Abstract

This study aims to illustrate the personal taxation system in Bangladesh; while arguing the systems drawbacks as well. Specifically, this paper looks into the different direct taxes imposed on individuals, the rules and regulations of how personal taxes of any individual are being assessed. For an under-developed country like Bangladesh, the personal taxation policies should be very strict, and very effective in order to accelerate the economic growth of this country and eradicate poverty. Considering the economic condition of Bangladesh then, with taking the taxation system of Bangladesh as a whole with setting its spotlight on the personal taxationthe report indulges into discovering that, are the personal taxation policies aiding the economy and government expenditures as expected or not. The report lately discusses about tax evasion and avoidance very briefly, while it will be still emphasizing on the personal taxation issues and the implications.

Keywords: Personal Taxation policies, Income Tax Ordinance 1984, Assessee, Assessment year, tax revenue.

Study Context:
The primary context of this report is to discuss the personal taxation scenario of Bangladesh, which includes the personal taxation rules and regulations, origin of the tax policies, personal taxation systems benefits and its effectiveness.

Methodology:
Most of the data used in this report are collected from secondary sources, such as online journals, & books from the website of The Institute of Cost and Accounting Management (ICMA) Bangladesh, the documents of National Board of Revenue (NBR) Bangladesh and Ministry of Finance (MOF), and some other external journal and news sources.

1.0 Introduction
Historically, in Bangladesh, tax revenue make up a major part of the countrys internal resources. According to Article 152(1) of the Constitution of Bangladesh, taxation includes the imposition of any tax, rate, duty or impost, whether general, local or special, and tax shall be construed accordingly. However, tax revenue comprises of Income Tax, Customs Duty, Value Added Tax (VAT), Excise Duty (SD), Infrastructure Development Surcharge (IDSC), and Travel Tax. The National Board of Revenue (NBR), under the internal Resources Division of the Ministry of Finance is responsible for the collection of all taxes. Major tax laws in Bangladesh are: the Customs Act, 1969, Income Tax Ordinance, 1984 and the VAT Act, 1991, the Travel Tax Act, 2003; The Provisional Collection of Taxes Act, 1931 complements customs and VAT collection. Tax System in Bangladesh can be divided in three partswhich are: Income Tax, Customs Tax, and Value added Tax (VAT). Considering the Personal Income Tax scenario of Bangladesh, the tax base is too narrow with the number of taxpayers registered 1.25 million (which is only 0.94 percent of the total population of about 133 million). On the other hand, the tax law of this country is full of exemptions and allowances as well. There is always a controversy whether this sector is extra protected or not and if yes to continue for how long. There are many affluent people lying in the category of agricultural income and more such people avoiding taxes showing their entire income as a means of agriculture. It is widely known that very few people even among the registered taxpayers pay any tax in the form of income taxes in Bangladesh. Major share of income taxes come from the corporate sector and there is always an uneasy feeling having its higher rates. It has been said that, about 100 foreign investors pay 60 percent of the total revenue to the exchequer in Bangladesh. Taxes imposed are usually in progressive rates and maximum collection is done at source under withholding tax system. In Bangladesh, income tax for government employees is deemed

paid by the employer that is by the government, considering the fact that they are underpaid. However, in case of private sectors, such payments are considered income, which creates additional tax burden for the employee of the private firms. This is discriminatory and obviously encourages employees of private firms to avoid or evade taxes. So, in reality very few people share the burden of income taxes in Bangladesh and thus it is a real problem for the government to distribute the tax incidence in a fair manner.

2.0 Personal Taxation Scenario at a Glance

Basis Residents are taxed on worldwide income; non-residents are subject to tax only on Bangladesh source income. Residence An individual is resident for tax purposes if he/she is in Bangladesh for more than 182 days in the tax year, or during the preceding 4 years, was in Bangladesh for a total of at least 365 days and is in Bangladesh for any time in that income year for at least 90 days. Filing status Joint returns are not permitted; each individual must file a separate return. Taxable income As with companies, taxable income is divided into heads of income, which include income from employment, income from the exercise of a profession, income from property, capital gains and other income. Capital gains Capital gains are taxed as a head of income at the applicable personal income tax rate. Deductions and allowances Various personal allowances are granted. Deductions are possible where expenses are incurred in deriving taxable income.

Rates Personal income tax is progressive from 0% to 25%, but individuals must pay a minimum of BDT 2,000 per year. Non-resident individuals are taxed at a flat rate of 25%. Other Taxes on individuals: Capital duty No duty taxes are levied on individuals of Bangladesh. Stamp duty Stamp duty is levied on various documents, including leases and the transfer of shares, at rates ranging from 0.2% to 5%, depending on the transaction. Exemptions are available for certain transactions. Capital acquisitions tax No Real property tax Tax is levied on real property and buildings at varying rates. Inheritance/estate tax No estate tax is imposed on individuals. Net wealth/net worth tax No net worth tax is imposed by the Bangladesh government on individuals. Social security No social security tax is also applicable. Administration and Compliance: Tax Year The tax year generally is 1 July-30 June. Filing and payment Individuals must file a tax return by 30 September following financial year, unless an extension is obtained. Penalties Penalties are imposed for late filing, failure to file a return or failure to pay tax; concealment of income, failure to maintain proper records; and failure to provide required documents.

Value added tax:

Taxable transactions VAT is levied on the supply of goods and services, and the import of goods. Rates The standard rate is 15% with certain exceptions for supplies of services. Registration VAT registration is required if annual turnover is BDT 6 million and if the person is engaged in import and export business. Filing and payment The VAT return must be submitted within 15 days of the following month.

Source of tax law: Income Tax Ordinance (#36) 1984; Income Tax Rules, 1984; Value
Added Tax (#22) 1991.

Tax treaties: Bangladesh has concluded 27 tax treaties. Tax authorities: National Board of Revenue (NBR).

3.0 Assessment of Individuals

3.1 Definition of Individuals The word individual has special meaning in income tax law. To look at the its reference in tax law, we should look at two definitions, i.e. assessee and 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 this Ordinance 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 return of income under this Ordinance; and (d) every person who is deemed to be an assessee, or an assessee in default, under any provision of this Ordinance [Section 2(7)]. "Person" includes an individual, a firm, and an association of persons, a Hindu undivided family, a local authority, a company and every other artificial juridical person [Section 2 (46)].

Thus, the word assessee means a person that includes an individual who is liable to pay tax as per Income Tax Ordinance, 1984. This chapter presents the assessment of income of individuals and computation of tax liability of an individual assessee. 3.2 Scope of Income of Individual Assessee As per section 20 of IT Ordinance 1984, for the purpose of charge of income tax and computation of total income, all incomes shall be classified and computed under the following heads of income, namely (a) Salaries. (b) Interest on securities. (c)Income from house property. (d) Agricultural income. (e)Income from business or profession. (f) Capital gains. (g) Income from other sources.

3.3

Non-assessable and Tax Credit Income Some categories of income are declared as non assessable by the National Board of Revenue (NBR), which are listed in NBR website. Thus, at the time of assessment, it is important to know the items of non-assessable income so that it can be excluded at the time of computing taxable income. Again, tax credit income is such categories of income that can be used to claim tax rebate for using such income in allowable investment categories. The economic rationality of these provisions is embedded in the equation of income in economics:

Y = C+I Where, Y represents Income, C represents Consumption and I represents Investment. Income Taxable Non-assessable = Consumption + Investment Allowable investment Disallowed investment

To reduce the tax burden, some specific income from specific sources is declared non-assessable on which no tax is imposed. Again, to discourage consumption and motive investment, some investments are allowed for claiming investment tax credit at the rate of 10%. 3.4 Grossing Up of Income Another important issue is the grossing up of income which is received by the assessee after deducting taxes at specified rate at sources. The equation used to gross up income is given below:
Gross income = Net income X 100 100 Rate of tax deducted at source

Thus, for grossing up income, it is important to know the rate of TDS. Only income received after tax is required to gross up. Grossed up income should be included in calculating taxable income, however, tax already paid will be claimed as credit at the time of computing net tax liability. 3.5 Tax Rate of Individuals Individuals are taxed as per the five tier taxation system as applicable to Bangladesh. However, these rates are same for every individual including Bangladeshi Non-residents, HUF, Firm, AOP and every other artificial judicial person. Current rates applicable to individuals on taxable income are: Income tier On the first On the next On the next On the next On balance Tk. 2,20,000a Tk. 3,00,000 Tk. 4,00,000 Tk. 3,00,000
b

Rates Nil 10% 15% 20% 25%

the ****

Note: a) The non-assessable income limit will be as follows: For women and elderly citizens being more than 65 years Tk. 225,000 of age For disable persons For others Tk. 250,000 Tk. 220,000

b) If the aggregate income of an individual exceeds Tk. 1,180,000 (Tk. 180,000 + Tk. 300,000 + Tk. 400,000 + Tk. 300,000), he will be charged at maximum 25% on such income as it exceeds Tk. 1,180,000. c) However, the minimum tax would be Tk. 2,000. d) If the assessee is an owner of any small and cottage industry or engaged in such kind of activities in a NBR specified less developed / least developed area, he/she will be eligible to have a tax rebate on such income:

If production / turnover increases by 5% rebate on tax applicable on such more than 15% but less than 25% income will be allowed comparing to previous year If production / turnover increases by 10% rebate on tax applicable on such more than 25% comparing to previous income will be allowed year

e) Only individual assessee having net wealth exceeding Tk. 2 (two) crore as per wealth statement is liable to pay surcharge @10% on income tax payable effective from the assessment year 2011-12. f) However, the rate of tax would be flat 25% (at maximum rate) if the individual assess is classified as non-resident foreigner (NRF). 3.6 Procedure of Assessment Step 1: Compute taxable income under different heads. [Non-assessable income and grossing up of income are to be excluded at the time of computing taxable income is specified areas] Step 2: Compute allowable investments made

[The actual investment must be tested, so that it must not exceed the maximum limit. If it exceed maximum limit, allowable investment would be the lower one] Step 3: Compute net tax liability [One must consider tax credit due to TDS, refund adjustment, rebate, double taxation relief, rebate on additional income and rebate on income from partnership firm]

4.0 The Political Economy of Personal Taxation in Bangladesh

For an under-developed countrysuch as Bangladeshit must adopt a tax policy which may raise the rates of savings and capital formation in the country, to accelerate its economic growth. Since private investment is not adequate for the purpose, the government has to make up the deficiency of private investment by increasing public investment and for that purpose raises resources through taxation. There are several advantages of increasing savings and investment through taxes. (a) Taxation is the only effective weapon by which private consumption can be curbed and thus resources transferred to the State can be transferred from one place to another or from one region to another region. (b) Through taxation inequalities in income and wealth can be reduced. But the theory of increasing savings for Bangladesh somewhat seems unfeasible. Indeed the problem appears far more difficult and possibly much more unfair. In fiscal year (FY) 2011 Bangladesh collected a total of 10 per cent of gross domestic product (GDP) as tax revenues. Of this, personal tax accounted for a mere 1.0 per cent of GDP and corporate profit tax for 2.0 percent of GDP. This is a pitiable performance by any standards. Low tax revenue has severely constrained the ability of the government to finance expenditures that provide benefits to the poor, including health, education, water supply and safety net programmes. It has also constrained the ability of the government to improve the infrastructure situation that is constraining economic growth and employment. Faced with citizen's growing unhappiness with the poor state of public services, the government has been providing open-ended subsidies on energy, fertiliser and food as well as operating a number of safety net schemes. The financing of these expenditures is done partly through the banking system. Deficit financing in turn is feeding on monetary expansion beyond prudent limits and thereby contributing to rapid inflation. In September

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2011 the inflation rate climbed to 12 per cent, which is the highest level since December 1998. On the other hand, the tax system of this country leaves people with lots of tax exemptions and rebates; and the system is quite frequently questioned for its transparency and corrupt activities. It seems there is a huge confusion between tax evasion and avoidance. Tax evasion refers to the illegal act of suppression or understatement of the income. Tax avoidance on the other hand is an arrangement by which the taxpayer reduces his true tax liability by legal methods. The difference between evasion and avoidance is only of degree as in both the cases there is leakage of revenue which increases the burden of tax on other taxpayers who do not resort to such practices. This leads to black money which is utilized secretly in illegal transactions for earning more and more money. This vicious circle of tax evasion breeds into cancerous growth of black money. A recent study by Md. Shawkat Ali Waresi (December 2010) titled The Black Economy of Bangladesh : Taxing Missed Millions, has shown that most of the peopleswho are earning tons of moneyare earning it through stating the money as gift received, as to evade the tax in an illegal way. However, a study of Taxation policy of Bangladesh by Sadiq Ahmed (November 2009), has quoted that: Bangladesh taxation policy is at a cross roads. W hi le there have been some positive developments in terms of higher tax collections and improvements in tax administration, the reform efforts are half hearted. There are serious problems with the efficiency and equity of the tax system. The absence of a modern income tax system that taxes income, irrespective of the source of income, and a w el l developed property tax system has serious adverse implications for both tax yields and equity. As against this major policy gap in taxation, a strategy to use inflation tax as an active instrument of resource mobilization is fraught with severe downside risk that is best avoided. Instituting a modern income tax system that is broad-based with minimum exemptions is the highest fiscal reform priority. This is necessary both to increase the tax yield as w el l as to enhance the equity aspects of taxation. Fiscal policy must be coordinated with monetary policy to ensure that the effect of the budget on inflation is as low as possible. Citizens in turn must be willing to pay their fair share of taxes based on the ability to pay principle. This is akin to an unwritten social contract. Economic development without equity can be socially de-stabilizing. If citizens of advanced industrial economies with well functioning democratic institutions can take to the street to vent their frustrations and anger against inequitable policies, these difficulties can

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multiply manifold in low institutions are still evolving.

income economies like Bangladesh where democratic

5. Conclusion
Whatever may be the reasons for collection of tax revenue not being upto the expectation cannot cut short the governments expenditure. The government has to expend more money on various heads of accounts. Therefore, taxes should be collected at a greater space. Therefore, new scopes, opportunities and avenues should be found out for the purpose and tax net and tax base should be broadened. And government must emphasize on tightening the Tax laws, in order to accelerate the economic growth of this country which is slowed down in recent time. Lastly, the people should be motivated for paying taxes. Payment of taxes brings development in the country and also increases individual tax paid wealth. Therefore, the slogan should be Pay tax for increasing your Wealth.

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