Table of Content

Page
Abstract------01

Objectives------02

Methodology------03

Limitations------04

1. What is tax?------05

2. Derived from------05

3. Taxonomy------05

1. Functions------06

2. Types of tax------06-07

A: Ethical Aspects

1. Canon of equality------08-09

B: Administrative Aspects

2. Canon of certainty------09

3. Canon of Convenience ------09

4. Canon of Economy------10

5. Canon of Productivity------10

6. Canon of Buoyancy------10

7. Canon of Flexibility------10

8. Canon of Simplicity------11

9. Canon of Diversity------11

  1. The tax structure for------11-12

individual tax payers

  1. The percentage of------12

corporate tax levied

  1. The period for------12-13

assessment determined

  1. Tax Administration in ------13-14

Bangladesh

  1. Impartiality of imposing------15-16

tax (Canon of Equality)

  1. Assurance of paying tax ------16-19

(Canon certainty)

2.1.Time of payment------17

2.2.Quantity of Payment------17

2.3.Manner of payment------18-19

  1. Canon of Convenience------19

4. Cost – Cutting Measure------19-20

(Canon of Economy)

5. Tax revenue not at Efficient------20-21

Level (Canon of Productivity)

6. Elastic Tax Structure ------21-23

(Canon of Elasticity)

7. Tax to be imposed on Multi ------23-24

Sources (Canon of Diversity)

1. Conclusion------25

2. Recommendations ------25-26

List of table

Particulars / Page No.
Table 1: For the assessment year 2006/07 / 12
Table 2: Revenue Yield in Bangladesh (1990/91 - 2000/01) / 13
Table 3: Types of Taxpayers in Bangladesh / 15
Table 4: Types of Taxpayers on the basis of Individual Income Taxes / 16
Table 5: Tax rate / 17
Table 6: Revenue Earned v/s Cost Of Collection / 20
Table 7: Measure of Efficiency / 20
Table 8: Quantum of different taxes vis – a – vis total tax revenue / 23

April 2, 2007

Rehana Fowzia

Lecturer

Department Business Administration

Stamford UniversityBangladesh

Subject: Submission of the report on “Ascertain the Position of Canons of Taxation in Tax System of Bangladesh”

Dear Madam:

Our report is on “Ascertain the Position of Canons of Taxation in Tax System of Bangladesh” that you have assigned us as part of the Business Taxation. We have tried to follow the instructions and suggestions that you have given in every aspects of our study.

We would like to request you that if you have any question about the report, please don’t be indecisive to contact with us. We will always be available at your convenience to make further detail of the study.

Sincerely yours,

Group – Chowkosh

1.

2.

3.

4.

5.

6.

Sec – I

27th batch

Report

on

“Ascertain the Position of Canons of Taxation in Tax System of Bangladesh”

Submitted

to

Rehana Fowzia

Lecturer

Course Title – Business Taxation

Submitted

by

Group Name – Chawkash

Section – I

Batch – 27th

Trimester – spring’07

Department of Business Administration

STAMFORD UNIVERSITYBANGLADESH

April 2, 2007

“Ascertain The Position of Canons of Taxation in Tax System of Bangladesh”

Group Name – Chawkash

Workforce Behind This Report

NameID

1. MD. Faiz-ur-Rahman02707021

2. MD. Mahbub Hossain 02707093

3. Sunayan Kanti Paul02707063

4. MD. Wahidur Rahman02707092

5. MD. Mehedi Mustafa027070107

6. MD. Modassar Hossain02707198

Acknowledgement

We are truly thankful to our course teacher, Rehana Fowzia, Department of Business Administration, Stamford UniversityBangladesh. Without whose heartfelt supervision and suggestions it was extremely difficult for us to prepare the assignment.

We want to thank and convey our heartiest gratitude to executives of the BD income tax department,who gave us the obvious information and noteworthy documents and helped us to understand the several that entailed to the assignment.

Especially, thank to all of our class mates who encourage us and co-ordinate us in many troublesome tasks.

ABSTRACT

As a requirement of our course curriculum of Business Taxation we are assigned a report on Ascertain the position of canons of taxation in tax system of Bangladesh. The main purpose of this report is to analyze and determine the existing situation of tax system of Bangladesh and to know what revenue comes from which sectors as tax. Revenue from taxation has been used by states and their functional equivalents throughout history to carry out many functions. And we should abide by some principles of taxation if it is subjected to earn revenue from tax properly for our country. The principles are such – canon of equality, economy, certainty, productivity, convenience, and many more. Estimates for the period between 2003-2004 showed that on average, the NBR is responsible for collection of about 95% of total tax revenue and about 81% of the total revenue of the government in a year. By analyzing the canon of taxation and existing situation of taxation system of Bangladesh there are somerecommendations, which could act as remedies for a better income tax system inBangladesh and would relevant to other developing countries as well.

OBJECTIVES

The objectives are divided into two parts:

1. Broad Objective:

Get an idea about the existing situation of tax system in Bangladesh and determining the tenet of taxation of Bangladesh

2. Specific Objectives:

To know the canon of taxation.

Toknow about the tax system of Bangladesh.

To know the tax revenue in a year

To know classification of tax payers

Finally recommend some strategies that should be taken.

Methodology

Two types of data sources are used for the study:

 Primary source

 Secondary source

Primary Data:

The study has been developed by taking some exclusive interviews with several persons of National Board of Revenue and Ministry of Finance, Govt. of Bangladesh. We are very thankful to the respective authority of National Board of Revenue for helping us by giving their important time and support. We have used both structured and unstructured interviews to collect data. We tried to gather the following types of data to construct the report:

  • What is the canon of taxation?
  • What are the sources of tax?
  • What are the methods to impose tax?
  • What are the tax rates for different category of tax for different years?
  • What are the income sources of tax payers?
  • What is national revenue or total revenue from tax?
  • How much earn from particular sectors?

Secondary Data:

To construct our report, we have also taken help of various secondary sources like annual report published by NBR, journal, book and also searched through the intranet & internet for various pertinent information which have definitely enriched the research findings.

Limitations

Firstly, there was lack of sufficient data.

Secondly, we have not got enough time, which hampered the related processes to some extent. The time was not enough to prepare a formal and long business report.

Thirdly, financial bindings were another drawback in preparing the report.

Fourthly, there were some technologicalproblems.

We think the report could be organized more extensively if there was sufficient time and proper response of the reference groups’ to cover all particulars regarding report format, structure, investigation.

Introduction

1. What is Tax?

Taxation one of the major sources of public revenue to meet a country's revenue and development expenditures with a view to accomplishing some economic and social objectives, such as redistribution of income, price stabilization and discouraging harmful consumption. It supplements other sources of public finance such as issuance of currency notes and coins, charging for public goods and services and borrowings.

2. Derived From:

The term 'tax' has been derived from the French word taxe and etymologically, the Latin word taxare is related to the term 'tax', which means 'to charge'. Tax is 'a contribution exacted by the state'. It is a nonpenal but compulsory and unrequited transfer of resources from the private to the public sector, levied on the basis of predetermined criteria.

3. Taxonomy of Tax:

Tax can be categorized in different types based on different angels, such-

  1. On The Basis of Incidence

i)Direct tax

ii)Indirect tax

  1. On The Basis of Progression

i)Progressive Tax

ii)Proportionate Tax

iii)Regressive Tax

  1. On The Basis of Base

i)Single Tax

ii)Multiple Tax

Functions of Tax for a Country

1. Functions:

Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out many functions. Some of these include –

  • expenditures on war
  • the enforcement of law and public order
  • protection of property
  • economic infrastructure (roads, legal tender, enforcement of contracts, etc.)
  • public works
  • social engineering
  • the operation of government itself

Most modern governments also use taxes to fund welfare and public services. These services can include –

  • education systems
  • health care systems
  • pensions for the elderly
  • unemployment benefits
  • public transportation

Energy, water and waste management systems are also common public utilities. Colonial and moderning states have also used cash taxes to draw or force reluctant subsistence producers into cash economies.

2. Types of tax:

The Organisation for Economic Co-operation and Development (OECD) publishes perhaps the most comprehensive analysis of worldwide tax systems. In order to do this it has created a comprehensive categorisation of all taxes in all regimes which it covers:

i)Income tax

ii)Capital gains tax

iii)Corporation tax

iv)Excises duty

v)Import and export duty

vi)VAT (value added tax)

vii)Suplimentary duty

viii)Motor vehical tax

ix)Land revenue

x)Non judicial stam

xi)Inherent tax

xii)Pool tax

xiii)Property tax

xiv)Retirement tax

xv)Sales tax

xvi)Tarrifs

xvii)Transfer tax

xviii)Wealth (not worth) tax

Principle of Taxation

A tax systemfor achieving certain objectives, choose and adheres to certain principles which are termed its characteristics. A good tax system, therefore, is one which is designed on the basis of an appropriate set of principles, such as equality and certainty. Mostly, however, objectives of taxation conflict with each other and a compromise is needed. Therefore usually equally economists select some important objectives and work out the corresponding principles which the tax system should adhere to.A summarized version of these is given below:

Adam Smith's canons of taxation

Adam Smith's contribution to economic theory is regarded as classic. His statement of canons of taxation has hardly been surpassed in clarity and simplicity. Four canons of taxation are as under:

  1. Canon of equality.

This is based on the following concept

“The subjects of every State ought to contribute towards the support of the govt., as nearly as possible, in proportion to there respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State.”

This canon tries to observe the objective of economic justice. It dictates that in absolute terms the richer should pay more taxes because without the protection of the State they could not have earned and enjoyed that extra income. If we interpret this principles in terms of this disutility which the tax payers suffer by paying taxes, it follows that the tax should impose equal marginal disutility upon every tax – payer. Tow possibilities emerge in this case. If incomes are subject to constant marginal utility, then both the rich and the poor should be subjected proportional taxation – each person paying a given percentage office income as tax. On the other hand, if we agree with the more realistic proposition that income is subject to diminishing marginal utility, than the richer should pay a larger proportion of their income as taxes.

2. Canon of Certainty:

This canon is meant to protect the taxpayers from unnecessary harassment by the ‘tax officials’. The tax which each individual is bound to pay ought to be certain, and not arbitrary.Some fact should be clear and plain to the contributor and every other person, such –

  • The time of payment
  • The quantity of payment
  • The manner of payment

The tax – payers should not be subject to arbitrariness and discretion of tax officials, since that breeds a corrupt tax administration. Smith is so emphatic about this principle as to claim “that a very considerable degree of inequality….is not near so great an evil as a very small degree of uncertainty.”

Certainty is needed not only from the point of view of the tax-payer but also from that of state.

3. Canon of Convenience:

This canon takes into consideration the interest of the tax payer from the view of payment of tax. It emphasizes that the mode and timings of tax payment should be, so far as possible, convenient to the tax payers. This canon recommends that unnecessary trouble to the tax payer should be avoided, other vicarious ill – effects may result.

4. Canon of Economy:

Every tax has a cost of collection. This canon recommends that cost of collection of taxes should be as minimized as possible. It will be unless to impose taxes which are too widespread and difficult to administer. Productivity of taxes has been given importance in this canon. These taxes entail an unnecessary burden upon the society in the form of additional administrative expense. The productive effort of the people suffers due to this wastage.Realizing that the tax collections are being wasted, the tax – payers also tend to evade them.

These canons of taxation of a sound philosophy behind them and exhibitan insight into the practical aspect of tax administration and its effects. However, in view of development in economic philosophy and problems of a modern state, a few additional principles were also suggested by later writer. A brief description of these is as follows:

5. Canon of Productivity:

It is also called the canon of fiscal adequacy. According to this principle,

the tax system should be able to yield enough revenue for the treasury and the govt. should have no need to resort to deficit financing. The canon is thus also called canon of adequacy.

6. Canon of Buoyancy:

The tax revenue should have an inherent tendency to increase along with an increase in national income, even if the rates and coverage of taxes are not revised.

7. Canon of Flexibility:

It should be possible for the authorities without undue delay, to revise the tax structure, both with respect to its coverage and rates, to suit the changing requirements of the economy and of the treasury.

8. Canon of Simplicity:

The tax system should not be too complicated. That makes it difficult to administer and understand and breeds problems of difference in interpretation and legal disputes.

9. Canon of Diversity:

It is risky for the state to depend upon too few a source of public revenue. Such a system is bound to breed a lot of uncertainty for then treasury. It is also likely to be inequitable as between different sections of the society. On the other hand, if the tax revenue comes from diversified sources, then any reduction in the tax revenue on account of one cause is bound to be very small. However, too much multiplicity of taxes is also to be avoided. That leads to unnecessary cost of collection and violates the canon of economy.

AnOverviewofTaxSystemin Bangladesh

1. The tax structure for individual tax payers:

If an individual has been in Bangladesh for a period/period totaling 182 days or more in the income year, he/she is considered a resident. In case an individual has been in the country for 90 days in the income year and 365 days in four years preceding this year, he/she will also be considered a resident.

Each individual is entitled to an investment tax credit of 15 percent of the total income or Tk. 100,000 whichever is less. Incomes from small and cottage industries are entitled to a 5 to 10 per cent tax rebate depending on the production volume. Tax liability of an assessee is determined at the rate or rates applicable on the total income of the assessee. The tax rate is not uniformed for all types of assessee and for any level income. This is varied from assessment year to assessment year.

Table 1: For the assessment year 2006/07

Rate
on taka tk. 1,20,000 / Nil
on next taka tk. 2,50,000 / 10%
on next taka tk. 3,00,000 / 15%
on next taka tk. 3,50,000 / 20%
on the rest / 25%

2. The percentage of corporate tax levied:

Any income collected or gained by a company doing business in Bangladesh, whether resident or not is taxable. Corporate tax rates for industrial companies whose shares are publicly traded is 35% and the rate of those whose shares are not publicly traded is 40%.

Tax rates on income of all other companies including banks, financial institutions, insurance companies and local authorities are 45%. Companies enjoying tax holiday are required to invest only 25% to 30% of their income in other activities as per rules of the National board of Revenue (NBR).

3. The period for assessment determined:

Income tax is levied on all companies and individuals for the previous year and payable for the year of assessment of fiscal year (July to June). If a company adopts an accounting period different from the fiscal year, the business period is a 12 month accounting period preceding the year of assessment. Taxable income is calculated after adjusting for incurred expenses in the production of income.

Returns filed received by or due to foreign technician under contract if it is accompanied by audited accounts and certified by a chartered accountant as to the correctness of the total income of the assesses.

Salary income received by or due to a foreign technician under contract of service approved by the NBR is fully exempted from paying tax (subject to prescribed conditions and limitations) for a period of three years from the date of his arrival in Bangladesh.

Expenditure incurred by an employer in respect of remuneration of a foreign technician is also fully exempted from income tax (subject to stipulated conditions).

Expenditure incurred as a remuneration payable to a foreign technician by a Bangladeshi firm carrying on the business of consultant and engineers in Bangladesh is fully exempted from tax (subject to prescribed conditions and limitations).

4. Tax Administration in Bangladesh:

National Board of Revenue (NBR) is the central authority for tax administration inBangladesh and collects almost 78 percent of total revenue for the country (NBRannual report, 2000). Table 1 show that the total internal resource generation due torevenue earnings has been accounted for less than 10 percent of the gross domesticproduct (GDP) of Bangladesh in recent years. Tax revenue in general contributedmore than eighty percent towards the total revenue earning of the economy.

Table 2: Revenue Yield in Bangladesh (1990/91 - 2000/01)

Year / Total1 revenue
(%) / Tax2 revenue
(%) / Non-tax2 revenue
(%)
1992-1993
1993-1994
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002 / 9.13
9.22
9.84
9.22
9.62
9.50
9.00
8.47
9.28
9.83 / 7.26
7.07
7.90
7.29
7.89
7.69
7.36
6.78
7.80
8.09 / 1.87
2.15
1.94
1.93
1.73
1.81
1.64
1.69
1.47
1.74
Periodic Average
1992/93-1996/97
1997/98-2001/02 / 9.41
9.22 / 7.48
7.54 / 1.93
1.67
Periodic Average3
1975/76 – 1979/80
1980/81-1984/85 / 8.8
9.2 / 5.5
7.7 / 1.3
1.5

Note: 1. Total Revenue as Percentage of GDP