In order to make the Value Added Tax (VAT) system efficient, simpler, taxpayer friendly and to overcome the limitations of the existing system (as the 1991 VAT Act and Rules) the Government of Bangladesh (GoB) took initiative and passed the VAT and Supplementary Duty (SD) Act 2012.
The VAT and SD Act of 2012 provides for three taxes: a creditable 15 per cent VAT that is chargeable by businesses with taxable sales above Tk 8.0 million, a non-creditable 3.0 per cent turnover tax for businesses having annual turnover of more than Tk 3.0 million and up to Tk 8.0 million and a supplementary duty of varying rates that is chargeable on sales of specific goods and services. Under the new law, three VAT rates are effective: 15 per cent for all taxable import and supply, zero-rated (0 per cent) (for supply of any goods for export and other zero-rated supply) and 7.5 per cent for sale of residential building and joint venture property development (as the price of taxable supply shall be fifty per cent of the consideration of such a supply).
MAIN FEATURES OF THE NEW VAT LAW: The new VAT Act has incorporated many time befitting, trade and investment-friendly provisions. As per the provisions of the new VAT law, there is no need to get price approved by the divisional officer. Instead the taxpayers will need to notify the current price and input-output coefficient. This will largely ease VAT payment procedure and cost of doing business.
Under the new VAT law, the National Board of Revenue (NBR) will give only one registration number (9 digits) centrally for all business units of a group. In other words, it follows the registration principle of Company Act - one Company One Registration. However, a branch unit that maintains the records, and keeps the accounts, independently and separately from the central unit, may have a separate VAT registration. Under the VAT Act 1991 (excepting recent changes in 2016-17 budget), businesses had to obtain separate registration for each of their business unit. The provisioning of single registration for different units of a company in the new law will provide relief to the taxpayers of the requirement of having separate registration for every single unit.
The new law provides for general exemption from the payment of VAT. Enterprises with an annual turnover of Tk 3.0 million or less will remain out of the purview of the new VAT system. They will not be required to register under VAT and pay any tax. This will help small enterprises to run their business without observing any formalities for VAT. Similarly, the medium-sized enterprises (whose annual turnover is below the VAT threshold i.e. having an annual turnover in the range of more than Tk 3.0 million to Tk 8.0 million) except tobacco-products and alcoholic beverages, ingredients for alcoholic beverages or similar products, are entitled to receive an enlistment for turnover tax and pay only 3.0 per cent turnover tax. The exemption for small enterprises and reduced tax rates for medium-sized enterprises are expected to contribute to the expansion and growth of small and medium-sized enterprises (SMEs).
The new law has also removed the burdensome provision in the existing law of depositing VAT in the government treasury in advance of making supplies. Such advance payment of VAT and blocking the fund for quite a few months entails cost of fund. Under the new VAT Law (2012) to be effective from July 2017, such advance payment of VAT will not be required. The new law will thus help bring down the cost of doing business, encourage investment in the private sector and promote growth of the economy.
The new law provides for a broader scope to use up input tax credits. "Input tax" under the new law means the value added tax imposed on any taxable supply of any good, services or immovable property including the value added tax payable by any person on the taxable supply of imported goods or services; i.e. input tax credit can be taken on all economic activity unless otherwise decided by the authority. The widening of the scope of input tax credit in the new law is one of the important trade-friendly initiatives.
The New VAT system will be implemented under an automated platform. All activities for VAT payment such as Registration, payment of VAT, submission of return and payments of refunds will be done online. The VAT online system has gone into operation from March 23 with the help of Integrated VAT Administration System (iVAS). The iVAS system will have connectivity with the Customs, Bangladesh Bank, Income tax and Comptroller General of Auditors office.VAT challan info will be stored and processed in an automated system. As such, sending challan to the VAT Circle Offices will no longer be required. Preferring appeals against the decisions of VAT authority can also be made online under the new system and the final decision on appeal lodged over internet will be communicated online. In the new automated environment, business community will not be required to visit VAT offices (except hearing of cases/litigations) as all activities will be completed electronically. This will result in less hassle and reduced cost of doing business. Moreover, there are service provisions for businesses who lack online facilities. They will get support from VAT online Service Centres (VOSC) to get their registration and re-registration. The NBR has already set up four VOSC in Uttara, Mirpur, Farmgate and Motijheel, and one in Chittagong to provide the registration/re-registration services. Despite online system of registration, one can also submit their VAT registration application manually.
One of the salient features of the new Act is that any excess amount of paid VAT (i.e. net negative payable amount of money) in relation to an economic activity involving construction, house building or property development can be carried forward indefinitely. For other cases of negative balance of VAT (negative balance occurs when a person pays taxes in excess of what is shown as payable tax in the return for a tax period), such excess payments may be adjusted as a decreasing adjustment over six tax periods. If the registered person fails to make adjustment for his full amount of negative VAT within the six tax periods, he will be entitled to a refund of the remaining amount. In that case, the registered person/business will apply in Mushak-9.1 to get the refund and the refund will be approved in three months from the date of refund application. This time limit on VAT authority for making refund of excess amount (rebate) is a trade-friendly initiative.
Under the new VAT system (R 49, VAT & SD Rules 2016), the commissioner may permit amendment of the VAT or Turnover Tax return within four years from the date of submission of relevant return for removing the clerical mistakes and omissions (including errors in tax calculation) from such return; the new law thus provides pragmatic solution to problems that may arise out of errors/mistakes in VAT or Turnover Tax return. However, application for amendment cannot be submitted if the VAT authority starts any audit or inquiry or the error is already discovered. There is no such scope for amendment of return in the existing law.
Under the existing VAT system, awarding trade discount in selling of goods was subject to a number of conditions (such as discount can be given a maximum of 15 per cent of approved price, discount could not be given for more than 30 days in any period of 12 months (this provision, however, was changed recently vide Mushak-SRO 751 dated- 02 June 2016). Moreover, the issue of providing trade discount had to be advertised in a national daily newspaper and the VAT divisional officer needs to be informed). There are no such conditions on selling at discount under the new law. This provision of new VAT Act is consistent with real life business practices because the quantity and selling of goods is a business decision.
An important improvement made in the new law is the provision of considering any selling price (i.e. total price shown in VAT invoice) of VAT-able goods as VAT inclusive. This will simplify as well as increase collection of VAT from the VAT agents (i.e. sellers of VAT-able goods) because under the new provision of VAT inclusive pricing, there will be no scope for sellers to claim that they did not collect VAT from buyers. Moreover, VAT-inclusive pricing would ensure that the costs of VAT are not hidden from consumers. Another beneficial provision of the new law is that every eligible taxpayer will be entitled to turnover tax if their annual turnover is within the allowable threshold; this turnover tax benefit is not available for importers under the existing VAT system (Under current VAT system, importers are subject to VAT)
The new law provides for adjustment of supplementary duty (Rule 45) in the case export of goods. This will contribute to the enhancement of competitive advantage of our exporters. Exporters are denied this facility under the existing VAT system. The new law also contains provisions to consider a supply of services directly related to any land located outside Bangladesh (such as carrying on an activity of developing, or dealing in land located say in Australia) as zero-rated. This provision is sensible as the services supplied to non-residents who are outside Bangladesh should be zero-rated, as the services will be consumed overseas. This is also consistent with the destination principle of VAT under which supplies of goods and services are taxed in the jurisdiction where the goods and services are consumed.
BROADENING THE TAX BASE: The new law is expected to increase tax revenue considerably by broadening the tax base. The new law imposes VAT on sale of residential buildings, transfer of immovable property to the land owner by the developer, sale of second hand goods, sales through vending machines. The new VAT law will also cover import of services, lease grants, licences, permits and rights facilities. According to the new law, output tax will be paid on the basis of actual transaction values instead of tariff values (which are indeed very low compared to transaction value for selected manufactured goods) and truncated bases (for services and the trading sector) under the existing law. Additionally, the VAT base will be further expanded by substantially reducing the long list of exempt goods and services that are provided for under the current VAT system.
The increased revenue will contribute to the development activity of the state.
Other important pro-business provisions in the new law include (but not limited to) the scope for late submission of return, allowing supply of samples (a maximum BDT.20,000) without consideration, prohibition of multiple department audits (except genuine causes), provision of lay-by sales, provision of VAT Refund for Tourists, simplification of tax withholding at source by introducing a uniform withholding rate of not more than one-third (indeed it should be one-third; otherwise it will create implementation difficulty) in all cases and zero-rate for supply of goods for repair or replacement. The provision for VAT refund of Tourists will promote tourism industry in Bangladesh.
Apart from the aforesaid business-friendly provisions, the new law has provisions to make VAT palatable. Basic foods, primary health care and basic education will not be hit by the new law. The government has kept provisions to exempt imports and supplies of 15 types of goods and services, including any supply or import of prescribed basic food items for human consumption, life-saving medicines, social welfare activities (public health and medical services, education and training, childcare activities, agriculture, horticulture, pisciculture and veterinaries, prescribed supply of cultural services made on a non-profit basis, and supply of newspaper, sale of vacant land etc.) and other essentials from VAT in the new VAT Act (First Schedule of the VAT & SD Act 2012). These exemptions are aimed at serving public interests.
Despite many business-friendly provisions in the new VAT law, the business community of the country have expressed a few concerns about the withdrawal of the package VAT, truncated-base and imposition of uniform rate of VAT at 15 per cent. The steel makers say that prices of rod may increase because of the imposition of 15 per cent VAT under the new VAT law. Under the existing VAT system, manufacturers of MS Rod pay VAT for each ton of rod of varied description on tariff value basis that result in less than 15 per cent VAT).
It is encouraging to note that the NBR is engaged in constructive dialogue with the business community since long to make the replacement of existing law with the new VAT law a business, investment and development-friendly one. The NBR has also undertaken preparations to make the transition from the existing law to the new VAT law smooth. It has already introduced an advanced Call Centre (CC) to provide all types of information to the taxpayers. The hotline number of the VAT call centre service is 16555.
Given that many developing countries find VAT system more difficult to administer than initially thought, further adaptation as well as contextualisation may be needed to grapple with the problems of administration and enforcement.
To conclude, the new VAT law will be implemented in an automated environment. The NBR, the VAT online project and different VAT Commissionerates have already conducted a considerable number of training programmes, seminars and workshops with stakeholders to make them educated and aware about the new VAT system. Business houses have also taken steps to educate their staff/members about the new VAT system. Professional/Training organisations such as ICMAB, ICAB, ICSB, Bangladesh Tax Training Institute (BTTI), Bangladesh Institute of Management (BIM), Dhaka University Faculty of Business Studies, DCCI Business Institute and BDjobs have been imparting training on new VAT law. These initiatives will also aid the NBR in the implementation of the new VAT system.
Dr. Mohammad Abu Yusuf is Customs Specialist, USAID-BTFA.