Facilitation of business through tax measures under the VAT and SD Law

The Value Added Tax (VAT) and Supplementary Duty Act, 2012 was passed seven years ago. The objective of the act was to modernise the VAT law and incorporate time-befitting provisions to suit to the needs of modern business. The law also aimed to initiate digitisation of the tax system in the country.  Although some provisions of the law had been incorporated in the previous act during the last few years, it finally came into effect with the passage of the fiscal measures in the Budget FY2019-20.

The new provisions of the VAT regime contain many business-friendly features. Some of these measures are:  Getting rid of price declaration, rescinding the need for maintaining account current, providing a VAT exemption threshold, transfer  of stock from one unit to another, lay-by sales,  amendments to return, provisions for VAT collection for supplies through vending machine, fixing a registration threshold conducive for small-sized businesses, provision for decreasing adjustment for supplementary duty (SD),  mandatory disposition of appeal, provision of 'progressive or periodic supply' and a comprehensive VAT return.

The registration threshold of Tk 30 million (3.0 crore) provides a big relief for business entities and consumers. Previously this was  Tk 8.0 million (80 lakh). The new threshold for VAT is almost four times of the previous threshold.  This increase in registration threshold (annual turnover Tk 30 million) is expected to result in many existing VAT registered firms to be eligible for enlistment under turnover tax. If their annual turnover falls below the registration threshold, they may opt out of the VAT and get enlistment under turnover tax to pay at a much lower rate of 4.0 per cent. The  scope to pay turnover tax @ 4.0 per cent up to an annual turnover of Tk 30 million (3.0 crore)  takes care of the concerns of the relatively small entities who did not maintain accounts properly, were fearful about the complexities of the new VAT system and opposed the new VAT. Many of them were under package VAT system and the new registration threshold should make them come under TT (turnover tax) network. This new threshold is expected not to create much depressing effect on VAT collection as firms may not opt to be out of VAT because  this will provide them the scope to enjoy input tax credit. Similarly, entities whose annual turnover is Tk 5.0 million (50 lakh) or less will  be exempted from tax.  This is beneficial decision for small shops/businesses as they would not be required to maintain books of accounts under VAT.  This will reduce their cost of business.

Under the VAT Law of 1991, there was a compulsion to deposit tax in advance (before supply) so that they always have a positive balance in their current account register. The account current system indeed used to block a considerable amount of working capital of business entities and it always added to their cost of business. Under the new law, companies will only have to make payments once they become payable, i.e. before the filing of their monthly VAT returns (9.1) by the 15th of the next month. This will result in a registered entity's cash flow and provide relief on the working capital requirement.

Under the previous VAT regime, there was no scope to amend the original return by the filing of a revised return. Under the VAT and SD Act 2012, a registered entity can file an amended return after removing the clerical mistakes and omissions from such return and get decreasing adjustment.  This is, however, not allowed for forgery. Similarly, the act provides single registration in respect of all the units of an entity and, therefore, there will be no requirement of payment of VAT on stock transfer of goods from one unit to another.

Earlier, businesses faced some complexities in taking their taxable goods from one unit to another as the transfer was considered 'taxable supplies'. Under the present law (Sec 5.4, VAT & SD Act, 2012), movement of goods or exchange of services from one branch unit to another separately registered branch unit of the same economic activity shall not be treated as supplies. As such there shall arise no output tax liability or input tax credit claim. This provides a big relief to the tax payers.

The provision of VAT inclusive 'consideration' as enshrined in section 32 of the Act  will make both tax officials' and tax payers' job of determining of VAT of economic activities easier. Under the new law, the value of a taxable supply shall be the consideration for such supply, reduced by an amount equal to the tax fraction of that consideration. This provision will do away with any scope of confrontation between tax payers and tax authority as to whether the tax payer has collected the amount of VAT amount or not in his supply price. This will ensure collection of VAT without any dispute. Further, the provision for submission of  input-output coefficient by registered and enlisted persons (but not requiring their approval) under the new law will facilitate audit and proper assessment of VAT liability by tax authority; at the same time, it is business-friendly as it is not mandatory to get approved by the VAT authority.

Another time-befitting provision of the new VAT system is the provision concerning rights, options and vouchers. The provision of section 37  'where a voucher is accepted as payment, in part or in full, for a supply; the consideration for such supply shall be the remainder of the value after subtracting the value of such voucher' makes it easy for a person to buy goods of any value by using his voucher without facing any complexity in making VAT payable on it. For example, if a person gets a gift coupon from his friend of Tk 10,000, he can buy goods of Tk 12,000 from the concerned shop by paying supply price for the remainder of the value  and paying VAT on the remainder amount i.e. on 12000-10,000= 2000. The provisions of the recently enacted law also recognise the business reality of installment selling. The 'Lay-by sales' provision allows installment selling and payment of VAT on receipt of installments.

The scope of 'input tax credit' has been widened due to the expanded definition of 'input tax'. 'Input tax' includes  VAT paid on goods or services imported as input (at import stage) by any registered person (except Advance Tax) and VAT paid on goods or services or immovable property (e.g. building, flat, land) procured from the local source. This broad definition of input tax makes VAT paid on purchase of finished goods for resale rebatable. In other words, businesses are entitled to get rebate/credit for the amount of VAT paid on purchases for their business activities. The provision of the law allowing 'decreasing adjustment' for supplementary duty paid  at import stage by the exporters is another trade facilitating feature.

With regard to appeals to the commissioner (appeal), the new VAT Act prohibits the Commissioner, de novo, from sending  the case on remand for reconsideration. This is a pro-business provision as the aggrieved person(s) will have an order on his appeal within the given timeframe; it also reduces the risk of getting unfair treatment from the same official against whose order he preferred the appeal to the commissioner (appeal). Furthermore, this provision assigns some vital responsibility on the commissioner (appeal), thus empowering his office to pass an order after proper audit and analysis of relevant documents/records.

The new law contains many business and investment-friendly provisions. However, there are a few areas of concern. One such area is the fixed amount of VAT such as Tk 1000/1200 on local supply of bars, rods and angels (per metric ton MS products) as enshrined in the  Schedule 3 (Table 4). This provision of fixed tax may be advantageous for large manufacturers who will supply through different sales centres under central registration and pay VAT centrally. But, manufacturers/suppliers who do not have sales centre/branch units and who supply only from one (production) place may be relatively disadvantaged from this fixed tax provision. As value addition is nothing but (addition of different) costs, the same fixed VAT for manufacturers having different sales centres/branch units and having no sales centres indicate two things: a. either the costs for different sales centres of the manufacturers having central registration are not taken into account or b. the costs of the manufacturers having no sales centre (not centrally registered) are overestimated. This provision may be revisited especially for those who benefits from central registration and different sales centre/branch units but pay VAT centrally vis-a-vis those who do not have branch units.

The jargon 'Advance tax' sound dubious. Does it mean 'advance VAT' or AIT (Advance Income Tax) or any other advance tax? It is not clear.

The online system will allow a VAT registered business entity to benefit from time and cost savings. They will not be needed to visit VAT office as they will be able to comply with VAT requirements online sitting at home/office. This will necessitate them to  have computer systems. In particular, VAT-registered firms having Tk 50 million (5.0 crore) or more annual turnover in the last financial year  will have to mandatorily maintain their VAT records and  accounts  through the VAT software prescribed (and approved) by the National Board of Revenue (NBR). VAT executives and business houses will also need training on new concepts and formalities. In particular, they need clear examples of 'progressive or periodic supply, lay-by sales, illustration with examples of increasing and decreasing adjustment and extensive training on new VAT return and sub-forms.

The 'Increasing adjustment' and 'Decreasing adjustment' are new concepts, for both the VAT officials and the business entities. So clear idea about these adjustments will be necessary. In the list of increasing and decreasing adjustments, ones needs clarification/example to understand. For instance, what does an "increasing adjustment on being registered" mean is not readily understandable. The following example may make it clear.

Say a business entity was eligible to be registered under VAT in December 2018 and pay VAT. But it did not take registration under VAT and opted to remain under turnover to pay at a lower rate of say 3.0 per cent turnover tax instead of 15 per cent VAT. The firm ultimately got registered under VAT on June 10, 2018 when VAT authority forced it to get registered through sales evidence. In this case, the differential amount between 15 per cent VAT and 3.0 per cent turnover tax (i.e. the short levied amount) may be added to the VAT liability as an increasing adjustment. 

Finally, after the presentation of the Budget FY 2019-20, criticisms from different quarters were made about the non-availability of input tax credit against reduced rates. The government (and the NBR) has adopted an innovative approach in making tax provisions acceptable to all stakeholders. Now businesses have full discretion: a registered person may pay VAT @ 15 per cent instead of the reduced VAT rates of specific tax stipulated in the 3rd Schedule [Section 15] and enjoy rebate or they may pay VAT at reduced rates or at specified amount. This intelligent and innovative move  provided by the Government is not only a win-win solution for all concerned but also a highly flexible system for the businesses.

Mohammad Abu Yusuf, PhD is Deputy Secretary, Finance Division,  Ministry of Finance, Government of the People's Republic of Bangladesh

Disclaimer: The observations made in this write-up are of the writer's own. These do not, in any way, reflect the views of the Ministry or the Division he works for

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