Comparative Study of the Draft Direct Tax Act 2011 and the present Income Tax Ordinance1984 Paper Presenter: C. R. MAZUMDER FCA Senior Partner Saha Mazumder & Co Chartered Accountants 11 May 2011

Presenter: C R Mazumder FCA Topic of Presentation 2 Contd. Comparative Study of the Draft Direct Tax Act 2011 and The present Income Tax Ordinance May 2011

Presenter: C R Mazumder FCA INTRODUCTION 3 Contd. Comparative Study of the Draft Direct Tax Act, 2011 and the present Income Tax Ordinance, 1984 After a period of 27 years, the Government is thinking of revising the present Income Tax Ordinance, introduced in It also proposes to consolidate four (4) Tax Laws – Income Tax, Gift Tax, Property Tax and Foreign Travel Tax into one (1) Act. The new Act has been termed the Direct Tax Act, There is also a proposed VAT Act, 2011, which is being discussed by fellow presenter Mr. Abdul Khalek FCA. Both the drafts have been released on the NBR website for comments by the business community and professional bodies. ICAB is considering the impact of the changes and their rationality in the context of present and future business practices and provide comments and recommendations on the changes. 11 May 2011

Presenter: C R Mazumder FCA 4 Contd. Comparative Study of the Draft Direct Tax Act, 2011 and the present Income Tax Ordinance, 1984 This is a comparison between two Acts with many complexities and technicalities. I have tried to make my presentation as simple as possible without affecting the meaning. The contents of this presentation, based on my analysis of the changes, are set out as under: A.C omparison between two Acts mentioning the area of Changes. B.Impact on tax payer. 11 May 2011

Presenter: C R Mazumder FCA 5 The new act has following shortcomings: 1.There are many inconsistencies, some of which are highlighted below: (a)duplication of same text (b)definition of “income from business” is not given, (c)Provision for submission of revised return exists without inserting provision for normal return because 100% universal self assessment scheme has been proposed, (d)wrong placement of sections and so on. 2.It is not tax payer friendly in many areas as there are changes/additions which are of adverse interest to the tax payers while some changes deserve appreciation. Contd. Comparative Study of the Draft Direct Tax Act, 2011 and the present Income Tax Ordinance, May 2011

Presenter: C R Mazumder FCA 6 Detailed Analysis i.I have presented the detailed comparative section-wise study in the paper handed out to all the participants. This presentation is a brief summary only of the main changes. ii.I shall restrict my presentation to changes made in the new draft act with their impact on tax payers while the recommendations will be presented by Mr. Md. Shahadat Hossain FCA, VP-ICAB iii.Comparative summary position ParticularsAct of 1984Act of 2011 Chapters Sections Schedules Heads of Income Contd. Comparative Study of the Draft Direct Tax Act, 2011 and the present Income Tax Ordinance, May 2011

Presenter: C R Mazumder FCA 7 1. Definitions Some new definitions have been brought in while some omitted and/or changed. Notable changes/omissions are as under. Capital Asset old sec 2(15) Vs. new sec 41 Under the new act, any share held by a person for not more than 365 consecutive days shall not be treated as ‘capital asset’. Impact on tax payer: The day to day share traders of the stock exchanges have been taken under the tax net at individual tax rate. The income on sale of shares of listed companies shall however remain tax free as before if the share is held for one year or more to treat it as capital asset to get the benefit of tax exemption. DR 1 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 8 1. Definitions (cont.) Tax Year Old Sec 2(35) Vs. New Sec 14 The term “income year and assessment year” has been changed to “tax year” and if the tax year is other than financial year then it will be termed as special tax year. Tax year is from 01 July to 30 June and other year is special tax year. Moreover the concept of assessment year is withdrawn. Impact on tax payer: No tax impact. But bureaucratic process has been involved un-necessarily. This will very much affect the businessmen for that they will have to undergo cumbersome process for adoption of special tax year and change of tax year which is a normal business phenomenon occurring very often to the business community. Such adoption will require written approval from the Commissioner of Taxes, a top ranking official of the Tax Department. DR 1 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 9 1. Definitions (cont.) Dividend Old Sec 19(7) Vs. New Sec 10 As per old act, dividend is taxable only when it is received but as per new act it will be taxable when it is declared, distributed or paid as the case may be. Impact on tax payer: Now dividend will be taxed when it is declared, distributed or paid whichever occurs first. DR 1 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA Inclusion of spouse and minor children’s income Old Sec 43 Vs. New Sec 12 1.Under the new act, salary, commission, fees or any other form of remuneration of wife will be added to the income of husband if he has a substantial interest. The term “substantial interest” is not defined in the new act. 2.Income from converted property is also taxable in the hand of convertor under the new act. 3.If the property is converted to wife or minor child upon partition of the Hindu Undivided Family is also taxable in the hand of the husband under the new act. Impact on tax payer: The income of the spouse/parents will be burdened with incidence of tax even if the right of conversion is exercised as a matter of universally acceptable basic human right. DR 3 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA House Property Income Old Sec 24 Vs. New Sec 15 1.The word “house” has been deleted from the main head “income from house property”. Now the term is “income from property” in the new act. 2.Under the old act, income from letting of utilities is under the coverage of “income from house property”, but in the new act it is under the coverage of “income from other sources”. Impact on tax payer: By this change, income from letting of utilities shall be assessed under the head “income from other sources” which was hither to assessed under the head “income from house property” with outright deduction of 1/4th or 30% as the case may be while computing taxable income. Therefore the incidence of tax on such income will be much more than what was before. DR 6 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA House Property Income (Cont.) Old Sec 25 Vs. New Sec 15 3.Under the old act, the statutory deduction for repairs and maintenance was 1/4th or 30% for computing house property income but in the proposed new act it is further restricted to maximum amount of actual expenditure. Impact on tax payer: The unspent amount of allowable deductions could be shown as source of fund at wealth statement as per the old act which will not be possible when new act will come into force. DR 6 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA House Property Income (Cont.) Old Sec 25(g) (proviso) Vs. New Sec 15 4.Under the old act, interest on house building loan up to Tk. 20,00,000/- is considered as allowable deduction from total income if the assessee resides in his own house, but at the draft new act this facility has been withdrawn. Impact on tax payer: The relief granted to a tax payer residing in the house built through house building loan finance will now have to pay more tax than before. Moreover payment of tax during the currency of interest bearing house loan may be painful for the tax payers having no sufficient other cash income to support such tax payment. DR 6 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 14 4.Income from Business Old Sec 28 Vs. New Sec 23 1.“Business income” was not defined at all. This section, starting with “Net business income”, is confusing. 2.The word “Profession” has been deleted from the main head “income from business or profession” of the old act. The term “Profession” has been otherwise included in the definition of “net business income” in the new act. 3.All deemed income from business under the old act has been merged here in the new act. 4. “Balancing charge” from the disposal of intangible asset will be treated as income as per 6th schedule Part-E of the new act. Impact on tax payer: Tax will be payable in case intangible asset is disposed of at a higher price than the book value. DR 7 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 15 4.Income from Business (Cont.) Old Sec 28 Vs. New Sec 23 5.In case the business of a company is to let out property, the company’s income from property shall be treated as “business income” under the new act instead of income from house property under the old act which will now face more tax than before. Impact on tax payer: The statutory deduction of 1/4th or 30% for repairs and maintenance will not be allowable leading to more incidence of tax. DR 7 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 16 6.Business expenditure will be disallowed by the tax department if not found reasonable by the DCT. [section 23 of the new act]. Impact on tax payer: As assessment of reasonableness of any claimed business expenditure, although genuine, will remain at the discretion of the DCT, there is enough chance to misuse it by the assessing officer. There may be resultant undue tax demand by misuse of power by the DCT as experienced before. 4.Income from Business (Cont.) Old Sec 29 Vs. New Sec 23 DR 7 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 17 7.The method of accounting has been well reconstructed keeping in mind the requirement of international accounting standard, foreign currency gain or loss concept, long term contract, finance lease etc. Maintenance of accounts on accrual basis has been made mandatory for companies under the new act. But organization other than company, may maintain accounts on either cash or accrual basis according to their choice. Impact on tax payer: Foreign currency gain will be taxable and side by side loss will be treated as a deductible expense. 8.CSR activities: SRO # 270 dated Vs. New Sec 23 At the proposed new act “10th schedule” has been designed for investment allowance where tax rebate on CSR activities by companies has been specified. Under the old act it was through an SRO. Impact on tax payer: No tax impact. 4.Income from Business (Cont.) Old Sec 35 Vs. New Sec 23 DR 7 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 18 5.Income from life insurance policy on maturity Old n/a Vs. New Sec 43(m) It was not clear in the old act, whether or not any sum received in excess of premium of a life insurance policy is taxable. But in the proposed act it has been clearly mentioned as taxable. Impact on tax payer: Though it is a capital receipt, it will be taxable like revenue receipt. DR 8 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 6. Assessment old sec 81, 82, 82A, 82BB, 83(2) and 83AAA Vs. new sec 99 Under old act, return of income submitted opting for “universal self assessment scheme” is usually accepted by the tax department as it is, though a portion of returns are selected for audit but at section 99 of the new act it is proposed to scrutinize the returns submitted by the tax payer either manually by the DCT or electronically by the Central Data Processing Centre of NBR and re-compute income and tax liability in the pretext of processing/scrutiny. Impact on tax payer: (1)Existence of assessment of income under “universal self assessment scheme” in one hand and mandatory scrutiny/processing of the return submitted for re-computing income/tax liability on the other shall lead to harassment of the tax payers. Moreover it is against the basic principle of “universal self assessment scheme”. 19 DR 13 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 6. Assessment (cont.) Impact on tax payer: (cont.) (2)Keeping the provision of audit as before, under the changed name “scrutiny assessment” for computation of income and creation of additional tax demand through processing/scrutiny of returns will encourage corrupt practices through undue empowerment of the DCT. (3)Assessment chapter is not well drafted because there is no section for “assessment” on the basis of hearing like 83(2) before and also there is no specific provision to issue notice of hearing and producing books of accounts. Assessment/decision without notice and hearing may not be maintainable. (4)In the new act, at section 96, there is a provision of submission of revised returns. The provision for submission of normal returns has been withdrawn. The system of issuing receipt by the tax department against returns under universal self assessment scheme to treat the same as the assessment order has been retained. In this back drop question remains how submission of revised returns after assessment will be possible under the new act. 20 DR 13 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 7. Penalty provisions 1. Non submission of return [old sec 124 Vs. new sec 130] Per day penalty has been raised from Tk. 50 to Tk Concealment of Income [old sec 128 Vs. new sec 134] Compulsory 10% penalty per year in the old act has been raised to 100% and discretionary power has been given to DCT to impose it under the new act. More over a definition of “concealment of income” has been included in the new act. 3. Failure to maintain records [old sec 123 Vs. new sec 135] Imposition of a new step-by-step penalty system has been proposed for 1 st failure, 2 nd failure and 3 rd failure. 21 DR 14 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 7. Penalty provisions (Cont.) 4. Failure to furnish information to survey team [old sec n/a Vs. new sec 130] Provision for imposition of penalty has been inserted for the first time for failure to furnish information to survey team. The amount of instant penalty is Tk. 50,000 and for continuing default a further penalty of Tk. 500 per day. 5. Non displaying TIN certificate [old sec 124(2)(b) Vs. new sec 131(1)] Fixed penalty has been increased from Tk. 500 to Tk. 5,000 and subsequent per month penalty from Tk. 250 to Tk Non-payment of tax [old sec 137, 125, 127 Vs. new sec 132(1)] In old act it was the discretion of the DCT to impose such penalty but in the proposed new act imposition of penalty has been made compulsory. The rate of penalty is reduced but method of imposing penalty is prescribed step by step under the new act. 22 Contd. DR 14 Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 8. Taxes Appellate Tribunal The Judicial and Accountant Member [old sec 11 Vs. new sec 234] In the old act there was no provision of judicial member but in the new act it has been proposed that in a division bench of the tribunal shall consist of both Judicial and Accountant Member. Impact on tax payer: It is an excellent move for getting justice from the Taxes Appellate Tribunal because tribunal with only departmental members cannot ensure justice to the assessee. 23 DR 15 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 9. Alternative Dispute Resolution (ADR) [old sec n/a Vs. new chapter 13] It is a new process for early resolution of dispute without undergoing through court process which generally takes years to get award. Impact on tax payer: 1. It is a welcome move to have disputes settled outside court/appeals. 2. Physical presence of the tax payer himself with or without authorized representative has been made compulsory which is practically not possible. 24 DR 16 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 10. Determination of income from arm’s length transaction [old sec n/a Vs. new sec 202, 203] It is a new provision to bring transfer pricing into tax net. Impact on tax payer: 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. It may also lead to increase in cost of imported raw materials and consequently increase in cost of production. Ultimately the consumers have to bear the increased cost. 25 DR 21 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA 11. Other tax [Old 4 Separate Laws Vs. New 1 Law] Direct tax act deals with the following three (3) tax laws in addition to income tax: (i)Gift Tax; (ii)Property Tax; (iii)Foreign Travel Tax; Gift tax exemption limit has been raised from Tk. 20,000 to Tk 50,000 It has been proposed to introduce property tax on property held by assessee in addition to income tax. The exemption limit, valuation system, scope, rate of property tax, etc are not yet designed. Impact on tax payer: Re-introduction of property tax is an addition to income tax. So the burden of tax will be higher for those who have property in excess of allowable limit. 26 DR 23 Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011

Presenter: C R Mazumder FCA CONCLUSION 27 This study is for the use of ICAB and its members and should not be relied upon for any purpose other than the one for which it is intended. The comments/suggestions separately given in my detailed study report available with you are purely of myself. I have tried to present the changes and assess their impact on tax payers as best as I could within the limited time available. However, the changes and their impact on tax payers need to be discussed in more details and any comments and suggestions from the floor and various professional bodies and business communities are necessary to reach their final shape. Contd. Comparative Study of Draft Direct Tax Act 2011 & ITO May 2011 Thank You