The revenue board became aware of the strategic error in a internal evaluation of VAT collection situation recently
Collection of value added tax (VAT), which accounts for the lion's share of government revenue, faced major setback in the first quarter as revenue board's strategy to increase earnings from tobacco sector backfired.
Smokers are switching cigarette brands from high priced to lower priced after the National Board of Revenue hiked prices of higher tier cigarette brands in June, which caused a loss in revenue collection by the NBR.
The revenue board became aware of the strategic error in a internal evaluation of VAT collection situation recently.
NBR Chairman Md Mosharraf Hossain Bhuiyan, Board Members Md Jamal Hossain (VAT implementation and IT), Abdul Mannan Shikder (VAT Policy) and VAT commissioners were present at the evaluation meeting.
According to NBR finding, the revenue board collected Tk5,900 crore from the tobacco sector in the first quarter (July to September) of the current fiscal, down by Tk1,000 crore from that of corresponding period of the previous fiscal.
The revenue board cited this revenue loss from tobacco sector as a reason for slow growth in VAT collection in the first quarter of the current fiscal.
The NBR says it usually gets more than 10% of the total revenue from the tobacco sector every year.
Last year (FY2018-19) the revenue board collected Tk28,000 crore from the sector, a 12.50% of the total revenue collected in the fiscal.
If the current situation continues, the VAT collection would face huge shortfall against its target by the end of the current fiscal, the NBR apprehends.
The NBR increased the cigarette price by Tk5 to Tk18 for a 10-stick packet depending on different tiers on June 13.
The NBR had then estimated Tk7,000 crore additional revenue income in the current fiscal from the increased cigarette prices.
NBR Member Md Jamal Hossain said it was expected that VAT collection would increase after the rise in cigarette prices but the situation was the other way round.
“The opposite happened because the smokers switched over to lower tier cigarettes for the abnormal hikes in different tiers of cigarette prices,” he said.
he said the price of the middle tier cigarette, the most consumed category, was increased by 31.25% while the lower tier cigarette price was increased only 5.71%.
All of the cigarette companies including British American Tobacco Bangladesh faced a fall in sales of middle tier cigarettes, he informed, adding that the lower tier cigarette sales, on the other hand, increased.
But as the revenue from the lower tier cigarette was also low, the overall VAT collection faced a setback, the member said.
NBR got Tk26.27 revenue from a lower-tier 10-stick pack cigarette, while it was Tk38.88 in middle tier cigarette.
As per the NBR order, the minimum price of a 10-stick packet of the first tier cigarette has been fixed at Tk37, which was Tk32 earlier. The minimum price of the second tier has been increased to Tk63 from Tk48 and the third to Tk93 from Tk75.
Besides, the revenue collecting authorities categorized a new tier fixing the minimum price at Tk123.
The revenue board gets 15% VAT, 55-65% supplementary duty and 3% regulatory duty from cigarettes produced in the country, while imports of the products faces 600% duties in total.
The NBR collected Tk1,7373.47crore in VAT in July-September period, a 0.86% year-on-year growth.
However, the VAT collection faced Tk6429.17crore shortfall against its target of Tk23,802 in the first quarter.
Nine more reasons behind the VAT shortfall
The revenue board identified nine more reasons behind shortfall in VAT.
It said that it lost Tk1,528 crore in the first quarter of the current fiscal, as the government waived 15% VAT on the import of liquefied petroleum gas (LPG) in September last year.
Among other reasons is the adaptation of the ‘VAT and Supplementary Duty act 2012’ which took effect on July 1 this year.
Reconciling 5% Advance Tax (AT), absence of definition of raw materials, 100% instead of the previous 80% rebate facilities in utility sector including electricity, transfer of business registrations, lack of provision for submitting bill of entries with VAT returns and lack of provision of price declaration, fall in sources to 15 from the previous 39 for source VAT and VAT rebate facilities under the new VAT act are the main impediments in the way of its implementation.
The NBR chairman has, meanwhile, instructed the officials to ensure the new VAT law implementation at the field level and urged them to monitor strictly so that no one could evade VAT.