A Closer Look at the Income Tax Act 2023: Tax Reform in Bangladesh
Reviewing: Income Tax Act, 2023 and how it is sustainable for the overall taxation system
“Nothing can be said to be certain, except death and taxes” – a famous quote by the American Statesmen Benjamin franklin connects directly to the prevailing scenario of Bangladesh. For almost all the major services today, a citizen is asked to provide documents related to his/her income tax. Doing so, the government makes sure that the majority of the eligible population is under the radar of taxation. Why wouldn’t it do so? After all, about 80% of public revenues are derived from tax sources [1]. For the fiscal year 2022-2023, revenue receipt from NBR (National Board of Revenue) sources was 370000 Crore. [2] Although, a large number of taxpayers are still reluctant to pay taxes, tax collection is generally the biggest source of revenue for any government and also true in case of Bangladesh. Tax is basically of two types: 1) Income Tax and 2) Value Added Tax (VAT). Here the focus is more on Income Tax law and the major relevant changes in order to ensure a sustainable taxation system.
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[1] Bangladesh Economy: Recent Macroeconomic Trend: https://mof.portal.gov.bd/sites/default/files/files/mof.portal.gov.bd/page/fbec0015_547a_4cd0_ad6d_4e1f8fd07ba4/fiscal_sector.pdf
[2] Fiscal Policy and Fiscal Management: Chapter Four. Bangladesh Economic Review: https://mof.portal.gov.bd/sites/default/files/files/mof.portal.gov.bd/page/f2d8fabb_29c1_423a_9d37_cdb500260002/Chapter-4%20%28English-2023%29.pdf
Tax is basically of two types:
1) Income Tax and
2) Value Added Tax (VAT).
Here the focus is more on Income Tax law and the major relevant changes in order to ensure a sustainable taxation system.
Like any other developing nation, people are generally reluctant to pay taxes. Even if governments undertake strict policies to maximize the number of taxpayers, most of the time it does not work. For example, NBR (National Board of Revenue) anticipated the number of taxpayers as approximately 7.4 million, where in real they ended up getting only 2.3 million tax returns, which is shockingly low. So, the idea is to generate maximum number of tax returns as well as guiding the overall journey of a taxpayer. In a country like Bangladesh, where national revenue directly effects the livelihood of an individual, revenue from income tax is significant for government and therefore the people of the country to survive. Since, Income Tax as a source, generates the maximum portion of the whole revenue of the government, this particular system needs to run almost flawlessly. In order to regulate taxation, a proper set of regulation must be there. Bangladesh for a very long time was running by an old guiding law which required number of modifications here and there. In the year 2023, the state replaced the Income Tax Ordinance, 1984 with the awaited Income Tax Act, 2023 updating the overall taxation laws. It brought a number of changes relating to various aspects of tax, directing the overall taxation system to new direction. There are some major changes in the Act, 2023, which are going to be discussed throughout this article The article’s goal is to provide an overview of the upgrades as well as the remaining parts, along with their advantages and disadvantages. Here a comparison between the Income Tax Act,2023 and the Income Tax Ordinance,1984 or regulations prior to ITA, 2023, is given below:
Comparison between the Income Tax Ordinance, 1984 and Income Tax Act , 2023
| Subject | Income Tax Ordinance, 1984 or Prior to ITA, 2023 | Income Tax Act, 2023 |
|---|---|---|
| Income Tax Slab/Rate- Refers to ranges of income tax rates based on different taxable incomes of a taxpayer. | Up to Tk 3 lac – 0% On next Tk1 lac- 5% On next Tk 3 lac- 10% On next 4 lac- 15% The next 5 lac- 20% Rest of the money -25% | Up to Tk 3.5 lac – 0% On next Tk1 lac- 5% On next Tk 3 lac- 10% On next 4 lac- 15% The next 5 lac- 20% Rest of the money -25% |
| Decrease of Excessive WHT return statements – ‘WHT’ stands for withholding tax refers to tax deducted at source. A taxpayer is required to submit WHT statements during the return submission. | 29 | 12 |
| Precise deduction List | Previously the deduction list was scattered in different provisions. | The new list is specifically structured in four different categories. 1. General deduction, 2. Specific deduction, 3. Bad debt 4. Financing expenses |
| Simplification for tax exemption- tax exemption indicates to the amount of income or transactions that are free from tax | Previously the exemptions were categorized under different headings eventually amounting to 450000 Tk. | One Third of the total income or 450000 Tk. Whichever is less. |
| De-registration of E-TIN- If for any reason a taxpayer is willing to discontinue with the TIN | No laws regarding de-registration | Introduced laws specially for the purposes of- 1. Leaving Bangladesh, 2. Winding up 3. Closure of Branch/liaison office. 4. Deceased person |
| Proof of Submission of Tax Return for Different Services- in order to get various government or non-government services a taxpayer is required to submit the PSR | 38 | 43 |
| Exemption on Income of SPVs | 1. Alternative Investment Fund 2. Issuer of Mutual Funds | 1. Alternative Investment Fund 2. Mutual Funds 3. Real Estate Investment Trust 4. Exchange Traded Fund |
| Excessive Minimum Tax on Gross Receipt | Cigarettes – 1% Carbon Beverages - 0.60% | Cigarettes- 3% Carbon Beverages – 5% |
| Environmental surcharge on the additional vehicle – refers to the additional payment that is added with the original payment for something. | No environmental surcharge | Individuals having more than one personal vehicle will have to pay environmental surcharge on the additional vehicle |
| Simplicity in Language and Provisions. Penalty for failure of filling income tax return | English and scattered in several headings Tk.25000 with Tk.500 per day for continuation of default | In simple Bengali with precise categorization Tk.50000 with Tk.500 per day for continuation of default |
| Penalty for not maintaining accounts in prescribed manner | Tk. 100 | Tk. 5000 |
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Apart from the above-mentioned changes there are also some modifications in the ITA,2023 Regarding different aspects of income. Also, it is not necessary that all the changes would bring positive outcomes only, so there are sectors which are totally unchanged. For example, corporate tax for FY 2023-24 remains unchanged. Some of the crucial topics in this regard are mentioned below:
Modifications in the Income Tax Act, 2023
| Subject/Entity | Tax Rate | Comment |
|---|---|---|
| Listed Companies with more than 10% paid-up capital raised through initial public offering (IPC) | 20% | The rate is increased to 22.50% if the conditions are not met. |
| Listed companies with 10%or less paid-up capital raised through Initial public offering (IPC) | 22.50% | The rate is increased to 25% if the conditions are not met |
| One person Company (OPC) | 22.50% | The rate is increased to 25% if the conditions are not met. |
| Private Limited Companies (Not publicly traded) | 27.50% | The rate is increased to 30%if the conditions are not met |
| Listed banks, insurance and other financial institutions, including mobile financial service providers | 37.50% | |
| Unlisted banks, insurance and other financial institutions, including mobile financial service providers | 40% | |
| Merchant Banks | 37.50% | |
| Tobacco Manufacturer | 45% | Additional 2.5% surcharge as tobacco |
| Listed Mobile phone operators | 40% | |
| Unlisted Mobile phone operators | 45% | |
| Ready-made garment manufacturers and exporters | 12% | 10% in case of green building certifications |
| Export oriented companies | 12% | 10% in case of green building certifications |
| Textile Industries | 15% | |
| Jute goods exporters | 10% | |
| Trust | 27.50% | The rate is increased to 30% if the conditions are not met |
| Co-operatives | 15% | |
| Dividend tax for corporate | 20% |
For the time being there are some provisions which are unclear and lacks functionality. For example,
1) The whole act is in Bengali language therefore it might cause difficulties for foreign investors and officials.
2) The mapping and indexing of the sections are absent in this Act, which will make it harder to search for specific issues.
3) Another question is, what is the significance of obtaining an exemption approval certificate from the NBR when the legislation has granted exemption to specific companies and taxpayers? The applicability of the new act is still unclear if approval for tax exemption or exemption from NBR is still required.
4) Another problematic clause in the Act is the calculation of special business revenue under section 55. Any amount disallowed for failure to deduct taxes at source will be taxed separately at the standard rate when determining a company’s income. For the purpose of realizing taxes not deducted at source, including two percent interest, there is a separate section (143). Why should the business receive two separate penalties for the same error? [1]
5) The primary concern is that Section 163 of the Act imposes a minimum tax on the assessee, which is in fact greater than taxes withheld at the source, taxes computed on an income basis on a regular basis, and turnover taxes based on gross receipts. This is a problematic legal provision. Because any tax that is deducted at source is not refundable under the aforementioned rule, and any loss that is computed and subject to minimum tax is not modifiable.
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[1] https://thefinancialexpress.com.bd/views/pros-and-cons-of-the-new-income-tax-law
Apart from that, the laws are reasonable and consistent with the current tax administration procedures. It is anticipated that the Income Tax Act of 2023 will advance the field of taxes and provide crucial measures to support the nation’s economic growth. It is expected that the Income Tax Act, 2023 will accurately run Bangladesh’s tax system provided that the relevant amendments and confusing legislation are properly updated. Finally, in light of the broad scope of taxation, the authorities should review the various aspects of the Income Tax Act 2023 and implement the necessary measures to correct, modify, and amend the Act if necessary.
References:
- Bangladesh Economy: Recent Macroeconomic Trend: https://mof.portal.gov.bd/sites/default/files/files/mof.portal.gov.bd/page/fbec0015_547a_4cd0_ad6d_4e1f8fd07ba4/fiscal_sector.pdf
- Fiscal Policy and Fiscal Management: Chapter Four. Bangladesh Economic Review: https://mof.portal.gov.bd/sites/default/files/files/mof.portal.gov.bd/page/f2d8fabb_29c1_423a_9d37_cdb500260002/Chapter-4%20%28English-2023%29.pdf
- https://thefinancialexpress.com.bd/views/pros-and-cons-of-the-new-income-tax-law