Published in TAX INDIA ON LINE ON JULY 31, 2013 TPC & TPA - Alternative system of tax collection for Developing Countries - Part I By Prof Bijon Sarma THE system of Tax collection from the wage-earners, product-sellers, professional servicemen and renters of accommodation and equipments are known to all. This system works quite well in the developed countries. The same, however, creates problems in the developing countries due to cost for imported equipments, lack of skilled manpower and presence of personnel with questionable integrity. In the above situation, this author has proposed an alternate system of tax collection, which is non-expensive, efficient and transparent. The system comprises of : (01) Introduction of TPC or “Two-party Payment Cheque” (the employers can use this cheque for payment of wages, where the specified taxes are automatically deposited in the government account), (02) Introduction of TPA or “Two-party Payment Account” (where the product sellers, servicemen and renters can deposit the sale proceeds and their VAT or tax would automatically go to the government account) and (03) Rescheduling of the time of annual tax payment (where the final month of annual tax payment would be decided by the first letter of the tax payer's name). Brief details of the system are given hereunder in three installments and this one is the first part. TWO PARTY PAYMENT CHEQUE (TPC) In case of ordinary bank cheque the account holder directs his bank to debit his account and pay the quoted sum to a single party, who may be himself or his nominee or nominee's account. In the proposed “Two party Payment Cheque”, the payments will be made to the following two parties : (01) The account holder, his nominee or the nominee's account and (02) The government's tax account with this bank. The percent of sharing will be mentioned in percent of the whole, Figure and Words. A sample TP Cheque designed by this author has been shown below. SAMPLE TWO PARTY PAYMENT CHEQUE (TPC): ABCDEFGH BANK LTD Branch ......... Code ................... Cheque No. 0123456788 Date Pay to - Party-01: Bearer Party-01: Bearer Taka (in words) ................................................................... ................................................................... and Party -02 : Govt.'s Tax account No. ................................... Taka (in words) ..................................................... .............................................................................. Total amount (in words)...................................................... .............................................................................. Payee % Amount in figure. (1) Bearer or A/C. no ............ .............. .......... ............. (2) Gov. tax A/C. no. ......... ........................ ........ ............ Total 100% ............. Irrespective of whether it is cash or account payee cheque, the TPC will have to placed along with a “Tax Deposit slip” as shown here under. SAMPLE TPC DEPOSIT SLIP: ABCDEFGH BANK LTD Branch .......... Code ................... TPC DEPOSIT SLIP Cheque type Cash A/C Payee Sl. No 0000000000 Name ................................................... A/C. No. ..................... Date Account holder's Tax. Identification Number (TIN) Received by Payee % Taka in Figure and Words Ledger Serial Signature (01) In cash to ................................... Or, in A/C No. ................................... .......... Tk. ............................... (in words) ..................................................... (02) In Tax A/C No. .................................. ........ Tk. ................................. (in words) .......................................... Total 100 Tk. .............................. .. (in words) .................................... ....................................................... Tellers No. ............................ Deposited by ............................................................. Officer ..................................... After payments the bank would return one copy of the signed and sealed Deposit Slip to the depositor, who would preserve it for future use. The wage earners (government employees or those working in private companies) can be paid their taxable payments through the above TPC. After en-cashing the same in the bank, the final job of the payee would be, submission of a month-wise statement showing the Dates, Cheque nos., Tax amounts paid, type of tax (like, salary, bonus, selling of household items) etc. to the tax collection authority. IMPOSING TAX ON MONTHLY SALARY In most countries the tax authorities impose tax on annual income. However, it is convenient to use TPC when the same is imposed in percent on monthly salary. And it is possible to find out the above percent (tentative) from the annual taxable income, as mentioned by the tax authority. We present hereunder the process of conversion as may be applied in case of Bangladesh. The BD government has imposed different rates of taxes for the government and private employees. For example, the government employees have to pay tax on their basic salaries only, whereas the employees in the private sectors have to pay taxes for allowances like, house rent, festival bonus, incentive bonus, medical allowance, transport allowance, entertainment allowance, recreation allowance etc. GOVERNMENT EMPLOYEES : The tax authorities have made five slabs of annual income and have imposed varying amount of taxes on each of them. It has been shown in the second column of the following figure. No upper limit has been given in case of Slab 5. For convenience we have considered it as Taka 3,00,000. The rate of tax on monthly salary has been calculated from the given slabs by using the following principle : Rate of tax on monthly salary (in percent) = Income from all applicable slabs divided by 100. RATE OF TAX FOR GOVERNMENT EMPLOYEES ON ANNUAL INCOME AND THAT ON MONTHLY SALARY PRESENT TAX RATE ON ANNUAL INCOME EQUIVALENT PERCENT OF TAX ON MONTHLY SALARY (by calculation) Slab Annual Income Rate Monthly salary Rate Rounded 1 From 0 to 1,80,000 0% 0- 15,000. 0% 0% 2 From 1,80,000 to 4,80,000 10% 15,000 to 32,000 6.25% 7% 3 From 4,80,000 to 8,80,000 15% 32,000 to 73,400 10.227% 11% 4 From 8,80,000 to 11,80,000 20% 73,400 to 98,400 12.72% 13% 5 Above 11,80,000 (Considered up to 14,80,000) 25% Above 98,400 15.20% 16% After the rate of tax on monthly salaries has been found out, the taxes payable by government employees can be collected in the following way : (i) The employers shall pay all taxable monthly payments of their employees (wage earners) through Two-party Payment Cheque (TPC) with mention of the rate of tax. (ii) All non-taxable payments (like, festival bonus, allowances etc.) shall be made through ordinary cheques. TAX FOR PRIVATE EMPLOYEES : In addition to the tax on basic salaries, the wage earners working in the private sector need to pay taxes for house rent, festival bonus, incentive bonus, entertainment allowance, medical and transport allowance etc. However, they are given exemption for house rent up to Taka 15,000 per month. The problem with the assessment of taxes of such employees is, various employers give the above mentioned allowances at varying rates. Naturally, it is not possible to find out any universal scale or rate of tax for them. In such a situation, the employers would have to work out the annual taxable income of each of their employees at the very out set. This can be found out by summation of (i) Basic salary for one year, (ii) Festival bonus (usually it amounts to two month's basic salary), (iii) All allowances like, house rent, excess of approved medical allowance, transport allowance, entertainment allowance, recreation allowance etc. and then deducting the house rent at the rate of maximum Taka 15,000.00 per month. This would give the annual taxable amount. Rate of tax for this amount based on the slab fixed by the authority can be found out from the following table. RATE OF TAX FOR PRIVATE EMPLOYEES ANNUAL INCOME (inclusive of all taxable allowances) TAX RATE (on monthly payment) Taka 0 to Taka 1,80,000 0% In between Taka 1,80,000 to Taka 4,80,000 7% In between Taka 4,80,000 to Taka 8,80,000 11% In between Taka 8,80,000 to Taka 11,80,000 13% In between Taka 11,80,000 to Taka 14,80,000 and above 16% After the rate of tax has been found out, the employees can be given their taxable payments through Two-party Payment Cheque, with the mention of the rate of tax. Also the non-taxable payments, if any, may be paid by ordinary cheque. The tax authorities at times declare rebate on tax on certain items like, investment, donation etc. In such case, the tax payer may preserve documents for such items in the previous year and submit those with request for refund in the current year. TWO PARTY PAYMENT ACCOUNT (TPA) The large departmental stores sell low to mid-priced items at a quick rate. The use of “Bar code readable Cash registrar Machines” is a better option for them. This can be well accepted on condition that they honestly pay the government their taxes in due time. After them, the other important tax-payers are the following : (i) Sellers : Emporiums or stores selling high-price commodities at low frequency, (ii) Professional service providers : Physicians, Consultants, Lawyers etc. who give professional services, (iii) Renters : Persons or organizations renting accommodation, vehicle and equipments. The payable taxes of the above three groups can be easily be collected through the proposed TP Account. TP Account is like ordinary bank account with the additional arrangement that, (i) Fund from such account can be withdrawn only with TP Cheque and (ii) With every such withdrawal the percent mentioned in the name of the account will be deposited in the Tax account of the government. Let us take an example. Let an emporium sell high-price commodities like, electronic goods, jewelry, car etc. The tax authority has already prescribed varying rates of tax like, (say) 5%, 7%, 10% etc. on the selling price of these items. The tax authority would instruct such emporiums to open TP Accounts with titles (say), TPA5, TPA7 and TPA10 etc., where the numbers after ‘TPA' indicate the percent (%) of tax to be paid to the government. In case an emporium sells types of products for which the tax authority have prescribed varying rates, they would have to open different TP Accounts for each and use different types of cash memo-books. The ‘Cash Memo books' will have to be signed and sealed by the tax authority prior to use. After the buyer purchases any item by cash or normal cheque, it would be obligatory for the seller to deposit the sum in their specified TP Account. Acceptance of cheque will be the prerogative of the seller. However, such cheques must be crossed by writing “Payee's TP Account only”. The process of collection of taxes from the service professionals (like, physicians, lawyers etc.) and accommodation and vehicle renters (like, house owners, car renters etc.) will take place exactly in the way narrated in case of the seller of high-price commodities. It may be mentioned here that at present, in most of the developing countries the systems followed by the tax authorities for such collections do not work efficiently. To be continued… (The author is M.Arch, Architecture Department, Ahsanullah University of Science & Technology, Dhaka, Bangladesh)