MD. SHAHADAT HOSSAIN FCA

Vice President

CPD SEMINARon

DRAFT DIRECT TAX ACT -2011

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF BANGLADESHTHE INSTITUTE OF CHARTERED ACCOUNTANTS OF BANGLADESH

ICAB Auditorium (9th floor)

11 May 2011

The National Board of Revenue (NBR) has drafted a Direct Tax Act with a view to repeal Income Tax Ordinance-1984. The Draft Direct Tax Act 2011 includes Income Tax, Gift Tax, Travel Tax and Wealth Tax. The objective of the recommendations is to assist NBR to make the act both tax payer and revenue friendly through making the act more understandable removing any conflict with other laws and accounting standards.

INTRODUCTIONINTRODUCTION

In the Companies Act 1994 there are some guidelines about books to be kept by a Company. So keeping consistency with this act it may modified incorporating another clause ‘d’ as follows:  “books” or “books of account” includes journals, ledgers, day-books, cash books, account books, stock register and other books, kept-

“(d) For the company “books” or “books of accounts” will also include books to be kept as per Companies Act 1994”.

Definition of “books” or “books of accounts” [Section 2(23)]Definition of “books” or “books of accounts” [Section 2(23)]

1) A deduction shall be allowed for a bad debt that is not a debt in respect of

money lent in the ordinary course of business by a financial institution if:

a) the bad debt is written off in the person‘s accounts;

b) a reasonably prudent commercial person would conclude that there is no reasonable likelihood that the debt will be paid;

c) the person has taken all reasonable steps to pursue payment; and

d) the amount represented by the debt is included in the person’s income in a previous tax year.

2) A financial institution shall be allowed a deduction for a bad debt claim in respect of loans made by the taxpayer in accordance with generally accepted accounting principles (GAAP) and relevant directives issued by appropriate authority such as Bangladesh Bank or prudential supervisory body.

Bad debts- (Section-37) Bad debts- (Section-37)

In schedule XI of Companies Act 1994 mentioned that sundry debtors should be presented in the accounts as “other debts less provision”.

From the contents of Companies Act it is clear that debtors should be shown in the balance sheet deducting any debts which is doubtful of recovery. So keeping consistency with the Companies Act provision for bad debts may be considered as allowable deduction without write off.

Bad debts- (Section-37) Bad debts- (Section-37)

Recouped deductions – [Section 34(1)(a)]Recouped deductions – [Section 34(1)(a)]

In clause (a) of sub-section 1 of section 34 of draft act guideline has been given about recovered deductions of bad debts as under. (a) subsequently, during any income year, the assessee has

received, except as provided in clause (b) whether in cash or in any other manner whatsoever, any amount in respect of such loss, bad debt, or expenditure, the amount so received shall be deemed to be his income from business or profession during that income year; According to generally accepted accounting principles /BAS/ BFRS any collection against provision for bad debts should be credited in the profit & loss account. So it is needless to mention separately in the tax law.

Repairs and improvements –(Section-39Repairs and improvements –(Section-39))

Regarding allowable deductions under heading repairs and improvement guideline in section 39 of draft act is as follows:

1) A deduction is allowed for an expenditure incurred by a taxpayer in a tax year to repair a non-depreciable asset or to repair or improve a depreciable asset used in the generation of business income.

2) For a depreciable asset, the deduction under sub-section (1) for each tax year is limited to 5 percent (or in the case of a building 3 percent) of the written down value at the beginning of the tax year.

3) The excess, if any, of the amount described in sub-section (1) over the limit in subsection (2) is treated as the cost of an asset added thereto during the tax year.

The contents of sub-section (2) is completely in contrast with the normal course of activities because at initial stage written down value of depreciable asset is higher and accordingly allowable deduction will be higher but requirements for repairs and improvement will be less, on the contrary when the asset will be old then requirement of repairs and improvements will be more but allowable deductions will be less as the written down value will be reduced.  Again, the contents of sub-section (3) are completely in violation of International Accounting Standard because ‘repair’ is revenue expenditure it can never be added with depreciable assets. So considering the above this section may be deleted.

Repairs and improvements –(Section-39)Repairs and improvements –(Section-39)

The contents of section 43(L) of the draft act is as follows: l) income from machinery, plant or furniture belonging to the person and let on hire, if the income is not included under the head” income from business” or “income from property”;

It will create ambiguity and hence it may be cleared in one place.

Income from other source –[Section-43(L)]Income from other source –[Section-43(L)]

Cash–basis accounting-(Section-46Cash–basis accounting-(Section-46))

In section 46 of the draft act necessary descriptions have been given about cash –basis accounting which is as follows: 1) A person accounting for income chargeable to tax on a

cash basis shall derive income when it is received and shall incur expenditure when it is paid.

 As per Companies act all the companies are to maintain accounts on accrual basis so the sub-section (1) of section 46 may be replaced by the followings. “A person other than a company accounting for income chargeable to tax on a cash basis shall derive income when it is received and shall incur expenditure when it is paid”.

As per Companies Act there is no scope of change of method of accounting therefore the sub-section (4) of section 45 may be replaced by the following. 

“A person other than a company may apply, in writing, for a change in the person‘s method of accounting and the Commissioner of Taxes may, by order in writing, approve such an application but only if satisfied that the change is necessary to clearly reflect the person‘s income chargeable to tax under the head “Income from Business”.

Method of accounting –[Section-45 (4)]Method of accounting –[Section-45 (4)]

In some cases there remain contradiction. For example Companies Act allow LIFO method. Since Company should prepare its accounts following norms of Companies Act so under section 48 another sub-section may to be added as follows: “(e) For the company method of accounting of

stock-in-trade as mentioned in the Companies Act-1994 and/or BFRS should be followed”.

Stock-in-trade-(Section-48)Stock-in-trade-(Section-48)

Gross income from business : (A)

Summary showing accounts as per companies Act & Summary showing accounts as per companies Act & BFRS and Computation of net business income as per BFRS and Computation of net business income as per tax lawtax law

1.1. All amount, whether of revenue nature, or All amount, whether of revenue nature, or

not not accrues or arises or deemed to have accrues or arises or deemed to have

been been accrued or arisen from the conduct of a accrued or arisen from the conduct of a

businessbusiness

XXXXXXXX

2.2. Income from other sources of business (Section-Income from other sources of business (Section-

26)26)

XXXXXXXX

3.3. Gross income from businessGross income from business XXXXXXXX

Less: Expenses incurred (B)Less: Expenses incurred (B)

1.1. Expenses accrued or incurred Expenses accrued or incurred for for the yearthe year XXXXXX

XX

2.2. Losses suffered in the year on Losses suffered in the year on the the disposal of assets disposal of assets XXXXXXXX

3.3. Depreciation or amortization Depreciation or amortization XXXXXXXX

4.4. Bad debts –if written off and Bad debts –if written off and fulfill fulfill other conditions (Sec-27)other conditions (Sec-27) XXXXXXXX

(Recommende(Recommended for revise)d for revise)

Net business income (A-B)Net business income (A-B) XXXXXXXX

Computation net business income Computation net business income as per taxas per tax

Net business income as per Net business income as per accountsaccounts

XXXXXXXX

Add personal or living expensesAdd personal or living expenses XXXXXXXX (Covered by (Covered by Companies Companies Act)Act)

Capital expenditure Capital expenditure XXXXXXXX (Covered by (Covered by GAAP)GAAP)

Expenses against public policyExpenses against public policy XXXXXXXX

Expenses until withholding Expenses until withholding obligation discharged obligation discharged XXXXXXXX

Receive against loss, debts & Receive against loss, debts & expenditure expenditure XXXXXX

XX

Interest/Profit provided on loan but Interest/Profit provided on loan but not paid within 3 years not paid within 3 years XXXXXX

XX

Trading liability not paid within 3 Trading liability not paid within 3 yearsyears

XXXXXXXX

Research and development Research and development expenses for depreciable asset and expenses for depreciable asset and natural depositnatural deposit

XXXXXXXX

Repairs and Improvement more Repairs and Improvement more than annual limit (Sec-39)than annual limit (Sec-39)

XXXXXXXX (Recommend(Recommended for delete)ed for delete)

Foreign currency debt lessees not Foreign currency debt lessees not fulfill the condition of (Sec-51) fulfill the condition of (Sec-51) XXXXXXXX

Payment against interest/profit, Payment against interest/profit, trading liability which were trading liability which were considered as income earlier due considered as income earlier due to non-payment within 3 years.to non-payment within 3 years. (XXXX(XXXX

))

Net business income as per taxNet business income as per tax XXXXXXXX

Deductions from agricultural income- Deductions from agricultural income- [Section 22 (1)(d)][Section 22 (1)(d)]

From the contents of this section it appears that forty percent of the market value of the produce of the land is considerate as profit. As per calculation of different government organization the margin of cultivation of the crop is very poor, not even more than ten percent. Considering the situation this sub-section may be replaced by the following. “where books of accounts in respect of agricultural income derived from the land are not maintained, the cost of production to be deducted shall, instead of the expenditure mentioned in clause (c), be eighty per cent of the market value of the produce of the land”.

Deductions from agricultural income-Deductions from agricultural income-

[Section 22 (2)][Section 22 (2)]

• There may be various conditions of cultivation of land through system of sharing of crop, such as some portion of cost of cultivation (like fertilizer irrigation) may be borne by the land owner under adhi, barga or bhag system. Considering this circumstance following para may be included under sub-section -2 of section -22.

• “Provided that payment if any, made by the land owner under adhi, barga or bhag system supported by necessary documents shall be considered as deductible expenditure in computing the income under the head agricultural income”.

But in section 15, where heads of income have been mentioned, there is no such head Interest on securities. According to draft act income from interest on securities will be considered as income from other sources. So considering this the section 58(4)(b) may be replaced by the following  “in the case of payments constituting income classifiable under the head “income from other sources” as “interest on securities” not being payment made by or on behalf of the Government, the authority, company or other institution issuing the security or the principal officer thereof”.

General provisions for deduction at source General provisions for deduction at source and advance payment of tax– [Section-58(4)and advance payment of tax– [Section-58(4)

(b)](b)]

Since in case of lottery there are scope of payment of goods instead of cash to the winners of lottery in that case there is no scope of deduction of tax except collection of tax. So considering the circumstance section 78 (1) may be changed as follows:

“The person responsible for paying any amount on account of winning referred to in section 46 (1) shall, at the time of making such payment deduct or collect tax payable on the amount at the rate of twenty percent”.

Deduction from income from lottery, etc-Deduction from income from lottery, etc-(Section-78)(Section-78)

Methodology of computation of advance tax as per section 89 (1) is as follows: 1) The amount of advance tax due to an assessee for a quarter

shall be computed according to the following formula, namely:

(A ÷ 4) – B,where –A is the tax assessed to the taxpayer for the latest tax year

or latest tax year under the repealed Act; and B is the tax paid or deducted or collected for the tax year

under this chapter.

The formula for each quarter advance tax payable as “(A÷4) –B “should be changed allowing assessee to adjust advance payment or deduction up to that quarter. Revised formula may be as follows:

{(A÷4) × number of quarter} -B

Computation of advance tax - section 89

As regards to accounts the contents of section 94 (3) (a) of the draft act is the return shall be accompanied by  a) a statement of accounts audited by a chartered

accountant in case of a company; To establish more financial discipline above clause (a) may be replaced by the following

“a statement of accounts audited by a chartered accountant and authenticated by the directors as per Companies Act in case of the company”.

Return of income –[Section 94(3)(a)]Return of income –[Section 94(3)(a)]

As per section 105 of draft act 2011provision of assessment in case of persons leaving Bangladesh.

Again as per section 111 of draft act of assessment of persons about to leave Bangladesh.

Both these sanctions are in same nature so it should appear in one section only.

Assessment in case of persons leaving Assessment in case of persons leaving Bangladesh –(Section-105)Bangladesh –(Section-105)

Sub-section (2) of section 113 mentioned limit about gift as follows: 2) In addition to the exemptions mentioned in sub section 1, no gift tax shall be applicable under this Act for any gift made by any person in a tax year not exceeding the value of taka fifty thousand.

Considering the present volume of economy, increasing the limit of non taxable gift may be inserted as under “In addition to the exemptions mentioned in sub section 1, no gift tax shall be applicable under this Act for any gift made by any person in a tax year not exceeding the value of taka two lac”.

Exemption is the case of certain type of Exemption is the case of certain type of gifts -[Section-113(2)]gifts -[Section-113(2)]

Section 126 mentioned the exemption from travel tax. Considering the importance of travel following may be considered for exemption of travel tax. “(b) Patient suffering from cancer and other disease

which need advance treatment/diagnosis but not available in the country.

(k) any person traveling the other countries to participate in the meeting on behalf of any institutes/institutions approved by the Government”.

Exemption from travel tax -(Section-126)Exemption from travel tax -(Section-126)

The quantum of interest payable by the government is set at 7.5%, whereas the assessee has to pay 10% u/S 92 (1) and even 24% u/S 80 (1) (b). As a delay in payment has the same effect for both the taxpayer and the government, the interest rates should be aligned.

 

Recommendation: To amend Sec 93 (1), Sec 80 (1) (b) and Sec 171 in a way that the same interest rate is applied in all cases.

Interest on delayed refund (Section -185)Interest on delayed refund (Section -185)

Both Sections have the same name. Whereas Sec 200 is generic, Sec 204 is very specific. The Sections can be combined for easier reference.

 

Recommendation: It should appear in one section only.

Avoidance of tax through transactions Avoidance of tax through transactions with non-residents (Section-200 and 204)with non-residents (Section-200 and 204)

According to part D of First schedule under section-

25 of Direct Tax Act-2011 there is a provision that the

income from certain sources shall be computed

applying the rate of tax applicable for the tax year,

which is similar to the section 82 (c) of existing tax

ordinance -1984. This provision income tax create

scope of window dressing of the financial statements.

An example is presented below assuming rate of tax

deduction at source from contractors bill @ 4.50%

Rate of settled tax on income of certain Rate of settled tax on income of certain categories of businesscategories of business

Particulars Particulars Actual Actual (Tk. In (Tk. In crore)crore)

Probable Probable Impact of Impact of First Schedule First Schedule Part -D (Tk. In Part -D (Tk. In crore)crore)

Turn over Turn over 100.0100.0 100.0100.0

Cost of Goods sold/construction cost Cost of Goods sold/construction cost 80.080.0 70.670.6

Gross Profit Gross Profit 20.020.0 29.429.4

Administrative overhead Administrative overhead 6.06.0 6.06.0

Selling overhead Selling overhead 4.04.0 4.04.0

Financial overheadFinancial overhead 3.03.0 3.03.0

13.013.0 13.013.0

Profit before taxProfit before tax 7.07.0 16.416.4

Provision for taxProvision for tax 1.91.9 4.54.5

Net profit after taxNet profit after tax 5.15.1 11.911.9

Earnings per share (EPS)-TakaEarnings per share (EPS)-Taka 20.420.4 47.647.6

XYZ Ltd.XYZ Ltd.Profit & Loss AccountProfit & Loss Account

Capital & Liabilities Capital & Liabilities

Share capital (25lac share @ Tk. Share capital (25lac share @ Tk. 100) 100)

25.025.0 25.025.0

Bank LoanBank Loan 30.030.0 30.030.0

Current liabilities Current liabilities 25.025.0 18.218.2

Profit & Loss AccountProfit & Loss Account 20.020.0 26.826.8

100.0100.0 100.0100.0

Property & AssetsProperty & Assets

Fixed Assets Fixed Assets 80.080.0 80.080.0

Current AssetsCurrent Assets 20.020.0 20.020.0

100.0100.0 100.0100.0

XYZ Ltd.XYZ Ltd.Balance SheetBalance Sheet

The tax year

• The provision for written permission requirement should be withdrawn and original provision of the old act be restored to make it tax payer friendly as before.

Capital asset

• (4a) “Capital asset” has a universal meaning. This meaning should not be restricted by saying that an asset is capital asset only when it is held for more than 365 days or so on.

• (4b) It is to be seen if the capital market, the main source of private capital, will be affected

Dividend

• Payment of tax on accrued dividend is against the spirit of levy of direct tax. Moreover payment of tax on accrued dividend will be impossible for tax payers who will have only such accrued dividend income and adjustment of TDS on dividend received subsequently will be difficult for them.

• This provision should be amended to allow tax payment only after receipt of dividend like before.

House property income

• This newly changed provision should not be

there because this will discourage much

needed development of housing sector of

our over populated country

Business Income

• A new definition for “Business Income”

should be inserted before “Net Business

Income”.

Income from life insurance policy on maturity

• As capital receipt is not taxable and as

there is no profit motive behind a life

insurance policy, it should not be taxed

Alternative Dispute Resolution (ADR):

• Physical presence of the tax payer himself

with or without authorized representative

has been made compulsory which is

practically not possible. Therefore it needs

amendment.

Determination of income from arm’s length transaction

• Examined before It is to be enactment if this will affect FDI and is a pre-mature decision. Clear and specific rules should be there with no discretionary power to the assessing officer.

• Transfer pricing is a very complex and technical matter and inaccurate knowledge and application may lead to unfair and arbitrary assessments. There are already enough provisions to tax business income and this section should be considered for deletion. It may also lead to increase in cost of imported raw materials and consequently increase in cost of production.