Assignment on personal taxation scenario of Bangladesh

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  http://www.nbr-bd.org/

Ø  Bangladesh, Economic Review 2002. Published by Economic Advisor’s Wing, Finance Division, Ministry of Finance, Government of the Peoples Republic of Bangladesh.

Ø  http://www.mof.gov.bd/en/

Chowdhury, O. H. (1994), Incidence of Indirect Taxation in Bangladesh, 1984-85, Research Monograph 16. Banglad