SALARY TAX ASSESSMENT

Md Ali Hossain Managing Director Paschimanchal Gas Company

Definition of Salary There is no exhaustive definition of salary at Income Tax Ordinance, 1984. Only an inclusive definition is given at section 2(58) where "salary" includes the following:a) Wages b) Annuity c) Pension -Totally exempted as per 6th Schedule (Part-A) Para-8 d) Gratuity - Totally exempted as per 6th Schedule (Part-A) Para-20 e) Fees f) Commission g) Allowances h) Perquisites i) Profits in lieu of salary or wages j) Profits in addition to salary or wages k) Advance Salary I) Leave encashment However, the term "Basic Salary"
has been defined at Rule 33(2) as well as at Rule 65A (1) where basic salary means the pay and allowances payable monthly or otherwise but does not include the following:

a)

Dearness allowance (unless it enters into the computation of Superannuation or retirement benefits of the employee)

b) c) d)

Employer's contribution to Recognised Provident Fund and interest credited on the accumulated balance Allowances which are tax exempted Allowances, perquisites, annuities and other benefits

Section 2(58) contains definitions within the definition. Salary includes perquisites and profits in lieu of salary, which again defined at section 2(45) and 2(50) respectively.

Perquisite is defined in the Oxford English Dictionary as "any casual emolument, fee or profit attached to an office or position in addition to salary or wages." There is an exclusive definition of perquisite at section 2(45) where perquisite means any payment or benefit made to an employee in the form of cash or any other form but excluding the following:a) b) c) d) e) f) g) Basic Salary Festival bonus Incentive bonus Arrear Salary Advance Salary Leave encashment Leave Fare Assistance (LFA)

h) Overtime i) Contribution by the employer to1) 2) 3) 4)

salary include: -

Recognized provident fund. Approved Pension Fund. Approved Gratuity Fund and Approved Superannuation Fund.

There is an inclusive definition of "Profits in lieu of salary" at section 2(50) where profits in lieu of a)
The amount of compensation is connection with the termination / modification of any terms and conditions relating to employment.

b)

Any payment from a provident or other fund to the extent to which it does not consist of contributions by the employee and the interest on such contributions.

1. Classification of Salary (Section : 21~) The following 3 (three) categories of income of an assessee is classified and computed under the head "salaries", namely;a) Salary due from an employer to an employee in the income year, whether paid or not; b) Salary paid or allowed to an employee in the income year though not due before it become due to him; and c) Arrears of salary paid or allowed to him in the income year, if not charged to income tax for any earlier income year. Salary once included in any year on due basis or advance payment basis is not includible again in salary income of an employee of any other year. No payment can fall and to be taxed under the head salary unless the relationship of employer and employee exists between the payer and the payee. Salary can be taxed not only on payments made by an employer during employment, but also on payments by a former employer after the employment has come to an end. The definition of "employee" is given at section 2(28) where employee

includes a director also. It has been provided that an employee, in relation to a company, includes the managing director or any other director or other person, who irrespective of his designation performs any duties or functions in connection with the management of the affairs of the company. So a director who is not connected with the management of affairs of the company may not be called employee. For the purpose of determining the value of perquisites of an employee under rule-33, employee includes a shareholder director. If the shareholder director is director of more than one company then he shall be entitled to the benefits under rule-33 for one company only.

2. Apportionment of salary over the years due to arrear or advance salary (sec.172) Where the salary is assessable at a rate higher than that at which it would otherwise have been assessed by reason of(a) Any portion of salary being received in arrear or in advance; (b)Salary received in the year for more than 12 months;

(c) Received a payment, which is a profit in lieu of salary; The DCT may, on the basis of application to him by the assessee, allocate salary over the year or years to which it relates and may refund the amount of tax, if any, paid in excess. According to section 21, salary is taxable in the year in which it is due or is paid. Where salary is paid in arrear or in advance, or where a retirement benefit or salary for more than 12 months is received in any one year, the income for that year may be liable to assessment at a rate higher than that at which it would otherwise have been assessed. Section 172 authorises the DCT to grant appropriate relief for income tax in the above situation. 3. Pay and Allowances totally exempt from Tax: (Sixth Schedule, Part-A) The following pay and allowances shall be exempted from payment of tax and shall not be included in the computation of salary income:a) Interest accrued on P.F.on which Provident Fund Act, 1925 applies (Para 4(1). b) Interest accrued on Workers Profit Participation Fund established under the Companies Profit (workers participation) Act, 1968 (Para 4(2) c) Any special allowances, benefits, or perquisites granted to meet expenses incurred for official duties (Para-5) d) Remuneration of Ambassadors/High Commissioner/Charge d'affairs etc. of Embassies of foreign states and their non-Bangladeshi employees (Para-7). e) Pension (Para-8). f) Gratuity (Para-20). g) Any payment from provident fund to which PF Act. 1925 applies or from a recognized provided fund, an approved superannuation fund or workers' profit participation fund (Para-21). h) Interest credited on accumulated balance of a recognized provident fund. The exemption limit is l/3rd of salary or interest credited @ 14.5% whichever is higher (Para-25 and
S.R.O.no 310 dated 27/06/1984).

i) Any amount received at the time of voluntary retirement in accordance with any scheme approved by the Govt. (Para-26). 4.

Salaries exempt from payment of tax (as per S.R.O.)

Salaries of the following categories are exempted as per Govt. S.R.O. and notification: a) As per Private Sector Power Generation Policy of Bangladesh, income of any foreigner employed in a private power generation company of Bangladesh is tax-free for 3 years from the date of his arrival in Bangladesh. (S.R.O. no 114/1999) b) Any salary drawn by any foreigner from the contracting state or agency as per bilateral agreement between the Govt, of Bangladesh and Govt, of the contracting state or agency from any foreign aided development project is fully exempt from payment of tax. (S.R.O. NO 207/1997) c) Salaries of categorized personnel of United Nations and its agencies are tax free as per provision of schedule-1 (Article-V) Section-17 and schedule-2 (Article-VI) section-18 of

United Nations and Specialized Agencies (Privileges and Immunities) Act, 1975. (NBR Circular No: NBR/Tax-7/Tax Policy/02/2006, dated. 29/4/2007.) d) When in any year an assessee has ceased to be an employee participating in a recognised Provided Fund and has been declared by the employer maintaining the Fund not to be eligible toreceive the whole for the accumulated balance due to him, so much of his
income as is assessable for that year shall be exempted from income tax and shall be excluded from the computation of his total income and if such amount exceeds the amount of his income in that year, so much of his income in the following year or years as is equal to the amount of such excess shall be so exempted and excluded is such year or years. [S.R.O.no 454(serial nol9) dated:31/12/1980]

5.

Information regarding payment of salary (Section 108 read with rule 21, 22 and 23)

Every employer shall furnish salary statement of employees in the form prescribed at rule-23 to the DCT before 1st September each year. The DCT may however extend this date. This section requires information to be given regarding accrual and actual payment of salary in order to help detection of any avoidance of tax. In case of non-govt. employees every person responsible for making deduction before payment of salaries to them shall send forthwith a statement prepared in the form prescribed in rule-21 to the concerned DCT. The Commissioner of Taxes may under rule-22 permit an employer to pay tax on the income of his employees in a lump sum every month based on the average amount of tax deductible from such income from salaries and submit at the end of the year the statement in the form prescribed in rule-23(3) Such statement must show not only the salary which is paid but also the salary due. Because salary due is chargeable under section 21, whether paid or not. Failure to furnish statement is punishable under section 124(b) and for making a false statement under section 165. 6. Tax on Tax Salary of the employees is exempt if tax is being borne by the employer and there is no tax on tax in this case. (S.R.O. no 182/1999 dated 01-07-1999)

7. Salary Income Computation As per income tax law the following pay and allowances will be included in computing salary income:a) b) c) d) e) f) g) h) Full basic salary; Full festival bonus; Full incentive bonus; Full dearness allowance. Full entertainment allowance; Any allowance where there is no exemption limit Employer's contribution to Recognised provident fund; Cash house rent allowance if it exceeds 50% of basic salary or Tk. 15,000/- per month whichever is lower; i) Rental value of the rent-free accommodation or 25% of basic salary of the employeewhichever is less. (Where the accommodation is provided at a concessionary

rate, the rent actually paid by him shall be deducted); j) Cash conveyance allowance if it exceeds Tk. 24,000/ per year. k) 7.5% of basic salary if conveyance is provided by the employer for the use of the employeeexclusively for personal or private purpose; l) In case of medical allowance, the amount exceeding the actual expenditure, m) The value of any benefit provided free of cost or at a concessionary rate; n) Any sum paid by an employer in respect of any obligation of an employee. 8. Investment Tax Rebate: According to section 44(2) and Part-B of the 6th schedule, the following investments and donations are eligible for tax rebate:a) Life insurance premium (Para-1) b) Employee's contribution to provident fund to which P.F.Act, 1925 applies (Para-3) c) Both employee's and employer's contribution to Recognized Provident Fund (Para-5) d) Employee's contribution to approved superannuation fund in which the employee is a participant (Para-6) e) Contribution to benevolent fund and group insurance scheme (Para 17) f) Contribution to any DPS up to Tk.60,000 per year at any scheduled bank. (Para-11) g) Investment in the following instruments1) Savings Certificates 2) ICB Unit Certificates 3) ICB Mutual Fund Certificates 4) Government Bonds and Securities (Para-10) Purchase of lcomputer (desktop) within Tk. 50,000/ orl laptop within Tk.l,00,000/(Para23). Donation to: 1. Rural charitable hospital approved by the Govt (Para- 11A) (2) Organisation for the welfare of the retarded people approved by the Social Welfare Department and NBR (Para 11B) 2. Donation to Jakat Fund (Para 13) 3. Donation to an institution of Aga Khan Development Network (Para 21) 4. Donation to Govt, approved philanthropic and educational institutions (Para22) 5. National level institution set up in memory of the liberation war (Para-24) 6. National level institution set up in memory of Father of the Nation. (Para-25) 7. Prime Minister's Higher Education Fund (Para-26) Investment at shares through IPO ONLY. (Para-27) Investment at Govt. Treasury Bond (Para-28)

h) i)

j) k)

9. Allowable Investment Allowance: The allowable investment allowance is the lower amount of the following three: 20% of total income excluding 1. employer's contributions to recognized provident fund(RPF) 2. taxable portion of interest on RPFl 3. any income u/s 82C OR TK. 1,00,00,000/= OR Actual Investments
Tax rebate @10% is applicable on such allowable investment.

Whichever is lower is lower to be

treated as investment allowance

After rebate, minimum tax is Tk. 2000/ if total income exceeds the minimum taxable limit. 10. Income tax rate for the assessment year 2011-2012 Rates 1.On the First Tk. 1,80,000/- of total income 2.On the next Tk. 3,00,000/- of total income 3.On the next Tk. 4,00,000/- of total income 4.On the nextTk. 3,00,000/- of total income 5.On the balance of total income
Nil 10% 15% 20% 25%

However, the threshold limit for woman and senior citizen ageing 65 years or more is Tk.2,00,000/ and for physically handicapped persons Tk. 2,50,000/ However, the minimum tax is Tk. 2,000/ if total income exceeds the minimum taxable limit. 11. Deduction of tax at source from salaries (Section 50+Rule-13) The employer including Govt, shall deduct tax at source at the time of paying salaries at an average rate applicable to the estimated total income of the employee. At the time of making such deductions, the amount to be deducted may be increased or decreased for the purpose of adjusting any excess or deficiency arising out of any previous deductions or failure to make deductions. The employer's liability to deduct tax is absolute and is not affected by any private arrangement whereby the employee has undertaken to discharge his own tax liability. The amount deducted shall be deposited to the credit of the Govt, within 3 weeks from the date of such deduction. However DCT can, with the prior approval of the DCT, permit an employer to pay the tax deducted at source under the head salaries quarterly on: a) 15th September b) 15th December c) 15th March; and

d) 15th June

12. Practical Problem Mr. X (50 years old) is the Managing Director of ABC Co. Ltd. He has been given the following monthly salary and allowances for the year ending on 30th June, 2011. 1. Basic Salary 250000.00 2. Dearness Allowance 5000.00 3. Entertainment Allowance 1000.00 4. Employer's Contribution to P.F. (Recognized) 2500.00 5. Lunch Allowance 1000.00 6. School fee for the Children of Mr. X 5000.00 7. Utility Allowances 3000.00 8. Fee for Golf Club (yearly) 5000.00 9. Medical Allowance 3000.00 10. (Actual expenditure during the year wasTk. 30,000/-) Festival Bonus Equal to basic pay (got two
bonus during year)

Other Particulars: (1)He has purchased 5 years savings certificates amounting to Tk. 1,00,000/-. (2)Employer provided him a free accommodation. (Rent of the house is roughly Tk. 35,000p.m.) (3)Employer also provided him a full time car. (4)He has been given a servant from his office whose monthly salary is Tk. 1,200/-. (5)He paid LLP. Tk. 50,000/-. (Policy value isTk. 4,00,000/-). (1) He contributed Tk. 2,500/- per month to the recognized provident fund (RPF). Employer also contributed the same. (6)During the year he received bank interest amounting to Tk. l,80,000/-( net of tax) (2) He purchased secondary shares of Tk.75;000/- of a public ltd. company which is listed
in DSE. Compute the total income and determine the tax liability of Mr. X for the assessment year 2011-2012. Computation of Total Income of Mr. X [Assessment Year-2011-2012] 1. Income from Salary (Section-2i) (1) Basic Salary (25000 X12) (2)D.A. (5000X12) (3) Entertainment Allowance (1000 X12) (4) Employer's Contribution to R.P.F (2500 X12) (5) Lunch Allowance (1000 X12) 3,00,000/60,000/12,000/30,000/12,000/-

(6) School Fee (5000 X12) (7) Utility Allowance (3000 X12) (8) Notional income for full time car for private use (7.5% of Basic Salary as per Rule: 33D) (9) Fee for Golf Club (10) Medical Allowance (3000 X 12) Less Actual Expenditure (11) Festival Bonus (25000 X 2) (12) Full Free Accommodation: Rental value of accommodation (35000 X 12) 25% of basic Salary (whichever is less) (13) Servant's Salary (1200 X 12) Salary Income 2. Income from Other Sources [Section-33] 100 Bank Interest (1,80,000 x ) 100-10 Total Income 4,20,000/75.000/36,000/30,000/-

60,000/36,000/22,500/5,000/6,000/50,000/-

75,000/14,400/6,82,900/-

2,00,000

8,82.900/-

Computation of Investment Allowance 1. Savings Certificate 2. LIP (10% of sum assured) 3. Contribution to R.P.F. (Self + Employer) Total investment allowances claimed

1,00,000 /40,000/60,000/2.00.000 /-

As per Section 44(3) of the I.T. Ordinance, allowable investment allowance

comes to 20 % of total income [excluding employer's contribution to R.P.F.] = (8, 82,90030,000) x 20% = 1,70,580/

TAX CALCULATION On 1st Tk. 1,80,000/-of Total Income On Next Tk. 3,00,000/- of Total Income On NextTk. 4,00,000/- of Total Income On Balance Tk. 2,900/- of Total Income
Tax on Total Income of Tk. Allowance

Tax Tax @ 10% Tax @ 15%

Tax @ 20%

Nil Tk. 30,000/Tk. 60,000/Tk. 580/-

8,82,900

Tk.90,580/17,058 73,522/

Less: Tax Rebate on Investment

(1,70,580/- X 10%)

Total Tax:

Less:- Tax deducted at source from bank interest

20.000/53522

Net tax liability

Answer: (1) Total Income: - Tk. 8,82,900/-(2) Net tax liability: - Tk. 53,522/-