Term Paper

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Tax Holiday vs Accelerated Depreciation- A critical analysis

Contents
1. Accelerated Deprecation.................................................................................................................... 1
1.1 Understanding the Accelerated Depreciation ............................................................................. 1
1.2 Criteria of getting the accelerated depreciation allowance ....................................................... 1
1.3 Application to NBR ....................................................................................................................... 1
1.4 Rate of accelerated depreciation allowance ............................................................................... 2
1.5 Advantages accelerated depreciation allowance ....................................................................... 2
1.6 Disadvantages accelerated depreciation allowance ................................................................... 2
2. Tax Holiday ......................................................................................................................................... 2
2.1 Understanding the Tax Holiday ................................................................................................... 2
2.2 Criteria of getting the accelerated depreciation allowance and rate for tax holiday ............... 3
2.3 Which industries get this facility ................................................................................................. 4
2.4 Application to NBR ....................................................................................................................... 5
2.5 Advantages of Tax holiday ........................................................................................................... 5
2.6 Disadvantages of Tax holiday- ..................................................................................................... 5
Opinion/ Critical Analysis:...................................................................................................................... 5
Conclusion: ............................................................................................................................................. 6
1. Accelerated Deprecation
1.1 Understanding the Accelerated Depreciation
Accelerated depreciation is a method of depreciation used for accounting and income tax
purposes that allows greater deductions in the earlier years of the life of an asset. While the
straight-line depreciation method spreads the cost evenly over the life of an asset, an
accelerated depreciation method allows the deduction of higher expenses in the first years
after purchase and lower expenses as the depreciated item ages.
The use of accelerated depreciation methods is mostly logistical. Although an asset is not
required to be depreciated in the same manner in which it is used, an accelerated
depreciation method tends to make this occur. This is because an asset is most heavily used
when it is new, functional, and most efficient. Because this tends to occur at the beginning
of the asset’s life, the rationale behind an accelerated method of depreciation is that it
appropriately matches how the underlying asset is used. As an asset ages, it is not used as
heavily, since it is slowly phased out for newer assets.

1.2 Criteria of getting the accelerated depreciation allowance

Accelerated depreciation is only applicable on the machineries or plants other than office
appliances & road transport vehicles. In addition, there are also some criteria to be selected
for it-

 The asset not having been previously used in Bangladesh.

 The industrial undertaking as referred to in section 46B of the Ordinance and set up
in Bangladesh between the first day of July, 2014 and the thirtieth day of June, 2019
(both days inclusive).
 No second hand asset is allowable.
 The industrial undertakings are owned & managed by Bangladeshi company or a
body corporate formed under any law and having its registered offices in
Bangladesh.
 The allowance shall be given from the year of commercial production.
 The particulars as required for the purpose of claiming the accelerated depreciation
allowance have been furnished.

1.3 Application to NBR

The application in the prescribed form for accelerated depreciation allowance under 3rd
schedule, 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.
In addition, that the application is accompanied by a declaration in writing that the
undertaking has not been approved for tax holiday or any tax exemption.

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1.4 Rate of accelerated depreciation allowance
Year Percentages
For 1st year (if commercial production commence) 50%
For 2nd year 30%
For 3rd year 20

1.5 Advantages accelerated depreciation allowance

As accelerated depreciation allows greater deductions in the earlier years of the life of an
asset, so the expense of the company will increase dramatically. As a result, the income will
be decreased that effects forward to be decreased the tax expense subsequently.
As it is an allowable expenditure by NBR, so if any loss will incur due to charge it with
income then such losses can be carry forwarded to the following years.
The company just not taking tax advantages in current year, it also takes benefits for the
following years.
One more important thing and major advantage is “time value of Money”. As the company
has not to pay any tax in present days but the company has to pay it in future. So, in future
these monies will be adjust with inflation.

1.6 Disadvantages accelerated depreciation allowance

If the company is enjoying any tax facilities or deserve any tax advantages in accordance
with law like tax exemption, tax holidays etc then the company must have to stop such
facilities by application to NBR other than the accelerated depreciation allowance will not
be applicable. So, the major disadvantage of accelerated depreciation allowance is to
sacrifice the other tax facilities.

2. Tax Holiday
2.1 Understanding the Tax Holiday
A tax holiday is a government incentive program that offers a tax reduction or elimination to
businesses. Tax holidays are often used to reduce the taxes that implied on operating tax.
They are also commonly used by governments in developing countries to help stimulate
foreign investment.
Tax holiday is allowed to industries subject to the relevant rules and procedures set by the
National Board of Revenue (NBR). Presently, it is allowed for 5, 7, 9 and 12 years for
industries set up in the developed, less developed, least developed and special economic
zones respectively. The period of such tax holiday is calculated from the month of
commencement of commercial production. The eligibility of tax holiday is to be determined
by the NBR and the commencement of production is certified by the respective sponsoring
agencies.

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2.2 Criteria of getting the accelerated depreciation allowance and rate for tax holiday
There are some time slots in order to get tax holiday facility and these time slots are
applicable in different specific industries.

Reference Time Slots

Section- 46A 01 July 1995 to 30 June 2008
Section- 46B & 46C 01 July 2011 to 30 June 2019
Section- 46BB & 46CC 01 July 2019 to 30 June 2024

The business shall be established the said time slots along with meeting the following
conditions-
- Must be set-up in Dhaka, Mymensingh and Chattogram divisions, excluding Dhaka,
Narayanganj, Gazipur, Chattogram, Rangamati, Bandarban and Khagrachari districts,
for a period of five years beginning with the month of commencement of
commercial production of the industry. The following rate of exemption will be
applicable-

Period of Exemption Rate of Exemption

For the first year 90% of income
For the second year 80% of income
For the third year 60% of income
For the fourth year 40% of income
For the fifth year 20% of income

- Must be set-up in Rajshahi, Khulna, Sylhet, Barishal and Rangpur divisions (excluding
City Corporation area) and Rangamati, Bandarban and Khagrachari districts, for a
period of ten years beginning with the month of commencement of commercial
production of the industry. The following rate of exemption will be applicable-

Period of Exemption Rate of Exemption

For the first year 90% of income
For the second year 90% of income
For the third year 80% of income
For the fourth year 70% of income
For the fifth year 60% of income
For the Sixth year 50% of income
For the seventh year 40% of income
For the eighth year 30% of income
For the ninth year 20% of income
For the tenth year 10% of income

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 - The business is owned and managed by a body corporate established by or under
any law for the time being in force with its head office in Bangladesh or a company
as defined in company act 1994 with its registered office in Bangladesh and having a
subscribed and paid up capital of not less than two million taka on the date of
commencement of commercial production.
- 30% (thirty percent) of the exempted income shall be invested to any new industry
or said industry or after ending the holiday period the company must have to invest
the said amount to the share market.
- the said 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 machinery or plant used in business which was being carried on in Bangladesh at
any time before the commencement of the new business.
- that the said undertaking is approved, and during the relevant income year, stands
approved by the Board for the purposes of this section.
- that the said undertaking maintains books of accounts on a regular basis and submits
return of its income as per provisions laid down in section 75 of this Ordinance.

2.3 Which industries get this facility

An industry engaged in, or in the production of-

 active pharmaceuticals ingredient  home appliances (blender, rice

and radio pharmaceuticals cooker, microwave oven, electric
 agriculture machineries oven, washing machine, induction
 automatic bricks cooker, water filter etc.)
 automobile  insecticides or pesticides
 barrier contraceptive and rubber  leather and leather goods LED TV
latex  locally produced fruits and
 basic components of electronics (e.g. vegetables processing
resistor, capacitor, transistor,  mobile phone
integrated circuit, multilayer PCB  petro-chemicals
etc.)  pharmaceuticals
 bi-cycle including parts thereof  plastic recycling
 bio-fertilizer  textile machinery
 biotechnology based agro products  tissue grafting
 boiler including parts and equipment  toy manufacturing
thereof  tyre manufacturing
 compressor including parts thereof  any other category of industrial
 computer hardware undertaking as the Government may,
 furniture by notification in the official Gazette,
specify

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2.4 Application to NBR

An application in the prescribed form for approval for the purposes must have to send to
NBR as per this section, 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.

Provided that the said undertaking obtained a clearance certificate for the relevant income
year from the Directorate of Environment.

NBR shall be liable to give his decision within 45 workings days from the date of application.
If company wants to cancel its tax holiday, then the company can do it within 01 years.

2.5 Advantages of Tax holiday

When tax burden is reduced by government, the company can use these monies to grow its
business that will help to grow the economy of the country and it is facilitated the foreign
investments, attracts offshoring companies.

A tax holiday is a temporary reduction or elimination of a tax to achieve a short-term

benefit. Usually it is enacted in order to achieve a short-term benefit. For these government,
issuing a tax holiday is a tradeoff. They will lose the revenues that would have been
generated from operating profit that take place during the holiday.

In theory, this cost is more than offset by the benefits of consumers spending more than
they otherwise would have spent. Part of these additional operating benefits consists of
accelerated purchases, meaning that consumers would have spent the money anyway, just
later. The other part consists of new purchases that would not have been made had it not
been for the tax holiday. Impulse buys make up a large component of these new purchases.

There is growing interest from other state legislators to consider holding sales tax holidays
as a way to stimulate the economy.

2.6 Disadvantages of Tax holiday-

- Difficult to buy & sell its product to market in high price or low price.
- Tax depreciation allowance is not applicable.
- The tax holidays lead to manipulation by some persons who get into the habit of
avoiding tax payments unethically.
- Tax holidays directly hit the government’s earning by declining the tax collected
within the specific period.

Opinion/ Critical Analysis:

Tax holiday and accelerated depreciation both are good but the question is that which one
is more good. So, if I am identifying the best one then it is so much difficult to select without
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know the business details. In order to select the best one, I have to know the business
nature, location, business design and current condition of the business. However, I
demonstrate below some business sectors for selection the best one.

 If it is a IT company, then both benefits are not acceptable because IT business is

already in tax exemption.
 If the business in initial stage is already in loss situation, then the tax holiday is not
appropriate for this company because it makes loss. So, other than minimum tax the
company no need to pay any tax. In this contrast, accelerated depreciation is best for
the company because it creates more which will carry forwarded to the following
years. Carrying any loss to following years means the chance to offset the loss with
the following year incomes.
 If the business makes profit in every year and qualified to get the tax holiday facility,
then the business should take tax holiday rather than accelerated depreciation
because accelerated depreciation provides temporary benefits to the business but in
long run it is adjusted and no benefits will be availed.
 If the business having huge valuable asset and it not qualified to get tax holiday, then
the business should go for accelerated depreciation because presently it gives
relaxation from tax burden that will assists to grow the business faster.

Conclusion:
As we know it is not possible to avail the both Tax holiday and accelerated depreciation
benefits together and I discussed in Opinion/ Critical Analysis part that the benefits are
depend on the nature, condition and future plan of the business.

However, both benefits are significantly impact on government revenue temporally but
these benefits helps to grow the business resulting the economy is developing also.