VAT deduction at source: Procedure needs simplification

Value Added Tax (VAT) is a consumption tax, which by its very nature is a tax to be collected from the consumers by the sellers against the supply of goods or services. However, practically for various reasons including the intention to maintain competitive price for the supplies, many businesses fail to collect VAT from consumers. To address this problem, the government introduced a system of deduction of VAT at source (VDS) in the country's VAT system since its beginning in 1991 at a limited scale. It gave good results in terms of the amount of VAT collected and resource employed for collection. So, gradually more items were brought under the VDS mechanism. In 2011, VDS was further expanded and detailed regulations were devised through issuance of a General Order by the National Board of Revenue (NBR). The VDS mechanism essentially reverses the paying and collecting entity for VAT, thereby distorting the basic VAT mechanism which innately requires the supplier of the goods or services to collect VAT from the consumers. However, its importance is growing because of the revenue contribution and resources required for collection. Presently, about 40 per cent of domestic VAT is collected through VDS method.

Under VDS mechanism, few specific consumers are liable to deduct VAT from the invoiced amount while making payment to the suppliers of goods or services. Though the law allows for deduction of VAT at source on both goods and services as are specified by National Board of Revenue (NBR), at present, the VDS mechanism is mainly applied on the service sector. This is presumably because due to the intangible nature of services, collection of VAT against supply of services is far more challenging than collection of VAT against supply of goods. The enforcement of VDS mechanism has been strengthened by imposing joint liabilities upon the service provider and service receiver; consequently, any non-payment of VAT against the specified service might be recoverable from either service provider or the service receiver.

Since its introduction, VDS proved to be a very effective method of VAT collection primarily because the obligation has been imposed on entities with structured business operations and better enforcement of financial rules. Though the VDS method has become a money-generating machine for the government, with the passage of time VDS has become one of the most dreaded measure for the withholding entities, those who qualify to be audited by the VAT authorities.

At present, there are a number of uncertainties surrounding the VDS provisions. The relevant General Order, among other services, specifies "Other Miscellaneous Services" under service code S099.20 eligible for deduction of VAT at source. "Other Miscellaneous Services" appears to be a very broad category and thereby triggering VDS obligations for the withholding entities on the overwhelming portion of their service procurement. It should be mentioned that expansion of VDS area for reasons of easy revenue collection shall not ensure, in the long run, establishment of a sound taxation system. Therefore, rather than going for expansion of VDS area, efforts need to be made to ensure collection of VAT at the place and time when it is supposed to be done as per law.

The definition of "procurement provider" under service code S037.00 would require a withholding entity to deduct VAT at source while procuring services or goods against quotation, bid or in any other manner, though in general, there is no VDS obligations for procurement of goods when procured with VAT invoice. Procurement provider is a very broad and confusing area to be understood and implemented properly by the officials of withholding entities. All of them cannot be expected to have professionally extremely high level of expertise in the area. Such broad and equivocal scope for interpretation fosters confusion not only for the taxpayers, but also for those administering tax provisions at the field level.

Another recurrent issue arises when the government/ autonomous/ semi-government bodies deduct VAT at source on account of fees, revenue sharing etc. pursuant to Rule 18Uma of the VAT Rules. While such deduction is regarded as VDS, such deductions effectively amounts to input VAT for those paying VAT under this section, thereby enabling them to take rebate of such VAT. But it becomes impossible for them to get rebate due to non-issuance of VAT invoice by these entities and due to some other realities.

The main characteristic feature which sets VAT system apart is its in-built mechanism to avoid double taxation by way of adjustment and rebate of input-output VAT. Unfortunately, the present VDS mechanism has created an undesirable chain of interdependency for the service provider and service recipient. If the service receiver, for any reason, fails to provide sufficient documentation supporting deduction of VAT i.e. 'Mushak-12Kha', the service provider may not be able to take adjustment of the output VAT against his input VAT, though such VAT payment has already been made by the service receiver. Similarly, if a service provider has supplied VDS eligible services to an entity liable to deduct VDS by issuing 'Mushak-11', thereby collecting VAT from the service receiver and depositing the same with the treasury in the usual manner, the service receiver may not be able to take rebate of such taxes, though this was clearly his input tax. These ambiguities discussed above and others leave the taxpayers at the mercy of administrators in many cases.

It goes without saying that securing compliance with law mandates strict enforcement; however, enforcement of ambiguous provisions to the detriment of taxpayers would not only create hardships for the taxpayers, but also contribute to the creation of hostile environment for businesses. This will affect the total revenue collection in the long run. In order to secure maximum compliance with the VDS provisions, besides penal provisions, a way should be devised for incentivising withholding entities and VDS procedure simplification in the short run. In the long run, efforts need to be made to ensure collection of tax at the time and place as required by general procedure rather than devising special procedures.

Dr Md. Abdur Rouf is Founder Chairman of Bangladesh VAT Professionals Forum (VAT Forum). Barrister Farhana Khan is an advocate of the Supreme Court of Bangladesh. [email protected]; and [email protected].