5th international business research conference-final

7/30/2019 5th International Business Research Conference-Final

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Tax Evasion and Avoidance Crimes A

Study on Some Corporate Firms of

Bangladesh

Dr. Md. Jahirul Hoque

Professor, Faculty of Business Administration

Eastern University

&

Md. Zahid Hossain Bhuiyan

Lecture in ManagementInternational Islamic University Chittagong

&

Afzal Ahmad

Lecture in Accounting

International Islamic University Chittagong


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Introduction

The five year plans of the Government ofthe Peoples Republic of Bangladesh(As

for example The First Five Years Plan of

Bangladesh, 1973) have indicated that a

sizeable number of persons especially thebusinessmen evade & avoid taxes. As a

result, the yield of income tax is very low in

Bangladesh as a percentage of Gross

Domestic Product.

Professor Dr. Md. Jahirul HoqueEastern University

&

Md. Zahid Hossain BhuiyanInternational Islamic University Chittagong

&

Afzal AhmadInternational Islamic University Chittagong


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Introduction

The following Table 01 presents thepicture of collection of Tax Revenue in

Bangladesh (in core Taka)


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Sources of Tax

Revenue

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY-07-08 FY 08-09 FY-09-10 Averag

e

Total Tax

Revenue (in

absolute

Figure)

28,300 31,950 36,175 39,247 48,012 55,526 63,956 43,309

T.T. R of % of

GDP Direct

Taxes

8.50 8.62 8.70 8.40 8.86 9.02 9.2 8.75

Taxes on

Income &

Profit (in

absolute

Figure)

5270 5850 6960 8924 11005 13538 16560 9729

Taxes on

Income &

Profit

( as % of T.T.R)

18.62 18.30 19.24 22.47 22.92 24.38 25.89 21.69

Source: Bangdesh Economic Review 2010

Source: Bangladesh Economic Review 2010


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Introduction

The Table 01 indicates that the average total taxrevenue as percentage of GDP during FY 03 to

10 was 8.75 only which seems to be meagre as

compared to SAARC countries mainly India,

Pakistan and Srilanka. In India, Pakistan &

Srilanka, tax GDP ratio was 16.58%, 10.01%,14.82% respectively during FY 05. The main

reason of such a state of affairs was large scale

tax evasion and avoidance practices in

Bangladesh especially by the businessman e.g.

corporate firms individuals and partnership firms.


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Introduction

Therefore, in Bangladesh, tax evasion &avoidance pose to be a serious problem

which stimulates the researchers to

undertake a mini research on tax evasion

& avoidance crimes.


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Objective of the study

The main objective of the study is tocritically analyze tax evasion andavoidance crimes committed by

selected corporate firms operating in

Bangladesh.

Main Objective


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Objective of the study

In order to achieve the main objective, the studycovers the following specific areas:

Main reasons for tax evasion and tax avoidance. Techniques/modes adopted by the corporate firms in

evading and avoiding corporate taxes.

Identification of the authorities responsible for detectingtax evasion and avoidance crimes and the techniquesfollowed thereof.

Identification of the authorities empowered for disposal ofthe crime cases and their main functions of

responsibilities in such respects.

Examining the impact of tax evasion and avoidancecrimes on the revenue of the Government in particular

and the economy of the country, as a whole.

Ways and means of preventing tax evasion andavoidance crimes.

SpecificObjectives


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Limitations of the study

The main limitation of the study is the limited coverage ofthe samples e.g. only 06 (six) appeal cases and only 16

respondents of two categories such as Tax practitioners

and Tax officials. This is because of time and money

constraints at the disposal of the researchers, on one

hand, and the unwillingness and the busy schedule of theTax officials, in the other, in order to provide us with more

appeal cases and their valued opinions. However, we

had to convince the respondents by giving gentlemen

word that the names of the corporate firms would not be

disclosed in our study and the materials would be used

for this study purpose only. However, the analysis of theappeal cases and valued opinions of the learned

respondents definitely reflect the picture of tax evasion

and avoidance practices in the country.Professor Dr. Md. Jahirul HoqueEastern University

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Methodology of the study

Two kinds of data were used in this study: 1. Primary data: They were obtained from collecting

necessary data throughout the questionnaire designed

especially for this study and containing a group of

questions covering the study objectives. The

questionnaire was distributed to a study sample of

sixteen (16) respondents of two groups namely top

level tax officials and 8 persons engaged as tax

practitioners especially in the area of company

assessment. Of the top level tax officials 4 (four) are of

the rank and status of DCT (Deputy Commissioner of

Taxes) from administrative tax authority and 4 (four) are

of the rank and status of joint commissioner of tax

(Appeal division). All the respondents of both the

groups were selected purposively in order to having

easy access to the requisite data and information.


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The collected primary and secondary data andinformation were critically analyzed and

interpreted by the researchers themselves in

order to make the study more informative anduseful to the readers. The findings of the study

may be useful to the prospective researchers

desiring to make further study on this vital

national issue, in one hand, and to the tax

planners, on the other, for reforming existing tax

laws provisions with a view to alleviating tax

evasion and avoidance practices to a great

extent.Professor Dr. Md. Jahirul HoqueEastern University

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2. Secondary data: Secondary data included atotal number of 06 (Six) appellate cases

belonging to the assessees of corporate firms

operating in Bangladesh. These cases werecollected by the researchers themselves from the

relevant tax officials assuring them that the names

of the corporate firms would not be disclosed in

the study and these would be used only for this

research study. It is to be mentioned here that

originally these cases were in Bengali version in a

detailed way. But these cases were translated

into English version and also summarized under

some headings for the study purpose.


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Literature review

1.Tax Planning of Banks Operating in Jordan,

Joummah, 1993.

The study aimed to find standards to measure theextent of using tax planning by the banks

operating in Jordan, and to determine the impact

of including a department specialized in tax

issues in these banks and also the impact of the

banks nationality.

2. Tax Planning of Jordan Industrial

Companies Hassen, 1996.

The main aims of the study were (i) measuring theextent of conducting tax planning and (ii)

measuring the extent of following financial and

accounting policies tax planning.


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Literature review

3. Factors Controlling the Pricing Way of the

Spent Stock, Shihatta, 1997.

The study dealt with the factors that help theadministration to choose the right way to price the

stock and the impact of tax incentives on

choosing the right way of pricing.

4. Tax Planning In Jordan Joint Stock

Companies Working in Service sector. Noor

and Ibrahem, 1999.

The study aimed to recognize the process of taxplanning generally and to study the extent of

applying it in the companies working particularly

in service sector in Jordan.


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Literature review

5. Income Tax Monitoring Means in Yemen

Republic, Omer, 1999.

The study dealt with tax monitoring in Yemenrepublic to figure out its weakness points and

suggest some means necessary to develop it in

order to maintain the rights of public treasury and,

on the other, implement tax justice.

6. Addressing tax evasion and tax avoidancein developing countries, GIZ Sector

Programme Public Finance, Administrative

Reform; 2010.Professor Dr. Md. Jahirul HoqueEastern University

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Literature review

The findings suggest that there are variousreasons and facilitating factors for tax evasion

and tax avoidance. In order to develop methods

and instruments for fighting tax evasion and

avoidance, it is important to establish a broadunderstanding of the different reasons underlying

these problems.


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Findings and Analysis

Appeal Case-I Assessee and Assessment Year:

The assessee was a company engaged in the manufacture of

vegetable oil.

The appeal case was related to the assessment year 2005-

2006.

Facts of the Case: The relevant DCT added back to the net profit of the company

a sum of TK. 65,690 as excessive depreciation in the name of

extra shift allowance for double shift only for 100 days. DCT

disallowed the amount as excessive depreciation.

Appeal and Disposal: The company made an appeal to Appellate Joint

Commissioner of Taxes (AJCT) against the decision passed

by DCT. After giving necessary hearing to the assessee; the

AJCT maintained DCTs addition of TK 65,690 to the net profit

of the company for tax purpose.

Conclusion: In this case, the assessee tried to evade taxesby charging excessive depreciation in the form of extra shiftallowance.

Part 1.APresentation of

Appeal Cases


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Assessee and Assessment Year:The assessee was a company engaged in the manufacture of jute

goods. The appeal case was related to the assessment year 2006-2007.

Facts of the Case:

The said company received a sum of Tk 5,45,000 (Tk4,00,000 for

replacing and repairing the machinery and the balance against the

consequential loss of profit) from a Bima Company in the previous year

as a claim for damages and loss incurred by the company owing todivesting fire in the factory. But the company treated the whole amount

as capital income instead of revenue income thereby showing lower

taxable income. The relevant DCT added back TK 45,000 as revenue

income.

Appeal and Disposal:

The company made an appeal to the relevant AJCT against the decisionof the DCT. The AJCT maintained the decision of DCT of adding back TK

1, 45,000 to the net profit of the company as revenue income.

Conclusion: In this case, the assessee tried to evade taxes by showing

revenue income as capital income.


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AppealCase:2


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Assessee and Assessment Year: The assessee was a company engaged in the manufacture of

textiles. The

appeal case was related to the assessment year 2005-2006. Facts of the Case: In the concerned previous year, the company showed excessive

wastage @ 7% of raw materials used. But the concerned DCT allowedthe wastage @3% only as being reasonable and added back the

difference to the net profit of the company.

Appeal and Disposal: The company made an appeal before the relevant AJCT against the

decision of DCT of adding back excessive wastage of raw material to

the net profit of the company. But, the AJCT considering all the

circumstances relating to volume and nature of the production,

however, opined that it would be fair and justice to allow wastage @5%

instead of 3% as allowed by DCT.

Conclusion: In this case, the assessee tried to evade taxes by

charging excessive wasted of raw materials.


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AppealCase:3


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Assessee and Assessment Year: The assessee was a company engaged in the Telecommunication

business. The appeal case was related to the assessment year 2007-

2008.

Facts of the Case: The said company showed lower gross profit to the extent of TK 2,

21,510 by way of charging excessive manufacturing depreciation as

well as entertainment allowance which was inadmissible as per ITO

1984. The concerned DCT added back the said amount to the net profit

of the company.

Appeal and Disposal: The said company made an appeal to the relevant AJCT against the

decision of DCT of adding back TK 2, 21,510 to the gross profit of the

company and reassessed the tax liability of the company. The

concerned AJCT after giving necessary hearings to the companymaintained the decision of DCT.

Conclusion: In this case, the assessee tried to evade taxes by way ofcharging manufacturing depreciation and entertainment allowance.


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AppealCase:4


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Assessee and Assessment Year:The assessee was a company engaged in the Telecommunication

business. The appeal case was related to the assessment year 2007-

2008.

Facts of the Case:

The said company showed lower amount of import purchase worth TK

6, 83, 60,520. But the actual amount of import purchase was worth

TK79, 72, 10,984. Thus the company evaded huge amount of tax by

underinvoicing import purchase to the extent of TK 72,88,50,464

(TK79,72,10,984-TK 6,83,60,520). The relevant DCT after proper

investigation of invoicing the import purchase of the company added

back the underinvoiced amount of TK72, 88, 50,464 to the amount of

total income of the company and then reassessed the tax liability of the

company.

Appeal and Disposal:

The aggrieved company made an appeal to the relevant AJCT againstthe decision of the DCT of adding back the underinvoiced amount. The

AJCT after proper scrutiny of the import purchase of the company

maintained the decision of DCT of adding back the underinvoiced

amount of import purchases and the determination of the new tax

liability of the company.

Conclusion: In this case, the assessee tried to evade a large amount of

taxes by underinvoicing the import purchases.


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AppealCase:5


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Assessee and Assessment Year: The assessee was a company engaged in the shipping agency business. The

appeal case was related to the assessment year 2008-09.

Facts of the Case: The said company charged against its profit some inadmissible expenses during

the previous 2007-08. The examples of such expenses are: printing & stationary

expenses of which VAT was deducted at source but not supported by copy of

treasury chalan, consultant and legal fee of which tax was deducted at source but

not supported by treasury chalan, audit and legal fees of which tax was deducted atsource but not supported by treasury chalan and excessive entertainment expenses

not reasonable and approved by income tax rule. The relevant DCT added back all

such inadmissible expenses worth TK. 138, 20,527 with the taxable income of the

assessee and reassessed its tax liability.

Appeal and Disposal: The aggrieved company made an appeal to the concerned AJCT against the

decision of the DCT of adding back the amount of inadmissible expenses

amounting taka 138, 20,527 with taxable income. But the AJCT maintained thedecision of DCT after proper scrutiny of the vouchers and copy of Chalan of

VAT/Tax deducted at source.

Conclusion: In this case, the company tried to evade huge amount of taxes by showing some

inadmissible expenses as admissible under the Income Tax Ordinance.


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AppealCase:6


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The analysis of the appeal case studies as highlighted above reveals thatthe selected corporate firms adopted the following techniques in

evading and avoiding corporate taxes:

Charging deprecation at higher rates than permissible under IncomeTax Ordinance, 1984 which, in turn, reduces the net profit as well as tax

liability of the company.

Showing revenue income as capital income thereby reducing net profitand hence tax liability of the firm.

Charging inadmissible expenses as admissible under ITO, 1984thereby reducing net profit and hence tax liability of the firms.

Recognizing capital expenditures as revenues expenditure andcharging the same against net profit thereby reducing tax liability of the

firms.

Charging personal expenses as business expenses thereby reducingnet profit and hence tax liability of the firms.

Showing low rates of gross profit than the actual ones by chargingexcess manufacturing depreciation, under valuing closing inventory

etc., which, in turn, reduces taxable income of the assessee.

Showing excessive wastage of raw materials in the course ofproduction by the manufacturing industries thereby showing low net

profit than the actual one which in turn reduces taxable income of the

assessee.


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Part 1.B.

Techniques adopted

by the tax payers inevading and

avoiding Taxes


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The analysis of the selected respondents

opinions reveals the following techniques and

modes by adopting which the assessees of all

types whether individuals, partnership firms,

sole-trader business, companies and

corporations try to evade and avoid incometaxes. The responses of our respondents have

been tabulated in Table 02.


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Part 2:

Analysis of

RespondentsOpinions


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Table 02: Showing responses as regards techniquesand modes adopted in evading and avoiding taxes


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Sl. No. Specific technique and mode No. of

respondens

% of respondents

1 Not recording cash transactions 10 62.5

2 Under invoicing by importers and exporters 8 50.0

3 Showing benami transactions 16 100.0

4 Showing cash credit 8 50.0

5 Showing excessive depreciation 12 75.0

6 Showing personal expenses as business expenses 8 50.0

7 Showing excessive wastage of raw materials in production process 10 62.5

8 Showing bogus bad debts 8 50.0

9 Creating reserve and provision for bad debts 8 50.0

10 Making wrong classification of business expenditures as capital and revenue 16 100.0

11 Showing inadmissible expenses as allowable 16 100.0

12 Claiming excessive tax deduction, tax exemption and tax credits 12 75.0

13 Bribing the low morale tax officials 8 50.0

14 Claiming tax holidays which is not genuine in nature 6 37.5

15 Lack of compliance of tax laws and provisions in full 11 68.75

16 Low ability of tax authority, both administration and appellate to enforce tax liability 11 62.5

17 Low tax morale of the tax payers 10 62.5

18 Low quality of service provided in return for taxes 16 100.0

19 High compliance costs 8 50.0

20 Weak capacity on the part of tax administration in detecting and prosecuting tax evasion and

avoidance practices of the tax payers

8 50.0

21 Showing revenue income as capital income 9 56.25

Source: Field Survey

Part 2:

Analysis of

RespondentsOpinions


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Table 02 reveals that techniques namely showing benami transaction,showing inadmissible expenses as admissible, making wrong

classification of business expenditure, low quality of service provided

in return for taxes have been the mostly used as opined by the 100%

respondents. Again, 75% respondents opined that showing excessive

depreciation, claiming excessive tax deduction, tax exemption and tax

credits have also been used as the most important techniques. Again,

68.75% respondents opined in favor of lack of compliance of tax laws

and provisions in full which has been used as the most importanttechniques. Moreover, 62.5% respondents opined the techniques

namely not recording cash transactions, showing excessive wastage

of raw materials in production process, low ability of tax authority,

both administration and appellate to enforce tax liability and low tax

morale of the tax payers which have been widely used as the

techniques. Lastly, the remaining techniques, namely showing

revenue income as capital income, under invoicing by importers andexporters, showing cash credit, showing personal expenses as

business expenses, showing bogus bad debts, creating reserve and

provision for bad debts, bribing the low morale tax officials, high

compliance costs, weak capacity on the part of tax administration in

detecting and prosecuting tax evasion and avoidance practices of the

tax payers have also been used by 50% to 56.25% respondents.

Part 2:

1. Analysis of

RespondentsOpinions


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There are various reasons for tax evasion and taxavoidance. These reasons can be filed in two

categories.

The first category comprises factors thatnegatively affect taxpayers compliance with tax

legislation.

The second category contains reasons for the low

ability of tax administration and fiscal courts toenforce tax liabilities.

Part 2

2. Reasons for tax

evasion and taxavoidance crimes


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Low tax morale Low quality of the service in return for taxes Tax system and perception of fairness Low transparency and accountability of public

institutions

High level of corruption Lack of rule of law and weak fiscal jurisdiction High compliance costs Weak enforcement of tax laws Insufficiencies in tax collection Weak capacity in detecting and prosecuting

inappropriate tax practices

No trust in the government High tax rates Weak tax administration


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Part 2

2. Respondents

response regardingthe reasons for tax

evasion and taxavoidance crimes


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Organogram of Tax Authority in Bangladesh


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Part 2

3. Authorities

empowered fordetecting tax

evasion and tax

avoidance

National Board of Revenue

DG Training

Tax Appeal andInspecting

Commissioner of

Taxes

Additional

Commissioner

ofTaxes

Joint Commissionerof Taxes

Tax Recovery

OfficerInspectors of Taxes

Source: Organization Manual of National Board of Revenue, Government of the Peoples Republic of Bangladesh

DG Inspection

Tax Administration

DG Central Intelligence

Cell

Commissioner of

Taxes

Assistant Commissionerof Taxes

Deputy Commissioner of

Taxes

Joint Commissioner

of Taxes

Additional

Commissioner of Taxes

Assistant Extra

Commissioner of Taxes


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Gathering relevant information Remaining constant vigilant of the DCT while assessing

any assessess taxable income and tax liability

Making thorough bank search of the respective taxpayers

Intelligent inspections of the books of accounts andothers relevant documents of the tax payers Critically examining the audit reports of the tax payers Critically examining the Cash Book, Sales Register,

Purchase Register, Profit and lose account, Balance

Sheet and other relevant documents thereto Critically examining the Import-Export invoices, Latterof Credit and other relevant document thereto.

4. Respondents

response

regardingtechniques

followed by DCT

in detecting tax

evasion and

avoidance crimes


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5. Authoritiesempowered for

settlement of tax

evasion and tax

avoidance cases

It is the Appellate and Inspecting Division under the

National Board of Revenue which deals with appeal

cases of the assessees whether individuals,

partnership firms and corporate firms. In the

Appellate and Inspecting Division, Commissioner

of Taxes, Additional Commissioner of Taxes, Joint

Commissioner of Taxes are the authorities

empowered for settlement of tax evasion and tax

avoidance cases. The aggrieved assessees make

an appeal to the Appellate Joint Commissioners of

Taxes (AJCT). The AJCTs settle the appeal casesafter giving necessary hearing to the respective

assessees.Professor Dr. Md. Jahirul HoqueEastern University

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6.Adverse impact

of tax evasion and

tax avoidance

Tax evasion and tax avoidance are importantinsofar as they affect both the volume and

nature of government finances. Today,

corruption and tax evasion seem to take place in

practically every country in the world, and

should be considered a potential problem

everywhere. Still, evasion and fraud in tax

administration are phenomena which hit

developing countries hardest (Klitgaard, 1994).



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Firm evidence on the extent of such illegal practices is

naturally hard to come by. But anecdotal evidence from

different developing countries indicate that half or more

of the taxes that should be collected cannot be traced

by the government treasuries due to corruption and tax

evasion (Mann, 2004).

This erosion of the tax base has several detrimental

fiscal effects. The consequences of lost revenue to the

funding of public services are of special concern (Tanzi,

2000a).


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6.Adverse impact

of tax evasion and

tax avoidance


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Firm evidence on the extent of such illegal practices is

naturally hard to come by. But anecdotal evidence from

different developing countries indicate that half or more

of the taxes that should be collected cannot be traced

by the government treasuries due to corruption and tax

evasion (Mann, 2004).This erosion of the tax base has several detrimental

fiscal effects. The consequences of lost revenue to the

funding of public services are of special concern (Tanzi,

2000a).

In addition, corruption and tax evasion may have

harmful effects on economic efficiency in general

(Chand and Moene, 1999; Tanzi, 2000b), and income

distribution in particular because the effective tax rates

faced by individuals and firms may differ due to

different opportunities for evasion (Hindriks et al, 1999).


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6.Adverse impact

of tax evasion and

tax avoidance


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Transparency International, Bangladesh (TIB) said thatan amount of Tk 210 billion in taxes were evaded or

defalcated in fiscal 2009-10 which was 2.8 per cent of

the countrys national income and one-third of tax

revenues collected during the year. The TIB, in its

research findings noted, the National Board of Revenue(NBR) could have collected 34 per cent more revenues

than what it did in fiscal 2009-10 if it realized the above-

noted tax-evaded or defalcated amount of money. In

the study report, the TIB identified tax evasion as a

major reason for the countrys poor tax-GDP ratio as

indicated in Table 1 of the study. (The Financial

Express, 2011)Professor Dr. Md. Jahirul HoqueEastern University

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6.Adverse impact

of tax evasion and

tax avoidance


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Thus, tax evasion and corruption can make the realeffects of the tax system very different from those that

the formal system would have if honestly implemented.


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6.Adverse impact

of tax evasion and

tax avoidance


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Creating awareness of paying taxes for the welfare of thestate and its citizens

More and more publicity of paying taxes through media

about the socio-economic responsibility of the citizens.

Effective implementation of the tax rules and provisions

Making stringent rules and provisions of the tax

Appointing adequate trained and experienced tax officialsEmpowering tax officials to take necessary panel actions

Imposing physical punishment to the tax evaders and

avoiders under sections 164 and 165 of ITO, 1984

Imposing high monetary penalty in the form of fines

Ensuring access of the tax officials to the bank accounts

and relevant software of the tax payersStrengthening collection of the requisite data and

information from the respective tax payers

Measures improving tax compliance by properly

educating the tax payers and addressing tax compliance

costs and administrative costs.


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7. Respondents

response

regarding waysand means of

prevention of tax

evasion and tax

avoidance


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Conclusion and policy recommendations

This study provides critical analyses oftax evasion and tax avoidance crimes in

Bangladesh. The findings of the study

have been analyzed under two main

parts. The first part gives an analysis ofappeal cases and the second part gives

an analysis of the opinions of the

respondents.


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The study reveals the main techniques andmodes adopted by the tax payers in tax evasions

and tax avoidances; the main techniques adopted

by the relevant tax officials in detecting tax

evasion and tax avoidance cases; major reasons

for evading and avoiding taxes by the tax payers;adverse impact of tax evasion and tax avoidance

and preventive measures of tax evasion and tax

avoidance.


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The preventive measures suggested by the learnedrespondents as mentioned in the study should be

implemented as far as practicable. However, the following

policy implications are relevant for the study.

Reforming tax policies and strengthening tax administrations iscrucial to establish a level playing field in tax matters.

Reforming needs to be made removing loopholes of theexisting tax provisions.

Training facilities of the tax personnel needs to be improvedcovering the professional as well as Islamic ethics of the tax

officials. In this regards, the existing Tax Academy has a great

role to play.

The successful top level administration of the Tax Authoritynamely Chairman and other members of NBR need to benationally awarded by providing both financial and non-

financial incentives. In this respect, one of the important

criteria may be increase in the collection of tax revenues by

curving tax evasion and tax avoidance crimes.


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The successful key tax officials namely Deputy Commissioner of Taxesfrom the Administrative Divisions and Appellate Joint Commissioner of

Taxes from Appellate and Inspecting Divisions also need to be awarded

locally with financial and non-financial incentives. One of the most

important criteria of the successful Tax Officials may be detecting the

tax fraud cases as much as possible during the fiscal year.

The top officials of the NBR must supervise and monitor the activities ofthe key tax officials on a regular basis with a view to curving Taxevasion and Tax avoidance crimes, in one hand, and control of

unnecessary tax compliance as well as administrative costs, on the

other.

Quality of the service to the tax payers in return for their tax payment

needs to be improved so that tax payers feeling become positive to theGovernment.

Transparency and accountability of NBR need to be improved in orderto increase public confidence in Government activities.

The appointment of Judges, Income Tax Lawyers and CharteredAccountants as members of the appellate tribunal needs to be ensured.


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Thanks to the respected

audience for patient hearing

5th international business research conference-final

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