NBR plans tax on govt employee allowances 

• Tax exemption reduction is part of NBR initiatives taken to amend Income Tax Law
• Initiatives include establishing a fixed tax holiday period for industries
• NBR, however, plans to keep tax incentives for inward remittances
• The initiatives are in line with the IMF guidelines for its $4.7b loan package

The National Board of Revenue (NBR) plans to tax house rent and other allowances of government employees to close the gap in tax incentives between them and their private sector counterparts.

This is part of a set of initiatives taken by the board to amend the Income Tax Law. These initiatives include establishing a fixed tax holiday period for the industrial sector, aimed at curbing the misuse of these benefits.

To encourage continued inflows of foreign currency, the NBR, however, plans to keep tax incentives for inward remittances in place, according to an internal presentation seen by The Business Standard.

NBR officials explained the disparity by pointing out that pension allowances for government employees are exempt from tax, whereas the provident funds of private sector employees are subject to taxation.

For example, the government has allocated Tk32,869 crore for pensions in the current budget. However, the entire amount will not be subject to taxation because employees with lower pay will still be exempt from the levies.

At present, private employees are required to pay income tax on two-thirds of their total income, which includes basic salary, bonus, house rent, and travel allowance (with one-third or Tk4.5 lakh, whichever is less, being exempted from tax), at the prescribed rate. Conversely, government employees are only taxed on their basic salary and bonus.

The NBR has initiated this plan to reduce tax exemptions and incentives in line with the guidelines of the International Monetary Fund (IMF) as part of its $4.7 billion loan package. This plan will be incorporated into the income tax law through the Finance Bill in the next budget.

A team led by Iqbal Hossain, a member of the Taxes Appeal and Exemption, is working on a rationalisation of tax exemptions and incentives.

On 20 March, the team gave a detailed presentation, a copy of which has been seen by TBS, to the NBR chairman regarding the context of tax incentives, existing arrangements, and suggestions to rationalise tax incentives through reforming the law.

The presentation mentioned that tax incentives are being provided to achieve several objectives, including attracting foreign investment, promoting local investment, fostering competitive export-oriented industries and services, enhancing the quality of life for disadvantaged segments of society, supporting research and education programmes, and stimulating investment in labour-intensive enterprises for job creation.

NBR officials mentioned that approximately 15 industrial sectors and certain individuals are benefiting from tax exemption privileges through a total of 318 gazette notifications and special orders.

Among these, only 45 notifications have specified a deadline, whereas the remaining 273 notifications have no time limit specified.

They said the impact of tax exemptions on revenue generation has hindered the government's ability to allocate funds to other critical areas such as infrastructure, healthcare and education.

Seeking anonymity, a senior official of the NBR income tax wing said the board is currently reviewing the existing framework to rationalise tax incentives and prevent their misuse. The NBR aims to formulate a policy to instil discipline in tax incentives, which will dictate the granting of any future tax exemptions or incentives.

The presentation noted that the government has provided tax incentives to enhance competitiveness, but in some cases these facilities are also being misused.

In some cases, to evade taxes and exploit incentives, a group of industries or individuals may underreport income for particular businesses that are subject to higher taxes while over-reporting income for their entities subject to lower taxes, as stated in the presentation.

It also mentioned that, due to such unplanned tax incentives, the actual tax expenditure and the benefits of tax expenditure are not precisely measured. The compliance costs of tax incentives increase, leading to greater corruption and irregularities, which also increase unfair competition among businesses.

Besides, there is an initiative to rearrange the amount of tax rebate that individual or corporate taxpayers receive in terms of donations across various sectors.

Additionally, plans are underway to rationalise tax exemptions in these cases and specify the scope of charitable and public welfare trusts to prevent potential misuse of incentives.

Sources also indicate that tax exemptions or incentives for the industrial sector will not be indefinite in the future. Tax incentives to encourage industry will remain in place but will be time-bound, with a maximum duration of five years.

Entities that have already received tax exemptions or incentives will not be eligible for new benefits. Moreover, all incentives that create unfair competition in business may be eliminated.

Additionally, autonomous institutions such as universities, medical colleges, and the Bangladesh Army that are not required to file income tax returns, but have taxable income, are planned to be included in the Income Tax Act to address the issue of filing an annual report documenting their receipt and payment of taxes on the income of their respective institutions, where applicable.

Similarly, there are plans to establish clear provisions for taxation on the taxable income of government institutions.

According to the NBR, the amount of direct tax exemption in the fiscal 2020-21 was over Tk1.25 lakh crore – Tk85,314 crore for corporate companies and Tk40,499 crore for individuals.

Overall, direct tax expenditure accounted for 3.56% of GDP in FY21. In the current financial year, considering the size of the GDP, direct tax expenditure is projected to exceed Tk1.78 lakh crore.