LETTER OF TRANSMITTAL

04th April 2007

Ms.Rehana Fowzia (Lecturer)
Department of Business Administration
Stamford University Bangladesh

Subject: Submission of report on ‘Ascertain the position of cannons of taxation in tax system
of Bangladesh’.

Dear Ms.Rehana Fowzia madam

We are pleased to submit this report on “‘Ascertain the position of cannons of taxation in tax
system of Bangladesh’ for particular fulfillment of BBA Degree.
This research program was taken by the help of ‘Three tax system of Bangladesh’, written by
M.A. Akkas & ‘Income Tax’ written by Mahmud, Purohit, Bhattacharjee. Here is the report
on the observational study of ‘Tax System Of Bangladesh’ you asked us to conduct last
month.
We honestly believe that this report will fulfill the requirements of the project report for
BBA, which will help us a lot to gain sufficient knowledge about the ‘Tax System Of
Bangladesh’.
We appreciate having this assignment. If you should need any assistance in interpreting this
report or in implementing our recommendations, please contact us
atuddin_mezbah@yahoo.com, Contact No. 01718330355
Sincerely,
01. Mezbah Uddin Ahamed BBA02707126
02. Subbir Ahmed BBA02707121
03. Md. Mahmud Hossain BBA02707154
04. Subroto Biswas BBA02707125
05. Shamol Kanti Sarkar BBA02707112
06. Md. Mahfujul Alam BBA02707153

Program: BBA, Batch: 27 (J), Stamford University Bangladesh.

 ACKNOWLEDGEMENT

Education involves not only reading books and doing exercises but also acquiring
knowledge through doing something practically. This report has designed only for
considering that objective. In this period of time, we enjoyed the study of tax system of
Bangladesh in various aspect of tax.

First of all, we are indebted to our guide teacher Ms.Rehana Fowzia Lecturer, Department of
Business Administration, Stamford University Bangladesh. His views, suggestions save us
from more difficulties.

We are also grateful to our group members’ most valuable cooperation, inspiration and
suggestions.
 TABLE OF CONTENTS

Heading Page No.

LETTER OF TRANSMITTAL
ACKNOWLEDGEMENT
EXECUTIVE SUMMARY

A. Objective of this study - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -05

B. Limitation of this study- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 05
C. Methodology of study - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 06
D. About tax- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -07
E. Tax system of Bangladesh: - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 08
 Major heads of tax-revenues of Bangladesh - - - - - - - - - - - - - - - - - 08
 Major heads of non-tax revenues of Bangladesh - - - - - - - - - - - - - -08
 The characteristic of Bangladesh Tax System - - - - - - - - - - - - - - - -09
G. Tax structure of Bangladesh - - - - - - - - - - - - - - - - - - - - - - - - - - - - 15
H. Canon of taxation- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 18
I. Application of canon in the tax system of Bangladesh - - - - - - - - - - - 21
J. Conclusion - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -23
k. Recommendation- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 24
L. Bibliography- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -25
 EXECUTIVE SUMMARY

This dissertation report highlights on our practical experience in different types and
categories ‘Tax System’ especially Tax System Of Bangladesh. During our short working
period, we tried to gather information from News Paper, web sites. But the NBR does not
provide information in the web site directly and even it does not publish tax structure
implement in Bangladesh. So, we take much information about tax in our personal concept
and view of Tax System of Bangladesh.

To complete this report, we have gained practical knowledge about various type of Tax
System. For example, Tax System Of Bangladesh, canon of taxation and implementation the
canon of Bangladesh in Tax System Of Bangladesh.

In this way, we are getting knowledge not only the tax system but also the implementation of
canon on tax system of Bangladesh.

As, tax is an important part of our country development. so, day by day, people are getting
more conscious and informed about tax.
 OBJECTIVE OF THIS STUDY

We can gain knowledge about the tax system of Bangladesh by studying this topic. As
following aspects of tax we can learn from this study:
1. To get the idea about the collection of revenue, as context of Bangladesh.
2. How distribute the income of people in Bangladesh is allocated.
3. How economic control to achieve their micro economic control.
4. Effect of the tax system of Bangladesh to economic development.
5. How national income is raised in desired level.

LIMITATION OF THIS STUDY

There are some limitations of this study. Therefore the assignment may lack some crucial
data.
1. Necessary data and information an neither adequate nor well finished.
2. The duration that is for assignment program is not enough to learn about the tax
system of Bangladesh.
3. This assignment does not analyze the critical analysis of different sectors in the tax
system of Bangladesh in details.

The assignment has encountered these limitations that may have hinder progress. But with
constant effort, our goal was to minimize the negative efforts of these limitations.
 METHODOLOGY OF THIS STUDY

Basically there are two types of methodology. One is Primary sources and another is
secondary sources.
Primary source:
Primary source are those type of source that we collect information or survey directly from
the organization.
Secondary source:
Secondary source are those type of source that we collect information from online or any
reference books.
To make this overall assignment we followed the secondary sources like, online, reference
book, and journal.
 ABOUTTAX

Tax is a compulsory levy imposed by the Government. People pay taxes to the Government
on the basis of what they earn, what they own and what they purchase.

A tax is a compulsory payment levied on the persons or companies to meet the expenditure
incurred on conferring common benefits upon the people of a country.

Two aspects of taxes follow from this definition:

 A tax is a compulsory payment and no one can refuse to pay it.

 Proceed from taxes are used for common benefits or general purposes of the state.

Classification Of Tax:

On the basis of tax rate

 Progressive Tax
 Proportional Tax
 Regressive Tax

On the basis of impact and incidence

 Direct Tax
 Indirect Tax

On the basis of base

 Single Tax
 Multiple Tax

TAX SYSTEM OF BANGLADESH

Major heads of tax-revenues of Bangladesh are as follows:

A. Taxes on Income and Profit

1. Income tax-Companies
2. Income tax-Other than Companies

B. Taxes on Property & Capital Transfer

1. Estate Duty and Gift Tax

2. Wealth Tax
3. Narcotics Duty
4. Land Revenue
5. Stamp duty-non-judicial
6. Registration

C. Taxes on goods and services

1. Customs Duties
2. Excise Duties
3. Value Added Tax (VAT)
4. Supplementary Duty (On luxury items and in addition to VAT)
5. Taxes on Vehicles
6. Electricity Duties
7. Other Taxes and Duties (travel tax, turn over tax, etc.)

Major heads of non-tax revenues are as follows:

D. Interest, Dividend and Profit

E. General Administration and Services

F. Social and Community Service

G. Economic Services

H. Agriculture and Allied Services

I. Transport and Communication

J. Other non-tax revenue

K. Capital Revenue

The characteristic of Bangladesh Tax System comprised of the

following factors:

(a) Revenue GDP Ratio:

A key component of fiscal policy of the government is to strengthen the effort to mobilize
domestic resources to generate a larger share of resources for investment. The strategy
involves both revamping tax management and providing the right incentives to stimulate
domestic savings. Domestic resource mobilization through the tax effort is not outstanding,
but is a significant improvement over the past. The following table gives the ratio of tax
revenue, non-tax revenue and revenue to GDP over the years.

Ratio of GDP

Year 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002

Tax Revenue 7.69 7.36 6.78 7.80 8.09

Non-tax 1.81 1.64 1.69 1.47 1.74

Revenue

Total Revenue 9.50 9.00 8.47 9.28 9.83

 10
9
8
7
6
Rate 5
Tax revenue
4
Non-Tax revenue
3
2 Total Revenue
1
0
1997-98 1998-99 1999- 2000-01 2001-02
2000
Year

Figure: Ratio of GDP

(b) Realization of taxes vis-à-vis budget:

The apex organization which controls the bulk of revenue receipts and taxes in Bangladesh is
the National Board of Revenue (NBR), which was established in 1972. In Bangladesh, it has
been observed that over the years, realization of revenue (NBR portion) exceeds or comes
closer to budget target. The actual realization of revenue (NBR portion) was 2.16% higher
than the target. This may be seen clearly from the following table (1990-91 to 1994-95).

Actual Realization of tax revenue vis-à-vis target

Financial Year Realization of Target

1990-91 102.35%.

1991 -92 101.21%.

1992-93 101.04%

1993 - 94 97.78%

1994-95 102.16%
(c) NBR Tax Vis-a-vis Total Revenue:
Realization of Target

103
102
101
Realization of 100
99
Target(%)
98
97 Realization of Target
96
95
1990- 1991- 1992- 1993- 1994-
91 92 93 94 95
Year

(d) Trend of Revenue Receipts:

(e) Domination of Indirect Tax Over Direct Tax:

Despite the progress for ensuring self-reliant development in a global climate of free
economy, a major thrust of fiscal policy in Bangladesh has to be on raising the revenue-GDP
ratio. Further, there is an urgent need for shift in the composition of revenues away from tax
on international trade, goods and services towards direct taxes on income and profit, whose
share in total revenue in Bangladesh is appallingly low, even compared to other developing
countries in Asia. This can be seen from the following table

Heads of Taxation Total Amount Percentage

(Crore Taka) (Rounded Off)

Customs duties (Export / import) 3,676.94 34%

VAT (Import) 2,215.23 21%

VAT (local production) 1.248.34 12%

Supplementary Duty (Luxury Items) 187.61 15%

Supplementary Duty (Luxury goods of local origin) 1,344.12

Excise Duty 177.82 2%

Income Tax 1,491.56 14%

Other Taxes 180.94 2%

Total 10,522.56 100%

Source: National Board of Revenue

* This is depicted in the following pie diagram:

Custom Duty

VAT (local production)

14% 2%
2%
0% 34%
Supplementary Duty
(Luxury Items)
15%
Supplementary Duty
12% 21% (Luxury goods of local
origin)
Excise Duty

Income Tax

Other Taxes

It will be seen that major share of tax revenue is attributed to indirect taxes. Out of the
indirect taxes, share of import-based taxes was the highest. Lack of progress in expanding the
base for direct taxes remains a major shortcoming of the tax reform agenda of Bangladesh.

(f) Forecast of Tax-Revenue:

The introduction of VAT in 1991 was a bold move. It now covers manufacturing at the
wholesale and retail stage and some selected services. Efforts are on to make VAT as
comprehensive as possible. Though VAT is now recognized as an efficient and non-distorting
means of taxation by economists and policy makers alike, its introduction in many countries
is held up due to political reasons. Thus Bangladesh can take credit of introduction of VAT
within so short a period of time. Due to computerization in progress at NBR, it is now
possible to predict revenues and their composition with much more precision than in the past.
Tax revenues have recently shown unusual buoyancy and responsiveness to tax reforms and
rate adjustments. Imports responded vigorously in 1994-95 to the sharp reductions in tariffs
yielding significantly higher revenues from import taxation with tariffs rates at an all time
low. As most revenue targets except those of direct taxes were exceeded in 1994/95, it
warranted upward revision of targets for the following year. This optimistic trend is expected
to continue into the year 2000 with tax revenues posing a higher trajectory, than would have
been the case without tax-reforms.

TAX STRUCTURE OF BANGLADESH

Below is a table of tax revenue collection of Bangladesh government for the financial year
2005-06 and budget estimate for the financial year of 2006-07.
Description Budget Budget Increase/ Increase /
(2006-07) 2005-06 (Decrease) in (Decrease) in
(Revised) 2006-07 over 2006-07 over
2005-06 (Tk) 2005-06 (%)
Tax revenue:
National Board
of revenue(NBR
Portion)
Taxes on income 8500 6960 1540 22%
and profit
Value added 14729 12398 2331 19%
Tax(VAT)
Import duty 9485 8235 1250 15%
Excise duty 185 163 22 13%
Supplementary 7701 6394 1307 20%
Duty
Other taxes and 455 306 149 49%
duty
Sub total: NBR 41055 34456 6599 19%
portion
Non- NBR 1860 1719 141 8%
 Portion
Total tax revenue 42915 36175 6740 19%
Total Non-tax 9625 8693 932 11%
revenue
Total revenue 52540 44868 7672 17%
(Source: Finance Minister’s Budget Speech for FY 2006-07)

1. DIRECT TAX CONTRIBUTES ONLY SMALL PORTION OF

TOTAL TAX REVENUE:

Tax revenue structure of Bangladesh can be divided into direct and indirect taxes. A direct
tax is paid by a person to the revenue authority. Direct tax is borne by the tax payer and can
not be passed on to any person, whereas indirect tax is passed on by the tax payer so that the
burden of the tax is ultimately borne by another, for example Value Added Tax(VAT) which,
although paid by the businessmen, is passed on to the customers. That is, indirect tax is
charged on consumption in one way or another. Indirect tax is regressive because it takes a
higher portion of a poor person’s income than of a reach person’s. VAT is the same for all
people. Indirect taxes do not develop any civil consciousness in the minds of tax payers
because no body feels that he is paying a tax as it is concealed in price, whereas direct tax
create a civic consciousness among the tax payer; they feel that they are contributing towards
the state expenditure. In the case of direct taxes, the relation between the tax payer and the
revenue authorities is direct personal. But there is an indirect relation between the tax payer
and tax authorities in the case of indirect taxes, for the taxes are collected unofficially through
the agency of merchants.

2. PREDOMINENCE OF INCOME TAX AMON THE DIRECT

TAXES:

According to the income tax Ordinance, 1984, income may generate from different sources,
namely, salary, business & profession, house property, interest on security, agriculture,
capital gains, and other sources.
 3. NEGLIGIBLE DIRECT CONTRIBUTION OF THE

AGRICULTURAL SECTOR TO TAX REVENUE:

Direct taxation on agricultural sector normally takes two forms; land revenue tax and tax on
agricultural income. This sector accounted for more than 50% of total direct tax revenue in
the early sixties, but now agricultural income tax is very negligible. It accounts for only
0.01% of the GDP, although the average contribution of agriculture to the GDP is 35%.
Agriculture, more specifically, non-farm activity, still remains an untapped source of revenue
to the government. In most cases, income from agriculture does not exceed the ceiling of
non-taxable limit primarily due to subdivision and fragmentation of holdings for which
income is distributed to different hands. Furthermore, tax administration is not expanded
down to village, and therefore, current information on this source of income cannot be easily
collected for making assessment. Placing more emphasis on the collection of income tax from
agriculture may augment the price of our main food and may create socio-political unrest.
Government does not like others to do politics with food. High cost of collection of
agricultural tax may be another consideration. All these factors may contribute to the poor tax
performance of agriculture sector.

4. HEAVY RELIANCE ON DIRECT TAX BASED:

Bangladesh relies too much on indirect taxes, which accounts for nearly 80% of the total tax
revenue. On the other hand, the developed countries rely less on indirect taxes and more on
direct taxes. For example, indirect taxes account for 45% of total tax revenue of UK (Stain,
1997). Our dependence on indirect taxes is increasing gradually. Indirect tax is comprised of
mainly three types: Value Added Tax (VAT), Customs Duty, and Excise duty. The
government of Bangladesh introduced the VAT system in 1991-92. It was imposed at the
import cum manufacturing stage and replaced the prevailing excise duty on domestic
production at the production stage and sales tax on imports at the import stage. It is also
imposed on domestic services and its coverage of domestic goods has gradually increased in
the recent times. Value added is defined as the difference between the value of a firm’s sale
(outputs) and purchases of inputs.
 5. IMPORT DEPENDENCY OF INDIRECT TAX BASE:

Our tax structure is heavily dependent on imports. It is, however, obvious that the indirect
taxes on international trade composed almost entirely of taxes on imports, account for the
lion’s share of our tax yield. That is, the system of indirect taxation in Bangladesh is heavily
dependent upon import trade. Total import-based indirect tax is around 50% of total tax
revenue.

6. POOR TAX- GDP RATIO:

The ratio of tax revenue to GDP is an indicator of the government’s performance in

generating resources at its disposal through the taxation machinery. The higher this ratio, the
higher the effectiveness of the taxation system in terms of revenue yields. The contribution of
tax revenue to the GDP of Bangladesh was less than 4% in FY 1972-73 against 9.35% in
1995-1996. As per Periodic Economic Update of the World Bank of June 2002, tax revenue –
GDP ratio of Bangladesh is 9.7% in FY 2001-02. The Government claims that the current tax
revenue- GDP ratio is 10.40% and is expected to increase to 12% within the FY 2004-05.

CANNON OF TAXATION

The four canons of taxation as prescribed by Adam smith are the following:

1. Canon of equality:

“The subjects of every state ought to contribute towards the support of the government, as
nearly as possible, in proportion to their respective abilities; that is, in proportion to the
revenue which they respectively enjoy under the protection of the State.” This cannon tries to
observe the objective of economic justice. It dictates that in absolute terms the richer should
pay more taxes because without the protection of the State they could not have earned and
enjoyed that extra income. If we interpret this principle in terms of disutility which the tax-
payers suffer by paying taxes, it follows that the tax should impose equal marginal disutility
upon every tax-payer. Two possibilities emerge in this case. If incomes are subject to
constant marginal utility, then both the rich and the poor should be subjected to proportional
taxation—each person paying a given percentage of his income as tax. On the other hand, if
we agree with the more realistic proposition that income is subject to diminishing marginal
utility, then the richer should pay a larger proportion of their income as taxes (that is, the
taxes should be progressive).

2. Canon of Certainty:

This canon is meant to protect the tax-payers from unnecessary harassment by the ‘tax
officials’. “The tax which each individual is bound to pay ought to be certain, and not
arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to
be clear and plain to the contributor, and to every other person.” The tax-payers should not be
subject to arbitrariness and discretion of the tax officials, since that breeds a corrupt tax
administration. With a scope for arbitrariness even honest tax machinery will become
unpopular. Smith is so emphatic about this principle as to claim “that a very considerable
degree of inequality… is not near so great an evil as a very small degree of uncertainty.”

3. Canon of Convenience:

The mode and timings of tax payment should be, so far as possible, convenient to the tax-
payer. This canon recommends that unnecessary trouble to the tax-payer should be avoided;
otherwise various ill-effects may result.

4. Canon of Economy:

This canon recommends that cost of collection of taxes should be the minimum possible. It is
useless to impose taxes which are too widespread and difficult to administer. These taxes
entail an unnecessary burden upon the society in the form of additional administrative
expense. The productive efforts of the people suffer due to this wastage. Realizing that the
tax collections are being wasted, the tax-payers also tend to evade them.
These canons of taxation have a sound philosophy behind them and exhibit an insight into the
practical aspects of tax administration and its effect. However, in view of developments in
economic philosophy and problems of a modern state, a few additional principles were also
suggested by latter writers. A brief description of these is as follows:

5. Canon of productivity:

It is also called the canon of fiscal adequacy. According to this principle, the tax system
should be able to yield enough revenue for the treasury and the government should have no
need to resort to deficit financing.

6. Canon of Buoyancy:

The tax revenue should have an inherent tendency to increase along with an increase in
national income, even it the rates and coverage of taxes is not revised.

7. Canon of Flexibility:

It should be possible for the authorities, without undue delay, to revise the tax structure, both
with respect to its coverage and rates, to suit the changing requirements of the economy and
of the treasury.

8. Canon of Simplicity:

The tax system should not be too complicated. That makes it difficult to understand and
administer and breeds problems of interpretation and legal disputes.

9. Canon of Diversity:
It is risky for the State to depend upon too few a source of public revenue. Such a system is
bound to breed a lot of uncertainty for the treasury. It is also likely to be inequitable as
between different sections of the society. On the other hand, if the tax revenue comes form
diversified sources, and then any reduction in tax revenue on account of any one cause is
bound to be very small. However, too much multiplicity to taxes is also to be avoided. That
leads to unnecessary cost of collection and violates the canon of economy.

In general, we must remember that the tax structure is a part of the economic organization of
a society and should, therefore, fit in its overall economic philosophy. No tax system that
does not satisfy this basic condition can be termed a good one. Over time, therefore, ideas
regarding what should form a good tax system have undergone an evolution. In the following
section we would briefly discuss the characteristics of a good tax system in the light of
modern economic philosophy.

APPLICATION OF CANNON IN THE TAX SYSTEM OF

BANGLADEH

There are so many tax system remains in Bangladesh. Among this tax system some cannons
are followed, some are not.
1. Canon of equality:
In these cannon it imposes of tax according to ability to pay. So under these circumstances
this is usually followed in the tax system of Bangladesh.

2. Canon of certainty:
This canon describe that the tax which each individual is bound to pay or to be certain and
not arbitrary. The time of payment, the manner of payment, the quantity to be paid, all ought
to be clear and playing to the contributor and to every other person. This canon is not to be
followed in the tax system of Bangladesh. So many corruptions are seen here.

3. Canon of convenience:
It should be convenient to pay tax. A person who starts to get earning money he or she has to
give tax on that moment. This step is not followed in tax system of Bangladesh properly.

3. Canon of economy:
Every tax has a tax of collection. It is important that the cost of collection should be as small
as possible. It will be useless to imposed tax which is too widespread and difficult to
administer.

4. Canon of productivity:

According to this principle, the tax system should be able to yield enough revenue for the
treasury and the Government should not be forced to resort to deficit financing.

5. Canon of elasticity:

As the need of the country increases, the revenue should also increase. To meet emergency,
the govt. should be in a position to augment its financial revenue through increasing tax rate.

6. Canon of simplicity:

The tax system should be simple and plain so that every one can easily understand it. The
assessment of tax must be simplified. To avoid corruption taxation should be simple.

8. Canon of diversity:

In line of productivity, canon of diversity also gives importance to adequate collection of tax
through diversification. Such a system breeds a lot of uncertainty for the treasury. On the
other hand, if the tax revenue comes from diversified sources, then any reduction in tax
revenue on account of any one is likely to be very small on total tax revenue. However, too
much multiplicity of taxes is also to be avoided.

CONCLUSION

After finishing this assignment successfully, we have learnt the canon of taxation, the
various tax systems in Bangladesh and the implementation of canon in the tax system of
Bangladesh. There are many problems in tax system of Bangladesh which is created by us.
So under these circumstances we all should reach on amalgamate decision with a view to
solving the problem immediately for the sake of the welfare of the whole nation.

RECOMMENDATION

Canon of tax implementation for the tax system in Bangladesh properly is not an easy task. It
needs several efforts, integration of all resources, proper rules and regulation and their
effective visualization.
This paper presents the following recommendations to be used by the authority or the process
of taxation for implementing the canon of tax system in Bangladesh-
 The canon of equality and certainty is not implemented properly in tax system in
Bangladesh. So, we should give concern about this canon.

 In tax system of Bangladesh the canon of convenience should be implemented properly.

It should be convenience to all people of Bangladeshi and it should be that assessee. So that
gives their payment quite easily.

 In Bangladeshi tax system is corrupted in many ways so we have to conscious about that
virus (corruption).

 There are many political influences is available in our tax system. So we have to get
it.

 All in all we have to be conscious about the tax payment for the sake of the country well.

BIBLIOGRAPHY

To complete this group assignment successfully, we have to collect information from

Various sources, such as newspapers, bulletin and web sites. So, as a reference website and
reference books

We can mention-
M. A. Akkas, M. com. MBA (AIT).. (2003),
“Three taxes of Bangladesh”,
(Income tax, Value Added Tax, Gift Tax),
pp, 6-9.

Dr. Kanchan Kumar Purohit, (2006),

“Income Tax”
(Including Gift tax & Value Added Tax),
pp, 1-3, 10-12.

http://www.AssiaTradeHub.com\Tax System of Bangladesh\BANGLADESH Tax Structure

(Tax System)\Trade in Bangladesh Trade Gallery.htm

(Stamford University Bangladesh B.B.A. 02707143 PH;

+8801914472526)