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72 views36 pagesTax CHP 1
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/ 36
Bangladesh Income Tax
Theory and Practice
Detailed Table of Contents
Chapter 1: Introduction
Public Finance 2
Public Finance Vs. Private Finance 2
Importance of Public Finance 3
Public Finance and the Economic Systems 4
15 Principle of Maximum Social Advantage 5
(16) Meaning and Sources of Public Revenue¥ 7
CP) Definition ofTax & .
CST Characteristics of Tax-5 By
GJ Purposes or Objectives of Taxation Q 10
Tax Base a1
Canons of Taxation & 4
Characteristics of a good tax system 12
Tax in Economic Development 13
Tax Burden and its Allocation Approaches 14
Impact, Incidence, Effect and Burden of Tax 16
Tax Shifting 17
Classification of Taxes $v. WL 20
25
Effects of Taxation
‘Tax Structure in Bangladesh & ot 27
Ranking of Bangladesh in Ease of Paying Taxes \ (QP 30
Income Tax - Concept and Definition 5 30
31
Characteristics of Income Tax
Objectives and Importance of Income Tax 31
Income Tax in Economic Growth of Bangladesh 32
Scope of Bangladesh Income Tax Law 33
Schemes of Bangladesh Income Tax Law 34
History of Income Tax Law in Bangladesh 35
General Rights and Obligation of a Taxpayer 37
Chapter 2: Basics of Income Tax
Income Tax Payment Cycle in Bangladesh 43
iene. ee er
Assessee and Person 49
24 Determining Residential Status 53
25 Computation of Total Income 63
26 Charge of Income Tax: Basic Principles 64
27 Charge of Surcharge 65
28 Charge of Additional Tax 66
29 Income Tax Rates 66
210 Charge of Minimum Tax 70
241 Charge of Tax on Stock Dividend 2B
212 Charge of Tax on Retained Earnings, Reserves, Surplus Etc. 4
74
213 Charge of Tax on the Difference of Investment, Import and Export Introduction
The art of taxation consists in so plucking the goose
as to get the most feathers with the least hissing."
— Jean Baptist Colbert
completion of this chapter, you will be able to
explain the concepts of public finance and taxes
2 determine the sources of public finance and taxes
differentiate various types of taxes
evaluate the features of taxes and a tax system
explain taxes and public finance of Bangladesh
explain the implications of taxes and public finance
integrate historical orientation in existing taxation system
summarize the rights and obligations of a taxpayer
Bloom's Taxonomy
hapter Learning Objectives (CLOs) -
KEY TERMS
| Public finance, Maximum
social advantage, Tax,
Tax burden, Tax shifting,
Cannon of _ taxation,
Bangladesh tax structure,
Income tax, Income tax
law, Rights & obligations
Clarify Predict
= =
See
Carry out Use
t t
Select Differentiate Integrate Deconstruct
1 Las i t
Select Determine Judge Reflect
1 1 t I
Gnerate Assemble Design [4 Create"
Income Tax-1A cl
16
Chapter ~ 1 Introduction
O h 1 un individual, there can be no internal borrowing, it has always to
ernment can borrow both internally from its own
vernments and from foreign people.
1 An individual has to earn his income, whereas the State gets most of its income
from people's income. No doubt sometimes the States also run productive
enterprises and get income on their own account
The State can issue paper currency in order to meet its expenditure But no such
course is open to a private individual
No equi-marginalizing of utilities. An individual tries to maximize satisfaction
from his income by distributing his expenditure in such a manner as to have equi-
marginal utility in every case. But State expenditure is done by the Finance
Department in an objective manner, not by equi-marginalizing of utilities.
O Surplus budgeting is a virtue for an individual but need not be so for the State.
sensible individual must use less than his income. He ought to have a superfluous
financial plan. For an individual, this is considered a virtue. However. for a
nation it- need not be so
joan. But the
people and externally from fore
IMPORTANCE OF PUBLIC FINANCE
The role of public finance is very crucial for a mode*TZOvernment as every
government ensures “Social Welfare” to its citizens and therefore, the scope of
governmental activities has been increasing day by day. Modern government do not
only confine themselves to law and order situations, but they also actively intéFvene
in economic matters to justify themselves as, *Well . The governments
require money to spend it on welfare of citizens. Hente the importance of public
finance has increased greatly in recent years. The importance of public finance can be
justified on the following grounds-
Proigction to infant industries: The government of an underdeveloped country
Protects its infant industries against foreign competition through various public
finance activities like imposition of heavy tariff duties on imports, putting
restrictions on imports, giving subsidies to keep the cost low etc.
© Planned Economic Development: Public finance renders. valuable help in the
planned economic development of a country. The pkitning authorities fix the
priorities of expenditure for the plan period and raise the necessary funds to
implement.the plans through various fiscal measures.
Rettig Consumption Habits: Public finance regulates the consumption habits
of thie people. Iti es on items of consumption, the use of which is to be
discouraged such as wine, cigarettes ete. and allows conggssions and rebajes in
(es if it likes to encourage the consumption of any comi oars
Reducing Inequalities: Public finance also plays a vital role in reducing social
inequalities, through its fiscal policies. The Government can taxes on
the richer sections of the society and spend the incomes so ‘on providing
various facilities to poor sections of the society such as providing free medical
facilities, education, cheap housing, cheap rations through fair price shops ete.
® ed
®
—_
A
\ if
XVL 4O SOILSIMALOVYVHO
{ Chapter =U tntroduction
~ = sump The government not only raises revenue through
SNAUON, but italso imposes restriction on the use of certain goods and services in
a) desirable and respectable for a healthy state of the society. Taxes on
Hitoxigant, tObageg ete, raise public revenue no less than other taxes but their
ETRE verre p
HAAR MAF en: the deieriogtion of health of general public. More tax is
wr = levied on luxury goods to reace thei use
Protection of lo f
tion of local industries. Wn order to protect the local industries from the
neven 0 ;
F competition government may provide tx incentives for poor local
industries and §o, s| e
tries and So, should design thg tax policy to ensure the protection of poor
local industries,
Economic deve!
2% Economic developmem: The tax revenue can be used by the government to
ensure the economic development of the country. It can be used to build the
in ate .
nfrastructure, to invest in social_security programs, in various poverty elevation
Programs. Government can invest in productive sectors and can reduce
unemployme a ant
So, it can be said that the purpose of tax is not only the collection of revenue, but also
to ensure the economic development and social welfare of the country, But it is only
possible when the country designs(the tax polit
an effective and ef
1.10 TAX BASE i
0 A tax base is a total amount of assets or jncome that can be taxed by a taxing
ci authority, usually by the government. It is used (o calculate tax liabilities. This can be
in different forms, including income or property ~ANtax base is defined as the total
value of assets, properties, or income in a certain area or Juxjsdiction. To calculate the
total tax liability, the tax base must be multiplied by the tax'vate ize. (Tax Liability ~
Tax Base * Tax Rate), The rate of tax imposed varies dependifig-on the type of tax
and the tax base total. Income tax, gift tax, and estate tax are each calculated using a
different tax rate schedule.
jent manner.
CANONS OF TAXATION
Canons of taxation refer to The administrative aspects of a tax. They relate to the rate,
amount, method of levy and collection of a tax. In other words, the characteristics, or
the characteristics, of.
4 qualities which a good tax should possess are_generally deseribed as canons of
ixation Recording 19 Adam Smith, there are four canons or maxinie EET?
which are still recognized as classic and There are some other Cannons referred by
other economists some of which are explained below
ee a onnonts of Takollon poe >
‘Adam Equality, Certainty, Elasiciy, Productivio: | | pastable |
Smith [7] Economy, Convenience | | Simplicity, Expediency ;
" cLo
1.6
Chapter ~ 1 Introduction
ould be id based
4 are: es based on fundamental principles of iaxgtGn like th
of east SI ive, cost, and benefit and above all rsh,
+ i and above all ability to pay
2.9 axes should follow the most importary’canons) vale
conyegient to pay, certain, ec mivane (CT TY
= economicak productive, and elastic
0,01 TARSYStEM Should be balanced containing both direct and indigect nature of
indigect nature of taxes
so that it can m
mize government revenue
AO The tax authority should be supported by sufficient simple Jaws and rules, sk;
manpower arid efficient administrative tools and techniques ie
QO Tax system should have positive effect on production and distribution withos
causing any edyerie effect upon ability-and willingness th WOTKigave mad ives
€ C1 The tax systefft Sffould be so framed as to ensure that the productive resources of
the economy are optimally allogated and utilized. For this purpose, it is essential
that the tax system should be economically neutral
ers A good tax system has least collection cost to collect maximum amount af tayes
‘The tax system should provide no scope for the evagjon of tax by the taxpayer
Above all, the tax system should abide by the principle of maximum social advantage
so that the society is benefited to the maximum effect possible. Maximizing social
g advantage or least aggregate sacrifice is not the task of one tax. but from all the taxes.
TAX IN ECONOMIC DEVELOPMENT —
‘The classical economists were in view that the only objective of taxation was to raise
government revenue, But with the changes in circumstances and ideologies, the aim
of taxes has also been chinged. These days apart from the object of raising the public
revenue, taxes are levied to affect consumption, production and distribution with a
view to ensuring the social welfare through the economic development of a country
For such instance, tax can be used as an important tool in the following manner:
EX Optimum allocation of available resources: Tax isthe most important source of
public revenue. The ingest of tax leads to diversion of resources from the
taxed to the non-taxed Sector. This revenue is allocated on various productive
sectors in the country with a view to inereasing the overall growth ofthe county:
Tax revenue may be used to encourage development activities in the less
dgveloped areas of the country where normal investors are not willing to invest.
am ing government revere. In modern times, the aim of public finance is not
merely to raise sufficient financial resources for meeting administrative nr
for maintenance of law and order and to protect the country from foreign
n object is to ensure the social welfare The increase in
sion, Now the mall ;
1eeSF ion of tax increases the government revenue: It is safer for the
a to avoid borrowings by increasing tax ae “fe ia
. Sit el
ing sav nt ec countries
Enc omy ce abo 0 teh © OO
ion and inv pout in the private and public sectors. Taxon
iso To raising the ratio of sayings sa.nationsl eo"
B3 S ——
nequalities
iment aM encourgy
is another role to maintgy
; rene ped countries, there
In under-developed count
ce st ensure growth with stability
Y nom Igo used as a control mechanism to chee
B mnism: Tax policy is also used as nec
San vion of liquor and luxury goods and to protect the local pag
nflation, consumption of liquor @ ye pholoraiect
poe ihe uneven competition. Taxation is the only effective weapon h
industries from the uneven co Ue aay
‘thigh private consumption can be curbed and thus resources \ransferred to t
State, Thus, the economy can ensure sustainable development
7 co ainly depe
Thus, it can be said that the economic development of a country mainly depends q
the presence of an effective and efficient taxation policy
TAX BURDEN AND IT’S ALLOCATION APPROACHES
Tax burden is considered as the amount of tax paid by a person, company, or count
in a specified period considered as a proportion of total income in that period. Fe
public finance purposes the tax burden, or tax ratio, in a country is computed b
taking the total tax payments for a particular fiscal year as a fraction or percentage ¢
the Gross National Product (GNP) or national income for that year. While designin
the tax policy of a country, any government tries to justify the imposition of varios
taxes for financing state activities and on the other, by inferences, provides a bast
for apportioning the tax burden between members of society. The following popul
approaches are evident to allocate the tax burden
The Expediency Approach
RGAE die ocrbiclv eves 7
a approach, every tax proposal must pass the test of practicability. It must
tl m cia! vi o
ce only consideration weighing with the authorities in choosing a tax propos?
wl and social objectives of the state and the effects of a tax system should #
reated as ele’ e
S irrelevant since it is useless to have a tax which cannot be levied a
Collected efficient
efficiently. There are pre fi
ly are pressures from ecos a al gro
inva Nee ses m economic, social, and political grouf
agenda and authorities are often fore '
ecareatiacerca, es are often forced to reshape tax structure
se. pressure
Pressures. In addition, the administrative set up may not # reasonable cost 0
mis : of collection, Taxation provides a
the authorities and should be effectively used for
i¢ and social problems of the society such a
income inequalities
clieal fluctuations and so on.
The Socio-Political Approach
ph Wagner is the pioneer o}
1 is the pioneer of this approach. He emphasized that social and
political objectives should be the deciding factors in choosis
problem should not be f ieee
id not be focused through individualist approach rather should be looked
its social and political context to find out an appropriate solution, A tax system
should not be designed to serve individual members of the society but should be used
to cure the problems of the society. This approach advocates a modern welfare
approach in evolving and adopting a tax policy that can be used for reducing income
inequalities. Wagner believed that private property and inheritance were the result of
ate, therefore, should
state policies and not because of any God-given rights. The S
have the right to control the ownership of property and its inheritance in the interests
of the society. Wagner's ideas, though much criticized at that time, are now the
hallmark of fiscal policies of modern state
The Benefits Received Approach
This approach assumes that there is basically an exchange or contractual relationship
between taxpayers and the state. The state provides certain goods and services t0 the
members of the society, and they contribute to the cost of these supplies in proportion
to the benefits received. In this quid pro quo set up, there is no place for issues like
equitable distribution of income and wealth. Instead, the benefits received are taken to
represent the basis for distributing the tax burden in a specific manner. This approach
overlooks the possible use of the tax policy for bringing about economic growth or
economic stabilization in the country
The Cost-of-Service Approach
This approach is very similar to the benefits received approach. It emphasizes the
semi-commercial relationship between the state and the citizens to a greater extent.
The implication is that the citizens are not entitled to any benefits from the state and if
they do receive any, they must pay the cost thereof, In this approach, the state is being
asked to give up basic protective and welfare functions. It is to scrupulously recover
the cost of the services and therefore this theory. unlike the benefits-received one,
specifically implies @ balanced budget policy. In the process, the state is not to be
concerned with the problems of income distribution. No ait is to be ‘made 0
improve income distribution; and no notice is to be taken if the policy of levying
taxes according to the cost-of-service principles deteriorates it further.
The Ability to Pay Approach 7
This approach considers tax liability in its true form i.
state without quid pro quo. It does not assume any cot
t to the
e. compulsory paymen|
mercial
mmercial or semi-com
15 Income Tax-24
p Chapter ~1 Introduction
we Direct money burden is the tax paid by the
a» Indirect money burden is the
taxpayers for tax payment
D1 Real Burden is the loss of welfare to the
of increasing unemployment, reduced prov
* Direct real burden ~ sacrifice of th
taxpayers to the tax authorities
additional money expenses incurred by the
taxpayers and the community, in terms
duction, etc, This can be of two types:
ie welfare which the tax itself imposes
upon the taxpayers, but not as net of the benefits, if any
"Indirect ‘real burden ~ indirect loss of welfare which results from
interference with consumer choice, changes in factor supply and hence total
output, and changes in employment through changes in aggregate demand
Distinction between Impact and Incidence of Tax
A distinction can be made between the impact and incidence of a tax as follows:
Impact refers to the initial burden of a tax whereas incidence refers to the
ultimate burden of tax
Impact of tax falls on the person who initially bears it and pays to the government
while the incidence of tax falls on the person who ultimately bears it and who
cannot pass it on to some other person.
O The incidence of tax cannot be shifted whereas the impact of tax can be shifted,
Generally, the impact and the incidence of a direct tax are on the same person because
it is ultimately paid by a person on whom it is initially levied whereas the impact and
incidence of an indirect tax are on different persons because it can be easily shifted to
some other person who ultimately pays it.
Distinction between Incidence of Tax and Effect of Tax
A distinction can be made between the incidence and effect of a tax as follows:
OA tax reduces the income of the person on whom the incidence rests, while the
tax effect is the pressure or influence of the incidence (such as forced reduction
of consumption and investment for disposable income reduced by tax incidence)
1 Tax incidence is direct money burden and tax effect is the indirect money burden.
C1 The effects of a tax can be the result of the fact of tax imposition itself (impact)
and they could also follow from the process of shitting its incidence
TAX SHIFTING
The process of transferring the direct money burden of a tax to another person is
known as the shifting of tax i.e, if incidence differs from impact, tax is said to have
been shifted. In the above example, the customs duty / value added tax paid by the
manufacturer, may be added to its cost and the price of the product will be Leet
by the amount of tax and thereby shifts the burden to the consumer, This process 0
passing on the burden is called shifting of a tax. Shifting of tax incidence is
through the means of a price variation. Tax shifting may be ~ e
- 19
ail Bangladesh Income Tax - Theory and Practice Nihenin tes fts his tax bund
a iting vs Penny shifting, as the COMSUMET CANNOL shi
to the consumer, it is known ieee vthe tax burden is shifte : Const
his tax burden, On the other aes TT mult-point shifting. For example,
through different points, tS SION cinu because itis levied and first pq
VAT on a commodity A nt importer shifts the burden on to the Wholesale
= se Ifa tax incidence is shifted through a sq
ora value added tax (VAT) imposed o
an excise duty impo:
alled forward shifting. For example, an exc! P
ransaction d forward
a producer may be shifted to a consumer
in case of multi-stage forward shifting of i
seller may be shifted to a buyer
incidence, a tax incidence shifted from a sel u d
d so on until the tax fin
settles on th
will also shift it to another buyer a 4
ultimate purchaser or consumer, it may be called that the tax is being shift
ard. On the other hand, if a tax incidence is shifled through a purcha
kward shifting, If a VAT imposed on a consumer ar
onw
transaction, it is called bz
he can shift it to the producer, or a VAT imposed on a buyer and he can shift ity
the seller, then it will be backward shifting. Backward shifting may be throug
tax capitalization when a tax affects the capital value of assets. If a tax change
he expected yield of an asset, then it will also change its market price. In othe
words, the tax has been capitalized. Say, a durabl
good is subject to a period
tax (¢
equivalent to previous annual license fee on TV) and an equivalent ¢
the future tax payments is found in terms of the present value (PV) of t
Periodic tax discounted based on interest rate. If the purchase price of the dura
item is redu
by a part or full amount of this PV by the purchaser, then it
called tax capitalization
theories of Tax Shifting
P Concentration Theory: This theory was advocated by the physiocratic schoolé
thought in France during the middle of the 18 century. This,
; This approach maintai
that there is
an inherent tendency for the taxes to be
tax on wage or tax on land incom
concentrate on a particular class of
their products. This theory adv
absorbed by certain incom
classes (e.
€ only). Here, each tax tends
People who happen to enjoy surplus fr
‘cated that the government should concentrate 6
a single tax on economic rent earned by landlord
; 8
abolishing rite It also stood in favor
the diversified tax struct
Diffusion Theory: The diffusion theory w
Canard and Mansfield,
centration theory
members of a co
Ditiseetnce developed by the French writer lt
hist) Jory I developed, contrary to the &
neon) asserted that all taxes are diffused amon
Ona ty: This theory holds tha government may impose SM
are most easily
Aruction ton collected and will
The diffusion
and complete mobility of all
taxes. as
assessed and
ealth
- ational is
Perfect competition
cause the
theory of taxation assumes
Sconomic agents. According Chapter - 1 Introduction
this theory, the du whom w ly
See individuals from whom the tax is collected will not ultimatel
wed Ye : re burden of taxation. The burden will be shified on to other classes
and finally it will be diffused all ove
er the society, untraceab|
ae ty, le. Because of the
interaction of sales/purchase transactions, eventually it becomes
impossible (0 trace the final incidence of any tax and in reality, all taxes get
“diffused” in the economic system. . F
QO Demand and Supply Theory: This theory starts with the basic fact that incidence
of a tax can be shifted only through sale/purchase transactions, and therefore,
only through a variation in prices. According to this theory, a tax can be shifted
only through a shift in the demand and/or supply curves and the sharing of the
incidence will be determined by the demand and supply elasticity. If the demand
is inelastic, tax can easily be shifted by the seller to the buyer. Where demand is
clastic, the burden of tax will mainly be borne by the seller. Actually, the tax
burden will be shared between the buyer and the seller in the ratio of the
elasticities of supply and demand of the taxed item
Additional Factors Influencing Tax Shifting
As-we have already discussed in the Demand and Supply theory of Tax Shifting, the
following two factors are mainly behind any kind of shifting in tax:
Elasticity of supply
Elasticity of demand
Additional Factors Influencing Tax Shifting:
‘Type of tax: transaction tax easier to shift.
Price being fixed & accepted as normal: difficult to shift through price variation
Tax rate: small tax chosen to be borne by the seller in a competitive situation.
Tax on commodity having close and effective substitute: difficult to shift.
J: itis difficult to shift if not imposed in neighboring areas.
oooo00
Geographical coverag:
Imposition of a Specific Tax ;
{A specific tax is a form of taxation where the amount of tax is directly proportional to
the level of output produced. As more output is produce, the tax paid by the firm also
increases. A specific tax will, therefore, affect the variable cost of the firm. Bs
change in variable cost will also affect the average cost and the marginal se a ise
firm. As a result, the monopolist increases the price of the commodity, Wit
decreasing the amount of the output it produces. Unlike lump sum tsx PAT
specific tax can be passed to the consumers in the form of higher Prices,
levels of output.
Deficit Financing as a Hidden Tax ; pie
Deficit financing by the government is that portion of its budgetary @XPEN TTT
is financed by some form of non-tax revenue receipts, that is Boron TT
cash of drawing down of cash balances. Creation of cash or drawitt
ing in
balances adds to the flow of aggregate demand in the econo) resulting
19 Tee eo
On the basis of
ra
L EXHIBIT
Chapter -1 Introduction
Critical Evaluation of Direct and Indirect Taxes
pifferences between direct and Indirect taxes
Direct Tax
» Taxable Event
assessees.
» Levy & Collection
« Shifting of Burden
cannot be shifted.
« Collected
valuation
valuation date,
Merits of Direct and Indirect Taxes
Direct Tax
Equitable since they are progressive in their rates.
Economical as it requires low administrative
collection cost
Elastic since they can be adjusted as per the needs
of the State.
Certain as the rate, amount and time regarding tax
collection is known to both taxpayer and tax
authority.
It is based on taxpayers’ ability that ensures
distributive justice.
Itcreates civic consciousness among the taxpayers.
No scope for any leakage as it is directly paid to the
treasury.
Demerits of Direct and Indirect Taxes
Direct Tax
* Large scale tax evasion by the dishonest taxpayers
using loopholes of the tax system
* Since the burden cannot be shifted, they are
unpopular.
* Direct taxes are found to be arbitrary to determine
the degree of progression in taxation.
* Since the taxpayers need to follow certain com|
Steps like filing returns, it is inconvenient.
* Collection is not satisfactory if the system Is not
strong enough.
SER cen Sa Ree meee eee
plex
Taxable Income/Taxable Wealth of the
Levied and collected from the assessee
Directly borne by the assessee. Hence,
After the income for a year is earned or
of assets is done on
_ ____ Indirect Tax
Purchase/Sale/Manufacture of goods and
provision of services.
Levied & collected from the consumer but
paid/deposited to the government by the
Assessee/Dealer.
Tax burden is shifted to the subsequent
/ultimate user.
At the time of sale of purchases or
the rendering of services
Indirect Tax
They are very convenient to pay since taxes are
included in price.
They are generally difficult to be evaded as they are
included in the price of the goods.
Highly revenue productive in a developing country
since income level of the average people is low.
By taxing luxury goods heavily equitability can be
ensured,
Can be used to control the consumption of luxury,
liquor and harmful goods by imposing high taxes.
Indirect Tax
They are inequitable since same rates are applied
{for both poor and rich.
‘They are uneconomical since the collection of these
taxes involves many stages and thus the cost of
collection becomes greater:
Indirect taxes give chance for ch
retailers may charge the customers
specific amount
tis. a cause of inflation since it im
production
ating as the
more than the
creases the cost of Chapter - 1 Introduction
O Regressive Tax: A tax is regressive whe
n its burden falls more heavily on the
the rich since the tax rate
decreases as the tax base (income) increases
This is just the opposite of Progressive tax. Gales tax is a regressive tax. If two
individuals spend the samé amount on a given produc, they will both pay the
same sales, tax, regardless of whether one earns more than the other one, For
another example, tax on total income of Tk. 100,000 is 15%
is 10%, Here tax will decrease more th
or th
@ but on Tk. 500,000
n proportionately
‘egressive taxes encourage savings and investment as high-
income earners pay less tax and have more
to use for investment and savings.
Merits = R
cretionary funds
Regressive taxes increase net government revenue. As people
have more after-tax income to use for savings and investment,
these additional investments in turn generate more taxable
income and the cycle begins again - more investment, more
wealth, and ultimately more tax revenues.
Regressive tax systems encourage people to earn more income
because the more you make, the more you get to keep. This
incentive will produce more investment, savings, job growth,
and national GDP.
Demerits: © I does not follow the ability to pay principle.
\ * This system totally ignores the principle of taxable capacity.
. = This tax increases inequalities of income/wealth in the society
O_Degressive tax: Taxes which are mildly progressive, hence not very steep so that
high Income does not make a due sacrifice, such taxes based on equity are called
degressive. Here, a tax may be slowly progressive up to a certain limit, after that
it may be charged at a flat rate. The merits and demerits of this tax system are
similar to the progressive tax system. In Bangladesh, this system is followed
where income tax rate of an individual for the assessment year 2021 ~ 2022 is:
On first Tk. On next Tk. On remaining
300,000 ~ 100,000 300,000 400,000 500,000 income
@0% ~ @5% + @10% @1S% @20% @25%
Marginal tax rate against income as the base under these four categories of taxes are
graphically presented in the figure below.
The figure shows, the proportional tax rate has a constant slope, i we -
progressive tax rate has a rising positive slope. The steeper the slope os "ler
the progressive the tax regime. The regressive tax rate line has a declining ene
slope. The steeper the negative slope of the tax line, the more ee eaae
The digressive tax rate line has a rising slope initially. but it becomes con
point.
3 atter o) ation
Classification Based on Subject Matter of Taxation
ee 4 persona’ apabilit
oO g., income tax} is Tevied based on persona
Pia gaats vi ts like si we
1 In Rem axis levied on activites or objec like
Classification Based on Elasticity of Tax ‘
O Elasi ¢ of changes in tax is more than the rate of mn the
este 1 oe
base, the tax is known as elastic tax.
5 Mnelastic tax: If the rate of changes in tax is less than the rate of chan
tax base, the tax is known as ine
tic tax.
Classification Based on Tax Base
5 Income tax is changed based on the income of a person or entity, e.g., income ta
O Wealth tax is charged on the value of financial asset e.g., shares, securities etc
non Rnancial asset e.g., building, premises, land, Such as wealth ta!
X, gift tax
O Vglue Added Tax is charged on the value addition in
@ commodity or service
7 “duce tax is charged on the expenditure like purchase
Expenditure tax
ax, sales ti
x etc
Classification Acc “ording to Change in Government Revenue
nce: Musgrave and Musgrave, 1989 pp
216-217
OD Lositive ax: These are taxes which increase the Tevenue of the government. Suc
a, income tax, wealth tax, VAT ete
O Negative.
These are taxes which don’t ine
rather decrease. These are basically tr
Tease revenue of the governmetl
Ansler payments like pension, gratuity ele
Classification Ac ording to Taxing
Q
a is levieg
UY Local ta Rate i;
Parishad. Municip
Authority
d by the central zovernment
levied by th
Central
Such as
he local authorities,
ality etc. This is al
income tax, wealth tax
like City Corporation, Un
so known as rates I> Savings
Effects of Direct 7
direct
come b
Higher taxes “reduce disposable
hy curtailing the income directly
countries w
allowances are
In the
‘here_unemployment
provided,
becomes worse whi
the situation
en an unemployed gets
employment but falls in the lower income.
bracket, because then he will not receive
the unemployment benefit and at the
same time, he has to pay tax. This is called
‘unemployment trap’
Higher direct taxes reduce the ability of
see
Ha Sa coh ie LE
ind Indirect Taxes
Ree e
Tax Effects of Direct a
Chapter -1 Introduction
| ole
Effects of Indirect Tax
Usually the imposition of an indirect tax increases
the price of the concerncd goods or services. Thus,
the purchaser has to pay more, which reduces the
net income.
Usually, it is said that highér indirect tax
and the tax-paying individuals or enterprises indirectly encourages savings, as it increases price
Investment to save or invest. But it depends on the and thereby reduces demand. But grossly, higher
extent of financing the enhanced tax from indirect taxation decreases savings and
savings or consumption. investments.
* Price Higher direct taxes have a deflationary Indirect taxation usually increases price level, and
effect on price by decreasing the demand. it has an inflationary effect. But the extent of
But labor organizations may create inflationary effect depends on the price elasticity
Pressure to increase the wage level to of demand and supply. If the price elasticity of
‘meet the higher taxes, which may cause a supply is more than the price elasticity of demand,
cost-push inflationary effect. then the price will rise and if the price elasticity of
demand is higher, then the price will fall.
* Initiative Higher direct taxes have a negative effect Higher indirect tax has also a negative effect on
on initiative, and the leisure is preferable the business community's initiative because it is
to work. But due to higher direct tax some seen as an impediment to their trade and
might do more works to maintain the commerce causing a price barrier.
standard of living.
* Overall Other things remaining the same, because of higher taxation, aggregate demand of the
economy will fall, which may cause an inflationary effect on the price and output levels.
Balance of payments may be improved by decreasing the dependency on foreign aid. But the
employment situation may be worsened due to the fall in aggregate demand. Besides, taxation
may affect regional disparity, inequality between income and wealth, etc.
‘AX STRUCTURE IN BANGLADESH QB
‘The tax structure in the country consists of both direct (income tay, gift tax, land
development tax, non-judicial stamp, registration, immovable property tax, ete.) and
indirect (customs duty, excise duty, motor vehicle tax, narcotics and liquor duty.
VAT, SD, foreign travel tax, TT, electricity duty, advertisement tax, ete.) tares-
‘Analysis of revenue collection activities in Bangladesh for the fiscal year 2020-2!
cd
Economy
i
ae Chapter ~ 1 Introduction
Fav avoidance behavior of the 1
- wxpavers: ‘The he:
(GxaTOT TSW Treat The heavy reliance on indirect
ay one of the
progress in Bangladesh aig nn era Obstacles in attaining economic
Ce rr only @ few taxpayers share the burden of taxes
espite 5 Untiving effort, the progres
: 8 dgress is not still satisfactor
corporate firms use various measure: cia eana cea
S 10 evade tax using loopholes of the curr:
tas system, In a country of 161 million people, onty re Penida
and companies‘organizations paid income tax. ip fiiagletesh duing the
assessment year 2019-20, which is just 1.37% of the total population.
0 Neweaw Tax hase. Out’ tax base 1 too naraw, and the Gx law ie-fall of
exemptions and allowances. Agricultural sector provides employment for around
6Q6 of the population contributing only 16% of GDP and virtually pays litle
ineowe tax. From a study it has been found that black shadow economy in
Bangladesh consists of around 37% of GDP, from which no tax is collected
EXHIBIT
Tax Structure of Bangladesh: Some Statistics
(Source: Bangladesh Economic Review, 2020)
+ Tax Revenue as percentage of GDP
2014-15 2015-16 2016-17 201 2019-20
Total revenue 10.8 10.2 124
Tax Revenue 9.30 9.00 2
0
Non-tax Revenue 1.50 130 13
: in crore Tk,
Composition of Revenue (in c? i oe Po erie, ts
Total 67.170 i 214261 2.59454 — 3,16,613
eee 140, 677 155400 1,92.261 2,32,202 2,89,600 _ 3,13,067
eas "76493. -—«(22,694 «22,000 «27252 27.013 35.002
Non-tax Revenue phism 87.26 89.73 89.50 9147 89.94
% of Tax to Revenue 2920 55746 68.821 83.303 1.03299 1,14,603
Direct Tax (DT) 35.54% 35.87% 35.65% 36.61%
35.87% :
‘% of DT to Total Tax Se 99,654 1,23,940 148,899 1.86361 1,98,464
Indirect Tax (17) ee 64.13% 64.46% © 64.13% 64.35% 63.%
% of IT to total tax a
* Item Wise Collection “16 2016-17 2017-18 2018-19 2019-20
2014-15 ee F572% 35.62% 35.09%
var 35.24% 11.02% 11.22% 11.43% 10.12%
10.74% 32.64% 33.48%
Import a
ne aq 34.56% 6 15.35% 14.97%
| Swpptementary duty a a ee
Seater
anaining an optimal 18x StUCIUTE iS one Of the
ae discussion clearly Pe ° re to inerease the revenue generation fop
i ‘issues
most_ important
29
a =
1.20 RANKING oF BANGLADESH IN EASE OF PAYING TAXgg
’ ‘Income tax is a tax on income
Chapter ~ 1 Introduction
annual basis). No 7
is). No specific definition of income t
But in section 16 of the ITO, 1984
assessment year at any
respect of th
ax has been giver 1984
a n in the ITO,
‘ate or rates shall be
total income of the
't’stated that the Income tax for any
charged, levied, paid, and collected in
income year or income years of every person. Some
the verdicts of various cases are as following:
definitions of income tax given in
and not or
id not on anything else. It is one tax not a collection
of taxes essentially distinct," 5
ly distinct. [Bengal Coal Co. Ltd. vs. Janardan Kishore Lal Singh
(Cal) 1936 L.T.R, 392]
‘ty tax is a tax on in Merc! id. vs. Stedeford: c
come
ele income.” [Peter Merchant v ford: 30
a2
cLo
14
12.
Clo
14
Ce
sie ihe 10m
is one tax and not a collection of taxes of different items of income and
Y were :
ssment to income tax is one whole and not a group of assessments of different
items of income." {CIT vs. Numberumal Chatty & Sons (1933), 1.T.R.32 at 37 (Mad))
7 eee tax is an annual tax and the profits of each year should be subjected to
income tax" [CIT ys. Sri Sukhdeodas Jalan (Pat) 1954, 26, |.T.R. 617]
Above Yefinition revealed that income tax is a girect and single t arged on the
total income of a person for a relevant income year in relevant assessment vs
CHARACTERISTICS OF INCOME TAX
From the above discussion, we can depict the following characteristics of income tax:
O Iisa direct tax.
The levy of Income t
XXXVI of 1984].
(0 Itis charged on total income of
OO The rate of income tax is d
‘Assembly through the Finance Act
the National Board of Revenue from time
1 tis one tax not a collection of taxes essentially distinet
i titer da ie Hove by tre'goverament 2 © annual basis
FTax imposed on items other than income not income tax.
ax is regulated by the Income Tax Ordinance, 1984 [Act No.
an income year of @ person in an assessment year.
fetermined by the government in the National
Besides rules/orders/circulars are issued by
to time.
D IMPORTANCE OF INCOME TAX
to meet a country's revenue
major sources of
iditures with a ¥
redistribution of
ption. Income tax is one
ives ancl importance of
BJECTIVES AN!
‘Taxation is one of the
and development exper
social objectives, such 8
discouraging harmful consu™
of public finance, Some major obie
follows:
3
CCC
public revenue
jew to accomplishin:
income, price stabilization and
g some economic and
of the most significant sources
ome tax are as 1.25
clo
4
5 Chapter ~1 Introduction
Investment allowan nt
g y allowance is given on the
“machineries of new Fishing Bo
are established in NBR specifie
Accelerated Depreciati
investment in new machineries (like
ats & passenger boats) (@) 20%, and 254% if the:
'd areas. This provision is also attracting investors
on Allowance: Depreciation allowance is allowed on the
ew WatMieries used in various mMistries a
for specified areas, and 80% in first
established in other areas.)
oO Tax incentives for Small & ( ‘ottage Industries According to section 47(b) ii) tax
encourage investment which can contribute to the economy si
Tax incentives for encouraging savings: The ’
providing tax credit facilites on cert
a specified rate (100% in first year
and 20% in the second year for industries
ificantly
government also encourages savings
‘ain types of investment and expenditures.
Such as, investment instock market. savings certificate. DPS. insurance
Premium. provident fund, government treasury bill ete
O Tax exemptions in certain expenditures: Expenditures to enhance social welfare
like contribution to president’s/prime minister's relief fund; Government Zakat
fund, Ahsania Mission Cancer Hospital etc, are exempted from tax. These also
encourage people to spend in certain social development program.
O Tax_incentives for foreign investors: For attracting foreign investors, various