Basic of Income Tax

7/29/2019 Basic of Income Tax

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Md. Ziaul Haque

Department of businessAdministration

East West University.

TaxationCourse Code-ACT 311


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Meaning of Public Finance

Public finance is a science that deals with the income

and expenditure of public bodied and the government of a

nation. The government of a nation has to perform two

types of functions (a) obligatory function ( Defense,

maintenance of law and order situation (b) Optionalfunction ( providing various facilities to its citizens such

as infrastructure, health, environment. To meet this

expenditure govt. raise fund from public in the form of

taxes, fees, penalties, sale of goods and servicesAccording to H.L Lutz. Public deals with the provisions,

custody and disbursement of resources needed for the

conduct of public or governmental functions


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Definition of Tax

Tax is a contribution exated by the state.

It is a compulsory levy, to be paid by the citizens who are liable to

pay it, imposed by the government

According to P.E Taylor, Taxes are compulsury payment to

government without expectation of direct return in benefit to the

tax payers.

According to Dalton, A tax is a compulsory contribution imposed

by a public authority irrespective of the exact amount of service

rendered to the tax payer in return and not imposed as penalty for

any legal offense

According to section2(62) of ITO 1984, " Tax means the incometax payable under this Ordinance and includes any additional tax,

excess profit tax, penalty, interest, fee or other charges leviable or

payable under this Ordinance;

So we can say taxes are compulsory contribution by the taxpayers

to the government.


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Reason for paying tax

Get medical facilities at lesser cost in public hospital

Our children get education at nominal cost in public schools and

universities

Enjoy the benefit of roads & bridges

Police, fire brigade and many government agencies ensure oursafety and security

Benefit of state run museums, public libraries and academics

Benefit of afforestation program, family planning, relief and

rehabilitation for poor, women and old

Govt. manage natural calamities like flood, river-erosion &earthquake

Provides an opportunity for rich to contribute to the wellbeing of

poor


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Characteristics of tax

Tax is payment to government by people as itlevied by the government

Payment of tax is non-penal and compulsory

To ensure public interest To finance the govt. expenditure

Tax is not cost of benefit conferred by the govt.

on the public

It is the prime of source of govt. revenue

Tax is not any fine or penalty

Tax can only be imposed by govt.


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Purpose/objective of taxation

Taxation is a major source of revenue for thegovernment. It is a way of transferring the resources from

private/non government to government sectors

Revenue Collection: In Bd 80% of total govt revenue

Reduction of Inequalities income and wealth:

Accelerating economic growth: Raises the rates ofinvestment and savings. Savings must be invested in productive sector

Control of consumption.: such as toxic material, more tax on

luxury goods

Protection of local industries: Govt. provide tax incentive forlocal industries

Economic development: construction of infrastructure, poverty

alleviation programs, social security program etc.


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Canon of Taxation

Canon of taxation of taxation refers to the administrative aspect

of tax. They relate to the rate, amount and method of levy and

collection of a tax.Adam smith has given four canon

Canon of equality: Burden of taxation must be shared equally.

means rich bear more tax and poor will less tax Canon of certainty: Tax should be certain and not arbitrary

Canon economy: take out and to keep out of pockets of thepeople as little as possible, over and above what brings into

the public treasury.

Canon of convenience: that must be convenient fro thecontributor to pay


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Canon of Taxation Canon of productivity: must adequately cover

govt.expenditure

Canon of simplicity: tax rate, tax system ought tosimple, plain and intelligibele to the common

understanding Cannon of elasticity: tax system should be flexible

so that the autority can change the system

conveinently

Canon of diversity: should not be based on singletax or few tax. should be mixture of direct and indirect

tax

Canon of Functional efficiency: so that it cangenerate sufficient revenue an be able to to reduce

harassment and tax avoidance


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Classification of tax

Classification on the basis of number of taxes: a.Single taxb.Multiple tax

Classification on the basis of impact and incidence oftaxes: a. Direct tax e.g incometax.land revenue taxb.Indirect tax e.g VAT,Customs duty

Classification on the basis of structure of taxe rate:

a.Propotional tax: whatever the size of income the rates of

taxation remains constant.

b.progrsive tax: the rate or taxation increases as the taxable

income increases.It is more equitable

.c.Regressive tax : burden falls more on poor than rich.

d.DegressiveTaxes ; which is midly progressive so that high

income does not sacrifice more


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Classification of tax Classification on the basis of subject matter of taxes:

a.Personal tax e.g Income tax b.In Rem tax: levied on some

activities or objects e.g sales tax,wealth tax

Classification on the basis of elasticcity of taxes:

a.Elastic tax (rate changes more than tax base changes)b.inelastic tax (rate changes less than tax base changes)

Classification on the basis of taxe base:

a.Income tax b.Wealth tax c.Value added tax c.Expenditure tax

Classification according to changes of government revenue:

a.Positive tax b.Negative tax Classification according to taxing authority:

a.Central tax e.g Income tax,wealth tax b.Local tax e.g. Union

parshad tax,city corporation tax,municipal tax


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Difference between Direct tax and Indirect tax

Burden cannot be shifted but burden can be

shifted

D.T imposed on income but I.T imposed on

goods and personal services D.T generally in progressive nature but IT

can not be made progressive.

D.T generally elastic but I.T is inelastic

Since the burden is not shifted so It has

adverse effect on taxpayers willingness to

work and save but I.T has no adverse effect


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Characteristics of a good Tax System

should be levied on the basis of fundamental principles of

taxation

Should be equitable, convenient to pay, economical, certain,

productive and elastic

should be balanced containing both direct and indirect nature of

taxes

tax authority should be supported by sufficient simple laws and

rules

should have positive effect on both production and distribution

without any adverse effect Productive resources of the economy are optimally allocated and

utilized.

A good tax system has least collection cost

No scope for the evasion of tax by the tax payer


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Tax Structure of Bangladesh

Multiple tax system: a. taxes on income and profit: i. Income tax-company ii Income tax

other than company

b. Taxes on property & capital transfer: 1.Estate duty 2.Gift tax

3.Narcotics duty 4.Land revenue 5.Stamp duty-non judicial

6.Registration

c. Taxes on good and services: 1.Custom duties 2.Excise duties

3.VAT 4.Supplementary duty on luxury item 5.Taxes on vehicle

6.electricity duty 7. other tax( travel tax, turnover tax)

Inadequate and stagnant revenue yield relative to GDP:

High ratio of indirect to direct tax revenue

Dominance of VAT and import duty;

Tax avoidance behavior

Narrow tax base


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Definition of Income tax

Income tax is the tax which is levied on the taxable

income of a person or entity as per provision of the income

tax ordinance 1984

Where an Act of Parliament provides that income tax shallbe charged for any assessment year at any rate or rates,

income tax at that rate or those rates shall, subject to the

provisions of that Act, be charged, levied, paid and

collected in accordance with the provisions of this

Ordinance in respect of the total income of the income year

or income years, as the case may be, of every person


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Role of income tax in economicdevelopment of Bangladesh

Tax holiday Scheme: Investment allowance:

Accelerated depreciation allowance:

Tax incentives or small & cottage industry: Tax incentives for encouraging savings:

Tax exemption on certain expenditure:

Tax incentives for foreign investors

Allowance for Scientific research

Tax incentive for remittance in Bangladesh


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Scope of Bangladesh income Tax Law

The income tax ordinance,1984 Income tax rule,1984

Finance Act SRO(Statutory regulatory order) Judicial Decision

Other general and special ordersmade or explanations given orcircular issued by the NBR


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Determination of Income year

"income year", in respect of any separate source of income, means- (a) the financial year immediately preceding the assessment year; or

(b) where the accounts of the assesses have been made up to a date withinthe said financial year and the assesses so opts, the 12 months ending on

such date.e.g Assesse accounting year ends 31st march 2011 then income

year will be 1st April 2010 to march 2011 ( IY 2010 -2011 & 2011-2012)

(c) in the case of a business or profession newly set up in the said financialyear, the period beginning with the date of the setting up of the business orprofession and -

(i) ending with the said financial year; if the business set up is 1st October2010 then income year will be 1st October to June 2011 ( IY 2010 -2011 &Fy 2011-2012).or

(ii) where the accounts of the assesses have been made up to a date withinthe said financial year and the assesses so opts, ending on that date If the

assesse set up business 1st october 2010 and end 31st march then income

year 1st october 2010 to 31st march 2011 (IY 2010-2011& 2011-2012) or

(d) in the case of a business or profession newly set up in the 12 monthsimmediately preceding the said financial year


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i) if the accounts of the assessee have been made up to a date within the said financialyear and the period from the date of the setting up of the business or profession to the

first-mentioned date does not exceed twelve months, then, at the option of the assesses,

such period, e.g if the assesse setup business 1st November 2009 and end ups 31st

march 2010 but assessment year is 2011-2012 ,So income year will be 1st November

2009 to 31st march 2010 or

(ii) if any period has been determined under sub-clause (e), then the period beginning

with the date of the setting up of the business or profession and ending with the last dayof that period, as the case may be; or

(e) in the case of any person or class of persons or any business or profession or class ofbusiness or profession such period as may be determined by the Board or by such

authority as the Board may authorise in this behalf;

(f) in respect of the assessee's share in the income of a firm of which the assessee is apartner and the firm has been assessed as such, the period determined as the income

year for the assessment of income of the firm;

g) where in respect of a particular source of income an assessee has once beenassessed or where in respect of a business or profession newly set up, an assessee has

once exercised the option under sub-clause (b) or sub-clause (c) (ii) or sub-clause (d) (i)

then, he shall not, in respect of that source, or, as the case may be, business or

profession, be entitled to vary the meaning of the expression "income year" as then

applicable to him, except with the consent of the Deputy Commissioner of Taxes upon

such conditions as the Deputy Commissioner of Taxes may think fit to impo



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Income year is financial year which is used to determine thetax base of income tax

It may be any year(not exceeding 12 months) as desired by

assessee

If the financial year of assess ends within 30th June ,the said

financial year will be his income year and the subsequentyear will be assessment year.

If the financial year ends after 30th June his income year will

be the next financial year and assessment year will be

subsequent year of the income year.

In case of a newly setup business duration of first year maybe less than 12 months.

For share of income from partnership firm, firms income year

is applicable


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Firm Incomeyear ended on

Financial year inwhich last dateof income yearfalls

Income year forTax purpose

Assessmentyear

30-06-2004 2003-2004 2003-2004 2004-2005

31-12-2004 2004-2005 2004-2005 2005-2006

13-04-2004 2003-2004 2003-2004 2004-2005

31-11-2004 2004-2005 2004-2005 2005-2006

26-04-2002 2001-2002 2001-2002 2002-2003


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Importance of Income Year Computation of total Income:Assesse has to

pay only on income earned in come year not in

previous year or subsequent year.

Investment Allowance: Investment Allowanceis allowed only on amount invested in incomeyear

Residential Status: It is determined on the

basis of his staying in income year notassessment year

Submisssion of Accounts:Account submittedon the basis of income year


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Assessment year

assessment year" means the periodof 12 months commencing on the first

day of July every year; and includesany such period which is deemed,

under the provisions of this Ordinance,

to be assessment year in respect ofany income for any period;


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Assesse & Person "Assessee", means a person by whom any tax or other sum of

money is payable under this Ordinance, and includes

(a) every person in respect of whom any proceeding under thisOrdinance has been taken for the assessment of his income or the

income of any other person in respect of which he is assessable, or

of the amount of refund due to him or to such other person; (b) every person who is required to file a return under section 75,

section 89 or section 91;

(c) every person who desires to be assessed and submits his returnof income under this Ordinance; and

(d) every person who is deemed to be an assessee, or an assesseein default, under any provision of this Ordinance;

person" includes an individual, a firm, an association of persons, a Hinduundivided family, a local authority, a company and every other

artificial juridical person;


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Classification of Assesse

On the basis of Person:

# Individual # Company #Firm #Local

Authority e.g Municipal Corporation,

Cantonment board # Hindu Undividedfamily # Artificial Judicial Person e.g

Dhaka university, BRTC # Association

of PersonOn the basis of Residential Status

# Resident #Non Resident


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Residential Status determinationCategory Rules to be Resident Rules to be non Resident

Individual He is in Bangladesh for 182 days

or more year in a income year

Or

For 90days or more income year

and 365 days or more during

4years immediately preceding theIY

None of the condition

fulfilled

HUF,AOP& Firm Control and Management is

situated wholly or partly in

Bangladesh in IY

Control and Management

is situated wholly or partly

outside Bangladesh in IY

Company Control and Management is

situated wholly in Bangladesh in IY

Control and Management

is situated wholly or partly

outside Bangladesh in IY


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Residential Status of IndividualDid Assesse reside incountry 180 days in IY

Resident

Did Assesse reside

in country 90 days

or more in IY Did Assesse reside in

country 365 days or

more in during 4years

immediate preceding IY

Non

Resident Is assesseBangladeshi Citizen

Non resident

Foreigner

Non resident

Bangladeshi


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Effects of Residential Status in Assessing income

Particulars ofincome

Status of Income Resident Non Resident

Income received

or deemed to be

received in BD

BD income Taxable Taxable

Income earned or

deemed to be

earned in BD

BD income Taxable Taxable

Income accrued

arouse outside inBD

Foreign income Taxable Non-Taxable


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Tax Rate (Assessment Year- 2012-13) :

Other than Company : For individuals other than female taxpayers, senior

taxpayers of 65 years and above and retarded taxpayers,tax payable for the

First 2,00,000/- Nil Next 3,00,000/- 10% Next 4,00,000/- 15%

Next 3,00,000/- 20% Rest Amount 25%

For female taxpayers, senior taxpayers of age 65 yearsand above and , tax payable for the

First 2,25,000/- Nil Next 3,00,000/- 10% Next 4,00,000/- 15%

Next 3,00,000/- 20% Rest Amount 25%

For retarded taxpayers threshold limit is TK.2,75,000

Minimum tax for any individual assessee is Tk. 3,000

Non-resident Individual 25% (other than non-resident

Bangladeshi)


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Tax Rate (Assessment Year-2012-13) : For Companies Publicly Traded Company 27.5%

Non-publicly Traded Company 37.5%

Bank, Insurance & Financial Company (Except merchant bank)

42.5%

Merchant bank 37.5%

Cigarette manufacturing company 42.5%

Publicly traded cigarette company 35%

Mobile Phone Operator Company 45%

Publicly traded mobile company 35%

If any publicly traded company declares more than 20% dividend, tax

rate would be 24.75% and if declares less than 10% dividend tax rate

would be 37.5%.

If any non publicly traded company transfers minimum of 20% shares

of its paid-up capital through IPO(Initial Public Offering) it would get

10% rebate on total tax in the year of transfer.


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Income Tax Authorities: National Board of Revenue, Chief commissioner of taxes

Director General of Inspection (Tax),

Commissioner of Taxes (Appeals),

Commissioner of Taxes (LTU)

Director General (Training),

Director General Central Intelligence Cell (CIC),

Commissioner of Taxes,

Additional Commissioner of Taxes (Appeal/Inspecting),

Joint Commissioner of Taxes(Appeal/Inspecting ),

Deputy Commissioner of Taxes,

Tax recovery officer,

Assistant Commissioner of Taxes,

Extra Assistant Commissioner of Taxes,

Inspectors of Taxes.


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(a) any income, profits or gains, from whateversource derived, chargeable to tax under any

provision of this Ordinance under any head

specified in section 20;

(b) any loss of such income, profits or gains; (c) the profits and gains of any business of

insurance carried on by a mutual insurance

association computed in accordance with

paragraph 8 of the Fourth Schedule; (d) any sum deemed to be income, or any income

accruing or arising or received, or deemed to

accrue or arise or be received in Bangladesh under

any provision of this Ordinance:

Definition of Income In ITO


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Sources of Income

For the purpose of computation of total income and chargingtax thereon, sources of income can be classified into 7

categories, which are as follows :

Salaries U/S 21

Interest on securities U/S 22 Income from house property U/S 24

Income from agriculture U/S 26

Income from business or profession U/S 28

Capital gains U/S 31 Income from other sources. U/S 33

Income from spouse or minor child as applicable U/S43(4)


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Classification of Income On the basis of Locality:

Domestic Income

Foreign Income

On the basis of Assessment

Non Assessable income

Assessable income ; a.Tax free income e.g

income from partnership firm and incomefrom Association of person if tax paid b. Tax

credit income c. Tax payable income


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List of Investment on which

Allowance allowed Life insurance premium up to 10% of the face value.

Contribution to Provident Fund to which Provident Fund Act, 1925

applies.

Self contribution and employer's contribution to Recognized Provident

Fund.

Contribution to Supper Annuation Fund. Contribution up to TK 60,000 to deposit pension scheme sponsored by

any scheduled bank or a financial institution.

Investment in approved debenture or debenture stock, Stocks or Shares

Contribution to Benevolent Fund and Group Insurance premium

Contribution to Zakat Fund Donation to charitable hospital approved by National Board of Revenue

Donation to philanthropic or educational institution approved by the

Government

Donation to socioeconomic or cultural development institution

established in Bangladesh by Aga Khan Development Network


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List of Investment on which

Allowance allowed Donation to ICDDRB, Donation to philanthropic institution-CRP, Savar, Dhaka

Donation up to five lac to (1) Shishu Swasthya Foundation Hospital

Mirpur, Shishu Hospital, Jessore and Hospital for Sick Children,

Sathkhira run by shishu swasthya Foundation, Dhaka. (2) Diganta

Memorial cancer Hospital, Dhaka, (3) The ENT and Head-Neck

cancer Foundation of Bangladesh, Dhaka and (4) Jatiya Prtibandhi

Unnayan Foundation, Mirpur, Dhaka;

Donation to Asiatic society of Bangladesh

Donation to Muktijudha Jadughar

Donation to National level institution set up in memory of liberation

war;

Donation to National level institution set up in memory of Father of

the Nation

Any investment by an individual in Bangladesh Government Treasury

Bond;

Investment in purchase of one computer or one laptop by an

Basic of Income Tax

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