Ensuring effectiveness of the 2012 VAT Act

Ferdaus Ara Begum | Published: May 07, 2019 21:11:12

The '40th budget consultative committee meeting', jointly organised by the National Board of Revenue (NBR) and the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) on April 30, 2019, has given a clear signal that the new VAT & Supplementary Duty Act, passed in parliament in 2012, will become effective with the announcement of the proposed budget for 2019-20 fiscal year.  It has also been announced that the rates will be five per cent, 7.5 per cent and 10 per cent. It seems that the highest rate of VAT will be 10 per cent, which was earlier 15 per cent. This will definitely make the private sector happy.

The Finance Minister AHM Mustafa Kamal has categorically mentioned that harassment of tax-payers will be reduced and tax net will be widened so that the burden of tax can be distributed among more people. It has not been decided which items will be taxed at high rate and which will be face lower tax rates. It was informed at the meeting that these questions will be answered when the budget is announced. But prior to that there will be discussions with the private sector. It is also not clear how the new act will be implemented with different rates of tax on board. The private sector has received at least some directives about the new Vat implementation date, but some issues still remain unclear.

CREDIT-RECEIVING DETAILS: One of the primary concerns of VAT and its main feature is to get credit. With the introduction of the new act, it was expected that all the credit-receiving details will become automated and thus the problem of getting credit will also be resolved. But the VAT credit system has not been automated yet. It was also pointed out during the meeting that if the rate is 15 per cent, then there may be provisions for rebate. So, one would need to wait some more time in order to get a clearer picture about the situation.

TAXES ON SMALL BUSINESSES: There were also discussions and debate regarding taxes on small businesses and abolition of package VAT. On the other hand, the private sector requested for increase of VAT exemption from amounts starting from Tk 3.6 million to Tk 5.0 million.

LAUNCH OF NEW INITIATIVES ARE YET TO OCCUR: It is of course true that a number of factors related to the new VAT and Supplementary Duty Act have already been implemented in the guise of VAT 1991. The main difference between the new and old Acts is that under the new Act, transparency will be ensured through automation of the VAT system.  The mega VOP (VAT Online Project) in FY 2013 is already in operation. It was hoped by the policy-makers that the launch of new initiatives will increase revenue generation from VAT. But this did not happen.

POLICY UNCERTAINTY: In FY 2018-19, Tk 1.10 trillion was targeted from VAT. In the first quarter of the FY, shortfall of revenue target was 0.87 per cent. Since 1991, VAT collection has increased by 63 fold. This is a remarkable feat.  In FY 2018-19, VAT collection was 22.76 per cent less than the target.  During the previous fiscal year of 2017-18, VAT collection was 20.37 per cent less than the target. Policy uncertainty may be the reason behind lower collections.

LACK OF INTERNAL INTEGRATION: Internal integration among the various wings of the NBR is necessary. The integration should have the iVAS (Integrated VAT Administration System) at its centre for revenue collection. Banks & payment gateways should also be integrated.  It has been designed for the automation of VAT system that the NBR controlled VAT entities (287 VAT circles, 84 divisional offices and 12 commissionerates) will be fully automated. These are yet to be completed. Without full integration among the actors of iVAS, it will not be possible to reap the benefits of automation which is going to make the VAT payment process easier.

ODDS REMAIN FOR SMES: About 56 per cent of the total VAT was collected through LTU (170) in FY 2016-17. Remaining 44 per cent VAT came from Small & Medium Entrepreneurs, domestic level VAT payers etc. It is true that large companies are somehow benefitted by automation and will be benefitted by the introduction of the new act. But the odds will remain for the SME. Additionally, the finer details need to be discussed with the private sector in order to reach an agreement on the rates of taxes.

E-BIN REGISTRATION SOFTWARE: Once electronic Business Identification Number (e-BIN) has been acquired by all VAT payers, they will continue to use this number forever. Single registration (central registration) will also be active. It seems that the process for movement of raw materials among sister concerns will be simplified (when Form 6.5 will be in use). Simple VAT payment through online, simple and easy VAT credit system will reduce VAT for individual businesses. Work in these areas is yet to be completed.

E-BIN registration can be done online. But changing information and cancelling an e-BIN cannot be done online. For these, manual application is necessary. These provisions need to be incorporated into the e-BIN registration software. The Forms for VAT 11 (Chalan), 19(Return) and VAT 6.3 & 9.1(VAT & SD Act) are completely different. In previous forms, BIN was not in place, but now e-BIN would be the main vehicle to comply with VAT. Presently old Forms are still being used. VAT payers would need to understand that under the new Act the forms will be totally different.

WITHHOLDING TAX: The number of sectors for withholding tax (VAT at source) has increased from 39 to 105. VAT at source contributed to 49 per cent of total domestic VAT in FY 2016-17. The VAT incidence is high because the truncated value based VAT cannot be credited. VAT Deduction at Source (VDS) is mostly imposed on services.

VAT DEDUCTION AT SOURCE: The other miscellaneous service (S099.20) & procurement provider (S037.00) listed under VDS is not specific and thus is creating confusion in the VAT system. A comprehensive list of all services (including catering service, intellectual property transfer and tour operator) need to be specified with service code and VAT rate where VAT credit would be available. VDS is not creditable because the VAT deducting authority (six entities under VAT act 1991 and 10 entities in VAT & SD Act 2012) do not issue the invoice (12 kha/ Certificate/Testimonial). Certificate or issuance of testimonials by VDS entities should be made mandatory by law. This would simplify the VAT credit taking process and final VAT calculation.

HIGH VAT INCIDENCE FOR SMALL ENTREPRENUERS: Under the circumstances, small entrepreneurs would be in a difficult situation as most of them do not maintain any books of account. For Small and Cottage industries (SCI) an exemption was in place in the VAT Act 1991. But in the new Act, there was no clear policy. Turnover Tax at four per cent will be applicable (Tk 3.60 to 8.00 million) but tax credit is not available for turnover taxpayers. VAT incidence is high for this segment.

TRANSACTION-BASED ACCOUNTING IS NECESSARY: The VAT system would also need to follow accrual-based accounting where the dual books of account can create confusion in VAT calculation process. Accrual-based accounting (transaction based) with a single books of accounts should be made mandatory through the Act and rules.

AUDIT REPORTS: Presently the audit reports submitted by enterprises are not always considered authentic by NBR. The NBR calculates VAT arbitrarily while ignoring the audited financial statement. In the VAT & SD Act 2012, there is no provision for penalty for third party auditors for submitting fake audit reports. There should an enlistment process of external auditors backed by law. The audit report must be granted as final financial statement of a venture. There should be a provision for penalty (in section 85 of VAT Act 2012) for both auditor and entrepreneurs simultaneously for falsifying the financial statement. There should also be a provision for compensation or fix interest rates on delayed VAT adjustment by tax authority, under the new VAT Act.

CLEAR DEFINITIONS FOR VAT AND RELATED TERMS: There is no definition of VAT in VAT Act and Rules. The new Act should clarify who would pay VAT, submit returns etc. Under the existing and new VAT laws, there is no specific definition for manufacturers also. These definitions need to be included. The meanings should be specific.

REGISTRATION FOR VDS AUTHORITIES: Since service sector contribution to the GDP is about 56 per cent, these areas remain almost undisclosed. VDS is applicable on 39 services right now. The VDS authorities (10 in number according to 2012 Act) need to be registered so that VAT credit process can be simplified and transparent. It has been also observed that a handsome amount of money flows inward to the Bangladesh economy as grant, aid, foreign loans. These funds and the economic activities fuelled by these need to be tracked. The value addition of these funds needs to be accounted for.

Avoiding the issuance of 12 kha (Certificate/Testimonial for deducting VDS (VAT Act 1991) by the VAT-deducting entity has been making VDS untraceable and un-creditable for the entrepreneurs. Under the present VAT system, broadly: land, building, office-equipment, vehicles and labour are not considered as inputs. So, credit is not allowed for these elements.

The new law liberally allows input tax credit on almost all elements that will be business-friendly. VAT Credit or adjustment claimed is not aligned with the transaction history. If the ASYCUDA and other preceding data are not aligned, the overall payment process will not be as simple as stated by the tax authority.

VAT Challan presently requires that it be sent to the VAT Circle office within five working days of the issuance. Under the new system, this will not be required. Data will be stored and processed in an automated manner.

SIMPLIFICATION OF MONTHLY ONLINE RETURN PROCESS: The monthly Online Return is also complicated as all the invoices need to be uploaded separately. The automatic upload of invoice and Bill of lading should be an in-built feature of the online VAT return system. A limited number of users are using Point-of-Sale (PoS) machines currently. But the use of electronic fiscal device (EFD) is not in practice yet. The PoS machine and EFD need to be made mandatory for all kind of traders who sell the final products to consumers. The devices can be supplied at a subsidised price.

VAT-CHECKER APPS: Recently NBR has introduced a mobile application called VAT Checker. There two other VAT apps available for taxpayers: LTU VAT and VAT East. The VAT app needs to be developed for all VAT payers and should be automated. In case of VAT Checker, still BIN is being used.

ALTERNATIVE DISPUTE RESOLUTION: Alternative Dispute Resolution (ADR) is currently done by following the VAT Act 1991. There is no plan yet to bring this process under VAT automation. An automated process for ADR can be considered so that less time is required to reach a resolution.

Clarification and addressing these problems can make the new VAT Act more effective.

Ferdaus Ara Begum is CEO of Business Initiative Leading Development (BUILD), a joint collaboration of DCCI, MCCI and CCCI.


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