Published at: The Financial Express, February 17, 2019
The Bangladesh Investment Development Authority (BIDA) has recently suggested updating of the fiscal depreciation, as mentioned in the third schedule of the income tax ordinance.
During a meeting with the officials of the National Board of Revenue (NBR) and other stakeholders recently, the BIDA found the system of recognising and categorising the products for fiscal depreciation rather complex.
The Bangladesh Investment Development Authority (BIDA) has recently suggested updating of the fiscal depreciation, as mentioned in the third schedule of the income tax ordinance.
During a meeting with the officials of the National Board of Revenue (NBR) and other stakeholders recently, the BIDA found the system of recognising and categorising the products for fiscal depreciation rather complex.
The revenue board should follow revaluation method for determining the value of property, plant and equipment, which will reflect economic reality, the state-investment promotion agency said.
The BIDA told the meeting the current “fiscal depreciation” system is largely based on historical cost and discourages investment.
The BIDA has also proposed the taxmen to incorporate fiscal depreciation into the existing tax laws for the property used for rental income.
“Fiscal depreciation is not entitled to property used for rental income. This is an obstacle to development of real estate companies (not developers) engaged in development and management of real estate for the rental purpose,” the BIDA said.
It said fiscal depreciation can encourage investors to come with large real estate projects through fiscal product such as REITs (real estate investment trusts)
REITs were established by the US Congress in 1960 as an amendment to the Cigar Excise Tax Extension of 1960.
In a paper titled “Fiscal depreciation for economic transformation: Modernisation of third schedule of income tax ordinance,” and presented at the meeting the BIDA said the relevant provisions of the income tax ordinance require updating to accommodate real business situation as well as to provide incentives to investors.
It said the current depreciation facility in the tax law does not consider the nature and actual life of assets, also it is not following the financial accounting and reporting standards.
“The third schedule of income tax ordinance, dealing with how assets are recognised and categorised for fiscal depreciation are complex, requires additional documentation, and does not incorporate the current needs of business,” the BIDA said in the paper.
Currently, fiscal depreciation is applied to written down value at a fixed rate throughout the life of an asset which in turn assumes an arbitrary life of all assets falling in the class.
For example, industries can enjoy 20 per cent depreciation on written down value of machinery.
This means a little more than 21 years will require reaching negligible written down value, which is unrealistic in many situations, the paper noted.
The BIDA also proposed incorporating the required provision in the third schedule that would first capitalise some activities including research and development (R&D), patent and amortise later.
Talking to the FE, a senior BIDA official, who attended the meeting, said some tangible and intangible assets are entitled to enjoy the depreciation facility as per tax law but, in actual sense, they are unable to enjoy this to reduce tax burden on them due to the lack of updated provisions in the tax law.
He said furniture, real estate, tanker, ship, software businesses are the worst sufferers as depreciation facility is not determined in the tax law as per commercial reality of those products.
For example, the furniture industry enjoys depreciation facility at the same rate irrespective of their categories-wood, steel, iron or cane-made.
The BIDA official said the economic life of the products, both tangible and intangible, should be considered for the depreciation facility.
Syed Aminul Karim, tax advisor of ACI limited and former income tax member of NBR, said the BIDA’s proposal should be considered seriously to make the third schedule investor-friendly.
He argued that the existing depreciation facility in tax laws needed an amendment in line with the suggestions of the investors
In the meeting with BIDA, representatives of the ACI Limited also came up with the suggestions regarding required amendments to the fiscal depreciation facility.
