Tax Planning in Business Bangladesh Perspective_by Swapan Kumar Bala_SSRN-id991329

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Tax Planning in Business: Bangladesh Perspective

Swapan Kumar Bala, FCMAAssociate Professor

Department of Accounting & Information Systems

University of Dhaka, Dhaka

Abstract:

This paper highlights the tax planning issues in the context of business environment in Bangladesh.

Given the complexity and the tax law ambiguity prevailing in Bangladesh, this paper encompasses the

traditional tax planning devices along with a brief overview of the Scholes-Wolfson paradigm of tax

planning strategies. The fiscal plans are referred to the related tax law provisions (mentioned in the

appendices in a very organized manner), which are expected to be very useful for the existing and

potential businessmen.

Keywords:

Tax compliance, Tax minimization Effective tax planning, Tax strategy, Tax incentives.

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Tax Planning in Business: Bangladesh Perspective

Swapan Kumar Bala, FCMAAssociate Professor

Department of Accounting & Information Systems

University of Dhaka, Dhaka

Introduction

The term tax planning in business consists of three main words: tax, planning, and business. Tax

is a contribution exacted by the state Chambers English Dictionary (1992). The term taxes is

confined to compulsory, unrequited payments to general government (OECD, 1988: 37; vide

Wilkinson, 1992: 2). Planning is the process of determining in advance the factors necessary to

achieve a set of goals; designing an effective means of achieving some future goals (ends) Kohlers

Dictionary for Accountants (Cooper and Ijiri, 1984: 383).Businessmeans the carrying on of trade or

commerce, involving the use of capital and having, as a major objective, income derived from sales of

goods or services Kohlers Dictionary for Accountants (Cooper and Ijiri, 1984: 78). According tosection2(14) of the Income Tax Ordinance (ITO), 1984,business includes any trade, commerce or

manufacture, or any adventure or concern in the nature of trade, commerce or manufacture.1Thus,

tax planning in business means dealing with the tax matters of a business entity with a view to

maximizing the after-tax rate of return on investments after ensuring voluntary tax compliance. For

this purpose, each business entity has to

1. ensure that it keeps proper records;

2. deduct tax at source where it is necessary;

3. pay advance tax in time, if applicable;

4. file returns in time;

5. comply with notices received from the tax authorities; and

6. be aware of legal remedies where it does not have its rights under the law recognized.

Tax function activitiesof a business entity are those activities which are concerned with fiscal issues.

These functions are of two types: (1) tax compliance activities, and (2) tax planning activities. Tax

compliance activitiesare those activities which include the functions or obligations according to the

provisions of various fiscal statutes. Tax planning activitiesmeans dealing with the tax matters of a

taxpayer with a view to maximizing the after-tax rate of return on investments after ensuring

voluntary tax compliance.

FORMS OF BUSINESS VS. TAX PAYING ENTITY

A business entity may be of three types: sole-proprietorship, partnership firm and company. Sole-

proprietorship has not been defined by the Income Tax Ordinance.

Under section 2(32) of the ITO, firm has the same meaning as assigned to it in the Partnership Act,

1932 (IX of 1932). Under section 4 of the Partnership Act, 1932, Partnership is the relation between

persons who have agreed to share the profits of a business carried on by all or any of them acting for

all. Persons who have entered into partnership with one another are called individually partners and

collectively a firm, and the name under which their business is carried on is called the firm name.

1 Section, sub-section, rule, sub-rule, clause or proviso mentioned elsewhere in this paper without referring to anyenactment shall be referred to the Income Tax Ordinance, 1984 (Ordinance No. XXXVI of 1984) and the Income Tax

Rules, 1984 [No. S.R.O. 39/L/85 dated 14.01.1985, vide sec. 185(4) of the Income Tax Ordinance, 1984].

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Under section 2(20) of the ITO, company means a company as defined in the Companies Act, 1913

(VII of 1913) or Companies Act, 1994 (Act No. 18 of 1994)*and includes

(a) a body corporate established or constituted by or under any law for the time being in

force;

(b) any nationalised banking or other financial institution, insurance body and industrial or

business enterprise;

(bb) an association or combination of persons, called by whatever name, if any of such persons

is a company as defined in the Companies Act, 1913 or Companies Act, 1994;

(bbb) any association or body incorporated by or under the laws of a country outside

Bangladesh; and;

(c) any foreign association or body, not incorporated by or under any law, which the National

Board of Revenue may, by general or special order, declare to be a company for the

purposes of the Income Tax Ordinance.

For preferential tax purpose, from assessment year (AY) 2002-2003 [vide the Finance Act 2002 to the

Finance Act 2006] companies are classified into following groups:

(1) Company being bank, insurance or financial institution;

(2) Other companies:(a) Company not publicly traded; and

(b) Publicly traded company.

From AY 2002-2003, as per the Explanationgiven in the relevant Schedule for income tax rates in

the Finance Act, publicly traded company means a company which fulfills the following

conditions:

(a) The company is registered in Bangladesh under the Companies Act 1913 or 1994;

(b) The company is enlisted with the Stock Exchange before the end of the concerned income year

in which income tax assessment will be made.

Taxpayers Status: Under the Income Tax Ordinance, 1984, a taxpayer has two types of status:

personal statusand residential status. A sole-proprietorship has no separate tax paying identity andindividual owner running the sole-proprietorship will have Individual status of the owner and not of

the business entity, but both partnership firm and company have distinct personal status Firm and

Company respectively. Residential status may be resident [defined u/s 2(55), ITO] or non-

resident [defined u/s 2(42), ITO]. Under section 17, resident assessee (taxpayer) has to pay income

tax on total global income including foreign income, but non-resident taxpayer has to pay income tax

only on his total domestic (Bangladeshi) income as determined u/s 18 (income deemed to accrue or

arise in Bangladesh). Under section 2(55), an individual is to be a resident if his period of stay in

Bangladesh is at least 182 days in the concerned income year, or at least 90 days in the concerned

income year, and at least 365 days in the preceding 4 income years. A partnership firm is considered

as resident, if the control and management of its affairs situated wholly or partly in Bangladesh in the

concerned income year. A company will be a resident, if control and management of its affairs

situated wholly in Bangladesh in the concerned income year. Otherwise, a taxpayer will be treated as

non-resident [u/s 2(42)].

Levels of Taxation: Question regarding whether the entity itself and/or the owner(s) of the entity

is(are) taxable is explained on the basis of two concepts: pass-through entity(orflow-through entity)

andnon-pass-through entity:

Pass-Through Entity: This entity is not taxable itself. The income of the entity will pass

through the owners and is taxable after its accumulation with the owners other income. Sole-

proprietorship is a pass-through entity. The owner of the entity is taxable for the entire income

of the business entity (whether withdrawn or not) along with his/her other income.

* Under section 2(1)(d) of the Companies Act 1994, company means a company formed and registered under

this Act or an existing company.

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Non-Pass-Through Entities:This entity is taxable itself. The income of the entity may be

distributed to the owners and is usually again taxable in the hands of owners after its

accumulation with his/her other income. Partnership firm and company are non-pass-through

entities.

A partnership firm is taxable for its income in first instance as a non-pass-through entity. The partners

of the firm shall include the share of total income of the firm in the income year [to be computed u/s

43(3)] and but to avoid double taxation, the share of income will be treated as tax-free income subject

to tax rebate at average tax rate (ATR) if the firm has already paid tax on its income [paragraph

16, Part-B, Sixth Schedule]. But where any tax payable by any partner of a firm in respect of his

share of income cannot be recovered from him, then DCT (Deputy Commissioner of Taxes) shall

collect it from the firm [sec. 98]. In case of discontinued business of a firm or if the firm is dissolved,

the partners are jointly and severally liable to pay due tax, if any [sec. 99]. See few other statutory

issues regarding partnership firm and partners inAppendix-I.

A company is taxable for its total income always as a non-pass-through entity. The shareholders of the

company are taxable for the income of the entity, only if distributed to them as dividend, which is

subject to a source-tax (@ 10% (u/s 54). At the time of sale/transfer of shares, the shareholder mayrequire to pay tax on capital gain arising from the sale or transfer. Thus, shareholder-level of tax (ts)

usually includes tax on dividend distributed and tax on capital gain on sale/transfer of shares.

However, capital gain on transfer of shares of a company established under the Companies Act 1994

is subject to a reduced rate of 10% [S.R.O. No. 220-Ain/Aykar/2004 dated 13.07.2004], but the

capital gain on transfer of stocks and shares of public companies listed with a stock exchange in

Bangladesh is fully exempted [sec. 32(7)].

In case of a non-pass-through entity, there is at leastdouble-level taxation. First, a tax is paid by the

entity and then a second tax is paid by the owners of the entity (partners of a firm or shareholders of

company). In case of firm which has duly paid its tax, double taxation is avoided by considering the

share of firms income as tax-free and allowing a tax rebate thereon to the partners. But in case of a

company, the company has to pay tax on its income at 30%, 40% or 45% and then the individualshareholders have to pay source-tax at 10%, which will be treated as advance income tax (AIT) and

then considering the marginal tax rate of the concerned shareholders, tax rate on dividend may be up

to 25% for high-income taxpayers. In case of a company investing in shares of another company,

there will betriple taxation. The company of which shares have been purchased has to payfirst-level

taxon its income at 30%, 40% or 45%. Then the investing company has to pay second-level taxon

distributed dividend at 15% and when it will distribute its income as dividend, its individual

shareholder has to pay third-level tax(source-tax and possible extra tax).

TAX EVASION, TAX AVOIDANCE, AND TAX PLANNING

Tax reduction strategies are often tainted with legality. Income tax statutes have provisions for

charging tax on any income, profits or gains, from whatever source derived u/s 2(34)(a) and hence,according to the spirit of this provision, legality of the source may not be questioned if tax is duly

paid. Suffice it to say, in the Income Tax Ordinance, there are several sections where investment out

of undisclosed income can be legalized by paying tax at a stipulated rate not always on the invested

amount and the tax rate is often very low [e.g., specific tax rate at Taka 300 or Taka 500 or Taka 200

per square meter for investment in house property u/s 19B, 7.5% of the deed value in case of

investment u/s 19BB, and 10% or 15% of the purchase value in case of investment in motor vehicle].

Income by way of winnings from card games and other games of any sort or from gambling or

betting referred to in section 19(13) is subject to source-tax of 20% (u/s 55) and this tax deducted at

source is a final discharge of tax liability u/s 82C(4). However, given these moral issues, while

dealing with any sort of strategy regarding tax, we must be aware about the distinctions among tax

evasion, tax avoidance and tax planning.

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Tax Evasion

Tax evasion has the objective of reduction of tax illegally. Sometimes, it is referred to as tax

cheating through acts of commission or omission. Deceit, concealment, and/or misrepresentation are

common elements in most illegal tax plans (Sommerfeld et al., 1980: 28/1). As stated by Webley et al.

(1991: 2-3), Noncompliance is a more neutral term than evasion since it does not assume that an

inaccurate tax return is necessarily the result of an intention to defraud the authorities and it

recognizes that inaccuracy may actually result in overpayment of taxes. In evading tax one is

knowingly breaking the law. This has social and psychological consequences such as stigma and guilt

and involves confronting different costs since there is a risk of being caught and fined or sent to

prison.

According to Lakhotia and Lakhotia (1998: 9), The expression Tax evasion means illegally hiding

income or concealing the particulars of income or concealing the particular source or sources of

income or in manipulating the accounts so as to inflate the expenditure and other outgoings with a

view to illegally reduce the burden of taxation. Hence, tax evasion is illegal and unethical.

Tax Avoidance

Tax avoidance and tax evasion usually both have same objective of reduction of tax, but tax

avoidance encompasses only legal means of achieving the objective.

Justice Jagadisan J. has mentioned in the verdict of Aruna Group of Estate v. State of Madras (1965)

case, Avoidance of tax is not tax evasion and it carries no ignominy with it, for, it is sound law and,

certainly, not bad morality, for anybody to so arrange his affairs as to reduce the brunt of taxation to a

minimum. (Palkhivala and Palkhivala 1976: 46).

Avoidance involves every attempt by legal means to prevent or reduce tax liability which would

otherwise be incurred, by taking advantage of some provision or lack of provision in the law it

presupposes the existence of alternatives, one of which would result in less tax than the other (Report

of the Royal Commission of Taxation 1966: 538; videWebley et al.1991: 2).

Tax avoidance is the art of dodging taxes without breaking the law. tax avoidance means of

traveling within the framework of the law or acting as per the language of the law only in form, but

murdering the very spirit of the law and thus acting against the intention of the law and defeating the

purpose of the particular legal enactment (Lakhotia and Lakhotia 1998: 10).

Perhaps the most celebrated statement made in defense of tax avoidance came from the pen of Judge

Learned Hand. In a dissenting opinion, in Commissioner v. Newman case, he once said:

Over and over again courts have said that there is nothing sinister in so arranging ones

affairs as to keep taxes as low as possible. Everybody does so, rich or poor, and all do right,

for nobody owes any public duty to pay more than the law demands: taxes are enforced

exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

[Commissioner v. Newman, 159 F.2d 848 (CA-2,1947), videScholes et al., 2002: 5].

Tax Planning

As stated earlier, tax planning is legal, desirable for the fiscal policymakers and ethical. In a narrow

sense, tax planning and tax avoidance are used interchangeably. But for tax avoidance purpose, usual

means are the exploiting the tax loopholes, or getting the advantages of tax law ambiguity, and

hence it is often distinguished from tax planning. According to Lakhotia and Lakhotia (1998: 10),

Tax planning takes maximum advantage of the exemptions, deductions, rebates, reliefs and other

tax concessions allowed by taxation statutes, leading to the reduction of the tax liability of the tax

payer.

However, according to Scholes and Wolfson (1992: 3), Traditional approaches to tax planning fail to

recognize that effective tax planningand tax minimizationare very different things. The reason isthat in a world of costly contracting, implementation of tax-minimizing strategies may introduce

significant costs along nontax dimensions. Therefore, the tax-minimization strategy may be

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undesirable. After all, a particular easy way to avoid paying taxes is to avoid investing in profitable

ventures. Thus, effective tax planning means not to minimize tax, but to maximize after-tax rates of

return on assets.

COMPLIANCE OBLIGATIONS OF A BUSINESS ENTITY UNDER ITO

Following are the tax compliance obligations of a business entity as per various sections the Income

Tax Ordinance 1984:(1) Obligations of a business entity as an assessee (taxpayer):

(2) Obligations of a business entity as a tax collector on behalf of tax authority:

(3) Obligations of related persons of a business entity.

(1)

Compliance as an assessee (taxpayer):

- Collection of TIN (Tax-payers Identification Number) Certificate u/s 184B, 184A

- Displaying of TIN Certificate u/s 184C

-

Advance income tax payment u/s 48, 64-73

-

Preparation of tax return u/s 75

-

Payment of tax as per tax return u/s 74

-

Filing of tax return and statements in prescribed forms u/s 75

-

Filing of revised return if any omission or incorrect statement in the previously filed returndiscovered before the assessment is made u/s 78

-

Maintenance of accounts and documents: u/s 35

-

Production of accounts and documents on receipts of a notice from the DCT: u/s 79

-

Cooperation with income tax authority during inspection (u/s 114), survey (u/s 115),

enquiry (u/s 116), search and seizure (u/s 117) and verification regarding deduction or

collection of tax at source (u/s 117A)

- Compliance with various notices:

Notice of Demand u/s 135,

Notice to file return u/s 77,

Notice to produce accounts, statements and documents u/s 79,

Notice to file statement of assets, liabilities and life style u/s 80 [normally applicable forindividual assessee],

Notice to attend hearing u/s 83(1) in case of assessment after hearing,

Notice to inform re-assessment u/s 93(1),

Notice to attend hearing u/s 130 in case of imposing penalty u/s 123-128,

Notice to the transferor, the transferee and the person in occupation of the immovable

property to initiate the proceedings for acquisition of the immovable property u/s 32(4)

and u/r 42 if the fair market value of the property exceeds the transferors declared

value and others], and so on.

(2)

Compliance as a tax collector on behalf of tax authority:

- Collection of Tax Collection Account number u/s 184BB

-

Tax deduction at sources (TDS), if applicable, and deposit thereof to the Treasury u/s 48-63- Giving documents of TDS with necessary information u/s 58, and

-

Furnishing annual returns in case of payment of salary (u/s 108), interest (u/s 109) and

dividend (u/s 110).

(3) Compliance obligations of related persons of a business entity.

-

Appearance on behalf of the assessee at any income tax proceedings u/s 174,

-

Legal representative to be treated as deemed to be assessee in case of a deceased person u/s

92,

-

Liability in certain cases (as a representative of another person u/s 95, as an agent of a non-

resident principal u/s 96, 102 and 103A),

- Filing a return of the income of any other person for whom the company is assessable [u/s

75(1B)],

-

Joint liability in case of director of a private company (u/s 100), and- Joint liability in case of liquidator of a private company (u/s 101).

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In case of non-compliance with any of the above issues, a business entity may face different types of

enforcements by the tax authority (such as inspection of register of companies u/s 114, survey u/s 115,

enquiry and production of documents u/s 116, search and seizure u/s 117, verification of deduction or

collection of tax u/s 117A, best judgment assessment u/s 84 and thereafter recovery of tax u/s 134-

143, imposition of penalty u/s 123-133, prosecution u/s 134-171), disallowances of deductions u/s 30,

disallowances of exemptions due to not having appropriate evidence of the income, imposition of

penalty interest u/s 57 & 73, etc. For these reasons, a business entity may be involved with litigations

for which it might seek appeals u/s 153-159, revision u/s 120-121, and references u/s 160-162. But

everything is costly and is subject to not only pecuniary costs, but also political and psychic costs.

TRADITIONAL TAX PLANNING TECHNIQUES

Traditional tax planning is equivalent to tax avoidance with the main purpose of legal reduction of tax

liability. Following are the major issues regarding this type of tax planning.

Tax Planning Principles: Jones and Rhoads-Catanach (2004) have suggested following four tax

planning principles:

Taxes decrease if income earned by entity is subject to a low rate.

Taxes decrease if payment can be deferred to a later year, because tax deferred is tax reduced.

Taxes decrease if income is generated in a low rate jurisdiction.

Taxes decrease if income is taxed at a preferential rate.

For planning purposes only relevant rate is rate at which the transaction will be taxed, i.e., marginal

rate rate at which next Taka of income will be taxed. The marginal tax rate may change as follows:

(a) higher bracket due to more income, or (b) law may be changed and a new rate is prescribed.

Factors Affecting Tax Planning: According to Jones and Rhoads-Catanach (2004), following are the

factors affecting tax planning:

Which entity undertakes the transaction?

Over what period does a transaction take place?

In which jurisdiction does the transaction take place?

What is the character of the income?

The above factors have been briefly discussed below.

Choice of Entity: The first factor to affect the tax planning is the entity undertaking the

transaction. Different entities have different tax rates. Pass-through entities (sole-proprietorship)

allow shifting income to owner and one level of tax. Non-pass-through entities (companies) are

subject to double taxation, once at corporate level and then again at the shareholder level.

Period of Transaction: Tax planning is affected by the period over which a transaction takes

place. Tax deferred is tax saved based upon time value of money. Common techniques are to

accelerate deductions (e.g., following accelerated depreciation) and to defer income (e.g., through

installment sale). A taxpayer has to consider when taxes are actually paid (e.g., quarterly

estimates versus end of year computation).

Tax Jurisdictions:The third factor by which tax planning is affected is the jurisdiction in whichthe transaction takes place. Tax liability depends whether the income will be accrued in foreign

country (subject to exemption or tax relief) or Bangladesh or whether the income will be earned

by establishing the entity in a low tax zone or a high tax zone.

Character of Income:The final affecting factor is the character of the income. Depending on the

income character, certain types of income are exempted fully or partially. Certain types of income

are taxed at preferential rates (e.g., capital gain on transfer of stocks and shares of private limited

company taxed @ 10%, dividend income from shares taxed to companies @ 15%).

A final tax liability is a function of three variables: the law, the facts, and the administrative (and

sometimes judicial) process. If any taxpayer is not satisfied with either the law or the administrative

and judicial processes, there is relatively little that s/he can do (unless, of course, s/he has enough

money and clout to get a tax law change). The facts, however, are generally amenable to modification.If a taxpayer is wise enough to understand when and how to modify them, s/he may very well reduce

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Since the ultimate objective of traditional tax planning is the minimization of the bottom line that is,

the minimization of the net tax payable the rules of simple arithmetic suggest that tax planning must

necessarily involve the maximization of tax credits/rebates/reliefs, the minimization of the applicable

tax rate(s), and the maximization of deductions and/or exclusions. In other words, the items on all

even-numbered lines in the above formula constitute the critical variables in tax planning. Each of

these variables is briefly explained below.

Maximization of exclusions: Exclusions are the incomes which are not included in the tax-base of

the income tax [total income as defined u/s 2(65), the scope of which is outlined u/s 17 and

computed u/s 43 according to the heads of income u/s 20, but to be reported under the heads

mentioned in the Form of Return of Income (Form IT-GA) u/r 24]. Under section 44(1), any income

or class of income or the income of any person or class of persons specified in Part A of the Sixth

Schedule shall be exempt from the tax, subject to the limits, conditions and qualifications laid down

therein and shall be excluded from the computation of total income. Along with this list under Part A

of the Sixth Schedule, Government has issued a number of Statutory Rules and Orders (S.R.O.) u/s

44(4) of the Income Tax Ordinance, 1984 to extend this exclusion list. Few SROs issued u/s 60(1) of

the Income-tax Act 1922 are still in force for similar exclusion purpose. The business entities which

have been allowed tax holiday u/s 46A or under any SRO are able to exclude their income enjoyingtax holiday. See Appendix-III for a checklist of all these exemptions to date. Through maximizing

these exclusions, tax-base and consequent tax liability can be minimized.

Maximization of deductions: Except Salaries head u/s 21, all other statutory heads of income have

provisions of deductions: section 23 for deductions from Interest on securities, section 25 for

deductions from Income from house property, section 27 for deductions from Agricultural

income, section 29 for deductions from Income from business or profession [along with section 30

for inadmissible expenses from Income from business or profession], section 32(1) for deductions

from Capital gains [along with section 32(12) for restricted deductions from Capital gains], and

section 34 for deductions from Income from other sources. All these deductions are subject to

limits, and conditions and subject to evidential proofs. So a business entity must be careful about

these conditions, limits and authenticity of the transactions and thereby, disallowances may beavoided and deductions can be maximized. See Appendix-IV for the provision of accelerated

depreciation (as an alternative to tax holiday) and initial depreciation (as an extra allowance in

addition to normal depreciation).

Under section 37, in the year of loss, losses under any head other than two losses loss in speculation

business and loss under the head Capital gains can be set-off against other head(s) except against

speculation business income and capital gain. But one speculation business loss can be set off against

other speculation business income only and one capital loss can be set off against other capital gain

only. Under other provisions of sections 38-42, set-off of losses can be done in future six successive

income years only against the concerned head of income and applicable only for following incomes:

speculation business income (u/s 39), other business income (u/s 38), Capital gains (u/s 40), and

agricultural income (u/s 41). But in case of capital loss, carry-forward can be done after deduction ofTaka 5,000 [u/s 40(3)]. Loss will be calculated for carry-forward after deducting any cash subsidy

from the Government [second proviso to section 37]. Loss due to depreciation can be carried forward

for unlimited period [u/s 42]. In case of loss, how to maximize the setting-off of the loss in the year

concerned should be given special attention and in case of unset-off losses, special tax planning

regarding accounting method can help to set off those losses before the expiry of the time limits.

Minimization of the tax rate(s): As noted earlier, marginal tax rate is the relevant tax rate for any

business decision. Sommerfeld et al. (1980: 28/4) have mentioned, the marginal tax rate is to

business affairs what the law of gravity is to physics. Just as water seeks its lowest level (due to the

laws of gravity), so also taxable income seeks its lowest marginal tax rate. The tax planning objective

is achieved, of course, when the marginal tax rate is minimized. SeeAppendix-Vfor the statutory tax

rates for business entities and some other reduced tax rates for some industrial sectors and some

specific types of income.

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Maximization of credits/rebates/relief: Final emphasis for tax planning is to be given to maximize

tax credits, tax rebates and tax reliefs. Again these are subject to conditions, limits and special

applicability.Appendix-VIshows the areas where one can get these benefits.

Alternative View of Tax Planning Opportunities:

An alternative way of viewing tax-planning opportunities is to observe that income tax is constrainedby time, entity, and accounting method. Since income tax rates start over with each new tax year

and because very few taxpayers have a constant level of taxable income in each year, there tend to be

high-tax years and low-tax years. The tax value of a deduction is directly dependent on the marginal

tax bracket of the party reporting it. Obviously, therefore, taxpayers tend to recognize losses and other

deductions in high-tax years and to defer the recognition of taxable income to low-tax years. To the

extent that a taxpayer can control tax timing, s/he should do so only after giving full considerations to

the time value of money. Sometimes the financial cost of deferral is greater than the tax benefit

(Sommerfeld et al., 1980: 28/5).

Method of Accounting in ITO: All income classifiable under the head Agricultural income [u/s 26

& 27], Income from business or profession [u/s 28-30, 30A] or Income from other sources [u/s

33, 34, 36 & 43] shall be computed in accordance with the method of accounting regularly employed

by the business entity [sec. 35(1)]. However, every public or private company as defined in the

Companies Act, 1913 or 1994 shall, with the return of income required to be filed under the Income

Tax Ordinance for any income year, furnish a copy of the trading account, profit and loss account and

the balance sheet in respect of that income year certified by a chartered accountant (CA) [sec. 35(3)].

Where no method of accounting has been regularly employed, or if the method employed is such that,

in the opinion of the DCT, the income of the assessee cannot be properly deduced therefrom; or where

a company fails to furnish financial statements certified by a CA with its return, the income of the

entity shall be computed on such basis and in such manner as the DCT may think fit [sec. 35(4)]. The

method of accounting may be mercantile system (or accrual basis) or cash system (or cash basis)

or a hybrid system (i.e., mixture of these two for separate heads of income). However, in the income

tax laws, few incomes must be computed under a specific accounting method. For instance, declared

dividend is taxable under mercantile system [u/s 19(7)], income from house property is taxable undercash system [S.R.O. No. 454-L/80 dated 31.12.1980, vide sec. 60(1) of the Income-tax Act 1922], and

advance salary income are taxable under cash system [u/s 21(1)(b)] subject to a relief u/s 172.

The time constraint may also be important in case of working with a closely held private company as

a shareholder director, i.e., the owner/operator (O/O). The salaries with arrangement of tax-deduction

at source (TDS) of the director are an allowable deduction with some other limits u/s 30 in case of

determining the total income of the company. The salaries are taxable in the hand of the director

subject to the exclusions under rules 33 and 33A-33J and Part A, Sixth Schedule. The method of

accounting followed by the company may be mercantile system, but the accounting method

followed by the director may be cash system. Depending on this entity level advantage (as O/O of

the company), a year-end bonus to the director may be shown as a deduction under accrual basis but

the O/O is not required to show it as an income until the time of receipt. Even income year might be

different from the entity to its O/O. Such accounting legerdemain is a common practice for taxplanning purpose.

TAX PLANNING UNDER THE SCHOLES-WOLFSON PARADIGM

Myron S. Scholes, the 1997 Nobel Winner in Economics as the co-originator of the Black-Scholes

option pricing model and a partner of Oak Hill Capital Management and Mark A. Wolfson, a

managing partner of Oak Hill Capital Management, have jointly developed a paradigm for tax

strategy in 1992 through their book titled Taxes and Business Strategy: A Planning Approach. They

have adopted a contractual perspective for their paradigm and suggested three key aspects of tax

planning globally:

1. Multilateral Approach:All contracting parties must be taken into account in tax planning, which

allows a global or multilateral, rather than a unilateral, approach.

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2. Importance of Hidden Taxes: All taxes (both implicit tax and explicit tax) must be taken into

account considering the global measures of taxes. Implicit tax is the decrease in return due to

availing tax favored investment and explicit taxis the tax deposited in the treasury.

3. Importance of Nontax Costs:All costs of business must be considered, not just taxes.

Thus, the paradigm is based on consideration of ALL PARTIES, ALL TAXES, ALL COSTS.

Taxing Authority: How to Consider Its Presence in Tax Planning?

According to Scholes and Wolfson, taxing authority is always an uninvited party to all contracts.

Taxing authoritys roles can be seen as follows. Taxing authority

Brings to each of its forced ventures with taxpayers a set of contractual terms (tax rules) ;

Does not negotiate the contractual terms separately for each venture;

Announces a standard set of the above terms taxpayers must accept;

Claims a partnership interest in taxpayers profit but not at the time of loss;

Does not exercise any voting rights in the entity;

Does not directly monitor taxpayers performance to determine whether taxpayers are violating

the contractual terms;

But does conduct audits; and

Being a partner in all firms enables the taxing authority to determine when taxpayers arereporting result far out of line with what other taxpayers are reporting in similar situations

(information that is used to select return for audit).

Types of Tax Plans:

Contractual terms that taxing authority imposes on its joint venture are the tax rules, which result from

a variety of socioeconomic forces: (i) finance public projects, (ii) redistribute wealth and (iii)

encourage economic activities. Government ensures objectives of the tax rules by designing to

discriminate among different economic activities. This has been done through two things: progressive

taxation (for redistributing wealth) and subsidy (for encouraging economic activities). Tax rules

provide also to arrange taxpayers affairs to keep the tax bite as painless as possible. Thus,

progressive taxation, subsidy and provision to arrange taxpayers affairs to minimize tax-bite give rise

to marginal tax rate (MTR) that widely varies: (1) from one contracting party to the next; (2) for agiven contracting party over time; and (3) for a given contracting party over different economic

activities.

Changes in tax statutes are a regular and frequent event. At the time of passing the budget, these

changes are almost obvious. Even in the name of revenue, SROs (sometimes cynically referred to as

Short Route to Opulence) may be issued at any time for changing the taxing provisions. All changes

in tax regimes involve turning two types of dials:

1. Levels of tax rates (in case of slab-taxation system, slabs may be changed);

2. Relative tax rates varying:

Across different tax paying units;

Across different tax periods for the same taxpayer; and

Across different economic activities for the same taxpayer and same time period.

Thus, types of income tax planning activities are:

Attempts to have income converted from one type to another (ordinary income vs. capital

gain, regular income vs. windfall income, domestic income vs. foreign income, set-off of loss

under any head);

Attempts to have income shifted from onepocket to another(taxable vs. tax-exempt sources);

and

Attempts to have income shifted from one time period to another (delaying recognition of

income, if tax rates are constant or declining over time, instant salary vs. deferred compensation)

In short, the types of income tax planning activities are:

Shifting income from one pocket to another

Shifting income from one time period to another Converting income from one type to another.

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Tax Planning as a Tax-Favored Activity

Tax planning itself is a tax-favored activity because money spent thereon is tax deductible and tax

savings arising from tax planning is effectively tax exempt because they reduce taxes payable and

hence, more tax-favored than tax-exemption. When PTROR (pre-tax rate of return) is equal to

ATROR (after-tax rate of return), then it is called tax exemption (a situation in which an asset

escapes explicit taxation).For example, there are two alternatives with marginal tax rate (MTR) of 15%: Alternative-1:Invest

Tk. 10,000 in fully taxable corporate bonds for one year with a yield of 10% p.a. before taxes. And

Alternative-2:Invest Tk. 10,000 in tax planning services to save Tk. 11,0000 in taxes in one year.

PTROR (Pre-tax Return/Pre-tax Investment) for Alternative-1 will be 10% [= (Tk. 10,000x10%)/Tk.

10,000]. And PTROR for Alternative-2 will also be 10% [=(Tk. 11,000 Tk. 10,000)/Tk. 10,000].

But ATROR (After-tax Return/After-tax Investment) for Alternative-1 will be 8.5% [={(Tk.

10,000x10%)(1 15%)}/Tk. 10,000]. And ATROR for Alternative-2 will be 11.76% [= {(Tk. 11,000

Tk. 10,000) (1 0%)}/{Tk. 10,000(1 15%)}]. Thus, Alternative-2 (tax planning) yields higher

ATROR and hence, tax-favored.

A Brief Highlight on Scholes-Wolfson Tax Strategy

Scholes-Wolfson tax strategy depends on identification of tax clientele, which is based on implicit taxand also the adoption of tax arbitrage. Implicit tax arises because the pre-tax investment returns

available on tax-favored assets are less than those available on tax-disfavored assets. Taxpayers

wishing to obtain the tax-favored treatment offered by the investment bid up the price of the

investment lowering the pre-tax return. Thus, a desperate effort to avoid tax might emphasize only to

reduce explicit tax by adopting tax-favored treatments, might reduce the after-tax return and hence

there will be a decrease in after-tax return, which is nothing but an implicit tax. Implicit tax rate is

the difference in pretax returns on a given asset, and the benchmark asset (usually, fully taxable

bonds taken as benchmark asset). Say, pretax return on fully taxable bond is 10%, and fully tax-

exempted return on government security is 7%, then implicit tax rate on government security 30%

[=(10% 7%)/10%]. Thus, paying tax at a rate of 30% on fully taxable bond would result in a return

of 7%, the same as the pretax return on tax-exempt government security. Taxpayers who are

indifferent between purchasing two equally risky assets, the returns to which are taxed differently, are

called the marginal investors. Taxpayers that prefer one investment over another are referred to as

the tax clientele for the preferred investment. Unless investors correctly identify their proper tax

clientele, they will not maximize their after-tax rates of return. Usually to identify the proper tax

clientele, one way is to compute the implicit tax on tax-favored investment based on a fully taxable

investment, then clientele of the fully taxable investment will be the taxpayers having marginal

explicit tax rates (METR) below the implicit tax found. For example,pretax return on fully taxable

bond is assumed at 10%, and fully tax-exempted return on government security is 7%, then implicit

tax rate on government security is 30% [=(10%7%)/10%]. The clientele for fully taxable bond are

taxpayers with METR below 30%. A taxpayer with 20% METR will earn 8% [=10%(120%)] after-

tax by investing in fully taxable bond, 1% greater than in tax-exempt government security.

Tax arbitrage is the purchase of one asset (a long position) and the sale of another (a shortposition) to create a sure profit despite a zero level of net investment. Through tax arbitrage, one can

maximize after tax return effectively without adopting easy and desperate tax-minimization strategies

which might introduce significant nontax costs. There are two types of tax arbitrage: organizational-

form arbitrage and clientele-based arbitrage. They can be briefly explained as follows:

Arbitrage Type of taxpayers Long Position in Short Position in

Organizational-form

All taxpayers An asset or productiveactivity through a favorably

taxed organizational form

An asset or productive activitythrough an unfavorably taxed

organizational form

High-tax-rate

taxpayers

A relatively tax-favored asset

(one that bears a relativelyhigh implicit tax)

A relatively tax-disfavored

asset (one that bears arelatively more explicit tax)

Clientele-based

Low-tax-rate

taxpayers

A relatively tax-disfavored

asset

A relatively tax-favored asset

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But tax arbitrage may be prevented bytax-rule restrictionsandfrictions.Tax-rule restrictionsare

the restrictions imposed by the taxing authority, which prevent taxpayers from using certain tax

arbitrage techniques to reduce taxes in socially undesirable way (e.g., placing limits by tax authority

on taxpayers ability to deduct interest only from the income out of investment by the borrowing) and

frictions are the direct transaction costs. Although tax-rule restrictions and frictions may impede

employment of tax arbitrage technique, but it is these frictions and tax-rule restrictions that make

potential returns to tax planning so high.

CONCLUSION

Tax planning as a tax favored activity should be devised in such a way, so that ultimate after-tax rate

of return can be maximized. Then the trade-off between extra income and tax cost can be achieved. In

cases of business decisions having dichotomous alternatives, tax provision is favorable only for one.

For instances, deciding on centralized vs. decentralized management, opening a branch vs.

establishing a subsidiary, buying resources from local supplier vs. foreign supplier, dividend

distribution vs. retention, raising capital through issuing equity vs. debt securities, repatriation vs.

reinvestment (in case of multinational subsidiary), tax is one of the most influential factors that should

be evaluated critically. Sometimes, a hassle-free provision may not be favorable to some taxpayers

(e.g., treating tax deducted at sources as final discharge of tax liability under section 82C is notdesirable for losing business enterprises). Absence of any provision may be utilized as a tax loophole

to exploit its benefit (e.g., absence of provision to compute loss under the head Capital Gains can be

used to show never a capital loss, which cannot be set off against other income). This paper highlights

various aspects of tax planning and tax strategies for a business entity, although not in an exhaustive

way. But for this purpose thorough background of accounting, finance, economics and fiscal

regulations are also equally needed to make the plans and strategies successful.

References:

Chambers English Dictionary.New Delhi: Allide Publishers Ltd., 1992.Cooper, W.W. and Y. Ijiri (eds.). 1984. Kohlers Dictionary for Accountants. New Delhi: Prentice-Hall of

India Private Ltd.International Accounting Standards Board (IASB) (2004), International Financial Reporting Standards

(IFRSs) 2004. London: International Accounting Standards Board. International Accounting

Standard IAS 12, Income Taxes has been provided in pp. 721-780.

Jones, S. M. and S. C. Rhoads-Catanach. 2004. Principles of Taxation: Advanced Strategies. New York:McGraw-Hill Companies, Inc.

Lakhotia, R. N., and S. Lakhotia. 1998. Corporate Tax Planning. New Delhi: Vision Books.OECD (Organization for Economic Co-operation and Development). 1988. The Revenue Statistics of

OECD Member Countries 1965-87. Paris: OECD.

Palkhivala, N. A., and B. A. Palkhivala. 1976. Kanga and Palkhivalas the Law and Practice of IncomeTax Volume I. Bombay: N. M. Tripathi Private Ltd.

Rajaratnam, S. 1994. Tax Management. Madrsa, India: Forum for Legal Studies Pvt. Ltd.

Robinson, M. (ed.). 2004. Chambers 21st

English Dictionary. New Delhi: Allied Chambers (India) Ltd.Scholes, Myron S. and Mark A. Wolfson. 1992. Taxes and Business Strategy: A Planning Approach.

Englewood Cliffs, New Jersey: Prentice-Hall, Inc.Scholes, Myron S., Mark A. Wolfson, Merle Erickson, Edward L. Maydew and Terry Shevlin. 2002. Taxes

and Business Strategy: A Planning Approach.Upper Saddle River, New Jersey: Prentice-Hall.Shuklendra, A., and M. G. Gurha. 1992. Tax Planning under Direct Tax. Allahabad: Modern Law House.

Sommerfeld, R. M., H M. Anderson and H. R. Brock. 1980. An Introduction to Taxation. New York:

Harcourt Brace Jovanovich, Inc.Webley, P., H. Robben, H. Elffers, and D. Hessing. 1991. Tax Evasion An Experimental Approach.

Cambridge: Cambridge University Press.

Wilkinson, M. 1992. Taxation. Hong Kong: The Macmillan Press Ltd.

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Appendix-I: Partnership Firm and Its Partners

Payment of interest, salary, commission or remuneration made by a firm to its partners is not allowed as

deduction [u/s 30(b)].

Share of income of a partner out of the capital gains on which tax has been paid by the firm is fully tax-exempted [para 18, Part A, Sixth Schedule]

Income from partnership firm [para 16 of Part B, Sixth Schedule] will be treated as tax-free incomeif, thefirm has already paid tax on its income. This tax-free income will be included in total income of partnersand a tax rebate will be allowed on this income at ATR (average tax rate) [proviso to para 16 of Part B,

Sixth Schedule and sec. 43(2)].

Where the assessee is a partnerof a firm, then, whether the firm has made a profit or a loss, his share(whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other

remuneration payable to him by the firm in respect of the income year increased or decreased respectivelyby his share in the balance the profit or loss of the firm after the deduction of any interest, salary,commission or other remuneration payable to any partner in respect of the income year and such share shallbe included in his total income [sec. 43(3)]. But Provided that if his share so computed is a loss, such lossmay be set off or carried forward and set off in accordance with the provisions of section 42 [proviso to sec.43(3)].

Where the assessee is the firm, the loss sustained by it under any head of income shall be set off under

section 37 only against the income of the firm under any other head and not against the income of any ofthe partnersof the firm [sec. 42(3)(a)].

Where the assessee is a partner of the firm, he shall not be entitled to have any loss sustained by the firmcarried forward and set off against his own income [sec. 42(3)(b)].

In the case of a firm in the constitution of which a change has occurred, the firm shall not be entitled to setoff so much of the loss proportionate to the share of a retired or deceased partner as exceeds his share ofprofits, if any, of the income year in the firm [sec. 42(5)(a)].

In the case of a firm in the constitution of which a change has occurred, a partner of the firm shall not beentitled to the benefit of any portion of the said loss as is not apportionable to him [sec. 42(5)(b)].

So much of the income of the spouse or minor child of an individual as arises, directly or indirectly, from

the membership of the spouse or from the admission of the minor child to the benefits of partnership in afirm in a firm of which such individual is a partner, is to be shown under the head Income of the Spouse orMinor Child as applicable: u/s 43(4) [sub-clauses (i) and (ii) of clause (a) of sec. 43(4)].

A partnership is exempted from tax on its income subject to the following conditions:(a) Income of the firm is professional;(b) Income of the firm is dependent wholly or principally on the personal qualification of the partners; and(c) The firm cannot be registered as a limited liability association under the Companies Act, 1913 or the

Companies Act, 19994 due to any Act in force for the time being or any other provision:Provided that the firm exempted from tax under this notification income tax return, statement

of accounts and necessary documents are to be submitted to the concerned Deputy Commissioner of

Tax (DCT) for the income year related to the exemption and the DCT shall complete the assessment ofthe firm under sections 28 and 29 of the Income Tax Ordinance:

Provided further that in case of partners of the concerned firm, any tax deducted at sourceunder section 52A of the Income Tax Ordinance against such exempted firm shall be deemed to be taxpaid in advance in proportion to their distribution of profit. [S.R.O. No. 150-Ain/95 dated 28.08.1995,amended by S.R.O. No. 183-Ain/98 dated 19.08.1998 and S.R.O. No. 181-Ain/99 dated 01.07.1999].

Appendix-II: Special Provisions Relating to Avoidance of Tax under Chapter-XI of ITO Section 104: Avoidance of tax through transactions with non-residents [Where any business is

carried on between a resident and a non-resident and it appears to the DCT that, owing to the closeconnection between them, the course of business is so arranged that the business transacted betweenthem produces to the resident either no profits or profits less than the ordinary profits which might beexpected to yield in that business, the DCT shall determine the amount of income which may

reasonably be considered to have accrued to the resident from such business and include such amountin the total income of the resident.]

Section 105: Avoidance of tax through transfer of assets[Any income which becomes payable to a

non-resident by virtue, or in consequence, of any transfer of assets, whether alone or in conjunctionwith associated operations, shall be deemed to be the income of the person who (a) has acquired, by

means of such transfer or associated operations, any right by virtue, or in consequence, of which he has

power to enjoy, whether forthwith or in future, the income which becomes so payable to the non-resident, or (b) has received or is entitled to receive at any time, for reasons attributable to suchtransactions or associated operations, any sum paid or payable by way of loan or repayment of loan or

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any other sum, not being a sum paid or payable as income or for full consideration of money ormoneys worth; subject to other conditions of section 105.]

Section 106: Avoidance of tax by transactions in securities[Where the owner of any securities sellsor transfers those securities and buys them back or reacquires them, or buys or acquires similarsecurities, and the result of the transactions is that any interest becoming payable in respect of theoriginal securities sold or transferred by the owner is not receivable by the owner, the interest payable

as aforesaid shall be deemed to be the income of such owner and not of any other person; subject toother conditions of section 106.]

Section 107: Tax clearance certificate required for persons leaving Bangladesh [Subject to such

exceptions as the NBR may make in this behalf, a person who is not domiciled in Bangladesh, or aperson who being domiciled in Bangladesh at the time of his departure is not, in the opinion of an

income tax authority likely to return to Bangladesh, shall not leave Bangladesh without obtaining fromthe DCT authorised in this behalf by the NBR (a) a tax clearance certificate, or (b) if he has theintention of returning to Bangladesh, an exemption certificate which shall be issued only if the DCT issatisfied that such person has such intention; and such exemption certificate may be either for a single

journey or for all journeys within the period specified in the certificate; subject to other conditions ofsection 107.]

Appendix-III

Exclusions from Total Income [Part A, Sixth Schedule, vide sec. 44(1), SROs issued u/s 44(4) ofthe ITO and SROS issued under the Income-tax Act 1922]:

(a) Exclusions from Salaries IncomeItems of Salary and Extent of Taxability: Rules 33, 33A-33J & Part A, Sixth Schedule

Pay & Allowances Taxability or Exemption

Conveyance allowance (without any car) [rule 33C] Exempted up to Taka 18,000

Provision of car for personal and/or official purpose(without any cash allowance) [rule 33D]

Taxable amount:7.5% of basic salaryLess: Amount deducted from salary (if any)

Provision of car for personal and/or official purpose(with cash allowance) [rule 33E]

Taxable amount: 7.5% of basic salary plusCashallowance

House rent allowance (cash) [rule 33A] Exempted:50% of basic salary or Taka 15,000per month, lower one

Medical allowance [rule 33I] Exempted:Actual medical or hospitalization

expense

Interest accrued on recognized provident fund[Para 25, Part A, Sixth Schedule]

Exempted:1/3rd

of salary or 14.5% interest rate[S.R.O. 310-L/84 dated 27.06.1984]

Special allowance, benefits or perquisite granted to

meet official expenses [Para 5, Part A, Sixth

Schedule]

Fully exempted

Deemed income for free furnished/unfurnishedaccommodation [rule 33B(1)]

Taxable: (Rental value or 25% of basic salary,whichever is less) minus Cash house rentallowance waivedLess: Amount deducted from salary (if any)

Furnished/unfurnished accommodation withconcessional rent [rule 33B(2)]

Taxable: (Rental value or 25% of basic salary,whichever is less) minus Cash house rent

allowance waived lessRent paid by employeeFree or concessional passage for travel abroad [rule33G]

Exempted:once in every 2 years if provided asper terms of employment

Free or concessional passage for travel within

Bangladesh [rule 33G]

Exempted: if provided as per terms of

employment

Free or concessional passage provided by anorganization doing transport business [rule 33G]

Fully exempted

Entertainment allowance [rule 33H] Fully taxable (exceptfree tea, coffee, beverage orlike provided during the office hour)

Other benefits [rule 33J] Exempted:if provided for official purpose

* A shareholder, being director of more than one company, shall be entitled to the benefits under rule 33 forone company only [rule 33(2)(b)].

Retirement Benefits Exempted under Part A, Sixth Schedule: (a) Income of a Government provident

fund (GPF) and workers participation fund (para 4); (b)Income of a recognized provident fund (RPF), anapproved superannuation fund and an approved gratuity fund (para 6); (c) Payment from GPF, RPF,

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approved superannuation fund or workers participation fund (para 21); (d) Pension (para 8); and (f)Gratuity (para 20).

(b) Exclusions from Interest on Securities Interest on tax-free Government securities is fully exempted [para 24, Part A, Sixth Schedule].

Previous exemption on interest income on savings instruments [Pratiraksha Sanchaypatra, Five-Year

Term Bangladesh Sanchaypatra, Bonus Sanchaypatra, Three-Year Term Sanchaypatra, Six-Month

Interval Profit-Based Sanchaypatra and Family Sanchaypatra] under S.R.O. No. 178-Ain/89 dated04.06.1989 (amended by S.R.O. No. 201-Ain/97 dated 01.09.1997) was repealed by S.R.O. No. 173-Aykar/2002 dated 03.07.2002. Only yield of Post Office Savings Certificates is exempted [S.R.O. No.454-L/80 dated 31.12.1980, vide sec. 60(1) of the Income-tax Act 1922]. But since the Post Office hasno securities now, practically there is no tax-free Government security.

Interest from taxable Government securities up to Taka 5,000 [para 12, Part A, Sixth Schedule].

Interest on debenture up to Taka 20,000, provided that joint exemption on interest on debenture and

interest from taxable Government is up to Taka 20,000 [para 13, Part A, Sixth Schedule].

Income exceeding Taka 25 thousand received from interest on savings instruments, where no source-tax is deducted u/s 52D (i.e., savings instruments purchased during 10 June 1999 to 31 December

2003) [para 31B, Part A, Sixth Schedule].

Income up to Taka 25,000 earned from investment in Zero-Coupon Bond issued an organization

approved by the Bangladesh Bank and the Securities & Exchange Commission is exempted [S.R.O.No. 203-Ain/Aykar/2005 dated 06.07.2005, videsec. 44(4)].

Interest up to Taka 25,000 earned from investment in Bangladesh Industrial Development Bond ofvarious terms issued a nationalized commercial bank (NCB) is exempted. If the interest exceeds Taka

25,000, then tax is to be deducted at source at 10% on full amount of interest and such interestdeducted at source shall be treated as final settlement of tax liability [S.R.O. No. 203-Ain/Aykar/2005dated 06.07.2005, videsec. 44(4)].

Both the principal and interest on the purchase of Wage Earners Development Bond [S.R.O. No. 160-L/81 dated 25.05.1981, vide sec. 60(1) of the Income-tax Act 1922].

(c) Exclusions from Income from Other Sources Income from dividend of a mutual or Unit Fund where such dividend does not exceed 25,000 taka [para

22A, Part A, Sixth Schedule].

Interest provided by a Scheduled Bank on Savings Pension Scheme introduced by the Scheduled Bankand approved by the Government [S.R.O. No. 89-Ain-Aykar/2003 dated 02.04.2003, w.e.f. 26.01.2003,vide sec. 44(4)]. This exemption was first provided under S.R.O. No. 54-Ain/95 dated 04.04.1995,

which was repealed by S.R.O. No. 21-Ain-Aykar/2002 dated 26.01.2002.

Interest accrued in from the Non-Resident Foreign Currency Deposit Account is exempted [S.R.O. No.415-L/82 dated 23.10.1983, vide sec. 60(1) of the Income-tax Act 1922].

The interest on deposits in the Post Office Savings Bank is exempted [S.R.O. No. 454-L/80 dated31.12.1980, vide sec. 60(1) of the Income-tax Act 1922].

Scholarships granted to meet the cost of education is exempted [S.R.O. No. 454-L/80 dated31.12.1980, vide sec. 60(1) of the Income-tax Act 1922].

(d) Exclusions from Income from Business or Profession 50% of the export income exceptin case of an assessee, who is enjoying exemption of tax or reduction

in rate of tax by any notification [para 28, Part A, Sixth Schedule].

Income of the mutual fund of the person issuing such mutual fund [para 30, Part A, Sixth Schedule].

Income of Unit Fund of the Investment Corporation of Bangladesh is exempted [S.R.O. No. 187-L/83dated 12.06.1983, vide sec. 60(1) of the Income-tax Act 1922].

Income of Mutual Funds of the Investment Corporation of Bangladesh is exempted [S.R.O. No. 88-L/80 dated 01.04.1980, vide sec. 60(1) of the Income-tax Act 1922].

(e) Exclusions from Income under any Head Tax on donation up to Taka 500,000 out of income of an assessee made to the organizers of first class

national and international sports programs held or to be held in Bangladesh is exempted [S.R.O. No.202/Ain/91 dated 01.07.1991, videsec. 44(4)].

Tax payable on so much of the income of an assessee donated towards the Prime Ministers ReliefFund is exempted [S.R.O. No. 125-Ain/91 dated 05.05.1991, videsec. 44(4)].

Tax payable on so much of the income of an assessee donated towards the Presidents Relief Fund isexempted [S.R.O. No. 254-L/85 dated 10.06.1985, videsec. 44(4)].

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Tax payable on so much of the income of an assessee donated towards the CMLAs Flood ReliefFund is exempted [S.R.O. No. 389-L/83 dated 23.10.1983, vide sec. 60(1) of the Income-tax Act1922].

(f) Exclusions from Capital Gains Capital gain on transfer of capital asset being Government securities and stocks and shares of public

companies listed with a stock exchange in Bangladesh [sec. 32(7); w.e.f. AY 1995-96].

Profits and gains on transfer of stocks or shares of a public company as defined in the Companies Act,1994 received by an assessee, being a non-resident, subject to the condition that such assessee isentitled to similar exemption in the country in which he is a resident [proviso to sec. 31, inserted by the

Finance Act 1990]. Section 2(1)(j) of the Companies Act 1994 defines a public company.

Capital gain on transfer of machinery or plant used for the purpose of business or profession [Para 31Aof Part A, Sixth Schedule],

Capital gain on transfer of any business capital asset (other than machinery or plant) if the capital gainis utilized to acquire similar asset within one year before or after the date of transfer [sec. 32(5)],

Capital Gain on transfer of buildings or lands to a new company for equity financing [sec. 32(10)],

Capital gain on transfer of capital asset of a partnership firm to a new company for equity financing[sec. 32(11)],

Capital gain on transfer of an asset of an assessee to a new company for equity financing [sec.

32(11A)].(f) Exclusions of Foreign Income

Income derived by a citizen of Bangladesh, irrespective of the residential/nonresidential status, outsideBangladesh and brought into Bangladesh under the laws in force is exempted under the Income Tax

Ordinance, 1984 [S.R.O. No. 216-Ain/Aykar/2004 dated 13.07.2004, videsec. 44(4)].

Income earned abroad by a resident is exempted under the Income Tax Ordinance, 1984 subject to thefollowing conditions: (a) the income is brought into Bangladesh in foreign currency exchangeable

without any restriction through banking channel; and (b) the money brought shall be spent in repayingdefault bank loan of the concerned person. No question regarding the source of the income earnedabroad, if the conditions of this notification are complied with [S.R.O. No. 322-Ain/2001 dated09.12.2001, videsec. 44(4)].

(g) Exclusions of Income for allowing Tax HolidayTax holiday u/s 46A:This is a period (4 years or 6 years) for which the company is allowed full exemptionof tax on its income from business or profession for prescribed sectors.

Location Tax Holiday Period

Dhaka & Chittagong Divisions except 3 hill districts of Rangamati, Bandarbanand Khagrachari [sec. 46A(1)(a)]

4 years

Barisal, Khulna, Rajshahi, Sylhet and 3 hill districts of Rangamati, Bandarban and

Khagrachari [sec. 46A(1)(b)]

6 years

Tax holiday under S.R.O.:Type of Industry/Income Tax Holiday PeriodIncome of any industry established in any Export Processing Zones (EPZ) [S.R.O.No. 289-Ain/89 dated 17-08-1989]

10 years from the dateof commercial

production

Income of a private sector Power Generation Company established under thefulfillment of all the conditions mentioned in the Private Sector Power GenerationPolicy of Bangladesh [S.R.O. No. 114-Ain/99 dated 26-05-1999, which repealedS.R.O. No. 35-Ain/97 and S.R.O. No. 36-Ain/97 dated 03.02.1997].Other Tax-Exempted Incomes:(a) Income of the foreign individuals working inthe company for 3 years from the date of their entering into Bangladesh [w.e.f.

03.02.1997]; (b) Interest payable on foreign loan taken by the company [w.e.f.26.05.1999]; (c) Royalties, Technical Know-how and Technical Assistance Feepayable by the company [w.e.f. 26.05.1999]; and (d) capital gain arising fromtransfer of the shares of the company [w.e.f. 26.05.1999].

15 years from the dateof commercial

production [w.e.f.03.02.1997]

Agro-processing industries [S.R.O. No. 166-Ain/Aykar/2006 dated 06.07.2006,which repeals S.R.O. No. 214-Aykar/2003 dated 19.07.2003. SRO of 2003

repealed S.R.O. No. 175-Aykar/2002 dated 03.07.2002 effective from 1-7-2002]

from 01-07-2002 to 30-06-2008

Income of any Bangladeshi resident person from computer software business[S.R.O. No. 172-Aykar/2002 dated 03.07.2002]

from 01-07-2002 to 30-06-2005

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Tax holiday under S.R.O.: .. contdType of Industry/Income Tax Holiday PeriodIncome attributable to export of handicrafts [S.R.O. No. 191-Ain/97 dated

29.08.1997, which repeals S.R.O. No. 313-L/86 dated 24.07.1986]

Effective from 01-07-

1986

Company investing in any sector of Bangladesh economy on a commercial basisunder an agreement between Bangladesh Government and any other foreign

government or any investment organization established by the foreign government[S.R.O. No. 32/Ain/90 dated 24.01.1990, which repeals S.R.O. No. 147-Ain/87dated 15.07.1987 under which investment in agriculture and industry wascovered]

Effective from 15-07-1987

Any income attributable from various agro-farms (fish farming, poultry farming,duckery, pelleted poultry feed production, seed production, marketing of locallyproduced seeds, cattle farming, dairy farming, frog farming, horticulture,

cultivation of mulberry, sericulture, mushroom farming, and floriculture) [S.R.O.No. 206-Ain/Aykar/2006 dated 06.07.2005, which is amended by S.R.O. No. 215-Aykar/2003 dated 19.07.2003; later S.R.O being amended by S.R.O. No. 168-Ain/2001 dated 28-06-2001]Subject to some conditions:(a) if the tax-exempted income exceeds Tk. 1 lakh,at least 10% of such income is to be invested in bond or security issued by

Government within 6 months from the end of the concerned income year; (b)income tax return is to be submitted to the DCT for each year related to the taxexemption period; (c) tax exempted income cannot be transferred within 5 yearsfrom the concerned tax exempted activities.

from 01-07-2001 to 30-06-2008

[first allowed from 1-7-

1980 under S.R.O. No.317-L/80 dated 28-8-1980

for fish farming, poultryfarming, duckery, cattle

farming, dairy farmingand horticulture]

Any new hospital (i) set up between 1-7-1999 and 30-6-2008 under theCompanies Act 1994, (ii) set up on own land of the hospital, (iii) having at least200 beds in case of general hospital and at least 50 beds in case of specialization

for heart-disease, kidney and cancer, (iv) having 10% beds for free treatment ofpoor patients [S.R.O. No. 180-Ain/99 dated 01.07.1999 and S.R.O. No. 204-Ain/Aykar/2005 dated 06.07.2005]

5 years

Appendix-IV: Some Accelerated Deductions

(a) Initial depreciation allowance: From financial year 2002-03, under paragraph 5A of the ThirdAccelerated Depreciation:This is an extraordinary depreciation allowance as per paragraphs 7 and 7A ofthe Third Schedule of the Income Tax Ordinance 1984:

from AY 2006-07, 50% in the first year, 30% in the second year and 20% in the third year (previously

100% in the first yearup to AY 2005-06) provided as per paragraph 7 [the application for accelerateddepreciation is accompanied by a declaration in writing that the concerned industrial undertaking hasnot approved for tax holiday and that no application has been made for tax holiday u/s 45 or 46A]; or

80% in first year and 20% in second year provided as per paragraph 7A [applicable in case of

machinery or plant (other than office appliances and road transport vehicles) which not having beenpreviously used in Bangladesh, has been or is used in the expansion unit set up between from 1-7-1995

to 30-6-2005 (both days inclusive) in any existing undertaking enjoying tax holiday u/s 46A].

Prescribed hitech electronic industry set-up in Export Processing Zones (EPZ) is entitled to accelerateddepreciation of 100% of the actual cost of machinery or plant (other than office appliances and road

transport vehicles) within the tax exemption period of 10 years, but application for accelerated depreciationis to be made within 4 months from the end of the month of installation of the machinery or plant to the

NBR [S.R.O. No. 269-L/86 dated 01-07-1986].

Tax holiday and accelerated depreciation are mutually exclusive [paragraph 7(2)(d) and paragraph 7A(1)(a)

of Third Schedule].

Tax Holiday vs. Accelerated Depreciation: Criteria for selection if both are availableTax Holiday Accelerated Depreciation

Labour-intensive Capital-intensive

Profitable venture from starting Initially losing venture

Loss during the tax holiday period cannot be carriedforward beyond tax holiday. Loss due to depreciation can be carried forward forunlimited period.

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(b) Initial depreciation allowance: From financial year 2002-03, under paragraph 5A of the ThirdSchedule, initial depreciation allowance is allowed for the first year at 10% on the cost of building and 25%on the cost of machinery or plant (other than ships or motor vehicles not plying for hire or any machinery orplant which has previously been used in Bangladesh).

Appendix-V: Tax Rates Statutory and Reduced

(a) Income Tax Rates: Tax Rate for Non-Corporate Taxpayers including Firm:

Tax Rates for AYTypes of

Assessee

Type of Income2006-07 2007-08

(1) Long-term capitalgain

15% or Av. Tax Rate on total incomeincluding capital gain, lower one

Same

(2) Accidental incomeu/s 19(13)

20% or ATR on total income includingaccidental income, lower one

Same

(3) Other income

Total Income-Slab 2006-2007 2007-2008

On first Tk.On next Tk.

On next Tk.On next Tk.On balance Tk.

120,000250,000

300,000350,000Balance

120,000250,000

300,000350,000Balance

**

Nil10%

15%20%25%

Nil10%

15%20%25%

Residentindividualassessee*, non-resident

Bangladeshi,association ofpersons, firmand otherartificialjuridical persons

Minimum tax (Tk.) 1,800 1,800Non-company

non-residentassessee (except

any Bangladeshi)

Total income 25% 25%

* The tax exemption benefit on remittance from abroad for resident persons who are not citizens of Bangladesh hasbeen withdrawn from FY 2006-07.

** But 10% tax rebates on the additional tax paid by those individual taxpayers paying tax at the highest rate of 25%disclosing more than 10% higher income in the assessment year (AY) 2007-08.

Tax Rate for Corporate Taxpayers:Tax Rates for AYTypes of

CompanyType of Income

2006-07 2007-08

- Transfer of stocks & shares of privatelimited company [S.R.O. No. 220-Ain/Aykar/2004dated 13.07.2004]

10% 10%(1) Capital gainarising outof

- Transfer of other capital assets 15% 15%

(2) Dividend income 15% 15%

Bank*,

insurance,financialinstitutions

(3) Otherincome

- Both for publicly traded and not publiclytraded company

45% 45%

- Transfer of stocks & shares of privatelimited company [S.R.O. No. 220-Ain/Aykar/2004dated 13.07.2004]

10% 10%(1) Capital gainarising outof

- Transfer of other capital assets 15% 15%

(2) Dividend income 15% 15%- For publicly traded company * Dividend declared by less than 10% or

failure to pay declared dividend withinSEC stipulated time

* Other situation

40%

30%

40%

30%

Othercompany

**

(3) Otherincome

- For other company 40% 40%* Under section 16C, a bank company, if shows, in the return, profit exceeding 50% of the aggregate sum of

capital and reserve, shall pay tax @ 15% of such excess profit as additional tax.** Under section 16B, a listed company other than a banking or insurance company, if has not issued,

declared or distributed dividend or bonus share equivalent to at least 15% of paid-up capital within six

months immediately following any income year, shall pay tax @ 5% of undistributed profit(accumulated profit including free reserve) as additional tax.

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(b) Reduced Tax Rate for Industrial Sectors:Industries Reduced tax rate

Companies engaged in thread-production, thread-dyeing, finishing,conning, cloth-making, cloth-dyeing, finishing, printing or one or moresimilar process relating to textile production [S.R.O. No. 168-Ain/Aykar/2006 dated 06.07.2006, which repeals S.R.O. No. 219-

Ain/Aykar/2004 dated 13.07.2004]. Under S.R.O. No. 218-Ain/Aykar/2003 dated 19.07.2003, initially reduced rate of 20%

introduced with effect from 1-7-2006.

15% [w.e.f. 1-7-2004 to 30-6-2008][20% for income year 2003-04]

Enterprise engaged in producing jute products [S.R.O. No. 169-Ain/Aykar/2006 dated 06.07.2006, which repeals S.R.O. No. 218-Ain/Aykar/2004 dated 13.07.2004]

15% [w.e.f. 1-7-2008 to 30-6-2008]

Income attributable from export by enterprises engaged in producingreadymade garments [S.R.O. No. 217-Aykar/2003 dated 19.07.2003,repealed by S.R.O. No. 201-Ain/Aykar/2005 dated 06.07.2005]

10% [w.e.f. 1-7-2003 to 30-6-2005; initially effective upto 30-6-2006]

Income attributable from export of knit-wear and woven garments by anexporter [S.R.O. No. 205-Ain/Aykar/2005 dated 06.07.2005].

Subject to some conditions:(a) income deemed to be income u/s 19 orincome due to disallowances u/s 30 shall not be income subject to settled

tax; (b) income to be determined by assuming an income tax rate of 10%;(c) income under other heads shall be computed normally; (d) income taxreturn shall be submitted to the concerned DCT along with statements ofaccounts and necessary documents.

0.25% of the total exportproceeds deducted at source

by the collecting bank u/s53BB [w.e.f. 1-7-2005 to

30-6-2010]

Any new industry (i) set up between 1-7-2002 and 30-6-2005 under theCompanies Act 1994, (ii) set up not as an expansion unit of an existingindustry, (iii) not applied for tax holiday u/s 46A, (iv) not applied for

accelerated depreciation, and (v) computing normal depreciationallowance on actual value rather than written down value [S.R.O. No.177-Aykar/2002 dated 03.07.2002]

20% [w.e.f. 1-7-2002 for 5years]

Income derived from only diamond cutting and polishing business by acompany engaged in diamond cutting and polishing industry [S.R.O. No.174-Ain/Aykar/2006 dated 06.07.2006]

15% [w.e.f. 1-7-2006 to 30-6-2008]

(b) Reduced Tax Rate for Specific Income:Income Reduced tax rate

Capital gain on transfer of shares of a company established under the

Companies Act, 1994 [S.R.O. No. 232-Aykar/2003 dated 31.07.2003].

10% [w.e.f. 31-7-2003]

Capital gain on transfer of shares of a company established under the

Companies Act 1994 [S.R.O. No. 220-Ain/Aykar/2004 dated 13.07.2004]

10% [w.e.f. 13-7-2004]

Appendix-VI: Tax Credits, Tax Rebates and Tax Relief

(a) TAX CREDIT @ 15% on Allowable Investments/Donations/Zakat:Under section 44(2)(b), an assessee shall be entitled to a credit from the amount of tax payable on his total

income of an amount equal to 15% of the sums specified in all paragraphs excluding paragraphs 15 and 16of the said Part B of the Sixth Schedule.

Under section 44(3), the aggregate of the allowances admissible under all paragraphs excluding paragraphs15 and 16 of Part B of the Sixth Schedule shall not exceed 250,000 taka. But the amount admissible shallnot, under any circumstances, exceed 20% of the total income of the assessee excluding [refer to Proviso toPara 4, Part B, First Schedule]:

employers contribution to recognized provident fund (PF) and

taxable interest on accumulated balance of recognized provident fund, if any (interest on accumulated

balance of an employee in a recognized PF is exempted up to 1/3rd

of salary or 14.5% interest rate,under para-25 of Part A, Sixth Schedule & S.R.O. 310-L/84 dated 27.06.1984).

Under section 43(2), in computing the total income of an assessee, there shall be included any exemption orallowance specified in Part B of the Sixth Schedule.

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Forced Investment by Salaried Employees:

Sum deducted from salary for a deferred annuity or of making provisions for his wife or children, up todeduction of 1/5

thof salary (para 3)

Contribution to any Government provident fund (para 4)

Assessees and employers contribution to a recognised PF (para 5)

Ordinary annual contribution to approved superannuation fund (para 6)

Payment to a benevolent fund or any group insurance premium (para 17)Passive Investments:

Insurance premium or payment towards deferred annuity contract, on the life of the assessee or spouseor minor children up to 10% of policy value (para 1)

Investment in stocks or shares of a company (listed with a Stock Exchange in Bangladesh) or otherbody corporate by non-corporate assessee (para 8)

Investment in the purchase of debentures or debenture-stocks from primary market by a non-corporate assessee, up to lesserof following two: (a) Net investment in concerned income year; (b) Netinvestment in last three income years (para 9)

Investment by a non-corporate assessee in the purchase of: (a) savings certificates or instruments; (b)

ICB unit certificates and mutual fund certificates; (c) other Government securities (includingDevelopment loans or Bonds); and (d) shares of investment companies, but investment tax credit willbe disallowed if sold within 5 years from the date of investment (para 10)

Contribution by an individual in Deposit Pension Scheme (para 11)

Donations:

Donation by an assessee to a charitable hospital (para 11A)

Donation by an assessee to an organization set up for the welfare of retarded people (para 11B)

Donation to any socio-economic or cultural development institution established in Bangladesh by theAga Khan Development Network (para 21)

Donation to a philanthropic or educational institution (para 22); Ahsania Mission Cancer Hospitalapproved by the NBR as a philanthropic institution [S.R.O. No. 202-Ain/Aykar/2005 dated06.07.2005].

Zakat:

Zakat to the Zakat Fund (para 13).

(b) TAX REBATE: Under section 44(2)(a), tax shall not be payable by an assessee in respect of any income or any sum

specified in paragraphs 15 and 16 of Part B of the Sixth Schedule.

Income from partnership firm [para 16] and income from association of person or AOP (other than aHindu undivided family or HUF, or a company or a firm) [para 15] will be treated as tax-free incomeif, the firm or AOP has already paid tax on its income. This tax-free income will be included in total

income of partners/members and a tax rebate will be allowed on this income at ATR (average tax rate)[provisos to para 15 and para 16 of Part B, Sixth Schedule and sec. 43(2)].

Rebate of Higher Dividend by Listed Industrial Companies:Listed industrial companies are entitled

to 10% tax rebate if they declare dividend at more than 20% [Finance Acts, 2005 & 2006].

Rebate on Higher Productivity:Any assessee being the owner of a small or cottage industry situated inthe Less Developed Area [prescribed through the S.R.O. No. 411-L/85, dated 22.09.1985 u/s

45(2A)(c)] or Least Developed Area [prescribed through the S.R.O. No. 412-L/85, dated 22.09.1985

u/s 45(2A)(b)] and engaged in the production of such cottage industry, will be allowed on the incomederived from such small or cottage industry a rebate at following rates [Finance Acts, 2005 & 2006]:

Production during the concerned year is higher than

the production in the preceding year by

Rate of Rebate

(a) More than 15%, but not more than 25% 5% of tax payable on such income

(b) More than 25% 10% of tax payable on such income

But 10% tax rebates on the additional tax paid by those individual taxpayers paying tax at the highestrate of 25% disclosing more than 10% higher income in the assessment year (AY) 2007-08 [FinanceAct, 2006]..

(c) TAX RELIEF:

Double taxation relief: When any income is already taxed but non-assessable, then pre-tax amountofthe income will be included in total income, a tax relief will be allowed at a rate lower of the two rates Bangladesh tax rate and the tax rate at which the income is taxed.

This relief is usually allowed on foreign incomeunder Seventh Schedule [section 144].

Tax Planning in Business Bangladesh Perspective_by Swapan Kumar Bala_SSRN-id991329

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