Value Added Tax
Value Added Tax (VAT) a percentage-wise tax on the value added to a commodity or service as each constituent stage of its production and distribution is completed. VAT may be classified in three ways: (i) on the basis of coverage of stages - throughout the production and distribution stages, or confined to limited stages - manufacturing plus wholesale, or wholesale plus retail; (ii) on the basis of the method of calculation - tax credit method, subtraction method, and addition method; and (iii) on the basis of tax treatment of final-product capital goods such as machinery, equipment, and supplies - the consumption form, the income form, and the product variety. Thus the three broad types of VAT are the gross national product (GNP) type, income type and consumption type. A consumption type VAT is an indirect tax. An income type or a GNP type VAT might be considered as a direct tax but a commodity tax cannot be considered so. Consumption type VAT is also considered as an alternative form of 'sales tax'.
In April 1979, the Taxation Enquiry Commission (TEC) officially took up the issue of introducing VAT in Bangladesh as an alternate to sales tax. Until 1982, sales tax was being collected under the Sales Tax Act 1951, which was replaced by the Sales Tax Ordinance 1982 with effect from 1 July 1982. The World Bank played the pioneering role in introduction of VAT in Bangladesh. A World Bank Mission visited Bangladesh for preparing an agenda for tax reform in Bangladesh in December 1986. The mission submitted its final report on 15 October 1989. The report recommended the introduction of a manufacturing-cum-import stage VAT at a single standard rate within three years. Thereafter, a Bangladesh Tax Mission visited India, Indonesia, the Philippines and Thailand during 13 November - 04 December 1989. The Mission submitted its report in January 1990. The government discussed the issues relating to introduction of VAT with all related private and public agencies including the various leading Chambers of Commerce and Industry from time to time. The government prepared the Value Added Tax Act 1990 (Draft) in June 1990.
Final version of the Value Added Tax Act was promulgated 31 May 1991 as a Presidential Ordinance with eight sections (relating to registration under VAT system and the appointment and powers of VAT authorities). It was made effective from 2 June 1991. The Value Added Tax Bill 1991 was introduced in the Parliament on 1 July 1991 and the Parliament passed it on 9 July 1991. With the Presidential assent to the bill on the next day it came into effect as The Value Added Tax Act 1991. The VAT Act 1991 replaced the Business Turnover Tax Ordinance 1982 and the Sales Tax Ordinance 1982 with effect from 1 July 1991. In 1991-92, it imposed VAT @ 15% on importer or supplier (producer) of taxable goods and provider of taxable services having annual threshold turnover of Tk 0.5 million (Tk 0.75 million in 1993-94, Tk 1.5 million from 1994-95 to 1998-99, Tk 2.0 million from 1999-2000 to 2007-08, Tk 2.4 million 2008-09, and Tk 4.0 million in 2009-10). It imposed Turnover Tax (TT) @ 2% (currently 4% since 1997-98) on supplier of taxable goods and provider of taxable services having annual turnover of less than the annual threshold turnover for VAT, i.e. Tk 4.0 million in 2009-10. The new law imposed VAT at zero-rate on export sales of any goods and services, brought excise duties on most goods under the VAT net, and imposed Supplementary Duty (SD) @ 10% to 85% on goods and services which are luxurious and non-essential and are socially undesirable.
The objectives behind introducing VAT in Bangladesh were to (a) bring transparency in the taxation system; (b) prohibit cascading taxation at different stages of production; (c) consolidate the tax administration; (d) activate the overall economy by mobilising more internal resources; and (e) bring a consistency in the tax-GDP ratio.
VAT introduced in Bangladesh in its initial form was a sort of consumption tax (by allowing purchase of capital goods as input), which extended its coverage up to the level of import, production or manufacture and service-rendering but not to export (which is zero-rated), wholesale or retail level. Since the financial year 1996-97, VAT in Bangladesh has become a broad-based consumption expenditure tax by covering the wholesale and retail levels. VAT is imposed on the following goods and services: all goods imported in Bangladesh except those mentioned in the First Schedule of the VAT Act; all goods supplied except those mentioned in the First Schedule of the VAT Act; and all services provided in Bangladesh except those mentioned in the Second Schedule of the VAT Act.
The standard tax rate for VAT has been fixed all along at 15% (for taxable goods and services). The adoption of truncated value-bases caused multiplicity of practical tax rates, but VAT rate is a single, flat or uniform one. The rate of turnover tax (TT) is also uniform at 4% (2% up to 11 June 1997). But the rates of supplementary duty (SD) are multiple and there are two types of rates of SD ' basic rates and special high tax rates. At the beginning (1991-92), there were only five different basic rates which ranged from 10% to 85%. In 2001-02, there was maximum number of 12-tier basic SD rates for goods ranging from 2.5% to 30%. In 2000-01, there was maximum number of 18-tier special high SD rates for goods ranging from 35% to 350%. In this year (2000-01), thus, total number of SD rates was maximum 29 in number (ranged from 2.5% as on coffee to 350% as on cigarettes) including 11 basic rates from 2.5% to 30%. For 2007-08 and 2008-09, the basic SD rates were only 2-tier rates (lowest 20% and highest 60%) and in 2009-10, the basic SD rates have been enhanced to 4-tier rates (20%, 30%, 45% and 60%) with special high tax rates of 100%, 250% and 350%. The taxable services are also subject to SD with current three-tier rates (10%, 15% and 35% in 2008-09 and 15, 25 and 35% in 2009-10).
The computation of actual value-addition requires detailed recording of payments for goods/services bought, which is not properly done in Bangladesh. To ease the administrative steps for taxation of services, in specified cases, a 'truncated value-base' was fixed with the option of waiving 'input tax credit'. Under the VAT system, tax points depend on the stage of production and distribution. For goods imported by any importer, VAT is to be paid at the time of paying import duty under the Customs Act 1969.
For goods produced or manufactured or imported, purchased, acquired, or otherwise collected by any registered persons in the course of business operation or expansion, VAT is to be paid at the time of one of the following activities whichever occurs first: (a) when the goods are delivered or supplied; (b) when an invoice relating to the supply of goods is given; (c) when any goods are used personally or given for use to another person; and (d) when the price is received in part or full. For services rendered by any registered persons in the course of business operation or expansion, VAT is to be paid at the time of one of the following activities whichever occurs first: (a) when the services are rendered; (b) when an invoice relating to the rendering of service is given; and (c) when the price is received in part or full. For goods or class of goods for which the national board of revenue has ordered through the official Gazette notification to use stamp or banderole or special sign or mark having security system of specified value on package or carrier or container of the goods, VAT is to be considered as paid equivalent to the value of the stamp or banderole or special sign or mark used.
For services rendered by construction firms, indenting firms, travel agencies, motor garages and workshops, and dockyards and other services determined by the official Gazette notification, VAT is to be paid as withholding tax and VAT is collected, deducted and deposited by the receiver of the services or the persons paying the price or commission as the case may be. For any other goods and class of goods or services, VAT is to be paid at the time as indicated in the NBR rule.
Taxation remains a poor tool of government revenue collection in Bangladesh. Taxes to GDP (gross domestic ratio) ratios are usually not high in South Asia. But in case of Bangladesh the figure is alarmingly low - only a little higher than 9%, while the average for South Asian countries is 11%, the developing countries more than 15%, the industrialised countries 30%, and high income countries 24%. The introduction of VAT contributed significantly to raise the tax revenue collection in Bangladesh. In 1990-91, sales tax and excise duty were collected at an amount of Tk. 25.5 billion. In the first year of introduction of VAT (1991-92), the combined collection of VAT and excise duty was Tk. 31.4 billion, which was 23.3% higher than last year's combined tax from ales tax and excise duty and the combined collection from the taxes under the VAT Act (ie, VAT, SD and TT) and excise duty was Tk. 31.9 billion, thus 25.3% higher than last year's combined tax from ales tax and excise duty. The joint tax revenue from sales tax and excise duty was average 38.9% of total tax during the last five years before introducing VAT (1986-87 to 1990-91). After introduction of VAT, the share of tax collection under the VAT laws (VAT, SD and TT) in the total tax has increasingly been increased over the years. During 1991-92 to 1995-96, the individual tax collection from VAT was average 28.5% of total tax and the combined tax collection under the VAT laws (VAT, SD and TT) was average 39.8%. During 2006-07 to 2009-10, these ratios have become respectively average 35.7% for VAT only and average 51.7% for VAT, SD and TT). In absolute volume, the annual increase in revenue from VAT and excise duty is more than the previous annual increase in revenue from sales tax and excise duty. However, in relative term, the share of sales tax and excise duty in total tax in the 1980s was almost similar to the share of VAT and excise duties in that under the VAT regime. The share of VAT as a per cent of different indicators (internal trade tax, external trade tax, indirect tax, total tax, total GDP and non-agricultural GDP) has usually an increasing trend and the shares are significant. On an average, around three-fourth of total tax come from indirect taxes (projected to decline to around 70% in 2009-10 budget), and more than a half of the indirect taxes is collected in the form of VAT (Tk 227.9 billion targeted in 2009-10 budget, which is 50.2% of total taxes). The scope of VAT mainly covers the 'non-agricultural sector' but with a standard tax rate of 15%, the share of VAT as a percent of 'non-agricultural GDP' is only 3% to 4%.
VAT was introduced in Bangladesh as a consumption tax and allowed the full deduction of 'machinery' as an input from the 'output value' (sale proceeds of taxable goods and services) to compute the tax-base (i.e., value added). Although the initial coverage was up to import and production stages, the VAT-net has been expanded to wholesale and retail stages since 1996-97. On the basis of the latest version of service codes (July 2010), initially the number of VAT taxable services were 29 (under 24 Heading numbers), but now the number is theoretically unlimited, although for practical purposes this number is kept limited to 93 services under 71 heading numbers (in July 2010) for which the scope is defined. Goods other than primary unprocessed agricultural products and food items listed in the First Schedule of the VAT Act (live animals or poultry, human or animal hair, parts of animal body or animal products, parts of plant, green or dried vegetables, fruits, unprocessed spices, food items, oil seeds, natural gums or like products, wood, uncarded wool or cotton, and raw jute, etc) are subject to VAT. Thus almost the whole economy falls under the VAT-net and as a consumption tax, VAT is supposed to streamline the economic activities with corrective measures by applying supplementary duty. [Rafuqul Islam and Swapan Kumar Bala]