Will employees' funds be required to file a tax return? – Yes

Many funds reached us to subscribe to our services and I have received numerous calls on tax implications of funds. Hence, I am sharing my personal view with all of you.

Up to last year, approved employees' funds including Provident Fund, Gratuity Fund, and Workers Profit Participation Fund were exempted from filing tax returns. The new Income Tax Act (ITA 23) has withdrawn that provision in section 166(2). Hence, funds will be required to file a tax return.

Funds have been categorised in the definition of assessee in section 2 of the ITA 23. As per the definition of tax day, a fund will be required to file a tax return by 30 November.

Please bear in the delay in filing tax returns that will attract interest at 4%/month. So, start taking steps immediately.

What will be the tax rate?

Depending on the compliance, the tax rate will be either 27.5% or 30%. 

In most cases, funds receive contributions from the company and other receipts through the banking channel and make payments for investment or to the employees through the banking channel. As such, the Corporate Tax rate will most likely be 27.5% on its income from securities or other sources. 

Please keep in mind that income from savings certificates is a minimum tax for funds, not a final tax. It may enjoy a 15% tax rate on capital gains.

Will they be required to submit an audited financial statement? 

As per section 73 of the ITA 23, if turnover exceeds Tk3 crore, a fund must file an audited financial statement. However, as per labour law, the preparation of financial statements is mandatory. Hence, for the sake of transparency, a fund may file an audited financial statement along with a tax return.

What will be the income year? 

As per the definition of Income Year, it will be from July to June next.

In some cases, funds follow the January-December income year aligned with their company income year since a subsidiary of multinational companies, banks, insurance, and nonbank financial institutions may not follow the July-June income year. But, in the case of a fund, it must follow July-June year.

While filing a tax return for the first time, funds may face trouble as it has closed the financials for the period from January 2022 to December 2022. Therefore, there are two options – prepare financial statements either from January 2023 to June 2023 or from July 2022 to June 2023.

In the case of (a) above, the tax authorities may challenge since the income year must be a period of twelve months. In the case of (b), it will be complex, since we need to identify the opening balance as of 1 July 2022 and then prepare the financial statement. For those who have completed the audit for 2022 (from January 2022 to December 2022), their auditor has already obtained a Document Verification Code (DVC). 

Now, since half of the year will be re-audited, can their auditor take DVC for the same period? We expect a clarification in the Paripatra in the same way while the Definition of Income year was amended through Finance Act 2016.

Will funds be required to pay advance income tax?

Funds will be required to pay advance income tax on 15 September, 15 December, 15 March, and 15 June if income exceeds Tk6 lakh. Balance tax will be payable on 30 November.

The writer is a chartered accountant and a director of SMAC Advisory Services Ltd