The new VAT law, though difficult, is necessary
The new VAT law (VAT and Supplementary Duty Act, 2012 and Rules 2016) has finally been put into effect this year, starting from July 1. The law was put on hold many times due to various internal and external factors.
This time, the National Board of Revenue (NBR), seems to be confident enough to put it into effect, though it may face various internal and external challenges. The National Budget 2019-20 proposed slapping three more VAT rates -- 5%, 7.5%, and 10% -- along with the current 15% which was introduced in 1991.
Though this time the business community welcomed the introduction of the new law, it also expressed concern that they may get harassed if the four VAT rates mentioned in the new law are not implemented properly. They urged the government to ensure easy, hassle-free, and business-friendly implementation of the new VAT law.
They were looking forward to seeing the government ensure the new VAT regime didn’t increase the complexities of running businesses. The leading trade bodies also demanded that the government take steps so that tax-payers did not get harassed for minor lapses in the compliance of the VAT provision. Some have even suggested the government allow the companies time to adjust with the new law.
A lot of effort has been expended in trying to explain the need of the new act and its benefits to the country as a whole through all forms of media such as television and newspaper advertisements, social media updates, radio broadcasts, etc, but many more issues are yet to be clarified by the NBR.
In order to expand the VAT net and to encourage the business houses to obtain VAT registration, NBR introduced online VAT registration in March 2017. It was an encouraging attempt by NBR under the VAT online project wherein the intended VAT-payer was able to obtain VAT registration on the basis of a few relevant documents within an hour.
It has been established as a hassle-free initiative of the NBR to grant VAT registration and, as a result, a large number of intended tax-payers had voluntarily obtained VAT registration.
However, if the granting of online registration to is delayed, this would, in effect, be an impediment to enforcing the new VAT law. The new VAT law has proposed centralized VAT registration against a single Tax Identification Number (TIN) and, accordingly, an entity having multifarious activities across various places of business in Bangladesh should have a single VAT registration.
It is to be clarified whether a different BIN (Business Identification Number) already granted to an entity would be discontinued and would be replaced by a single VAT registration under the new VAT law regime which would permit the registered person to file a single VAT return.
The new VAT law would be fully effective and efficient only when the online VAT system will become operational. The transition from manual proceedings to a virtual VAT administration should assist in overcoming the hassles that the businesses currently have to deal with under the present VAT system.
However, the business community at large is in a fix over the recent NBR directives to use their approved software from 11 selected software developers. It may be mentioned here that the new VAT law does not mandate the VAT-registered person to use any software duly approved by NBR for maintenance of VAT records.
The new VAT law has proposed multitier VAT rates at 5%, 7.5%, 10%, and 15%. As expected, goods and services covered under these rates have been notified under different schedules and goods proposed to be exempt from payment of VAT at various stages has been notified under a separate schedule.
However, it is yet to be made clear whether input tax credit would be allowed at each stage with respect to the supply of goods and services falling under all the aforesaid VAT rates. Further, it is to be cleared whether the lower rate would be optional with no input tax credit.
This clarification is very crucial for the manufacturing as well as the trading community to determine their sale price of final goods and services. In the event credit is granted across the board and where output VAT rate is lower than corresponding input VAT rate, the government may have to refund accumulated input tax credit due to inverted duty structure.
The new act has abolished truncated VAT rates and tariff valuation which may impact the business community and the consumers at large. Suitable measures need to be taken to safeguard the interest of the common people as various VAT exemptions are now being enjoyed by businesses, especially the export houses.
Under the global VAT norms, such exemptions are converted under refund mechanism. Appropriate steps have to be taken to safeguard the interest of the export houses as well as smooth transition to the global VAT mechanism.
The new VAT law still has room for improvement. The benefits of the introduction of the new act should not outweigh its flaws because such issues should be sorted out as the new act has wider scope and provides much more clarity unlike the current act.
In the interest of collection of higher revenue, minimization of the hassles with regards to being compliant with the new law andthe step to introduce an online based VAT system will help in building an automated cohesive database for the authority and will also help in smoother running of businesses once the transition phase has been dealt with.
There should be none to deny the fact that the government is attempting to take a forward-thinking approach, and is trying to not only adapt to a new perspective, but also willing to walk with the fast-moving competitive world.
Changing the entire system is an enormous task, but this seems necessary given the requirement to grow in a world that’s growing at an even faster rate.
Dr Muhammad Abdul Mazid is a former secretary to the government, and former chairman, NBR.