Value Added Tax (VAT) was introduced in 1991. Since then, many changes were made in the VAT law. Due to imperfections and complexities, a new VAT law was passed in 2012. This new law gets implemented since FY20. The new law was passed to modernise and simplify the VAT system. But this law also has its weaknesses. In informal discussions, it is often shared by many that the new law is not easy to understand, it contains many provisions which are the carbon copy of developed country VAT/GST law, and not adjusted to Bangladesh situation and circumstances.
In order to make any observations about the VAT system in Bangladesh, the new law may need to be examined using the lens of International Monetary Fund (IMF). This paper, therefore, aims to provide a review of a well functional VAT system, resource requirements of a tax administration, areas (sectors) of high compliance risks and the role of digitalisation for a proper tax administration.
According to the IMF, the following are the prerequisites for a well-functioning VAT: (i) Good design of VAT policy and legal framework; (ii) Careful setting (and adjusting) of VAT threshold; (iii) Self-assessment, digital, and efficient processes; (iv) Extensive use of third-party data and robust analytics; (v) Collaboration between tax and customs administrations; and (vi) Well-resourced tax administration with sound institutional framework.
SHORTCOMINGS: VAT law contains some provisions that are not much relevant for Bangladesh. There are also unnecessary provisions or complex issues such as definition of "Adjustment event" [Sec 2(87)] not needed. Similarly, there are provisions on which there are no elaborations or understanding such as Reverse Charge (S 20). Inconsistent provisions are also contained in the VAT Act/VAT Rules 2016. For example, as per rule 40 (1)(?)(?), a registered person shall issue a VAT invoice (Mushak-6.3) stating buyer's name, address and Business Identification No (BIN) where supply price exceeds Tk. 25,000. This is not practical because a buyer may not always be a VAT registered person. So an unregistered person will, in no way, be able to provide BIN no. Therefore, the requirement to mention buyer's BIN name may be omitted.
The increasing adjustments and decreasing adjustments need illustrations. For example, increasing adjustment after Registration-- what type of increasing adjustment will arise after registration is not clear to the users of VAT law. There are other issues and weaknesses of VAT law for which we cannot strongly claim that the VAT policy and the legal framework is good. Rather it seems many more amendments and illustrations by the regulatory authority is needed.
A major shortcoming of the VAT Law and Rules is that in different sections of the law, it mentions "specific method", but the detailed procedure in the rules are not framed in all cases. Example: Rules on turnover tax collection, accounts keeping and adjudication stipulated in Section 63 is yet to be formulated. In a similar vein, separate rules on recovery of arrear tax by Debt Recovery Officer (DRO) as enshrined in S .95 is necessary. In addition to this, the current VAT law lacks rules on export procedure; there were detailed procedure for export under rule 27 of the repealed VAT Rules, 1991. Exporters were allowed flexibility (through the then Mushak-20) to get the export consignments examined in a place convenient to them. Rule on export procedure seems a necessity to facilitate export of the country. Although there are no provisions for 'drawback' on exports in the current VAT & SD Law/Rules (Unlike the current regime, there were detailed provisions on Drawbacks in the Rules 28-30 in VAT Rules, 1991), S. 63 states about drawback of turnover tax. Section 73 also mentions about drawback. The current VAT law/rules offer refunds to the tax payers (Sections 68-69, 72; Rule 19), not drawback. The term "drawback may, therefore, be re-considered/ replaced by the word "refund", consistent with current VAT law. It is pertinent to mention that the IMF also speaks about VAT credits and refunds in its VAT Compliance and Risk Management literature. Despite few weaknesses in the legal system, NBR has taken an intelligent move by amending Section 46 vide Finance Act 2021 to permit 'input tax credit' for exporters instead of 'decreasing adjustment'. A number of few good changes have been brought in the VAT law/rules adopted vide Finance Act 2021.
A major drawback of the current VAT law (2012) is that this law does not have provision for forfeiture of seized/detained goods. There were such provisions (Section 38) in the VAT Act 1991. The brief discussion on few issues of the current VAT law/rules above indicates the scope and necessity of refining our VAT & SD Act 2012.
VAT THRESHOLD: The threshold to get registration under previous law was Tk. 8.0 million. In making the VAT law 2012 effective, VAT threshold was suddenly increased from previous Tk. 8.0 million to Tk 30 million in the FY20. It is learnt that this high threshold was set without any survey or impact assessment on revenue collection or the number of persons who will be moved from VAT into Turnover tax. As a result, many businesses under VAT suddenly came out of VAT to pay turnover tax at much lower rates. National Board of Revenue (NBR) also saw that the number of VAT registration was falling. NBR, however, realised the problem quickly and mitigated the situation of "would be adverse effects on collection of VAT" (due to sudden increase in the VAT threshold by a large degree) by issuing a General Order on 17 July, 2019 requiring more than 170 products and services to get VAT registration irrespective of their annual turnover. The VAT threshold of peer countries shown in the following table also shows that Bangladesh's VAT registration threshold is too high.
The VAT registration threshold may be reviewed and re-fixed instead of asking a big number of suppliers of products/services to be under mandatory VAT. Such mandatory VAT registration irrespective of turnover does not seem business-friendly especially for small scale suppliers.
SELF-ASSESSMENT AND ICT: Value added tax system allows self-assessment system. Under VAT system, taxpayers self-assess; in other words, they calculate and pay their own tax liabilities. They keep records of their VAT-able activities, prepare and submit VAT return (with their payments) to the tax administration. This is also known as voluntary compliance (taxpayers comply with their basic tax obligations without the intervention of a tax official). If they do not voluntarily comply, the tax authority takes appropriate enforcement actions, including imposition of penalties as per law and conduct audit. The concept of Self-assessment allows the audit of VAT returns who are under suspicion for non-compliance.
It is good to state that VAT payers and collectors are now more accustomed to online environment. The VAT returns are now submitted online. As of May, 2021, 116548 returns were submitted online out of a total return of 197, 538 i.e. 59 per cent returns were submitted online [Total Registration: 257445]. This seems to be a significant improvement in implementing the VAT law in an online environment. Furthermore, E-payment module has been implemented with 14 banks. Since the implementation of the new VAT law on 1 July, 2019, 12 modules have been developed a number including Tax Type, Registration, Return, Taxpayer Account, Revenue Management, E-Payment, Document Certification, Document Management, Refund, and Non-filing modules are now operational and live. The NBR also achieved initial success in installation of Electronic Fiscal Devices (EFD), although much needs to be done in creating awareness among buyers/VAT payers about the necessity of claiming invoice and keeping the invoice (lack of award claims by winning numbers selected through EFD lottery manifests this need for awareness). In sum, the increased use of ICT in the VAT system is undoubtedly a welcome news for tax administration and tax payers and it will improve the ease of doing business in Bangladesh.
USE OF THIRD PARTY DATA: Third party data helps check fraud refund claims. Analysis of past refund results and behaviour of other taxpayers helps identify false refund claims. Indicators of risk levels (e.g. first time refund claims, refund claims exceed trigger value, previous claims rejected or significantly reduced during audit and claim deviates significantly from normal claim pattern are indicates high risk factor) of refund claims are used to screen VAT returns with a view to identify suspicious ones. These are then flagged for verification (Mario Pessoa et.al., 2021). The effectiveness of such screening will depend on the availability of reliable third-party data available in real time (such as e-invoices or customs data). Expertise or support of the subject matter experts and risk analysts also matters.
COLLABORATION BETWEEN TAX AND CUSTOMS: As both the customs and tax departments are administered by the NBR under the same leadership/administration, there is no problem in sharing of data and collaboration between each other. However, the reality is that the two departments seem to work in their own ways and there is scope for more collaboration between them. Information (statements, records and evidence) provided by tax payers under the provisions of Income Tax Ord 1984 are confidential. However, Section163, sub-section (3) (m) of the same Ordinance allows the tax department to share info with customs and VAT authority to enable them to exercise their powers under the Customs Act, 1969 (IV of 1969), or/and Value Added Tax Act. The reality is that sharing of information by Income tax department is still not at its expected level. This may be due to lack of practice of information sharing or it may also be a result of misinterpretation by some officials. It may be pertinent to mention that such sharing of information will rather help tax department to capture untapped tax potential.
In a similar vein, data sharing between customs and VAT is also not at its best. There is a features of iBAS that all customs information (both import and export) will be automatically stored against each BIN month wise in the iVAS (Integrated VAT Administration Systems). This feature allows VAT officials to retrieve customs information of each month (against BINs) from this feature without resorting to the ASYCUDA ++ system. However, this feature is yet to be activated. It is a matter of satisfaction to note that it is on the agenda of VAT online project (Personal communication, with Syed Mushfequr Rahman, 01 June, 2021)
WELL-RESOURCED TAX ADMINISTRATION: Tax department collects tax for the government. Out of this tax revenue, government meets its day to day operating as well as development expenditure. As such, it is important to see tax department is well-resourced. Adequate manpower is a precondition to increase tax collection as broadening the taxpayer base needs necessary staff numbers. Furthermore, staff members are needed to devote for audit and verification activities. An IMF study indicates that "Increased staffing of a tax administration agency improves revenue performance up to a threshold of 0.25 percent of the labor force", (known as critical threshold) beyond which the marginal benefit of additional staffing may turn negative (Chang, Gavin, Gueorguiev, Honda and Baer, 2020). The reality is that Lower Income Countries cannot afford to provide resources (in terms of staff per citizen or tax expenditure per Tk. 100) as much as a developed country can. The staff number of many Emerging Markets (Ems) and Low-Income Developing Countries (LIDCs) tax administrations is below this level as evidenced in the following table. Additional staffing is likely to be associated with higher tax collection. (Chang ., et.al., 2020).
COST OF TAX COLLECTION: The cost of tax collection of NBR is one of the lowest. In FY19, NBR cost of tax administration was $ 0.50 for collection of US$ 100 while the same was $3.7 for collection of $100 by India, $0.6/$100 for Sri Lanka, $0.70/$100 for Indonesia and $0.4/$100 for the Philippines. The costs of tax collection by NBR vis-à-vis peer countries indicates Bangladesh's investment in tax collection purpose is one of the lowest among comparator countries; there are scope for additional investment in customs, VAT and tax department to enhance capacity building of NBR officials as well as for digitalization of tax efforts.
A study (USAID 2020) finds that the number of active taxpayers per tax official is 500 (India), 837 (Indonesia), 1443(Nepal) and 498 (Sri Lanka) and 102 for Bangladesh. It means our 'tax- effort' (tax payer number per tax official is lowest) and we have scope to increase number of active taxpayers (per official) to expand our tax net.
To conclude, it can be said that the VAT system in Bangladesh is, in no way, near to ideal VAT system envisaged in IMF checklist. The NBR needs to refine its VAT law and rules and ask for more resources in the national budget (with rationale) for capacity development of tax personnel, digitalisation of tax administration (for NBR and its offices) and logistics support for tax department to increase tax-GDP ratio, facilitate tax services, improve overall investment regime and see better compliance regime.
Mohammad Abu Yusuf is a trainer on Customs & VAT, University of Dhaka and Federation of Chartered Taxation of Bangladesh (FCTB).