All you need to know about the new Income Tax Act

"In this world, nothing can be said to be certain, except death and taxes."

— Benjamin Franklin, in a letter to Jean-Baptiste Le Roy, 1789.

The new Income Tax Act, 2023 was passed in parliament last week, and it is going to create quite a stir in the coming days. This is the first complete overhaul since the Income Tax Ordinance, 1984. There are many changes for individuals, companies, and even start-ups. Some rules will be straightforward, while some will leave room for multiple interpretations, settling on a consensus over time. Here, we will go over the key changes that you have to keep in mind while filing your income tax.

Tax exemption on salary

Previously, three separate exemptions on salary existed: medical Allowance up to Tk 120,000; house rent Allowance up to Tk 300,000; and conveyance allowance up to Tk 30,000. Now, these allowances are consolidated into a single tax exemption of up to Tk 450,000, based on the lesser of Tk 450,000 or one-third of the annual salary. The remaining amount after deducting this exemption is considered as taxable income.

The tax slab has been slightly increased. Previously, the first slab with zero percent tax was Tk 0-300,000. Now, it is Tk 0-350,000. This change, all else being equal, is expected to decrease an individual's annual tax liability by approximately Tk 2,500-12,500. Women, the elderly, and gazetted freedom fighters have even higher zero percent tax slabs, leading to additional tax savings.

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No minimum tax

The government recently introduced a significant measure to boost tax collection, imposing a minimum tax of Tk 2,000 on all e-TIN holders. The aim was to encourage e-TIN holders to file taxes, as currently, less than one-third of them do so. However, the government has since retracted this decision and eliminated the Tk 2,000 minimum tax, avoiding further debate on its fairness.

In addition, the minimum tax of Tk 5,000 will remain in effect for individuals in the Dhaka and Chattogram city corporation areas if their taxable income exceeds the first slab (Tk 350,000). For individuals in other city corporations, the minimum tax amount is Tk 4,000. For non-city corporation areas, it is Tk 3,000.

Tax rebate

The government has made a significant change by putting a ceiling of Tk 500,000 for investments in Sanchayapatra and other government securities for allowable investments that provide tax credits. Mutual funds now have an investment ceiling of Tk 500,000, allowing a maximum rebate of Tk 75,000 from open-ended mutual. The rebate benefit for DPS has been doubled, with an investment ceiling of Tk 120,000 and a rebate of Tk 18,000. While mutual funds have a limit, counterintuitively there is no investment ceiling for listed company stocks, allowing investors to potentially receive higher rebates by directly investing in stocks that perform well in the market. Multiple rebate sources can be combined until reaching the overall ceiling of Tk 10 lakh. Some other avenues for tax rebates include insurance premiums and provident funds. In the case of life insurance, it is equal to the premium paid during the year or 10 percent of the insured amount – whichever is lower.

One very interesting thing that is not getting much press is the removal of tax exemption on dividend income from mutual funds and stocks. Previously, the first Tk 25,000 dividend income from open-ended mutual funds was tax exempted. So was the first Tk 50,000 dividend income from listed stocks. Starting now, these will be fully taxable.

Infographic in collaboration with Credyt

Tax surcharge

Tax surcharge is levied on total tax liability. But the percentage point is decided on one's net asset value. It is crucial to remember that tax surcharge is not calculated as a percentage of total assets. In general, the net asset limit for surcharge has been raised to Tk 4 crore from Tk 3 crore.

Tax on cars

The Advance Income Tax (AIT) on cars remains unchanged. However, a new environmental surcharge is applicable if an individual owns multiple cars. The surcharge is equivalent to the AIT and is imposed on the car(s) with the highest cubic capacity (CC). Additionally, a CC-KW equivalent has been introduced to accommodate electric cars, a timely decision.

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Reporting assets and liabilities

Assets and liabilities are disclosed in a form called IT 10-B, which is often the most challenging part of filing taxes. Unlike income, expenses, and rebates, which pertain to a specific income year, IT 10-B is a comprehensive balance sheet representing a person's assets and liabilities since they began filing income tax. Mistakes made in one year carry forward, causing future complications. Previously, the form was mandatory for individuals meeting any of the following conditions: 1) total assets exceeding Tk 40 lakh; 2) ownership of property in a city corporation area; 3) ownership of a car; or 4) shareholding director of any company. It is crucial for taxpayers to carefully review their IT 10-B and address any past issues. Furthermore, starting this year, the government has the authority to audit tax files from previous years, as the statute of limitation has been extended beyond the previous six-year limit.

In conclusion, the new tax code is likely to elicit mixed reactions initially. However, as time passes and the uncertainties are resolved, a consensus will emerge, enabling a fair assessment of its effectiveness in achieving its intended goals. With patience and adaptability, we can navigate these changes and optimise our tax planning strategies.

The author gives special thanks to Ashish Kumar Ghosh, tax adviser, for his sincere help with the information of this content.

Taukir Aziz is a capital market professional specializing in financial economics.