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Taxation Course Code-ACT 311

Md. Ziaul Haque Department of business Administration East West University.

Meaning of Public Finance


Public finance is a science that deals with the income and expenditure of public bodied and the government of a nation. The government of a nation has to perform two types of functions (a) obligatory function ( Defense, maintenance of law and order situation (b) Optional function ( providing various facilities to its citizens such as infrastructure, health, environment. To meet this expenditure govt. raise fund from public in the form of taxes, fees, penalties, sale of goods and services According to H.L Lutz. Public deals with the provisions, custody and disbursement of resources needed for the conduct of public or governmental functions

Definition of Tax

Tax is a contribution exated by the state. It is a compulsory levy, to be paid by the citizens who are liable to pay it, imposed by the government According to P.E Taylor, Taxes are compulsury payment to government without expectation of direct return in benefit to the tax payers. According to Dalton, A tax is a compulsory contribution imposed by a public authority irrespective of the exact amount of service rendered to the tax payer in return and not imposed as penalty for any legal offense According to section2(62) of ITO 1984, " Tax means the income tax payable under this Ordinance and includes any additional tax, excess profit tax, penalty, interest, fee or other charges leviable or payable under this Ordinance; So we can say taxes are compulsory contribution by the taxpayers to the government.

Reason for paying tax


Get medical facilities at lesser cost in public hospital Our children get education at nominal cost in public schools and universities Enjoy the benefit of roads & bridges Police, fire brigade and many government agencies ensure our safety and security Benefit of state run museums, public libraries and academics Benefit of afforestation program, family planning, relief and rehabilitation for poor, women and old Govt. manage natural calamities like flood, river-erosion & earthquake Provides an opportunity for rich to contribute to the wellbeing of poor

Characteristics of tax

Tax is payment to government by people as it levied by the government Payment of tax is non-penal and compulsory To ensure public interest To finance the govt. expenditure Tax is not cost of benefit conferred by the govt. on the public It is the prime of source of govt. revenue Tax is not any fine or penalty Tax can only be imposed by govt.

Purpose/objective of taxation

Taxation is a major source of revenue for the government. It is a way of transferring the resources from private/non government to government sectors Revenue Collection: In Bd 80% of total govt revenue Reduction of Inequalities income and wealth: Accelerating economic growth: Raises the rates of
investment and savings. Savings must be invested in productive sector

Control of consumption.: such as toxic material, more tax on


luxury goods

Protection of local industries: Govt. provide tax incentive for


local industries

Economic development: construction of infrastructure, poverty


alleviation programs, social security program etc.

Canon of Taxation

Canon of taxation of taxation refers to the administrative aspect of tax. They relate to the rate, amount and method of levy and collection of a tax.Adam smith has given four canon Canon of equality: Burden of taxation must be shared equally.
means rich bear more tax and poor will less tax

Canon of certainty: Tax should be certain and not arbitrary Canon economy: take out and to keep out of pockets of the people as little as possible, over and above what brings into the public treasury. Canon of convenience: that must be convenient fro the contributor to pay

Canon of Taxation

Canon of productivity: must adequately cover govt.expenditure Canon of simplicity: tax rate, tax system ought to simple, plain and intelligibele to the common understanding Cannon of elasticity: tax system should be flexible so that the autority can change the system conveinently Canon of diversity: should not be based on single tax or few tax. should be mixture of direct and indirect tax Canon of Functional efficiency: so that it can generate sufficient revenue an be able to to reduce harassment and tax avoidance

Classification of tax

Classification on the basis of number of taxes: a.Single tax b.Multiple tax Classification on the basis of impact and incidence of taxes: a. Direct tax e.g incometax.land revenue tax b.Indirect tax e.g VAT,Customs duty Classification on the basis of structure of taxe rate: a.Propotional tax: whatever the size of income the rates of taxation remains constant. b.progrsive tax: the rate or taxation increases as the taxable income increases.It is more equitable .c.Regressive tax : burden falls more on poor than rich. d.DegressiveTaxes ; which is midly progressive so that high income does not sacrifice more

Classification of tax

Classification on the basis of subject matter of taxes: a.Personal tax e.g Income tax b.In Rem tax: levied on some activities or objects e.g sales tax,wealth tax Classification on the basis of elasticcity of taxes: a.Elastic tax (rate changes more than tax base changes) b.inelastic tax (rate changes less than tax base changes) Classification on the basis of taxe base: a.Income tax b.Wealth tax c.Value added tax c.Expenditure tax Classification according to changes of government revenue: a.Positive tax b.Negative tax Classification according to taxing authority: a.Central tax e.g Income tax,wealth tax b.Local tax e.g. Union parshad tax,city corporation tax,municipal tax

Difference between Direct tax and Indirect tax

Burden cannot be shifted but burden can be shifted D.T imposed on income but I.T imposed on goods and personal services D.T generally in progressive nature but IT can not be made progressive. D.T generally elastic but I.T is inelastic Since the burden is not shifted so It has adverse effect on taxpayers willingness to work and save but I.T has no adverse effect

Characteristics of a good Tax System

should be levied on the basis of fundamental principles of taxation Should be equitable, convenient to pay, economical, certain, productive and elastic should be balanced containing both direct and indirect nature of taxes tax authority should be supported by sufficient simple laws and rules should have positive effect on both production and distribution without any adverse effect Productive resources of the economy are optimally allocated and utilized. A good tax system has least collection cost No scope for the evasion of tax by the tax payer

Tax Structure of Bangladesh


Multiple tax system: a. taxes on income and profit: i. Income tax-company ii Income tax other than company b. Taxes on property & capital transfer: 1.Estate duty 2.Gift tax 3.Narcotics duty 4.Land revenue 5.Stamp duty-non judicial 6.Registration c. Taxes on good and services: 1.Custom duties 2.Excise duties 3.VAT 4.Supplementary duty on luxury item 5.Taxes on vehicle 6.electricity duty 7. other tax( travel tax, turnover tax) Inadequate and stagnant revenue yield relative to GDP: High ratio of indirect to direct tax revenue Dominance of VAT and import duty; Tax avoidance behavior Narrow tax base

Definition of Income tax

Income tax is the tax which is levied on the taxable income of a person or entity as per provision of the income tax ordinance 1984 Where an Act of Parliament provides that income tax shall be charged for any assessment year at any rate or rates, income tax at that rate or those rates shall, subject to the provisions of that Act, be charged, levied, paid and collected in accordance with the provisions of this Ordinance in respect of the total income of the income year or income years, as the case may be, of every person

Role of income tax in economic development of Bangladesh


Tax holiday Scheme: Investment allowance: Accelerated depreciation allowance: Tax incentives or small & cottage industry: Tax incentives for encouraging savings: Tax exemption on certain expenditure: Tax incentives for foreign investors Allowance for Scientific research Tax incentive for remittance in Bangladesh

Scope of Bangladesh income Tax Law


The income tax ordinance,1984 Income tax rule,1984 Finance Act SRO(Statutory regulatory order) Judicial Decision Other general and special orders made or explanations given or circular issued by the NBR

Determination of Income year


"income year", in respect of any separate source of income, means(a) the financial year immediately preceding the assessment year; or (b) where the accounts of the assesses have been made up to a date within the said financial year and the assesses so opts, the 12 months ending on such date.e.g Assesse accounting year ends 31st march 2011 then income year will be 1st April 2010 to march 2011 ( IY 2010 -2011 & 2011-2012) (c) in the case of a business or profession newly set up in the said financial year, the period beginning with the date of the setting up of the business or profession and (i) ending with the said financial year; if the business set up is 1st October 2010 then income year will be 1st October to June 2011 ( IY 2010 -2011 & Fy 2011-2012).or (ii) where the accounts of the assesses have been made up to a date within the said financial year and the assesses so opts, ending on that date If the assesse set up business 1st october 2010 and end 31st march then income year 1st october 2010 to 31st march 2011 (IY 2010-2011& 2011-2012) or (d) in the case of a business or profession newly set up in the 12 months immediately preceding the said financial year

Determination of Income year

i) if the accounts of the assessee have been made up to a date within the said financial year and the period from the date of the setting up of the business or profession to the first-mentioned date does not exceed twelve months, then, at the option of the assesses, such period, e.g if the assesse setup business 1st November 2009 and end ups 31st march 2010 but assessment year is 2011-2012 ,So income year will be 1st November 2009 to 31st march 2010 or (ii) if any period has been determined under sub-clause (e), then the period beginning with the date of the setting up of the business or profession and ending with the last day of that period, as the case may be; or (e) in the case of any person or class of persons or any business or profession or class of business or profession such period as may be determined by the Board or by such authority as the Board may authorise in this behalf; (f) in respect of the assessee's share in the income of a firm of which the assessee is a partner and the firm has been assessed as such, the period determined as the income year for the assessment of income of the firm; g) where in respect of a particular source of income an assessee has once been assessed or where in respect of a business or profession newly set up, an assessee has once exercised the option under sub-clause (b) or sub-clause (c) (ii) or sub-clause (d) (i) then, he shall not, in respect of that source, or, as the case may be, business or profession, be entitled to vary the meaning of the expression "income year" as then applicable to him, except with the consent of the Deputy Commissioner of Taxes upon such conditions as the Deputy Commissioner of Taxes may think fit to impo

Determination of Income year

Income year is financial year which is used to determine the tax base of income tax It may be any year(not exceeding 12 months) as desired by assessee If the financial year of assess ends within 30th June ,the said financial year will be his income year and the subsequent year will be assessment year. If the financial year ends after 30th June his income year will be the next financial year and assessment year will be subsequent year of the income year. In case of a newly setup business duration of first year may be less than 12 months. For share of income from partnership firm, firms income year is applicable

Determination of Income year


Firm Income year ended on Financial year in which last date of income year falls Income year for Tax purpose Assessment year

30-06-2004

2003-2004

2003-2004

2004-2005

31-12-2004
13-04-2004

2004-2005
2003-2004

2004-2005
2003-2004

2005-2006
2004-2005

31-11-2004
26-04-2002

2004-2005
2001-2002

2004-2005
2001-2002

2005-2006
2002-2003

Importance of Income Year

Computation of total Income: Assesse has to pay only on income earned in come year not in previous year or subsequent year. Investment Allowance: Investment Allowance is allowed only on amount invested in income year Residential Status: It is determined on the basis of his staying in income year not assessment year Submisssion of Accounts: Account submitted on the basis of income year

Assessment year

assessment year" means the period of 12 months commencing on the first day of July every year; and includes any such period which is deemed, under the provisions of this Ordinance, to be assessment year in respect of any income for any period;

Assesse & Person


"Assessee", means a person by whom any tax or other sum of money is payable under this Ordinance, and includes (a) every person in respect of whom any proceeding under this Ordinance has been taken for the assessment of his income or the income of any other person in respect of which he is assessable, or of the amount of refund due to him or to such other person; (b) every person who is required to file a return under section 75, section 89 or section 91; (c) every person who desires to be assessed and submits his return of income under this Ordinance; and (d) every person who is deemed to be an assessee, or an assessee in default, under any provision of this Ordinance; person" includes an individual, a firm, an association of persons, a Hindu undivided family, a local authority, a company and every other artificial juridical person;

Classification of Assesse
On the basis of Person: # Individual # Company #Firm #Local Authority e.g Municipal Corporation, Cantonment board # Hindu Undivided family # Artificial Judicial Person e.g Dhaka university, BRTC # Association of Person On the basis of Residential Status # Resident #Non Resident

Residential Status determination


Category Individual Rules to be Resident He is in Bangladesh for 182 days or more year in a income year Or For 90days or more income year and 365 days or more during 4years immediately preceding the IY Control and Management is situated wholly or partly in Bangladesh in IY Rules to be non Resident None of the condition fulfilled

HUF,AOP& Firm

Control and Management is situated wholly or partly outside Bangladesh in IY

Company

Control and Management is situated wholly in Bangladesh in IY

Control and Management is situated wholly or partly outside Bangladesh in IY

Residential Status of Individual


Did Assesse reside in country 180 days in IY Did Assesse reside in country 90 days or more in IY

Did Assesse reside in country 365 days or more in during 4years immediate preceding IY

Resident

Non Resident

Is assesse Bangladeshi Citizen

Non resident Foreigner

Non resident Bangladeshi

Effects of Residential Status in Assessing income


Particulars of income Income received or deemed to be received in BD Income earned or deemed to be earned in BD Status of Income Resident BD income Taxable Non Resident Taxable

BD income

Taxable

Taxable

Income accrued Foreign income arouse outside in BD

Taxable

Non-Taxable

Tax Rate (Assessment Year- 2012-13) :


Other than Company : For individuals other than female taxpayers, senior taxpayers of 65 years and above and retarded taxpayers, tax payable for the First 2,00,000/- Nil Next 3,00,000/- 10% Next 4,00,000/- 15% Next 3,00,000/- 20% Rest Amount 25% For female taxpayers, senior taxpayers of age 65 years and above and , tax payable for the First 2,25,000/- Nil Next 3,00,000/- 10% Next 4,00,000/- 15% Next 3,00,000/- 20% Rest Amount 25% For retarded taxpayers threshold limit is TK.2,75,000 Minimum tax for any individual assessee is Tk. 3,000 Non-resident Individual 25% (other than non-resident Bangladeshi)

Tax Rate (Assessment Year2012-13) :

For Companies
Publicly Traded Company 27.5% Non-publicly Traded Company 37.5% Bank, Insurance & Financial Company (Except merchant bank) 42.5% Merchant bank 37.5% Cigarette manufacturing company 42.5% Publicly traded cigarette company 35% Mobile Phone Operator Company 45% Publicly traded mobile company 35% If any publicly traded company declares more than 20% dividend, tax rate would be 24.75% and if declares less than 10% dividend tax rate would be 37.5%. If any non publicly traded company transfers minimum of 20% shares of its paid-up capital through IPO(Initial Public Offering) it would get 10% rebate on total tax in the year of transfer.

Income Tax Authorities:


National Board of Revenue, Chief commissioner of taxes Director General of Inspection (Tax), Commissioner of Taxes (Appeals), Commissioner of Taxes (LTU) Director General (Training), Director General Central Intelligence Cell (CIC), Commissioner of Taxes, Additional Commissioner of Taxes (Appeal/Inspecting), Joint Commissioner of Taxes(Appeal/Inspecting ), Deputy Commissioner of Taxes, Tax recovery officer, Assistant Commissioner of Taxes, Extra Assistant Commissioner of Taxes, Inspectors of Taxes.

Definition of Income In ITO

(a) any income, profits or gains, from whatever source derived, chargeable to tax under any provision of this Ordinance under any head specified in section 20; (b) any loss of such income, profits or gains; (c) the profits and gains of any business of insurance carried on by a mutual insurance association computed in accordance with paragraph 8 of the Fourth Schedule; (d) any sum deemed to be income, or any income accruing or arising or received, or deemed to accrue or arise or be received in Bangladesh under any provision of this Ordinance:

Sources of Income

For the purpose of computation of total income and charging tax thereon, sources of income can be classified into 7 categories, which are as follows : Salaries U/S 21 Interest on securities U/S 22 Income from house property U/S 24 Income from agriculture U/S 26 Income from business or profession U/S 28 Capital gains U/S 31 Income from other sources. U/S 33 Income from spouse or minor child as applicable U/S 43(4)

Classification of Income
On the basis of Locality: Domestic Income Foreign Income On the basis of Assessment Non Assessable income Assessable income ; a.Tax free income e.g income from partnership firm and income from Association of person if tax paid b. Tax credit income c. Tax payable income

List of Investment on which Allowance allowed


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 Supper Annuation 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 Donation to charitable hospital approved by National Board of Revenue Donation to philanthropic or educational institution approved by the Government Donation to socioeconomic or cultural development institution established in Bangladesh by Aga Khan Development Network

List of Investment on which Allowance allowed


Donation to ICDDRB, Donation to philanthropic institution-CRP, Savar, Dhaka Donation up to five 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 Prtibandhi Unnayan Foundation, Mirpur, Dhaka; Donation to Asiatic society of Bangladesh Donation to Muktijudha Jadughar 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 Bangladesh Government Treasury Bond; Investment in purchase of one computer or one laptop by an individual assessee.