The Value Added Tax and Supplementary Duty Act, 2012 (New VAT law) is expected to come into full effect from tomorrow (July 01, 2016). The new VAT law was passed by parliament in November, 2012. Since then and even before its enactment, there was resentment among many in the business community regarding some aspects of the new VAT law. But very recently, when the law is about to go for full implementation, enough stir has been created centring a few aspects of the new VAT law.
It is being said that the new VAT law, when implemented, will have adverse impact on the prices and, the prices of the essentials will go up. It is also being said that the reduced rates will be abolished under the new VAT regime; as there will be a standard 15 per cent VAT rate, so prices will go up. But such apprehension is overblown. Input tax credit will be allowed under the new VAT regime, so there will not be excess rise in prices. Tariff value and truncated base are two forms of reduced rates in our present VAT system. Tariff value is the fixed value of some goods on which VAT is to be paid. The real sale value of the goods may be much higher. Presently, VAT is collected on truncated base on about 18 services. There is no possibility of increase in prices of these goods and services because of input tax credit that will be allowed under the new law.
Suppose an item has a fixed tariff value of Taka 40, i.e, if this item is sold VAT has to be paid on Taka 40. At the rate of 15 per cent, VAT amount will be Taka 6.0 on Taka 40. The item is actually sold at Taka 100, i.e., a customer pays Taka 106 for the item. The cost of raw materials for production of the item is Taka 70. On Taka 70 he has paid Taka 9.0 VAT on which he could not take credit. It may be mentioned here that input tax credit can not be obtained on the raw materias of goods with tariff value and on the inputs of services with truncated base. He has added Taka 30 value and has sold it at Taka 100 with Taka 6.0 VAT, i.e, total Taka 106. In standard VAT system, in the same case, his raw material cost and value addition will be Taka 100. He will take input tax credit of Taka 10.50 on Taka 70 inputs. That means his cost of the item will be Taka100-10.50=89.50. On Taka 89.50, VAT at the rate of 15 per cent will be Taka 13.42. So, with 15 per cent VAT, his sale price will be 89.50+13.42=102.92. This shows that under both the systems the payment by the purchaser is nearly the same. This is true for both the items with tariff value and services with truncated base.
At present, at import stage, goods with about 1362 HS Codes attract supplementary duty but under the new VAT law only goods with about 170 HS Codes attract supplementary duty at the import stage. Such withdrawl of supplementary duty from import stage will make import less costly. So, the people will get imported goods with lower prices. However, at the production stage, there will be supplementary duty on more goods under the new VAT regime compared to the current VAT regime. Prices of these goods may go up. However, these goods are mostly considered as luxury and nonessential items.
Some exempted goods will be brought under the VAT net with 15 per cent VAT under the new VAT regime. This may appear that prices of those items will be increased by 15 per cent. But actually that will not be the case. Prices will increase at a much lower rate. Presently, seller of the exempted goods do not get input tax credit. When brought under VAT net, input tax credit will be allowed for the exempted items. So, if 15 per cent VAT is paid and input tax is taken credit, there will be about 2/3 per cent net VAT burden, i.e, price increase.
VAT is a tax on the ultimate consumers. In the fiscal year 2014-15, the government collected about Taka 490 billion as VAT. This amount of VAT has been paid by the ultimate consumers, i.e., the people of this country. Any increased amount of VAT, if the government targets to collect, will have to be paid by the people of this country, i.e, the people will have to pay more. So, there will certainly be some price increase. Prices are increase not only by VAT but by many other factors. When the government increases pay of the employees then the prices of essentials go up. There is no direct relationship of such pay rise and price increase of essentials. In this case, the sellers increase the price with the understanindg that the customers will have ability to pay. The government has to collect more VAT. So, there will be some price increase. However, the price increase will not be as high as it is being feared to be. If more VAT is to be collected, then some price increase can not be avoided. It has to be endured and properly managed, i.e., justly distributed.
Dr. Md. Abdur Rouf is Additional Director General of the Bangladesh Customs Excise and VAT Training Academy under the National Board of Revenue (NBR).
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