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Complexities in the Income Tax Laws:A Quest for a Simpler Taxation System

Presentation onPresentation on

Presentation byPresentation by

Swapan Kumar Bala Swapan Kumar Bala FCMAFCMAUniversity of DhakaUniversity of Dhaka

Dec. 17, 2009Dec. 17, 2009

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• Albert EinsteinAlbert Einstein is reputed to have said: is reputed to have said: ““The hardest thing in the world to understand The hardest thing in the world to understand is the income taxis the income tax.”.”

• This illustrates the popular view that This illustrates the popular view that the the income tax system can income tax system can defeatdefeat even the even the brightestbrightest (although not necessarily the (although not necessarily the most most organizedorganized) among us) among us..

IntroductionIntroduction

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2009-10 2008-09Tax-GDP RatioTax-GDP Ratio 9.31%9.31% 9.03%9.03%Of Total Tax: Direct Tax 30.1% 28.6%Income Tax 25.9% 24.4%

Importance of Income Tax and Importance of Income Tax and Corporate TaxpayersCorporate Taxpayers

Of Total Income Tax:

Corporate Income Tax about 60%

Of Total No. of Income Taxpayers:

Corporate Income Taxpayers about 3%

Salaried Taxpayers about 20%

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Second maxim of Adam Smith Second maxim of Adam Smith on on CERTAINTYCERTAINTY::Following of a tax ought to be Following of a tax ought to be certaincertain, and , and not not arbitrary arbitrary and ought all to be and ought all to be clear and plainclear and plain to to taxpayertaxpayer::

Complexities in Income TaxComplexities in Income Tax

When a tax system loses the certainty When a tax system loses the certainty principle, it becomes complex.principle, it becomes complex.

Another aspect of complexities is the Another aspect of complexities is the sheer length of the Tax Code.sheer length of the Tax Code.

• Time of paymentTime of payment• Manner of paymentManner of payment• Quantity to be paidQuantity to be paid

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Income Tax Code: How Lengthy? Income Tax Code: How Lengthy?

Volume 1: 428 pages (IT Ordinance)

Volume 2: 260 pages (IT Rules)

Volume 3: 351 pages (IT SROs)

Volume 4: 606 pages (IT Circulars, Explanations and Summary of TDS)

Total: 1645 pages

4-Vol. Compilation of Total I.T. Laws by L. B. Adhikary:

IT Statutes Original as on July 1, ’09IT Ordinance 22 chapters

187 sections7 schedules

22 chapters243 sections8 schedules

IT Rules 66 rules 99 rules

IT SRO --- 287 prescribed58 repealed229 effective

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Time of Tax Payment: Certain?

Certainty Principle under Income Tax LawsCertainty Principle under Income Tax Laws

Pay-as-you-earn (PAYE) Advance Income Tax (AIT) Payment of tax on the basis of return on or before

the date of filing the return Payment as per notice of demand

For Taxpayers: 4 options

For Entities deducting tax at sources: 3 options

Salary TDS by Employer – quarterly Double-cheque method for 4 cases Within 3 weeks from the date of deduction

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Manner of Tax Payment: Certain?

Certainty Principle under Income Tax LawsCertainty Principle under Income Tax Laws

Cash deposit to Treasury Pay order or demand draft or A/C payee cheque Payment of tax on the basis of return on/before

the date of filing the return Payment on receiving the notice of demand Payment through recovery by tax authorities Payment through adjustment of surplus income

tax or other taxes

.. cont’d

6 options:

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Quantity of Tax to be Paid: Certain?

Certainty Principle under Income Tax LawsCertainty Principle under Income Tax Laws

Factors of uncertainties: Related to Return So many heads of income Difficulties in acquiring prior knowledge for reporting

the tax exempted and tax free income Difficulties in tax computation – the most complicated

things Difficulties in obtaining tax credit on investments Difficulties in obtaining required documents Differing treatment regarding illegal income and illegal

expenses Absence of family return and consequent emotional

accounting

.. cont’d

Probably this is the most uncertain part of the I.T. System.

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Quantity of Tax to be Paid: Certain?

Certainty Principle under Income Tax LawsCertainty Principle under Income Tax Laws

Factors of uncertainties: Others• Different perspectives, different meanings

• Same thing clarified differently

• Presence of unusual provisions

• Absence of provisions

• Provisions only through SRO

• Presence of unconstitutional provisions

• Ambiguous provisions

• Overlapping provisions for deductions from “Income from business or profession”

• Deductions from “Income from business or profession” both generous and restrictive against normal accounting practice

• Conditions, conditions, conditions…..

.. cont’d

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Administrative costs (Tax Collection Costs): Administrative costs (Tax Collection Costs): Amount: Tk. 5,705.2Amount: Tk. 5,705.2 million in 2007-08

[ to collect Tk. Tk. 474,356.6474,356.6 million tax]Average Annual Tax Collection Costs (per Taka 100 of Tax) in 2007-08 : Indirect Tax: Tk. 0.51Direct Tax: Tk. 0.60Total Tax: Tk. 1.20

(including the NBR’s Head Office costs)

Costs of ComplexitiesCosts of Complexities

Resource Costs

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Compliance costs (Taxpayers’ Costs): Compliance costs (Taxpayers’ Costs): Out-of-pocket costs:• Direct monetary outlays for professional guidance • Expenses for recordkeeping and ‘supplies’

(stationeries, files, etc.)• Expenses for buying latest tax publications • Cost of audits, appeals and lawsuits Time spent by the taxpayers on their tax affairs• Own time for preparing return• For activities such as researching the tax law,

meeting with an advisor, or arranging financial affairs to minimize taxes

Costs of ComplexitiesCosts of Complexities

Resource Costs …..cont’d

Cont’d

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Compliance costs (Taxpayers’ Costs): Compliance costs (Taxpayers’ Costs): Time spent and costs incurred by business entities

(usually large corporate bodies)• More time for corporate return and returns for directors• Complex depreciation rules• Alternative tax rates (say, for exporters)• Jurisdictional differences for tax treatments (EPZ,

Chittagong Hill Districts, etc.)

Non-monetary costs :• Anxiety suffered by taxpayers concerned about getting

their taxes done on time and done right• Worrying about a tax audit

Costs of ComplexitiesCosts of Complexities

Resource Costs …..cont’d

.. cont’d

.. cont’d

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Tax Authorities’ ViewTax Authorities’ ViewPeople think taxation is a terribly mundane subject. But what makes it fascinating is that taxation, in reality, is life. If you know the position a person takes on taxes, you can tell their whole philosophy. The tax code, once you get to know it, embodies all the essence of life: greed, politics, power, goodness, charity. Everything’s in there. That’s why it’s so hard to get a simplified tax code. Life just isn’t simple.

— Former IRS Commissioner Sheldon Cohen

Other Reasons of Complexities:• Desire to achieve equity and fairness• Attempts to encourage certain activities deemed socially or economically desirable

• Sometimes, political factors appear to be responsible

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How to eliminate the Complexities?How to eliminate the Complexities?

Many of the tax complexities are beneficial for those who can exploit them.

Livelihood of the tax lawyers/practitioners dependent on this complication of the tax code, because

Concerns:

most of the taxpayers are not willing to understand his own tax issues (which are not at all complicated) and

they have an unwillingness to face the perceived hassle and harassment in the tax offices.

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How to eliminate the Complexities?How to eliminate the Complexities?

• Withdrawal of provision of ‘capital loss’ [first proviso to sec. 37 and sec. 40]

• Withdrawal of restrictive provision on business expenditures and application of ‘expediency principle’ u/s 29(1)(xxvii)

• Explicit provision for distinction between ‘investment’ and ‘speculation’ [sec. 32(7)]

• Allowing cash transfer from director’s return to new company’s return [sec. 19(24)].

• Withdrawal of income from unconstitutional source [‘gambling’ u/s 19(13)]

Policy Recommendations:

Top 5 priority recommendations

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How to eliminate the Complexities?How to eliminate the Complexities?

•Updated tax code to be available in the NBR’s website.

•Allowing flexible tax deposit and on-line deposit

•A help desk to fill up the return quickly.

•Simplified 1-page return for salaried & lower-income taxpayers

•Govt. should provide direction of tax offices or map.

•Limiting treatment of withholding as settled tax for “income”

•Elimination of discretionary power of the tax authority or if necessary, in writing and subject to scrutiny

•Refund system to be made automatic and quick.

•Burden of proof must lie on the person raising the complaint

Policy Recommendations: Other recommendations

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End of PresentationEnd of Presentation

Questions?????