Value Added Tax (VAT) law has been enacted to collect VAT from people. VAT is consumers' tax. Consumers i.e., purchasers of goods and services make payment to sellers against purchase. At that moment, there is no feasible way for the purchasers to pay VAT to the government. Therefore, the sellers have been asked to collect VAT from the purchasers and pay to the government later. So, in the VAT management system, sellers have become more important though VAT is consumers' liability.
In VAT management, first it requires making a list of the sellers which is called registration. Then, the sellers require keeping records of sale, purchase, VAT payment etc., so that the regulatory authority can check from time to time the appropriateness of payment of VAT. The sellers are of different types; such as: individuals, proprietorship firms, partnership firms, limited companies, trusts, societies, non-government organisations (NGOs), government enterprises etc., with one, several or dozens of points of manufacturing, warehousing, sale, trading, service rendering and management offices. So, there arose the concept of unit registration and central registration. Registering one unit at one place is called unit registration and registering multiple units together is called central registration.
There needs a feasible basis for allowing either unit registration or central registration. Account is considered to be the most relevant and common basis. Every entity has an account. An entity with one or multiple units maintains an account incorporating all transactions.
The entities require complying with company law, customs law, income tax law, VAT law, labour law, environment law etc. Most documents of an entity require to be maintained under company law and VAT law. These documents are the evidences of purchase and sale, income and expenditure, profit and loss. So, one entity/company, one account, one Business Identification Number (BIN) can be the best principle for VAT registration. Mentionably, BIN is VAT registration number.
Suppose, Rahman Chemical Industries Ltd is a soap manufacturer located at Gazipur. It sells to dealers and distributors from the manufacturing place and maintains accounts there. This entity qualifies for unit registration. Excell Industries Ltd has three manufacturing plants located at Gazipur, Savar and Narayangonj. It has 10 distribution centres scattered countrywide. Following manufacture at three places, goods are warehoused at ten places and sold from there. It is a limited company. Accounts of three manufacturing plants, ten distribution centres and one head office are maintained together. Chartered Accountant firm prepares one audit report compiling accounts of 14 places which is used for the purposes of company law and income tax law. If this entity needs to take 14 registrations at 14 places under the VAT law, it will neither be easier for the entity to comply nor to the government to monitor. Such entity requires to be given central VAT registration. Separate accounts shall be maintained at all places but accounts of all places shall be compiled centrally. Sale can be made issuing VAT invoice from all places. Raw-materials, finished goods or services can move among these places freely. One VAT return shall be submitted from the centre taking into account the transactions of all places. Any method in the VAT system requires to be easier for VAT-payers to comply and collection of VAT has to be ensured i.e., it has to be business-friendly and revenue-friendly. The basic objective of central VAT registration is to list the multiple points together for easier compliance and collection.
The central registration regime currently in force in our VAT system introduced on July 1, 2019 is a departure from the above. The scope of central registration has been limited and therefore, adequate number of entities can not avail it. When VAT was introduced in Bangladesh in July 1991, a type of central registration was launched. The Value Added Tax and Supplementary Duty Act, 2012 (new VAT law) was enacted in November, 2012 incorporating another type of central registration. A new type of central registration was introduced on July 1, 2019, when the new VAT law came into full force. After 30 years of VAT implementation with different central registration regimes, it is now pertinent to assess and determine what type of central registration is better for revenue and business.
Under the 1991 VAT law, entities of three categories qualify for central registration. Those are: (a) a manufacturer manufacturing at one place and selling through multiple places; (b) a commercial importer selling through multiple places; and (c) a service provider rendering service through multiple places. Multiple manufacturers were not given one central registration. Traders purchasing locally (not commercial importer) were also not given central registration. The exclusion was not overwhelming and was not complex. The number of multiple manufacturing plants under one entity was less in those days, so was the number of local traders. For the sake of ease of registration-seekers, the National Board of Revenue (NBR) issued central registration on direct application. Later on, when it was streamlined, the authority was vested upon the VAT Divisional Officer.
There was another method in practice under the 1991 VAT law that was called sale at identical price (avinno mulley bikroy). Under this method, any manufacturer or commercial importer could pay all VAT from the place of manufacture or import and could sell then VAT-free from own sale-centres, dealers or agents. So, the 1991 VAT law included adequate provisions under which manufacturers, commercial importers and service providers could pay VAT centrally. In the early stage of introduction of VAT, especially during 1995-2000 period, many entities were given central registration and approval for selling at identical price. Later on, the practice was discontinued. From 2009 when talks surfaced regarding enactment of a new VAT law.
In the new VAT law enacted in November 2012, the registration regime was basically central, one entity/company, one BIN was adopted as the basic principle of registration. It was also provided that if any branch or centre maintains separate accounts, it could take separate unit registration. Thus, it was perceived that VAT compliance shall be easier, in line with accounts. This mechanism was broader than the central registration regime enshrined in the 1991 VAT law. Online VAT registration started on March 17, 2017 and all entities were given such central registration.
Implementation of the new VAT law was deferred by two years from July 2017. However, it was decided that VAT automation shall continue. Accordingly, VAT registration continued to be given online which was basically central, designed as per the new VAT law, though VAT Act, 1991 was in force during the time.
The new VAT law was made fully effective from July 1, 2019 bringing changes through Finance Act, 2019, some of those changes reshaped registration regime again. The new central registration regime is as follows:
(a) a manufacturer manufacturing and selling identical or similar goods with 15 per cent VAT rate from two or more places shall be given central registration.
(b) a commercial importer importing and selling through own sale-centers identical or similar goods with 15 per cent VAT rate shall be given central registration.
(c) a trader purchasing locally and selling throgh own sale-centers identical or similar goods with 15 per cent VAT rate shall be given central registration, and
(d) a service renderer rendering identical or similar service through own branches with 15 per cent VAT rate shall be given central registration.
In the above central registration regime, the following three new notions were brought which appear to be not in conformity with the objective and spirit of standard central VAT registration:
(a) A manufacturer manufacturing at one place and selling through multiple places shall not be entitled with central registration. Most of the manufacturers are of this nature. Suppose, a manufacturer is a limited company with a manufacturing place, 10 sale-centres and one head office. So, it has to take 12 VAT registrations. Does it appear sensible? The provision has limited the scope of central registration.
(b) Another new notion is central registration shall be entitled if identical or similar goods or services are provided. Identical goods are those which are of identical nature excepting minor outward difference in physical shape, standard and repulation and manufactured in the same geographical area. Such as-- rod of same quality manufactured by two manufacturers at the same geographical area. Similar goods are such which are not same but of same type in nature and component and are able to perform same functions. Such as two mobile hand-sets of different brands and standards. These concepts are long being used worldwide in customs valuation. We failed to find any relation between central VAT registration and identical or similar nature of the goods or services. In VAT management, emphasis lies on collection of revenue in the easiest possible manner. Is their any harm, if entities selling goods or services not identical or similar can pay VAT centrally with ease? Rather, it is the basic objective of the VAT law. The notion has made the scope of central registration limited.
(c) Central registration shall be allowed to the entities selling goods and services with 15 per cent VAT rate is another new notion which does not appear consistent with the objective and spirit of central registration and does not fit with business realities. Central registration is given to collect VAT from one place with ease. It is really challenging to find reason for allowing or disallowing central registration on the basis of the rate of VAT. Mentionably, apart from 15 per cent rate of VAT, we have few reduced rates (10, 7.5, 5 per cent) and fixed VAT in our current VAT system. The notion again has made the scope of central registration limited.
In the Preamble of the new VAT law, four objectives have been articulated; namely, expansion of tax-base, simplification of VAT collection procedure, integration of procedure and making other relevant provisions. Simplification has been an important objective of the new VAT law which appears elusive in the current central registration regime. One entity with one accounts shall be given one registration. If the entity has multiple places of business, it shall be given central registration which is the basic rule of standard central registration. If the entity is a limited company, it has a registration under the Registrar of Joint Stock Companies (RJSC) under company law. It also has a Tax-payer Identification Number (TIN) under income lax law. So, one entity/company shall have one RJSC registration, one TIN and one BIN preparing accounts on the basis of same turnover to be submitted to three regulatory agencies. The Institute of Chartered Accountants of Bangladesh (ICAB), the National Board of Revenue (NBR), the Bangladesh Securities and Exchange Commission (BSEC) and the Financial Reporting Council (FRC) have meanwhile introduced documents verification system (DVS) to check fraudulent activities in audit reports. One entity/company maintaining one accounts and one BIN principle shall best suit the purpose.
We talk a lot about ease of doing business. If entities are asked to keep same account for compliance of three laws, certainly it goes in favor of ease of doing business since cost of compliance and complexity reduces. We are talking about simplification. Is there any other simpler method?
By registering the entities under VAT law, first we list the entities capable of paying VAT; second, we bring the entities under a network for proper monitoring and third, we develop data for VAT management. Gradually, we have to integrate our VAT management system with other information management systems of the government and with some relevant non-government entities. One entity/company, one accounts, one BIN appears to be much helpful for the purpose.
After practising varying methods of central VAT registration for long 30 years, we can now settle to one entity/company, one account, one VAT registration principle for establishing a business-friendly and revenue-friendly VAT registration regime. These thoughts may kindly be considered while formulating the Finance Act 2021 and upcoming budgetary measures.
Dr Md Abdur Rouf is a VAT expert, currently working as Director General, Customs Intelligence and Investigation Directorate. Opinion expressed in this article is his personal. [email protected]