The Value Added Tax (VAT) and Supplementary Duty Act, 2012 (new VAT law), was planned to be implemented last year. However, it was put on hold amidst a lot of uncertainty and resistance from stakeholders and, primarily, unpreparedness on the part of the government and the business community.
Over the last year, the government has been concentrating all its efforts on building the IT infrastructure for the implementation of its envisioned online VAT project -- the backbone of the new VAT law.
For smooth implementation of the new VAT law, the government has also initiated various measures to dispel any confusion within the business community at large through television and newspaper advertisements, social media updates, radio broadcasts, etc.
As a result, the government seems confident and is determined to implement this new VAT law with effect from July 1.
The move has been further confirmed by the chairman of National Board of Revenue (NBR), at the pre-budget meeting held on April 4, 2017, where he expressed the government’s commitment to implement the new VAT law with all the amendments, modifications, and recommendations received from all business communities, chambers of commerce, professionals, and economists.
The new VAT law aims to initiate the modernisation and digitisation of the tax system in Bangladesh.
The transition from a manual to a virtual VAT administration will assist in overcoming bureaucratic hurdles that businesses currently have to deal with under the present VAT system.
Other than simplifying the multiple VAT rates into one standardised rate, ie 15%, the new act has also introduced other benefits, some of which are discussed below.
NBR has introduced a new dedicated website for VAT registration, payment of VAT, and filing of returns. Unlike current manual system the online system will allow a business entity to carry on its day-to-day VAT compliances from the convenience of its office or home through the VAT website.
As a result, by eliminating the hassle of going to the VAT office, the online system will allow businesses to enjoy huge savings in time and cost which could be invested in doing business in a more professional and compliant manner.
The process of registration under the new act has already commenced. Under it, existing VAT registered entities as well as new business entities are required to obtain Business Identification Numbers (BINs) before the implementation date.
The new VAT law aims to initiate the modernisation and digitisation of the tax system in Bangladesh
Making advance payments
Under the current VAT law, companies are required to deposit tax in advance (before supply) and, therefore, always required to maintain a positive balance in their current account register. In contrast, under the new law, companies will only have to make payments once they are due, ie before the filing of their monthly returns by the 15th of the next month.
This will grant a registered entity time from 15 to 45 days to make the payment of VAT for the supply affected by it in a month. This will, in turn, improve a registered entity’s cash flow and provide relief on the working capital requirement.
Refund of unutilised input tax
Currently, there is no provision on the refund of unutilised input tax credit unless the registered entity cancels or surrenders its registration.
Any excess unutilised input tax credit needs to be indefinitely carried forward and adjusted against the output tax in the following tax periods.
This becomes an unnecessary hurdle for a business entity to liquidate its working capital blockage.
The new VAT law has a provision for availing of the option of refund of excess input tax credit upon completion of carry forward up to six months. This will provide great relief to the business community and will have a positive impact on the cash flow of businesses.
Valuation and levy of VAT
At present, manufacturers are required to include all their cost and overheads in the sale price for determination of price on which VAT is payable, thus precipitating challenges in fixing the price in the competitive market. The new VAT law allows manufacturers to discharge VAT only on the transaction value (sale price), regardless of whether cost price is higher than sale price. This change will give a competitive edge to the business community.
The present VAT law does not provide any scope for correction in the original return by the filing of a revised return.
However, under the new VAT law, a registered entity is now allowed to file a revised return after identifying any discrepancy, omission due to clerical error, or any other error except forgery either online or manually, thus resulting in reduction of disputes as well as penalties imposed by the VAT Authority.
Where a payment from a customer remains outstanding for over 12 months and gets written off for non-collection, the tax paid at the time of supply becomes a cost with no provision in the present VAT law to adjust the same. Under the new VAT law, the supplier will be allowed to make a decreasing adjustment, which will in turn lower the amount of tax payable by the supplier.High seas sales transactions
Though conducted globally over the decades, high seas sales transactions were never recognised under the present VAT law, thus preventing businesses from carrying out such transactions.
The new VAT law provides an opportunity for businesses to carry out such transactions, which are exempted from the payment of VAT.
Stock transfer from one business unit to another
At present, separate units require separate VAT registrations and, therefore, all such units are considered as separate entities for the purpose of payment of VAT. As a result, VAT is also payable on transfer of stock from one unit to another.
Though the transferee unit is eligible to claim input tax credit, the working capital of the same organisation is impacted by such payment of VAT.
The proposed act provides single registration in respect of all the units of an entity and, therefore, there will be no requirement of payment of VAT on stock transfer of goods from one unit to another.
Areas of concern
There are some areas of concern which may affect the business community and consumers at large.
The following are some of the areas the government may consider for proper redressal or relief:
A new concept of “fair market value” has been introduced in the new VAT law when supply takes place between two related entities.
However, there is no provision for mechanism to determine the fair market value.
The government needs to formulate rules in order to determine the fair market value in case of domestic transactions between related parties as well as cross-border service transactions.
The new law has abolished truncated VAT rates and VAT payable on tariff valuation which will affect the business community and consumers at large.
As more and more business entities come under the registration network, it is expected that the immediate financial impact will be minimised over time
The government should bring in an anti-profiteering measure to ensure that the input tax credit availed by those assessees are duly passed on to consumers which will, in effect, reduce the tax burden in the hands of the final consumers.
The increase in VAT rate on basic utilities like water, gas and electricity is from 5% to 15%.
There is a bar on the utilisation of accumulated/unutilised input tax credit available on the date of transition where any disputes/demands are pending before any forum, imposing huge financial burdens on businesses.
In such a situation, a provision should be made in the act to refund the tax paid, if the assessee gets a favourable order from a court of law.
However, it is expected that the long-term benefits of the new VAT law will outweigh its immediate financial impact on businesses and consumers.
Where business and law collide
As more and more business entities come under the registration network, it is expected that the immediate financial impact will be minimised over time.
The government has been launching multiple initiatives in order to familiarise the business community with the law as well as the tax administration.
The changes effected by the new VAT law are no doubt drastic, and it is, therefore, only natural for businesses to be reluctant to welcome this new and unfamiliar arrangement.
But, businesses must delve into the details of each and every aspect of the new VAT law or modification to the old one in order to comprehend the purpose behind such tax reform measures.
The government has taken steps to introduce an online VAT system not only with the aim of collecting higher revenue by the VAT authority but also to minimise the hassles associated with complying with the law.
Further, the government hopes to integrate this new law into businesses all across the country in the near future.
This will help in building an automated cohesive database for the authority and will also help in the smooth running of businesses after the transition from the manual to the virtual system has taken place.
Additional scrutiny of the new act reveals that its introduction will further diminish the gaps between the VAT and customs laws.
This is because the new VAT law has clarified many aspects of the scope of VAT in terms of imports and exports as well as incorporated some globally accepted and practiced laws, such as high seas sale and appointment of a VAT agent by non-residents for VAT compliances, indicating that Bangladesh is getting ready to catch up with the rest of the world.
It is quite evident that the government is attempting to take a forward-thinking approach and is trying not only to adapt to a new perspective but also to keep pace with the fast-moving competitive world.
Although changing the entire system is an enormous task, change in VAT regime seems absolute necessary for economic growth in a rapidly evolving world.
Mamun Rashid is the Managing Partner at PricewaterhouseCoopers (PwC) Bangladesh. This article has been prepared with extensive help from Pulak Saha (Partner, Indirect Tax) and Prabir Mitra (Manager, Indirect Tax) from PwC India and Sanjida Mithila, Analyst from PwC Bangladesh.