Private employees to face strict tax scrutiny

Private sector companies are going to face greater scrutiny in claiming their expenses for employees' salaries.

From fiscal 2017-18, companies will have to pay taxes on the salaries to be paid to employees who avoid tax return submission despite having taxable income.

This is also likely to be applicable to those working at management or executive level positions in a firm -- a further tightening of rules by the National Board of Revenue to increase collection of payroll tax that remains at a very low level because of non-compliance.

“We are focusing on compliance in the private sector after taking measures to ensure submission of income tax returns in public sector,” said a senior official of the NBR.

The NBR last year framed rules making it mandatory for public sector employees drawing more than Tk 16,000 in monthly salary to have Taxpayer Identification Number.

The rule, however, has been waived for private sector employees drawing similar amount of wages a month.

It also made submission of returns mandatory for public sector employees with basic salary of Tk 16,000 and above.

The latest rule, proposed in the Finance Bill 2017, will empower taxmen to claim taxes on salary payment to those employees who do not submit returns even after having taxable income.

Tax planners said employers will have to ensure that their employees with taxable income submit tax returns, to claim expenses for salaries.

In other words, employees will have to inform their offices about tax returns submission, officials said.

One can inform offices about his/her tax return submission date and the serial number given in the acknowledge receipt or tax certificate.

The latest measure comes a year after the NBR made it mandatory for employers to submit a list of employees' TINs to field tax offices while claiming salary expenses.

If employers fail to do so, the salary payment that they have made will be treated as income and will be taxable, according to taxmen.

“We introduced audits into tax returns related to source tax last year. We will go for auditing the returns of files related to withholding tax,” the official said.

The NBR is seeking to tighten the rules at a time when collection of payroll taxes, which accounts for nearly 2 percent of total income tax collected in a year, is on the decline, according to the NBR data.

The NBR logged in about Tk 716 crore as withholding tax from salaried persons in fiscal 2015-16, down 27 percent year-on-year, according to NBR's provisional data. The collection of withholding from salaries stood at Tk 600 crore in the first half of the fiscal year, with officials expecting total receipts from salaries to surpass last year's collections.

The NBR official said the rule to audit tax returns related to source tax was introduced last year to ensure that withholding tax comes to the state coffer properly and to curb the practice of claiming higher expenses by showing ghost employees on the payroll.

Globally, payroll tax is the main source of withholding tax. However, its contribution to total withholding tax is very low.

“This low ratio indicates evasion and non-compliance,” he said, citing that withholding tax on salaries accounts for 15-20 percent of total collections in developing countries and 25-30 percent in developed countries.

To curb such tax evasions, the NBR earlier tagged a condition that salaries should be paid through banking channels.

Taxmen said the rule that made it mandatory to pay salaries to employees drawing in more than Tk 16,000 based on TIN has become instrumental in improving compliance.

The number of TIN shot up to 29 lakh now from 19.84 lakh at the end of fiscal 2015-16. The number of tax return filers also surged to 15.65 lakh this year from nearly 12 lakh a year ago, according to the NBR.

“We are very happy that the corporate sector is cooperating,” the official added.

Some 5.95 crore people above 15 years of age are employed in Bangladesh, with about 95 percent of them being in the private sector.

Of the employed, 2.36 crore are paid employees and 55 percent draw salaries and wages on a monthly basis, according to the Quarterly Labour Force Survey 2015-16 by the Bangladesh  Bureau of Statistics.

Managers, professionals, technicians and associate professionals, clerical support workers, and service and sales workers account for one-fourth of the total employed population, according to BBS data.