Gratuity is a discretionary payment, paid to the employee by the employer upon successful completion of his employment at the company. Unless, it is a dismissal for misconduct or violation of company rules, the employer is liable for gratuity payment or compensation, whichever is higher, to the employee in all other terminations of employment; be it a retirement, voluntary termination, involuntary termination like redundancy, mutual termination, illness, disability or even on the death of the employee as stipulated in Bangladesh Labour Act 2006. If the company does not have a gratuity scheme set up, they would be responsible to pay a compensation instead under the 2006 Act, which would be calculated in addition to any wage or salary payment, in lieu of notice attributable to termination of service of the employee. To be eligible for either compensation or gratuity fund payments, the employee must have been in incessant service for more than a year. Section 2(10) of the Bangladesh Labour Act 2006, defined gratuity period as more than six months of continuous service would be considered one year, therefore, after completion of first year, a further six months of uninterrupted service would be considered as a full year. In other words, it could be said that that individual employee has completed two years of continuous service rather than a tenure of eighteen months. Calculation:The amount of gratuity an employee receives is directly proportional to the duration of service he completes at that particular company. Section 2(10) of the Bangladesh Labour Act 2006 specified the gratuity for each year of service is equal to 30 days’ salary calculated based on the last payment of salary. However, if the employee is employed for 10 years, the calculation would be equivalent to 45 days’ salary for each year he has worked for the company. In both the cases, whether he has worked for 10 years or not, the calculation is based on the sum of the last basic salary he drew and the dearness allowance. Furthermore, if more than six months have passed after completing the first year, it should be considered a full year. Under section 14 of the Bangladesh Labour Act 2006, the calculation of one year and six months should follow the rule of 240 working days in a year and 120 days in six months respectively in the previous 12 months. Types:There are two types of gratuity scheme in Bangladesh. They are: approved or registered gratuity fund, and unregistered gratuity funds. Under section 2(5A) of the Income Tax Ordinance 1984, registered gratuity fund denominates those gratuity schemes which have been registered with and approved by the Bangladesh National Revenue Board (NBR) pursuant to Part C of the 1st schedule of the Income Tax Ordinance 1984.Prerequisites to be fulfilled by the registered gratuity fund:Income Tax Law 2023 has stipulated the requirements to be met for the gratuity fund to be recognised or registered and continue to be recognised. The following prerequisites and any other conditions specified by the National Board of Revenue should be followed by the Gratuity fund.
The Gratuity fund must be established under an irrevocable trust formed by the company which operates its business activities in Bangladesh.
The company must employ at least 90% of the total employee in Bangladesh.
The prime purpose of the fund is to provide gratuity to the employee when the ties between the employer and the employee is severed for any reason such as retirements, redundancy, due to mental or physical illness, or death when employed.
The company should contribute to the fund periodically.
All the benefits payable by the fund should only be paid only in Bangladesh.
Setting Up of the Gratuity fund:Pursuant to Income Tax Law 2023, a request for recognition of the gratuity fund must be in writing by the trustees of the fund to the National Board of Revenue, along with the following documents:Documents required for setting up a Gratuity fund:
Trade Licence.
TIN Certificate.
Board Resolution.
Photographs of signatories.
Government issued IDs, e.g., National ID, Passport, Driving Licence.
Trust Deed.
Provident fund trust rules.
NBR Certificates.
Memorandum and Articles of Association (MOA & AOA).
Certificate of Incorporation.
The Process:
Pursuant to the latest Income Tax Law of 2023, the trustees of the gratuity fund are required to submit a written application to the National Board of Revenue for its approval. The application should be accompanied by two copies of the fund’s charter and the deed of incorporation of the funds.
The trustees of the funds, must provide two copies accounts of the funds for the relevant years which should not exceed three years immediately preceding the year in which the application for approval is made.
The board could seek further information and documents if it deemed essential.
The trustees of the funds must take action if there is any changes to the law, the intent of the constitution of the funds or the condition of the funds, or its requirements after National Board of Revenue has accepted its application for approval.
The trustees of the funds must inform the Deputy Commissioner of Taxes mentioned in the local area as promptly as possible.
If the trustees of the funds fail to inform the Deputy Commissioner of Taxes promptly, the Commissioner has the right to withdraw the application for approval from the date of aforementioned changes, unless otherwise directed by the National Board of Revenue.
Upon receipt of the written application to the National Board of Revenue, the Board should either approve or disapprove the application within four months.
If the Board fails to notify its decision to the trustees of the fund within four months, the trustees should consider that their application has been approved.
The Board consequently, has the right to withdraw its approval if it considers that the trustees of the funds have breached the conditions of the funds.
The decision of the Board should take effect from the date specified by the Board in writing to the trustees of the funds.
The Board whilst declining or revoking its approval to the gratuity fund, might give an opportunity for hearing to the trustees of the funds.
Yearly Compliance:Under Labour Act 2006, the authority of the fund must conduct an annual audit which covers the income and expenditures. The annual financial audit for both the gratuity funds and the business itself, is very important for multiple reasons for example, the audit assists the business to achieve its goal, prevents from suspicious transactions, and increases its sustainability of the fund. Furthermore, the audit of the gratuity fund reinsures the tax exemption for both the employer and the employees.New Updates:Albeit, the gratuity funds were exempted from tax, the new laws under the Income Tax Act 2023, imposed a 30% (27.5%, if certain conditions are fulfilled) tax is imposed on the provident fund. However, in December 2023, the National Board of Revenue, the supreme authority on tax administration has reduced the rate to a flat 15% on all sorts of income generated by provident fund, gratuity fund, and pension funds. This new Act generated effusive reprimand regarding the lifting of tax exemption on the provident funds, gratuity funds and employees’ profit participation in the private sectors, albeit the government regulated provident funds are out of scope of the new Act. Section 166(1) of the Income Tax Act 2023 listed out the entities who must submit tax returns and section 166(2) listed out those who do not have to submit the tax returns.
How ABC Partners Can help?
Registration Process: ABC’s expert team would organise all the necessary documents and fill out the application forms and records required for registering the provident fund with the National Board of Revenue (NBR)Preparing the Memorandum: We would provide support and guidance in preparing the memorandum which would outline the rules and the regulations regarding the management of the fund and its operation.Tax Enrollment & Statutory Audit: Our team of expert auditors would facilitate the enrollment with the NBR and conduct a full audit of the funds which would be clean, official and ready for submission at the NBR.Fund Administration: We would oversee specific aspects of the fund which would include monthly contributions and performance of the fund.Secretarial Services: We would prepare financial statements time to time as per your request to submit to the members and carry out all sorts of correspondences with the relevant authorities on provident fund related issues.
