-1-

Introduction

A country s tax administration is one of the few public sector organizations which touches the lives of a country s citizens and businesses on a daily basis and, arguably has the greatest impact on their livelihood. Tax administration employees are amongst the most frequently contacted government officials and often represent to the public what is right or wrong about their government. The responsiveness, integrity, and quality of tax administration staff must therefore meet a very high standard. Revenue collected from taxes along with customs collections represents the major funding source for governmental expenditures. An effective and efficient tax administration system is integral to any countrys well being. The proper amount of tax must be collected in a timely manner and the enforcement powers of the tax administration must be applied judiciously and in an even handed fashion. The tax administration must provide an even playing field for business by ensuring that all taxpayers meet their tax filing and paying requirements. This requires significant efforts to deal with the underground economy and to, therefore, increase the tax base. Failure to bring business activity from the shadow economy into the tax system puts compliant taxpayers at a competitive disadvantage, and ultimately leads to an erosion of the tax base. The tax administration must balance its educational and assistance role with its enforcement role. The overriding goal is to foster voluntary compliance with the tax laws. This represents a significant challenge in a developing economy. Private enterprises in developing countries often face difficulties when dealing with the government in general and the tax administration in particular. Many of the difficulties with the tax authorities are the consequence of poorly conceived tax policies and a lack of certainty regarding future policy changes. It would be rare indeed to not hear complaints about the complexity and/or ambiguity of the tax laws, high tax rates, and the lack of an integrated fiscal strategy that takes social taxes, and local taxes and fees into account when determining the overall tax burden placed on the business community.

-2-

In carrying out their responsibilities, tax administrations can also create problems for the business community when they impose burdensome reporting and record keeping requirements; conduct excessive inspections and audits; fail to deal with corrupt tax administration employees; and, fail to provide transparency in tax administration operations. This type of environment harms individual businesses and the overall economy. As a result, many in the business community react by taking steps which adversely affect the tax base. This typically includes underreporting profits and turnover; underreporting employee wages; and, by creating phantom employees. A significant number of businesses also fail to register or file tax declarations. This only increases the burden on those taxpayers who try to comply with the tax law, and discourages their future compliance. The result is a vicious cycle which tends to preserve the status quo. Only meaningful reforms to the tax system can break the cycle and result in an improved business climate which will stimulate economic growth.

According to the sec.-94: Limitation for Assessment:

(1) [(1) Subject to the provisions of sub-section (2) & (3), no order of assessment under the provisions in respect of any income shall be made after the expiry of six months from the end of the assessment year in which the income was first assessable.] (2) [(1A) notwithstanding anything contained in sub-section (1), no order of assessment under sub section (2) of section 82B or sub-section (2) of section 83A shall be made (a) After the expiry of two years from the end of the assessment year in which the income was first assessable; or (b) After the expiry of the period of fifteen months from the end of the month in which the return is submitted, which ever is earlier.] (2) Notwithstanding anything contained in sub-section (1), assessment under section 93 may be made(a) In the cases falling under section 93(3)(a) & (b),within (3) [two years] from the end of the year in which notice under the said sub-section was issued ; & (b) In the cases falling under section 93(3)(c) , within (4) [one year ] from the end of the year in which notice under the said sub-section was issued .

-3-

(3) Notwithstanding anything contained in this section, limiting the time within which any action may be taken, or any order or assessment may be made, order or assessment, as the case may be, to be made on the assesses or any other person consequence of, or to give effect to, any finding or direction contained in an order under sections 120, 121, (5)[**] 156, 159, 161 or 162 or, in the case of a firm, an assessment to be made on a partner of a firm in consequence of an assessment made no firm, (6) [shall be made within sixty days] from the date on which the order was communicated] (7) [& such revised order shall be communicated to the assesses within thirty days next following 8) [: Provided that where an order of assessment has been set aside by any authority in that case the assessment shall be made within forty five days from the date on which the order was communicated to him .] (2) [ (4) Where the Deputy Commissioner of Taxes fails to give effect to any finding or direction contained in an order referred to in sub-section (3) within the period stipulated therein , such failure of the Deputy Commissioner of Taxes shall be construed as misconduct .]

Limitation in Respect of Allowance for Depreciation.1. The aggregate of the allowance for depreciation allowed under this Ordinance or the Income-Tax Act, 1922 ( XI of 1922 ), in respect of any asset, shall not exceed the original cost of the asset . 2. Where full effect cannot be given to depreciation allowance under this schedule in the year in which it is admissible, there being no income chargeable for that year or such income being less than the allowance admissible, then, subject first to carrying forward of the loss, if any, under section 38, the allowances or the part thereof to which effect has not been given shall be added to the amount of the allowance for the following year or, if no allowance is admissible for such following year, shall be deemed to be allowance admissible for such year & so on for succeeding years till such time as the entire allowance on this account is adjusted against the profits .

-4-

Limitation for Claim.1. Subject to the provisions of sub-paragraph (2), any claim for an allowance by way of credit for foreign tax in respect of any income shall be made to the Deputy Commissioner of Taxes of the district in which the claimant is chargeable to income tax not later than two years from the end of the year of assessment for which that income falls to be charged to Bangladesh tax or would fall so to be chargeable in respect thereof. 2. Where, the amount of any credit given under the agreement is rendered excessive or insufficient by reason of any tax payable either in Bangladesh or under the law of any other country, nothing in the Ordinance limiting the time for making of assessment of claims for refund shall apply to any assessment or claim made not later than two years from the time when all such assessment , adjustments & other determinations have been made whether in Bangladesh or elsewhere, as are material in determining whether any, & if so, how much, credit falls to be given.

Conditions & Limitations of Carrying forward of Losses.1. The provisions of sections 37, 38, 39, 40 &41 shall have effect subject to the conditions & limitations set out in this section. 2. For firmthe firm itself is treated as an assesses & rules of section 37 is applicable for such firm. So the partners shall not be entitled to set off & carry forward of partnership losses against their own income.

-5-

Progressively of Tax Rates:

This study has analyzed the tax liability and degree of progressiveness of different level of income for personal income taxes since FY 1992- FY2002. It seems that both the rates are decreasing over the years for the lower and middle-income earners but remain static for the higher income groups. The results of periodic average of the two indicators also resemble the same. The sudden shifting of income exemption limit for FY 2000 and FY 2001 were very unusual that entirely escaped the lower income people that might lead them to be out of the purview of taxation. Both the rates found zero at the initial level of income, which will be thought to be far above the average tax exempted level even in neighboring south Asian countries. The effect in the context of Bangladesh is twofold. First, it will obviously work against broadening the much-desired income tax net. Second, it might lead to shift the tax liability only to a limited number of taxpayers of middle and higher-income groups. Since FY 1992 to FY 1999 it seems there were always a common effort to reduce the average tax rates for especially the lower income people but for the middle and high-income earners it affected too slowly. However for marginal rate of taxes it remains very proportional for the middle and high-income earners. An effort has only been made in FY 2002 to reconsider the tax-exempted limit as earlier that might help the government to keep those taxpayers within the ambit of taxation. It is thus recommended to soften the tax burden among all the taxpayers in such a manner that might reduce the average tax rates of middle and higher income people.

Inequality of Taxing Urban and Rural Sectors:

There is a common belief that the tax structure in Bangladesh is biased against the poorer class, especially in the rural areas. On the other hand, there is also the view often expressed by a section of the community, particularly in the urban sector, that the present tax structure weighs heavily against the business and entrepreneur class. It 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 & rural sectors. The commissions report presented the relative tax burden of the two sectors from direct taxes. 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 remains 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 more control over the urban sector. Such an inequality should be resolved and taken into account in future tax reforms. 5

-6-

Inequality in taxing Wages between Private and Public Sector:

In Bangladesh, income tax for government employees is deemed paid by their employer that is government. However, if a private employer pays income tax for its employees, such payments are considered income, which creates additional tax burden for the employee of the private firm. This seems discriminatory, that encourages employees 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 taxGDP ratio and hindering the expansion of tax base as well. Since governments of the developing countries solely run the development activities, the bureaucrats hold extra power that enhance abuse of power and lead them to corruption. The recent corruption index published by the UNDP (2002) resembles the same for Bangladesh. When such public servants are kept outside the purview of taxation it works as some sort of incentive for them to become corrupted. The problem obviously lies unresolved due to the existing poor salary structure of the government employees that usually not frequently adjusted with the current higher inflation rate. Improving existing salary structure as a means to protect corruption has been adopted by many other developing countries as China and India (The Economist, May 2002). Government of Bangladesh might have to coincide with the standard as to expect good governance and transparency among civil servants. In that case rightsizing the government with maximizing salary level is much desired.

-7-

Characteristics of Tax Administrations in Developing Countries Prior to Reform

Most or all of the following characteristics are present in countries before tax administrations undergo major reforms. This is especially true in a country which is transitioning from a command economy to a market-driven economy. All registered taxpayers and all tax liabilities are controlled on a regular basis. The reliance is on the known universe of taxpayers who are subjected to frequent and intrusive tax inspections regardless of their past compliance history or loss of revenue risk they may pose. Little attention is paid to identifying non-filers and bringing them onto the tax rolls. This is especially true with taxpayers operating in the illegal, as opposed to the formal sector. Most tax controls or inspections do not represent thorough or professional financial audits practiced by modern tax administrations and do not meet international standards. There is no limit on the total amounts of penalties that can be assessed in addition to tax. The actual amount of tax due may be substantially less than the penalties assessed. There is limited interest in building a system of self-assessment and voluntary compliance with the tax laws. A PAYE (pay as you earn-employee taxes withheld by an employer which are required to be deposited in the tax administration s account on a periodic basis) system may not be in place and there is limited withholding at the source by banks or other third part payers (interest, dividends, etc.) There is a lack of specialization in the tax administration. Prior to a tax return being accepted for filing, a tax inspector pre-reviews the tax return for accuracy and may provide advice to the taxpayer. The same tax inspector may then assess the tax liability, subsequently be responsible for collection of any unpaid amount, and even determine if a control visit is necessary. This close relationship where the tax inspector is responsible for a specific group of taxpayers can easily lead to corruption.

-8-

The emphasis of the tax administration is to meet a pre-determined revenue target for which they have limited or no input. There is a significant underground or grey economy with a high percentage of unregistered and/or non-filing taxpayers as well as filers who underreport their income, turnover, or profits. There are inadequate controls to prevent external or internal corruption. There are little or no written operating procedures to be followed by tax administration staff either in the same tax office or in different tax office locations. Taxpayer education and assistance efforts are minimal. There is a limited effort to solicit business or trade association input on tax administration requirements or operations. Tax administration internal communications are minimal and/or there is a top down management approach which discourages employee suggestions or feedback. Overall management practices are poor. Training is considered an overhead activity which does not justify much attention or resources. There are few or no training professionals on staff. The emphasis of staff training is on teaching the contents of tax laws as opposed to applying the laws. Little or no attention is paid to skills, techniques, procedures, customer relations, or managerial training. There is little interest in improving the overall image of the tax administration. Proper treatment of taxpayers and protection of taxpayer rights is not a major concern. There is limited use of computers. The emphasis is on the acquisition of hardware as opposed to the development of an overall information system plan. Software development is based on automating current operations as opposed to reengineering the business processes of the tax administration to produce maximum effectiveness and efficiency.

-9-

There is no centralized or unique numbering system used to identify all taxpayers. Therefore, the establishment of a taxpayer master file for the country is impaired. There may also be different numbering schemes used by other government bodies such as business registration, customs service, social taxes, etc. for the same taxpayer. These multiple systems impair the tax administrations ability to obtain and match information on business taxpayers. Taxpayers may be faced with multiple and uncoordinated audits and/or controls from different organizational elements of the tax administration. They may, also, face audits by the social insurance agencies that collect their own contributions or taxes which are not coordinated with the tax administration. The number of employees and/or skill sets of tax administration staff are not in balance with organizational requirements. The number and location of tax administration offices are not in balance with organizational requirements.

PERSONAL INCOME TAXES

In case of personal income taxes this study has found a number of problems in Bangladesh tax system and suggested measures are recommended as follows. Bangladesh Income Tax Rates Bangladesh personal income tax rates for assessment year 2010 - 2011 is progressive up to 25%. Bangladesh Income Tax Rates for individuals other than female taxpayers, senior taxpayers of 65 years and above and retarded taxpayers - Assessment Year 2010 - 2011 First Next Next Next Rest Amount BDT 1,65,000 BDT 2,75,000 BDT 3,25,000 BDT 3,75,000 Nil 10% 15% 20% 25%

- 10 -

Bangladesh Income Tax Rates for female taxpayers, senior taxpayers of age 65 years and above - Assessment Year 2010 - 2011 First Next Next Next Rest Amount BDT 1,80,000 BDT 2,75,000 BDT 3,25,000 BDT 3,75,000 Nil 10% 15% 20% 25%

Bangladesh Income Tax Rates for retarded taxpayers - Assessment Year 2010 - 2011 First Next Next Next Rest Amount BDT 2,00,000 BDT 2,75,000 BDT 3,25,000 BDT 3,75,000 Nil 10% 15% 20% 25%

Minimum tax for any individual assesses is Tk. 2,000 Non-resident Individual: 25% (other than non-resident Bangladeshi) On Dividend income: 20% Income tax is one of the main sources of revenue in Bangladesh. It is a progressive tax system. Bangladesh Income tax is imposed on the basis of ability to pay. The more a taxpayer earns the more tax he should pay. This is the basic principle of charging income tax in Bangladesh. The tax system aims at ensuring equity and social justice. Tax rates in Bangladesh also differs between male and female individuals. Time to submit income tax return: Unless the date is extended, by the 30th day of September next following the income year.

10

- 11 -

RECOMENDATION CONCLUSIONS
Attaining an optimal income tax system is a difficult and unenviable task, but nevertheless critical for revenue generation required for accelerating growth and to improve the quality of life of the citizens. A long-term sustainable solution to enhance transparency, promote growth, improve tax compliance and thus to increase tax to GDP ratio is a much desirable issue in the context of Bangladesh. Historically Bangladeshs direct taxes have been heavily skewed against salary-earners and corporate sector. Small business, services and farm incomes manage to slip through the tax net effortlessly. This study unveils the present scenario of tax incidence among different income groups, in case of personal and corporation income taxes in Bangladesh tax system. The findings and policy recommendations presented here could be important to carry on future tax reforms and to make Bangladesh tax structure more broad based, revenue buoyant and equitable.

Reference: 1. The Income Tax Ordinance, 1984 (XXXVI of 1984) Income Tax Manual (part-I) 2. Dr. Mahmud Morshed Monjur & Dr. Purohit Kumar Kanchan & Dr. Bhattacharjee Kumar Milan Income Tax, Ctg, BD 3. Internet

11