The implications of tax exemption laws in Bangladesh

          Mohammad Taqi Yasir[1]












Tax exemption is one of the key instruments employed by governments to stimulate economic growth. The reason behind this is its implications which make incomes falling under the garb of tax exemption laws to be tax free. The concept of tax exemption is nothing complicated; it’s effortlessly plain and clear. However, the application of laws governing tax exemptions is knotty and convoluted. The complexities appertaining the application of tax exemption laws lie in relation to its extent. It has been and it still remains a matter of debate as to whether business undertakings taking benefit of tax exemption can also pass this exemption to dividends issued by the entities. Furthermore, the treatment of income being liable to tax exemption has also posed to be controversial. Nevertheless, the judiciary of Bangladesh has in various cases attempted to clarify the perplexities concerning tax exemption laws. These decisions, albeit decided in the last century, stands strong today.







One of the biggest source of state revenue for any country is taxation. Taxes are mandatory charges imposed by the government through legislations and regulations on income and profits, or added to the cost of some goods, services, and transactions. Taxes differ from other sources of revenue in that they are compulsory levies and are unrequited—i.e., they are generally not paid in exchange for some specific thing, such as a particular public service, the sale of public  property, or the issuance of public debt.[2] While taxes are presumably collected for the welfare of taxpayers as a whole, the individual taxpayer’s liability is independent of any specific benefit received.[3]

The principal purpose of imposing tax is to raise revenue to meet government expenditure. However, there are numerous other objectives influencing the imposition of taxes which includes alleviating income inequalities by imposing high tax rates on high income earners and comparatively lower tax rates on low income earners, controlling economic cycles – boom and depression, and reducing unemployment.

The purposes mentioned above indicates that tax plays a very important role in every economy. It is in fact, an influencing factor of economic growth. While tax imposition raises state revenue, it may also discourage development in certain areas of business if the tax rates are too high. This is essentially because high taxation will increase of costs of the goods and services which will inversely affect the demand of the goods and services of that particular industry.

The inverse correlation between expansions in an economic sector and high tax rates have prompted governments to enact tax exemption laws. Tax exemptions are monetary exemptions stipulated by the law. The effect of tax exemptions is to reduce taxable income which may include complete relief from taxes on certain types of income. It is to be noted that tax exemption are statutory exceptions and are not absence of taxations in certain circumstances, which are otherwise known as exclusion.

Tax exemptions are usually imposed on certain entities or on certain economic sectors. The purpose of tax exemption is to stimulate growth of tax exempted entities and to encourage developments and expansion in the tax exemption economic sectors. It is a common tool for inducing investments in developing countries. In fact, the People’s Republic of Bangladesh (“Bangladesh”) has been a regular user of tax exemption laws. Chapter VI of the Income Tax Ordinance 1984 (the “ITO 1984”) of Bangladesh allows tax exemptions and allowances to be made. The imposition of tax exemption legislations in Bangladesh dates back to pre-liberation Bangladesh with its use being continued till today to encourage growth in certain areas like the power sector.

Tax exemptions, as can be discerned from the name and the explanations made earlier, are simply exemptions from tax. While this may seem plain, ordinary and a non-debatable topic, the effects of tax exemptions have been largely controversial, especially in Bangladesh. This invited debates from several quarters and required the involvement of the judiciary for clarifications of its impact. At present, there are a string of judicial decisions which have settled the issues appertaining tax exemptions. Nevertheless, the existence of such concrete decisions has not been universally accepted by academics and ergo, the debates on the tax exemption laws have not ceased. This paper will seek to discuss the impacts of tax exemptions in light of judicial commentaries.

In order to aptly analyse the tax exemption laws, it is imperative that an existing tax exemption law is taken into consideration. This exposition shall discuss the impacts of tax exemption laws in light of SRO No. 211-Law/Income Tax/2013 (the “SRO 211”). The SRO 211 granted tax exemption on income generated from the business of power production for a period of 15 years provided the power producing company initiated commercial productions on or before December 31, 2014. It must be noted that the application of the tax exemption on companies starting its commercial operations on or before December 31, 2014 was subsequently extended to June 30, 2016 by SRO No. 354-Law/2013 (the “SRO 354”) and further to December 31, 2019 by SRO No. 246/Law/2016 (the “SRO 246”).

The above SROs applies only to companies undertaking the business of power production and the exemption granted by the SROs are only applicable to income generated from power production of such companies. These two conditions must be fulfilled if an entity is to take benefit of the SROs. This view is supported by the case of Commissioner of Taxes v Ghaus-i-Pak-i-Azam Welfare Trust (“GPAW”)[4] where the Appellate Division of the Supreme Court of Bangladesh (the “Appellate Division”) held that tax exemption granted by Section 4(3) of the Income Tax Act 1922 (the “ITA 1922”) did not apply to a trust since it failed to fulfill the conditions laid down by the aforesaid provision.

In GPAW, the respondent-assessee was a welfare trust known as Ghaus-e-Pak-i-Azam. The property dedicated to the trust for charitable and religious purposes originally consisted of two motor launches and one insurance policy of Tk. 50,000/-. Three more launches were later brought in and since then, the entire income derived from the business of plying these five launches for hire was applied wholly for charitable and religious purposes and the said business was also carried on by the trustee himself who had no business of his own. The trustee sought exemption from tax under Section 4(3) of the ITA 1922 which reads as follows: “Any income, profits or gains falling within the following classes shall not, to such extent as may be specified in this sub-section or prescribed in this behalf, be included in the total income of the person receiving them,—(i) Any income derived from pro­perty held under trust or other legal obligation wholly for religious or cha­ritable purposes, and in the case of property so held in part for such purposes, the income applied, or finally set apart for application, thereto: Provided that in the case of income derived from business this clause shall not apply unless the business is carried on, on behalf of a religious or chari­table institution and the income is applied solely for a religious or charitable purpose of the institution; and either-(i) The business is carried on in the course of the carrying out of a religious or charitable purpose of the institution; or (ii) The work in connection with the business is mainly carried on by bene­ficiaries of the institution.

In reaching the conclusion that the trust is not liable to be exempted from tax, the Appellate Division opined that: “Reading sub-section (3) as a whole it is found clearly that though, in general, income from property held in trust wholly for religious or charitable purpose is exem­pted from income-tax, but when the said property is a ‘business’ then two alternative conditions have been imposed for getting that exemption, one condition being that the business is carried on in the course of the carrying out of the purpose of the trust. In­tention behind this condition is clear that a religious or charitable institution, or a trust should be discouraged from entering into business with trust properties unless such business is directly related to the objectives of the trust or institution, such as, the business is intended to give training to the beneficiaries of the trust or to some poor persons so that they can earn their livelihood by learning a profession or acquiring skill in a trade or industry. It is only such business whose income is exempted from taxation. This proviso certainly restricts drastically the scope and field of the general exemption under the main provision of the law, but this restriction having been imposed by con­scious act on the part of the law-makers it is not within the Court’s power to dilate the restriction by liberal interpretation ignor­ing the language of the statute.[5]

The last part of the above quotation, “it is not within the Court’s power to dilate the restriction by liberal interpretation ignor­ing the language of the statute”, indicates that the courts in Bangladesh ought to take a restrictive approach when it comes to dealing with interpretations of tax exemption laws and regulations. Therefore, in the absence of a failure to strictly adhere to the earlier mentioned SROs, it is unlikely that a power generating company will be able to reap benefits from tax exemption on its income.

It is clear from the SROs that income resulting from the business of power generation will be exempted from tax provided the necessary conditions are fulfilled; however, it cannot be ascertained whether the exemption also applies to dividends issued by companies falling under the garbs of SROs. In general, dividends issued by companies are liable to be taxed as per Section 54 of ITO 1984 which states that: “The principal officer of a company registered in Bangladesh, or of any other company, shall, at the time of paying any dividend to a shareholder, deduct tax on the amount of such dividend, in the case of a resident or a non-resident Bangladeshi,- (a)if the shareholder is a company, at the rate applicable to a company ;(b)if the shareholder is a person other than a company, at the rate of ten per cent (10%) where the person receiving such dividend furnishes his twelve-digit Taxpayer’s Identification Number (TIN) to the payer or fifteen per cent (15%) where the person receiving such dividend fails to furnish his twelve-digit Taxpayer’s Identification Number (TIN) to the payer.

Furthermore, in the absence of any express words to the effect that investors or shareholders of power companies will enjoy tax exemptions on their dividends coupled with the rigid approach taken by the Appellate Division in GPAW in relation to undertaking liberal interpretation of tax exemption laws, it should be conducive that dividends will not be liable to tax exemption under the said SROs.

However, the Appellate Division in the case of Commissioner of Income Tax v Masuda Khatun (“Masuda Khatun”)[6] took the opposite view to above when deciding whether a tax exemption law applicable to certain undertakings extended to dividends issued by those undertakings. In this case, the provision in question was Section 15-BB of ITA 1922 which granted tax exemption to industrial undertakings set up between the first day of April, 1959 and the thirtieth day of June, 1965. The relevant provision of Section 15-BB of ITA 1922 provides that: “(1) Subject to the provisions of this Act the income, profits and gains of an industrial undertaking set up in Pakistan between the first day of April, 1959 and the thirtieth day of June, 1965 both dates inclusive, shall be exempt from the tax payable under this Act for a period of four years beginning with the month in which the undertaking is set up or the commercial production is commenced whichever is the later.

In order to reach a clear conclusion on the issue of extending tax exemptions to dividends, the Appellate Division sought to define dividends and the definition provided by the Appellate Division is as follows: ““dividend” means the sum of money set aside out of profits of a company for distribution amongst the shareholders. Profits of a company may be distributed to shareholders in the shape of:—(i) cash or some other assets, (ii) bonus shares of a company, (iii) shares or debentures of the other company, (iv) deposit certificates of deferred warrants. The dividend includes (a) any distribution of accumulated profits whether capitalised or not if such distribution entails the release to the share­holders all or any part of the assets, (b) bonus debentures, (c) any distribution out of accumulated profits of the company in liquidation, (d) any distribution on reduction of capital to the extent of accumulated profits.[7]

It was held by the Appellate Division that dividends ought to be exempted from tax on the basis that dividend forms part of income, profit and gains of undertaking upon which the exemption granted by Section 15-BB of ITA 1922 was applicable and the dividend does not lose that character when it reaches the hands of a shareholder. The precise words of the Appellate Division had been: “The law has given the exemption to income, profits and gains of an industrial un­dertaking under section 15-BB. When dividend is declared, it is declared from the income, profit and gain of the industrial undertaking itself. It retains that character when it reaches the hand of the shareholder. The shareholder as an assessee is not liable to be taxed for this amount which he received as dividend because the profit of the company out of which this has been paid is exempt from tax.[8]

The Appellate Division provided further justifications as to why dividends of tax exempted entities ought to be liable to tax exemption: “The purpose of section 15-BB is to grant tax-holiday to the newcomers in the industries. The capital is contributed by the shareholders. Tax-holiday generates incentive in the prospective shareholders. Unless they get some benefit out of it what will be the charm for buying share of such a company which does not declare tax-free dividend. The view of the Revenue that such income is taxable if accepted would mean that when the tax-holiday has been given to the com­pany, the benefit of it cannot be availed of by the shareholders. That is a difficult proposition because the very purpose of the law will be defeated.[9]

The above proposition of the Appellate Division is completely logical in the sense that tax exemptions are granted in order to encourage growth of an industry and if the exemptions does not extend to dividends, it will not enkindle investments. While there is a need to maintain a strict interpretation of tax exemption laws as suggested by the Appellate Division in GPAW, this should not be achieved at the expense of overlooking a completely obvious point.

Nevertheless, considering the precise nature of the drafting of taxation laws and regulations, it can be considered fair to assume that if the legislature had wanted to grant tax exemption to dividends, then it would have specified it as such. Although this is not wrong, it can be countered by the views of the Appellate Division in Masuda Khatun that “the contention … that had the legislature intended to give exemption then it would have said so, the reply by the respondent is that there is no presumption as to impose a tax is convincing. It is settled that in a taxing Act one has to look merely at what is clearly stated. There is no room for intendment. There is no equity about tax. “Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used” (Per Rowlatt, J. in Cape Brandy Syndicate Vs. I.R. (1921) I.K.B. 54 approved by H.L. Canadian Eagle Oil Company Ltd. Vs. King. 27 T.C. 205. It is not the case that all the dividends are exempt from tax; subject to certain limit the “income” from dividend is taxable (vide s.4 (3) (xv). The conclusion is irresistible that such dividend is also exempt from tax. To hold to the contrary is to make the exemption illusory. Accordingly, the answer to the ques­tion framed must be in the affirmative.[10]

However, a small distinction may be drawn between Section-15BB of the ITA 1922 and the SRO-211 which is that tax exemption granted by the former applied to income, profit and gain of the relevant industrial undertakings whereas the latter applies only to income resulting from the business of power generation. Building upon this argument, it may be submitted that the decision of Masuda Khatun will not apply to SRO-211. However, this argument can be defeated by referring to the proposition of the Appellate Division in Masuda Khatun that dividend forms part of the income and thus even though SRO-211 grants exemption on incomes resulting from business of power production, dividends issued from such incomes will be liable to tax exemptions.

In light of the above cases, it can be safely concluded that where an entity will enjoy tax exemptions, the benefit of the exemption will also pass onto the dividends issued by the entity to its shareholders. This view of the Appellate Division is fortified by the observations of the Bombay High Court in the case of Commissioner Of Income Tax v N.M. Raiji, (Raiji)[11] where the Bombay High Court determined whether a partner’s share after dissolution of a firm and exempted from payment of income tax can be included in the total income. M.C. Chagla C.J., in the said case opined that “The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption and exclusion also operates for the purpose of computing the total income. Not only is the sum not liable to tax, but it is also not to form part of the total income for the purpose of determining the rate.[12]


In line with the decision of the Bombay High Court, the High Court Division of the Supreme Court of Bangladesh (“the High Court”), in the case of Commissioner of Taxes v Justice S. Ahmed (S. Ahmed)[13] decided that income which is exempted from income tax cannot come within the ambit of total income of an assessee and consequently it cannot be clubbed with the other income of the assessee. This view can be inferred from the following paragraph of the judgement: “the law in this regard would be that once an income such as the salary of the Judges in the instant case is taken out from taxability it must be held to carry with it an exclusion from total income also. If the intention of the legislature would have been otherwise the legislature would have said so in the Act itself …[14]


The principal question before the Court in the above case was whether salary, income and other allowances of the Honourable Judges which are exempted from income tax ought to be included with the total income for the purpose of fixing the rate of income tax. The High Court opined that “We are in respectful agreement with the observation as quoted above which are in complete accord with the view we have taken herein before to the seffect that exclusion for the purpose of income tax would carry with it exclusion from total income computed for the purpose of determination of rate if the law does not specifically provide otherwise and the exempting Statute having been silent about it no addition can be made to it by a departmental instruction by way of supplying an imaginary omission as was done here.[15]


The discussions made above indicates that the judiciary of Bangladesh undertakes a taxpayer clement approach when it comes to dealing with issues concerning tax exemption laws. The case laws referred above suggest that tax exemption laws are only applicable if certain conditions are fulfilled and if it applies to an undertaking, it extends to dividends issued by the entity to its shareholders. Furthermore, a tax exempted income, whether it be dividends of a shareholder or the income of a company, will be excluded from the total income when calculating the tax rate to be applicable on someone. However, it is to be noted that these decisions are of the previous century and the taking account of changing circumstances, the decisions may very well be overturned by the Apex Court of the country. In the absence of any leading contradictory decision, the law regarding tax exemption law stands as discussed above.

[1] Mohammad Taqi Yasir is an LLB graduate of the University of London and is one of the fifteen students around the world who was awarded first class by the University of London in 2017. After graduation, Yasir joined a corporate law chambers ranked Band 1 in Bangladesh in Corporate & Finance by Chambers and Partners. Yasir has published numerous articles in legal website platforms. He aspires to be specialist in civil law, more specifically in the area of corporate and commercial law. He is also an entrepreneur who holds board membership in a marketing and event management company Planet X Incorporated, and is the permanent member and Vice President of Footsteps Foundation.


[2]  Fritz Neumark, Charles E. McLure and Maria S. Cox, ‘Taxation’ (Encyclopedia Britannica, 09 October 1998) <> accessed 23 June 2018

[3] ibid

[4] [1984] AD [1984] 36 DLR 166

[5] GPAW [12]

[6] [1978] AD [1982] 34 DLR 85

[7] Masuda Khatun [16]

[8] Masuda Khatun [29]


[9] Masuda Khatun [18]

[10] Masuda Khatun [30]

[11] [1948] Bombay High Court [1949] 51 BOMLR 118

[12] Raiji [2]

[13] [1988] HCD [1988] 40 DLR 435

[14] S. Ahmed [11]

[15] S. Ahmed [15]