Current Income Tax law in Bangladesh is governed by the Income Tax Ordinance, 1984; the Income Tax Rules, 1984, Special Regulatory Orders (SROs) issued under the Income Tax Ordinance and Tax treaties signed with different government. The tax ordinance has classified all source of income into 7 category/ income heads. These seven heads are Income from Salary, Income from House Property, Income from Securities, Income from Business & Profession, Capital Gain, Income from Agriculture and Income from other sources. Taxes are charged on the tax payers based on their income from these 7 heads of income.
According to the taxation law in Bangladesh Tax payers are classified as ‘Individual’ and ‘Other than individuals’. ‘Other than individual’ includes all the organization & artificial entities, specially corporations/ companies. Tax rate and process for determining taxable income vary based on type of tax payer. However, deductions from heads of income are more or less similar for all types of tax payers. However, there is a significant conceptual anomaly while charging tax on individual income from salary.
Only individual tax payers pay tax on income from salary. It is not possible for any other tax payers to submit returns showing income from salary. While charging tax on income from salary, tax law allows some deduction from total receipt/ revenue like any other heads of income. However, unlike other heads, allowed expenses are very restricted.
Consider income tax of a company. Tax is charged on income available after deducting all sorts of expenses made. Although there are limit for some expenses but mostly all expenses are deducted from company revenue to determine taxable income. Whereas, only 3 types of expenses; House Rent, Medical & Conveyance, are deducted from gross receipt while charging tax on income from salary. Most of the individual tax payers pay tax on their income from salary. With the salary the receive, these individual has to manage all the basic needs as well as extended needs. However, tax authority allows deduction on only 3 types of expenses. As if people need only house to live, medical to health and conveyance to go office. As if people do not need to eat, do not need to wear cloths and send their children to schools.
People have five basic needs; food, shelter, clothes, medical & education. These needs must be fulfilled to survive and stand in the society. Now a days, Electricity, gas & water has also become part of basic needs. People need to pay for these utility bills. Then comes the need for recreation and travel. That means most of the earnings of any individuals are spent of food, housing, clothing, medical treatment, tuition fees for own and children education, utility bills, entertainment and conveyance. Although there could be numerous other expenses but these mostly the largest component of expenditures for an individual.
Now as for taxation, tax law only allows deduction from housing expenses, conveyance and medical expenses but up to a certain limit based on percentage of income. However, there are still some other expenses individuals needs to take care of. But government does not allow any deduction. Whereas, for companies, almost all sorts of expenses are allowed as deduction from revenue or gross income. If that is the case, why individuals should not be given the same benefit? why the same concept should be applicable for individuals who only has salary as income source?
It is the responsibility of government to ensure the basic needs for its citizen. So when a tax payer has to spend for his/her basic needs e.g. food, housing, clothing, medical treatment, tuition fees for own and children education, utility bills, entertainment and conveyance, no tax should be charged for these expenses. these expenditure should be allowed as deduction from the gross income from that tax payer. There could be certain limit based on percentage of income but there should be allowed deduction for expenditures for basic needs. And Tax should be charged on residual income after deducting expenses which are necessary for a citizen to fulfill the basic needs.
Tax authority has simplified taxation law in last few years. They have introduced new expenditures and allowed deduction and modified the existing allowed expenditures for the benefit of tax payers. They should also consider the expenditures for basic need as allowed expenditures. It will be really beneficial for individual tax payer as the tax burden will decrease. As a result number of individual tax payer will rise.