Tax System

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  • 1

    Assignment on:

    Critical Analysis of Taxation System of Bangladesh

    Course Title:

    Public Finance and Taxation

    Submission Date: 30 August, 2014

    Submitted By: (Group: CBS Sanguine)

    Md. Emad Uddin Khan 1302007

    Mahmud Ismet Sunny 1302029

    Rejaul Alam Opu 1302031

    Fazle Hasan Zami 1302036

    Prianka Chowdhury 1302039

    Submitted To:

    Mr. Tanvir Md. Hayder Arif

    Associate Professor

    Department of Finance and Banking

    University of Chittagong

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    Table of Contents

    Topic Page No.

    Chapter-1: Introduction 1.1 Background of the Study 4

    1.2 Objectives of the Study 4

    1.3 Methodology 5

    1.4 Limitations 5

    Chapter-2:Study of the Tax History 2.1 Historical Background of Tax Law 7

    2.2 Historical Background of the VAT 7

    Chapter-3:Tax Scenario of Bangladesh and Critical Analysis 3.1 Tax Schedule 9

    3.2 Canons 13

    3.3 Tax Law 14

    3.4 Authority Simplicity 15

    3.5 Unfair Practice 15

    3.6 Tax Holiday 15

    3.7 Tax Process 16

    3.8 Income From Landlord 16

    3.9 Black Money 16

    Chapter-4:Recommendations 4.1 Increasing Time phases 18

    4.2 Simplified Tax procedure 18

    4.3 Centralized Authority 18

    4.4 Consistency 18

    4.5 Sector wise Tax holiday 18

    4.6 Environmental Tax 18

    4.7 VAT system 18

    4.8 Widening of Tax Umbrella 18

    4.9 Elimination of Existing Duties and Tax 18

    4.10 Participation of Multi-national organizations 19

    4.11 Stop evading Tax 19

    4.12 Allowance for Scientific Research 19

    4.13 Provide Grand Reward 19

    Conclusion 21

    Reference 23

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    Chapter: 1

    INTRODUCTION

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    1.1 Background of the Study:

    Bangladesh has been independent for about 54 years. It gained independence first from

    the British Rule in 1947 and then again for the second time in 1971 from the West

    Pakistan.

    Since 1947 till date our population has increased from some 50 million to 160 million. In

    the meantime it has faced several famines, floods and cyclones, not to mention other

    kinds of losses. The economic situation has worsened day by day.

    Political independence failed to lead this country to the desired goal of economic

    independence. Throughout these long years extending more than half a century,

    Bangladesh has definitely made some serious mistakes that have resulted in its fiscal

    failure. Some of these mistakes are oldest form of tax law, defective and inefficient tax

    policy in Bangladesh.

    However this report is intended to be a matter of critical evaluation of the tax system of

    Bangladesh.

    Bangladesh now has a population of about 160 million. The per-capita income is

    somewhat like US$ 1190 per year. Though it is unthinkable to raise the income of a

    Bangladeshi to a level comparable to those of people in developed nations. But we have

    to make continuous effort to utilize this large number of population and their income to

    ensure maximum amount of benefit.

    1.2 Objectives of the Study:

    The main objective of this report is to analyze the Critical Analysis of Taxation System

    of Bangladesh.

    Specific Objectives are-

    1. To get an overview on tax policy of Bangladesh.

    2. To know the present scenario of taxation policy of Bangladesh and

    3. To modify existing tax policy and process of Bangladesh.

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    1.3 Methodology:

    The study mainly involves descriptive analyses based on available secondary data

    provided by the Government of Bangladesh and Non-government Organizations about

    Critical Analysis of the Taxation System of Bangladesh. The latest data provided by

    different Govt. organizations was used to analyze the current taxation policy and to

    modify existing tax policy of Bangladesh.

    1.4 Limitations:

    - Lack of sufficient latest data was the major problem we faced at the time of

    analyzing data.

    - Very little readymade information. Relevant papers and documents were not

    available sufficiently, which could aid us in writing the report easily.

    - Relative published data varied organization to organization under the same

    heading.

    - Limitation of time was the most important factors that languish the present study.

    Due to time limitation many aspects could not be discussed in the present study.

    - Limitation of the word. It was difficult to accommodate detailed information and

    data because of the word limit of this report.

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    Chapter: 2

    Study of the Tax History

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    2.1 Historical Background of Tax law in Bangladesh:

    After the independence in Bangladesh 1971, she inherited the income Tax Act, 1922 and

    adapted with the changes made from time to time but due to longtime gap from its

    farming. The act needed a change to cope with prevailing condition in fact for long

    different quarter were demanding the repeal of the act and to frame a new act to cope

    with the demand of time and at last in 1984 new act was established under the title

    income tax ordinance(XXXVI), 1984 was then enforced from 01/07/1984. By the

    enforcement of this new law the old income tax law of 1922 stands repealed.

    No major conceptual change the content of previous act has been made. The object was

    to being into focus the constituent element of is provision imposing liabilities and

    granting rights so as to minimize scope of dispose.

    At present income tax and corporate tax system are practiced under this law.

    2.2 Historical Background of Value Added Tax (VAT):

    Bangladesh introduced the Value Added Tax (VAT) in 1991 by replacing the age-old

    excise duty on the domestically produced goods and services and sales tax at the

    importation stage. VAT has been introduced not only because of its revenue raising

    potentials but also because of its simplicity, effectiveness and efficiency, transparency,

    equity, and progressiveness all of which complement the establishment of good

    governance. Of all the tax revenues, VAT at present is the single largest contributor to

    GDP. It has been found that VAT funds the government expenditure more than any other

    tax. But still different stakeholders raise the questions of efficiency and effectiveness of

    the VAT.

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    Chapter: 3

    Tax Scenario of Bangladesh

    and Critical Analysis

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    3.1 Tax Schedule:

    Present Scenario:

    In Bangladesh we have taxes divided on two broad aspects:

    Direct Tax

    Indirect Tax

    Before going to the discussion of tax structure of Bangladesh it is necessary to know

    about the taxes which follow these above written types mostly.

    3.1.1 Direct Tax

    In the general sense, a direct tax is paid directly at one shot to the government by the

    persons on whom it is imposed.

    Income taxes

    Corporate taxes

    Transfer taxes

    Wealth taxes

    Narcotics duties

    Land revenue

    Stamp duty-non-judicial

    Registration

    Income Tax:

    Among direct taxes, income tax is one of the main sources of revenue. In Bangladesh

    Income tax is imposed on the basis of ability to pay. The more a taxpayer earns the more

    he should pay - is the basic principle of charging income tax. It aims at ensuring equity

    and social justice. All individuals and companies in the country need to pay income tax if

    their annual income excess certain limit determined by the Government. There are some

    conditions for paying Income Tax which are controlled by Tax Laws and Amendments in

    Bangladesh.

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    General Tax Rate:

    2012-13 2013-14

    Income slabs (in taka) Tax rate Income slabs (in taka) Tax rate

    On first tk. 200000 0% On first tk. 220000 0%

    On next tk. 300000 10% On next tk. 300000 10%

    On next tk. 400000 15% On next tk. 400000 15%

    On next tk. 300000 20% On next tk. 300000 20%

    On balance of total income 25% On balance of total income 25%

    Tax rate for women and senior citizen: (65 years and above)

    2012-13 2013-14

    Income slabs (in taka) Tax rate Income slabs (in taka) Tax rate

    On first tk. 225000 0% On first tk. 250000 0%

    On next tk. 300000 10% On next tk. 300000 10%

    On next tk. 400000 15% On next tk. 400000 15%

    On next tk. 300000 20% On next tk. 300000 20%

    On balance of total income 25% On balance of total income 25%

    Critical Analysis:

    In this existing tax slabs we can see that, the amount of minimum taxable limit is high

    which is done to encourage people to pay more tax in a relaxed way on their income. But

    if we cannot ensure a flexible and efficient tax administration for collecting tax this

    objective cannot be successful. So for that, it should provide low amount of tax slab as it

    can increase the number of tax payer.

    Corporate Tax:

    Present Scenario:

    There is no significant change in corporate tax rates. But considering the public health the

    tax rate for the companies, producing cigarettes, raised from 37.5% to 42.5%. Along with

    this, these companies have to pay .50% tax on their total receives as the mandatory tax

    rates. Tax holiday facility is allowed to newly setup industrial undertakings, tourist

    industry and physical infrastructure facilities subject to certain specified conditions in

    order to:

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    Promote industrialization

    Encourage tourism

    Employment generation

    Exemptions and deductions are applicable to incomes from firms in Export Processing

    Zone (EPZ), 50% of income for export earnings, power generation companies, computer

    software business, agriculture related industry, micro credit for Non-government

    organizations (NGOs), Local government, welfare activities, etc.

    Rate of Tax and Rebate:

    Types of Companies Tax rate

    (2012-13) and (2013-14)

    Publicly Traded Companies (other than Banks, Insurance

    & Financial Institutions)

    27.50%

    In the case of local authorities and a company which is

    not a publicly traded company

    37.50%

    In the case of bank financing institution 42.50%

    For merchant banking rate

    is 37.5%

    In case of mobile phone operating company 45.00%

    As per financial act 2013, for cigarette manufacturing

    company

    45.00%

    But if it is publicly traded

    company 37.5%

    In the case of nonresident, non Bangladeshi 25.00%

    On dividend income 20.00%

    Companies Not Publicly Traded 40.00%

    Critical Analysis:

    This table is showing the difference between the tax rates of publicly traded company and

    non-publicly traded company. The non-publicly traded company pays more taxes than

    publicly traded company. This tax rate is fixed to encourage non-publicly traded

    company to be listed in the stock market. But still they are paying more tax but not being

    listed. Govt. should take initiatives to list this company in the stock market expanding

    internal income of a country and enlarging economical development. Policy can be liked

    as increasing the tax rate in case of non traded public company than existing one.

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    3.1.2 Indirect Tax:

    The term indirect tax has more than one meaning. An indirect tax is a tax collected by an

    intermediary (such as a retail store) from the person who bears the ultimate economic

    burden of the tax.

    Value added taxes (VAT)

    Customs duties

    Excise duties

    Supplementary duty

    Taxes of vehicle

    Electricity duty

    Travel tax

    Turn over tax

    Value Added Taxes (VAT):

    Present Scenario:

    To facilitate some industries and services VAT has been exempted in some selected

    areas. Goods exempted from VAT include food and agricultural products, animal

    products poultry sector, agriculture imputes, cloths made of cotton and synthetics,

    malaria, cancer preventive medicine, homoeopathic medicine, family planning items,

    books and periodicals, etc. Services exempted from VAT include fundamental services

    for livelihood, social welfare services, services relating to culture, services relating to

    money and finance, transport services, personal services and other services other than the

    above.

    The general rate of Value Added Tax (VAT) in Bangladesh is 15%.

    Value Added Tax (VAT) is imposed on goods and services at import stage,

    manufacturing, wholesale and retails levels;

    A uniform VAT rate of 15% is applicable for both goods and services;

    15% Value Added Tax (VAT) is applicable for all business or industrial units with

    an annual turnover of Taka 2 million and above;

    Turnover tax at the rate of 4% is livable where annual turnover is less than BDT 2

    million;

    Value Added Tax is applicable to all domestic products and services with some

    exemptions;

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    Value Added Tax (VAT) is payable at the time of supply of goods and services;

    Tax paid on inputs is creditable / adjustable against output tax;

    Export is VAT exempt;

    Cottage industries (defined as a unit with an annual turnover of less than BDT 2

    million and with a capital machinery valued up to BDT 300,000) are exempt from

    Value Added Tax;

    Critical Analysis:

    Despite various reforms in VAT system, the growth performance of the VAT system was

    far from satisfactory. VAT system seems to have underperformed in Bangladesh due to

    the following reasons:

    Collection mechanism is old-fashioned, excise-type and based on control over

    physical shipment/ production/delivery of goods and services.

    The VAT payment system, based on treasury receipts (challans), is outdated, error

    prone, and burdensome for the taxpayers.

    Overall, the tax system is inefficient in generating revenue for the government

    given the basic rate of 15 percent, because seller does not maintain proper record

    of selling of goods and services.

    3.2 Canons:

    Taxation is the ministry of public expenditure. In a developing economy with almost

    insatiable for investible fund ever expanding development activities of government have

    placed the emphasis on taxation as the main source of fund for defense, administration

    and development activities.

    In this context, tax embellished with some objectives:

    Collection of revenue

    Re-distribution of income

    Economic control

    Protection of industry

    Economic development

    Full employment

    Raising national income in a desired level

    In order to achieve these objectives of certain Principles which is generally known as

    CANON of TAXATION should follow. These Canons are:

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    Canon of equality

    Canon of certainty

    Canon of convenience

    Canon of economy

    Canon of productivity

    Canon of diversity

    Canon of simplicity

    Canon of social objectives

    Canon of functional efficiency.

    Critical Analysis:

    But in the context of Bangladesh these canon of taxation is not followed properly.

    Like canon of convenience cannot be ensured because of critical paying system of

    tax.

    Canon of productivity cannot be ensured because of less utilization of fund by.

    Canon of equality cannot be ensured because of variation of tax in different

    income level.

    3.3 Tax Law:

    Critical Analysis:

    Existing tax law of Bangladesh does not show no major conceptual change in the content

    of the previous income act, 1922. So this law cannot keep pace with the modern system

    of economy.

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    3.4 Authority Simplicity:

    Critical Analysis:

    This structure of authority is very critical and old form of structure in present situation.

    This structure creates obstruction in path of maintaining canon of simplicity and canon of

    economy.

    3.5 Unfair Practice:

    At the case of corporate tax, corporations need to pay their tax through proper authority.

    But at the time of payment they face artificial bureaucratic problem, because so many

    govt. employees are engaged in unfair practice. Beside this corporations also try to evade

    tax by doing unfair practice. As a result, our govt. loses a huge amount of revenue.

    3.6 Tax holiday:

    Present Scenario

    Tax holiday is allowed to industries subject to the relevant rules and procedures set by the

    National Board of Revenue (NBR) for the following period according to the location of

    the establishment.

    In Dhaka and Chittagong Divisions (excluding 3 hill districts): 5 years.

    In other divisions (including 3 hill districts of Chittagong Division): 7 years.

    The period of such tax holiday will be calculated from the month of commencement of

    commercial production. The eligibility of tax holiday to be determined by the NBR and

    the time of the commencement of commercial production is certified by the respective

    sponsoring agencies. The industrial establishment should be registered under the

    companies Act. 1994.

    Tax holiday facility can be availed by industries coming into commercial production

    within 30 June 2000 A.D.

    Critical Analysis:

    Our govt. policy about tax holiday is not standard one.

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    They frequently change the tax holiday policy. As a result many organization face

    problem as they invest a large amount of money considering this facility.

    They provide long term tax holiday for the industry of definite zone. This can ensure of

    equal development of industry all over the country.

    3.7 Tax Process:

    In our country we need to follow a long formal and manual process at the time of

    providing tax both individual and corporate. Recently govt. established E-TIN service for

    the individuals, but still corporate tax is not out of facing lengthy process. For this

    circumstance many corporations are not willing to pay their tax and VAT at the right

    way. Most of the cases many corporations engaged in unfair practice to avoid lengthy tax

    payment procedure. On the other side, so many peoples in our country are illiterate but

    have much wealth. They also try to avoid the manual process and also try to avoid E-TIN,

    because of their illiteracy.

    3.8 Income from landlord:

    In the present context of Bangladesh, land lord does not submit the proper list of their

    property. Sometimes they show the more number of allotted flats for personal use which

    actually deduct the amount taxable income of govt. Because as per law, flats use for

    personal need are non-taxable.

    There is no proper assessment of authority as a result they utilize this opportunity also.

    There is law that vacant land having no house will not be taxed. As a result, the land lord

    show a huge number of fake vacant land or house to avoid pay tax.

    3.9 Black Money:

    Every year in our budget Government keep an opportunity of whitening black money in

    regular rate. This rule discourage regular tax payer.

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    Chapter: 4

    Recommendation

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    Recommendation:

    Payment time of tax return should be flexible by increasing tax return phases

    more than one in a assessment year.

    The structure of authority regarding tax procedure should be simplified.

    The control regarding rules regulation and activities of the respective authority

    and institution must be centralized by the NBR. Like the banking industry is

    controlled by Bangladesh Bank. .

    Regarding tax of industry rules and regulation must be consistent.

    Sector wise Tax Holiday on

    Organic farm, Agro farm and Automobile should be introduced as these are

    competitive sector in the present world.

    Research and development and tourism should be enlarged and other facilities

    like subsidy on raw materials, worker salary and deduction of custom duty,

    excise duty must be minimized to make the respective industry profitable and

    established one in a definite time period.

    Introducing Environmental tax for industry which polluted environment in a large

    volume. Like Tannery industry, Brick field, Chemical industry, Tobacco industry.

    Modernization of VAT system i.e. online VAT registration and written submission

    allowed by law.

    Govt. can widen tax umbrella of different sector considering the income of

    respective sector and Govt.s development projects.

    In order to extend support to the domestic trade transaction we suggest that,

    rather than imposing in advance tax can be imposed at final stage of the value

    chain in case of local procurement of raw materials.

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    To encourage the participation of multinational company the rate of tax for non-

    publicly traded company should increase in an increasing rate than publicly traded

    company. Government can provide incentive for companies listed in the stock

    market.

    Govt. must take proper step to stop evading tax when an assesse adopt the

    following means to avoid tax:

    Cash sales

    False expenses

    Concealment of additional source

    Forgery document

    Maintenance of duplicate records

    Fake transfer of asset

    Enhancement of allowance for scientific research such as developing new

    product, technologies in the industrial sector must be made.

    Government can provide grand reward for outstanding tax collection and

    detection of tax evades to the respective personnel.

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    CONCLUSION

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    Conclusion:

    This report critically analyses the overall taxation system of Bangladesh. In our country

    major portion of the tax revenues comes from indirect taxes, particularly VAT. For a

    developing country like Bangladesh, utilization of domestic resources is important

    formulating an effective tax policy. For this, it is required to create an efficient tax

    system, which includes appropriate tax revenue measures that serve social objectives as

    well as being economically feasible. Therefore, a critical review of the existing tax

    revenue measures in Bangladesh is necessary to achieve this goal. Our analysis has

    proposed some recommendations including the exhibiting tax revenue measures,

    especially in the categories of income tax and VAT, the expansion of tax umbrella,

    restructuring the tax administration meeting the revenue needs of Bangladesh. It is also

    important to set a definition and to develop a methodology for measuring the tax

    revenues in the context of Bangladesh.

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    Reference

  • 23

    Morshed, Monjur (2013), Taxation In Bangladesh Theory and Practice, 11th edition, Padma Prokashani

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    Retrieved August 22,2014, from Effectiveness of Vat in Bangladesh - Research Papers - Muzikid

    Retrieved August 23,2014, from Tax Structure & Policy Suggestions: Bangladesh Case |

    ,

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    Retrieved August 29,2014, from http://www.cpd.org.bd/downloads/Budget%20FY14.pdf