TAXATION – II

Suggested Answer
Nov-Dec 2017

Question No. 1

Silkway Group has two companies, Silkway Toiletries Ltd. (STL), an unlisted public limited company in
toiletries manufacturing business and Silkway Chemicals Ltd. (SCL) (subsidiary of STL with 80%
equity). The subsidiary operates a factory in old Dhaka, closed due to order of the Directorate of
Environment not to run chemical factory in city area.

(a) Silkway Toiletries Ltd. filed its tax return showing total revenue of taka five crore; profit taka
5,000,000 for the year ended on 30.06.2017 after debits and credits of the items revealed from the
examination of accounts of the company as follows:

DEBITS

1) Depreciation on revaluation of assets Taka 100,000/=

2) COGS includes (a) taka 1,000,000 for direct materials bought from supplier on which tax was not
deducted u/s 52 and Rule 16, (b) taka 500,000 paid to an enlisted tailor for supply of uniforms for
production floor workers on which tax was not deducted u/s 52 and Rule 16.

3) Insurance premium paid to BGIC taka 250,000/ on 02.02.2017 without tds.

4) Paid taka 200,000 to Grameen phone Ltd. for supply of mobile phone sets without tds.

5) Provision for loss in subsidiary – Taka 500,000/=

6) Written off taka 50,000 representing the value of machinery missing from physical verification.

7) Exchange loss linked to the income from foreign agent due to delay in remitting the income.

8) Interest taka 100,000/= on overdraft to pay interest for failure to pay advance tax.

9) Written off taka 200,000/= long due from a missing party who was advanced this sum for raw
material.

10) Commission paid taka 250,000/= to a bank for forward contract (dated 25.06.17) to hedge each risk
involving settlement of import L/C dues due after a quarter.
11) Taka 500,000/= on a/c of free samples of finished goods given to distributors (limited 1% of
turnover)

12) Trade discounts to customers taka 1,000,000/= and distributors commission paid taka 500,000/=.

CREDITS

1) Dividend taka 100,000/= from investment in an approved Alternative Investment Fund

2) Capital gain on sale of fixed assets taka 100,000/=
3) Interest earned on security deposit at bank in Kenya, taka eqvt 100,000/=.

Page | 63
OTHER INFORMATION

1) Unabsorbed depreciation brought forward from assessment year 2016-2017 taka two lacs.
2) Return filed for the income y/e 30.06.17 on 30.09.2017; assessment completed on 30.11.17.
Company‘s assessed income in the previous income year was taka 6,000,000/=.
3) For the reported income year, the opening stock of toiletries was valued at taka 35 lacs and closing
stock of toiletries raw materials at taka 15 lacs. These opening stock and closing stock were wrongly
overvalued and undervalued respectively by 5% and 10%.
4) Tax was duly deducted from office rent payment of taka 500,000/= but did not deposit to treasury for
about six months.
5) A Chinese supplier breached L/C terms to supply toiletries machineries on order. Company received a
liquidated damage for this eqvt taka 1,500,000/= which has not been credited to P&L. This machinery
L/C was done under 50% margin (taka 75 lacs) with a bank, funded by a separate short term loan for
same amount at 10% p.a. Company paid interest on such loan taka five lacs and charged to revenue.
6) Company acquired a delivery van under lease finance from a NBFI. Registration was done in the
name of the Company. Depreciation charged taka 400,000/=.
7) Company made exports of selected item of toiletries to Africa through an agent in Kenya. Under
permission from Bangladesh Bank, company made an interest bearing security deposit with the
agent‘s bank in Kenya to cover product warranty in which interest earned was taka 100,000/=(tax
paid thereon in Kenya, taka eqvt 15,000/= at 15%). Customers total tds including tds by bank on
exports realization taka 700,000/=.
8) Company paid advance tax taka 500,000/= during the income year.
(b) Silkway Toiletries Ltd. (STL) and its Managing Director own Silkway Chemical Ltd. for 80% and
20% equity respectively. In the attempt to consolidate the business in the face of closure of the
Chemical subsidiary, the shareholders of Silkway Chemical Ltd. resolved to wind up the subsidiary
voluntarily vide EGM dated 31.08.2017. STL and its MD acquired shares of SCL four years ago at
10% premium over the par value. Factory land was registered to the shareholders at market value.
Liquidator closed his account on 30.11.17 having paid off all liabilities as they are and disposed of all
assets. Expenses incurred during winding up process taka 100,000/= Net assets on EGM date prior to
the distribution to shareholders were as follows:

ASSETS
Machineries net taka 500,000 (Original cost taka 4,500,000, Sold by Liquidator taka 300,000). Factory
land taka 5,000,000 (market value taka 8,500,000/=). Cash and Bank balance taka 1,500,000. Due from
Silkway Toiletries Ltd. taka 1,000,000 against chemical sale(r/m for toiletries)

LIABILITIES
Share capital is taka 5,000,000 (taka100 per share). General Reserve is taka 500,000. P&L Appropriation
is taka 1,500,000. Payables to employees taka 500,000/=. VAT payable is taka 500,000.

Requirements:

i) Compute total income and tax liability of Silkway Toiletries Ltd separately showing computation of
excess or shortfall of advance tax and explanation for consequence. [Marks: 20]
ii) Show distribution upon liquidation, tax implication on SCL and shareholders. [Marks: 10]

Page | 64
Answer to the Question No. 1a.

Silkway Toiletries Ltd.

Income y/e 30.06.2017. [AY 2017-18]
Computation of Total Income, Tax Liability and Others
TAKA
Income from Business:
Shown Net profit 5,000,000
Less: Non-business income for separate consideration TAKA
(1)Capital gain 100,000
(2)Dividend from Alternative Investment Fund 100,000
(3)Interest from foreign bank deposit in Kenya 100,000
(300,000)

Add: Inadmissible expenses

(1)Dep. not allowable on revaluated assets 100,000
(2)Paid to enlisted contractual tailor u/s 30(aa) 500,000
(3)Paid to GP for mobile sets supply u/s 30(aa) 200,000
(4)Provision for loss is not allowable exp. u/s 29 500,000
(5)Machinery physically not found is not allowable u/s 29 50,000
(6)Commission for hedging as it is not allowable exp. u/s 29 250,000
(7)Office rent u/s 30(aa) as tds not deposited 500,000
(8)Adjustment for overvaluation of stocks:
Opening stock overvalued by 5% 166,667
Closing stock undervalued by 10% 136,364
2,403,030

Add: Compensation received from a Chinese company not credited 1,500,000

Less: Unabsorbed depreciation - carried forward for set off (200,000)

Business Income 8,403,030

Capital Gain 100,000

Income from Other Sources:
Dividend from AIF [note-11] 100,000
Interest on foreign bank deposit [note-12] 100,000
200,000

TOTAL INCOME 8,703,030

Tax calculation:
i) Tax on Business Income and interest income @35%
35% on 8,503,030 2,976,061
ii) Tax on Capital Gain (15% on 100,000) 15,000
iii) Tax on dividend 20% on 100,000 20,000

GROSS TAX LIABILITY 3,001,061

Page | 65
Less:
i) AIT 500,000
ii) Tds 700,000
total tax paid 1,200,000
NET TAX LIABILITY 1,801,061
Computation of simple interest for short payment of AIT:
Gross Tax 3,001,061
75% of tax comes at 2,250,796
Total AIT 1,200,000
Shortfall 1,050,796
43,783
10% interest on shortfall for 5 months 43,783

TOTAL TAX PLUS SIMPLE INT. DUE 1,844,844

Computation of Minimum Tax on gross receipts:
Gross revenue 50,000,000
Capital gain 100,000
Other source income 200,000

Gross Receipts 50,300,000

Minimum tax @ 0.60% on gross receipts 301,800

Notes:
[1]50% income rebate is applicable on export as per 6th schedule but as the export figure is not given in
the question so it is not possible to workout.
[2]Direct raw material purchase is not subject to tds and that‘s why not disallowed u/s 30(aa)
[3]Insurance premium paid to Insurance company is not subject to tds and that‘s why not disallowed
u/s 30(aa)
[4]Exchange loss is allowable business loss as per section 29, so not disallowed.
[5]Bad debt Tk.2,00,000/( dues from missing supplier)is in connection with business, so allowed.
[6]Depreciation on leasehold vehicles is allowable as per Third Schedule as it is finance lease. The
indication is that it was registered in the name of the company.
[7]Free sample exp. is within the limit prescribed at Rule-65, so nothing is disallowed from here.
[8]Interest on overdraft is allowable expenditure as per section 29 as business expenditure
[9]Trade discount Tk.10,00,000 and distribution commission Tk.5,00,000/ is allowable expenditure
assuming that source tax was deducted properly from distributorship commission.
[10]Office rent fully disallowed assuming that source tax was not deposited before assessment.
[11] Dividend from Alternative Investment Fund (AIF) is taxable @ 20%. It should be noted here
that income of the fund itself is tax-free as per 6th Schedule (Part-A) Para-54, not dividend income in the
hand of shareholder.
[12] About interest income from Kenya: As there is no DTAA between Bangladesh and Kenya so no
foreign tax credit will be allowed as per section 145 as NBR not yet prescribed any rules in this behalf.

Page | 66
Answer to the Question No. 1b.
Silkway Chemical Limited
Distribution of assets to Shareholders upon Liquidation
Amount in
TAKA
INFLOW:
Machinery sold 300,000
Received from Silkway Toiletries 1,000,000
Cash and Bank Balance 1,500,000

2,800,000
OUTFLOW:
Expense 100,000
VAT paid 500,000
Payable settled 500,000

1,100,000
NET cash Available for Distribution 1,700,000
Distribution to Shareholders:
Silkway
MD of
Total Toiletries
STL
Ltd.
Ownership 80% 20%
Net Fund 1,700,000 1,360,000 340,000
Factory land 8,500,000 6,800,000 1,700,000
10,200,000 8,160,000 2,040,000

NOTE:
Machinery sold for 300,000/ against WDV 500,000/. Therefore, revenue loss taka 200,000/(3 rd Sch
(para-10) Factory land transferred at market value of Tk. 85,00,000/= against COA 50,00,000/ =
35,00,000/ is capital gains on Silkway Chemical Limited upon distribution of assets upon liquidation.
Silkway MD of
Total Toiletries Ltd. STL
Amount of share capital in the company 5,000,000 4,000,000 1,000,000
No. of shares at taka 100 each 50,000 40,000 10,000
Cost of share to the shareholders at 10% premium 4,400,000 1,100,000

Deemed Dividend u/s 2(26) on the distribution:

Total assets value distributed to the shareholders 10,200,000 8,160,000 2,040,000
Less: Dimmed DIV upto the accumulated profits 2,000,000 1,600,000 400,000
Balance after deemed dividend 8,200,000 6,560,000 1,640,000
Less: Share investment value(COA u/s 32(2)(i) 4,400,000 1,100,000
Balance -- Capital Gain u/s 31,32 in the hands S/H 2,160,000 540,000

SUMMARY OF DISTRIBUTION TO SHAREHOLDERS:

Distribution to the extent of DEEMED DIVIDEND 1,600,000 400,000
Balance Distribution 6,560,000 1,640,000
Of which, Capital Gain 2,160,000 540,00

Page | 67
TDS on Dividend distribution by Sikway Chemical Ltd.
Rate of tds on company and individual 20% 10%
TDS amount on deemed dividend 320,000 40,000
Net dividend to shareholders 1,280,000 360,000

Question No. 2
ABC & Co. (―Firm‖), Chartered Accountants, acts as tax consultant of XYZ Ltd. (―Company‖), a private
limited company incorporated in Bangladesh. The Company is engaged in the business of yarn dyeing.
You are a Chartered Accountant and working as Tax Partner of the Firm. Assessment and appeal
proceedings of the Company for the assessment year 2013-2014 are complete. There were cross appeals
before the taxes appellate tribunal for AY 2013-2014 relating to addition of current liabilities to taxable
income and application of 35% tax rate on business income from sale of fixed assets.
The assessment order analyzed the components of current liabilities that consist of working capital loan,
term loan, lease finance, trade creditors and liabilities for expenses and are disclosed under separate notes
to the audited financial statements. The sale of fixed assets was also recorded in detail.
The Deputy Commissioner of Taxes (―DCT‖) added back taka 20,000,000/= out of current liabilities and
the Commissioner of Taxes (Appeals) reduced the same to Taka 15,000,000/=. In the cross appeal, the
Taxes Appellate Tribunal further reduced the addition under current liabilities to Taka 5,00,000/=.
Subsequently the Director General of Inspection (Taxes) called for the file and reviewed the same where
he did not find supporting documents as regards the appealed issues. Being advised by the office of the
Director General of Inspection (Taxes), the DCT reopened the case and issued notice under Section 93 of
the ITO, 1984, on the ground that tax was evaded by non-submission of evidences.
Requirement:
Prepare a reply to the notice of the DCT considering the grounds for reopening the case and applicability
of Section 93 of the ITO, 1984, for XYZ Ltd. [Marks: 10]
Answer to the Question No. 2:
The Deputy Commissioner of Taxes
Taxes Circle –Taxes Zone –
Dhaka, Bangladesh
05 December 2017
Dear Sir:
Request to Cancel the Proceedings of Income Tax Cases Reopened under section 93 of the Income
Tax Ordinance, 1984, (“ITO, 1984”) for the Assessment Year 2013-2014
Assessee: XYZ Ltd.
Please refer to the subject mentioned above. As regards income tax case reopened under section 93 of the
ITO,1984,for the assessment year 2013-2014 we would like to offer following
explanations/statements/documents/information:
Business Income from Sale of Fixed Assets:
The DCT recorded the detailed information on sale of assets upon examination of all the documents and
information submitted in support of the said transactions and computed income/(loss) from sale of assets.
He also confirmed that the assessee submitted information on purchase price, sales prices, accumulated
depreciation, and computation of income and minutes of the meeting of the board of directors relating to
sale of assets.

Page | 68
Section 93 is not applicable in the instant case as non-submission of evidences relating to sale of assets is
fabrication of information and the DCT acted on suspect, surmise and conjecture and he is just on a
fishing expedition.
Where the decisions of the appellate authorities are there and if the DCT is aggrieved by the decisions of
the appellate authorities, he had the option to file appeal to the higher appellate authority or reference
application to the High Court Division, as the case may be, in accordance with the provisions of the ITO,
1984. Reopening of the case on the appealed grounds without going to higher appellate authority or
reference application to the High Court Division is violation of income tax law and against the natural
justice.
Current Liabilities:
The DCT examined the documents submitted in support of current liabilities of Tk. …………………….
disclosed under separate notes to the audited financial statements and he recorded the same in the
assessment order. Upon examination of submitted documents and information, he added back Tk.
20,00,000/=.
Section 93 is not applicable in the instant case as the audited financial statements clearly disclosed
information on current liabilities and the assessee submitted all supporting documents relating to current
liabilities. In reopening the cases on this ground, the DCT acted on suspect, surmise and conjecture and he
is just on a fishing expedition. Non-submission of evidences relating to heads under current liabilities as
reasoning for reopening the cases is completely vague, fallacious and distortion of information.
Where the decisions of the appellate authorities are there and if the DCT is aggrieved by the decisions of
the appellate authorities, he had the option to file appeal to the higher appellate authority or reference
application to the High Court Division, as the case may be, in accordance with the provisions of the ITO,
1984. Reopening of the case on the appealed grounds without going to higher appellate authority or
reference application to the High Court Division is violation of income tax law and against the natural
justice.
It is notable that once the DCT examined and decided on current liabilities as mentioned in the
assessment orders along with notes, he verified all the heads under current liabilities such as Trade
Creditors, Working Capital, Accounts Payable, Liabilities for Expenses, Term Loans, etc. The orders
from the appellate authorities provided their decisions in the like manner.
Applicability of section 93 of the ITO, 1984:
The following conditions should be studied for which any sum payable by an assessee under the ITO,
1984, shall be deemed to have escaped payment as referred to in section 93 of the ITO, 1984:

Sl # Conditions
i. The income or a part thereof has escaped assessment
ii. The income has been understated
iii. Excessive loss, deduction, allowance or relief in the return has been claimed
iv. The liability of tax or any other amount payable under the ITO, 1984, has been shown or
computed lower by concealment or misreporting of any income or by concealment or
misreporting of any assets, expenditure or any other particulars in a statement submitted under
section 80
v. Income chargeable to tax has been under-assessed, or income has been assessed at a lower than
due tax rate
vi. Income that is subject to tax has been made the subject of tax exemption
vii. Income has been made the subject of excessive relief, or excessive loss or depreciation allowance
or any other allowance under the ITO, 1984, has been computed

Page | 69
viii. A tax or an amount, payable under the ITO, 1984, has been computed or paid lower than due
amount by reason of lower base

In light of the above, we would earnestly request you to withdraw the proceedings of income tax case
reopened under section 93 of the ITO, 1984, for the sake of upholding the rule of law and natural justice.

Yours faithfully,
………………………….

Question No. 3

Tax heavens or Offshore Financial Centers (OFC) are financial jurisdictions outside the regulations of
one‘s own nation used by companies and individuals to lower their taxes on profits and assets. They are
often small islands, such as, Cayman Island, mostly in the Caribbean. After ‗panama paper leaks in 2016,
now hit the headlines are ‗Paradise Papers‘ which contain millions of documents reportedly from offshore
legal and corporate service providers. Names are up in the media in reference to Paradise papers including
name of an accounting firm which allegedly worked for dodging assessee. You, a CA, involve in cross-
country tax practice.
One of your clients, ‗Cell BD Ltd‘, a Bangladeshi public limited JV company, is a mobile operator in
Bangladesh. Cell BD Ltd. is owned 75% by ‗Cell CI Ltd.‘, a Cayman Island (tax heaven) company which
is 100% owned by Cell UK Ltd. As BTRC stopped issuing new license, Mobile UK Ltd., which wants to
enter into Bangladesh market hammered out a strategic investment deal with Cell UK Ltd. to take control
in Cell BD Ltd. through ‗Cell CI Ltd‘
Pre-Transfer Structure and Post-Transfer Structure

Cell UK Ltd.
owns 100% Mobile UK Ltd.

Cell CI Ltd. Mobile CI Ltd.

owns 75%

Cell BD Ltd. Mobile BD Ltd.

Share capital of ‗Cell CI Ltd.‘ is US$1.0 million. ‗Mobile UK Ltd.‘ bought the entire share of Cell CI Ltd.
for US$2.0 million from Cell UK Ltd. Mobile UK Ltd. made full payment to Cell UK Ltd. in UK for the
transfer and then changed the name of Cell CI Ltd. to ‗Mobile CI Ltd.‘ in Cayman Island and from Cell
BD Ltd. to Mobile BD Ltd. in Bangladesh. Cell UK Ltd. made a huge gain on the transfer which is in
public through media.

You have filed tax return for your client (Cell BD Ltd.) with the audited accounts for the relevant income
year which depicts information about the ownership change and subsequent name change. Tax
Department issued a show-cause notice to Mobile UK Ltd and to your client to explain why tax was not
withheld u/s 56 on payments made by Mobile UK Ltd. to Cell UK Ltd. in relation to the share transfer in

Page | 70
Cell CI Ltd. Tax department contended that the share transfer in Cell CI Ltd. derived its value from assets
in Cell BD Ltd. and thus it implicated a connection u/s 18(2). Tax Department argued, the controlling
shareholding obtained by Mobile UK Ltd. in Cell BD Ltd.(75%) has its situs in Bangladesh and,
therefore, the capital gain arising on this share transfer outside Bangladesh is liable to tax in Bangladesh
as an ‗indirect transfer‘. Mobile UK Ltd. is considering a HC writ in Bangladesh challenging tax
department‘s demand and approached you, as tax lawyer of their Bangladesh subsidiary, for technical tax
views.
Requirements:
a. Brief your views about the legality of investment in tax heavens by Bangladesh resident assessee
having overseas operations in reference to IT Ordinance. What are the ethical implications of a
Professional Accountant in practice and your position if approached by such a client? [Marks: 5]
b. Consider share transfer case of Cell CI Ltd. Write technical inputs in reference to applicable tax
provisions, tax treaty and case decision, if any, giving your views on the validity of tax demand on such
share transfer. [Marks: 5]
Answer to the Question No. 3a:
An OFC (Offshore Financial Centre) or tax heaven is a country or also just a part of a country that offers
low tax rates or even no taxes at all for foreign investors. Disclosure and information exchange with other
countries are limited. If Bangladeshi resident assessee, having foreign income, duly taxed in source
country and disclosed the same fully under the concept of scope of world income u/s 17 in Bangladesh
and invests part of his such taxed income in tax heaven country, it may not be termed as an illegal
conduct.
As Bangladesh Foreign Exchange regulations generally prohibit transfer of fund out of Bangladesh,
investment in OFCs or tax heavens from Bangladesh shall be generally illegal. If any resident assessee
uses OFCs to hide untaxed income, it‘s an utter illegal conduct. Leaks through Panama papers and now
Paradise papers generated extreme heat globally naming corporations and individuals of high profile.
These leaks reveal that so-called tax heavens, though may not be illegal, are being used for illegal purpose
and they tend to offer laws and measures that can be used for tax evasion.
Ethical implication for a professional accountant in practice is huge and specific when dealing with a
client having stake or intention to invest in tax heavens. As the activities involving OFCs are increasingly
being proved illegal, accountant must take special care to stay off those sensitive clients. Dealing with
such clients brings threats to major fundamental ethical principles like Integrity, confidentiality and
professional behavior.
We cannot do anything that discredit our professional and contravene laws and regulations (like tax law,
foreign exchange law). Self-interest threat, familiarity threat and intimidation threats are prominent in this
kind of client relationship and strong safeguards to mitigate these threats are not much there. Therefore, I
shall resign from the service to such client if my consultations to stay legal seem to be failing.
Answer to the Question No. 3b:
Tax Department issued notice to my assessee and its grandfather holding company to explain why tax was
not withheld u/s 56 on payments made by Mobile UK Ltd. to Cell UK Ltd. for transfer of 100% shares in
Cell CI Ltd. which holds 75% of Mobile BD Ltd. Tax Dept contended that the share transfer in Cell CI
Ltd. derived its value from assets in Cell BD Ltd. and thus it implicated a connection u/s 18(2).
In my view, tax department‘s notice stems from a misunderstanding to differentiate between ‗sale of
company shares‘ and ‗sale of company assets‘ of the company. Ownership of share of a company does
not mean ownership of assets of that company. The transfer of shares of one non-resident company (Cell

Page | 71
UK Ltd.) to another non-resident company (Mobile UK Ltd.) did not result in the transfer of any assets of
Cell BD Ltd. in Bangladesh. ‗Share sale‘ is one of the many different restructuring strategies adopted by
corporate managements. It cannot be argued that sale of shares in UK resulted in capital gain in
Bangladesh which binds Mobile UK Ltd. to deduct tax at source under Bangladesh tax law.
Section 18(2) provides for ‗income accruing or arising directly or indirectly through or from transfer of
capital assets in Bangladesh‘ but Cell UK Ltd. did not make any ‗indirect transfer‘ of any capital assets in
Bangladesh. By the transfer of Cell UK Share to Mobile UK, there has not been any transfer of the assets
of Cell BD Ltd. As 18(2) does not invoke, application of section 56 does not arise at all. These sections
shall not attract and, therefore, gains arising to a foreign company from transfer of shares of a foreign
holding company, which indirectly held equity interest in an Indian operating company would not be
taxable (Vodafone International Holdings BV vs. Union of India, Supreme Court)
Question No. 4
Mr. PQ used to compute his income tax and prepare tax return on his own. While computing income tax
for the assessment year 2017-18, he was confused about the computation and presentation of the tax
collected at source on transfer of inherited property and at the time of import of goods. Therefore, he
appointed XYZ & Co. (―Firm‖), Chartered Accountants, for assisting him in computation of taxable
income, tax liability and preparation of tax return. You are a Chartered Accountant and working as a tax
consultant of the Firm. Mr. PQ sent you an email furnishing the following information on transfer of
inherited property:
Particulars Tk.
Tax Collected/Deducted at Source on transfer of property 10,000,000
Sale proceeds received in cash and by bank transfer 250,000,000
In addition, Mr. PQ also provided you with the following information on income and tax deducted at
source relating to the assessment year 2017-18:
Particulars Tk.
Remuneration as a member of the Board of Directors of a private limited company 6,000,000
Interest on fixed deposits 3,000,000
Income from dividend of a publicly listed company 1,000,000
Interest on savings instruments 1,500,000
Income from a mutual fund 500,000
Income from lease of vacant land 1,200,000
Taxes were deducted at source from remuneration, interest, dividend and lease money as per applicable
rates. Mr. PQ imported goods of Tk.10,000,000/= during the income year 2016-17 and advance tax was
collected at source amounting to Tk.500,000/= at import stage applying @5%. He made profit of
Tk.3,000,000/= from import business in the same period.
Net wealth of Mr. PQ was computed at Tk.30,050,000/= as of 30 June 2017 which you should consider
for computation of wealth surcharge. During the income year 2016-17, Tk.10,000,000/= was invested by
him in acquisition of shares of companies listed on Dhaka Stock Exchange. He also invested
Tk.1,000,000/= in DPS at a scheduled bank. He was 67 years old on 30 June 2017 and has been
submitting return of income for last 20 years.
Requirements:
Write a reply to the email of Mr. PQ along with computations of the following:
(i) Minimum tax on income from import business. [Marks: 5]
(ii) Total taxable income from all sources and total tax liabilities. [Marks: 3]

Page | 72
(iii) Investment Tax Rebate. [Marks: 6]
(iv) Wealth surcharge and Net Tax Payable. [Marks: 4]

Answer to the Question No. 4:

Email
To: PQ
From: XYZ & Co.
Date: 20 December 2017
Re: Assistance in computation of your taxable income and tax liability for the assessment year
2017-18

Dear Mr PQ,

Thank you very much for the email dated 15 November 2017. I went through the information provided by
you. We are providing you with the draft computations, as requested, below:

Name of Assessee: PQ
Taxpayer's Identification Number :
Income Year: 2016-17
Assessment Year: 2017-18

Income Tax Computation

Sources fall under section 82C(2)(d) proviso (for which regular computation is not required):
Particulars Tax deducted/collected Income (Tk.)
at source (Tk.)
Transfer of property 10,000,000 250,000,000
Interest on savings instruments 75,000 1,500,000
10,075,000 251,500,000

Sources fall under section 82C(2)(b) (for which computation in regular manner is required):
Particulars Tax Income (Tk.)
deducted/
collected at
source (Tk.)
Import Business 500,000 3,000,000
500,000 3,000,000

Regular sources of income:

Particulars Tax deducted/ Gross Taxable
collected at Income Income (Taka)
source (Tk.) (Taka)
Income from Salary
Remuneration from the private limited company 1,345,000 6,000,000 6,000,000
Sub-total: (i) 1,345,000 6,000,000 6,000,000
Other Income
Interest on fixed deposits 300,000 3,000,000 3,000,000
Income from dividend of publicly listed company 100,000 1,000,000 975,000

Page | 73
Income from mutual fund - 500,000 475,000
Income from lease of land 60,000 1,200,000 1,200,000
Sub total: (ii) 460,000 5,700,000 5,650,000
Total: (i) + ii) 1,805,000 11,700,000 11,650,000

Tax on taxable Income from regular sources:

Slabs Taxable Income (Tk.) Rate Tax (Tk.)
First 300,000 0% -
Next 400,000 10% 40,000
Next 500,000 15% 75,000
Next 600,000 20% 120,000
Next 3,000,000 25% 750,000
Balance 6,850,000 30% 2,055,000
Total 11,650,000 3,040,000

(a) Computation of minimum tax liability for import business:

Taxable income from regular sources 11,650,000

Income from import business computed in regular manner 3,000,000
14,650,000

Computation of applicable tax on sum of income from regular sources and income from import
business:
Slabs Taxable Income (Tk.) Rate Tax (Tk.)
First 300,000 0%
-
Next 400,000 10% 40,000
Next 500,000 15% 75,000
Next 600,000 20% 120,000
Next 3,000,000 25% 750,000
Balance 9,850,000 30% 2,955,000
Total 14,650,000 3,940,000

Applicable tax on sum of income from regular sources and income 3,940,000
from import business

Less: Tax applicable to income from regular sources 3,040,000

Tax liability for import business computed in regular manner and 900,000
applying regular tax rate

Tax collected at source at import stage 500,000

Since, regular tax liability from import business is higher than tax collected/deducted at source, so Tk.
900,000/= will be minimum tax on income from import business

(b) Computation of total taxable income from all sources and total tax liabilities:

Taxable Income Tax Liabilities

Page | 74
 (Tk.) (Tk.)
Taxable income from regulars sources of income A 11,650,000 3,040,000
Income from sources fall under section 82C (for which 3,000,000 900,000
computation in regular manner is required)
Income from sources fall under section 82C (for which 251,500,000 10,075,000
computation in regular manner is not required)
Total 266,150,000 14,015,000

(iii) Investment Allowance & Tax Rebate: Tk. Tk.

(a) Actual Investment made during the income year:
Shares of companies listed on Dhaka Stock Exchange 10,000,000
DPS (Maximum Tk. 60,000) 60,000 10,060,000
(b) 25% of (Total Taxable Income-Income u/s 82C-Exempted 29,12,500
Income-Income subject to reduced tax rate)
(c) Maximum Limit 15,000,000
(d) Eligible Amount for Tax Rebate: the lowest of (a), (b) and (c) 29,12,500

Investment Tax Rebate:

Tk 250,000 15% 37,500
Tk 500,000 12% 60,000
Tk 21,62,500 10% 2,16,250
29,12,500 B 3,13,750

Total Income Tax Payable (from C=A-B

regular sources) 27,26,250

Income Tax (from section 82C sources) D 10,975,000

Surcharge @ 30% E=(C+D) X 30% 41,10,375

Total Income Tax & Surcharge F=C+D+E 1,50,85,375

Tax collected/deducted at source

Tax deducted/collected from sources fall under section 82C (for which computation in 500,000
regular manner is required):
Tax deducted/collected from sources fall under section 82C (for which computation in 10,075,000
regular manner is not required):
Tax deducted/collected from regular sources 1,805,000
Total Tax deducted/collected from all G 12,380,000
sources
Balance Tax Payable H=F-G 4,502,450

Surcharge has been computed on the basis of information provided by you on net wealth as of 30 June
2017. We could not compute closing net wealth for the assessment year 2017-18 due to lack of necessary
information.
Should you have any queries in this regard, please feel free to contact us.
Best wishes and regards,
………………………………………

Page | 75
Question No. 5
ABC Ltd. is a Bangladeshi RMG company, having its factory in Jessore, in which XYZ Inc.; a UK based
company has 28% shareholding and voting power. The management of these two companies is going to
enter into an agreement on the following transactions:
a) ABC Ltd. will sell 1,000,000 pieces of T-shirts @ $2 per T-shirt to XYZ Inc. This type of T-shirts is
generally sold to unrelated parties @ $3 per T-shirt.
b) ABC Ltd. will borrow $200,000 from a foreign lender based on the guarantee of XYZ Inc. For this,
ABC Ltd. will pay $10,000 as guarantee fee to XYZ Inc. To an unrelated party for the same amount
of loan, XYZ Inc. collects $7000 as guarantee fee.
c) ABC Ltd. will pay $15,000 to XYZ Inc. for getting various potential customers details to improve its
business. XYZ Inc. provides the same services to unrelated parties for $10,000.
d) ABC Ltd. will procure used machineries from XYZ Inc. costing $150,000 which will be paid in four
installments.
Furthermore, in the current year, ABC Ltd. will need to write-off receivable amount from XYZ Ltd.
amounting to Tk. 1,000,000.
MAT & Co, Chartered Accountants, acts as tax consultant of ABC Ltd. You are a Chartered Accountant
and currently working as Director of Transfer Pricing Department of MAT & Co. The CFO of ABC Ltd.
requested you to provide your opinion in the report form on the above matters, which will assist ABC
Ltd. to get an extensive idea on tax exposure according to Bangladesh Tax Law. On the basis of your
report, ABC Ltd. will make their tax planning and determine their decision. [Consider 1$= BDT 78]
Requirements:
Your report should cover the following issues:
a. Brief discussion on area of implication of TP regulations. [Marks: 6]
b. Elaboration of TP aspects on the above issues, demonstrating financial impact of tax
exposure [Marks: 6]
Answer to the Question No. 5:

The Managing Director

ABC Ltd.
18 December 2017
Dear Sir:
Report on the queries based on Transfer Pricing Provisions
Please refer to the subject mentioned above and your request providing professional opinion(s) on the
various issue(s) raised therein. As requested, we are providing below our professional opinion:
Requirement # i
Provisions relating to TP as mentioned in Chapter XIA, Section 107A to 107J of the ITO, 1984, are
applicable from the income year 2014-15. The provisions relating to TP has been summarized below:
TP refers to the pricing of international transactions between two associated enterprises. Due to the
special relationship between related parties, the transfer price may be different than the price that would

Page | 76
have been agreed between unrelated parties. A price between unrelated parties is known as the ―arm‘s
length‖ price. The provisions of TP are applicable only if:
 There are two or more enterprises
 The enterprises are Associated enterprises
 The enterprises enter into an international transaction
Method of TP: There are five methods for TP:
 comparable uncontrolled price method;
 resale price method;
 cost plus method;
 profit split method;
 transactional net margin method;
A statement of international transactions is required to be submitted as per section 107EE. The DCT may
require a report singed by a Chartered Accountant or a Cost and Management Accountant. There is also
penal provisions for non-compliance regarding TP provisions.

Requirement # ii
ABC Ltd., the Bangladeshi Company and XYZ Inc., the UK based company are deemed to be associated
enterprises as per section 107A(2),as XYZ Inc. holds shares carrying not less than 25% of the voting
power of ABC Ltd. As per section 107A(5), the transactions entered into between these two companies
for sale of product, lending or guarantee and provisions of services are included within the meaning of
international transactions.
Accordingly, provisions of transfer pricing would be attracted and the income arising from such
international transactions have to be computed having regard to arm's length price. In this case from the
information given, the arm's length price has to be determined taking the comparable uncontrolled price
method to be the most appropriate method.
Amount by which total income of ABC Ltd. is enhanced on account of adjustment in the
Taka
value of international transactions:
a) Difference in price of T-shirt @$ 1 each for 1,000,000 pieces sold to XYZ Inc. ($ 78,000,000
1 X 1,000,000 X 78)
b) Difference for excess payment of guarantee fee to XYZ Inc. for loan borrowed 234,000
from foreign lender ( $ 3000 X 78)
c) Difference for excess payment for services to XYZ Inc. ( $ 5000 X 78) 390,000
d) Bad debt written off: it will be admissible expenditures only when proper -
supporting is presented, such as, supporting related legal action taken for recovery,
board resolution, etc. No impact under TP regulations.
Total 78,624,000

Amount of Tk. 78,624,000 will be added back to the taxable income under section 107C(5) of the ITO,
1984.

Should you have any query in this regard, feel free to contact us.
Yours faithfully,

MAT & Co.

Chartered Accountants

Page | 77
Question No. 6
(a)You are a VAT adviser to PQ Ltd. (―Company‖). A taxable service provider is unwilling to issue a
valid VAT invoice (Mushak-11) and has asked the Company to deduct VAT at source from the amount
payable thereto. The Chief Financial Officer (―CFO‖) of the Company has requested you to discuss the
issue in more detail at the next meeting.
Requirements:
Prepare a note for discussion at the meeting with the CFO of the Company, addressing the consequence of
entering into a transaction with a registered person who/which does not issue a valid VAT invoice
(Mushak-11). [Marks: 5]

(b) Electric bike is a bicycle powered by lightweight lithium-ion battery which has gained popularity in
many countries. A motor cycle importer imported 100 pieces of electric bicycle to try first time in
Bangladesh market. Cost per piece including VAT at import point 100 US dollar. He incurred 15%
import VAT. The importer incurred C&F charges taka 50,000 to clear the consignment. He sold 90 units
to wholesaler at 10% profit. Wholesaler incurred indirect fixed overhead of taka 15,000 in a tax period in
which he sold 90 units of electric bike.

As a pricing policy, he aims to recover the fixed overhead from margin charged to retail. Wholesale
margin is 10% on his sale to retailer. Retailer sold his entire stock of 90 units in one tax period. He
engaged a technician at monthly salary of taka 5,000/= (direct cost) to service the new electric bike.
Retailer‘s direct cost including technician salary amount to taka 50,000/=. Retailer margin is 15%.

Exchange rate Taka 80 to a US dollar.

The wholesaler maintains full statutory VAT records and operates on full VAT system. Wholesaler has 10
units unsold stock of electric bike purchase. In one later evening, his shop got fire fully damaging
(consider nothing recoverable) the entire stock of electric bike. Wholesaler approached you for legal
advice what to do under the circumstances.

Wholesaler‘s indirect fixed overhead taka 15,000/= include estd taka 2000/= insurance cover (including
15% VAT), taka 3000/= for electricity (including VAT 5%) and taka 10000/= (including VAT 15%) paid
to part timer CA application level student to provide bookkeeping support. This wholesaler can take
rebate of input VAT in the product cost but he is not sure if he can claim rebate of VAT he paid on the
indirect expenses of taka 15,000/=.

Requirements:

i. Compute VAT to be borne by consumer for the stock of electric bike actually sold by
retailer [Marks: 10]
ii. Can wholesaler claim rebate of the input VAT included in damaged stock? Describe procedure in ref
to the applicable provisions of the VAT law to deal with electric bike stock is damaged by
fire. [Marks: 5]

Answer to the Question No. 6(a):

Notes for discussion at the meeting with the CFO of PQ Ltd.

Consequence of entering into a transaction with a registered person who does not issue a valid VAT
invoice (Mushak-11)

Page | 78
According to Section 37 (2) of the VAT Act, 1991, the following activities, inter alia, will be treated as
offence, if any person:
 fails to issue a VAT invoice or renders a fallacious VAT invoice from the perspective of material
information;
 receives goods or services without VAT invoice despite the recipient is a VAT registered person;
 engages himself in receiving or acquiring possession of goods or entering into transactions
though he knows or he has reason to believe that VAT or, where applicable, VAT and SD
payable on such goods has been evaded; or
 evades or attempts to evade VAT or SD by any other means;
 does or abates in doing anything specified in clauses from (ka) to (to) of Section 37 (2) of the
VAT Act, 1991.
In the event that the aforementioned offences result in evasion of VAT, the said person shall be liable to a
monetary penalty which shall be not less than 50% and not more than 100% of the amount of VAT so
evaded. For the offences set forth in Section 37 (2) of the VAT Act, 1991, which are considered as
irregularities other than evasion of revenue, the said person shall be liable to a monetary penalty of not
less than Tk. 20,000/= and not more than Tk. 50,000/=.
Section 37 (6) of the VAT Act, 1991, provides that any person who is convicted in the Court of Special
Judge for the offences set forth in Section 37 (2) of the VAT Act, 1991, shall be liable to imprisonment
for a term which shall be not less than 3 months and not more than 2 years or a pecuniary penalty which
shall be not less than 50% and not more than 100% of the amount of VAT payable or both.
In accordance with Rule 35 of the VAT Rules, 1991, any registered person who contravenes any
provision of the VAT rules shall be liable to a pecuniary penalty which shall be not less than 50% and not
more than 100% of the amount of VAT payable on relevant supply of goods or rendering of services and
the said goods or services (where applicable) related to such contravention shall be confiscated in favor of
the government.
Furthermore, VAT authority may impose a penalty of not more than Tk. 10,000/= and not less than Tk.
5,000/= under Rule 35 of the VAT Rules, 1991, for violation of the VAT Rules, 1991, if the infringement
does not result in evasion of VAT.
In light of the above, it is obvious that there is no scope in VAT laws to do transaction with a person
who/which does not provide a valid VAT invoice (Mushak-11). Deduction of VAT at source will not
discharge the service recipient from the obligation to enter into transaction with a VAT compliant
counterpart.
Answer to the Question No. 6(b)(i):
Importer Stage - Computation of VAT
Check Amount(Taka)
Price including VAT 100x80x100 800,000.00
[VAT on import included in the price] 104,347.83 104,347.83
Price Excluding VAT - 100 units 695,652.17
ADD: C&F Charges 50,000.00

[promotional cost 1000 tk per unit is not product cost]

Total cost excluding VAT - 100 units 745,652.17
ADD: Margin 10% 74,565.217
Value Addition 124,565.22
820,217.39
VAT on Value Addition 18,684.78

Page | 79
VAT on import 104,347.83 15% 123,032.61 Output VAT
Price to Wholesale including VAT 943,250.00
Wholesaler Stage - Computation of VAT
Cost of purchase -- 100 units 943,250.00
Less: Input VAT for 100 units (Cost)*(3/23) 123,032.61 123,032.61
Net cost of goods available(100 pcs) 820,217.39

Total cost for 100 units excluding input VAT 820,217.39

Total cost for 90 units excluding input VAT 738,195.65
ADD: Margin at 10% on 90 units 73,819.57
Selling price excluding VAT -- 90 units 812,015.22

[Total value addition at wholesaler]

VAT on value addition -

Input VAT -- prop on 90 units 110,729.35 14% 110,729.35 Output VAT
PRICE TO RETAILER 922,744.57

Retailer Stage - Computation of VAT

Cost of purchase - 90 units 922,744.57
Less: Input VAT for 90 units (Cost)*(3/23) 120,357.99 120,357.99
Net cost of goods available (90 pcs) 802,386.58
ADD: Direct cost for 90 units 50,000.00
Total cost for 90 units excluding input VAT 852,386.58

ADD: Margin at 15% 127,857.99

Selling price excluding VAT of 90units 980,244.57

Total value addition at Retailer 177,857.99

VAT on Value Addition 26,678.70

Input VAT 120,357.99 15% 147,036.68 Output VAT
PRICE TO CONSUMER 1,127,281.25
Consumer cost per unit 12,525

Importer Wholesaler Retailer Consumer

100 90 90 90
Output VAT 123,032.61 110,729.35 147,036.68
Less: Input VAT - 110,729.35 120,357.99
NET VAT 123,032.61 - 26,678.70
NET VAT for 90 units 110,729.35 - 26,678.70 137,408.05
Total VAT amount consumers pay for 90 units 137,408.05
Consumer Price per unit 12,525
VAT in consumer price per unit 1,633.74
90
Total amount of VAT for 90 units sale 147,036.68

Page | 80
Answer to the Question No. 6(b)(ii):

VAT Rule 41 applies to deal with the manner how to dispose damaged goods in possession of the
assessee. The assessee should do police station record of the fire incident. The procedures under VAT law
are as follows:

 Wholesaler shall apply to local VAT circle using the Form VAT-27 within 24 hours of the
incident of fire duly detailing the damages resulted from the fire.

 He will coordinate with local VAT circle to visit the shop premises within three days to assess the
probable output VAT connected with the damaged stock and, at the same time, the VAT officer
shall forward the application to Division Office for approval with his recommendation as to how
to dispose the damaged stock.

 Division office shall make his decision within 30 days on how to dispose the damaged goods. He
will order for cancelling the input rebate on the purchase of the damaged stock and make the
adjustment of the same in the assessee‘s current account and in the next period monthly return.

 Wholesaler shall act according to the order of Division Office.

Page | 81