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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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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). Business means 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 to
section 2(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.1 Thus,
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 activities of 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 activities are those activities which include the functions or obligations according to the
provisions of various fiscal statutes. Tax planning activities means 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.
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 any
enactment 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 Explanation given 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 status and residential status. A sole-proprietorship has no separate tax paying identity and
individual 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 (or flow-through entity)
and non-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 in Appendix-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 may
require 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 least double-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 individual
shareholders 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 be triple taxation. The company of which shares have been purchased has to pay first-level
tax on its income at 30%, 40% or 45%. Then the investing company has to pay second-level tax on
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 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; vide Webley 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), vide Scholes 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 planning and tax minimization are very different things. The reason is
that 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 return
discovered 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 for
individual 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.
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her/his tax liability significantly. The most highly qualified professional tax experts earn most of their
lucrative fees by giving advice on alternative ways of arranging facts. In other words, most
professional tax planning is little more than the prearrangement of facts in the most tax-favored way
(Sommerfeld et al., 1980: 28/1). Even the International Accounting Standard 12, Income Taxes (IAS
12) has suggested exploiting tax planning opportunities through changing the accounting method or
arranging the facts. Under paragraph 30 of IAS 12, tax planning opportunities are actions that the
enterprise would take in order to create or increase taxable income in a particular period before the
expiry of a tax loss or tax credit carryforward. IAS 12 has mentioned following few examples how, in
some jurisdictions, taxable profit may be created or increased:
(a) by electing to have interest income taxed on either a received or receivable basis;
(b) by deferring the claim for certain deductions from taxable profit;
(c) by selling, and perhaps leasing back, assets that have appreciated but for which the tax base
has not been adjusted to reflect such appreciation; and
(d) by selling an asset that generates non-taxable income (such as, in some jurisdictions, a
government bond) in order to purchase another investment that generates taxable income.
Where tax planning opportunities advance taxable profit from a later period to an earlier period, the
utilisation of a tax loss or tax credit carryforward still depends on the existence of future taxable
profit from sources other than future originating temporary differences (IASB, 2004: 740).
However, Chapter-XI (sections 104 to 107) of the Income Tax Ordinance, 1984 is on Special
Provisions Relating to Avoidance of Tax as follows:
Section 104: Avoidance of tax through transactions with non-residents
Section 105: Avoidance of tax through transfer of assets
Section 106: Avoidance of tax by transactions in securities
Section 107: Tax clearance certificate required for persons leaving Bangladesh.
Appendix-II delineates the Special Provisions Relating to Avoidance of Tax under Chapter-XI of the
Income Tax Ordinance, 1984.
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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 enjoying
tax 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 be
avoided 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 of
Taka 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. See Appendix-V for 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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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 tax is 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 are
reporting result far out of line with what other taxpayers are reporting in similar situations
(information that is used to select return for audit).
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But tax arbitrage may be prevented by tax-rule restrictions and frictions. Tax-rule restrictions are
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 not
desirable 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.
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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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any other sum, not being a sum paid or payable as income or for full consideration of money or
moneys worth; subject to other conditions of section 105.]
Section 106: Avoidance of tax by transactions in securities [Where the owner of any securities sells
or transfers those securities and buys them back or reacquires them, or buys or acquires similar
securities, and the result of the transactions is that any interest becoming payable in respect of the
original 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 to
other 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 a
person 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 from
the DCT authorised in this behalf by the NBR (a) a tax clearance certificate, or (b) if he has the
intention of returning to Bangladesh, an exemption certificate which shall be issued only if the DCT is
satisfied 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 of
section 107.]
Appendix-III
Exclusions from Total Income [Part A, Sixth Schedule, vide sec. 44(1), SROs issued u/s 44(4) of
the ITO and SROS issued under the Income-tax Act 1922]:
(a) Exclusions from Salaries Income
Items 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 Taxable amount: 7.5% of basic salary
(without any cash allowance) [rule 33D] Less: Amount deducted from salary (if any)
Provision of car for personal and/or official purpose Taxable amount: 7.5% of basic salary plus Cash
(with cash allowance) [rule 33E] allowance
House rent allowance (cash) [rule 33A] Exempted: 50% of basic salary or Taka 15,000
per month, lower one
Medical allowance [rule 33I] Exempted: Actual medical or hospitalization
expense
Interest accrued on recognized provident fund Exempted: 1/3rd of salary or 14.5% interest rate
[Para 25, Part A, Sixth Schedule] [S.R.O. 310-L/84 dated 27.06.1984]
Special allowance, benefits or perquisite granted to Fully exempted
meet official expenses [Para 5, Part A, Sixth
Schedule]
Deemed income for free furnished/unfurnished Taxable: (Rental value or 25% of basic salary,
accommodation [rule 33B(1)] whichever is less) minus Cash house rent
allowance waived
Less: Amount deducted from salary (if any)
Furnished/unfurnished accommodation with Taxable: (Rental value or 25% of basic salary,
concessional rent [rule 33B(2)] whichever is less) minus Cash house rent
allowance waived less Rent paid by employee
Free or concessional passage for travel abroad [rule Exempted: once in every 2 years if provided as
33G] per terms of employment
Free or concessional passage for travel within Exempted: if provided as per terms of
Bangladesh [rule 33G] employment
Free or concessional passage provided by an Fully exempted
organization doing transport business [rule 33G]
Entertainment allowance [rule 33H] Fully taxable (except free tea, coffee, beverage or
like 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 for
one 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), an
approved 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 dated
04.06.1989 (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 has
no 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, vide sec. 44(4)].
Interest up to Taka 25,000 earned from investment in Bangladesh Industrial Development Bond of
various 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 interest
deducted at source shall be treated as final settlement of tax liability [S.R.O. No. 203-Ain/Aykar/2005
dated 06.07.2005, vide sec. 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 Bank
and 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 dated
31.12.1980, 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 dated
31.12.1980, vide sec. 60(1) of the Income-tax Act 1922].
(d) Exclusions from Income from Business or Profession
50% of the export income except in 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/83
dated 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, vide sec. 44(4)].
Tax payable on so much of the income of an assessee donated towards the Prime Ministers Relief
Fund is exempted [S.R.O. No. 125-Ain/91 dated 05.05.1991, vide sec. 44(4)].
Tax payable on so much of the income of an assessee donated towards the Presidents Relief Fund is
exempted [S.R.O. No. 254-L/85 dated 10.06.1985, vide sec. 44(4)].
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Tax payable on so much of the income of an assessee donated towards the CMLAs Flood Relief
Fund is exempted [S.R.O. No. 389-L/83 dated 23.10.1983, vide sec. 60(1) of the Income-tax Act
1922].
(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 is
entitled 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 31A
of Part A, Sixth Schedule],
Capital gain on transfer of any business capital asset (other than machinery or plant) if the capital gain
is 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, outside
Bangladesh 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, vide sec. 44(4)].
Income earned abroad by a resident is exempted under the Income Tax Ordinance, 1984 subject to the
following 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 repaying
default bank loan of the concerned person. No question regarding the source of the income earned
abroad, if the conditions of this notification are complied with [S.R.O. No. 322-Ain/2001 dated
09.12.2001, vide sec. 44(4)].
(g) Exclusions of Income for allowing Tax Holiday
Tax holiday u/s 46A: This is a period (4 years or 6 years) for which the company is allowed full exemption
of tax on its income from business or profession for prescribed sectors.
Location Tax Holiday Period
Dhaka & Chittagong Divisions except 3 hill districts of Rangamati, Bandarban 4 years
and Khagrachari [sec. 46A(1)(a)]
Barisal, Khulna, Rajshahi, Sylhet and 3 hill districts of Rangamati, Bandarban and 6 years
Khagrachari [sec. 46A(1)(b)]
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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 year up to AY 2005-06) provided as per paragraph 7 [the application for accelerated
depreciation is accompanied by a declaration in writing that the concerned industrial undertaking has
not 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 been
previously 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 accelerated
depreciation 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 depreciation
is 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 available
Tax Holiday Accelerated Depreciation
Labour-intensive Capital-intensive
Profitable venture from starting Initially losing venture
Loss during the tax holiday period cannot be carried Loss due to depreciation can be carried forward for
forward beyond tax holiday. unlimited period.
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(b) Initial depreciation allowance: From financial year 2002-03, under paragraph 5A of the Third
Schedule, 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 or
plant which has previously been used in Bangladesh).
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V i e w p u b l i c a t i o n s t a t s