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By Jalal Uddin Ahmed

Despite vehement criticism from the concerned circles around the country, the Govt. is going to implement the Value Added Tax (VAT) and Supplementary Duty (SD) Act, 2012 from the coming fiscal year at July, 2017.

Among many other features of the Act, Finance Minister Abul Maal Abdul Muhith has proposed a flat 15% VAT rate in the budget for the fiscal year 2017-18. He said in his budget speech in Parliament, “First of all, I would like to say that VAT will be applicable at a single and uniform rate. This rate will be 15 percent which will be unchanged over the next three years.” [1]

The present VAT Act (the VAT Act, 1991) was passed in 1991 and VAT collection started from the fiscal year 1992-93. Under the present act, the VAT rate has been kept at a variable amount depending on the type and nature of the industry. It also needs to be mentioned that a number of items enjoy exemption from VAT under the coverage of VAT Act 1991. Cottage industries are kept outside the VAT net. Exported items and essential commodities are zero-rated to VAT. Some special sectors within the small industries category enjoy VAT exemptions and differential rates (truncated rates). Turnover tax (TT) gives preferential provision to the small enterprises, which has annual turnover below Tk. 80 lakhs, to pay turnover tax at a lower rate of 3 per cent. There is also provision for ‘Package VAT’ for small scale trading enterprises which usually do not maintain any formal ledger accounting. [2]

The new VAT & SD Act brings about many changes in the system. First of all, there is the provision for a uniform VAT rate at 15%. The provision of ‘Package VAT’ has been removed and besides TT, all the entrepreneurs will be treated equally. The new law also makes it mandatory for all businesses to have electronic cash registers(ECR) and a completely digitized ledger. It also gives the officials of National Board of Revenue (NBR) the power to to recover tax arrears, including freezing a tax debtor’s bank accounts, placing a lien on the tax debtor’s property, and holding company directors liable for paying unpaid taxes.

The new VAT & SD Act has exempted some basic necessities and services from the scope of VAT, but at the same time imposed VAT on some other basic necessities. The new VAT rate is applicable on electricity, gas and internet. It is also applicable on paper and liquefied petroleum gas (LPG) at 15%. Under the present law, VAT for electricity and gas had to be paid at a rebated rate of 5%. Now consumers will have to pay an additional 10% VAT under the new VAT & SD Act. Placing VAT on LPG would increase the price from 1,028% to 1,589%. The new VAT & SD Act also increased taxes on air travel.

Effects of the new VAT and Supplementary Duty Act, 2012

The main concern with the new VAT & SD Act is the flat 15% VAT rate applicable for all businesses. The entire business community has protested at this move. The president of the Federation of Bangladesh Chambers of Commerce & Industries (FBCCI), Shafiul Alam has said,”Due to the new VAT rate,flat and paper prices will go up. Increasing air travel cost wasn’t right either. These steps are anti-investment.”[3] Former FBCCI Adviser Monzur Ahmed has said,”95% business owners are mad at the government after the new VAT rate has been proposed.”[4]

As stated earlier, the new VAT rate would increase the prices of electricity and gas. Not only would consumers would have to pay more,but this would also increase industrial costs to rise. Costs for farmers would also increase. Business leaders have also raised concerns that if the new law is implemented 2 crore workers would lose their jobs due to rise in costs and 2 lakh crore taka will be laundered into foreign banks. [5] The new VAT & SD Act would also see a rise in inflation and an increase in prices. Around 18 service sectors will face additional burden due to the new VAT & SD Act including the real estate sector which has been in shatters since 2009 will face even more problems since the new law also places VAT on immovable property.

The implementation of the new VAT & SD Act will see English medium schools charged a 15% VAT, though Bangla medium schools continue to enjoy VAT exemption. This is supplemented by the Money Bill 2017 which clearly states that “all educational systems, excluding English medium schools, are exempted from VAT.”[6] This proposal goes directly against the Appellate Division’s recent verdict stating the collection of VAT from English medium schools is illegal.

Direct impact on local industries

The local paper industry in the last decade has developed a lot. Presently they pay 15% tariff at supply stage as VAT. With the new VAT & SD Act, they would have to pay an additional 15% and plus at the production stage 4% VAT has been increased as well. This will seriously damage the local paper industry. At present, cost of production of per ton paper is 60 thousand taka. Paper mills are forced to sell this at only 62 thousand taka as dishonest businesses take advantage of the bonded warehouse facilities and import papers tax free. Per ton binded copy’s production cost is 25 thousand taka. Presently at 4% tariff rate an additional 1 thousand taka has to be paid as VAT but with the new rate, and double the taxes the cost would rise up to 63 thousand taka per ton. Presently there are 87 big and small paper mills in the country which employ 36 thousand workers. If we add the people involved through backlink the number rises to 1 lac. All these workers livelihood would be in jeopardy as production costs would increase. Given how the government talks about spreading education as one of its top priority, the cost of education would increase as well through the increase of price of papers. [7]

The new VAT & SD Act has also placed VAT on LPG. This also goes against the government’s goal of having 70% residences, hotels and restaurants run on LPG by the year 2020. Presently only 7% of the country’s population use natural gas. Rest 93% run on LPG. Under the present scheme of things a 5-10 kg cylinder has a tariff of BDT 35 and with 15% VAT at production stage of BDT 5.25, its production cost is BDT 397.75. It is sold in the markets at BDT 400. Under the new law, with 15% VAT on the selling price the market price will go up by BDT 54. The rise in costs will discourage households from buying LPG and will have a negative impact on another rising industry.[8]

The new VAT & SD Act will have a huge effect on the local SME & backward industries. There are some industries which are unable to take tax rebate on their products, thus they will face the brunt of additional taxation. This will make the product prices go up and at the end the consumers will face the problem. Regarding effect of VAT collection on Small and Medium Enterprises (SMEs), Mr Ali Zaman, President, SME Ownership Association noted that truncation and tariff value should be abolished for SME and real value addition should be in place to collect VAT. He added that the mechanism of 4 percent VAT collection is difficult because it is repeatedly collected every time a good changes hands. Although sales tax has been abolished, SME entrepreneurs pay VAT for imported raw materials because they cannot directly import.[9]

Changes brought to the overall VAT regime

Under the new VAT & SD Act, the provision of “Package VAT” has been removed. There are certain local products which get VAT rebate by giving a specific tariff as VAT. This brings the production costs down and helps consumers at the end. Products like powdered milk, spices, biscuits, rod etc. get the benefit of the package VAT. But removing this provision will make the production costs of this products rise and at the end it’s the buyers that have to bear the brunt of it.

The new VAT & SD Act also makes it mandatory for businesses to have electronic cash registers (ECR) and point of sales (POS). The payment of VAT has been made online based. The problem with this is that 80% of businesses aren’t online based. Even though NBR claims to have trained 2 lakh businesses on operating the ECR’s and paying VAT digitally,the reality isn’t even close. Helal Uddin, president of Bangladesh Dokan Malik Samity has said that NBR hasn’t even trained 200 let alone 2 lakh. [10]

The new VAT & SD Act also gives NBR officials to freeze bank accounts. This gives an opportunity for misuse of power and corruption. Business leaders allege that certain businesses misusing bonded warehouse facilities release imported clothes in the local market brining down the price of the local goods and certain corrupt NBR officials are also involved with it. [11] State Minister for Finance and Planning MA Mannan also opined against the provision of the new VAT & SD Act which empowers the VAT administration to freeze bank accounts of the businesses to collect unpaid taxes.‘The provision should be reviewed and no bank account should be frozen without instruction of court’, he said. [12]

Impractical VAT Exemptions

Section 26 of the VAT and SD Act, 2012 has a list of products which are exempted from VAT. Although certain daily necessities such as local rice, puffed rice, cooking oil, sugar, milk etc. has been exempted from VAT, experts say the government has just inflated the list for just showing off. Certain products have been included in the list which one will question as to why they have been included. Live horse,donkey,stallion import will see no VAT on it. Pork – fresh or preserved will be exempted from VAT. Meat and intestines of horse and donkey, up to 2.5kg will be exempted from VAT. Fat of domestic bird, snail, crab etc will also receive VAT exemption.

Although products like rice, cooking oil,sugar etc. has been exempted from VAT, but at the same time VAT has been placed on electricity and gas usage. This will cause production cost to go up and thus eventually the prices of these products will go up as well.

Conclusion

The reaction from the business community has been completely negative to the new VAT & SD Act. Mr. Shafiul Alam, president of FBCCI has said, “Instead of brining in a new law,the present law should be amended and the VAT rate should be brought down.”[13] This new VAT & SD Act will indeed bring additional burden on the businesses and thus the consumer as well. Instead of helping the economy,it will result in unemployment and money laundering as businesses will close down and shift outside Bangladesh.

There are four roles of any taxation: (i) it is a source of government revenue which is required to run any government; (ii) it provides finance for public services and investment (public goods), particularly at a time when the availability of finance for development (including overseas development assistance) is lean; (iii) it is a strategic tool for government to promote certain sectors with a view to support investment, economic growth and employment; and (iv) it is an instrument to ensure social and economic equity and justice. It seems like the new VAT & SD Act is more biased towards the first two roles. The Finance Minister will need to consider the latter two roles with similar importance as well.

As the VAT & SD Act is coming into effect on July 1st, there is still time to amend the law and ensure the interests of the stakeholders are ensured. Here is to hoping, intelligent thinking prevails.



References:

[1] Uniform VAT to be 15% : The Daily Star(online) – June 01,2017

[2] VAT and SD Act 2012: Concerns and Implementation Challenges – Towfiqul Islam Khan Research Fellow, CPD and Md. Zafar Sadique Senior Research Associate, CPD

[3] VAT e KhubddoBebsayeera : Bangladesh Pratidin – June 07,2017

[4] VAT erFadeyShorkar : Bangladesh Pratidin – June 06,2017

[5] Ibid

[6] VAT immunity aside, English medium schools to be charged double : Dhaka Tribune – June 01,2017

[7] KagojeKousholi VAT e BaiyBarbeShikkhae :KalerKantha – June 05,2017

[8] VAT e Dam BarbeLPG’r : Bangladesh Pratidin – June 10,2017

[9] VAT and SD Act 2012 questioned on grounds of equity, SME interests – CPD,December 10,2014

[10] VAT e KhubddoBebsayeera : Bangladesh Pratidin – June 07,2017

[11] Ibid

[12] Amend new VAT law to reduce rate, economists advise govt : New Age – December 11,2014

[13] VAT e Khubddo Bebsayeera : Bangladesh Pratidin – June 07,2017

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