UNIVERSITY OF DHAKA

Master of Professional Accounting (MPA) Program

Course code: MPA 705 (SECTION A)

Course Title: Advanced Taxation

ASSIGNMENT
ON
Tax holiday vs Accelerated depreciation,
a critical analysis

Submitted to Submitted by
Ran.ian Kumar Bhowmik, FCMA Mir Makarim Ahsan
Member (Tax) ID: MPA19010836
National Board of Revenue

Submission Date: a
03-08-2020
 EXECUTIVE SUMMARY

A common form of tax incentive found in about half of developing countries is

a "tax holiday" which permits a new company to operate for a given number
of years before paying corporate income taxes. Companies may be required to
meet certain conditions to qualify for a holiday. Most often, the tax holiday is
an instrument used by a government to encourage investment in long-lived
capital and to direct a country's long-term development.

On the other hand, “Accelerated depreciation” is an extraordinary depreciation

allowance on machinery/plant as per the third Schedule of income tax ordinance 1984.
Accelerated depreciation is not allowed for physical infrastructure facility under section
46C,

In this paper we focus on the problem of a combination of two popular types of tax
benefits accelerated depreciation and tax holidays. In situations where companies need
to choice between these two incentives they should consider the nature of their
business’s because nether of this two options in superior to other.

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 CONTENTS
INTRODUCTION ........................................................................................................ 1
ACCELERATED DEPRECIATIONS ....................................................................... 2
Definition .................................................................................................................... 2
Extraordinary depreciation rate .................................................................................. 2
Conditions ................................................................................................................... 2
TAX HOLIDAY ............................................................................................................ 3
Definition .................................................................................................................... 3
Eligibility .................................................................................................................... 3
Industrial Undertaking; ........................................................................................... 3
Physical Infrastructure facility ............................................................................... 4
Conditions ............................................................................................................... 4
Application procedure ................................................................................................ 5
Withdrawal and Cancellation of tax holiday. ............................................................. 5
Period of Tax holiday ................................................................................................. 6
Industrial undertakings ........................................................................................... 6
Physical infrastructure facility ................................................................................ 7
Conditions to be fulfilled after getting tax holiday .................................................... 7
Documents to be submitted with tax holiday application .......................................... 8
RECOMMENDATIONS ............................................................................................. 9
REFERENCES ........................................................................................................... 10

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 INTRODUCTION

Tax holiday and Accelerated Depreciation are tax incentives, which permits new
companies to operate for a given number of years without paying corporate income
taxes or paying low corporate taxes.
Tax Holiday: Tax holiday means a period during which business income is tax
exempted for industrial undertaking or physical infrastructural facility.
Accelerated depreciation It is an extraordinary depreciation allowance on
machinery/plant as per the third Schedule of income tax ordinance 1984 This is a
method of depreciation used for income tax purposes that allows greater deductions in
the earlier years of the life of an asset. It results higher expenses in earlier periods
compared to in later periods. Companies may utilize this strategy to deferment tax
liabilities due to income being lower in earlier periods.

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 ACCELERATED DEPRECIATIONS

Definition
It is an extraordinary depreciation allowance on machinery/plant as per the third
Schedule of income tax ordinance 1984 This is a method of depreciation used for
income tax purposes that allows greater deductions in the earlier years of the life of an
asset. It results higher expenses in earlier periods compared to in later periods.
Companies may utilize this strategy to deferment tax liabilities due to income being
lower in earlier periods.
Extraordinary depreciation rate
Alternative to the tax holiday facility mentioned for the industrial undertakings under
section 46B above, accelerated depreciation allowance is reinstated o machinery and
plant for the new industrial entrepreneurs as stated below,

Year Rate

1st 50%

2nd 30%

3rd 20%

Accelerated depreciation is not allowed for physical infrastructure facility under section
46C
Conditions
The industrial undertaking referred who want accelerated depreciation shall fulfil the
following conditions, namely: -
a) The industrial undertaking is owned and managed by a Bangladeshi company,
or a body corporate formed in pursuance of an Act of Parliament, having its
registered office in Bangladesh;
b) It belongs to the industrial undertaking as specified in subsection 2 of section
46B;
c) The particulars required for the purpose of entitlement to, or claiming accelerated
depreciation allowance under this paragraph have been furnished; and
d) The application in the prescribed form for accelerated depreciation allowance
under this paragraph, as verified in the prescribed manner, is made to the Board
within six months from the end of the month of commencement of commercial
production; and The application is accompanied by a declaration in writing that
the undertaking has not been approved for, and that no application in respect of
the undertaking has been made or shall be made to the Board for approval of,
exemption from payment of tax under section 46B or 46C of this Ordinance for
any period.

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 TAX HOLIDAY

Definition
Tax holiday means a period during which business income is tax exempted for industrial
undertaking or physical infrastructural facility.
Eligibility
Two types of industries are eligible to apply for tax holiday: -
1. Industrial Undertaking;
2. Physical Infrastructure facility.

Industrial Undertaking;

The following 34 categories of industries are now eligible for tax holiday:
1. Active Pharmaceuticals ingredient industry and radio pharmaceuticals industry
2. Agriculture machinery
3. Automatic bricks
4. Automobile
5. Barrier contraceptive and rubber latex
6. Basic components of electronics (resistor, capacitor, transistor, integrated
circuit and multilayer printed circuit board etc.)
7. Bi-cycle including parts thereof
8. Bio-fertiliser
9. Biotechnology-based agro products
10. Boiler, including parts and equipment thereof;
11. Compressor, including parts thereof
12. Computer hardware
13. Furniture
14. Home appliances (blender, rice cooker, microwave oven, electric oven,
washing machine, induction cooker, water filter etc.)
15. Insecticides or pesticides
16. Leather and leather goods
17. LED TV
18. locally-produced fruits and vegetables processing
19. Mobile phones
20. Petrochemicals
21. Pharmaceuticals
22. Plastic recycling
23. Textile machinery
24. Tissue grafting
25. Toy manufacturing
26. Tyre manufacturing
27. Artificial fibre or manmade fibre manufacturing

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 28. Automobile parts and components manufacturing
29. Automation and robotics design and manufacturing, including parts and
components thereof
30. Artificial intelligence-based system design or manufacturing
31. Nanotechnology-based products manufacturing
32. Aircraft heavy maintenance services, including parts manufacturing
33. Electrical transformer manufacturing

Physical Infrastructure facility

The following 19 categories of “physical infrastructure facility" are now eligible for
tax holiday:

1. Deep sea port;

2. Elevated expressway;
3. Export processing zone;
4. Flyover;
5. Gas pipe line;
6. Hi-tech park;
7. Information and communication technology (ICT) village or software
technology zone;
8. Information technology (IT) park;
9. Large water treatment plant and supply through pipe line;
10. Liquefied natural gas (ING) terminal and transmission line;
11. Mono-rail;
12. Rapid transit;
13. Renewable energy (e.g. energy saving bulb, solar energy plant,
14. Windmill);
15. Sea or river port;
16. Underground rail;
17. Waste treatment plant; or
18. Any other category of physical infrastructure facility as the
19. Government may, by notification in the official gazette, specify.

Conditions

Some conditions are required to be fulfilled NBR tax holiday under section 46B and
46C of the income Tax Ordinance, 1984. These are as follows: -
1. The undertaking must be owned and managed by either a body corporate established
by or under an act of parliament with its head office in Bangladesh or a company as
per Companies Act, 1913/1994 with its registered office in Bangladesh having a
subscribed and paid up capital of not less than taka20,00,000/- (Tk. Twenty lakh) on
the date of commencement of commercial production or operation.

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2. The undertaking is not formed by splitting up or by reconstruction or reconstitution
of business already in existence or by transfer to a new business of any plant and
machinery used in business, which was being carried on in Bangladesh’s at any time
before the commencement of the new business.
3. The undertaking must be approved by the NBR for the purpose of tax holiday.
4. The undertaking shall have to obtain clearance certificate from the Directorate of
Environment for the relevant income year.

Application procedure
Tax holiday application is to be submitted to the NBR within 6 months from the end of
the month of commercial production or operations in the form prescribed in Rule 59A,
in duplicate, duly signed and verified by the MD or Director of the company.
1. NBR shall give its decision within 45 days from the date of receipt of the
application by the Board. Otherwise, the undertaking shall be deemed to have
been approved.
2. NBR shall not reject any application unless the applicant is given a reasonable
opportunity of being heard.
3. If NBR rejects any tax holiday application, the undertaking can submit a review
application to the Chairman of the Board within 4 months from the date of receipt
of the rejection letter. Chairman then will either review himself or will constitute
a committee consisting of 3 Member of the NBR who will review its previous
decision and pass such order as it think fit. There is no time limit for disposal of
the review application. The decision of the review committee of the NBR as final
and conclusive and there is no scope to submit further review application.
Withdrawal and Cancellation of tax holiday.
Any undertaking after getting tax holiday from the NBR can write to the NBR for
cancellation of tax holiday within 1 year from the date of granting such tax holiday.
a) NBR may also cancel/suspend fully/partially any tax holiday in the public interest.
b) The DCT in the course of assessment may also withdraw the tax holiday from the
relevant assessment year if he is satisfied that one or more of the required conditions
are not fulfilled.
c) Tax holiday shall be deemed to have been withdrawn for the assessment year in
Which the following transaction is made: -
A. If the company is engaged in any commercial transaction with another company
having one or more sponsor shareholders.
B. If the DCT finds that the company has purchased or sold goods at higher/lower
price than the normal market price with the intention to reduce the income of
another undertaking/company.
C. If the DCT finds that the company employed/allowed any foreign national to
work without prior approval from the BOI or any other competent authority of
the Govt.

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Period of Tax holiday

Industrial undertakings

Area Years Rate of exemptions

Established from Established from 01/7/19 to

01/7/13 to 30/6/19 30/6/14

Dhaka, Mymensingh 1st & 2nd 100% 1st 90%

and Chittagang division
(excluding Dhaka, 5 3rd 60 2nd 80
Narayangonj, Gazipur
and Chittagong district 4th 40 3rd 60
and alsothe hill district
of Rangamati, 5th 20% 4th 40
Bandarban
5th 20%

Rajshahi, Khulna, 1st & 2nd 100% 1st & 2nd 90

Sylhet, Rangpur and
Barisal 3rd 70 3rd 80
division[excluding city 10
corporation area] and the 4th 55 4th 70
hill district of
5th 40 5th 60
Rangamati, Bandarban
and Khagrachari 6th 25 6th 50

7th to 10th 20% 7th 40

8th 30

9th 20

10th 10

Provided that bio-fertilizer industry and petro-chemical industry will get tax holiday for
5 years even if it is set up in the district of Dhaka, Narayangonj, Gazipur and Chittagong.

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Physical infrastructure facility

Year Established from within Established from 01/7/19 to 30/6/14

30/6/19

1st & 2nd 100% 90%

3rd 80 80

4th 70 70

5th 60 60

6th 50 50

7th 40 40

8th 30 30

9th 20 20

10th 10% 10%

Conditions to be fulfilled after getting tax holiday

a) The profits and gains of the tax holiday company shall be computed separately;
b) Any loss during the tax holiday period cannot be carried forward beyond the tax
holiday
c) period.
d) Only normal depreciation is applicable for tax holiday enjoying companies 30% +
l0 = 40%-year wise tax holiday income is to be reinvested. 30% is to be reinvested
in the same company or in a new industry within the tax holiday period or maximum
within I year from the end of the tax holiday period. Another 10% is to be reinvested
in the shares of listed company in each year within 3 months from the end of the
income year. Otherwise income of the year or years will subject of tax. However,
the quantum of reinvestment will be reduced by the amount of dividend if declared
by the company.
e) Company shall not Employ/allow any foreign national to work with-out prior
approval from the BIDA or any other competent authority of the Govt.
The income of the tax holiday company under the following heads are taxable;
(1) Capital gain
(2) Any income arising from the disallowances u/s 30.
(3) Dividend is taxable at the hand of shareholders

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Documents to be submitted with tax holiday application

The following documents are to be submitted along with tax holiday application: -
a) An attested copy of certificate of incorporation;
b) An attested copy of the Memorandum and Articles of Association of the
company;
c) A certificate of commencement of business;
d) In case the company has already commenced business, certified copy of the
audited balance sheet and profit and loss accounts for the period for which the
accounts have been prepared:
e) In case industrial undertaking/physical infrastructure facility for which approval
is sought has been acquired for another party, an attested copy of the agreement
between the applicant company and the seller enter into for the acquisition of the
industrial undertaking/physical infrastructure with list and value of assets
acquire;
f) A certificate to the effect that the industrial undertaking/physical infrastructure
facility has not applied or shall not apply for accelerated depreciation-allowance
under paragraph 7 or 7 A of third Schedule to the Ordinance.

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 RECOMMENDATIONS

Tax holiday and Accelerated Depreciation are tax incentives, which permits new
companies to operate for a given number of years without paying corporate income
taxes or paying low corporate taxes but Tax holiday and Accelerated depreciation are
mutually exclusive. In situations where companies need to choice between these two
incentives I will recommend them to consider following matters,

 Labour-intensive/ Capital-intensive:
A company tax holiday can be generous to labour if such labour is compensated by
profit distributions that may be exempt at the individual level. Moreover, although
it is generally disallowed, investors may try to shift taxable income earned by
associated companies into the tax holiday firm. Accelerated Depreciation will not
benefit labour intensive industries because they will have less depreciable assets on
the other hand the capital intensive industries can use accelerated depreciation
option, which will allow them to charge higher depreciation and pay less taxes.

 Profitable venture from starting/ initially losing venture:

The tax holiday provisions for investment in long-lived assets are not as generous to
the firm as one might initially believe. Even if the firm is fully exempt during the
holiday, its investment decisions may be significantly affected by tax liabilities that
will occur after the holiday. If a firm must write off tax depreciation allowances
during the holiday but its capital goods generate high income thereafter, without
depreciation deductions, the firm may face relatively high effective tax rates.
If profitable companies use accelerated depreciation options they may have to pay
tax for the income which are more than the depreciation so it’s better for them to use
tax holiday and not pay tax upfront and also reduce taxes by using the depreciation
in later years. On the other hand, the companies, which is initially losing venture,
should use accelerated depreciation because this will help them to carry forward the
losses in future and allow them to pay no or less tax when it will become profitable.

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 REFERENCES

 Corporate Tax Holidays and Investment by Jack M. Mintz (THE WORLD

BANK ECONOMIC REVIEW, VOL. 4, NO. 1: 8 1 -1 02, jan-1990)
 Income tax ordinance 1984
 NBR Website ( http://nbr.gov.bd/ )
 Bangladesh Bank Website ( https://www.bb.org.bd/ )
 Taxation Handbook (Updated to Finance Act 2019, September 2019)

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