What is the Income Tax Ordinance, 1984?

Introduction

The Income Tax Ordinance, 1984, is the cornerstone of income tax legislation in Bangladesh. It is a comprehensive and detailed law that establishes the framework for the assessment, collection, and administration of income tax on individuals, businesses, and other entities earning income within the country. This Ordinance is a critical piece of legislation that impacts virtually all taxpayers in Bangladesh, making a thorough understanding of its key provisions essential for ensuring compliance, optimizing tax planning, and avoiding potential legal and financial repercussions. This article provides a detailed overview of the Income Tax Ordinance, 1984, highlighting its significance, key aspects, and implications for taxpayers in Bangladesh.

Primary Legislation for Income Tax

The Income Tax Ordinance, 1984, serves as the primary and foundational legal framework governing all aspects of income taxation in Bangladesh. It is a comprehensive statute that establishes the fundamental principles, rules, and procedures related to:

• Taxable Entities: The Ordinance clearly defines who is liable to pay income tax in Bangladesh. This includes:
  • Individuals: Both resident and non-resident individuals earning income from sources within Bangladesh.
  • Companies: Domestic and foreign companies operating in Bangladesh.
  • Partnership Firms: Firms engaged in business activities within the country.
  • Associations of Persons (AOPs): Groups of individuals or entities formed for a common purpose.
  • Hindu Undivided Families (HUFs): A traditional family structure recognized under the law.
  • Other Entities: Any other artificial juridical person not falling under the above categories.
• Taxable Income: The Ordinance meticulously specifies the various types of income that are subject to taxation in Bangladesh. This includes income from:
  • Salaries: Remuneration received by employees for services rendered.
  • Income from House Property: Rental income derived from owning and letting out property.
  • Profits and Gains of Business or Profession: Income earned from carrying on a business or practicing a profession.
  • Capital Gains: Profits arising from the sale or transfer of capital assets, such as land, buildings, shares, and securities.
  • Income from Other Sources: Income that does not fall under any of the other specified heads, such as interest income, dividends, and royalties.
• Tax Rates: The Ordinance establishes the applicable tax rates for different categories of taxpayers and different income levels. This includes:
  • Progressive Tax Rates for Individuals: Higher tax rates for higher income brackets, reflecting the principle of ability to pay.
  • Flat Tax Rates for Companies: A fixed tax rate for corporate income, which may vary depending on the type of company or industry.
  • Specific Tax Rates for Other Entities: Different tax rates for partnership firms, AOPs, and other entities.
• Tax Deductions and Exemptions: The Ordinance outlines a wide range of deductions and exemptions that taxpayers can claim to reduce their taxable income. These provisions are designed to encourage certain types of behavior, such as investment or charitable giving, or to provide relief to taxpayers in specific circumstances. Examples include:
  • Investment Tax Credits: Credits for investments in approved instruments, such as life insurance, provident funds, and government securities.
  • Deductions for Donations: Deductions for donations made to approved charitable organizations.
  • Exemptions for Specific Types of Income: Exemptions for certain categories of income, such as agricultural income (subject to specific conditions) or income earned by certain non-profit organizations.
• Tax Assessment and Collection: The Ordinance establishes the detailed procedures for assessing tax liabilities and collecting tax payments. This includes:
  • Filing of Tax Returns: Requirements for taxpayers to file annual tax returns, providing a comprehensive statement of their income, deductions, and tax liability.
  • Self-Assessment: Provisions for taxpayers to calculate and pay their own taxes based on their income and applicable tax laws.
  • Assessment by Tax Authorities: Powers of the tax authorities to assess or reassess a taxpayer's income and tax liability.
  • Advance Tax Payments: Requirements for taxpayers to pay their estimated tax liability in advance in installments throughout the year.
  • Tax Deducted at Source (TDS): Obligations on certain entities to deduct tax at source from payments made to others and deposit it with the government.
• Tax Administration: The Ordinance defines the powers, functions, and responsibilities of the National Board of Revenue (NBR) and its officers in administering the income tax system. This includes:
  • Appointment and Jurisdiction of Tax Authorities: Provisions for the appointment of various tax authorities, such as Commissioners of Taxes, Deputy Commissioners of Taxes, and other officers, and the definition of their respective jurisdictions.
  • Powers of Search, Seizure, and Survey: Powers granted to tax authorities to conduct searches, seize documents and assets, and carry out surveys to ensure compliance with tax laws.
  • Collection and Recovery of Taxes: Mechanisms for the collection and recovery of unpaid taxes, including the imposition of penalties and interest charges.
• Tax Disputes and Appeals: The Ordinance provides a comprehensive framework for resolving tax disputes between taxpayers and the tax authorities. This includes:
  • Appeals to the Commissioner (Appeals): The right of taxpayers to appeal against assessment orders or other decisions of tax officers to the Commissioner (Appeals).
  • Appeals to the Taxes Appellate Tribunal: The right to further appeal to the Taxes Appellate Tribunal, an independent quasi-judicial body.
  • Reference to the High Court Division: Provisions for referring questions of law to the High Court Division of the Supreme Court.
  • Appeals to the Appellate Division: The right to appeal against decisions of the High Court Division to the Appellate Division of the Supreme Court, the highest court in Bangladesh.

Key Provisions of the Ordinance:

• Residential Status: The Ordinance defines the criteria for determining the residential status of taxpayers (resident or non-resident), which is crucial as it determines the scope of their tax liability in Bangladesh. Residents are generally taxed on their global income, while non-residents are typically taxed only on income sourced in Bangladesh.
• Heads of Income: The Ordinance classifies income into different "heads," such as salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources. Each head of income has its own specific rules for computation and deductions.
• Tax Year: The Ordinance specifies the tax year, also known as the "income year," which typically runs from July 1st to June 30th of the following year. Taxpayers are required to assess their income and file their tax returns based on this defined period.
• Advance Tax: The Ordinance mandates the payment of advance tax in installments throughout the year. This is based on the taxpayer's estimated income for the year and helps ensure a steady flow of revenue to the government. It also reduces the burden of a large lump-sum tax payment at the end of the year.
• Tax Deducted at Source (TDS): The Ordinance requires certain entities, such as employers and banks, to deduct tax at source from specific types of payments, including salaries, interest, and dividends. This mechanism helps ensure tax compliance and facilitates tax collection.
• Depreciation: The Ordinance provides detailed rules for claiming depreciation on assets used in a business or profession. Depreciation allows businesses to deduct a portion of the cost of an asset over its useful life, reflecting the asset's wear and tear.
• Carry Forward and Set Off of Losses: The Ordinance allows businesses to carry forward certain types of losses and set them off against future profits, subject to specific conditions and time limits. This provision recognizes that businesses may experience fluctuations in profitability.

Governing Income Tax for Individuals and Businesses

The Income Tax Ordinance, 1984, applies comprehensively to both individuals and businesses operating in Bangladesh, establishing the specific rules, regulations, and procedures that each category of taxpayer must follow.

• Individuals: For individual taxpayers, the Ordinance outlines:
  • Tax Slabs and Rates: Progressive tax rates applicable to individuals based on their income levels, with higher tax rates for higher income brackets.
  • Personal Allowances and Deductions: Various allowances and deductions that individuals can claim to reduce their taxable income, such as deductions for investments, donations, and certain types of expenses.
  • Filing Requirements: Requirements for individuals to file their tax returns, including the applicable forms, deadlines, and supporting documentation.
  • Tax Payment Procedures: Procedures for individuals to pay their taxes, including advance tax, self-assessment, and payment upon assessment by tax authorities.
• Businesses: For businesses, including companies, partnership firms, and sole proprietorships, the Ordinance provides detailed rules for:
  • Computation of Business Income: Specific rules for calculating the taxable income of different types of businesses, including allowable deductions for business expenses, depreciation, and other relevant provisions.
  • Corporate Tax Rates: Applicable tax rates for companies, which may vary depending on the type of company or industry.
  • Tax Treatment of Different Business Structures: Different tax rules for sole proprietorships, partnerships, and companies, recognizing the unique characteristics of each business structure.
  • Compliance Requirements: Specific compliance obligations for businesses, such as maintaining proper books of accounts, filing tax returns, and complying with TDS and advance tax provisions.
  • Carry Forward and Set-off of Losses: Provisions allowing businesses to carry forward and set off losses against future profits, subject to certain conditions.

Importance of Complying with the Income Tax Ordinance, 1984:

• Avoiding Penalties and Legal Action: Non-compliance with the Ordinance can result in severe penalties, including fines, interest charges, and even criminal prosecution in cases of tax evasion.
• Ensuring Smooth Business Operations: Adherence to tax laws helps ensure the smooth and uninterrupted operation of businesses, avoiding disruptions caused by tax disputes or investigations.
• Maintaining a Good Reputation: Tax compliance demonstrates a commitment to ethical business practices and good corporate governance, enhancing a company's reputation among stakeholders.
• Contributing to National Development: Paying taxes is a civic duty and a vital contribution to the economic development of Bangladesh, funding essential public services and infrastructure projects.
• Access to Financial Services and Opportunities: A good track record of tax compliance can improve a business's access to loans, credit, and other financial services, as well as enhance its ability to participate in government contracts and other opportunities.

Conclusion

The Income Tax Ordinance, 1984, is a vital and far-reaching piece of legislation that forms the bedrock of the income tax system in Bangladesh. It governs all aspects of income taxation, from defining taxable entities and income to establishing procedures for assessment, collection, administration, and dispute resolution. A comprehensive understanding of the Ordinance's key provisions is indispensable for both individuals and businesses to ensure full compliance, effectively manage their tax affairs, and avoid potential legal and financial pitfalls. The Ordinance's provisions are complex and subject to change, making it crucial for taxpayers to stay informed about updates and amendments. Moreover, given the intricate nature of tax law and its significant implications, seeking professional advice from qualified tax experts, such as those at Afzal and Associates, is highly advisable. Their expertise can provide invaluable assistance in navigating the complexities of the Income Tax Ordinance, developing optimal tax planning strategies, and ensuring full compliance with all applicable tax laws and regulations.

Call to Action

Do you need expert advice on the Income Tax Ordinance, 1984, or other aspects of income tax law in Bangladesh? Contact Afzal and Associates today. Our team of highly skilled and experienced tax professionals can provide comprehensive guidance on all aspects of income tax law, helping you stay compliant, optimize your tax position, and achieve your financial goals. We are dedicated to providing personalized, practical, and ethical solutions tailored to your specific needs. Let us be your trusted partner in navigating the complexities of income taxation in Bangladesh and securing your financial well-being.

Afzal Hosen Mandal

Position: Lawyer at Afzal and Associates

Specializations: Civil Litigation, Criminal Defense, Property Law

Location: Narsingdi Judge Court, Bangladesh

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