REPORT ON TAXATION LAWS AND PRACTICE IN BANGLADESH
PATUAKHALI SCIENCE AND TECHNOLOGY UNIVERSITY
Tax Assessment on Renata Limited
Prepared For M. Takibur Rahman Lecturer Department of Accounting & Information System Faculty of Business Administration and Management
Prepared by Group: 01(Warrior) Level-II, Semester-II Faculty of Business Administration and Management
Sl. No.
Name of the students
Position
Roll No.
Reg. No.
01
Md. Kamruzzaman
Group Leader
01
00660
02
Shuvradeb Barai
Asst. Group leader
09
00668
03
Abu Zafour
Member
21
00680
04
Sahana Parveen
Member
07
00666
05
Nazmul Alam Siddiqui
Member
25
00565
Taxation Laws and Practice in Bangladesh Course code: AIS 223 Date of submission: 23 August 2007
PATUAKHALI SCIENCE AND TECHNOLOGY UNIVERSITY
Date: 23 August 2007
To M. Takibur Rahman Lecturer Department of Accounting & Information System Faculty of Business Administration and Management Subject: Letter of Transmittal Dear Sir, Here is the report on “Tax Assessment on Renata Limited” you asked us to prepare this report as a course requirement of Taxation Laws and Practice in Bangladesh This report focuses on the tax assessment of Renata Limited. We are proud of making this report. We have tried our level best to make the report informative and fruitful. For any classification we will be available and looking for such term paper in coming days. We will be happy to get such type of report further. Sincerely Yours
Md. Kamruzzaman (Group Leader) Group: 01(Warrior) Level-II, Semester-II Faculty of Business Administration and Management
I
A
cknowledgement
It is with affection and appreciation that we acknowledge our indebtedness to the persons, without whose continuous support the completion of the report cannot be possible. First of all, the credit goes to our honorable course teacher M. Takibur Rahman, Lecturer, Department of Accounting and Information Systems, faculty of Business Administration and Management, Patuakhali Science & Technology University who assigned us to prepare this term paper and helped us with his support, encouragement and expertise knowledge. Next we would like to give our thanks and respect to other course teacher and the officials of the faculty. Without their great contribution we don’t able to find out our right way. We also give thanks especially to our friends & many individuals, for their enthusiastic encouragements and helps during the preparation of this report and for their assistance in typing and proofreading this manuscript. Finally, we believe that it will help us to face the challenge of 21st century.
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E
xecutive Summary
This report is an assigned job as a partial fulfillment of course requirement by honor Course teacher M. Takibur Rahman Lecturer, Department of Accounting & Information System, Faculty of Business Administration and Management. Patuakhali Science and Technology University Dumki, Patuakhali. It is the optimum aggregated outcome of 5 pupils’ about “Tax Assessment on Renata Limited”. Renata Limited is a public company limited by shares, incorporated in Bangladesh in the year 1995 under companies Act 1994. Now its make a great position in the market of Bangladesh. No government can run its administration and perform development works without collecting as a source of revenue. It also helps to push money to the economy, develop certain source of economy and control some other financial activities.
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Contents Section–1 ge 1. Introduction…………………………………………………………….……….….01 ►1.1OriginoftheReport………………………………………….……………02 ►1.2 Purpose of the Report……………………………………….…………..03 ►1.3 Limitation and Scope of the report. ……………………….……...….…04 ►1.4 Mythology of the Study….……………………………….…………......05
Section – 2
2. Description ►2.01 Overview of Tax Assessment …..……………………….…...………..06 ►2.02 Assessment of Company and Corporation………..………..………….07 ►2.03 Rate of Tax and Rebate ……………………...……………...…………10 ►2.04 Procedure of assessment ………………………………...………….... 12 ►2.05 Company Chronology ………………………………………….……...13 ►2.06 Renata Limited – Profit and loss account...………...………...…….….14 ►2.07 Assessment of Tax ………………………………..…………………...16
Section – 3 3.01 Notes ………………………………………………………….…..…….………..18 3.02 Conclusion…………………………………………….…………...……………..19
Section – 4 4. Bibliography ……………………………………………………………….…..…....20
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i
ntroduction
Tax is the consideration paid to the Government for living in a society with the benefit of civilian citizen. There are four factors of productions. Those are land, labor, capital, and organizations. Among them tax system can also be so designed as to cause remarkable effect on labor and capital to a significant way. Tax system may provide incentive for better work condition and intensive use of capital. Further, as per macro objectives, Government can prefer development of certain sectors and discourage others. Through tax incentives of various nature of the preferred sectors can be encouraged and vice-versa. Through tax system, saving and investment can also be encouraged. All these can contribute towards desired rate of economic growth and economic development of a country.
1
O
rigin of the report
We are lucky to say that our honorable course teacher M. Takibur Rahman Lecturer, Department of Accounting & Information System, of Faculty of Business Administration and Management. Assigned us a report on “Tax Assessment on Renata Limited” This report is prepared on the basis of surveying the Renata Limited.
2
P
urpose of the Report
As a business expectative of future, we should have to gather experience beside our survey. We should not concern our lesion only in classroom but to implement it in practical life that will help us in our future life .A clear objective help in preparation of well decorated report in which other take the right type of decision .So, we identifying objectives is very much important. Our purpose of preparing the report is: To identifying the tax assessment of a company. • To know about the Taxation practice in Bangladesh in respect of corporation and company. •
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L
imitation & Scope of the Report
As a student of faculty of Business Administration and Management, 4th semester, this is our first initiative for making a report on “Tax Assessment on Renata Limited” by meeting a survey. Beside this we have faced the following hindrances in preparing this report: ► Lack of knowledge and experience ► Short of time ► Lack of computer facilities ► Lack of sufficient privileges ►Lack of communication facilities
The survey report focuses on Tax Assessment on Renata Limited. The survey may not be more comparable or more valid. Moreover, the report is emphasized on the primary data such as interview of the manager of Renata Limited. Here we consider only the information that we collect from our survey.
4
M
ethodology of the Study
This report is based on both primary and secondary data. Initially, the work is started with data those were available at Company’s Annual Report and company’s news letter. Moreover, it becomes helpful to gather some more information from the website of the company. Later on, we have collected the data of balance sheet and income statement from a faithful executive person of accounting department of Renata Limited. According his providing data we the Group - 01 made our Tax Assessment report on Renata Limited. So, all the liability of accuracy of this assessment is gone over his providing data. Then we analyze those data from many angles, in different aspect and present the information in different segment according to their category, in compact way. We highlight different important things, which we found during our survey. After doing all of those we submit the report to the proper authority.
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Overview of Tax Assessment
Company has its own separate entity from its shareholder. This entity is recognized by the law. It is recognized by the income tax ordinance (ITO), by its own name, pays tax. So it has separate taxable entity. ITO, 1984 defines company in a more extensive then what is generally understood in Companies Act 1994. Section 2(20) if ITO, 1984 gives the definition of a company as follows: Any companies established or constitute and registered by or under section 2(d) of Companies Act, 1994. The registered companies are divided in to two groups. ► Public Ltd. Company and ► Private Ltd. Company According to the Section 2(j) of Companies Act, 1994 Public Ltd. Company means the company which is registered under said Act and which is not a Private Ltd. Company, that is: a) Restricted on the transfer of rights of the share. b) Limit the number of members openly excluding those the employed in the company. c) Restricted the selling of shares and debentures to the public. So Public Limited Company can easily transfer the shares and their will be no restriction of selling shares and debentures in the market and there will be no limitation of maximum shareholders. According to this Act Renata Limited is a Public Limited company. Its total number of shareholders is 1245.
Assessment of Corporation and Company
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Some Important Issues Relevant to the Determining Tax of the Corporation and the Company Determination of Tax Liabilities of the Corporation and the Company is different to some extent from other assesses in the following ways: a) There is no maximum taxable income limit for the Corporation and the Company i.e. they are to pay tax on their total income whether maybe the amount. b) Proportionate tax rate is applicable on total income of the Corporation and the company. Such proportionate tax rate is 30% to 45% applicable on the basis of nature of the Company. According to the Finance Act, 2004 tax rate is as follows: i)
ii) iii)
30% tax rate for Publicly Traded Company. 37.5% tax rate for not Publicly Traded Company and 45% tax rate for Banking and Financing Company, Local Authority and other such companies.
c) The tax rate on the capital gains of the company is 15%. d) There is no directly deductible non-taxable income from the total income of the company. e) According to the sections 45 and 46 of ITO, 1984, Dividend from the company or the corporation under Tax Holiday Scheme is exempted in full. f) The account audited by the Chartered Accountants are to be submitted with the Income Tax Return of the company assesses.
Tax Free Income Incase of the Company and the Corporation
7
The Company and the Corporation are entitled to enjoy the tax rebate at an average rate on the following tax-free income: Dividend Received from the Company under Tax Holiday Scheme. In addition to the above tax-free income, no tax is imposed on the following income as per ITO, 1984: Issues of bonus shares: original value or amount of bonus issued by the Company and the Corporation among the shareholders to increase the amount of paid up capital. Admissible Expenses i) Contribution to Recognized Provident fund of employees. ii) Loss of stock due to fire. iii) Retirement benefit or gratuity paid to employees. iv) License renewal fees. v) Sale tax/value added tax, water & road tax, excise duty etc. vi) Legal expenses against users of trade mark illegally, partnership agreement preparation, violator agreement. vii) Compensation to employees for accident in the course of service. Perquisites to any employee can give up to TK. 1,50,000. Any amount exceeding this celing will be taxable. viii) Revenue expenditure for advertisement. ix) Royalty and patent right fees. x)
Cost of accounting and audit.
xi) Commission and brokerage for sale of product
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xii) Reward to employees for increased efficiency. xiii) All revenue expenditure treated as admissible expenses. Non allowable expenses i) Past losses, if business are changed. ii) Salary, commission, and remuneration paid to partners. iii) Interest on capital to partner. iv) Income-tax and supper tax. v) Legal expenses incurred for income tax and dissolution of enterprise. vi) Bad debt reserve or reserve for discount. vii) Contribution to Un-recognized Provident Fund. viii) Contingency liability. ix) Preliminary expenses, under-writing commission, writing off share discount x) Loss of speculative business. xi) Loss for investment in securities. xii) Capital expenditure for advertisement. xiii) Legal expenses related with compensation for sale knowing it defective by seller. xiv) Brokerage for capital. xv) Expenses for protecting against competition. xvi) New years day presentation to employee. xvii) Fund embezzlement by employees after office hour. xviii) All capital expenditure treated as inadmissible expenses.
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Rate of Tax and Rebate Types of companies
Tax rate 2004-’05 and 2005-’06
Tax rate 2006-’07 and 2007-’08
30%
30%
37.5%
40%
45%
45%
25%
25%
On total income excluding dividend income receipt from the company the registered office of which is situated in Bangladesh: 1.In case of publicly traded company 2. In case of industrial company which is not a publicly traded company. 3. In case of a bank, financial institutions, local authorities and other companies. 4. In case of a person not being a company who is not resident in Bangladesh. 5.On dividend income 6. On capital gain
15% 15%
A rebate @ 10% of the tax shall be allowed to a company registered in Bangladesh under the Companies Act, 1994 on so much of its profits, income and gains accruing, arising outside Bangladesh as are brought by it in to Bangladesh. It is also be noted that here that according to Finance Act, 1993 if any assesses in Bangladesh brings his income earned outside Bangladesh through official channel and invest directly to the new industries or any auctioned industry of the Government or purchases stock, shares , Government bond and securities then such income will be fully exempted from tax.
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A further rebate to a company incorporate under the Company Act, 1994 if engaged in the productions of goods, shall be allowed at the following rate: Particulars 1.
Rebate Amount
i Where the productions in volume of the relevant 2.5% of the Income Tax year exceeds 15% but does not exceeds 25% of attributable to such the productions volume of the preceding year. income.
5% of the Income Tax ii Where the production in volume of the relevant attributable to such year exceeds 25% of that of the preceding year. income. 12.5% would be iii Where the total income includes income received reduced from such from Life Assurance Business. income 2. On the amount of Dividend received from a company registered in Bangladesh under the 15% Company Act or a body corporate formed in pursuance of an Act of Jatio Sangsad.
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Procedure of Assessment Generally the followings steps are followed in case of Assessment of the Company and the Corporation:
Step-1
Step-2
Computation of Business Income
Computation of Total Income
Step-3
Determination of Total Tax Liabilities
Step-4
Determination of Net Tax Liabilities
According to Sections 28, 29 and 30 of ITO, 1984 Income from business is to be calculated after considering admissible and inadmissible expenses to this end. Total Income of the Company is to be calculated by adding other income with income from business. Total Tax liabilities are to be determining by applying prescribed tax rate. Net Tax liability is to be ascertained by deducting the following tax rebate from Total Tax liabilities: ►10% Tax rebate on foreign income ►Tax rebate on increased production in case of industrial company, if applicable. ►Tax rebate on export income (at rate applicable) ►Tax rebate and average rate on tax free income.
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Company Chronology Renata Limited has created a new vista in manufacturing Pharmaceutical, Animal Health Medicine, Nutritional and Vaccines. Its year of Incorporation is 19972: as Pfizer laboratories (Bangladesh) Limited, subsidiary of Pfizer corporations, USA. In 1993 it renamed as “Renata Limited” after divestment of shareholders by Pfizer corporations, USA. Renata’s 10 products have been licensed to M/s Deurali-Janta pharmaceutical Ptv. Ltd., Nepal for manufacture, marketing and distribution in Nepal. Renata Limited is giving technical assistances for upgrading their manufacturing plant to WHO GMP standards. Renata Limited is dedicated to serving its valued customers with products of excellent quality through continuous improvement in process and technology; complain with the guidelines of good manufacturing process (GMP) and the requirements of ISO 9110:1999 quality management system. Its top management is committed to ensure that quality policy is adopted and practice in all phases of company activities and urge all concerned to perform their duties by following the principles. A sound system of internal and financial control has been established by Renata Limited, which involves periodical reporting, continuous audit of different segments of the business and budgetary control to ensure optimum utilization of the company’s resources. Renata Limited is a highly professionally managed organization. A team of skilled professionals has been dedicating their efforts in order to achieve the corporate objectives.
RENATA LIMITED
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Profit and loss account for the year ended 31Deceember 2006
Particulars
Amount
Expenses Cost of good sold Salaries, wages, allowances Remuneration to Directors Contribution to provident fund Charity Fuel and power Rent, rates, and taxes Insurance Convenience allowance Repairs and maintenance Legal and professional expenses Audit fee Advertising and sales promotion Field expenses Depreciation Traveling expenses Printing and stationary Postage, telex, fax, and telephone Distribution freight Interest on loan Provision for income tax Provision for deferred tax Canteen expenses Other expenses Contribution to WPPF Purchase of machinery Miscellaneous expenses Net profit
Total
969,853,000 221,543,000 435,000 3,626,000 9,114,000 9,009,000 17,967,000 3,950,000 85,000 6,200,000 450,000 200,000 58,228,000 35,667,000 4,178,000 91,194,000 8,617,000 14,005,000 52,295,000 62,250,000 98,240,000 6,858,000 13,560,000 2,652,000 16,657,000 700,000 11,958,000 242,358,000 1,961,849,000
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Particulars
Amount
Revenue Sales Dividend income Third party manufacturing charges received from SK+F Gain on disposal of property, plant, and equipment Interest on tax free Government Security Interest from investment outside Bangladesh.
1,927,732,000 12,598,000
Total
1,961,849,000
10,269,000 1,928,000 3,554,000 5,768,000
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Assessee: Renata Limited
Status: Resident Income Year: 2006 - 2007 Assessment Year: 2007- 2008 Determination of Total Income and Tax Liability Particulars 1.
Amount (Tk)
Business Income: Net Profit as per profit and loss account a) b) c) d) e) f) g) h)
Add: Inadmissible expenses Remuneration to Directors Contribution to provident fund Charity Income tax Provision deferred tax Other expenses Purchase of machinery Miscellaneous expenses
Amount (Tk) 242,358,000
435,000 3,626,000 9,114,000 98,240,000 6,858,000 500,000 700,000 11,958,000
131,431,000 373,789,000
Less: Non Business Income a) Dividend income b) Third party manufacturing charges received from SK+F c) Gain on disposal of property, plant, and equipment d) Interest on tax free Government Security e) Interest from investment outside Bangladesh
12,598,000 10,269,000 1,928,000 3,554,000 5,768,000
Business Income Less: Admissible expenses a) Miscellaneous expenses as per Income Tax Rule b) Tax holiday income Total Business Income
9,578,790 1,472,000
(34,117,000) 339,672,000
(11,050,790) 328,621,210
2. Non Business Income: a) Dividend income b) Third party manufacturing charges received from SK+F c) Gain on disposal of property, plant, and equipment d) Interest from investment outside Bangladesh
Total Taxable income
12,598,000 10,269,000 1,928,000 5,768,000
30,563,000 359,184,210
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Particulars 3.
Amount
Determination of Tax Liability a) On total Income excluding capital gains and dividend income ( 359,184,210 – 12,598,000 – 1,928,000 ) × 30% b) On capital gain 1,928,000 × 15% c) On Dividend income 12,598,000 × 15%
Total tax liability 4.
Amount
Determination of net tax liability Income tax Net tax payable
103,397,463 289,200 1,889,700 105,576,363
(98,240,000)
7,336,363
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Notes 1. Any payment by way of interest, salary, commission or remuneration made by a firm or association of persons to any partner of the firm or any member of the association would be non allowable expense. So, the Directors remuneration also non allowable expense. 2. Contribution to provident fund assumed to be un-recognized so it is inadmissible expenses. 3. Charity has been considered inadmissible since 1992. 4. Income tax is an inadmissible expense. 5. Provision for deferred tax also is an inadmissible expense. 6. Other expenses included Taka 500,000 paid for the traveling expenses of manager who traveled Japan for training on new machineries. So it is an inadmissible expense. 7. Contribution to WPPF is allowable expense. 8. Purchase of machinery is capital expenditure, so it is an inadmissible expense. 9. Miscellaneous expenses are allowable 1% of total revenue. So allowable miscellaneous expense is (957,879,000 × 1%) = 9,578,790. 10. Dividend income is not business income so it is deducted from business income and adds to the total income. 11. Third party manufacturing charges received from SK+F is also allowable deduction from business income and adds to the total income. 12. Gain on disposal of property, plant and equipment is not business income. These are capital gain so, it is add to the total income not business income. 13. Tax rate on business income is 30%. 14. Tax rate on capital gain is 15%. 15. On dividend income tax rate is 15%. 18
C
onclusion
Tax is the most important in the hand of the government to control the economy as well as the inflection. It also helps in push money to the economy, develop certain source of the economy and control some other activities of the economy. No Government can run it’s and perform administration works without collecting tax as a source of revenue. So, the Government imposes tax over the company and the corporations. On the other hand Government can also intensive to the infant and certain basic industry for protection through its tax policy.
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Bibliography 01. Mahmud Dr. Monjur Morshed, Purohit Dr. Kanchan Kumar & Bhattacharjee Dr. Milal Kumar “ Income Tax,” 4th edition, Padma Prokashani, 50, Jame Mosque Super Market, Chittagong, January, 2007, p. 329 - 364. 02. “Annual Report,” Renata Limited., Financial year 2005-2006, p. Al.
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