Income Taxation: Theories and

Implication
Summer 2023
Course Instructor:
AFD
 Basic Theory of Income
Taxation
 Income tax is a part of direct tax, it is the main
sources of public revenue income for each of
the country .
 Income tax revenue depends on tax base and
rate, such as:
R=b*t
where, b = income tax base, and t = income tax
rate
 Income tax revenue is highly responsive to base
changes for any economy
How can you justify an equitable
income tax structure?
For understanding the equity of income taxation – tax
structure is crucial, but the tax structure is determined
by two components –
•Marginal tax rate(MTR)
•2. Average tax rate(ATR)

Basically, there three types of income structure exists:

•Progressive income tax structure
•Proportional Income tax structure
•Regressive income tax structure
The progressive tax structure ensures the equity of
income taxation.
 Income Tax
Structure
This is a hypothetical
illustration
Income Marginal Total Average
Level Tax Rate Tax Taxes Tax Rate
0 - $100 0 $0 $0 0.0 %
%
$101 - $10
$200 10
% Additional Taxes ( $10)
Paid
MTR =
Additional Taxable Income ($100)
The Marginal Tax Rate (MTR) is the rate you pay
on the last dollars you earned
 Income Tax
structure
This is a hypothetical
illustration
Income Marginal Total Average
Level Tax Rate Tax Taxes Tax Rate
0 - $100 0 $0 $0 0.0 %
%
$101 - $10 $10 5.0 %
$200 10
% Total Taxes Paid ( $10)
ATR = --------------------------------
----------
EntireisIncome
The Average Tax Rate (ATR) the overall rate($200)
you pay on your
entire income
7-22
 Income Tax
Structure
This is a hypothetical
illustration
Income Marginal Tax Total Average
Level Tax Rate Taxes Tax Rate
0 - $100 $0
$101 - $200 $10
$201 - $300 $12
$301 - $400 $15
$401 - $500 $28
$501 - $600 $50
> $600
7-27
 Income Tax
Structure
This is a hypothetical
illustration
Income Marginal Tax Total Average
Level Tax Rate Taxes Tax Rate
0 - $100 0 $0 $0 0.0 %

%
$101 - $200 10 $10 $10 5.0 %

%
$201 - $300 12 % $12 $22 7.3 %
$301 - $400 15 % $15 $37 9.3 %
$401 - $500 28 % $28 $65 13.0 %
 Classification Income Tax Structure
• Progressive taxes
– Places a greater burden on those best able to pay and
little or no burden on the poor
• Proportional taxes
– Places an equal burden on the rich, the middle class,
and the poor
• Regressive taxes
– Places a heavier burden on the poor than on the rich

7-29
 Taxable Income
$0 $1000 $2000 $3000
Proportional
Tax liability $0 $100 $200 $300
ATR ---- 10% 10% 10%
MTR 10% 10% 10%
Progressive
Tax liability $0 $50 $150 $400
ATR --- 5% 7.5% 13.5%
MTR 5% 10% 25%
Regressive
Tax liability $0 $150 $200 $250
ATR --- 15% 10% 8.3%
MTR 15% 5% 5%
 a. Nominally
progressive tax
20

16

12

0
0 20 40 60 80
100
Annual income ($ thousands)
7-30
 b. Nominally
proportional tax
20

16

12

0
0

7-31
 c. Nominally
regressive tax
20

16

12

0
0 20 40 60 80
100
Annual income ($ thousands)
7-32
Calculation Tax Liability: A hypothetical Example

Consider, Mr. X works at ABC company, and his all sources of

income components are shown in the table below:
Sl. Head of Income Amount in BDT
Office:
1 Basic salary 50,000
2 Allowance
A. House Rent 20,000
B. Medical Service 5000
C. Festival Bonus 30,000
3 Interest Income on Bank account 10,000
4 Others source of Income 5000
Exemption and Deductions List --

 House rent allowance up to BDT 15,000

 Medical allowance up to BDT 5,000

 He has already paid tax at source by amount of BDT 1,500

in ABC company
Calculation Tax Liability: A hypothetical
Example
Based on income tax government will charge by
the below tax structure:

Income Range Income Tax Rate(%)

0-30,000 0%
30,001-40,000 10%
40,001 – 60,000 15%
60,001 – 90,000 20%
90,000 and above 30%
 Calculation Gross Tax liability
Total Income = All sources of Income

Gross Income = Total Income – Total Deductions and

Exemptions

Tax Liability =
1st Slab =0
2nd Slab = 1000
3rd Slab = 3000
4th Slab = 6000
Remaining Slab = 3000
Total = 13000
Tax Rate (Assessment Year 2015-16)

For individuals other than female taxpayers, senior

taxpayers of 65 years and above, retarded taxpayers
and gazetted war-wounded freedom fighter, income tax
is payable for the
On first upto Tk. 2,50,000/- Nil
On next upto Tk. 4,00,000/- 10%
On next upto Tk. 5,00,000/- 15%
On next upto Tk. 6,00,000/- 20%
On next upto Tk. 30,00,000/- 25%
On balance amount 30%
Tax Rate (Assessment Year 2015-16)

For female taxpayers, senior taxpayers of age 65 years

and above, income tax is payable for the
On first upto Tk. 3,00,000/- Nil
On next upto Tk. 4,00,000/- 10%
On next upto Tk. 5,00,000/- 15%
On next upto Tk. 6,00,000/- 20%
On next upto Tk. 30,00,000/- 25%
On balance amount 30%
Tax Rate (Assessment Year 2015-16)

•For retarded taxpayers, tax free income threshold limit is

TK.3,75,000/-.
•For gazetted war-wounded freedom fighters, tax free
income threshold limit is Tk. 4,25,000/- .
•Minimum tax for any individual assessee living in Dhaka
and Chittagong City Corporation area is Tk. 5,000/-.
•Minimum tax for any individual assessee living in other
City Corporations area is Tk. 4,000/-.
•Minimum tax for any individual assessee living in any
other areas is Tk. 3,000/-.
•Non-resident Individual 30% (other than non-resident
Bangladeshi)
 Rate of Rebate
• 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 Superannuation 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.
 Rate of Rebate
• Donation to charitable hospital approved by National Board of
Revenue.
• Donation to philanthropic or educational institution approved by
the Government.
• Donation to socio-economic or cultural development institution
established in Bangladesh by Aga Khan Development Network.
• Donation to ICDDRB.

• Donation to philanthropic institution-CRP, Savar, Dhaka.

• Donation to Asiatic Society of Bangladesh.

• Donation to Muktijodha Jadughar.

 Rate of Rebate
• Donation up to tk. 5 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 Protibandhi Unnayan
Foundation, Mirpur, Dhaka.
• Donation to Dhaka Ahsania Mission Cancer Hospital.

• Donation to Sylhet Diabetic Samity, Islamia Eye Hospital and MA

Ispahani Institute of Opthalmology, Kidney Foundation and National
Heart Foundation of Bangladesh.
 Rate of Rebate
• 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 savings certificate and
Bangladesh Government Treasury Bond.
• Investment in purchase of one computer or one laptop by an
individual assessee.
 Calculation Gross Tax liability

Moreover, Mr. X invests in approved debenture stock

for tax rebate by amount of BDT 100,000. He is allowed
to investment up to 30% of gross income and rebate
rate =20%.
 Calculation Gross Tax liability
Allowable investments ---
30% of Gross income =

Actual Investment for Rebate = Gross Income

We will choose the lowest one.

Tax Rebate = Allowable Investment * Rebate rate

Net Tax Due = Tax liability – Tax at source – Rebate

Total Tax Payment = Net Tax due + Tax at source

Problems of Implementation
Determining Income
Timing
Deductions
Automation in tax system
Cost of Tax Collections
Weak Institution Capacity
Income Tax and Bangladesh
Experience
 Narrow Tax Base
 Lower ETIN numbers
 Weak Institution capacity
 Problem of determination of income
 Withholding Tax or deduction at
sources
 Lack of Automation