Over the past couple of years, there has been a lot of discourse regarding rates of Value Added Tax (VAT) to be incorporated in the VAT legislature of the country i.e., the new VAT law (Value Added Tax and Supplementary Duty Act, 2012) which is going to be implemented from July 01, 2019 with amendments accommodating the concerns of the stake-holders that hindered its implementation during the last couple of years causing several deferrals. VAT rates being an important concern of them, a few areas of concern need to be discussed as these may be of interest to the concerned quarters.
Presently, under the 1991 VAT law (Value Added Tax Act, 1991), there is a 15 per cent standard rate and on traders there is a five per cent rate in addition to standard rate. On goods, there are tariff values on a good number of items where though rate of VAT is 15 per cent but base for the application of VAT has been reduced. As such, effective VAT rate is much lower than 15 per cent. For small traders, there are yearly fixed amount of VAT, popularly known as package VAT. On services, in addition to standard rate, there are 6 other truncated rates, such as: 2 per cent, 3 per cent, 4.5 per cent, 5 per cent, 7 per cent and 10 per cent. On Small and Medium Enterprises (SMEs), there is 3 per cent Turnover Tax rate and on export, there is zero per cent of VAT.
Under the new VAT law, standard VAT rate is 15 per cent. There is no tariff value, no package VAT. On SMEs, there is 3 per cent Turnover Tax. Joint Venture for Property Development (JVPD) will get a facility to apply VAT on 50 per cent of their base i.e., effective rate of VAT shall be 7.5 per cent. There is no other truncated rate on services. The new VAT law regime is being termed as the single rate system. The business community has been demanding for multiple VAT rates for quite some time. Some of them also have a demand that the rate of VAT be reduced to 10-12 per cent.
If we look at international practices, we will find that VAT remains in place at present in about 166 countries worldwide where lowest rate of VAT is 3 per cent and highest is 27 per cent. In the European countries, the VAT rates range from 8 per cent to 25 per cent. In neighbouring countries, Nepal has a VAT rate of 13 per cent, Pakistan 15 per cent, Myanmar 10 per cent, Sri Lanka 15 per cent, China 17 per cent, Thailand 7 per cent, Indonesia 10 per cent and Singapore 7 per cent. In India, a comprehensive GST was introduced from July 01, 2017 with a four-tier system of 5 per cent on household necessities, 12 per cent on processed food, 18 per cent on industrial intermediaries and 28 per cent on luxury items.
However, while deciding on the rate of VAT to be introduced in any country, there should not be any consideration about how much is the rate of VAT in other countries near or far. Rather VAT rate of a country should depend on many other realities and indicators of the concerned economy. Because sources of tax i.e., revenue are not the same in all countries. Revenues of some countries depend on natural resources where rate of tax shall be very low. Others depend on customs duty for revenue where rates of other taxes including VAT shall be lower. Some countries depend heavily on tourism for revenue where rates of other taxes are lower.
In Thailand, a huge chunk of the revenue for the government comes from tourism. So the rate of VAT remains lower i.e., 7 per cent. In Singapore, GST contributes only 22 per cent of the total revenue of the government and 51 per cent of the total revenue of the government comes from income tax. So rate of VAT is at 7 per cent.
In Sweden, lion's share of the revenue for the government comes from income tax and VAT. So, rate of VAT is high, at 25 per cent. So, rate of VAT depends mainly on how much the country is dependent on VAT for revenue collection. If government has other sources of income, then rate of VAT will be lower. If government has to depend on VAT for lion's share of revenue, then rate of VAT will be higher.
Bangladesh has a high dependency on VAT. The National Board of Revenue (NBR) collects about 86 per cent of the total revenue of the government. This revenue is collected with the help of three legal instruments, such as: the Customs Act, 1969; the Income Tax Ordinance, 1984 and the Value Added Tax Act, 1991. Customs duty contributes to about 29 per cent, income tax contributes to about 33 per cent and VAT contributes to about 38 per cent of the revenue collection of NBR. So, it is expected that VAT rate in Bangladesh should be higher, but it is not. It is below the global average of 18 per cent.
Under 1991 VAT law, there are presently multiple rates. Globally, very few countries have multiple rates for VAT. Generally, one or two short rates is common everywhere. Some countries have single rates. Single rate of VAT can be comfortably applied in a homogeneous economy. In heterogeneous economy, there must be multiple rates to accommodate various stake-holders with varying capacity to pay.
Another basic principle of reduced rate is that if threshold is high, the reduced rate would need to be higher. Otherwise, there shall be uneven competition with the entities paying VAT at standard rate. Generally, truncated rate should be kept at about 35 per cent-50 per cent of standard rate. This is done so that it serves as a disincentive with no input VAT credit. If truncated rate is lower, threshold needs to be kept low in order to broaden the VAT base.
The present VAT legislation accommodates that those paying VAT at truncated rate on services with no input VAT credit can opt for paying VAT at standard rate with input VAT credit. The same applies to the goods with tariff value and to traders paying 5 per cent trade VAT. So, they are all entitled to pay VAT at standard rate and can claim input VAT credit or can pay VAT at reduced rate without claiming input VAT credit. Only the Turnover Tax and package VAT are left. This is a very small portion of the VAT chunk of the country.
This is the beautiful aspect of VAT legislation in a heterogeneous economy like Bangladesh. Under the current VAT regime, what transpires is if one pays at standard rate, his compliance cost shall be higher but VAT burden shall be lower. But if one pays at a truncated rate, his compliance cost shall be lower and VAT burden shall be higher. So, the choice is on the VAT payers.
Legislation is accommodative. In the new VAT law, the primary blanket exemption threshold and Turnover Tax threshold have accommodated basic concerns of SMEs provided those are properly estimated and enforced. There may remain some concern on other aspects but presumably not on rates. Under the new VAT law, a question about the Turnover Tax to be 3 per cent or 4 per cent is passively immaterial.
So, the discourse on VAT rates appears to be less relevant. Rather, full compliance to establish a distinct exemption and short rate regime covering a small portion of the economy and a standard rate regime covering overwhelming portion of the economy needs to be ensured. So, rather than manoeuvring the rates of VAT in the VAT legislation, steps are required to ensure more compliance.
Dr. Md. Abdur Rouf currently works at a World Bank-financed VAT-related project as a Specialist. The opinions expressed in this article are his won.