Chapter -1

1. Definition of Tax
The term "taxation" comes from Latin word "taxo" or "Taxatio". It means the rate so as to
determine the payable quantum on estimate. Taxing authority determines tax to be
payable by the assessee. So, tax is the revenue collected by the Government from persons
and organizations under different taxing Acts. In other words, it is a liability imposed
upon the assessee who may be individuals, groups of individuals and other legal entities.
2. Characteristics of Tax
Against the backdrop of the definition and nature of tax, following charactersties of tax
may be identified:
i. It is a compulsory levy under taxing Act.
ii. It is generalized exertion for indirect tax and group exertion for ditect tax.
iii. Tax payers cannot claim direct and quid qua pro (proportionate or equivalent)
service for payment of tax; but some element as to accountability exist to some
extent, though not universal one.
iv. It is a price paid to the Government for living in a civilized society.
v. It is the main stay of Government revenue.

3. Objectives of Tax
Government needs revenue for defence, administration and development activities. The
main source of this revenue is tax. In such a context, the objectives of tax can be
identified as follows:
i. Collection of Revenue: No Govt. can run its administration and perform
development works without collecting tax as a source of revenue. Thus the main
objective of tax is the collection of revenue. In the context of Bangladesh, the main
source of revenue is also found to be tax.
ii. Redistribution of Income: Concentration of money and income in few hands can
create socio-economic and political problem. Through taxation and various
techniques under it, Govt. endeavours to the redistribution of income. This has
yielded positive result.
iii. Economic Control: To guide the economy in desired direction, Govt. needs to
corol inflation, push money to the economy, develop certain sectors of the
 economy and control some activites. Taxation can be an important tool to achieve
this macroeconomic objective.
iv. Protection of Home Industry: For the greater interest of the country Govt. may
provide incentive to infant and certain basic industries. For this tax incentive for
setting up and protecting such industry, export of products and import activities can
be directed in favour of such industries through tax policy.
v. Economic Development: For development of a country Govt. needs to create and
develop infrastructure and invest in relevant sectors. For this activities Govt. needs
funds and tax revenue can provide fund for the purpose.
vi. Full Employment: Every state creates employment opportunities for its citizen.
According to F. E. Taylor, besides collecting revenue and economic control, one of
the important objectives of tax is to lead the economy to full employment stage.
vii. Raising National Income at Desired Level: For economic development of a
country, national income needs to be increased. According to A. P. Nearner,
taxation can be used as a tool for the purpose. He opined that the impact of taxes
are two; it decreases income of tax payer and increases the income of the Govt.
The second effect is more important than first one. For increasing national income
in adequate level, tax system should be taken as the important tool and it can be
effectively used if the policy is framed taking such objective as the important
objective of taxation too.

4. Canons of Taxation
A tax system, in order to achieve its various objectives, needs to adhere certain principles.
But in view of the fact that the objectives of taxes are many and some of them are
conflicting, the writers of public finance have generally chosen and prescribed certain
principles which a good tax system may adhere. In this connection, Adam Smith gave
four principles of taxation which he called the canons of taxation. A brief description of
the same are now in order.
A) Adm Smith's Four Cannons of Taxation:
1) Canon of Equality: "The subjects of every state ought to contribute towards the
support of the Government, as nearly as possible, in proportion to their respective
abilities; that is, in proportion to the revenue which they respectively enjoy under
the protection of the State." This canon tries to observe the objective of economic
justice.
 2) Canon of Certainty: This canon describes that "The tax which each individual is
bound to pay ought to be certain, and not arbitrary. The time of payment, the
manner of payment, the quantity to be paid, all ought to be clear and plain to the
contributor and to every other person," The tax-payers should not be subject to
arbitrariness and discretion of the tax officials, in which case there will be a scope
for a corrupt tax administration.
3) Canon of Convenience: This canon takes into consideration the interest of the
taxpayer from the view of payment of tax. It emphasizes that the mode and timings
of tax payment should be, so far as possible, convenient to the tax-payer. This
canon recommends that unnecessary trouble to the tax-payer should be avoided,
otherwise various ill-effects may result.
4) Canon of Economy: Every tax has a cost of collection. It is important that the cost
of collection should be as minimum as possible. It will be useless to impose taxes
which are too widespread and difficult to administer. Productivity of taxes has been
given importance in this canon.
5. Classification of Tax
Tax can be classified into different types based on different angles, which are described
below:
(A) On the basis of Incidence
On the basis of incidence tax can be classified into two:
i. Direct tax: Direct tax is one whose incidence rests upon the person who bears its
impact also, such as Income tax.
ii. Indirect tax: Indirect tax is one which is imposed on a person or goods but its
burden is shifted to others, such as Value Added Tax, Excise duty etc. In these case
incidences is shifted to others.
(B) On the Basis of Progressions
Tax can also be classified on the basis of the degree of progression as follows:
1) Progressive Tax: A tax is said to be progressive when, with the increasing income,
the liability not only increases in absolute form but also in a progressive way. Here
the tax rate progressively increases. (For example, tax on total income of taka
1,00,000 is 10% but on Tk. 5,00,000 is 15%. Here tax rate will increase as sals of
income increases.)
 2) Proportionate Tax: A tax is said to be proportionate when tax liability i.e quantum
of tax increases in same proportion as income increases. The quantum tax increase
with quantum of income though rate is the same. (For example, tax on Tk 1,00,000
is 10% and on Tk. 5,00,000 is also 10%. In the former case tax becomes Tk 10,000
and in the latter Tk. 50,000. Here in absolute form tax has increased in proportion
to rate of increase of income. But the rate has not progressively increased as was
seen in case of progressive tax.)
3) Regressive Tax: A regressive tax is one where rate of tax decreases as the income,
property, expenditure increases.
C) On the Basis of Base
Tax can be classified into two on the basis of base as follows:
1) Single Tax: When in a country the tax system comprises only one tax, then it is
called single tax. For example, Poll tax or head tax, which in ancient time would be
imposed on a person because he lived in that society and not because his trade,
wealth, etc.
2) Multiple Tax: When in country different types of taxes are imposed considering
different bases, then it is called multiple tax. At present this system is prevalent
worldwide and single tax system is found absent.

6. Role of tax in the Economic Development of a country

For economic development of a country, tax can be used as an important tool in the
following manner:
i. Productive use of available resources: There are four factors of production viz.,
land, labour, capital and organization. Among them tax system can be so designed
as to cause remarkable effect on labour and capital to a significant way. 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.
ii. Contribution towards budget fund: The most important source of national
revenue budget is taxation. In fact, economic growth everywhere is co-related with
budget. It is natural that higher income can support large budget and the larger the
budget the wider is the fiscal scope of restricting consumption, influencing
demand-supply and allocating factors of production. In this way through financing
and chain reaction taxation can play a significant role in the economic
development of a country.
iii. Aiding Funding for Direct Govt. investment: In capitalist and mixed economy
private sector is supposed to play vital role in investment and development. But
there may be case when such investment may not be forthcoming. In such a
situation direct investment by the Govt. in the desired sectors may become
necessary. But investment will require fund. In such a case Govt. can collect fund
through taxation, along with other modes available to it.
iv. Helping Control on the economy: There was a time when under the influence of
laissez faire philosophy, it was advocated that Govt. should be neutral and not
control affairs beyond its traditional role of defence and administration. But with
passage of time market forces found to be ineffective as desired and Govt. role in
savings, investment etc; found necessary. In fact to lead a country towards desired
goal of industry, business etc., there is a need of positive direction and Govt.
through tax system can play important role in this case.

Chapter-2
1.Definition of Income Tax
Income tax is a typical example of a direct tax. The tax imposed on a person or entity
under the orbit of Income Tax Law is called income tax. It is imposed on a person in
relation to his income. It is calculated and assessed with reference to the income of an
assessee for a given year.
2.Characteristics of Income Tax
From the analysis of the definition and nature of income tax, the following characteristics
can be identified:
i. It is a direct tax.
ii. It is charged on the total income of a person.
iii. It is charged on the income of the income year at the rate applicable in assessment
year.
iv. It is payable in the year following the income year.
v. It is generally charged on revenue income of a person.
vi. It is a tax charged on a person for income that comes within the perview of relevant
Income Tax Law.
vii. It is a general is a Progressive tax.
3.Scope and constituents of Income Tax
The Income Tax Ordinance, 1984 came into existence on 1st July 1984 and extends to the
whole of Bangladesh. However, as to imposition and collection of income tax in
Bangladesh, it includes the following as constituent elements:
i. Income Tax Ordinance (XXXVI), 1984, that is Income Tax: Manual part-I
containing the main law and basic principles.
ii. Income Tax Rules, that is Income Tax: Manual part-II containing forms and
procedures for the operation of main law.
iii. Finance Act (F. A.) issued by the Government along with the national budget. It
describes any amendment made in the Income Tax Ordinance (ITO) and specifies
the rate of income tax applicable for income of the income year.
iv. Rules framed by the National Board of Revenue, Bangladesh relating to
income tax.
v. Orders, notes, instructions, circulars issued by the Income Tax Authorities of
Bangladesh from time to time.
vi. Income Tax Case Laws. Such case laws and decisions also act as guide line for
tax assessment in relevant case.

4. Arguments for and against Income tax

Income tax is a direct tax. It creates a scense of civil consciousness among the tax payers.
It is also an important source of Govt. revenue. Thus, it has impacts. But on the other
hand, it has some adverse effect too. It may discourage savings, will to work and give rise
to the practice of tax evasion. In such a case arguments for and against income-tax are
pointed out below:
Arguments in favour of Income-tax:
i. It can be imposed on the basis of ability to pay. Thus, justice can be maintained.
ii. It is generally charged on progressive rate basis. Thus, higher income holders pay
more tax compared to low-income holders. As a result, redistribution of income for
social justice can be ensured.
iii. As it is a direct tax it can be easily administered and cost of administion becomes
low.
iv. It ensures the canon of certainity, thus budget estimates in this regard becomes a
reality.
 v. With the change of rate quantum of revenue can be increased or decreased.
vi. It can be used as an instrument of fiscal policy to control & direct economy in
desired direction.
vii. It increases political consciousness.
Arguments against Income-tax:
i. It is a tax on income. But it is difficult to define income and some confusions
always remain there.
ii. In most of the cases, tax provisions are ambiguous and not simplified one. As a
result tax payers face difficulties.
iii. There are allegations about harassment of tax payers by tax administration.
iv. Tax payer in some cases remain hostile to the Govt. as payment is direct form his
income and pocket.
v. It gives rise to tax evasion and avoidence which are not compatiable to discharge
of civil responsibility.
vi. Maintenance of Account and following rules sometimes becomes difficult which
can give rise to arbitrary decision of the tax officials.
vii. If the tax rate becomes high, it can discourage saving investment and production.

5. Tax holiday scheme

(i) History: It is a system of exemption from payment of tax. The scheme was first
introduced in Pakistan in 1959. After liberation, the system was revoked in 1972 by the
Government of Bangladesh. However, the system was re-introduced in 1974 under the
Income Tax Act of 1922 by inserting Sec. 14A in the Act. Considering the importance of
the scheme in the industrialisation of the country, the Government retained the scheme in
the Income Tax Ordinance, 1984 by inserting Sections 45, 46 and 47.
(ii) Objectives: The objectives of this scheme are as follows:
i. To encourage formation of domestic capital needed for rapid industrialization of
Co-operative Societies the country.
ii. To attract direct foreign investment in the desired industrial sectors of the
economy.
iii. To maintain sectoral balance in industry.
iv. To have a balanced and equitable development of all the areas of the country.
(iii) Scope: The scope of tax-holiday scheme is explained by sections 45, 46 and 47 of
the Ordinance. In addition to these sections the scope of tax-exemptions has been
extended by SRO's issued from the Minsitry of Finance and finance Acts 2008 & onward.
Now a chart showing the areas covered by tax-holiday scheme is given below.

iv) Backdrop: Till 30th June 2008 Taxholiday were provided for Industrial undertakings,
Tourist industries, Cooperatives, Private hospitals & Export Processing Zone for full
income variying from 5 years to 12 years. Finance Act 2008 has changed provisions
relevent to Industrial undertakings & Tourist industries wherein Reduced tax system has
been introduced. Provision relavant to Cooperative society, Private Hospitals & Export
Processing Zones remains as usual. Previously for Industrial undertakings & Tourist
industries country was divided into 4 zones and exemption period was as under:
Areas Exemption period
a) Special zone 12 years
b) Least Developed ares 9 years
c) Less Developed areas 6 years
d) Developed areas 4 years