On the draft income tax law

The draft law has no option for advance ruling: the benefits of scheme of advance ruling and for the determination of tax liability in advance. It can reduce litigation and attract Foreign Direct Investment (FDI). Rulings are binding on the applicant as well as the department.

A draft income tax law has been pending enactment for a long time and it has many provisions which need to be evaluated and revised. The major drawback of the existing law is the lack of transparency and excessive prerogative power given to the officials. The draft law has proposed to increase the power of the NBR to deduct, reduce and exempt tax of the assessee. However, the existing law makes the responsibility of the NBR negligible as more than 90% of the tax collected by the government comes from businesses and individuals in the form of deduction at sources.

To collect tax efficiently and quickly, the Income Tax departments of the government around the world have introduced a system called Tax deduction at source (TDS) which is different in our country. The draft law set to increase the burden on the taxpayers. A major part of the draft law is on at source tax deduction proposed under sections 79 to 139. It covers all possible assesses so far and the rate of deduction from 0.30% to 20%.

In case of trade license, Municipalities and City Corporation will deduct Taka 500 to Taka 3000 depending upon categories of corporations. Under section 112, the Commissioner of Customs or his authorised officers may deduct tax at source of maximum 20%. It is interesting that the official has the discretionary power to decide the rate of tax deduction. Such discretion may be susceptible to misuse. Again, there are some confusing clauses which state that officials will deduct 10% income tax from Clearing and Forwarding (C&F) agents during export and import (section 114). It is not clear which shall be the base price to deduct income tax. The C&F agents get their commission on the service, but shipping documents of Import and Export do not reflect the income of the C&F agents.

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

Under the present Income Tax Ordinance, the tribunal is under the control of the NBR. The draft law has proposed to keep the provision unchanged and virtually will make the tribunal a part of the NBR. The government will nominate members from Commissioners, Chartered Accountants, Costs & Management Accountant, practicing lawyers and retired or in-service District Judges. The members will be minimum 3 and the government will nominate any of the members as Chairman of the tribunal. The responsibility is for a certain period, not a permanent responsibility. 

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

The draft law has no option for advance ruling: the benefits of scheme of advance ruling and for the determination of tax liability in advance. It can reduce litigation and attract Foreign Direct Investment (FDI). Rulings are binding on the applicant as well as the department.

Institution of Ombudsman is as old as the tax administration department itself. Jurisdiction of the Ombudsman is usually clearly defined in a separate law. It is an independent body but not a court and accountable only to the parliament. The draft law also should have an option to facilitate the establishment of Tax Ombudsman.

The writer is a Legal Economist & Adviser, Bangladesh Competition Commission.