CPD Seminar Paper of 11 May 2011 on

Vice President
ICAB Auditorium (9th floor)
11 May 2011
The National Board of Revenue (NBR) has drafted
a Direct Tax Act with a view to repeal Income Tax
Ordinance-1984. The Draft Direct Tax Act 2011
includes Income Tax, Gift Tax, Travel Tax and
Wealth Tax. The objective of the recommendations
is to assist NBR to make the act both tax payer
and revenue friendly through making the act more
understandable removing any conflict with other
laws and accounting standards.
Definition of “books” or “books of accounts” [Section 2(23)]
In the Companies Act 1994 there are some guidelines
about books to be kept by a Company. So keeping
consistency with this act it may modified incorporating
another clause ‘d’ as follows:
“books” or “books of account” includes journals, ledgers,
day-books, cash books, account books, stock register and
other books, kept“(d)
For the company “books” or “books of accounts” will also
include books to be kept as per Companies Act 1994”.
Bad debts- (Section-37)
1) A deduction shall be allowed for a bad debt that is not a debt in respect of
money lent in the ordinary course of business by a financial institution if:
the bad debt is written off in the person‘s accounts;
a reasonably prudent commercial person would conclude that
there is no reasonable likelihood that the debt will be paid;
the person has taken all reasonable steps to pursue payment;
the amount represented by the debt is included in the person’s
income in a previous tax year.
2) A financial institution shall be allowed a deduction for a bad debt claim in
respect of loans made by the taxpayer in accordance with generally
accepted accounting principles (GAAP) and relevant directives issued by
appropriate authority such as Bangladesh Bank or prudential supervisory
Bad debts- (Section-37)
In schedule XI of Companies Act 1994 mentioned that
sundry debtors should be presented in the accounts as
“other debts less provision”.
From the contents of Companies Act it is clear that
debtors should be shown in the balance sheet
deducting any debts which is doubtful of recovery. So
keeping consistency with the Companies Act provision
for bad debts may be considered as allowable
deduction without write off.
Recouped deductions – [Section 34(1)(a)]
In clause (a) of sub-section 1 of section 34 of draft act guideline
has been given about recovered deductions of bad debts as
subsequently, during any income year, the assessee has
received, except as provided in clause (b) whether in
cash or in any other manner whatsoever, any amount in
respect of such loss, bad debt, or expenditure, the
amount so received shall be deemed to be his income
from business or profession during that income year;
According to generally accepted accounting principles /BAS/
BFRS any collection against provision for bad debts should be
credited in the profit & loss account. So it is needless to
mention separately in the tax law.
Repairs and improvements –(Section-39)
Regarding allowable deductions under heading repairs and
improvement guideline in section 39 of draft act is as follows:
1) A deduction is allowed for an expenditure incurred by a
taxpayer in a tax year to repair a non-depreciable asset or to
repair or improve a depreciable asset used in the generation
of business income.
2) For a depreciable asset, the deduction under sub-section (1)
for each tax year is limited to 5 percent (or in the case of a
building 3 percent) of the written down value at the beginning
of the tax year.
3) The excess, if any, of the amount described in sub-section
(1) over the limit in subsection (2) is treated as the cost of an
asset added thereto during the tax year.
Repairs and improvements –(Section-39)
The contents of sub-section (2) is completely in contrast with
the normal course of activities because at initial stage written
down value of depreciable asset is higher and accordingly
allowable deduction will be higher but requirements for repairs
and improvement will be less, on the contrary when the asset
will be old then requirement of repairs and improvements will
be more but allowable deductions will be less as the written
down value will be reduced.
Again, the contents of sub-section (3) are completely in
violation of International Accounting Standard because ‘repair’
is revenue expenditure it can never be added with depreciable
So considering the above this section may be deleted.
Income from other source –[Section-43(L)]
The contents of section 43(L) of the draft act is as follows:
income from machinery, plant or furniture
belonging to the person and let on hire, if the
income is not included under the head” income
from business” or “income from property”;
It will create ambiguity and hence it may be cleared in one
Cash–basis accounting-(Section-46)
In section 46 of the draft act necessary descriptions have been
given about cash –basis accounting which is as follows:
A person accounting for income chargeable to tax on a
cash basis shall derive income when it is received and
shall incur expenditure when it is paid.
As per Companies act all the companies are to maintain
accounts on accrual basis so the sub-section (1) of section 46
may be replaced by the followings.
“A person other than a company accounting for income
chargeable to tax on a cash basis shall derive income when it is
received and shall incur expenditure when it is paid”.
Method of accounting –[Section-45 (4)]
As per Companies Act there is no scope of change of method
of accounting therefore the sub-section (4) of section 45 may be
replaced by the following.
“A person other than a company may apply, in writing, for a
change in the person‘s method of accounting and the
Commissioner of Taxes may, by order in writing, approve such
an application but only if satisfied that the change is necessary
to clearly reflect the person‘s income chargeable to tax under
the head “Income from Business”.
In some cases there remain contradiction. For
example Companies Act allow LIFO method. Since
Company should prepare its accounts following
norms of Companies Act so under section 48 another
sub-section may to be added as follows:
For the company method of accounting of
stock-in-trade as mentioned in the Companies
Act-1994 and/or BFRS should be followed”.
Summary showing accounts as per companies Act &
BFRS and Computation of net business income as per
tax law
Gross income from business : (A)
1. All amount, whether of revenue nature, or not
accrues or arises or deemed to have been
accrued or arisen from the conduct of a business
2. Income from other sources of business (Section-26)
3. Gross income from business
Less: Expenses incurred (B)
1. Expenses accrued or incurred for
the year
2. Losses suffered in the year on the
disposal of assets
3. Depreciation or amortization
4. Bad debts –if written off and fulfill
other conditions (Sec-27)
Net business income (A-B)
for revise)
Computation net business income as
per tax
Net business income as per accounts
Add personal or living expenses
XXXX (Covered by
Companies Act)
Capital expenditure
XXXX (Covered by
Expenses against public policy
Expenses until withholding obligation
Interest/Profit provided on loan but
not paid within 3 years
Trading liability not paid within 3 years
Research and development expenses
for depreciable asset and natural
Repairs and Improvement more than
annual limit (Sec-39)
Foreign currency debt lessees not fulfill
the condition of (Sec-51)
trading liability which were considered
as income earlier due to non-payment
within 3 years.
Net business income as per tax
for delete)
Deductions from agricultural income[Section 22 (1)(d)]
From the contents of this section it appears that forty
percent of the market value of the produce of the land is
considerate as profit. As per calculation of different
government organization the margin of cultivation of the
crop is very poor, not even more than ten percent.
Considering the situation this sub-section may be replaced
by the following.
“where books of accounts in respect of agricultural income
derived from the land are not maintained, the cost of
production to be deducted shall, instead of the expenditure
mentioned in clause (c), be eighty per cent of the market
value of the produce of the land”.
Deductions from agricultural income[Section 22 (2)]
• There may be various conditions of cultivation of
land through system of sharing of crop, such as
some portion of cost of cultivation (like fertilizer
irrigation) may be borne by the land owner under
adhi, barga or bhag system. Considering this
circumstance following para may be included under
sub-section -2 of section -22.
• “Provided that payment if any, made by the land owner
under adhi, barga or bhag system supported by
necessary documents shall be considered as deductible
expenditure in computing the income under the head
agricultural income”.
General provisions for deduction at source
and advance payment of tax– [Section58(4)(b)]
But in section 15, where heads of income have been
mentioned, there is no such head Interest on securities.
According to draft act income from interest on securities
will be considered as income from other sources. So
considering this the section 58(4)(b) may be replaced by
the following
“in the case of payments constituting income classifiable
under the head “income from other sources” as “interest
on securities” not being payment made by or on behalf of
the Government, the authority, company or other
institution issuing the security or the principal officer
Deduction from income from lottery, etc(Section-78)
Since in case of lottery there are scope of payment of
goods instead of cash to the winners of lottery in that
case there is no scope of deduction of tax except
collection of tax. So considering the circumstance
section 78 (1) may be changed as follows:
“The person responsible for paying any amount on
account of winning referred to in section 46 (1) shall,
at the time of making such payment deduct or collect
tax payable on the amount at the rate of twenty
Computation of advance tax - section 89
Methodology of computation of advance tax as per section 89 (1) is
as follows:
1) The amount of advance tax due to an assessee for a quarter
shall be computed according to the following formula, namely:
(A ÷ 4) – B,
where –
A is the tax assessed to the taxpayer for the latest tax year or
latest tax year under the repealed Act; and
B is the tax paid or deducted or collected for the tax year under
this chapter.
The formula for each quarter advance tax payable as “(A÷4) –B
“should be changed allowing assessee to adjust advance payment
or deduction up to that quarter. Revised formula may be as follows:
{(A÷4) × number of quarter} -B
Return of income –[Section 94(3)(a)]
As regards to accounts the contents of section 94 (3)
(a) of the draft act is the return shall be accompanied
a) a statement of accounts audited by a chartered
accountant in case of a company;
To establish more financial discipline above clause (a)
may be replaced by the following
“a statement of accounts audited by a chartered
accountant and authenticated by the directors as per
Companies Act in case of the company”.
Assessment in case of persons leaving
Bangladesh –(Section-105)
As per section 105 of draft act 2011provision of
assessment in case of persons leaving Bangladesh.
Again as per section 111 of draft act of assessment of
persons about to leave Bangladesh.
Both these sanctions are in same nature so it should
appear in one section only.
Exemption is the case of certain type of
gifts -[Section-113(2)]
Sub-section (2) of section 113 mentioned limit about gift as
2) In addition to the exemptions mentioned in sub section 1, no
gift tax shall be applicable under this Act for any gift made by
any person in a tax year not exceeding the value of taka fifty
Considering the present volume of economy, increasing the
limit of non taxable gift may be inserted as under
“In addition to the exemptions mentioned in sub section 1, no
gift tax shall be applicable under this Act for any gift made by
any person in a tax year not exceeding the value of taka two
Exemption from travel tax -(Section-126)
Section 126 mentioned the exemption from travel tax.
Considering the importance of travel following may be
considered for exemption of travel tax.
“(b) Patient suffering from cancer and other disease
which need advance treatment/diagnosis but
not available in the country.
any person traveling the other countries to
participate in the meeting on behalf of any
Interest on delayed refund (Section -185)
The quantum of interest payable by the government is
set at 7.5%, whereas the assessee has to pay 10% u/S
92 (1) and even 24% u/S 80 (1) (b). As a delay in
payment has the same effect for both the taxpayer
and the government, the interest rates should be
Recommendation: To amend Sec 93 (1), Sec 80 (1) (b)
and Sec 171 in a way that the same interest rate is
applied in all cases.
Avoidance of tax through transactions
with non-residents (Section-200 and 204)
Both Sections have the same name. Whereas Sec 200
is generic, Sec 204 is very specific. The Sections can
be combined for easier reference.
Recommendation: It should appear in one section
Rate of settled tax on income of certain
categories of business
According to part D of First schedule under section-25
of Direct Tax Act-2011 there is a provision that the
income from certain sources shall be computed
applying the rate of tax applicable for the tax year,
which is similar to the section 82 (c) of existing tax
ordinance -1984. This provision income tax create
scope of window dressing of the financial statements.
An example is presented below assuming rate of tax
deduction at source from contractors bill @ 4.50%
XYZ Ltd.
Profit & Loss Account
Turn over
Actual (Tk. Impact of First
In crore)
Schedule Part D (Tk. In crore)
Cost of Goods sold/construction cost
Gross Profit
Administrative overhead
Selling overhead
Financial overhead
Profit before tax
Provision for tax
Net profit after tax
Earnings per share (EPS)-Taka
XYZ Ltd.
Balance Sheet
Capital & Liabilities
Share capital (25lac share @ Tk. 100)
Bank Loan
Current liabilities
Profit & Loss Account
Fixed Assets
Current Assets
Property & Assets
The tax year
• The provision for written permission
requirement should be withdrawn and
original provision of the old act be restored
to make it tax payer friendly as before.
Capital asset
• (4a) “Capital asset” has a universal meaning.
This meaning should not be restricted by saying
that an asset is capital asset only when it is held
for more than 365 days or so on.
• (4b) It is to be seen if the capital market, the main
source of private capital, will be affected
Payment of tax on accrued dividend is against
the spirit of levy of direct tax. Moreover payment
of tax on accrued dividend will be impossible for
tax payers who will have only such accrued
dividend income and adjustment of TDS on
dividend received subsequently will be difficult
for them.
This provision should be amended to allow tax
payment only after receipt of dividend like
House property income
• This newly changed provision should not
be there because this will discourage much
needed development of housing sector of
our over populated country
Business Income
• A new definition for “Business Income”
should be inserted before “Net Business
Income from life insurance
policy on maturity
• As capital receipt is not taxable and as
there is no profit motive behind a life
insurance policy, it should not be taxed
Alternative Dispute Resolution
• Physical presence of the tax payer himself
with or without authorized representative
has been made compulsory which is
practically not possible. Therefore it needs
Determination of income from
arm’s length transaction
Examined before It is to be enactment if this will affect FDI
and is a pre-mature decision. Clear and specific rules
should be there with no discretionary power to the
assessing officer.
Transfer pricing is a very complex and technical matter and
inaccurate knowledge and application may lead to unfair
and arbitrary assessments. There are already enough
provisions to tax business income and this section should
be considered for deletion. It may also lead to increase in
cost of imported raw materials and consequently increase
in cost of production.