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Dhaka Tribune

VAT evasion: Retail shops can contribute 2,00,000C per year to govt coffers

  • Over 7.5 million shops operating nationwide
  • In 2022-23, 47% of total VAT received from 109 companies
Update : 21 Apr 2024, 09:00 AM

The Lady Shop in Maniknagar, alongside numerous other businesses in areas like Gopibagh and Tikatuli, conducts transactions worth large sums of money daily but fails to pay VAT to the government.

This widespread evasion of VAT is not limited to these areas but is a prevalent issue across all city corporation areas, including Dhaka, and even in municipal regions.

According to the VAT Act, businesses in city corporations and municipal areas are required to obtain VAT registration at least 15 days before starting operations. However, many shopkeepers operate without VAT registration, blatantly disregarding the legal requirement.

Statistics show that approximately 90% of VAT recoverable from retail and wholesale businesses is evaded. Despite a nominal VAT rate of 5% on retail business, only a fraction of the potential VAT revenue is collected annually, amounting to just Tk5,000 crore.

The World Bank reported that Bangladesh suffered a loss of approximately Tk2,00,000 crore in VAT revenue in a single fiscal year. In the fiscal year 2018-19, the government could only collect Tk85,000 crores in VAT, reflecting a significant shortfall compared to the recoverable VAT.

Bangladesh boasts over 7.5 million shop owners nationwide, with Dhaka alone housing 600,000-700,000 prominent shopkeepers. These businesses frequently engage in transactions worth over Tk1 lakh daily. 

Moreover, major cities like Khulna, Rajshahi, and Chittagong harbour significant numbers of high-volume businesses, further exacerbating VAT evasion.

If these businesses were to pay an average of Tk20,000 in VAT monthly, the government stands to gain a substantial annual revenue of Tk180,000 crore. This figure could potentially double when factoring in VAT contributions from other sizable businesses.

Retail businesses evading VAT

The Bangladesh Shop Owners Association estimates that Dhaka's divisional cities alone host over 200,000 such businessmen. There are more than 200,000 such businessmen in Khulna, 100,000 in Rajshahi, more than 400,000 in Chittagong. Apart from this, there are 40,000-50,000 shopkeepers in the district towns, while the number is around 1,000 to 10,000 in any upazila.

Addressing VAT evasion among these businesses represents a crucial step towards enhancing revenue collection and fostering fiscal integrity.

It is evident that there are hundreds of thousands of businesses conducting daily transactions ranging between Tk10 lakh and Tk20 lakh, but they are evading VAT payments.

Meanwhile, NBR's field assistant revenue officers primarily focus on collecting VAT from larger industries, creating an imbalance in enforcement efforts.

In the fiscal year 2022-23, a total of Tk1,25,424 crore was collected, with Tk58,566 crore received from just 109 establishments, comprising 47% of the total VAT collected. 

Similarly, in the previous fiscal year 2021-22, about 53% of the Tk1,00,300 crore VAT collection came from 110 large-scale institutions. This disproportionate reliance on a handful of entities for VAT collection underscores the widespread evasion among smaller businesses.

Furthermore, VAT collection has extended to private universities, and NBR plans to impose VAT on Metrorail passengers' tickets, further diversifying revenue sources.

Former NBR chairman Abdul Majeed highlighted that while a select few large companies shoulder the majority of the VAT collection burden, hundreds of thousands of smaller businesses evade VAT obligations, exacerbating pressure on the former.

2m VAT-eligible companies

Dr Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh (PRI), said that there are over two million VAT-eligible companies nationwide, but VAT collection from them remains elusive.

He proposed expanding VAT registration coverage to all city shopkeepers, which would alleviate pressure on compliant taxpayers. 

Additionally, implementing Electronic Fiscal Devices (EFDs) across city corporations and municipal areas could potentially boost government revenue by up to Tk1,00,000 annually. Extending EFD deployment to union or village levels could further double annual VAT collections, Dr Ahsan H Mansur added.

In the current financial year, NBR's revenue collection target stands at Tk4,30,000 crores, with a VAT collection goal of Tk1,59,100 crores. However, only Tk88,701 crore of VAT has been collected in the last eight months (July to February).

NBR sources reveal that there are only 800,000 VAT registered companies in the country. Of them, 96,000 companies file regular returns online, while 20,000-22,000 companies opt for manual filing. This suggests that approximately 5.9-6 million shop owners continue to evade VAT obligations year after year.

It is noteworthy that businesses with annual transactions below Tk50 lakh are exempt from VAT, meaning VAT payment is mandatory only if transactions exceed Tk14,000 per day. However, many businesses manipulate prices to include VAT without remitting it to the government, effectively pocketing the tax revenue.

Lack of use of EFDs

Royal Village Restaurant has been doing business for a long time in Maniknagar Bishwa Road area of the capital.

Despite having Electronic Fiscal Devices (EFD), the air-conditioned restaurant does not issue VAT invoices to consumers.

This practice allows businesses to maintain lower prices and attract customers, only levying extra charges when consumers voluntarily request VAT ECR receipts.

A 2021 survey conducted by the VAT Intelligence Department revealed alarming statistics: four out of every five businesses lack a Business Identification Number (BIN), conducting operations without proper registration. 

Among the surveyed shops in Dhaka, Narayanganj, and Narsingdi, 88% were not VAT-compliant, while the VAT payments of the remaining 12% were not reflective of actual transactions.

Technical errors

Despite efforts to enhance VAT collection through the installation of EFD machines at the retail level, technical errors have hindered progress. 

Since their introduction on an experimental basis in 2019, only 18,500 EFDs and 500 SDCs have been deployed nationwide due to compatibility issues between VAT online schemes and EFD machines.

Nevertheless, the NBR aims to install 500,000 EFD machines nationwide within the next five years to bolster transparency in VAT collection, its Chairman Abu Hena Md Rahmatul Munim said. 

NBR member Dr Mainul Khan said NBR is active in collecting VAT at the retail level. Furthermore, plans are underway to install an additional 60,000 EFD machines in Dhaka and Chittagong by next June.

What the authorities say

Helal Uddin, president of the Bangladesh Shop Owners Association, said that many organizations within their association are not VAT eligible, while others remain outside of the association despite being eligible. 

He estimates that around two million VAT-eligible establishments in the country have the capacity to pay VAT.

However, Helal Uddin questioned why the implementation of EFD machines, initiated six years ago, has not been completed yet. 

He emphasized that shopkeepers are eager to obtain VAT registration and are willing to comply if EFDs are provided for accounting purposes. This move would not only facilitate compliance but also eliminate misunderstandings regarding VAT payments.

The introduction of VAT laws in Bangladesh dates back to 1991, with subsequent efforts to improve VAT management culminating in a comprehensive law in 2012, slated for implementation in 2015. However, due to objections from businessmen, a revised law combining elements of the 1991 and 2012 legislations was enacted. Implementation commenced in 2019, yet widespread VAT evasion persists among lakhs of shopkeepers.

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