Rationalising customs duty and VAT

A stable, sustainable, transparent and business-friendly tax and tariff regime will not only integrate Bangladesh's business with the global value chain, but will also usher in a rational, transparent and efficient revenue collection regime. What are the existing challenges and constraints for the growth of business in terms of customs duty and value added tax (VAT)?

CUSTOMS DUTY: Tariff benefits granted against many industrial inputs are enjoyed only by a few listed sectors but similar benefits are denied to many other sectors using the same inputs. For instance, Customs SRO 128 of 01-06-2017 has set 1.0 per cent customs duty on capital machinery and spares in line with  explanatory rules and regulations for customs clearance procedure (vide: notification bs 08.01.0000.53.03.020.15/57, dated 04-02-2016). But the list of the capital machinery and spares is not exhaustive to allow tariff benefit on inputs for the development of a potential new sector.

There is also no specific level of effective rate of tariff margin to be allowed between the imported finished product and that of its required inputs. Lack of customs procedural efficiency and transparency in resolving the issues relating to customs valuation and under-valuation of imported goods and mis-declaration and lack of understanding and non-compliance of NBR regulations, notifications and explanations thereof at the field level have become a barrier to business growth.

So, it is important for the government to enact and enforce the new Bangladesh Customs Act, 2014 based on the Revised Kyoto Convention or RKC and its General Annex from the next fiscal year.

The customs duty on import of all inputs included in the respective Mushok-7 of all VAT (Value Added Tax) registered manufacturers, except assemblers of products imported in CKD condition, needs to be fixed at 5 per cent to 3 per cent level. Condition, however, should be there that industrial inputs produced in Bangladesh should have an effective rate of protection ranging around 30 per cent and necessary level of regulatory duty may be imposed for the purpose.  

To maintain effective rate of protection for local industry, existing level of supplementary duty should be retained or otherwise may be substituted by regulatory duty as and when necessary. 

The Customs duty on import of all machineries and spares included in the respective Mushok 7 of all VAT registered manufacturers should be fixed at 1.0 per cent as granted on the items listed under the relevant SRO (no:128/2016/Dated 2-6-2016).

VALUE ADDED TAX (VAT): Annual growth of revenue from VAT hovered around 15 to 20 per cent during FY92 to FY17. But in FY18, the growth target has been set at 36 per cent which is impractical and hardly attainable. Currently, VAT contributes around 39 per cent of total NBR tax revenue. Moreover, such huge target of tax burden will inflict serious pressure on business and consumers as well. Growth of revenue from VAT should be set at 20 per cent with 1.0 per cent incremental growth rate per year so that the economy can cope with the growth targets. 

VAT network could be increased by entrusting the local VAT offices and the respective business associations to work together. It will ensure 100 per cent VAT registration of eligible entities in the long run.

Rationalisation of VAT and SD Act 2012 needs to be done before enforcing it from the next fiscal year. What is most important is to simplify applicable VAT process taking into account the respective scale and business process and international practices. In this connection, following measures may be considered:  (i) 0.5 per cent turn-over tax on wholesalers and retailers on the basis of respective turnover finalised at the last income tax assessment; (ii) 3.0 per cent turn-over tax on industries and business in services sectors with turnover up to taka 50 million on the basis of respective turnover finalised at the last income tax assessment; (iii) 15 per cent VAT for industries and business in services sectors with turnover above Tk 50 million on the transaction price with credit for the amount paid as VAT in previous stages of procurements; (iv) 15 per cent VAT on the 26.67 per cent value addition price; (v) 15 per cent VAT on the basis of 10 per cent value addition or 1.5 per cent on the respective transaction price of the real estate, iron and steel and jems and jewellary sectors.

Moreover, VAT paid as above with credit or/and on value added portion of the price or/and turnover tax shall be deductable in the subsequent business processes. Local components of exports, however, should be treated duty-free like the foreign inputs and all duties paid should be refunded. 

There will be a series of benefits from rationalisation of VAT structure. For instance, micro, small and medium enterprises (MSMEs) account for 70 per cent of the country's national economy, but tax payers of these enterprises are not in a position to obtain VAT credit on 15 per cent VAT to be paid on sales price. If the credit is introduced, wholesalers and retailers will be highly encouraged to adopt and comply with the VAT regime.

By allowing VAT credit to the sector, credit chain will be established throughout the business process  and consumers will also be encouraged to pay VAT from the respective outlets at much lower rate ranging between 0.5 per cent and 4.0 per cent instead of current 15 per cent plus.

Manzur Ahmed, Member, Investment Promotion Team (IPT) of NBR, is Advisor of BEI, BCI and BPGMEA and a former Advisor of FBCCI (2005-March 30, 2017).

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