The Finance Act 2021: Changes to the Income Tax Ordinance 1984 (Part 1)

July 7, 2021, by Sadia Islam, Consultant at Vertex Chambers

The Finance Act 2021 (FA-2021) has explored the significant areas of the income tax and brought noteworthy changes in relation to special tax treatments of undisclosed income, corporate tax and personal tax.

 

While the period of special tax treatment of undisclosed income for individual taxpayers in securities has been extended for another income year starting from 1st of July 2021 till 30th June 2022, the rate of tax has shot up from 10% to a startling 25%.[1] The tax rate has been increased from 10% to a whopping 25% for undisclosed income of movable and immovable property including cash, bank deposits, financial schemes and instruments, all kinds of deposits or saving deposits, saving instruments or certificates.[2] Thus, the earlier position showed that undisclosed income which is invested in securities would have led a taxpayer to pay a tax rate of 10% and similarly a taxpayer who has an undisclosed income of bank deposits would also have to pay a tax rate of 10%. However, the increment of 25% for undisclosed income invested in securities and undisclosed income for cash, bank deposits etc. have tried to bring the position of the individual taxpayers in a fair footing. It should also be noted that as a penalty, an additional 5% tax will now be payable for undisclosed income of a taxpayer investing in securities and also for undisclosed income of movable property and immovable property.[3] Thus, it goes on to show that undisclosed income will now face a fine of 5% which did not exist in the Income Tax Ordinance earlier.

 

Similarly, a fresh inclusion in the Ordinance now allows special treatment of tax of undisclosed income in new industrial undertaking.[4] An individual taxpayer will pay a tax rate of 10% for undisclosed income who will invest in new industrial undertaking through a pay order or by an automated challan from 1st of July 2021 till 30th of June 2022.[5] Moreover, as per section 46BB of the Ordinance, income accrued under section 28 from an industrial undertaking will be exempted from 1st July 2019 till 30th June 2024. Such industrial undertakings include active pharmaceuticals ingredient and radio pharmaceuticals, agriculture machineries, automatic bricks, automobile, among others. Thus, it is more feasible for an individual to invest in an industrial undertaking as he will need to pay a tax rate of 10% rather than in securities where the tax rate is 25% and also no additional penalty charges exists for such investment in industrial undertakings.

 

Previously, in relation to payment of salary to an employee, gross monthly salary of BDT 15,000 or more needed to be paid through a crossed cheque or by bank transfer.[6] However, through the FA-2021, now the salary will be paid through only bank transfer and the amount will be BDT 20,000 or more.[7] Further, a new clause has been added which states that a person who buys raw materials worth sum exceeding BDT 500,000 shall pay it through the bank transfer.[8] Similarly, payment exceeding BDT 50,000 or more excluding salary or remuneration made to an employee without prejudice to an obligation referred in section 30(i) of the Ordinance (which now stands amended), payment for government obligation, and payment for purchase of raw materials will be made by bank transfer.[9] Further, payment by way of rent of commercial or residential property will now be done by bank transfer only as the option for payment through crossed cheque has now been scrapped.[10]

 

The provision of set off of losses has also seen a notable change as to any loss in respect of any speculation business or any loss under the head “Capital gains” shall be set off only against any income of such speculation business or under the head “Capital gains”.[11] Further, any loss from an income of a source that is exempted or the tax is reduced will not be set off against the income of that source.[12] It is important to note, however, that these changes are clarificatory in nature and existed, albeit in a different linguistic expression, in section 37 of the Ordinance.

 

The provision in relation to deduction of payment of tax at source to contractors has been amended where rate of tax will be 50% or higher if the said payment has not been made through bank transfer or by mobile financial services or any other digital means approved by the Bangladesh Bank.[13] Further, since it is the specified person who deducts tax at source, any e-commerce platform which is not any other specified person having an annual turnover exceeding BDT 10000,000 will also be able to deduct tax at source now.[14] Previously, a 5% tax would have been deductible from the payment of the beneficiary of a worker’s participation fund.[15] However, according to the new conditions set by the FA-2021, the said tax will not be deductible if the income of the beneficiary is not taxable and the amount of the fund does not exceed BDT 25,000.[16]

 

One of the most important changes that have been brought forward is the inclusion of the third gender. If an establishment hires people of the third gender community, then exemption of 5% tax or 75% of the total salary paid of the said employee will be given to the said establishment.[17] In relation to statements of assets, liabilities and life style, previously, a non-resident Bangladeshi or a non-Bangladeshi was not required to submit the statement regarding the total assets, liabilities and expenses of the person or the spouse, minor children and dependents of the person as on the last date of the income year.[18] However, it is now required that a non-resident Bangladeshi or a non-Bangladeshi will submit such statements if they have any assets located in Bangladesh.[19]

 

The above-mentioned analysis discusses a few of the important changes delivered by the FA-2021 regarding the income tax. The changes show that undisclosed income regardless of the area of investment will now face penalty, that the Government is trying to shift the payment method towards banking transfer and hence the option for crossed cheque has been removed as seen above.

 

Written by Sadia Islam, Consultant at Vertex Chambers
 
† Disclaimer: The opinions and comments expressed in this Blawg are not to be regarded or construed as legal advice by and from Vertex Chambers or any of its members. It is highly advisable that any person should seek independent legal advice before relying on any of the contents of this Blawg.
 
[1] Section 8 of the FA-2021: Replacement of section 19AAAA (1) of the ITO-1984
[2] Section 8 of the FA-2021: Replacement of section 19AAAAA (1) of the ITO-1984
[3] Section 8 of the FA-2021: Newly added sub- sections 19AAAA (2) and 19AAAAA (2) of the ITO-1984
[4] Section 9 of the FA-2021: Addition of section 19AAAAAA of the ITO-1984
[5] Section 9 of the FA-2021: Newly added sub-sections 19AAAAAA(1) and 19AAAAAA(2) of the ITO-1984
[6] Section 30 (i) of the ITO-1984
[7] Section 10 (ka) of the FA-2021: Amendment of section 30(i) of the ITO-1984
[8] Section 10 (kha) of the FA-2021: Addition of section 30(ii) of the ITO-1984
[9] Section 10 (gha) of the FA-2021: Amendment of section 30(m) of the ITO-1984
[10] Section 10 (umo) of the FA-2021: Amendment of section 30(n) of the ITO-1984
[11] Section 11 of the FA-2021: Replacement of first proviso of section 37 of ITO-1984
[12] Ibid
[13] Section 13 (ka) of the FA- 2021: Amendment of section 52 (1) of the ITO-1984
[14] Section 13 (kha) of the FA- 2021: Amendment of section 52 (2) of the ITO-1984
[15] Section 52DD of the ITO-1984
[16] Section 15 of the FA-2021: Replacement of Section 52DD and newly added sub-section 52DD(2) of ITO-1984
[17] Section 33 of the FA-2021
[18] Section 80 of the ITO-1984
[19] Section 25 of the FA-2021: Newly added sub-sections 80(3) and 80(4) of the ITO-1984