Tax Planning and Compliances

Suggested Answers [Exam Nov-Dec,2020]

Question No.1:

You are a Chartered Accountant recently employed in the tax department of X Bangladesh Ltd (“the Company”)
who are engaged in non-essential goods sector. Your line manager is a non-professional, responsible for overall
tax matters of the Company shared you the following information:

1) Finance Bill 2020 for the fiscal period 2020-2021 was announced on 11 June 2020, which was subsequently
passed in the Parliament as Finance Act 2020 on 30 June 2020. Based on primary review of the Finance Act,
you noticed the following changes:

i) Promotional expense exceeding 0.5% of disclosed business turnover will be considered inadmissible. As
per PARIPATRA issued by NBR, this has been made applicable for 2020-21 tax year (i.e. from the income
period started from 1 July 2019). For the income year 2019-20, the Company incurred Tk.16 crore as
promotional expense, while disclosed turnover of the Company was Tk. 1,610 crore.

ii) Corporate tax rate applicable for the Company has been reduced from 35% to 32.5% (applicable for the
assessment year starting from 1 July 2020)

2) For the 2018-19 assessment year, the Company submitted its income Tax return on 15 January 2019 under
Universal Self-Assessment (u/s 82BB) and assessed tax showed was Tk. 140 crore, which was subsequently
assessed as Tk.145 crore based on tax audit. Accordingly, revised assessment order was issued on 24 March
2020, against which company was contemplating to file appeal as per the law. For the assessment year 2020-
2021, the Company deposited its advance tax payable up to 3rd quarter and on the other hand due to Covid-
19 the Company is expecting a decrease of taxable income @ 30% compared to the taxable income of 2019-
2020 assessment year, which was 15% above the taxable income of 2018-19 as declared by the Company in
its tax return.

3) For finalizing the tax computation for the 2020-21 assessment year (i.e., 2019-20 income year) your line
manager advised you the following:
i) consider the changes in respect of corporate tax rate only; and
ii) promotional expenses only to the extent of 0.5% of the turnover and rest to other marketing expenses
so that there is no inadmissible expense in respect of promotion expenses as to him it is unreasonable
to apply retrospectively.

Company follows fiscal year (July to June) as the income year for the purpose of income tax.

Requirements:
a) Analyze your position being a member of Institute of Chartered Accountants of Bangladesh, if you follow
the advice of your line manager from tax law and ethical aspects
b) What was the amount that the Company should have deposited as 4th Quarter advance tax due on 15 June
2020, explaining the reason as per tax law?
c) Was there any option to challenge the position of NBR as clarified in the PARIPATRA for applying the new
provision of promotional expenses retrospectively from 1st July 2019?

Answer to the Question # 1 (a):

Analyzing my position being a member of Institute of Chartered Accountants of Bangladesh, if I follow the advice
of line manager from tax law and ethical aspects, in view of the applicability of changes at Finance Act,2020

From Tax law point of view:

For the change in promotion expenses exceeding 0.50% of the disclosed business turnover being inadmissible,
which has been clarified through PARIPATRA that it is applicable from 2020-21 A/Y, if I follow my line
manager’s advice and show only 0.50% of the turnover as promotion expenses instead of the actual amount of 16
crore, it will be a clear violation of income tax law, irrespective of any justification or unreasonableness exists.

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Accordingly, the company will be exposed to penal measures for concealment of income under the IT Ordinance
1984.

On the other hand, for the change in the corporate tax rate, it is clearly mentioned that it is applicable for the
assessment year starting from 1st July 2020. That means this rate shall be applicable for the assessment year 2020-
21, in other words for the income year started from 1st July 2019. Although this way, this can be seen that the rate
is being applied retrospectively but we have to accept it as this is the law, which is equally applicable even if the
rate was increased.

From ethical point of view:

The advice given by my line manager is contrary to the provision of IT Ordinance 1984. Hence, if I follow the
advice, I will be exposed to violation of following Key fundamental principles:

Integrity: I need to be fair and honest while dealing professional matters in applying changes at Finance Act 2020.

Objectivity: I need to be aware about my obligations as a professional accountant that I cannot compromise my
professional judgement because of my non-professional senior’s bias advices.

Professional behavior: I should be aware of my obligations to comply with relevant laws, regulations, company
policies and avoid any action that may bring discredit to the profession as well as for the company I work for.

Hence, I will try to convince my line manager highlighting the non-compliances, ethical aspects of the matter and
in case he is not convinced, I will request him to take an independent view from a reputed professional firm. If he
does not agree any of the above, I will definitely bring this to the notice of my CFO and senior management.

Answer to the Question # 1 (b):

The amount that the company should have deposited as 4th Quarter advance tax due on 15th June 2020:

Assessed income A/Y 2018-19 Tk. (Crore)

Assessed Tax as per income shown in the return 140.0
Tax rate applicable for A/Y 2018-19 35.0%
Assessed income shown in the return 400.0
Assessed income A/Y 2019-20
Assessed income A/Y 2018-19 400.0
Assessed income increased compared to A/Y 2018-19 15.0%
Assessed income shown in the return 460.0
Assessed income A/Y 2020-21
Assessed income A/Y 2019-20 460.0
Assessed income decreased compared to A/Y 2019-20 30.0%
Estimated income for A/Y 2020-21 322.0
Tax rate (applicable as per Finance Act 2020) 32.5%
Estimated tax for A/Y 2020-21 104.7
Advance Tax due for A/Y 2020-21
Latest assessed income
(On the basis of income assessed by tax authority for A/Y 2018-19) 400.0
Tax rate (applicable as per Finance Act 2020) 32.5%
Total Tax liability as per last assessed tax 130.0
Up to 3rd Quarter company should have deposited 3/4th which comes 97.5

Amount to be deposited in 4th Quarter

Estimated tax for A/Y 2020-21 104.7
Amount deposited up to 4th quarter 97.5
Balance to be deposited 7.1

Note: Up to 3rd quarter (up to 15th March 2020) the company deposited advance tax on the
basis of latest income assessed for A/Y 2018-19. In 4th quarter, the company submitted an
estimation due to decrease in income caused by Covid-19 and therefore ignored the revised
assessment order dated 24th March 2020 post tax audit for the A/Y 2018-19.
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Answer to the Question # 1 (c):

Option to challenge the position of NBR as clarified in the PARIPATRA for applying the new provision of
promotional expenses retrospectively from 1st July 2019

Yes, the company can challenge the position taken by NBR based on the provision of Finance Act 2020. This can
be done by not accepting the change on promotion expenses effective from 1st July 2019. This is because, as per
Finance Act 2020, in relation to Income Tax except for any change in tax rates (i.e., corporate tax rate or individual
tax rates, etc.) all other changes shall be applicable prospectively from the income year starting from 1st July 2020.
Hence, the position taken in the PARIPATRA contradicts with the provision of Finance Act 2020 and if there is
conflict between Act and subsequent clarification/rules, the provision of Act always prevails.

Question No.2:

Mr. X passed away leaving wife and 2 adult sons. All of them have tax files in Bangladesh. A real
estate company has offered to buy the land with two-storied building owned by the deceased, which
was acquired by him at Tk. 2,200,000/=. According to the said offer, the real estate company is willing
to pay Tk. 100,000,000/= and transfer a land worth Tk. 75,000,000/= to Mrs. X and her two sons. As
per location of the property, 4% tax would be collected at source by the sub-registrar. The cash
consideration will be paid to the bank account of Mrs. X, as her sons are domiciled in the UK. The total
purchase consideration of the property left by the deceased will be distributed as per Muslim law. The
registration cost of the property to be transferred by the real estate company is estimated at Tk.
8,250,103/= and would be borne by the legal heirs of Mr. X.

Receiving the aforesaid proposal for sale of the property, Mrs. X appointed you as a tax consultant
to see the final tax implications if the offer is accepted. She is 67 years old and unable to manage her
tax matters on her own. Mrs. X has also provided you with the following information for preparing
a draft tax return and statement of assets and liabilities:
Opening balance of assets Tk.
Shares in private limited company 100,000
Non-agricultural property 306,500
Agricultural property 15,000
Jewellery 45,000
Furniture 20,000
Electronic equipment 30,000
Cash and cash equivalent outside business 10,346,284
Particulars of income and expenditure Tk.
Compensation received from tenant for house damage (including share of 2 sons) 4,100,000
Pension received as nominated beneficiary 82,287
Bank interest 3,989,360
House rent (used for commercial purpose) 540,000
Land tax 18,768
Family expenditure (excluding tax) 378,543
Particulars of payment of tax Tk.
TDS from consultancy fee 398,936
TDS from house rent 27,000
Tax refund for previous year 20,407

While preparing the requested return and statement, you are advised to apply the tax rates applicable for AY
2020-2021.

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 Requirements: Provide Mrs. X with the following draft computations and statement:
a) Income tax liability (including surcharge, if applicable)
b) Net wealth statement
c) Sources of fund
Answer to the Question # 2 (a):

INCOME TAX COMPUTATION (FOR PLANNING PURPOSE)

INCOME YEAR 2019-2020
ASSESSMENT YEAR 2020-2021
Gross
Income Taxable Income
(Taka) (Taka)
House Rent Income (A)
Annual Value 540,000
Less: Admissible Expenses
Repair and maintenance 162,000
Land tax, municipal tax, local tax, etc. 18,768 180,768
Sub-total (A) 359,232 359,232
Income From Other Sources (B)
Interest 3,989,360
3,989,360
Compensation received from Tenant for house damage 512,500
512,500
Sub-total (B) 4,501,860 4,501,860
Sub-total excluding income u/s 82C (C)= (A + B) 4,861,092 4,861,092
Income u/s 82C from capital gain (D)
Gain from sale of inherited property 21,600,000
21,600,000
(to be considered under proviso of clause (d) of section 82C (2)
Total Income (E)= (C + D) 26,461,092 26,461,092
Income Tax
Rate Tax
First Tk. 350,000 0% -
Next Tk. 100,000 5% 5,000
Next Tk. 300,000 10% 30,000
Next Tk. 400,000 15% 60,000
Next Tk. 500,000 20% 100,000
Rest Tk. 3,211,092 25% 802,773
Total Taxable Income excluding income u/s 82C 4,861,092
Tax liability on income excluding income u/s 82C 997,773
Tax paid u/s 53H on sale of inherited property 875,000
(Final tax as per clause (d) of section 82C(2)
Total Tax (including tax u/s 82C) 1,872,773
Surcharge on Income Tax (on the basis of Net Wealth): 10% 187,277
Income tax including surcharge 2,060,050

Tax deducted at source/adjustment of previous year’s refund

TDS on interest* 398,936
TDS from rental Income 27,000
TDS under section 53H 875,000
Adjustment of previous year’s tax refund 20,407
Total Tax deducted and adjusted (1,321,343)
Net Tax Payable 738,707
*TDS on interest has been erroneously mentioned to be TDS on consultancy fee in the question.

Answer to the Question # 2 (b):

Net wealth statement:

STATEMENT OF ASSETS AND LIABILITIES

As at 30 June 2020
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 CASH FLOW STATEMENT
FOR THE INCOME YEAR 2019-2020

Taka
Opening Balance of cash in hand & at bank 10,346,284 10,346,284

A: Inflow:
Pension 82,287
House rent 359,232
Sale Value of Inherited Land (Including share of 2 sons) 175,000,000
Bank Interest 3,989,360
Compensation received from Tenant for house damage (Including share of 2 sons) 4,100,000
183,530,879
B: Outflow:
Personal Expenses (excluding tax) 378,543
Purchase of House Property (portion of 2 sons) 72,843,840
Purchase of House Property (self-portion) 10,406,263

AIT Payment for 2 sons 6,125,000

Tax paid 1,300,936
91,054,582
Net Increase/(decrease) in cash (A-B) 92,476,297

Closing Balance as on 30th June,2020 102,822,581

WEALTH STATEMENT
As on 30 June 2020
Particulars of Assets & Liabilities Balance as on Addition Balance as on
01 July 2019 Encashment/ 30 June 2020
Disposal
Taka Taka Taka Taka
Shares in private limited company 100,000 100,000
Non-agricultural property 306,500 10,406,263 275,000 10,437,763
Agricultural property 15,000 15,000
Jewelry 45,000 45,000
Furniture 20,000 20,000
Electronic Equipment 30,000 30,000
Cash & cash equivalent outside business 10,346,284 92,476,298 102,822,582
Total Assets 10,862,784 102,882,561 275,000 113,470,345

Payable to son 1 38,871,830 38,871,830

Payable to son 2 38,871,830 38,871,830
Total Liabilities - 77,743,660 - 77,743,660
Net Wealth 10,862,784 25,138,901 275,000 35,726,685

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Answer to the Question # 2 (c):

Sources of fund:

12. Net wealth as on last date of this income year Tk. 35,726,685
13. Net wealth as on last date of previous income year Tk. 10,862,784
14. Accretion in wealth (12-13) Tk. 24,863,901
15. Family Expenditure (Including Tax) Tk. 1,679,479
16. Total Accretion of wealth (14+15) Tk. 26,543,379
17. Sources of Fund: I
(i) Shown Return Income Tk. 26,461,092
(ii) Tax exempted/Tax free Income Tk. 82,287
(iii) Other Receipts- ---------- 26,543,379

18. Difference -------------

Working Notes:
A Particulars Total Mrs. X Son 1 Son 2
Tk 2/16th Share 7/16th Share 7/16th Share
(Tk) (Tk) (Tk)
1 Compensation received from Tenant for house damage 4,100,000 512,500 1,793,750 1,793,750
2 Sale Proceeds of Inherited land & house property (Sec 82C) 175,000,000 21,875,000 76,562,500 76,562,500
3 Cost of Inherited Property (as per deed) 2,200,000 275,000 962,500 962,500
4 Gain from Sale of Inherited land & house property (Sec 82C) 172,800,000 21,600,000 75,600,000 75,600,000
(Sale proceed less cost value of the inherited property)
5 Purchase of Land (Purchase Consideration) 75,000,000 9,375,000 32,812,500 32,812,500
6 Purchase of Land (Registration Cost) 8,250,103 1,031,263 3,609,420 3,609,420
7 AIT on Sale of Inherited land & house property 7,000,000 875,000 3,062,500 3,062,500
Total

B Income Total Mrs. X Son 1 Son 2

Tk 2/16th Share 7/16th Share 7/16th Share
(Tk) (Tk) (Tk)
1 Compensation received from Tenant for house damage 4,100,000 512,500 1,793,750 1,793,750
Total 512,500 1,793,750 1,793,750

C Receivable from Mrs. X Total Mrs. X Son 1 Son 2

Tk 2/16th Share 7/16th Share 7/16th Share
(Tk) (Tk) (Tk)
1 Compensation received from Tenant for house damage 4,100,000 1,793,750 1,793,750
2 Sale Proceeds of Inherited House Property (Sec 82C) 175,000,000 76,562,500 76,562,500
Total - 78,356,250 78,356,250

D Payable to Mrs. X Total Mrs. X Son 1 Son 2

Tk 2/16th Share 7/16th Share 7/16th Share
(Tk) (Tk) (Tk)
1 Purchase of Land Property (Purchase Consideration) 75,000,000 32,812,500 32,812,500
2 Purchase of Land Property (Registration Cost) 8,250,103 3,609,420 3,609,420
3 AIT Paid (Sale of Inherited Property) 3,062,500 3,062,500
Total - 39,484,420 39,484,420

E=C- Net Receivable from Mrs. X Total Mrs. X Son 1 Son 2

D Tk 2/16th Share 7/16th Share 7/16th Share
(Tk) (Tk) (Tk)
1 38,871,830 38,871,830

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Question No.3:

Ideal Bangladesh Ltd (“Ideal BD” or “the Company”) is a 100% owned subsidiary of Ideal World Limited, a
German conglomerate renowned for its famous consumer goods across the world. Ideal BD is a public limited
company but not listed with any stock exchanges in Bangladesh and has been engaged in manufacturing and
marketing of consumer goods under the global brands of Ideal World Limited for the last 10 years. Accordingly,
Ideal BD manufactures certain products in Bangladesh (“manufacturing unit”) and imports some other finished
products from its sister concerns (associated of Ideal BD) across the world, which it markets without doing any
further modification (“Trading unit”).

For the year ended on 31 December 2019(A/Y 2020-2021), following extracts were relevant for computing
income tax for Ideal BD

Particulars Amount in Crore Taka

Turnover 4,100
Profit before tax 700
Depreciation as per book 60
Royalty expenses 90
Excess perquisite 10
Profit on sale of motor vehicles used by the Chairman & MD for business purpose 2
Profit on sale of land property of the Company 5

In addition to the above, following information were also made available relevant for its tax assessment:
1) Turnover of Tk. 4,100 crore comprises of Tk. 3,500 crore on account of manufacturing unit and Tk. 600
crore on account of Trading unit.
2) Net profit after tax as per statement of accounts was Tk. 502.95 crore, out of which Tk. 9.75 crore
represent net profit of Trading unit.
3) Profit before tax posted by Ideal BD comprises Tk. 645 crore from Manufacturing unit and Tk. 55 crore
from Trading unit.
4) The Company maintains an unfunded gratuity scheme for its permanent employees and for the 2019 it
created a provision of Tk. 8 crore, while Tk. 2 crore were paid to 3 outgoing employees
5) The motor vehicles were sedan car, having antique value, acquired two years back at a price of Tk. 2.5
crore, which were sold at Tk. 3.5 crore, although the written down value was much lower. The Company
follows a straight-line method and depreciates its motor vehicle @ 20% rate.
6) All the capital gains were reinvested in new plant & machineries of the Company in 2019 itself and the
Company complied with other formalities to be able to claim the tax benefits to the extent possible that
is allowed u/s 32(5) of the ITO 1984
7) For Fiscal depreciation following information are available:
i) Total depreciation (excluding the depreciation of new plant and machinery) as allowed under law was
Tk. 78 crore. Addition to plant & machinery was Tk. 7 crore. As per 3 rd Schedule of the ITO 1984
there are normal depreciation allowance @ 20% and initial depreciation allowance @ 25% on plant
and machinery cost
ii) During 2019, for the purpose of depreciation allowances, maximum Tk. 25 lac as cost was allowed
for motor vehicle not plying for hire.
8) The latest assessed tax (A/Y 2018-19) of the Company was Tk. 189 crore (Manufacturing unit Tk. 175
crore and Trading Unit Tk. 14 crore). Because of fulfilling certain conditions of an exemption SRO, the
Company was eligible for a rebate of 20% on profit of the Manufacturing unit, which will continue this
year as well. The standard tax rate applicable for the Company in the latest assessed tax was 35%, which
is now 32.5% based on a revision made in the last Finance Act 2020. The Company paid due advance
tax u/s 64 following its last assessed income.
9) The Gross Profit ratio between Manufacturing and Trading unit was 92%:8%, which was allowed by tax
authority to allocate common business profit between these two units.

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 10) At port point the Company deposited Tk. 100 crore under Manufacturing unit and Tk. 20 crore under
Trading unit as advance tax, which were considered while depositing the advance tax for the Company
u/s 64.
11) From a data set acceptable by the Bangladesh taxing authority if the lowest value of comparable operating
profit at 30th percentile is 10%, highest value of comparable operating profit at 70th percentile is 15% and
median value comparable operating profit is 13%, state whether any adjustment is required to determine
the arm’s length profit for Trading unit. The operating profit % of trading unit was 9.17% of turnover
(consider TNMM will provide the most reliable measure of an arm’s length result)
Requirements:
a) Compute total income after determining adjustment if any required under transfer pricing regulations for the
Trading unit; and
b) Compute net tax liability considering the advance tax already deposited by the company for the relevant
assessment year, the income year being the year ended on 31st December 2019

Answer to the Question # 3 (a & b):

Ideal Bangladesh Limited
Computation of Total Income and Net Tax Liability
Assessment year 2020-2021 (income year ended on 31 December 2019)
Taka
Note in crore
A Income from Business or Profession:

Profit before tax as per statement of profit and loss and comprehensive income 700.00
Less: Accounting gain on sale of fixed assets for separate consideration 1 7.00
693.00
Add: Fiscal gain on sale of fixed assets 1 0.38
693.38
Add: Inadmissible expenses as per provision of law:
Accounting depreciation and impairment loss for separate consideration 60.00
Gratuity provision (unfunded) 8.00
68.00
761.38
Less: Admissible expenses as per provision of law:
Fiscal depreciation 2 81.06
Gratuity amount paid to the outgoing employees 2.00
83.06
Total Income from Business or Profession 678.32
Allocation of business income between manufacturing unit (other than section 82C) and trading
unit (section 82C) on the basis on gross profit ratio:
Unit Ratio Amount
Manufacturing (other than section 82C) 92.00% 624.05
Trading (section 82C) 8.00% 54.27
Total Business income 678.32
B
. Capital gains:
From sale of Motor vehicle 0.20 1
Less: Exemption for investment in Plant & machinery within one year of disposal (0.20)
From sale of Land property 5.00 5.00
C Separate business income to be taxes u/s 30B:
Inadmissible expenses u/s 30 of the ITO 1984 4 59.76
D Transfer pricing adjustment as per statement of international transaction u/s 107EE of ITO 1984 6 23.00
Total Income (A+B+C+D) [Requirement 2(a)(i)] 766.08
Tax Liability/Payable
Business income from manufacturing undertaking (other than section 82C):
202.8
Tax payable @32.5% on Tk. 624.05 2
Less: Tax rebate @20% on manufacturing profit as per exemption SRO 40.56 162.25
Income from 82C:
Tax payable @32.5% on Tk. 54.27 17.64
Analysis of minimum tax under section 82C:
Tax payable on regular business income (@32.5% on Trading profit) 17.64
Tax deduction under section 53 considered as minimum tax 20.00 20.00
(Actual tax payable or TDS the higher
one)
Capital gains:
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 Tax payable @15% on Tk. 5.00 0.75
Income from Other Sources:
Tax payable @32.5% on Tk. 59.76 19.42
Adjustment from transfer pricing as per statement of international transaction u/s 107EE of ITO 1984
Tax payable @32.5% on Tk. 23.00 7.48
209.90
Less: Tax paid
Tax deducted at source:
Other than section 82C of the ITO 1984 80.00
Section 82C of the ITO 1984 (TDS under section 53) 20.00
100.00
Advance tax paid u/s 64 5 75.50
175.50
Balance Tax to be deposited u/s 74 of the ITO 1984 [Requirement 2(a)(ii)] 34.40

Note:1 Gain on sale of Motor Vehicle As per book As per Tax

Cost of acquisition 2.50 0.50
Ratio of actual cost of acquisition vs Tax cost of acquisition 20%
Sale value 3.50 0.70
Written down value 1.50 0.32
Total gain 2.00 0.38
Split:
Capital gain (sale value exceeding cost of acquisition) 1.00 0.20
Balance: Revenue gain 1.00 0.18
Total gain 2.00 0.38
Note:2 Depreciation allowances as per Tax
Total depreciation other than Plant & machinery 78.00
Depreciation allowances on Plant & Machinery:
Addition in 2019 7.00
Less: Excluded benefit on capital gain (u/s 32(5) 0.20
6.80
Depreciation (Normal 20% + initial 25%) 3.06
Total Depreciation allowances as per Tax law 81.06
Note:3 Royalty disallowances as per section 30h of the ITO 1984
Royalty amount claimed in the financial statement 90.00
Admissible Royalty (8% of disclosed profit Tk. 502.95 crore) 40.24
Inadmissible amount 49.76
Note:4 Separate business Income to be taxed u/s 30B of ITO 1984
Inadmissible excess perquisite u/s 30e 10.00
Inadmissible Royalty expenses u/s 30h (Note:3) 49.76
59.76
Note:5 Calculation of Advance Tax
Assessed income based on latest assessment Assessed income Rate applicable Assessed tax
Manufacturing unit 625.00 28% 175.00
Trading Unit 40.00 35% 14.00
Total 665.00 189.00
Advance tax for current A/Y Assessed income Rate applicable Advance Tax
Manufacturing unit 625.00 26% 162.50
Trading Unit 40.00 33% 13.00
Total 665.00 175.50
Tax paid at port point 100.00
Amount to be deposited u/s 64 of the ITO 1984 75.50
Note: Manufacturing tax rate has arrived at 32.5% less 20% rebate allowed

Note:6 Transfer pricing adjustment as per statement of international transaction u/s 107EE of ITO 1984
Operating profit of the company is 9.17% of turnover, which does not fall within the arm's length of 10% to 15%.
Hence to arrive at the arm's length operating profit, we have to consider the median value of the data set acceptable
to Tax authority. The median value of the comparable operating profits for 2019 is 14% of turnover. Therefore, the
income of Trading unit for 2019 is to be increased to 13% of turnover. Accordingly, the amount to be added as
adjustment is as follows:
Operating profit at 13% of turnover of Trading unit (600 crores X 13%) 78.00
Operating profit declared by the company (@9.17% of turnover) 55.00
Adjustment required 23.00
.

Question No.4:
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Expo Ltd. is a foreign subsidiary company of BGD Ltd. The Company sells air conditioners to Expo Ltd. at a price
of Tk. 40,000 each for sale to its dealers in Vietnam. In other States, BGD Ltd. is directly selling to their dealers
at Tk. 45,000 with a warranty of two year (Tk. 3,500 for each air conditioner). Expo Ltd. does not offer such
warranty. Quantity sold to Expo Ltd. is 10,000 units and to dealers of BGD Ltd. is 5,000 units. Discuss the method
to be applied to arrive at the Arm’s Length Price (ALP) and compute the ALP. How is the assessment of BGD
Ltd. going to be affected?

Answer to the Question # 4:

Expo Ltd. and BGD Ltd. are associated enterprise as Expo Ltd is subsidiary of BGD Ltd. Comparable product
(Air Conditioner) is sold to dealers (Uncontrolled transactions). Hence, in given circumstances Comparable
Uncontrolled Price (CUP) Method for determining arm’s length price can be applied.

Particulars Amount (Tk.)

Sale price charged to Dealers of BGD Ltd. 45,000
Less cost of warranty included in price 3,500
Arm’s length price 41,500
Actual price paid by Expo Ltd. to BGD Ltd. 40,000
Difference per unit 1,500 1,500
Addition required to be made in the computations of the total income of BGD 15,000,000
Ltd. (1500 x 10,000 units)

Tk. 15,000,000 is to be shown as adjustment for Arm’s length price for international transaction u/s 107C.

Question No.5:

You are a practicing-chartered accountant and focused on taxation areas. Before finalizing business plan for the
year ended 31 December 2020, ABC Ltd. (“Company”) wants to know the effect of section 30B on computation
of minimum tax and carry forward of unabsorbed depreciation. In this regard, the Company has requested you to
help them based on the following situations:

Particulars AY 2021-2022
Situation-1 Situation-2 Situation-3 Situation-4
Tk. (‘000) Tk. (‘000) Tk. (‘000) Tk.(‘000)
Net income before tax as per audited financial 125 (30) (20) 175
statements
Expenditures would be disallowed due to non- 50 50 50 50
availability of appropriate evidences
Trade liability created and deducted in AY 25 25 25 25
2017-2018, but would remain unpaid in the
income year corresponding to AY 2021-2022
Depreciation allowances as per the audited FS 10 10 10 10
Depreciation allowances as per the 3rd 30 30 30 30
schedule
Unabsorbed depreciation allowances (opening - 25 50 50
balance)
Excess perquisites and cash payment of rent 80 80 80 80
Loan taken without banking channel 25 25 25 25
TDS from sources mentioned in section 82C (2) 50 50 50 50
(b)

Other information:
1) Income of the Company falls under the sources mentioned in section 82C (2) (b);
2) The Company plans to make a partial of adjustment of Tk. 45,000/= out of total depreciation allowance
available in situation-4;
3) Apply 45% corporate tax rate and minimum tax at the rate of 2%.

Page 10 of 17
Requirement: You are requested to compute tax liability for each of the illustrations provided in the above table
along with opinion on the issues in question from the standpoint of the ITO, 1984.

Answer to the Question # 5:

The Chief Financial Officer

………………………………..
Dhaka, Bangladesh
……November 2020
Dear Sir:

Computation of tax liability and pertinent issues

Please refer to your request dated …………. for providing professional opinion(s) on the issue(s) raised therein.
In this connection, our analysis focuses on the following provisions of tax laws:

According the provision of section 30B of the ITO, 1984, notwithstanding anything contained in section 82C or
any loss or profit computed under the head “Income from business or profession”, the amount of disallowances
made under section 30 shall be treated separately as “Income from business or profession” and the tax shall be
payable thereon at the regular rate. It is notable that section 30B of the ITO, 1984, has been inserted to ensure
collection of tax from the expenditures inadmissible under the provisions of section 30 of the same Ordinance. In
this connection, section 44 (5) (b) of the ITO, 1984, may be discussed here. As per the said section, notwithstanding
anything contained in section 44 (4)(b) or any other section in Chapter VI, any disallowance of expenditure under
section 30, in calculating the income of a source or of a person that is exempted from tax or is subject to a reduced
rate of tax, shall be treated as income for that source or of that person, as the case may be, and tax shall be payable
on such income at the regular rate. Section 44 (4) (b) as referred to above deals with exemption from tax, reduction
in tax rate, tax credit entitlement, etc.

In light of the aforementioned provisions of tax laws, we have reviewed the tax implications for business of the
Company on the basis of situations provided by you and presented below:
Particulars Sl. No. AY 2021-2022 (computation)
Situation-1 Situation-2 Situation-3 Situation-4
Tk. ('000) Tk. ('000) Tk. ('000) Tk. ('000)
Net income before tax 1 125 (30) (20) 175
Disallowances of expenditure (except section 30) 2 50 50 50 50
Trade liability added back under section 19 (business income) 3 25 25 25 25
Total Income before allowing depreciation 4=1+2+3 200 45 55 250
Depreciation allowances as the audited FS a 10 10 10 10
Depreciation allowances as the 3rd schedule b 30 30 30 30
Net effect of depreciation allowances (difference between 5=b-a 20 20 20 20
audited FS & 3rd schedule)
Unabsorbed depreciation allowances (opening balance) 6 - 25 50 50
Depreciation allowance for the year 7=5+6 20 45 70 70
Income from business (excluding section 30) 8=4-7 180 - - 225
Unabsorbed depreciation allowances to be carried - - 15 45
forward
Inadmissible expenditure under section 30 9 80 80 80 80
Loan taken without banking channel added back under section 10 25 25 25 25
19 (other income)
Total taxable income 11=8+9+10 285 105 105 330
Gross receipts 12 5,000 5,000 5,000 5,000
Minimum tax on gross receipts @ 2% 13 100 100 100 100
Income from business (excluding section 30) @ 45% 14 81 - - 101
Loan taken without banking channel added back under section 15 11 11 11 11
19 (other income) @ 45%
Regular tax (excluding section 30) 16=14+15 92 11 11 113
TDS from sources mentioned in section 82C (2) (b) 17 50 50 50 50
Tax payable: Higher of 13, 16 & 17 18 100 100 100 113
Tax on income from business under section 30B @ 45% 19 36 36 36 36
Assessed tax liability 20=18+19 136 136 136 149

As regards carry forward of unabsorbed depreciation, section 42 (6) of the ITO, 1984, states that where, in making
an assessment for any year, full effect cannot be given to the allowances referred to in section 29(1) (viii) owing
to there being no profits or gains chargeable for that year or such profits or gains being less than the allowance
then, subject to the provisions of section 42 (7), the allowance or part of the allowance to which effect has not
been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following
year and be deemed to be part of that allowance or if there is no such allowance for that year, be deemed to be the
allowance for that year and so on for succeeding years.
Page 11 of 17
While addressing limitation in respect of allowance for depreciation, paragraph 9 (2) of the 3rd Schedule of the
ITO, 1984, provides that where full effect cannot be given to depreciation allowances under the aforementioned
Schedule in the year in which it is admissible there being no income chargeable for that year or such income being
less than the allowance admissible, then, subject first to carrying forward of the loss, if any, under section 38, the
allowances or the part thereof to which effect has not been given shall be added to the amount of the allowance
for the following year or, if no allowance is admissible for such following year, shall be deemed to be allowance
admissible for such year and so on for succeeding years till such time as the entire allowance on this account is
adjusted against the profits.

In light of the, partial adjustment of unabsorbed depreciation allowance is not permitted by tax laws if there is
sufficient taxable profit from business for making full adjustment.

Should you have further queries in this regard, please contact us.

Yours faithfully,

Question No.6:

XYZ Ltd. is a service provider and renders services that fall under the scope of service code S099.20. The
following information has been extracted from the monthly VAT returns and VAT registers of XYZ Ltd.:
Amount in Tk.
Particulars April May June July August September October November
Total VAT
8,000,000 6,000,000 9,500,000 9,000,000 8,500,000 9,500,000 7,500,000 8,500,000
Payable
Total Input
5,000,000 4,000,000 5,500,000 7,500,000 3,000,000 7,500,000 3,500,000 5,500,000
Tax Credit
Total
Increasing
2,500,000 1,500,000 2,500,000 3,000,000 4,500,000 4,000,000 2,000,000 1,000,000
Adjustment
(VDS)
Total
Decreasing
Adjustment 7,500,000 6,000,000 6,000,000 8,000,000 9,000,000 7,500,000 8,000,000 6,500,000
(VDS
Certificate)

VAT return for the month of November 2020 is yet to prepare.

Requirements: As the VAT consultant, XYZ Ltd. has asked you to provide them with the following:
a) Provisions of section 68 of the VAT & SD Act, 2012, as regards carry forward and refund of negative net
amount;
b) Computation of the amount eligible for claiming refund in the VAT return for the month of November 2020;
c) Computation of the amount to be deposited in the government treasury for the month of November 2020 and
justification thereof;

Page 12 of 17
Answer to the Question # 6:

XYZ Ltd.
XXXXXXXXXXXXXX
Dhaka, Bangladesh

XX November 2020
Dear Sir:

(i) Provisions of section 68 of the VAT & SD Act, 2012, as regards carry forward and refund of negative
net amount
(ii) Computation of amount eligible for claiming refund in the VAT return for the month of November
2020;
(iii) Computation of amount to be deposited in the government treasury for the month of November 2020

Please refer to your request dated ……. and subsequent correspondences for providing computations of VAT as
stated above. In this connection, we are providing below the required computations and relevant provisions of
VAT laws:

Answer to the Question # 6 (a):

Provisions of section 68 of the VAT & SD Act, 2012, as regards carry forward and refund of negative net amount

As per section 68 of the VAT and SD Act, 2012, the following provisions shall be complied for carry forward and
refund of negative net amount

• The excess amount shall be carried forward and deducted over the following 6 tax periods;
• The remaining amount shall be refunded as per section 68;
• The amount of tax payable shall be determined following section 45 (without adjustments allowed under
section 68);
• If assessed tax is positive, decreasing adjustment shall be made by carried forward amount so as to reducing
the payable to nil;
• The unadjusted amount shall be carried forward until it becomes nil and upto 6 tax period;
• After 6 tax periods, if such balance does not exceed Tk. 50,000/=, it shall be carried forward until it is nil;
or
• In other cases, unadjusted balance shall be refunded within 3 months from the date of receiving application.

Answer to the Question # 6 (b):

Computation of amount eligible for claiming refund in the VAT return for the month of November 2020;

From the workings below, Tk. 500,000 is eligible for claiming refund in the VAT return for the month of
November 2020.

Workings:

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 Particulars April May June July August September October November
Total VAT Payable 8,000,000 6,000,000 9,500,000 9,000,000 8,500,000 9,500,000 7,500,000 8,500,000
Total Input Tax Credit 5,000,000 4,000,000 5,500,000 7,500,000 3,000,000 7,500,000 3,500,000 5,500,000
Total Increasing Adjustment (VDS) 2,500,000 1,500,000 2,500,000 3,000,000 4,500,000 4,000,000 2,000,000 1,000,000
Total Decreasing Adjustment (VDS 7,500,000 6,000,000 6,000,000 8,000,000 9,000,000 7,500,000 8,000,000 6,500,000
Certificate)
Net Payable VAT (2,000,000) (2,500,000) 500,000 (3,500,000) 1,000,000 (1,500,000) (2,000,000) (2,500,000)

Treasury deposit 2,500,000 1,500,000 2,500,000 3,000,000 4,500,000 4,000,000 2,000,000 1,000,000

Carry forward of negative net (2,000,000) (4,500,000) (4,000,000) (7,500,000) (6,500,000) (8,000,000) (10,000,000) (12,000,000)
amount:
April (2,000,000) (2,000,000) (1,500,000) (1,500,000) (500,000) (500,000) (500,000) Refund claim
May (2,500,000) (2,500,000) (2,500,000) (2,500,000) (2,500,000) (2,500,000) (2,500,000)
June - - - - - -
July (3,500,000) (3,500,000) (3,500,000) (3,500,000) (3,500,000)
August - - - -
September (1,500,000) (1,500,000) (1,500,000)
October (2,000,000) (2,000,000)
November (2,500,000)

Answer to the Question # 6 (c):

Computation of amount to be deposited in the government treasury for the month of November 2020 and
justification thereof;

From the workings above, Tk. 1,000,000 is required to be deposited in the government treasury on account of
VAT deducted at source for the month of November 2020. Despite there is difference of opinion as to whether
VDS should be adjusted against negative net amount or VDS should be compulsorily deposited in the government
exchequer through treasury challan, VAT authority focuses on the provisions of the Withholding VAT Deduction
and Collection Rules, 2020. If the provisions of section 2 (71), 45, 48, 49 and 68 and rule 40 (1) (cha) and form
Mushak 9.1 and Mushak 6.6 are reviewed together, it seems that deposit of VDS in government treasury is not
mandatory where the payment of VDS can be made through increasing adjustment in the VAT return. However,
the Withholding VAT Deduction and Collection Rules, 2020, issued under SRO No. 149 Aain/ 2020 110 Mushak
dated 11 June 2020 contradicts with the aforementioned provision of laws as regards compulsory deposit of VDS
in the government exchequer through treasury challan. Rule 6 (3) of the Withholding VAT Deduction and
Collection Rules, 2020, states as follows:

The person deducting tax at source will make increasing adjustment for VAT deducted at source in return (form
Mushak 9.1) and deposit the remaining balance, if any, after making adjustment of VDS deposited through treasury
challan against net VAT payable for the tax period concerned.

Hence, field level of the VAT authorities is of the opinion that VDS should be mandatorily deposited in the
government treasury, even if there is refundable VAT, as per the Withholding VAT Deduction and Collection
Rules, 2020.

Should you have further queries in this regard, please contact us.

Yours faithfully,

Question No.7:

Fair Ltd manufactures consumable goods at its factory located as Rupgonj, which has been registered under new
VAT Act under the VAT Commissionerate of same location. Fair Ltd sales its goods to its Distributors at a price
of Tk. 200 per unit (excluding VAT) through a distribution agreement. However, considering the actual value
addition is very high, it manages to submit input output co-efficient with a value addition much lower than the
actual and accordingly it issues Mushak 6.3 at price of Tk. 140 per unit (excluding VAT). Later on, during
assessment stage upon market survey by the VAT Authority, it was identified that similar goods under same
circumstances were sold to independent third party at Tk. 210 per unit (excluding VAT).
Requirements:
a) What would be the fair market value of the product sold by Fair Ltd? Why?
b) Mention the circumstances when fair market value is used under the VAT Act?
c) What are the legal consequences for issuing Mushak 6.3 at Tk. 140 per unit?

Answer to the Question # 7 (a):

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Fair market value of the product sold by Fair Ltd:
Actual selling price/unit = Tk. 200
Price of similar goods/unit = Tk. 210
Deviation = 5%
Fair market price/unit = Tk. 200
Here Fare Ltd and its distributors are to be treated as associated party as per the definition given u/s 2(97)(uma)
of the VAT and SD Act 2102. Under this circumstance, if the deviation is within 10%, actual selling price shall
be accepted as fair market price

Answer to the Question # 7 (b):

Circumstances when fair market value is used under the VAT Act:
a) u/s 73 of the VAT and SD Act at the time of assessing VAT for the Assessee
b) u/s 90 of the VAT and SD Act during audit and inspection
c) u/s 111 of the VAT and SD Act at the time of investigation of offence

Answer to the Question # 7 (c):

Legal consequences for issuing Mushak 6.3 at Tk. 140 per unit:
This is a clear deliberate violation for evasion of VAT as per the VAT law. Accordingly, the assessee will be
liable for payment of the evaded amount plus a penalty to the extent of two times of the evaded VAT.

Question No.8:

After qualifying as a chartered accountant, you have been practicing in an accounting firm known as an expert in VAT
advisories. In the month of July 2020, your manager asked you to review the following issues:
i) Walt Ltd. entered into a supply arrangement with Hope Hospital for supply of 10 Air Conditioner @ Tk. 100,000
each. As per the contract, Hope Hospital will be required to pay Tk. 200,000 to Walt Ltd. if the contract is
cancelled. Due to COVID 19, Hope Hospital was closed for two months and they decided to cancel the contract.
They had to pay Tk. 200,000 to Walt Ltd. as per the contract. Does Walt Ltd. need to pay any VAT on Tk.
200,000, although there has not been any supply that took place?
ii) Walt Ltd. has been registered under VAT and SD Act 2012. It has a licensing agreement with world-renowned
Air Conditioner manufacturer Gree for using their technical know-how to manufacture Air Conditioner under
its own brand name Walt. For using the technical know-how of Gree, Walt Ltd. remitted Tk. 3,000,000 as
royalty in the month of July 2020. Indicate the VAT amount that has to be paid on this royalty amount, who
should pay this and how this will be reflected in the return, explaining the reasons.

Answer to the Question # 8 (i):

As per section 42(2) of the VAT and SD Act 2012, if a transaction for any supply is cancelled‚ and the supplier
realizes any money from the recipient as a consequence thereof, that realized money shall be treated as the
consideration for the supply in the tax period in which it is realized and taxes shall be payable on that realized
amount. Accordingly, Walt Ltd. has to pay VAT @ 15% on Tk. 200,000 i.e., Tk. 30,000 although there has
not been any supply took place.

Answer to the Question # 8 (ii):

First, the amount for which the royalty is remitted shall be treated as Import of Services and shall be dealt
under reverse charge mechanism to the recipient. Accordingly, being the recipient of the services and registered
under VAT law, Walt Ltd. will be responsible for payment of VAT and therefore Walt Ltd. has to deposit
VAT @ 15% on Tk. 30,00,000 i.e., Tk. 4,50,000 as per the VAT law. Subject to compliance of other provisions
of the VAT law, Walt Ltd. will be eligible for claiming the input VAT that it paid on the royalty. In relation to
this, the entries shall be reflected in the return are as follows:

SUPPLY - OUTPUT TAX

Particulars Value (Tk.) VAT (Tk.)
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 Standard Rated Goods/Service- import of service 30,00,000 4,50,000
Total Sales Value & Total Payable Taxes 30,00,000 4,50,000
SUPPLY - INPPUT TAX
Standard Rated Goods/Service- import of service 30,00,000 4,50,000
Total Input Tax Credit 30,00,000 4,50,000
PAYMENT SCHEDULE (TREASURY DEPOSIT)
VAT Deposit for the Current Tax Period 4,50,000
Total Deposit 4,50,000

Question No.9:

Gloria Ltd. is a public limited company engaged in import, manufacture and marketing of consumer goods in
Bangladesh territory. It has its factory located at Mohakhali, where it packs goods imported in bulk and it has a separate
warehouse at Tejgaon registered for marketing of imported finished goods. Under an innovation project, Gloria is
contemplating to launch a new product effective from 1st July 2020, which the semi-finished goods it can import in bulk
form an repack in its factory at Mohakhali or it can import the product in finished from and supply the same from
Tejgaon warehouse complying with all other VAT formalities under the law. In connection with this, following
information are also available:
If imported in If imported in
Particulars
Bulk Finished form
C&F value per Kg in BDT (to be paid to Bank) 600 750
Minimum assessable value per Kg in BDT Not applicable 700
Basic duty 25% 25%
Regulatory duty 3% 3%
Supplementary duty 0% 20%
Value Added Tax (VAT) 15% 15%
Advance Tax (VAT) 4% 5%
Advance Income Tax 5% 5%

Additional information:
1) Gloria Ltd has two separate BINs, one for Mohakhali Factory and other one for Tejgaon premises. For supply
of products from Mohakhali Factory, it follows standard rate (15%), while for other premises it follows Trade
VAT and follow a fixed VAT rate of 5%.
2) For arriving at assessable value, additional 2.01% needs to be added with the C&F value or minimum
assessable value mentioned above.
3) Conversion cost from bulk to finished goods is Tk. 230 per kg inclusive of 15% VAT.
4) Marketing and media expenses is Tk. 230 per kg inclusive of 15% VAT
5) There is 10% supplementary duty applicable for products sold from Mohakhali factory.
6) Distribution cost is Tk. 50 per kg excluding VAT. VAT rate is 10%.
7) The unit size of the selling unit is 1 kg, and selling price is Tk. 2,000 inclusive of VAT whether it is packed
in Mohakhali Factory or marketed from Tejgaon warehouse

Requirement: Considering the overall financials, advise which one Gloria Ltd should consider.

Answer to the Question # 9:

Page 16 of 17
I would recommend Gloria Ltd should consider import in bulk and repack the same at its Mohakhali factory, as it will
result in higher profitability compared to import in finished form (Tk. 359.65 vs Tk. 283.41).
The details calculation in support of my recommendation are given below:
For Bulk import For Finished good import
Particulars
Rates Amount in Tk. Rates Amount in Tk.
Selling price inclusive of VAT 2,000.00 2,000.00
VAT 15% 260.87 5% 95.24
Selling price without VAT 1,739.13 1,904.76
Supp. Duty @ production stage 10% 158.10 0% -
Selling price without VAT & Supp. Duty 1,581.03 1,904.76
Product cost per unit (Note-1) 1,221.38 1,621.35
Profit per kg 359.65 283.41

Note-1: Computation of per kg cost under both the options

For Bulk import For Finished good import
Component
Rates Amount in Tk. Rates Amount in Tk.
C&F Value per kg (to be paid to bank) 600.00 750.00
Minimum assessable value per kg N/A 700.00
Assessable value in Tk 612.06 765.08
Customs duty 25% 153.02 25% 191.27
Regulatory duty 3% 18.36 3% 22.95
Supplementary duty 0% - 20% 195.86
Value Added Tax 15% 117.52 15% 176.27
Advance Income Tax 5% 30.60 5% 38.25
Advance Tax (VAT) 4% 39.17 5% 58.76
Total duties and taxes in Tk 358.67 683.36
Total Assessable values + duties and taxes in Tk 958.67 1,433.36
Less: Recoverable amount
Value Added Tax 117.52 -
Advance Income Tax 30.60 38.25
Advance Tax (VAT) 39.17 58.76
Total recoverable amount on import 187.29 97.01
Landed cost 771.38 1,336.35
Additional cost:
Conversion cost inclusive of VAT 230.00 -
Less: Recoverable amount (30.00) -
Marketing and media expenses inclusive of VAT 230.00 230.00
Less: Recoverable amount (30.00) -
Distribution cost 50.00 50.00
Unrecoverable VAT (10%) - 5.00
Total cost per kg 1,221.38 1,621.35

---The End---

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