Assignment

Course: Income Tax Accounting

Course code: ACT-301
Topic: Determinants of personal income tax in Bangladesh.

Submitted To
Md. Rayhanul Islam
Assistant Professor
Department of Business Administration

Submitted By
Fozle Rabby ID: 182-11-5893
Rodela Binte Ali ID: 182-11-5921
Md. Ashik Sultan Mahmud ID: 183-11-5991
Nusrat Zahan Tulona ID: 183-11-5994
 Determinants of personal income tax in Bangladesh.

Personal taxation scenario of Bangladesh:

 If income tax of any individual other than female, retired person or cripple,
need to pay tax when his annual income exceed 350000.
 Any person lives in a city corporation/ divisional HQ/district HQ and owns a
building of more than one stored and has a plinth area exceeding 1600 sq feet
and let out then he should pay tax.
 Person who own a motor car and ply on city road should pay vehicle tax.
 Person owing a membership of a club registered under vat law.
 Person who subscribes a mobile operator need to pay tax according to the
amount of service he has gotten.

Meaning of Salary: Salary means a fixed amount of payment received from

employer by an employee for service rendered. In general, salary means any
payments received by an employee for physical or mental work from the employer
for a specific time period.
In INCOME TAX ORDIANCE, 1984 an exclusive definition is given in Section
2(58) where it is said that salary includes:
a) Any wages,
b) Any annuity, pension or gratuity,
c) Any fees, commissions, allowances, perquisites or profit in lien of in addition to
salary and wages,
d) Any advance salary; and
e) Any leave encashment.

Elements of Salary: Based on the definition of salary and practical situation

elements of salary can be identified as follows:
1. Basic salary: It is the most important component of salary income because some
allowances and contributions are calculated on the basis of this. It is full taxable
income.
2. Bonus: Bonus pay is defined as the compensation awarded by employers over the
base salary and is generally distributed at the employer’s discretion. Bonus is taxable
income.
3. Dearness allowance : It is commonly given to employees to cope up with price-
hike at large costly cities. It is taxable.
4. Commission : Commission is what you pay to employees when they make a sale
or accomplish some other goal. Commissions can be a percentage of a sale, or they
can be a flat amount based on the sales volume.
5. Annuity : An income annuity is an annuity contract that is designed to start paying
income as soon as the policy is initiated. Once funded, an income annuity is
annuitized immediately, although the underlying income units may be in either fixed
or variable investments. As such, income payments may fluctuate over time.
6. Pension : Pension is taxable under the head salaries in your income tax return.
Pensions are paid out periodically, generally every month. However, you may also
choose to receive your pension as a lump sum (also called commuted pension)
instead of a periodical payment.
7. Gratuity : Gratuity is a lump sum that a company pays when an employee leaves
an organization and is one of the many retirement benefits offered by a company to
an employee. It is taxable.
8. Leave in casement : The tax of leave encashment is dependent on if you are
government or private sector employee, or if you are encashing it at the time of
retirement or mid-way.

Personal income from salary

1. House rent allowance (HRA): An employee can received in cash for rent of his
house rent allowance or quarter. The provision for calculating of the amount
chargeable to tax are as follows-
 Where HRA paid in cash- Sum of HRA exceeding lower of Tk.25000 per
month or 50% of basic salary.
  Where rent-free residential accommodation is provided- Lower of Annual
value of the house or 25% of basic salary.
 Where concessional rent residential accommodation is provided- Excess of
annual value of the house as computed under the last one over the actual rent
paid by the employee. Annual rental value of the house or 25% of basic which
is lower.

2. Conveyance allowance: An employee may receive cash conveyance allowance

or vehicle from his employer. Provisions for computation of allowance or inclusion
in salary for this perquisite are as follows-
 Where conveyance allowance is paid in cash- Conveyance allowance up to
Tk.30,000 is exempted. If it exceeds Tk.30,000 the exceeding amount will be
added with the salary.
 Where a vehicle is provided for office and personal use- An amount of 5% of
the basic salary or Tk.60,000 per year (which is higher) will be added with
salary.
 If additional allowance over and above the vehicles is received- In this
situation both higher of 5% of the basic salary or 60,000 and the additional
cash received will be added with salary income and taxable.

3. Medical allowance: Actual expenditure is exempted. But if the actual expense is

less than allowance received, the difference will be added with salary. Exempted
upto 10% of Basic or 120,000 which one is lower.

4. Entertainment allowance: Amount received by the employee in full will be

added with salary.

5. Contribution to Recognized Provident Fund (RPF): In case of RPF an equal

amount is contributed by the employee is also given by the employer. Here the
contribution of employer’s is added with the salary.
6. Interest on recognized provident fund: Interest from RPF is taxable an amount
exceeding at 14.5% rate or 1/3 of basic which one is lower.

Income from interest on securities

Scope of income from interest on securities:

 Interest received from any government securities or any security approved by

government.
 Interest received from any securities or debenture issued by or on behalf of
any local authority.
Classification of securities:

Government securities: Government securities come with a promise of the full

repayment of invested principal at maturity of the security. Some government
securities may also pay periodic coupon or interest payments.
It is of two types – tax free and taxable. Interest from tax free securities are not
taxable. Interest from taxable securities are taxable.
Commercial securities: It is of two types:
 Debentures: Issued by or on behalf of local authority or a company and
approved by SEC. Approved or unapproved debentures- both are taxable.
 Zero coupon bond: Its interest is Zero. This type of security initially sold at a
price lower than face value and owner received the face value at maturity. The
gap between the purchase price and face value is the benefit of buying such
security. Interest from zero coupon bond is tax free.

Income from house property

House property consists of building, apartment, land, furniture, fixture, fittings etc.
Income from house property whether used for commercial or residential purposes is
taxable on the basis of itsannual value.
The following deductions are applicable on house property:
 Land development tax or rent payable to Government
 Insurance premium paid
 Interest payable on mortgage or capital charge
  Annual charge except capital charge
 Ground rent
 Interest payable to bank or financial institution on borrowed capital for
acquisition, construction, reconstruction, repair or renovation of the house
property.
 Interest payable to bank or financial institution on borrowed capital for
construction of the house property, charged in 3 equal instalments in the first
3 years of earning income from such property.
 Maintenance allowance
a) House property used for residential purpose: 25% of annual value
b) House property used for commercial purpose: 30% of annual value
(However, any unspent portion of an amount of deduction allowed to an assessee for
repair and maintenance of house property would be treated as deemed income under
income from house property)
 Proportionate vacancy allowance: Individuals receiving above Tk. 25,000 as
rent from house property per month are needed to maintain a bank account in
any scheduled bank for deposit of the same.

Personal income from agriculture

Taxable income in agricultural sector are given bellow-
 Partly agricultural or partly business income:
1. Income from tea garden(60% agricultural and 40% business income)
2. Income from sugar mill ( cost of sugar cane treated as agricultural income ,
but the difference between sale value of sugar and market value of sugar cane
is considered as business income)
3. income from plantation of rubber (60% agricultural and 40% business
income)
4. Tobacco plantation ( same to the law of sugar mile)

 Some typical agricultural income that are considered under taxation policies-
1. Income from cattle raring land collected from cowboy
2. Income from flower cultivation
3. Income from cultivation of tobacco and palm tree
4. Income from park
5. Income from agricultural co-operative related with dairy
6. Income from land used in agricultural purposes
7. Income from dairy firm
8. Income from poultry firm if they are reared in land.

 Some typical nonagricultural taxable incomes-

1. Income from ferry ghat, fishing , catching , and market
2. Sales of soil used in nonagricultural purpose
3. Income from rent of house used for collecting crops
4. Income from royalty of mine
5. Income from Sault production
6. Income from house used as godown , factory etc
7. Income from sale of tree, grass, crops grown in land without agricultural work.
8. Income from sales of water used for irrigation
9. Income from purchasing of crop from other farmer

 Allowable expenses need to be ducted from agricultural income to find

taxable income-
1. Any land development tax and rent paid
2. Any local rate, tax and cess.
3. Cost of cultivation
4. Transportation cost for transporting land produces in market
5. For maintain agricultural implements and machinery.

Positive Sides of Personal Taxation

 It is imposed according to the ability to pay that means wealthier person needs
to pay more and less wealthy person needs to pay less.
 It is generally charged on the progressive tax rate basis that means person with
higher income pays more tax.
 As personal tax is categorized as direct tax it can easily be administered and
the cost of administration is comparatively lower than indirect taxation.
  Since this taxation system doesn’t hurt the principle of “canon of certainty”,
it ensures a proper and adequate justification.
 With the change of rate, quantum of revenue can be increased or decreased.
 A strong financial instrument to direct the national economy to the desired
direction.
 It increases political consciousness.
 It ensures justice for people with little income and enhances equality in the
economy.
 Make people more vigilant and responsible to society.
 Provide enough facility and exemption for the disable, women and aged
people and also for person who want to commence a new business.

Negative Sides of Personal Taxation

 It is mainly imposed on personal income but it is difficult to define income
and some confusion always remains there.
 Usually tax provisions are vague and are not specified thus create difficulties
for the tax payers.
 There are allegations about harassment of tax payer by tax administration.
 Tax payer always remains hostile to the Govt. as payment is direct from his
income and pocket.
 It causes a high tendency of tax evasion and avoidance which are not
competent to discharge civil responsibilities.
 Maintenance of accounts and following rules become difficult; these may
cause rise of arbitrary decision of tax officer.
 If tax rate is high it may discourage saving, investment and production.

Conclusion
Like many other developing countries, the administration of income taxation in
Bangladesh is very poor. There is rampant evasion and allegation of corruption is
widespread. We should understand the fact that any tax reform must go hand in hand
with cutting wasteful government consumption; so that taxpayers do not feel they
are sitting ducks for the exchequer to rip them off. Thus, the government must be
very cautious in taxing people so that the burden of taxes could be justified.