The Impact Study of Value Added Tax in Bangladesh

7/23/2019 The Impact Study of Value Added Tax in Bangladesh

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IntroductionTaxationone of the major sources of public revenue to meet a country'srevenue and development expenditures with a view to accomplishingsome economic and social objectives, such as redistribution of income,price stabilization and discouraging harmful consumption. It supplementsother sources of public nance such as issuance of currency notes and

coins, charging for public goods and services and borrowings. The term'tax' has been derived from the rench word taxeand etymologically, the!atin word taxareis related to the term 'tax', which means 'to charge'. Taxis 'a contribution exacted by the state'. It is a nonpenal but compulsoryand unre"uited transfer of resources from the private to the public sector,levied on the basis of predetermined criteria.

Background of the ReportThis report entitled #$alue %dded Tax in &angladesh is a fundamentalre"uirement for the completion of the (nd)ear *onor+s in %ccounting. Themain purpose of this report is to extract the information of the $alue%dded Tax practiced in &angladesh.

ObjectiveThe general objective of this report is to provide a synopsis of how $alue%dded Tax is practiced in our country and related conse"uences.It is alsore"uired for the completion of this course. &eside the general objective,the objectives behind this report are given belowPrimary ObjectiveThe primary objective of the report is-

To analyze on the issue #The Impact tudy of $%T in &angladesh.

To disclose the precise scenario of the #The Impact tudy of $%T in&angladesh.

To analyze and recommend on the mentioned issues.Secondary ObjectiveThe secondary objective to prepare this report is-

To fulll the re"uirements of our course /!0123.To have a clear understanding about the activity of specic

descriptive research techni"ue that is personal interview.To gather experience and 4nowledge of doing a professional report.

Scope of the Study

This research study will cover the topic #The Impact tudy of $%T in&angladesh and its related issues. It also includes recommendationsagainst the selected issues. This report can be used as a secondary sourcefor further purposes.

Sources of InformationTo fulll the objective of this report collection of relevant, accurate,standardized and needful information was re"uired. To ma4e this reportreliable we have collected data from both primary sources and secondarysources. pecial consideration was given so that chances of biasness

could not arise. The sources used werePrimary Sources

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5rimary data is dened as data, which originates as a result of thatparticular investigation. 6e have collected primary data through depthInter with various people. The primary data related to #The Impact tudyof $%T in &angladesh was collected from the audiences by the method ofpersonal interview that we conducted. &oth structured and unstructured"uestions were constructed to extract the primary data.

Secondary Sourcesecondary data represents the data which are made by others but it isuseful for another purpose or research. %s a part of collecting data fromsecondary sources, we have referred di7erent boo4s of Tax and $%T. 6ecollected our data from the magazine, news paper, libraries and also fromthe websites.

Limitations8o study is beyond any limitations. 6hile doing this research study wehad to face some di9culties. The limitations of the research activities areas follows-

6e did not have so much experience for conducting research andpreparing the report very fre"uently, though we are in learning position.

In depth interview some participants were unenthusiastic to provideenough information.

There was no current information related to &angladesh on the6ebsite.

There was lac4 of precise information: both primary and secondary.There was not enough time to analyze the selected issues.;ur resources


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"#$%T&R O'& ( )$L*& $++&+ T$,

Introduction

$alue %dded Tax is emerging as an e7ective tool of taxation in the handsof >overnments internationally. In fact more than ?22 countries aroundthe world have accepted this as a way of taxation on commercialactivities. ;ur neighboring countries li4e India, &hutan, 8epal and 5a4istanhave already recognized $%T. @eveloped countries including %ustralia,Anited tates, A/, and AB have already introduced $%T successfully.The origin of $alue %dded Tax erman turnover tax. ince then numerouseconomists have recommended it in di7erent contexts. %lso, variouscommittees have examined the tax in great detail. *owever, for itsrejuvenation, the tax owes much to Eaurice aure and Farl houp. Therecent evolution of $%T can be considered as the most important scalinnovation of the present century?. $%T was rst introduced in rance in?CG1. 6ith the imposition of Taxe sur la Valeur Adjoutee, rance becomethe rst Huropean country to implement $%T on an extensive scale. It wasnot, however, at rst a complete system of $%T, since it applied only to

transactions entered into by manufacturers and wholesalers. It wassupplemented by a separate tax on services


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$alue %dded Tax


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entrepreneurs=, whose annual turnover does not exceed Ta4a ?.G millionare re"uired to pay Turnover Tax at the rate of (.G per cent in lieu of ?Gper cent $%T. This limit is too low for small industries.%s a result, small industries are subjected to the same ?G per cent $%T astheir large0scale counterparts. In addition, supplementary duty is imposedat variable rates on certain categories of consumption goods across all

size categories. inally, excise duty applies to a limited number of itemsirrespective of size classication.

'ationa! Board of Revenue -'BR/ The Tax "entra! "o!!ection$uthority

The 8ational &oard of /evenue


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Introduction of )$T in Bang!adesh

In %pril ?CLC, the Taxation Hn"uiry Fommission


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Turnover Tax


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the irst chedule of the $%T %ct


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?. $%T is imposed on goods and services at import stage,manufacturing, wholesale and retails levels:(. % uniform $%T rate of ?G percent is applicable for both goods andservices:3. ?G percent $%T is applicable for all business or industrial units withan annual turnover of Ta4a ( million and above:

1. Turnover tax at the rate of 1 percent is leviable where annualturnover is less than Ta4a ( million:G. $%T is applicable to all domestic products and services with someexemptions:M. $%T is payable at the time of supply of goods and services:L. Tax paid on inputs is creditableQadjustable against output tax:D. Hxport is exempt:C. Fottage industries


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value= at which the goods are supplied by the manufacturer, this valueincludes all costs, charges, commission, duties and taxes except the $%Tamount. ;n the other hand, the gross receipts are considered to be thebasis for determining the $%T liability for services in general. &ut in specialcases, some narrow base values instead of gross value are ta4en intoaccount for $%T calculation. %gain in some cases, tari7 values are xed as

base value for determining $%T.Hach tax payer is re"uired to issue a tax invoice, as proof of payment of$%T, for each supply of goods or services. *owever, the importers are notre"uired to issue any tax invoice. &ut when importers sell their goods theymay issue a supplementary tax invoice to a $%T registered person. $%T onimported goods is to be paid by the importers at the time when thecustoms duties on it are paid. In other words, $%T at import stage is paidbefore clearance of goods. &ut for the local manufactured goods $%T ispayable at the time of supply of goods and services. Hach registeredsupplier of goods or services is eligible to ta4e instant credit of the $%Tpaid on inputs. The payments of $%T for goods ovt. treasury orthrough their input tax credit. ystem have also been introduced to collecttaxes on certain services li4e Fonstruction, Eotor >arages R 6or4shops,5rinting, Indentors, etc. at the source point of payment. Hach taxpayer isto submit a tax return for each tax period


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$alue %dded Tax


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$%T system in &angladesh operates under the legal framewor4 of $alue%dded Tax %ct ?CC? and $alue %dded Tax /ules ?CC? made under $alue%dded Tax %ct ?CC?. %s per $%T %ct at a Pat rate of ?GK is chargeable onall goods and services imported in &angladesh and on all goods andservices produced in &angladesh at every stage when the title of thegoods and services of the concerned transaction is transferred. *owever

there is exception for certain the goods and services listed in the rstschedule and second schedule of $%T act ?CC? respectively. Theexempted items are basic agricultural products, live animals and animalproducts, education, boo4s, magazines, newspapers, postal services andpassengers and goods transportation services etc.&esides, according to the law, any person engaged in the business ofgoods and services subject to $%T having yearly sale of less than Ta4a twomillion has to pay Turn0over Tax


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"#$%T&R T2O ( T$, &,%&'+IT*R&S I' B$'>L$+&S#

Introduction

In recent years, the study of tax expenditures has gained increasedimportance in the literature of public policy, particularly in developing andtransition economies. uch studies are primarily concerned with reductionin tax liabilities resulting from various tax preferences such as preferentialtax rates, exemptions, deductions, rebates, deferrals, credits, etc. Thesemeasures are often used as part of an e9cient tax policy in order toachieve certain scalQsocial objectives, e.g., generating revenue at socially

e9cient and e"uitable level that minimizes its disincentive e7ects oneconomic activities, reducing pressure on public sector borrowing andsubstituting direct government expenditures


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accounting is necessary broadly from two perspectives rst, it gives anindication about potential areas for further revenue generation: andsecond, it gives additional information about actual budget expendituresof the government that is not rePected in spending program of the budgetdocuments. This policy note attempts to analyze the concept and size oftax expenditures in the context of &angladesh with special references to

India and 5a4istan for )2G. It also nds the necessity to re0examine afew existing tax expenditure measures in &angladesh.

&xisting Tax &xpenditure easures in Bang!adesh

The tax system of &angladesh includes several tax expenditure measuresunder the broad headings of direct taxes and indirect taxes. Theseprovisions, introduced with the enactment of the tax law, have beensubject to changes from time to time. The major policy objectives behindthe tax expenditure measures in &angladesh are to accelerate the processof industrialization, to attract foreign currency through increasing exportsand foreign direct investment


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Tax Expenditure Measures in Indirect TaxesAnder the various acts of indirect taxes, exemptions and deductions aregiven in the area of customs duty, supplementary duty and $alue0%ddedTax oods and services exempted from $%T include food and agriculturalproducts, animal products, poultry sector, agriculture inputs, basicservices for living, social welfare services, culture related services, nanceand nancial activities related services, transport services, personalservices, etc.

"#$%T&R T#R&& ( )$T S4ST& I' B$'>L$+&S#

%s mentioned earlier, &angladesh introduced the $%T as a radical reformin the indirect tax system. The then government tried to familiarize people

with this new tax system and to ma4e the reform successful. &eforejudging the success of this reform, some important issues should bediscussed.

Revenue Structure

Total internal resource generation of a country consists of tax and non0taxrevenues. 8ational performance, therefore, regarding mobilization ofinternal resources may be assed by relating the overall tax and non0taxrevenue to national income and comparing these ratios over time. Table (

gives a picture of the revenue structure of the country.Tab!e 5Revenue Structure of Bang!adesh@ 3;=5A=7 ( 3;;6A;3 -per cent

4ear Tota! Revenue A>+%

Tax Revenue A Tota!Revenue

=5A=7 ( =8A=9 9.5


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%s indicated, the revenue >@5 ratio rose from a low of G.( per cent in theearly seventies to D.D per cent in the late seventies and then increasedonly marginally and remained at less than ?2 per cent even in ?CDDQDC J?CC2QC?. %lso tax receipts accounted, as table ( shows, for more thaneighty per cent of the total revenue earning of the country during thisperiod. Thus, it is evident that the internal resources generation e7ort of

the country is low and the loan+s share of it is borne by the tax revenue.

Tax !evenue8ational &oard of /evenue


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Tota! 'BR tax 3


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"overnment !eceiptsTax revenue is the main source of the government revenue. Tax revenueaccounts for about D2 percent of total government revenue. In ) ?CCM0CL, revenueQ>@5 ratio was C.M( percent, which rose to ?2.(? percent in)(22?02(. In ) (22M02L the revenueQ>@5 rose to ?2.GD percent. Table 1

shows tax and non0tax revenue receipts and tax0>@5 ratio during theperiod from )?CCM0CL to )(22M02L.Tab!e 8/ Revenue Receipts +%

Total/evenue

C.M( C.G C.2 D.1L C.M ?2.(?

?2.3G

?2.M3

?2.GL

?2.LC

?2.GD

Tax/evenue

L.DC L.MC L.3M M.LD L.D L.D? D.32 D.G D.M( D.L2 D.12

8on0tax/evenue

?.L3 ?.D? ?.M1 ?.MC ?.D (.1 (.2G (.?3 ?.CM (.2C (.?C

ource 8ational &oard of /evenue, inance @ivision and &&. igures arebased on revised budget.

Tax Mana#ement@etermination of tax policy of the government and its implementation arereposed on the 8ational &oard of /evenue


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!i4e woven and 4nit garments, collection of %IT at the rate of 2.(GKfrom the sale proceeds of any good or commodity exported at sourcelevel

Tax exemption on Sero Foupon &onds%bolition of upfront %IT from the Treasury bill and Treasury bond issued

by the government

Threshold limit for paying %IT increased from T4. (,22,222.22 to3,22,222.22

@eduction of %IT at the rate of ?2K from trustee fee and deduction of%IT at the rate of L.GK from freight forward agency commission

Tax *oliday for olar Hnergy 5lantsTax exemption period for agricultural industries extended up to 32 Nune

(22DHxemption facilities for inward remittances in &angladesh for foreign

nationals withdrawnIn case of jute and textile industries rebated tax at the rate of ?GK

extended up to 32 Nune (22Dpecial tax rate of ?GK for diamond cutting R polishing industriesintroduced

Transfer of capital for new assesses availing and self0assessmentsystem restricted to prevent tax evasion

?2K tax rebate allowed in case of assesses paying tax at the highestrate of (GK and showing ?2K higher income than the previous year

Einimum tax rate for companies introduced by inserting a new section?Mcc

8ew sections of laws introduced for courier services, cash incentivesfor exports and credit card

&angladesh has so far signed agreements with (G countries to avoiddouble taxationeasures under Indirect Tax System"ustoms +uty

our tier duty structure and the highest duty rate of (GK of last scalyear


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)a!ue $dded Tax -)$T


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%nalysis of revenue collection activities for )(22M02L by categoriesshows that the bul4 of revenue collection comes from value added taxTotal rand Tota! 5;;


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Tax Structure

The tax structure in the country consists of both direct


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Taxes on domestic goods and servicesi= Taxes on domestic goodsia= Hxcise @utiesib= ales


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Table shows that the share of the taxes on domestic goods and servicesremained stable at around a "uarter of total tax revenue after falling froma high of 3C.M per cent in the early seventies. The sales tax on domesticgoods does not exist any more. In fact, as table ( shows, excise taxesaccounted for almost the entire revenue yield form this source whichstands at a "uarter of total tax receipts of the country.

%nother interesting feature of taxes on domestic goods and services isthat only a few items generate the total tax yield for excise taxes. In fact,only four items namely0 tobacco, petroleum, petroleum gas and jutemanufacture accounted for more than L2 per cent of total excise tax yieldof &angladesh in ?CD1QDG. These ndings thus clearly indicate that taxeson domestic goods and services are low and the base is also very narrow.

d$ Taxes on %orei#n Tradeoreign trade tax has continued to play a dominant role in the taxstructure of &angladesh over the years. Table shows that it has accountedfor more than G2 per cent of the total tax yield of the country in recentyears.

e$ Ot&ers&xcise +uty

Hxcise duty is currently imposed in &angladesh under the Hxcise and alt%ct ?C11 introduced to levy and collect duties of excise on domesticallymanufactured goods and also to salt. &efore introducing $%T since Nuly?CC?, the excise constituted the second largest source of revenue for thegovernment eneral ales Tax %ct of ?C1D. Theales Tax %ct ?CG? came into force on ? Nuly ?CG? by repealing the

5a4istan >eneral ales Tax %ct of ?C1D. Antil ?CD(, sales tax was beingcollected under the ?CG? %ct, which was replaced by the ales Tax;rdinance ?CD(.The $%T law was promulgated by repealing the &usiness Turnover Tax;rdinance ?CD( and the ales Tax ;rdinance ?CD(with e7ect from ? Nuly?CC? by imposing three types of taxes, viz, $%T, @ and TT. 8ow $%T isbeing imposed at ?GK on 'value added' at import and all production anddistribution stages of taxable goods and services and collected from $%T0registered persons having annual turnover of T4 ( million or more. In caseof annual turnover of less than T4 ( million, TT is imposed at 1K on gross

turnover.>oods and services, which are luxurious, non0essential and sociallyundesirable, are subject to @ at rates ranging from (.GK to 3G2K.

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Hxports are subject to imposition of $%T at zero0rated, ie, $%T paid at pre0export stages is refunded to the exporters. The $%T authority has alsobeen collecting another tax called 'infrastructure development surcharge'at the rate of (.GK since ?CCL0CD on the value of goods produced in&angladesh as specied by the government in this regard.

Income Tax

Income tax was rst introduced in the subcontinent by the &ritish in ?DM2to ma4e up the revenue decit caused by the H5;) /H$;!T, ?DGL. %fterindependence of &angladesh, income tax was made e7ective under theIncome Tax %ct ?C(( passed on the basis of the recommendations of the%ll0India Income Tax Fommittee appointed in ?C(?. Furrently, income taxhas been imposed under the Income Tax ;rdinance ?CD1


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S 667 S 667.36 >arage and ?orkshop of motor car 8.9D

S 667.56 +ockyard 8.9D

S 668 S 668.66 "onstruction "ontactorASangstha 8.9D

S 66= S 66=.66 $dvertisement OrganiFation/ >overnment@SemiC>overnment@ $utonomous Body@'ationa!iFed Bank and Insurance Sector

8.9D

%rivate OrganiFation@ 'onC>overnmentSangstha -'>O@ %rivate Bank 0Insurance@ Limited "ompany@ $nySangstha or %erson

;D

Others 39D

S 66< S 66oods 3.9D

S 6:9 S 6:9.66 #ouse c!earing and maintenanceorganiFation

5.59D

S 6:: S 6::.66 Lottery ticket se!!er 39D

The Tax Structure for Individua! Tax %ayers

If an individual has been in &angladesh for a periodQperiod totaling ?D(days or more in the income year, heQshe is considered a resident. In casean individual has been in the country for C2 days in the income year and3MG days in four years proceeding this year, heQshe will also be considereda resident.Hach individual is entitled to an investment tax credit of ?G percent of thetotal income or T4 ?22,222 whichever is less. Incomes from small andcottage industries are entitled to a G to ?2 per cent tax rebate dependingon the production volume.

;n the rst T4. ?MG,222.22 of total income 0 no tax obligation;n the next T4. (LG,222.22 of total income 0 ?2K;n the next T4. 3(G,222.22 of total income 0 ?GK;n the next T4. 3LG,222.22 of total income 0 (2K;n the balance of total income 0 (GK

Tax #o!iday

Tax holiday is allowed to industries subject to the relevant rules andprocedures set by the 8ational board of /evenue


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In @ha4a and Fhittagong @ivisions


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%n application for enlisting has to be made to the superintendent ofconcerned local $%T o9ce, in form Eusha40M+. The superintendent issatised on the turnover declared by the applicant shall issue anenlistment certicate in form Eusha40D+.

!ecords to be maintained

5ersons enlisted shall maintain accounts of daily buy0sale transactions inform+Eusha40?L%+ and shall also preserve number wise sale cash memoincluding enlistment number. urther, declaration of turnover, challan oftreasury deposit, returns etc. shall have to be preserved for at least 1years.

Deduction o' Turnover TaxTurnover tax can not be deducted at source against supply of goods orservices. *owever, it is to be ensured through presentation of treasurychallan and certicate about deposit of due tax in advance for theconcerned tax period.

Tax Period 'or Turnover TaxTax period can be annual, "uarterly, or monthly. It fully depends on theconvenience of the Turnover tax enlisted person to choose his tax periodand mention the same while declaring annual turnover in form Eusha40(&+ on the basis of his own selection, enlisted person shall have to submitreturn to the concerned circle.

Payment o' Turnover TaxIn the case of annual declaration, within 32 days of declaration of turnover

and for "uarterly or monthly declaration within ?G days of suchdeclaration tax calculated O1K on the turnover declared, shall have todeposited to the treasury and the return together with the main copy oftreasury challan have to be submitted to the concerned circle in formEushal03+. Tax is payable from the date of enlistment and in absence ofany transaction in any tax period for any reason, tax has to be paid.Turnover tax is payable in advance within certain days of thecommencement of tax period. @efault to pay in due time may attract apenalty not exceeding T4. G222 and (K of additional tax for each monthas additional tax.

Clamin# o' Dra(bac)%ny registered or enlisted person is entitled to drawbac4 against exportfrom duty exemption and drawbac4 o9ce @5 ratio, government has to

nance growing budget decit through substantive amount of foreignloans and public debts. In ) (22G, Tax >@5 ratio was D.L, while /evenue>@5 ratio stood at ?2.M1. These gures indicate the poorest performance

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even among the outh Hast %sian subcontinent countries. *owever, forsubstantive growth in tax revenue collections, in the recent years, Tax0>@5 ratio is increasing steadily.Tab!e +% Ratio

145663 14 5665

145667

145668

145669

/evenue aspercentage of >@5

C.M ?2.(? ?2.3G ?2.M3 ?2.M1

Tax revenue aspercentage of >@5

L.D L.D D.3 D.G D.L

Tax revenue constitutes more than D2K of government revenue receipts.8ational &oard of /evenue


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more than D2 per cent of total revenue comes from taxes, restructuringthe tax system by introducing the $%T was thus critical.&angladesh relies on heavily on trade taxes. &ut studies of the taxstructure of certain developing countries suggest that the economic costof trade taxes is much higher than domestic consumption taxes. The tradetaxes lead to the creation of ine9cient domestic industries by penalizing

exports.The tax structure @5 ratioin &angladesh was only L.( per cent in ?CDGQDM which is far fromsatisfactory, from the point of view of tax collection, even by an %siantandard.o to 4eep pace with the ever growing public expenditure


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"#$%T&R 1O*R ( T#& S$LI&'T 1&$T*R&S O1 T#& )$T I'B$'>L$+&S#

%o!icy Issue

Consumption Type* Destination Principle and Invoice Met&od+The $%T that has been introduced in &angladesh is of the consumptiontype


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groups of goods are $%Table at retail sale. In future the retail level $%T willbe expanding.

Sing!e Rate

The standard rate of value added tax


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expediency or e"uity grounds. In fact distributive goals would be betterachieved if there exists necessary capacity to administer a comprehensivetransfer system.

Treatment of Sma!! 1irms

In &angladesh, for administrative and record 4eeping reasons, small formshave been 4ept outside the purview of the $%T. pecic industries withinstalled capital machinery valued at Ta4a 322,222 or below are exemptfrom the $%T. or administrative and record 4eeping reasons, small rmshave been 4ept outside the purview of the $%T in &angladesh. There aretwo bases for exempting the small rms. pecied industries withinstalled capital machinery valued below Ta4a three lacs and with annualturnover below Ta4a fteen lacs, are exempt from $%T. econdly, allmanufacturers or services renderers having turnover below Ta4a fteenlacs are exempt from $%T. This way of exempting economic activities fromthe purview of $%T is not however free from problems. There is thepotential danger of under reporting sales or understating the value ofcapital machineries. The borderline cases are also hard to deal with. Thisalso creates competitive imbalance, since the exempted rms havearticial price advantage over the taxable rms leading to mar4etdistortions.

Service

Fertain selected services were brought under the $%T system in

&angladesh during the introduction of the system in ?CC?. % few moreservices have also been added to the list in ?CC( and in ?CCM. inceorganized manufacturing accounts for only ?G percent of value added in&angladesh, in order to have a meaningfully broad based $%T, it isessential to expand the $%T system to cover as large an area of servicesas possible. &ut although the total value added by services is "uite high in&angladesh


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Broader "overage

The $%T in &angladesh has a broader coverage compared with the basesof taxes it has replaced. %ll goods except those mentioned in the irstchedule to the $%T %ct ?CC? are subject to $%T @5 or valueadded, increase in revenue is expected to 4eep pace with the >@5 growth.6ith regard to the services also, the $%T base is larger than the excisebase it has replaced.

Treatment of &xport

Hxports are zero rated under the $%T system in &angladesh. This impliesthat there would be no $%T on exports. In addition, all input taxes


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or the ease of administrating all procedure or suppliers of vatable goodsor services or traders or importers of goods or exporters of goods orservices shall have to be registered with the concerned divisional $%To9ce. The o9ce allocates a particular number to each of the procedures,suppliers, importers or exporters or traders to identify as a $%T payer andthis is registration. The certicate in which it is communicated


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Fentral /egistration6hen supply of vatable goods or services or export0import business isconducted from more than one place but the accounts are centrallymaintained, 8&/ can, by a special or general order direct to register onlythe head o9ce of business. It is 4nown as central registration. Thus, 8&/through /; 8o. ?ML0localQCGQ??C0Eusha4 directed for registration ofhead o9ces of insurance companies when accounts and records arecentrally maintained.

8ecessity of /egistration6hen the annual turnover or sale of producer or trader of vatable goods

or supplier of vatable services exceeds T4. (2 lacs registration is a legalnecessity. Turnover of any person, registered under turnover tax, whenexceeds in any continuous ?( months T4. (2 lac, he shall have to apply tothe divisional $%T o9cer for registration within 32 days after the end ofthe tax period. In the case of a person carrying on his business where $%Thas been newly imposed, he shall be re"uired to be registered from theday of such imposition.ollowing service providers and suppliers of goods are re"uired to beregistered for $%T even when annual turnover is less than T4. (2 lacs.oods

Figarette containing tobacco manufactured mechanically or manually.

Supp!iers of Services

Eotor garage and 6or4shopilm tudio

@oc4yardurvey irmFonstruction irm

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ales Fenters of urniture%dvertising rm>old mith and ilver mith, shop owner and gold rener5rinting 5ressEedical Fenter%rchitecture irm

5athological !aboratoryIndenting irmFonsultancy and upervisory irmreight orwarder!ease holderFlearing R orwarding irm&an4ing ervice 5rovider%udit and %ccounting irmHlectricity distributor%F launch service>lass Futting irm5rocurement 5rovider&uyer of %uction >oodsatellite Fable operator;rganizing issuing credit cardecurity erviceEoney changerTransport FontractorTailoring shop and Tailor!essor of transport vehicle%rchitect, Interior designer or decorator

5erson joining the board meeting

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"#$%T&R 1I)& ( $+)$'T$>&S O1 )$T

The rise of the value added tax


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"ertainty and Transparency

The $%T is a system based simply on transactions. Thus there is no needto go through complicated denitions li4e sales, sales price, turnover ofpurchases and turnover of sales. The tax is also broad0based and

applicable to all sales in business, thus there is little room for di7erentinterpretations. imilarly, due to the basic feature that it gives credit oftax paid on earlier stage, the buyer will always as4 for invoice. Thus thescope of tax avoidance or evasion will be much less. The disputes will alsobe fewer. This system brings certainty to a great extent. o also, the buyer4nows, out of the total consideration paid for material, what is taxcomponent. Thus, the system ensures transparency also.

In 2idespread *se

$%T is in use in well over sixty countries throughout the world. In its usualform, it is a transaction0based consumer tax applicable to both goods andservices, with the invoice overnment will receive its due tax on the nal consumerQretail saleprice. There will be a minimum possibility of revenue lea4age, since thetax credit will be given only if the proof of tax paid at an earlier stage isproduced. This means that if the tax is evaded at one stage, full tax will berecovered from the person at the subse"uent stage or from a personunable to produce to proof of such tax payment. Thus, in particular, aninvoice of $%T will be self enforcing and will induce business to demandinvoices from the suppliers. %nother attribute of $%T is that it is anexceptionally stable and Pexible source of government revenue. Thestability of $%T as a revenue source stems from the fact that if

consumption is less volatile the income system provides a Pexibleinstrument of taxation, since it is collected on a current basis. The

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decision about revenue can also be ta4en correctly as variance in rate oftax has directed relation with revenue collection.

&xports

$%T frees exports from the burden of tax in that the tax paid on inputs canbe identied and recovered by the exporter. Fonse"uently, goods enterinto international trade on an e"ual footing in this respect with those fromother countries.

)$T as an $id to Tax Reform% full $%T paid on importations and extending throughout manufacturing,wholesaleQdistribution and retail businesses 0 and including services 0provides a wide tax base and, depending on the state of the economy, abuoyant source of revenue. &ecause of this revenue0generating capability,the introduction of a $%T can be used to reform or modify other taxationstructures. or example, high customs tari7s may be lowered, a complexseries of excise0type rates of tax simplied, or an unsatisfactory sales taxremoved.

%!anning Ski!!s

In order to produce good results, the introduction of a $%T, whether a fullor partial


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5ublicity campaigns can be designed with a view to improving thetaxpayer's view of o9cialdom. imple explanations as to why a new tax isre"uired and how it will wor4 may improve the image of the taxationauthorities. @i7erent approaches to the education of taxpayers can beadopted, and the use of explanatory leaPets in easily understoodlanguage and in eye0catching layout can help. Eany steps can be ta4en to

improve the administratorQtaxpayer relationship which may lead in thelonger term to improved trader compliance.

Better Record Heeping by the Business "ommunity

The control of $%T rests on the use of invoices and the 4eeping of recordsby the taxpayers. !arger companies in most countries generally 4eepade"uate records, usually held on computers. ;ften it is the smallcompanies, fre"uently sole proprietorships that are not 4eeping properrecords. It is these people that are the most di9cult to control e7ectivelyfor the purposes of taxation. In this connection, much will depend on thelevel of turnover at which businesses are re"uired to register for tax. If thelevel is set too low, the cost of ade"uate control may become excessive.>ood publicity aimed at the education of taxpayers in the re"uirements ofthe tax will facilitate its administration and can lead, in time, to a generalimprovement in business procedures.

*se of *niue 'umeric IdentiGers

or a $%T it is essential that each business registered for the tax isidentied by means of an identication number uni"ue to that business.6here a suitable system of numbering already exists, it should be usedfor the $%T. 6here it does not, a system of uni"ue numbers


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responsible for training the sta7, and some expert assistance may benecessary. *ere again, much of the training experience and the strategiesadopted for $%T can be used, after any necessary adaptation, to improvethe situation in regard to other taxes.

Other BeneGts of )$T

The $%T avoids most of the negative features of the sales tax and excisetaxes. It removes cascading, allowing the tax content of any product to be4nown with greater degree of certainty and thus leading to betterresource allocation decisions as the investment decisions can be ta4enindependent of the tax policies. The self policing and cross chec4ingproperties of $%T as well as its collection in stages, leave less incentive forevasion. There is no fre"uent change in tax policies allowing investors tooperate in a certain and stable tax environment. $%T simplies taxadministration and increases e9ciency in resource allocation.

"#$%T&R SI, ( +IS$+)$'T$>&S O1 )$T

@espite having the advantages, the $%T is not free from its limitations. Ithas the following limitations

%rice &Ject of )$T on Retai! %rice

% persistent criticism of the $%T form has been that since the tax ispayable on the nal sale price, the $%T usually increases the price of thegoods. *owever, there appears to be an intrinsic reason as to why shouldhave any inPationary impact if it merely replaces the existing e"ual yieldtax. It is possible that the nal price under the $%T system may not bemore than the price under the sales tax system. % survey of the pricee7ect of introducing in more than ?32 countries resulted in a conclusionthat in more than D2K countries it did not alter the rate of inPation. It mayalso be pointed out that with the introduction of $%T: the tax impact ofraw material is to be totally eliminated.

"ost of $dministration to State

%nother point which needs consideration is the "uestion of the cost ofadministration to the state. &ecause of introduction of $%T, theadministration cost to the state can increase signicantly as the numberof dealers to be administered will g up signicantly. *owever, this increaseis re"uired to be evaluated against the li4ely gains under the $%T.

"omp!iance cost to the +ea!ers

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It is argued that for compliance with the $%T provision, the accountingcost will increase. The burden of this increase may not be commensuratewith the benet to traders and small rms. Though under sales0tax laws, itmay be stated that a transaction of sale is liable to tax, but for thepurpose of the liability, the purchase nucleus is re"uired to be found out. Ifthe purchases are from a registered dealer, it will be a resale., if purchases

are from outside the state, the sale will be a rst sale. Therefore, evenwithout the introduction of $%T, for taxation of a sale transaction, thesource of purchase has to be considered. Ander the $%T also, a closedaccount of the purchase will have to be maintained.

Increase in 2orking "apita! Reuirement

%nother possible wea4 point in the introduction of $%T, which will have anadverse impact on it is that, since the tax is to be imposed or paid atvarious stage and not on last stage, it would increase the wor4ing capitalre"uirements and the interest burden on the same.

Regressive

;pponents of the $%T argue that the $%T, li4e ant other consumptionbased0revenue source, is inherently regressive. Those least able to payface the highest overall burdens. &ecause it is believed that the $%T is abroad based tax levied on essential goods and as such must beregressive.

;ther demerits of $%T system are0

The $%T needs a formal economy where all economic units from importersto retailers document their transactions, and maintain accurate records.*owever in developing countries, the informal economy covers substantialtrading which is not documented and registered. Eoreover, the lowliteracy rate may result in poor compliance of the $%T %ct and /ules.Therefore, the $%T in such countries may fail to achieve its objectives.

rom the perspective of e"uity and justice, necessities and small units are

exempted from the $%T. %lthough this reduces administration costs of thegovernment, and the burden of compliance on the small units, suchexemption narrows the tax base, distorts the system and limits itssuccess.

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"#$%T&R S&)&' ( &"O'OI" &11&"TS O1 T#& )$T

The performance of the old tax system was not at all satisfactory from therevenue point of view. 6hile increased revenue is ever demanding forinfrustructural, social and institutional development for this poor country,the tax0>@5 ratio is only half of our neghbouring countries @5 ratio is ?L, ?1 and ?G percentrespectively=. o, though the purpose of introducing the $%T is overallreform of indirect taxation, the main objective of the government is to

raise the revenue maintaining possible e"uity and e9ciency of thetaxation. The various e7ects of the $%T are discussed below.

%rice &Jects of )$T

The most sensitive aspect of $%T introduction is its e7ect on prices. It isbecause of this, the policy ma4ers of di7erent countries are oftenreluctant to introduce $%T in their countries. This fear is essentiallygroundless. $%T can lead to a once0for0all increase in prices if morerevenues are desired. &ut there is nothing inherently inPationary about

$%T. % study on international experience involving thirty nine countriesshows that there was no price increase in twenty two countries. In the restof the countries, there were one time price increases. ince $%T is a verybig structural change, it often creates uncertainties in the minds of thebusinessmen and the consumers the consumers anticipate inevitableprice increase, while the businessmen use the across the board taxincrease to widen prots. 5rices could rise for reasons other than $%T aswell, depending on the timing of $%T introduction. %lthough priceincreases were also apprehended in &angladesh, the experience suggestthat there has not been any signicant rise in prices that could be

attributed to $%T.The $at can lead to a once and for all increases in prices and if morerevenues are desired but there is nothing inherently inPationary about the

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$%T. % study on international experience conducted by %lan Tait of the IEshows that out of 3? countries there is no price increase at all in (?countries. In the rest of the countries, there were one time price increases.It is very di9cult to nd out how much price has incresed in &angladeshdue to the $%T. %n in0depth study re"uired for this purpose. *owever, Gpercent and 1.G percent inPation rates in ?CC?0C( and ?CC(0C3

respectively in @ha4a city compared to C.3 percent and M.3 percent in?CDC0C2 and ?CC20C? respective indicate no adverse e7ect of the $%T ondomestic price level.%nother way of nding the e7ects $%T on price level is to compare theconsumer price indices roup in +haka "ity

4ear 1ood Rate ofIncreas

e

"!othingand

1oot?ear

Rate ofIncreas

e

>enera!Index

Rate ofIncreas

e

;enera!Index

Rate ofIncreas

e

;


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4ear $gr!.%roduct

s

Rate ofIncreas

e

Indust.%roducts

Rate ofIncreas

e

$!!>roups

Rate ofIncreas

e

;


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consolidated, then the benets of the system come into full play. It is,therefore, imperative to strive hard to lay the system rmly in place,initiate related changes and integrate the same into socio0economicmosaic of the country as surely and as smoothly as possible so that thetax induced and related distortions are removed, paving the way forindustrial expansion along economically justied lines and at the same

time enough revenues are generated to reduce external dependence andcontribute to the building of a self0reliant &angladesh.The $at has been acclaimed as the money machine. Eost of the countriesintroducing the $%T have achieved remar4able success in internalresource mobilization. In India, revenue growth was (D.G percent in therst year of the introduction of E;@$%T compared with ?( percent in theyear before. In Indonesia, revenue collection was just doubled during therst year of the introduction of the $%T. In %rgentina, Fhile, Fostarica andBorea, the revenue of ratio to >@5 grew by at least G2 percent during therst three years of the $at adoption, compared with revenue from theindirect taxes replaced by the $%T. The $%T was in AB rasing by ?C percentof central government revenue from taxation. %n al pervasive tax baseand e9cient system of administration and direction helped to increaserevenue substantially.In &angladesh, $%T is also proved to be augmenting. The following tablegives a clear pictureTab!e 35Revenue from sa!es tax A )$T -in mi!!ion taka

#ead 3;;=C;#T ( T$, R&1OR

Tax Reform

Introduction of value added tax


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replacing excises show that it still accounts for only around D percent ofthe total tax yield and as such the tax base remains very narrow. Anless$%T net is comprehensive it cannot achieve among other, the objectives ofbeing a general tax covering, as far as practicable, all goods and servicesand be levied on all stages of production and distribution including theretail stage.

% piece meal introduction of $%T negates its theoretical superiority overother tax handles because e7ect of an exemption prior to nal stage isaccumulation of tax caused by including previously paid $%T in the baseupon which a later $%T is applied. Thus the cascading e7ect, which $%Twas supposed to have avoided, is reintroduced. In fact, almost all theattributes to $%T such as being neutral, non0discriminatory betweenproducts etc. on which it is theoretically justied to be superior to othertax systems are completely destroyed unless it is a comprehensive one.Theoretically there is no reason as to why the tax structure of &angladeshshould not be elastic. @irect tax rates are very progressive while advalore" tax rates imply proportional tax rates for indirect taxes.Therefore, as national income increases, yield from direct taxes shouldincrease at a faster rate since higher proportion of increased incomewould be paid in taxes. Hlasticity of tax bases should determine theoverall income elasticity of indirect taxes. 6e have noted that all themajor tax bases of indirect taxes are elastic. *ence there is no reason asto why even overall indirect tax yield should be inelastic. The problem wasidentied to lie primarily on administrative capability. The success of $%T,on the other hand, crucially depends on e9cient administration anddeveloped accounting system. ;ne need not argue about the state ofaccounts 4eeping in ordinary transactions in &angladesh while poor

administration is the major wea4ness of our tax system. Thus poor taxadministration and narrow tax base remain to be the crucial stumblingbloc4s in improving our tax revenue and elasticity of the tax structure.Fomposition of indirect tax yield, on the other hand, still remains similarto what it was before the tax reform. Hxcise taxes still accounted for abouta "uarter of total tax revenue in ?CC?QC( and about L2 percent of it wascontributed by tobacco, natural gas and petroleum which were left out of$%T net. $%T replacing excise show that it still accounts for only around Dpercent of total tax yield implying that the tax base under this head is stillvery narrow.To get full advantage of $%T it should be comprehensive covering both the

production and distribution and unto the retail stage. The elasticity of thetax system can be ensured only if it covers all sales. If the tax is trulygeneral, no matter what part of the economy is expanding, the $%T willrespond at once to that activity. @uring a transitional period, such as theone &angladesh is passing through now, a zero rate of tax at the retailstage or to goods and services that are to be exempted from paying taxesmay be imposed. This is a technical device to operate a complete $%Tstructure while still exempting some commodities entirely from tax. Thezero rates is an actual tax rate of the $%T, the same as ?G percent, ?2percent etc. Thus, the credit o7set on purchases can be claimed against

the liability i.e., zero. ;n the other hand, a good which is exempt cannotclaim any credit and has no tax liability against which to o7set it andthereby pays tax on input which must be wholly passed on or absorbed.

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In this way, the zero rates allows consumers complete exemptionbecause, for instance, the retailer can claim full amount of tax he has paidon his input and, therefore, pays no tax, while all the previous stages havepassed their tax liability fully forward. Initially it will involve the re"uiredcost of administration without yielding any revenue. &ut this will bring alleconomic activities under the $%T system which will help achieving the

ultimate objective of having an elastic tax system for the country.Inevitability of the imports as a tax base was reinforced when value addedtax iven that the power regime is aware of it, it has been asserted that somepolitical behavior organized around the goal of ris4 reduction is "uite li4elyto ta4e place. In the prevailing circumstances, the foremost target of anyrevenue augmenting reform would be to set up a long run pattern ofrevenue growth which is not lower than the growth of national income andin addition, commensurate with the annual growth of the expenditure

budget. The long run trend should be at such a level that any minorPuctuation would not threaten with a budget decit and would not call for

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ad hoc scal measures. This would re"uire a lin4age of the tax to its baseand choosing a base which is well lin4ed to the growth of national income.%fter a successful lin4ing of the taxation mechanism with the growth ofincome, comes the second target of harmonizing the tax program with thebroader socio0economic objectives of the country. ;perationally this wouldre"uire comprehensive rationalization of the tax structure in conformity

with the national plans for growth and development. This would demandan integration of the tax planning with the tax policy ma4ing. Thisintegration would be re"uired at the o9cial level and would call for re0organization of the entire tax policy sector. Anless such steps are ta4en, itis feared that the formulation of reform oriented tax policy would continuein the traditional incremental pattern and the source of the problem wouldcontinue to exist. inally, any major revenue augmenting tax reform isexpected to raise the tax liability of the people in direct or indirect way.This would, therefore, re"uire political will and capability of a stature thattranscends the capacity of the bureaucratic polity. Fonse"uently, unlessthere is a political leadership of the reform movement, it is unli4ely thatany worthwhile reform program will materialize.

2hy )$T

% stri4ing feature of recent tax reforms world0wide has been the steadilygrowing number of countries adopting the $alue %dded Tax


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4eeping and reporting by businesses which benets the whole of thetrading community. In introducing a $%T many countries have encounteredserious di9culties due to two main causes. The Grst is that the basic taxstructure has been made too complex, e.g. too many rates of tax, toomany exemptions from tax, etc. The second is that the administrationhas found itself une"ual to the tas4 of ma4ing the tax operate with a

reasonable degree of success.

VT S , I,ST!-ME,T O% T.TIO, PO/IC0Taxation forms only one part of the economy of a country, and theproportion of gross domestic product @5= it absorbs will vary accordingto the re"uirements and dictates of the state. 6hat is certain, however, isthat an ade"uate and assured Pow of revenue is essential to anygovernment. This is perhaps particularly true in those cases whereindustrialization remains limited, domestic savings are too small toprovide su9cient investment for economic growth, and terms of trade areadverse with balance0of0payments di9culties arising. uch problems areoften of concern to developing countries, and therein we examine theposition of $alue %dded Tax


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5ortugal and the 8etherlands=. In &angladesh $%T


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i"provin$ the coordination and exchan$e of infor"ation, oth incountr and internationall&

i"provin$ the qualit of recruit"ent, re"uneration pac(a$es,pro"otion and personnel practices&

introducin$ i"proved collection sste"s&enhancin$ detection and investi$ative sste" and procedures, and

desi$nin$ and deliverin$ appropriate trainin$ pro$ra"s.

Trainin#Training is a fundamental component of capacity building, being amechanism by which 4nowledge, experience, s4ills and technology istransferred: creating indigenous ability to ta4e control and continue todevelop functions independent of external help. or this reason a strongtraining component embracing a variety of techni"ues from seminars,classroom learning, and distance learning pac4ages, through to on0the0jobtraining by the utilization of counterpart sta7 during all stages ofdevelopment is necessary.

/e#islationTo ensure that the revenue collection and administration legislation isade"uate to enable the Income Tax, ales TaxQ$alue %dded Tax, andFustoms and Hxcise @epartments to underta4e their delegatedresponsibilities e7ectively, and prepare amendments where shortcomingsexist.

Development Plannin#

To dene an administrative and operational framewor4 for theorganization around which the program of reform and modernization willdevelop.

Pr#ani4ation 5 Structure%n analysis and where necessary, modication of the structure andprganization to ensure that it can meet the re"uirements placed upon it.

2usiness Process !e6en#ineerin#7Personnel7Instructional Manuals% thorough review of all operational and administrative issues designed torePect the objectives of the /evenue @epartment to enable change to

ta4e place e9ciently, e7ectively and with the support of sta7 at all levelswithin the organization.

utomation@esign, development and implementation of a program of automationthat will optimise the e9ciency of the organization and ensure that allrelevant information is captured and utilized e7ectively.

nti Corruption ctivitiesImplementation of specialist teams with the objective of targeting areas of

abuse and ensuring that corrective action is implemented, and thatrevenue collection is enhanced in the short term.

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Investi#ation@evelopment of an e7ective Investigation @ivision to operate within theorganizational framewor4 of the /evenue @epartment.

En'orcementImplementation of e7ective enforcement procedures throughout the

organization.

Publicity@evelopment and implementation of publicity program designed toinform, educate and demonstrate the transparency of the organization.

Internal uditFreation and training of an Internal %udit @epartment designed to ensurethat all procedures and controls are properly and correctly applied by allsta7 in the organization.

The )$T odu!es

The basic modules comprise/egistration and @e0registration/eturn 5rocessing%utomatic processing of 5enalties, %ssessment and interestTrade %ccounting$isits to TradersFontrol and $erication

>enera! &ui!ibrium 1ormu!ation of the )$T System

The theory of value added tax


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are personal consumption expenditures: national income proper: andgross national product. The corresponding tax bases are theconsumption0type, income0type and gross product0type respectively. Toshow the lin4ages between national income accounts and the tax bases,erh et al


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consumption, are subject to $%T. In accordance to the destination0principle, exports are zero0rated. This means that no $%T is charged onexport sales, and that $%T and other indirect tax on all inputs used in theproduction of export goods is rebated. The $%T is consumption0type sinceall $%T paid on intermediate inputs and capital machinery is creditableagainst $%T payable on the sale of domestic output.

To incorporate the $%T system in the model, we start with revenuespecication of the $%T system. Ander the $%T formulation, the exciseduty on domestic manufacturing activities and sales taxes on import arereplaced by $%T, and the $%T paid on intermediate and capital goods arecredited to the domestic manufacturers as o7set against the $%T ondomestic output. Thus, only the domestic sales are subject to the $%T andthere is no $%T on intermediate and capital inputs. In a generalisedframewor4, assuming that domestic sales


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PX PD td tv D PE E

Xi

i i i i i i

i

= + 1

0, tdi = 0, and when tvi = 0, tdi > 0, sothat, the $%T and excise duty can not be applied on the same productsimultaneously.

The export supply e"uation is also modied to include the value addedtax:

E D PE

PD td tvi i

i i

i i i i

i=

1

1


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collection cost to the tates with easy compliance by taxpayers. In view ofthe anticipated advantages over a period of time all states and AnionTerritories including special category states have in principle agreed toshift to $%T from %pril ?, (223. *owever, some of the states are stillattempting to push forward the deadline as this will allow all states toe7ect the transition to $%T at the same time. This will also provide some

more time to the central government to amend central sales tax act, bringlegislative changes for implementation, taxation of services at state leveland settlement of procedure for compensation to states on account oflosses in revenue collection due to implementation of $%T. The delaywould also give the states more time to put administrative arrangementinto place and training employees for the new system.

Flearly, there is a need to popularize the scheme of $%T throughpersuasion, allaying the genuine fears of all the parties. 8ew regime willbe theoretically superior to the existing regime 4nown to all. If e7ectivelyimplemented, it will ensure greater transparency. It will also have thegreat merit of being simpler to monitor. Hven from the revenue angle, itshould increase the revenue in the hands of the tate >overnments.*owever, it is feared that in the rst few years of $%T, the tate>overnments might face shortfall in revenue.

Documents

The Impact Study of Value Added Tax in Bangladesh