From the next fiscal year, government agencies, implementing authorities of various publicly funded projects and corporate entities will come under greater scrutiny of taxmen as the National Board of Revenue has toughened rules to plug scope of avoidance regarding withholding tax deductions and payments.
The tax administration, for the first time, seeks to impose up to Tk 10 lakh in fines for failures to deduct tax at source during payments made by agencies to contractors, suppliers and various other service providers.
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The NBR also wants to make individuals at the government agencies and project implementing authorities who are responsible for approving payments or granting any clearance, registration, licence and permits, liable to pay taxes or penalty for the failure to deduct taxes during payment.
Besides, private firms will face the same consequence for non-deduction of tax during payment.
If any entity fails to make the deduction, the organisation itself and individuals responsible for approving or allowing the payment shall be jointly liable to pay taxes or penalty, according to the Finance Bill 2022 placed by the finance minister as a part of the fiscal measures for year 2022-23.
The move comes as the NBR finds that many state and private agencies do not deduct tax at source properly, depriving the state of due tax, which is vital for increasing the government’s capacity to finance development and non-development expenditure and create the fiscal space needed to intervene when needed.
Tax deducted at source (TDS) accounts for roughly 60 per cent of the overall direct tax collection by Bangladesh’s tax administration.
Taxmen said the ratio of collection of withholding tax should be higher in view of the development activities carried out by the government, and purchases of goods and services by private firms.
In the July-April period of the current fiscal year, taxmen collected Tk 43,994 crore in withholding tax which was 63 per cent of the total receipts of Tk 69,780 crore, according to the NBR data.
Taxmen said overall collection would have been much higher had all government and private entities ensured deduction of the TDS and deposited it to the state coffer.
“We do not have a pleasant experience regarding the TDS although the globally effective model for revenue collection is the TDS. What we find is that this regime is totally undisciplined,” said a senior official of the NBR.
The official said all public and private organisations were in practicality the withholding tax deducting authorities and these entities are to deposit the money to the exchequer after deduction.
However, in absence of any penalty or punitive measure, there has been a lax attitude on the part of many agencies regarding the TDS collection.
“This is why we are for tightening the rule,” said another official of the NBR.
The tax administration also wants to empower its field offices regarding verification and enforcement of deduction or collection of taxes.
As such, it brought changes in the income tax law seeking to empower field offices to have full and free access to the premises, places, books of accounts, records of economic activities and electronically preserved information.
Taxmen would also be able to extract data, images or any inputs stored in the electronic records and systems for purpose of enforcing proper deduction and tax collection.
If the entry or access is obstructed to the premises or places, the tax offices would be able to slap up to Tk 50 lakh in penalty, according to the Finance Bill 2022.
Snehasish Barua, partner at chartered accountancy firm Snehasish Mahmud & Co, said this may increase the arbitrary power of tax officials.
He said penalty for non-compliance with the rule for the failure to deduct and deposit withholding tax may overburden the person approving the payment who is also serving on behalf of the direction of owner, he said.
“This provision is illogical and should be withdrawn as we are yet to establish corporate culture,” he added.
Besides, as the NBR has taken initiatives to collect tax through an online e-TDS system, the provision for imposing such a huge penalty for obstruction to offices and premises may turn out to be a barrier to an effective e-TDS system, added Barua.
Md Alamgir Hossain, former member of income tax policy of the NBR, said imposing fines was not the objective of the law.
“The main objective is to ensure proper compliance. If anyone complies with the rules fully, there would be no question of penalty,” he said.
Hossain said on many occasion, public and private offices do not deduct tax properly or deduct less than the applicable rates because of a lack of awareness.
For this reason, the tax administration framed rules for submission of withholding tax return and audit related to withholding tax collection, he said.
Taxmen might have faced difficulties in accessing proper cooperation and information from the agencies. This may lead to the introduction of the new provision for penalty for obstruction, he said.
Hossain suggested that the NBR formulate a withholding tax audit manual, clearly set audit processes and define the issue of obstruction or hindrance clearly so that audit processes remain transparent for everyone.
At the same time, taxpayers should be given the opportunity for self-defence, he added.
“This will reduce discretionary powers of tax officials and fear of harassment of taxpayers,” said Hossain.