The latest “Income Tax Bill 2023” in Bangladesh seeks to amend the current Income Tax Ordinance, with the primary goals of increasing tax compliance and broadening the tax base.
Income tax in Bangladesh is currently governed by the Income Tax Ordinance 1984, which replaced the Income Tax Act 1922. The government has decided to replace the current law with a new one, despite the fact that it is amended every fiscal year by way of the Finance Acts. In order to achieve this objective, the National Board of Revenue (NBR) drafted the new Income Tax Act 2023 and formed a review committee to evaluate the draft and make any necessary changes.
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Notably, the draft Income Tax Bill 2023 is largely a Bangla translation of the Income Tax Ordinance 1984, which is currently in effect, with modifications and additions to reflect the changes in the tax payment system and overall tax management, taking into account the local peculiarities of Bangladesh and the international best practices.
What are the key changes?
The new bill modifies the definition of a company, the monthly submitting of source tax returns, the disclosure of assets while traveling abroad, the cancellation of Taxpayer Identification Numbers (TINs) and etc. The law also proposes tax exemptions for housing rent, medical expenses, and transportation.
Let’s delve into the key changes-
Modification in the definition of company:
The new income tax law’s modification of the definition of company is a significant change. This now includes non-governmental organizations (NGOs), industrial and commercial organizations, foundations, associations, cooperatives, and educational institutions. These entities are now subject to company regulations, including tax and other requirements.
Monthly submission of source tax returns:
Companies from different sectors that deduct tax at the source must now file monthly returns with the National Board of Revenue (NBR) and submit detailed information about their source of income. This modification is intended to streamline tax collection and assure prompt reporting. Local authorities, autonomous institutions, government agencies, and all other businesses besides schools must file their withholding tax returns by the 15th of each month for the previous month.
Additional requirements for availing government and non-government services:
To gain access to 38 government and non-government services, individuals must submit an annual income tax return or statement. This list has been updated to include, among others, landlords receiving rent or lease payments, suppliers of products or services, and those registering trusts, foundations, NGOs, and social cooperatives.
Implications for assets abroad:
In addition to local assets, the new law penalizes assets held abroad if tax authorities can establish their existence. This provision is intended to deter tax evasion and ensure that individuals declare their foreign assets.
Cancellation of Tax Identification Number (TIN):
Under certain conditions, the new tax law permits the cancellation of Taxpayer Identification Numbers (TINs). If an individual has no taxable income for three consecutive years and no potential income in the future due to physical disability, death, retirement, or permanent departure from Bangladesh with no income or employment in the country, the TIN can be revoked.
Tax exemptions and changes in deductible expenses:
The new law proposes tax exemptions of up to four lakh taka or one-third of total income for house rent, medical expenses, and transportation allowances. Nevertheless, the measure eliminates the advertisement that specifies the tax exemption limit.
In addition, the law establishes parameters for determining allowable expenses in an effort to limit the discretion of tax officials. By establishing specific benchmarks for tax-deductible expenses, the bill seeks to provide greater certainty to taxpayers and establish guidelines for tax administrators.
These parameters are founded on the commercial justification for the claimed expense, such as whether it was incurred to generate revenue, whether it qualifies as revenue expenditure, and whether there is a reasonable justification for incurring the expense. Ultimately, the deductibility of expenses will be determined by the taxpayer’s commercial grounds.
Electronic refund of excess tax:
Electronic refund of excess tax to the taxpayer, whereby the taxpayer is entitled to a refund of excess tax (paid to NBR) through an electronic bank transfer within 60 days from the date the Deputy Commissioner of Taxes finishes processing the tax return filed by the taxpayer using the self-assessment method.
This new feature is added to encourage more taxpayers to file and pay income taxes. It is anticipated that this will also expand the tax base.
Changes in investment-related tax benefits and restructuring-mergers:
The new act modifies investment-related tax benefits. For instance, the investment tax credit will be calculated based on the lesser of 3% of the total income or 15% of the total investment, up to Tk 10 lakhs. In addition, the measure proposes that restructuring-mergers be tax-neutral and introduces a startup sandbox to strengthen the startup ecosystem.
Addressing tax avoidance with General Anti-Avoidance Rule (GAAR):
The concept of a general anti-avoidance rule (GAAR) is introduced for the first time in the new income tax law. This provision aims to combat abusive tax arrangements by defining tax benefits and capturing arrangements whose primary objective is to gain a tax advantage without a corresponding business objective.
Concerns and considerations
With only 1.4% of the population filing tax returns in FY22, expanding Bangladesh’s tax base remains a challenge. This low compliance rate highlights the need for taxpayer integrity and morality. To encourage compliance, the new Income Tax Bill 2023 must portray the National Board of Revenue (NBR) as an organization that treats taxpayers fairly and justly.
The availability of the new income tax law in Bengali facilitates taxpayer comprehension, thereby improving compliance. However, both taxpayers and tax officials will require time to adapt to the provisions of the law. The withdrawal of tax officials’ discretionary powers from the new law is intended to increase transparency and reduce potential abuse. Conversely, this may increase the burden on taxpayers with middle incomes.
Concerns regarding the new income tax law include the requirement for taxpayers traveling abroad to submit asset and liability statements. To address this, the concept of “tax morality” becomes essential, as the National Board of Revenue (NBR) must establish trust and fairness in its system in order to encourage taxpayers to voluntarily fulfill their obligations. Simply stated, these measures are efforts to increase Bangladesh’s extremely low tax base.
To conclude, the “Income Tax Bill 2023” presents an opportunity to improve tax compliance and streamline procedures, but its successful implementation is contingent on fostering trust and assuring tax system equity. For the effective enforcement of the new law and attainment of the intended goals of increased tax revenue and a broader tax base, it will be essential to encourage taxpayer cooperation and compliance.