Review of tax measures in Finance Act-2014

--A F Nesaruddin FCA

It is more than two months now that the annual national budget was presented and subsequently, the Finance Act for financial year 2014-15 has been passed. Immediately before and after the placement of budget proposals in the Jatiyo Sangshad (national parliament), there were wide media coverage and a series of commentaries on the tax measures incorporated in the finance bill. But that excitement has obviously subsided. We can now dispassionately review and evaluate the tax measures introduced by the Finance Act 2014.

Many of the new measures are really good and deserve appreciation. Some of them are:

A)           Raising the taxable limit of income for women, wondered freedom fighters and physically retarded tax payers. This is one of the positive measures having significant social implications;

B)            Introducing tax rate of 30% for individual tax payers in case of income exceeding 44.20 lakhs. This will help increasing revenue;

C)            Introducing 4-slab rate for wealth surcharge instead of two and raising the highest rate to 30% instead of 15%. Similarly, this will also help increasing revenue.

On the purely fiscal perspective, some notable measures are – 1) Reducing the rate of minimum tax (turnover tax) from 0.50% to 0.30%; 2) Increasing the amount of allowable perquisites to Taka 350,000; 3) Extending the time limit of tax holidays up to 30 June 2019; 4) Reviewing the rate of tax for sale of immovable properties; 5) Expanding the area of tax withholding; 6) Making clear provisions of tax deduction in case of supply and procurement of goods through local LC; 7) Reintroducing provision for keeping self assessment returns out of audit subject to fulfill of certain conditions; 8) Making compliance with BAS and BFRS compulsory; 9) Introducing penalty for certification of incorrect or false audit report by Chartered Accountant; 10) Making the transfer pricing cell of NBR operate from July this year and many others.

We welcome the tax measures discussed above and feel that although these are not sufficient, they will contribute towards increasing tax collection and rationalizing tax administration to some extent. However, we also need to point out some weakness of the taxation system specially emphasizing that several important tax related issues have not been addressed in this years’ budget and subsequently, Finance Act too.

 

a)            There is no measure to curb the discretionary powers of tax assessing officials. These officials arbitrarily disregard audited accounts, make huge addition to tax payer’s income and create a heavy tax burden. Tax payers do not get proper redress in many cases against these arbitrary assessments even in appeal or Taxes Appellate Tribunal. Thus they face a helpless situation and being harassed unjustifiably.

b)            Selection of self assessment returns for audit is still not done in any neutral or objective basis. It is done on personal choice of tax officials depending on their personal likes and dislikes or some other personal motive. No step has been taken in this year in this regard to improve the situation.

c)            It has been a long standing demand of tax professionals and others that there should be a judicial member in each bench of the Taxes Appellate Tribunal. Because, except in one bench, almost all members of the Tribunal are now Tax Commissioners on deputation and consequently the Tribunal has lost its neutrality and impartiality in a general sense.

d)            A new provision has been introduced this year to impose tax on the amount received by an individual in excess of the total premium paid on maturity of his life insurance policy. This measure will have insignificant revenue impact but it will greatly discourage policyholders who mostly belong to middle class and fixed income groups. This will definitely have negative impact on national savings and insurance business.

e)            Tax rate for non-listed companies has been reduced nominally from 37.50% to 35%. But the corporate tax structure as a whole has been kept unchanged. Our corporate tax rate is quite high compared to other countries of the region. There has been continued request and appeal from concerned quarters to reduce and rationalize our corporate tax structure. Further, arbitrary and unjustifiable disallowances and additions to taxable income also lead to increase the effective rate of taxes. Mere increasing rate may apparently seems higher tax revenue but in reality, this encourages to have tendency for tax evasion. This issue need to be addressed for reasons which need no elaboration.

f)             The provision to penalize a Chartered Accountant for certifying false or incorrect audit report has been introduced but no provision has been enacted for penalizing the entity personnel who prepare the financial statements. It was expected that at the same time, some provision should have been there to take punitive action against the preparer of financial statements in the concerned company as well. Because an audit report is finalized on the basis of financial statements prepared and information supplied by the company as disclosed in the set of financial statements as well as in the audit report.

g)            No major avenues identified in the Finance Act this year for widening tax base. There appears no measure for improvement in the tax-GDP ratio.

h)            Presumptive tax for transport sector is not justifiable and causes lot of tax leakage suffering tax collection. Transport sector should come under normal system of taxation. Renewal of route permits should be subjected to payment of normal tax.

i)             Section 82C was introduced to simplify tax assessment procedures considering collected tax as final settlement. But in recent amendments, additional tax are also being collected over the tax collected under 82C. The charging additional tax under this provision is against the basic principle of “Final Settlement” and self-contradictory.

j)             Certain emerging and employment generating industries like tourist industries are still kept out of tax holiday or reduced tax rates in the current tax laws.

k)            Similarly, no fiscal incentives offered to potential investors in food and agriculture preserving installations like sophisticated and modern cold storage for ensuring fair price to agriculture producers and reducing price gap between producers and consumers levels.

l)             No provision appears with respect to investment by ‘provident fund’, ‘gratuity fund’ and ‘pension fund’. In Bangladesh, no pension benefits are sponsored by the state and in such a situation, an incentive for investments by such funds was absolutely essential apart from avenues of investments (allowing tax-free easier investment in Sanchaypatra and similar other instruments).

Regarding whitening black money, there is still confusion and many people ask whether this provision is still in force or deleted. Yes, the provision is still in existence and some provisions regarding disclosure of untaxed income (Whitening of black money) are still retained in our tax laws. Section 19E of the Income Tax Ordinance 1984 provides that a person may disclose his undisclosed income in his normal tax return indicating the head under which this undisclosed income falls. Normal tax on the undisclosed income plus 10% penalty on the amount of tax has to be paid before filing the tax return. In addition, a declaration regarding the undisclosed income has also to be submitted with the tax return. This section does not lay down any strict condition for investment of the amount thus disclosed. Similarly, section 19BBBBB of the Income Tax Ordinance 1984 provides another opportunity for investment of untaxed income through investment in flats or building. This section provides that no question will be raised as to the source of fund in respect of investment made by a person in construction or purchase of a building or apartment in city corporation, paurasava or other areas, if tax at specified rates are paid by the person before assessment for the year in which the investment was made is completed. The section specifies the various rates of tax per square meter depending on the location and size of the building or apartment. During the budget session of the Jatiya Sangshad in last many years, there were comments and counter comments in or outside the parliament from various quarters including the Finance Minister himself on the question of whether there should be any opportunity for disclosure and whitening of black money. Ultimately these two provisions have been retained. Incidentally, tax collected in this regard is negligible and this kind of provision encourages corruption in the society. Further, genuine tax payers are discouraged as well. However, considering all relevant aspects of the issue, it is strongly recommended that these provisions need further amendment in due course.

Considering the people’s expectation, general bottlenecks in our taxation system, people’s apathy towards payment of tax, poor tax GDP ratio, reducing corruption and sufferings of the genuine tax payers, developing a good relationship between the tax payers and collectors (as opposed to existence of mistrust in many cases), lack of adequate manpower with required expertise in the tax department, weak tax administration structure in terms of close monitoring and application of fair judgment and many other related issues, it is pertinent to consider and review the issues discussed above for a better taxation system.