Method of accounting for long-term contracts under Section 74 | Bangladesh Income Tax Act -2023

Method of Accounting for Long-Term Contracts under Section 74 of the Bangladesh Income Tax Act, 2023.

 Method of accounting for long-term contracts under Section 74 | Bangladesh Income Tax Act -2023 :

 As per section-74(ITA-2023) ,

  

(1) Recognition of Income from Long-Term Contracts

If a taxpayer uses the accrual basis of accounting for income classified under “Income from Business,” the income earned from a long-term contract during an income year must be determined using the percentage of completion method.

(2) Determination of Percentage of Completion

The percentage of completion of a long-term contract for an assessment year shall be calculated by comparing:

• the estimated total cost of the contract at the beginning of the contract period; and
• the total costs allocated and incurred on the contract up to the end of the relevant assessment year.

(3) Definitions

For the purposes of this section:

(a) Long-Term Contract
A long-term contract refers to a contract involving production, installation, construction, or related service activities that is not completed within one year from the commencement of work under the contract. However, contracts expected to be completed within approximately six months from the date work begins are excluded from this definition.

(b) Percentage of Completion Method
The percentage of completion method means the generally accepted accounting principle under which revenue and expenses relating to a long-term contract are recognized based on the stage of completion of the contract, as determined under subsection (2).

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Free asked questions(FAQ) :

1. What is the method of accounting for long-term contracts under Section 74?

Under Section 74 of the Bangladesh Income Tax Act 2023, income from long-term contracts must be calculated using the percentage of completion method when the taxpayer follows the accrual basis of accounting.

2. How is the percentage of completion determined for long-term contracts?

The percentage of completion is generally determined by comparing the costs incurred to date with the estimated total contract costs, allowing income to be recognized progressively during the contract period.

3. Who must apply the percentage of completion method under Section 74?

Any person or business entity that follows the accrual method of accounting and earns income from long-term contracts is required to apply the percentage of completion method under Section 74.

4. Why is the percentage of completion method important for tax purposes?

The percentage of completion method ensures that income and expenses from long-term contracts are recognized fairly and accurately over the duration of the contract, preventing tax distortions.