Draft income tax law needs overhauling

There is a demand from the taxpayers to update the income tax law. Government is also pledge bound to overhaul the income tax law in order to facilitate the ease of doing business and reduce cost of doing business and reduction of corruption. The existing law make the responsibility of NBR very comfortable. More than 90% of the tax collected by other government and businesses and individual in the form of deduction at sources.

Tax deduction at source (TDS) refers to claims made to reduce your taxable income, arising from various investments and expenses incurred by a taxpayer. Thus, income tax deduction reduces overall tax liability. It is a kind of tax benefit which helps you save tax.

To collect tax efficiently and quickly, the Income Tax departments of the Government around the world have introduced a system called TDS. Using TDS, tax can be deducted/collected at source of income. TDS is an indirect method of collecting tax by the government. It ensures a regular source of revenue for the government by ensuring the tax is collected as income is earned and not when a taxpayer file returns at the end of the year. Tax deductions help the taxpayers reduce certain amount from taxable income during final assessment from possible higher tax slab and hence save some tax.
TDS is different in our country. The draft law set to increase the burden on the tax payers. A major part of the draft law is on at source tax deduction from section 79 to 139. It covers all possible assesses so far and the rate of deduction from 0.30% to 20%. In case of trade license, Municipalities and City Corporation will deduct tk500 to Tk3000 depending upon categories of corporations. As for example, under section no112, Commissioner of customs or his authorized officer may deduct tax at source of maximum 20%.
It is interesting that the official got discretionary power to decide the rate of tax deduction. It may make system corrupt. Again, there are some confusing clauses. Officials will deduct 10% income tax from Clearing and Forwarding (C&F) agents during export and import (sect 114). It is not clear which the base price to deduct income tax. C&F agents get their commission on the service, but shipping documents of Import and Export don't reflect the income of the C&F agents.

The law has empowered the tax officials to give decision without explaining the reason of their action. This prerogative authority empowering with the wording like 'if the official believes or convinced of certain fact and figure' without any explanation. The section 78 of the draft law has empowered NBR to amend 6th schedule and to deduct, reduce and exempt tax of the assesses. It means NBR will have similar authority which is prerogative of the Parliament to exempt or reduce the taxes without referring to the Parliament. It is going beyond the constitution.

NBR has given many unconditional powers although the law has provision of Appellate Tribunal and Alternative Dispute Resolution (ADR). An Income Tax Appellate Tribunal (ITAT) is a quasi-judicial authority to file appeals against the orders of income tax authorities. Similarly, an income-tax authority can also file an appeal against any order passed by lower income-tax authorities. The Independence of the Income Tax Appellate Tribunal is the need of the hour for effective administration of justice.

Under the present Income tax ordinance, the tribunal is a part of NBR. The Income Tax Ordinance 1984 initially imposed appointment of a judiciary and an accountant member, along with a President of the Tribunal, but this was omitted by the Finance Act 2002. At present this clause is not mandatory. Present and retired Members of the NBR may be appointed as a member of the Tribunal as per the Finance Act 2009. Present Commissioner of Taxes with one year experience is also eligible to be member of the Taxes Appellate Tribunal subject to provision of Finance Act 2016. The current members are all acting or retired Commissioner or Member of NBR. So, the commissioners are discharging the Judiciary.

The draft law proposed to keep the provision unchanged and virtually will make the tribunal a part of the NBR. Government will nominate members from Commissioners, Chartered Accountants, Costs & Management Accountant, practicing lawyers and retired or in service District Judges. The members will be minimum 3 and Government will nominate any of the members at Chairman of the tribunal.

There is a proposed provision of ADR in the Section 291 about mutual agreement between representee. There will be a facilitator who will right down the points of agreement. The provision of ADR should be more detailed. The ADR in the existing law is not successful as the representative of NBR hardly come to an agreement for reduction of revenue of the government. ADR will remain ineffective without a major change the law and policy.

Like many other countries, all the forms of tax incentives, tax holidays (exemptions from paying tax for a certain period of time) are the most popular in Bangladesh. There privileges have numerous shortcomings. First, by exempting profits irrespective of their amount, tax holidays tend to benefit an investor who expects high profits and would have made the investment even if this incentive were not offered. Second, tax holidays provide a strong incentive for tax avoidance. This policy may encourage the shift their profits through transfer pricing (for example, overpaying for goods from the other enterprise and receiving a kickback). It may encourage the corruption and favouritism for influential persons.

The draft law has no option for advance ruling. The benefits of scheme of advance ruling: determination of tax liability in advance; reducing litigation. Attract Foreign Direct Investment (FDI). Rulings are binding on the applicant as well as the department. Rulings are pronounced within a certain period of time from the date of receipt of application.
Advance Ruling means written opinion or authoritative decision by an authority empowered to render it with regard to the tax consequences of a transaction or proposed transaction or an assessment in regard thereto concerning the treatment and consequence of one or series of contemplated future actions or transactions. It is a written statement, issued to a taxpayer by tax authorities, that interprets and applies the tax law to a specific set of facts.

It helps foreign investors in determining their tax liabilities in advance so that they can assess the transaction that they propose to undertake. It also brings certainty in determining the tax liability, as the ruling given by the authority for advance ruling is binding on the applicant as well as government authorities. Institution of Ombudsman is as old as is the tax administration department. Jurisdiction of the ombudsman is usually clearly defined in a separate law. It is an independent body but not a court and accountable only to the parliament. The draft law also should have an option to facilitate the establishment of Tax Ombudsman.

The draft law is very complex like the existing law. The major drawback of the existing law is the lack of transparency and prerogative power of the officials. The draft law has proposed to increase power of NBR and hardly any option for simplicity of the procedure. It got the authority of to deduct, reduce and exempt tax of the assesses.

The law focuses of advance income tax and deduction at sources without any visible payback system. The system should also have simple and transparent administrative procedures so that it is clear if the system is not being enforced as designed. The Appellate Tribunal and the ADR should be independent from NBR. The law should have option of Advance ruling to make the law transparent and easy to understand the consequence of any transactions for the taxpayers.

The law may be referred to the law commission for their opinion and re-draft as per demand of the time.
M S Siddiqui is a Legal Economist