Amendment of income tax ordinance 1984 & propose rules for income from

salary as usual income from agriculture:

Amendment of income tax ordinance 1984:

The provision of Implementation of Income Tax Regulations in Bangladesh are amended .
Because it has some lacks those are:
Problems & Weaknesses of income taxation system
It is widely known that very few people pay income tax in Bangladesh. Out of 160 million
population, the number of registered tax payers is only 3.0 million (which is less than 2% of the
total population) and actual tax payers paying income tax are roughly 02 million or 1.20% of the
total population. Only 0.54% of the population was within the tax net in 1999 and the ratio
was 0.25 % in 1977. In 2002, the number of taxpayers increased up to 0.94 percent and in FY
2009-10, it went up to 1.87%. This denotes a slow growth of the tax net until 2002 and during
2002 to 2010 the growth had been a bit faster. As will be discussed below, various factors are
liable for such eccentric and unreasonable allocation of income tax burden. The existing
revenue system in Bangladesh does not provide sufficient legal, institutional and economic
motivation for the taxpayers to pay due tax to the government. Resultantly, the country has
failed to raise adequate tax revenue and the tax-GDP ratio has never reached its desired level.
These have eventuated mainly due to the lack of good governance, concentration of wealth to
some individuals and corporations, perfunctory regulatory enforcement and weaknesses of the
existing legal and regulatory framework etc. Substantial shortcomings of the income taxation
system in Bangladesh can be categorized as:
i) Low level of revenue mobilization
ii) Regressive nature of corporate tax rates,
iii) Low or narrow tax base,
iv) High degree of tax evasion,
v) Limited or inadequate administrative capacity,
vi) Resource constraints (human and logistics),
vii) Inadequacies of law and cumbersome legal procedures.

Discrimination between urban and rural sectors

It is widely believed that the tax structure of Bangladesh is biased against the poorer class,
especially in the rural areas. On the contrary, the urban community often criticize that the
present income tax structure weighs heavily against the business and entrepreneur classes in
the municipal area. This is due to the fact that the effective tax rate is higher in the urban
sector than in the rural sector because of the difference in the nature of tax and the intensity at
which such tax is imposed on the two sectors, and the structure of consumption and income
between urban and rural sectors. The Tax Inquiry Commission’s report presented the relative
tax burden of the two sectors from direct sources. The average burden of direct taxes on urban
sector was 0.31 percent as against 0.14 percent in the rural sector. It shows that the effective
tax rate in the urban sector was 2.21 times higher than that of the rural sector in 1979. Over the
years the situation remained the same and in fact still the extreme majority of taxpayers are
urban people. This happens because the urban sector is more monetized and the government
has better control over this sector. Such an inequality should be resolved and be taken into
account in the continuing tax reforms.

Discrimination between public and private sectors

The government of Bangladesh has been traditionally paying income tax for its employees
considering the fact that they are insufficiently salaried. But when the owner of a private
enterprise pays income tax for its staffs, such payments are considered as income causing
additional tax burden for these people. This is clearly discriminatory and hence motivates the
wage-earners of private firms to avoid or evade taxes. Such discriminations create social
inequality and distortion in the tax system of the country with negative impact on her tax-GDP
ratio and slow down the expansion of tax base. Since governments of the developing countries
overwhelmingly control the development activities, the bureaucrats enjoy inordinate
discretion that enhance abuse of power and lead them to corruption. The Anti-Corruption
Practice Notes 2008 published by the UNDP resembles the situations applicable for
Bangladesh. If the government employees remain untaxed in their whole incumbency, there
are passable allures for them to become corrupt. This issue still remains unresolved because
the government pay scale, which is awfully incongruous with the standard living costs, is not
timely adjusted with the ongoing higher inflation rate. Improving the unsuited existing salary
structure as a means to prevent corruption has been adopted by many other countries like
China and India. Bangladesh would probably be justified in complying with these standards so
as to ensure respect and adherence to good governance and transparency by the civil servants.
In that case rightsizing the government with maximizing salary level is much desire.

Suggestion

The article has critically examined the major dynamics of personal and corporate income tax in
the revenue structure of Bangladesh. While doing so, it has divulged the impediments to
sustainable income tax management in the country. It may be opined that attaining an optimal
income tax system is an unenviable task , albeit crucial for the country’s expected economic
growth. Like many other developing countries, income taxation system in Bangladesh is
characterized as poorly administered, weakly compliant and corrupts prone. Her tax revenue to
GDP ratio is still low in comparison with South Asian Countries. It is found that the country’s
direct taxes have been heavily skewed against salary-earners and corporate sector. Small
business, service and farm incomes manage to slip through the tax net effortlessly. Establishing
a digitalized information management system, qualitative and quantitative improvement of
taxpayer services, holding meaningful public relation activities (tax counseling) and setting up of
a simple and broad based tax system are climacteric to the development of a better tax
administration. The findings and recommendations of the article would expectedly provide
momentum to enhance transparency in income tax administration, promote revenue growth,
improve tax compliance and thus increase tax to GDP ratio in Bangladesh. I agree with the
proposition that any tax reform must go hand in hand with preventing fiscal profligacy
(minimizing tax compliance cost and tax expenditure). Thus the government must be very
cautious in taxing people - ‘just as bees extract honey from the flowers without hurting the
flowers’. In spite of all shortcomings of the revenue system, the magnitude of income tax
collection in Bangladesh has increased over the years. A number of reformative and remedial
measures adopted by different governments to shape a people friendly tax structure are being
seen in the orbit. Hopingly, a new Direct Tax Code replacing the existing defective Ordinance is
likely to be introduced into the fiscal jurisdiction of Bangladesh.

Propose rules for income from salary & income from agriculture:

Income from salary:

Reintroduction of standard deduction for salaried assessees :Section 16
Issue/Justification
Salaried employees are not allowed deduction of any expenses incurred during the course of
the employment other than profession tax on employment. There are various expenses that
the employees incur during the course of employment which they cannot claim as deduction.
At the same time, the few exemptions that are available to them u/s 10 are subject to upper
limits which have been fixed several years back and virtually serve no purpose on account of
inflation. Employees during the course of their employment incur various expenses, including
for upgrading skill, for rendering their services as employees, deduction for such expenses
should be allowed. For avoiding leakage of revenue if any such deduction maybe a fixed sum or
certain percentage of salary, say 25% of the salary, but maximum may be restricted upto say .
5,00,000/- . Doing away with the multiple exemptions will help in cleaning up the Act and
removing unwieldy provisions – thereby simplifying the law.
Suggestion
Provisions similar to that of erstwhile standard deduction may be re-introduced.
Simultaneously, the multiple exemptions that are available (with minuscule upper limits) may
be done away with.
2. Deduction to salaried assesses Payment for notice period
Issue/Justification

As per the prevalent norm, the employees are required to serve notice within the stipulated
time before leaving the organisation. The notice period, however, varies from organisation to
organisation. For example, in an organisation the notice period may be 90 days or an employee
has to pay 90 days salary amount to the organisation as an employee may get a better job
opportunity in another organisation wherein he is required to join within 30 days. Accordingly
the employee has to give 30 days’ notice in old organisation, and pay for short notice of 60
days. Generally, the contract of service also provides that in case the employer is not satisfied
with the performance of the employee he may terminate his services by giving a notice of 30
days or 30 days salary. In case the employer suspends the employee with immediate effect he
pays an amount equivalent to 30 days salary and claims deduction thereof. Such amount
becomes taxable in the hands of the employee. However, in case the employee is required to
pay notice period salary, no deduction of such amount paid is allowed to him. If the new
employer agrees to bear the brunt of notice period pay, say of 60 days in above example, the
said amount will be included in the total income of the employee and tax will be deducted
thereon even if such income belonged to the ex-employer and is taxable in his hands. Thus, in
effect the assessee will be liable to pay tax on 14 months’ salary i.e. salary for more than 12
months without any deduction available to him.
Suggestion
It is suggested that said anomaly may be resolved and appropriate provisions be inserted so
that income from notice period pay is chargeable in the hands of exemployer and deduction of
the amount of notice period pay paid be made available to the employee as he has not
effectively received that income. (SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS
OF DIRECT TAX LAWS)
3. Medical reimbursements for retired employees
Issue/Justification
Under section 17 of the Income tax Act, medical reimbursements to employees are exempted
from tax up to Rs.15,000 per annum. Further, the expenditure incurred by the employer for the
medical treatment of the employees and his family in approved hospitals is also not treated as a
perquisite in the hands of the employee. However, this tax benefit is not available to retired
employees.
Suggestion
It is suggested that the provisions of section 17 be amended to include retired employees for
the tax benefit on medical reimbursements / hospitalization expenditure in approved hospitals.
(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Income from agriculture:

In most developing countries agriculture is considered as the largest sector. Taxing this sector is
thus very crucial for the economic progress of such countries. The incentives and distributional
use of taxation may be utilized to redirect agricultural production, encourage more
efficient use of land, accomplish changes in the land tenure, promote new productive
investment in agriculture, and stimulate movement of redundant labor from agriculture to
non-agriculture employment. Agricultural taxation is thus the chosen instrument charged with
the vital task of transferring surplus food, labor and capital to the non-agriculture sector, as
well as with reallocating resources within agriculture to increase the transferable surplus. Taxes
on agriculture are also needed to restrain a rise in rural food consumption which would
increase urban food prices and hence the rate of inflation. Agriculture sector in Bangladesh
provides employment for around 60% of the population and contributes only 25% of the GDP
but virtually pays little in the form of income tax. The reasons for low tax yield from this sector
are: predominance of the small farmers and the landless, additional income tax incentives, tax-
holiday to farm-owners and allowance of additional non-assessable income of Tk 40,000 to
farmers having exclusive agricultural income.
Though the majority of the rural populations live on subsistence farming, there are yet a good
number of well-to-do farmers who can and, on equity ground, should pay taxes. There are
many affluent people having agriculture income who avoid taxes showing their entire income as
a means of agriculture. A question arises whether the agriculture sector in Bangladesh will
remain untaxed or not and if yes –for how long. If 60% population of a country who are
engaged in agricultural sector are kept untaxed for uncertain period will undoubtedly impede
broadening of the much desired tax base.