REPORT ON TAXATION LAWS AND PRACTICE IN BANGLADESH

PATUAKHALI SCIENCE AND TECHNOLOGY UNIVERSITY

Tax Assessment on Renata Limited

Prepared For

M. Takibur RahmanLecturer

Department of Accounting & Information SystemFaculty of Business Administration and Management

Prepared byGroup: 01(Warrior)

Level-II, Semester-IIFaculty 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 RahmanLecturerDepartment of Accounting & Information SystemFaculty 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-IIFaculty of Business Administration and Management

I

Acknowledgement

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.

III

Executive 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.

IV

Contents

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

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

3.01 Notes ………………………………………………………….…..…….………..183.02 Conclusion…………………………………………….…………...……………..19

4. Bibliography ……………………………………………………………….…..…....20

Section – 2

Section–1 ge

Section – 3

Section – 4

V

introduction

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

Origin 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

Purpose 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.

3

Limitation & Scope of the Report

As a student of faculty of Business Administration and Management, 4 th

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

Methodology 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.

5

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.

6

Assessment of Corporation and Company

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) 30% tax rate for Publicly Traded Company.

ii) 37.5% tax rate for not Publicly Traded Company and

iii) 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.

7

Tax Free Income Incase of the Company and the Corporation

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.

8

x) Cost of accounting and audit.

xi) Commission and brokerage for sale of product

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.

Rate of Tax and Rebate

Types of companies Tax rate 2004-’05 and 2005-’06

Tax rate 2006-’07 and

2007-’08On 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 30% 30%

2. In case of industrial company which is not a publicly traded company.

37.5% 40%

3. In case of a bank, financial institutions, local authorities and other companies.

45% 45%

4. In case of a person not being a company who is not resident in Bangladesh.

25% 25%

5.On dividend income 15%

6. On capital gain 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.

9

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 Rebate Amount

1. i

ii

iii

Where the productions in volume of the relevant year exceeds 15% but does not exceeds 25% of the productions volume of the preceding year.

2.5% of the Income Tax attributable to such income.

Where the production in volume of the relevant year exceeds 25% of that of the preceding year.

5% of the Income Tax attributable to such income.

Where the total income includes income received from Life Assurance Business.

12.5% would be reduced from such income

2. On the amount of Dividend received from a company registered in Bangladesh under the Company Act or a body corporate formed in pursuance of an Act of Jatio Sangsad.

15%

10

Procedure of Assessment

Generally the followings steps are followed in case of Assessment of the Company and the Corporation:

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.

Computation of Business IncomeComputation of Business Income

Computation of Total IncomeComputation of Total Income

Determination of Total Tax LiabilitiesDetermination of Total Tax Liabilities

Determination of Net Tax LiabilitiesDetermination of Net Tax Liabilities

Step-1Step-1

Step-2Step-2

Step-3Step-3

Step-4Step-4

11

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.

12

RENATA LIMITED

Profit and loss account for the year ended 31Deceember 2006

Particulars Amount

Expenses

Cost of good sold Salaries, wages, allowancesRemuneration to DirectorsContribution to provident fundCharity Fuel and powerRent, rates, and taxes InsuranceConvenience allowanceRepairs and maintenanceLegal and professional expensesAudit feeAdvertising and sales promotionField expensesDepreciationTraveling expensesPrinting and stationary Postage, telex, fax, and telephoneDistribution freightInterest on loanProvision for income tax Provision for deferred taxCanteen expensesOther expenses Contribution to WPPFPurchase of machineryMiscellaneous expensesNet profit

969,853,000221,543,000

435,0003,626,0009,114,0009,009,000

17,967,0003,950,000

85,0006,200,000

450,000200,000

58,228,00035,667,0004,178,000

91,194,0008,617,000

14,005,00052,295,00062,250,00098,240,0006,858,000

13,560,0002,652,000

16,657,000700,000

11,958,000242,358,000

Total 1,961,849,000

13

Particulars Amount

RevenueSales Dividend incomeThird party manufacturing charges received from SK+F Gain on disposal of property, plant, and equipmentInterest on tax free Government SecurityInterest from investment outside Bangladesh.

1,927,732,00012,598,000

10,269,000

1,928,000

3,554,000

5,768,000

Total 1,961,849,000

14

Assessee: Renata Limited Status: Resident

Income Year: 2006 - 2007Assessment Year: 2007- 2008

Determination of Total Income and Tax Liability

Particulars Amount (Tk) Amount (Tk)

1. Business Income: Net Profit as per profit and loss account Add: Inadmissible expenses

a) Remuneration to Directors b) Contribution to provident fund c) Charityd) Income tax e) Provision deferred tax f) Other expenses g) Purchase of machinery h) Miscellaneous expenses

Less: Non Business Income

a) Dividend incomeb) 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

Business Income

Less: Admissible expenses a) Miscellaneous expenses as per Income Tax

Rule b) Tax holiday income

Total Business Income

2. Non Business Income:

a) Dividend incomeb) Third party manufacturing charges

received from SK+F c) Gain on disposal of property, plant, and

equipmentd) Interest from investment outside Bangladesh

435,0003,626,0009,114,000

98,240,0006,858,000

500,000700,000

11,958,000

242,358,000

131,431,000

12,598,000

10,269,000

1,928,0003,554,0005,768,000

373,789,000

(34,117,000)

9,578,7901,472,000

339,672,000

(11,050,790)

12,598,000

10,269,000

1,928,0005,768,000

328,621,210

30,563,000

15

16

Total Taxable income 359,184,210

Particulars Amount Amount

3. 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. Determination of net tax liability Income tax Net tax payable

103,397,463289,200

1,889,700105,576,363

(98,240,000)7,336,363

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%.

17

15. On dividend income tax rate is 15%.

Conclusion

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.

18

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.

19

1020