palm tree
4. Income from park
5. Income from agricultural co-operative related with
dairy
6. Income from land used in agricultural purposes
7. Income from dairy firm
8. Income from poultry firm if they are reared in land.
ü Some typical non agricultural taxable incomes-
1. Income from ferry ghat ,fishing , catching , and
market
2. Sales of soil used in non agricultural purpose
3. Income from rent of house used for collecting crops
4. Income from royalty of mine
5. Income from Sault production
6. Income from house used as storage , factory etc
7. Income from sale of tree, grass, crops grown in land
without agricultural work.
8. Income from sales of water used for irrigation
9. Income from purchasing of crop from other farmer
ü Allowable expenses need to be ducted from agricultural
income to find taxable income-
1. Any land development tax and rent paid
2. Any local rate, tax and cess.
3. Cost of cultivation
4. Transportation cost for transporting land produces in
market
5. For maintain agricultural implements and machinery.
An overview of the revenue system of Bangladesh
tax administration and revenue structure
National Board of Revenue (NBR) is
the central authority for tax administration in Bangladesh and collects almost
78 percent of total revenue for the country (NBR Annual Report, 2000). As shown
in Table 1, the total internal resource generation due to revenue earnings has
been accounted for less than 10 percent of GDP of Bangladesh. Tax revenue in
general contributed more than eighty percent towards the total revenue earning
of the economy.
Table 1
Tax and Non-Tax Share of Total Revenue
Yield in Bangladesh
(1992-93 to 2000-01)
Year (1992-93 to 2000-01)
|
Total Revenue [% of GDP]
|
Tax Revenue [% of Total Revenue]
|
Non-Tax Revenue [% of Total Revenue]
|
1992-1993
|
9.13
|
7.26
|
1.87
|
1993-1994
|
9.22
|
7.07
|
2.15
|
1994-1995
|
9.84
|
7.9
|
1.94
|
1995-1996
|
9.22
|
7.29
|
1.93
|
1996-1997
|
9.62
|
7.89
|
1.73
|
1997-1998
|
9.5
|
7.69
|
1.81
|
1998-1999
|
9
|
7.36
|
1.64
|
1999-2000
|
8.47
|
6.78
|
1.69
|
2000-2001
|
9.28
|
7.8
|
1.47
|
2001-2002
|
9.83
|
8.09
|
1.74
|
Periodic Average
|
|||
1992-93 to 1996-97
|
9.41
|
7.48
|
1.93
|
1997-98 to 2001-02
|
9.22
|
7.54
|
1.67
|
Periodic Average
|
|||
1975-76 to 1979-80
|
8.8
|
5.5
|
1.3
|
1980-81 to 1994-85
|
9.2
|
7.7
|
1.5
|
Note: 1. Total revenue
as percentage of GDP.
2. Tax and non-tax revenue as a percentage
of total revenue.
3. Adapted from Ghafur and Chowdhury (1987)
Source: Finance Division, NBR and BBS (Periodic data compiled by TAPAN
K. SARKER, Winter’2006).
Tax structure in Bangladesh
Total taxes in Bangladesh are
divided into direct and indirect taxes. Direct taxes in Bangladesh consist of
taxes on income (income tax, corporation tax, agricultural income tax etc.) and
taxes on property (wealth tax, gift tax, estate duty, capital gains tax, urban
property tax, house rent, land revenue, registration and non-judicial stamp
etc.). As shown in Table 2, direct taxes in general account for less than a
fifth of the total tax revenue of the country in the recent years and the rest
is accounted for by indirect taxes.
Table 2
Periodic Averages of Direct and Indirect Taxes in
Bangladesh
(From 1991-92 to 2000-01 and 1975-76 to 1984-85)
Particulars
|
1991-92 to 1995-961
|
1996-97
to 2000-012
|
1. Direct Taxes
|
18.3
|
17.17
|
Income Taxes
|
16.62
|
15.88
|
Other direct taxes
|
1.68
|
1.29
|
2. Indirect Taxes
|
81.7
|
82.83
|
Taxes on Foreign Trade
|
55.79
|
56.38
|
(i) Import Duty
|
34.47
|
30.43
|
(ii) VAT (Import)
|
20.03
|
20.75
|
(iii) Supplementary Duty (Import)
|
1.29
|
5.2
|
Taxes on Domestic Goods and Services
|
25.91
|
26.45
|
(i) VAT (Domestic)
|
10.18
|
12.97
|
(ii) Supplementary Duty (Domestic)
|
10.12
|
11.91
|
(iii) Excise Duties
|
5.61
|
1.57
|
1975-76 to 1979-80
|
1980-81 to 1984-85
|
|
1. Direct Taxes
|
18
|
19.7
|
Income Taxes
|
12.6
|
13.7
|
Other direct taxes
|
5.4
|
6
|
2. Indirect Taxes
|
82
|
80.3
|
Taxes on Foreign Trade
|
55.8
|
56
|
(i) Import Duty
|
37.4
|
38.9
|
(ii) Export Duty
|
2.2
|
1
|
(iii) Sales (Import) Taxes
|
15.9
|
15.5
|
(iv) Other Customs Taxes
|
0.3
|
0.6
|
Taxes on Domestic Goods and Services
|
26.2
|
24.3
|
(i) Taxes on Domestic Goods
|
24.2
|
23.5
|
(a) Excise Duties
|
22.2
|
23.2
|
(b) Sales (Domestic) Tax
|
2
|
0.3
|
(ii) Tax on Domestic Services
|
2
|
0.8
|
Note:
1 and 2 after introduction of VAT; 3 and 4 before introduction of VAT.
Source:
National Board of Revenue (NBR), Bangladesh Bank (BB), Ghafur and Chowdhury
(1987) and Chowdhury (1994). (Periodic data for FY 1991-92 to FY 2000-01
compiled by TAPAN K. SARKER, Winter’2006.)
Periodic average trends of total
revenue (as % of GDP) and tax revenue
(as % of total revenue) from 1975 to 2001
The five years periodic average rate
of total revenue (% of GDP) and tax revenue (% of total revenue) from FY1976 to
FY 2001 in several time periods poses different values. During FY 1976 to FY1980
the periodic average rate of total revenue is 8.8%, from 1980-81 to 1984-85 the
average rate went up to 9.2% with its continuation until next year up to 9.35% followed
by turning down during FY1997 to FY 2001. In the whole considered period during
1991-92 to 1995-96 the periodic average rate of total revenue is the highest
and during the 1975-76 to 1979-80 the periodic average rate of total revenue is
the lowest. During FY 1976 to FY1980 the periodic average rate of tax revenue
is 5.5%, from 1980-81 to 1984-85 the average rate went up to 7.7% with its
turning down to 7.38% during FY1992 to FY 1996 and last year turning up during
FY1997 to FY 2001. In the whole considered period during 1980-81 to 1984-85 the
periodic average rate of tax revenue is the highest and during the 1975-76 to
1979-80 the periodic average rate of tax revenue is the lowest.
Periodic average trends of indirect
tax, tax revenue (as % of total revenue) and direct tax from 1975 to 2001
[Not left sight number 79-83.5
indirect tax and right sight number 0-25 for tax revenue and direct tax]
The five years periodic average rate
of indirect taxes, tax revenue (% of total revenue) and direct taxes from
FY1976 to FY 2001 in several time periods poses different values. During FY 1976
to FY1980 the periodic average rate of indirect taxes is 82%, from 1980-81 to
1984-85 the average rate went down to 80.3% next year up to 81.7% with its
continuation until next year up FY1997 to FY 2001. In the whole considered
period during 1996-97 to 2000-01 the periodic average rate of indirect taxes is
the highest and during the 1980-81 to 1984-85 the periodic average rate of indirect
taxes is the lowest. During FY 1976 to FY1980 the periodic average rate of tax
revenue is 5.5%, from 1980-81 to 1984-85 the average rate went up to 7.7% with
its turning down to 7.38% during FY1992 to FY 1996 and last year turning up
during FY1997 to FY 2001. In the whole considered period during 1980-81 to
1984-85 the periodic average rate of tax revenue is the highest and during the 1975-76
to 1979-80 the periodic average rate of tax revenue is the lowest. During FY 1976
to FY1980 the periodic average rate of direct taxes is 18%, from 1980-81 to 1984-85
the average rate went up to 19.7% with its turning down to 18.3% with its
continuation until next year down FY1997 to FY 2001. In the whole considered
period during 1980-81 to 1984-85 the periodic average rate of direct taxes is
the highest and during the 1996-97 to 2000-01 the periodic average rate of
direct taxes is the lowest
Periodic average trends of direct
tax, income tax and other direct tax
from 1975 to 2001
The five years periodic average rate
of direct taxes, income tax and other direct taxes from FY1976 to FY 2001 in
several time periods poses different values. During FY 1976 to FY1980 the
periodic average rate of direct taxes is 18%, from 1980-81 to 1984-85 the
average rate went up to 19.7% with its turning down to 18.3% with its continuation
until next year down FY1997 to FY 2001. In the whole considered period during 1980-81
to 1984-85 the periodic average rate of direct taxes is the highest and during
the 1996-97 to 2000-01 the periodic average rate of direct taxes is the lowest.
During FY 1976 to FY1980 the periodic average rate of income tax is 12.6%, from
1980-81 to 1984-85 the average rate went up to 13.7% with its continuation
until next year up to 16.62% followed by turning down during FY1997 to FY 2001.
In the whole considered period during 1991-92 to 1995-96 the periodic average rate
of income tax is the highest and during the 1975-76 to 1979-80 the periodic
average rate of income tax is the lowest. During FY 1976 to FY1980 the periodic
average rate of other direct taxes is 5.4%, from 1980-81 to 1984-85 the average
rate went up to 6% with its turning down to 1.68% with its continuation until
next year down FY1997 to FY 2001. In the whole considered period during 1980-81
to 1984-85 the periodic average rate of other direct taxes is the highest and
during the 1996-97 to 2000-01 the periodic average rate of other direct taxes
is the lowest.
Positive sides of personal taxation
Ø It is imposed according to the
ability to pay that means wealthier person needs to pay more and less wealthy
person needs to pay less.
Ø It is generally charged on the progressive
tax rate basis that means person with higher income pays more tax.
Ø As personal tax is categorized as
direct tax it can easily be administered and the cost of administration is comparatively
lower than indirect taxation.
Ø Since this taxation system doesn’t
hurt the principle of “canon of certainty”, it ensures a proper and adequate
justification.
Ø With the change of rate, quantum of
revenue can be increased or decreased.
Ø A strong financial instrument to
direct the national economy to the desired direction.
Ø It increases political consciousness.
Ø It ensures justice for people with
little income and enhances equality in the economy.
Ø Make people more vigilant and
responsible to society.
Ø Provide enough facility and exemption
for the disable, women and aged people and also for person who want to commence
a new business.
Negative sides of personal taxation
Ø It is mainly imposed on personal
income but it is difficult to define income and some confusion always remain
there.
Ø Usually tax provisions are vague and
are not specified thus create difficulties for the tax payers.
Ø There are allegations about
harassment of tax payer by tax administration.
Ø Tax payer always remains hostile to the
Govt. as payment is direct from his income and pocket.
Ø It causes a high tendency of tax
evasion and avoidance which are not competent to discharge civil
responsibilities.
Ø Maintenance of accounts and following
rules become difficult; these may cause rise of arbitrary decision of tax
officer.
Ø If tax rate is high it may discourage
saving, investment and production.
Recommendation to improve the personal
taxation scenario in Bangladesh
Ø The taxation authority may specify some of the more tax slabs under
progressive taxation to expand tax bases
Ø Beyond agriculture sector some of the important
sectors like export enhancing and entrepreneurship encouraging sectors may be
added under personal tax exemption
Ø Personal taxation should be indexed with the inflation
as in Bangladesh its a major problem which affects the fixed income earners
severely
Ø There can be some cost and benefit analyses by the
taxation authority for applying either proportional or progressive or necessarily
regressive taxation in some special cases
Ø The optimal combination among personal tax, corporate
tax and value added tax should be maintained to attain the balanced budget
References
Ø TAPAN K. SARKER, Winter’2006) pp.
181-207
Ø Bangladesh, Economic Review 2002.
Published by Economic Advisor’s Wing, Finance Division, Ministry of Finance,
Government of the Peoples Republic of Bangladesh.
Chowdhury, O. H. (1994), Incidence of Indirect
Taxation in Bangladesh, 1984-85, Research Monograph 16. Banglad
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