Md. Abdur Rouf
The Value Added Tax Act, 1991 was introduced in Bangladesh in July, 1991. It is in vogue in Bangladesh for the last 22 years. During this period, a number of distortions gradually have creped into the system; namely: cascading effect, tariff value, truncated value base, maximum retail price-based value, price declaration, advance trade vat (ATV) at import stage, definition of services, deduction of VAT at source etc. In conformity with the sixth five-year plan (2012-16) of the government, the National Board of Revenue (NBR) adopted a modernization plan in 2011, a component of which was reviewing of the taxation laws to eliminate these distortions and to establish standard taxation system in Bangladesh. In that process, drafting of a new VAT law started. It was felt that introduction of a VAT system with all modern features is a necessity.
Input tax credit mechanism is the very basic of a modern VAT system. A person pays VAT on his purchased inputs. He makes value addition on the inputs processing those. He pays VAT on the total sale price with value addition. He takes credit of the VAT paid on the inputs. Thus, he ultimately pays VAT on the value addition at his stage. This is the beauty of a standard VAT system. In each stage, VAT is paid on the value addition only, thus tax component does not heavily fall upon any stage; rather it is distributed among all the stages of production and sale. Making the input tax credit mechanism operational across all economic activities is all about setting up of a standard VAT system. Under the present Value Added Tax Act, 1991 the operation of the credit mechanism has been largely stalled in many areas of the economic activities because of those distortions. So, the VAT and Supplementary Duty Act, 2012 had been adopted to lay down a system where the input tax credit mechanism will operate across almost all economic activities which is a prerequisite of a standard VAT system. It took more than two years to finalize the draft VAT Act. Experienced officers from NBR, law ministry, international experts, business community and other stake-holders were involved with the preparation process. While the draft was placed to Cabinet, a high-level committee was formed headed by the Economic Affairs Adviser to the Prime Minister to review the draft. And finally Parliamentary Standing Committee on the Ministry of Finance did the review being instructed by the Parliament.
The Parliament has adopted the VAT and Supplementary Duty Act, 2012. The people have enough curiosity about what are in the new Act and how is the new law different from the earlier one. Therefore, in this article, an effort had been made to present a comparison between the Value Added Tax Act, 1991 and the Value Added Tax and Supplementary Duty Act, 2012 so that people understand the basic differences between the two. Since this article aims at presenting to the readers the basic ideas and concepts of the Value Added Tax and Supplementary Duty Act, 2012 making a comparison with the present VAT Act; so, for the reasons of simplicity references from sections of the Acts will not be mentioned in this article.
The title of the new Act has been changed from the previous one. Title of the previous Act is Value Added Tax Act, 1991. But the title of the present Act is Value Added Tax and Supplementary Duty Act, 2012. Under the VAT system of Bangladesh, three taxes are collected; namely: Value Added Tax (VAT), Supplementary Duty (SD) and Turnover Tax (TT). The same is true with both the Acts. So, the Parliamentary Standing Committee on the Ministry of Finance felt that it is necessary to add Supplementary Duty with the title of the new Act. The Value Added Tax and Supplementary Duty Act, 2012 has a wider base compared to the previous one. This Act imposes VAT at import stage, production stage, trading stage, on rendering of services and on import of services and on immovable property, lease, grant, license, permit, rights, facilities etc. Thus the base of VAT has been expanded. In the Value Added Tax Act, 1991, VAT was imposed on imports, production, trading and services. Price declared by the VAT-payers and approved by the VAT authorities was the basis of VAT under the Value Added Tax Act, 1991 in most of the cases but under the new Act transaction value will be the basis for imposition of VAT. This will be in conformity with the best international practices. The new Act has abolished the provision of declaring prices of the goods and getting it approved by the VAT authorities. Instead, it stipulates maintenance of input-output co-efficient by the VAT-payers on the basis of which audit will be done later by the VAT authorities. Submitting price declaration and getting it approved by the VAT Divisional Officer is a major difficulty to the VAT payers presently, which has been done away with under the new law.
Sometimes, the sellers require to sale their goods at discount prices. Under the present law, there are three conditions to sale at discount prices. Those are: (1) it has to be advertised in a national daily where and when discount sale will be conducted; (2) the discount must not exceed 15 percent of the declared and approved value; and (3) in 365 days, one can not sale at discount prices more than 30 days. Under the new law, all these provisions have been done away with. There is no time limit for discount sale. So, under the new Act, discount sale procedures have been business-friendly. Truncated value base and tariff value are the major distortions under the present VAT system. These distortions hinder the operation of input tax credit mechanism across business activities, thus thwarts the development of a standard VAT system. Under the new Act, there is no provision for tariff value and truncated value base. This will help to develop a standard VAT system in the country. There has been change in the time of payment of VAT under the new law. Under the new law, VAT is payable in all cases before submission of return which is business-friendly. Under the present system, in the case of services who do not take input tax credit, by them VAT is to be paid before submission of return but in the case of goods and in the case of services who take input tax credit, VAT requires to be deposited to the government treasury in advance and keep balance in the Account Current Register from where VAT is to be deducted while making supply. But under the new law, there will be no Account Current Register. All registered persons will require paying VAT while submitting their return but not in advance through Account Current Register. So, it will be business-friendly.
In the new VAT law, the scope of input tax credit has been widened. Provisions have been made so that on almost all raw-materials, input tax credit can be taken. But under the present VAT system, broadly: land, building, office-equipments, vehicles and labor are not considered as inputs; so, credit is not allowed on these elements. Moreover, Section 9 of the VAT Act, 1991 lists a number of items where input tax credit is not allowed. The new law liberally allows input tax credit on almost all elements that will be business-friendly, in conformity with the best international practices and helpful to establish a standard VAT system in Bangladesh.
The new system will introduce single VAT registration number for all units and centers. However, if in any unit or center accounts are maintained separately, then separate VAT registration number could be issued for that unit. This will ensure ascertaining the actual tax liability of any person globally and facilitate smooth businesses. Under the present system, establishments require to take VAT registration at every place. However, there are provisions for central VAT registration of a producer who sells through different sales centers and a trader who has multiple sales points and a service renderer who renders services through different centers. But multiple producers under same ownership are not allowed central VAT registration presently. Under new law, multiple producers at different places under same ownership will get central VAT registration. Thus, under the new system, the scope of central VAT registration has been widened to the advantage of the VAT payers, since it will reduce their compliance costs and soften regulations on their activities. VAT Challan presently requires sending to the VAT Circle Office within five working days of the issuance. Under the new system, this will be done away with to the advantage of the VAT payers. Data will be stored and processed in an automated system. So, sending Challan to the VAT Circle Offices will no longer require.
Small and medium enterprises have been encouraged under the new Act. Any enterprise with Tk. 2.4 million or below annual turnover will remain out of the purview of the new VAT system. Thus, small enterprises will not require complying with VAT procedures. Establishments with an yearly turnover exceeding Tk. 2.4 million but not exceeding Tk. 8.0 million will require to pay 3 percent turnover tax. This will allow them to compete with large-scale enterprises. Under the present system, 3 percent turnover tax is to be paid by enterprises the yearly turnover of which do not exceed Tk. 7.0 million. Only few types of establishments enjoy cottage industry benefits under some conditions presently. So, Tk. 2.4 million lower level exemption threshold will be of great advantage to the small enterprises under the new Act. They will not require complying with any VAT procedures. Moreover, presently, turnover tax payers are not allowed to import but the new law allows them to import.
Under the present system, VAT returns require to be submitted to the VAT Circle Office. Presently, returns can not be examined properly because of manual submission and processing. Under the new system, all VAT returns will be centrally processed that will ensure exhaustive processing, ensure services to the VAT payers and effectively detect evasion. Under the present system, with few exceptions, return is to be submitted within 15th day of the next month. This time bar can not be withdrawn or extended. But the new system will allow the Commissioner to extend time limit for return submission on application of the VAT payers. Payment of VAT also can be deferred by the Commissioner on some grounds on application by the registered persons especially in cases of natural calamities. Such provisions are not there in the current VAT law. However, the late payers will have to be pay with 2.0 percent monthly simple interest. At present, VAT is to be paid through Treasury Challan only. But under the new system, through Treasury Challan, bank cheque and through on-line, one will be able to pay VAT. Thus, the new system of payment will be safe and tax-payer friendly. Under the new system, tax can be paid in installments if allowed by the Commissioner on application of the tax-payer on the grounds of natural calamities. The present system does not have any such provision of deferred payment on installment basis.
The concepts of progressive and periodic supply have been specified under the new Act. This will be administratively easier. Telecommunications services are a new dimension of today's life. In the present Act, there is no special mention of the concept but in the new Act the concept has been specially treated to accommodate all intricate realities that will be administratively easier and business-friendly. In the same manner, lottery, lucky draw, raffle draw, or other similar ventures have been brought into the folds of the new law. Moreover, provisions have been inserted about providing facilities to the employees in kind other that cash. Provisions have been made regarding payment of VAT while selling through vending machine, meter or any other electronic machine that operates through token or note. Special provisions have been made with regard to services of travel agents and tour operators across national boundaries to ascertain the taxability of some services and to exempt some other services on global basis.
In the new Act, residents and non-residents have been clearly differentiated and clear provisions have been inserted making some of their supplies taxable and some zero-rated. Provisions have been inserted in the new law regarding single and multiple supply and going concern which was not there in the present law. For non-residents, there will be VAT Agents appointed by the NBR. The VAT-Agents will perform all VAT related functions of the non-residents. Provisions have been made regarding imposition of VAT on second-hand goods in the new law. In the present law, there is no such provision. Under the new system, NBR will publish list of all VAT registered persons. Having seen the list, the people will be able to know whether his counterpart is VAT-registered or not. This will be taxpayer friendly. The present system does not have any such provision.
Under the present system, return once submitted can not be revised but under the new Act on permission from the Commissioner on application by the VAT payer, revised return can be submitted that will be business-friendly. Regarding offences and penalties, there have been some new insertions in the new Act. Departmental proceedings and proceedings of offences have been differentiated. The offences will be tried by Judicial Magistrate or Metropolitan Magistrate. Offences have been made non-cognizable and compoundable under the new system. Compoundability will help to settle the cases on negotiation. Presently, the Appellate Tribunal does not have any authority to issue stay order on the realization of taxes where the case is under trial. Under the new system, the Appellate Tribunal will have such authority. This will be tax-payer friendly. This will encourage people to settle their disputes at this level of trial. To file appeal to the High Court, 10.0 percent of the tax due or monetary penalty imposed has to be deposited under the new system. This will encourage settling the disputes at the lower tiers of adjudication.
The duty drawback mechanism of the present system will be largely overhauled under the new system. Presently, Duty Exemption and Drawback Office (DEDO) gives drawback. Under the new system, drawback will be given by the Commissioners. Refund as well will be given by the Commissioners. This will lessen difficulties to obtain drawback and refund. To realize arrears, powers of the VAT officers will be enhanced under the new system that will help reduce arrears and increase revenue. The Directors of a company will remain liable for any arrear of the company for a period of 5 years jointly or severally under the new law that will help realize government arrears.
In the new law, provisions are there regarding seizure of only Supplementary Dutyable goods but under the present law all goods can be seized. Under the new system, emphasis will be given on documentary prevention of revenue evasion but under the present system, besides documentary prevention, there are enough scopes for physical prevention of revenue evasion that is not tax payer friendly. The new system will function on the basis of information technology. Many of the activities will be outsourced and tax payer service center will operate centrally to give the people one-stop, uniform explanations regarding any VAT-related issue.
The VAT base has been expanded squeezing exemption facilities under the new system. The new law allows exemptions only to meet urgent needs and only government is empowered to allow exemptions. Exemptions once given will remain effective till the next Finance Act is passed. If it is not incorporated in the next Finance Act, the exemption order will automatically be cancelled. Under the present law, NBR enjoys power to allow exemptions which has been curtailed in the new Act. This will ensure level playing field of the tax payers and will contribute to the increase of revenue.
The new Act will come into full effect from hopefully July 2015. By this time, preparatory works i.e., automation of the VAT management system and education of the tax payers and tax collectors will be done. The NBR is now working to develop an Implementation Plan encompassing organization, staffing, information system, business process, tax payer services etc. Hopefully, when the new Act comes into force in July, 2015 in a new environment of modern and sustainable VAT management, revenue will be significantly increased and tax payers will get the required facilitating services from the taxmen concerned i.e., there will be a revenue-friendly and business-friendly VAT management system in Bangladesh. Let us look ahead.
Dr Md Abdur Rouf is First Secretary, Value Added Tax (VAT), National Board of Revenue (NBR).