The VAT saga

Mishel Khan
Thursday, July 27th, 2017


 

When the country’s Finance Minister, AMA Muhith, announced that a unified Value-Added Tax (VAT) rate would be implemented in his budget speech, there was a massive uproar from business leaders, compelling him to re-think his plans and eventually backtrack on his plans and defer the decision by two years at least. However, how much do these business leaders and industries truly contribute with VAT payments to the government’s coffers, and did the backtracking of the policy really help the majority of consumers in the country.

 

Although the revenue in VAT payments to the large taxpayers unit (LTU) from companies in Bangladesh increased by 20 percent in the fiscal year 2016-2017, the number of companies which have been paying the LTU have decreased over the years, which is significant as more companies should have been brought under this VAT paying umbrella, which would have happened directly if the flat-rate was implemented.

 

The total VAT collected by the LTU in the fiscal year 2016-2017 amounted to Tk. 367.82, which is a healthy increase by the unit amounting to more than Tk.63 billion in additional revenue. However, the top 20 taxpayers’ contributions amount to more than 84 percent of the total, whilst the rest contribute only 16 percent. In addition to this, surprisingly, almost half of all the VAT collected by the LTU has been from a tobacco multinational alone, British American Tobacco (BAT), who alone paid Tk. 136.5 billion.

 

An official in NBR, speaking on condition of anonymity, mentioned that there is still a significant amount of VAT which is still unrealized from the existing registered taxpayers as well as thousands of other un-registered taxpayers, which could potentially help with the deficit created in the budget with the withdrawal of flat rate for VAT in the budget, as well significantly increase the revenues of National Bureau of Revenue (NBR).

 

NBR had already started meticulously working towards the unified VAT rate of 15 percent right after the Finance minister had announced it in his budget speech, and it is thought that this would have brought thousands of potential taxable businesses under the NBR’s tax net and potentially increase revenues in the billions. The backtracking has put NBR in a difficult position, where it is required to now work towards the policy it had least predicted.

 

It is widely accepted that such a backtracking in policy is unprecedented, especially since the Finance Minister mentioned clearly on multiple occasions that the policy would not pass on any cost burden on consumers and that there would be enough cushion against price hikes. Finance ministry officials hold a few top businessmen responsible for this sudden change in policy, instead of the larger business community.

 

The government is still going forward with its plan to make the VAT system automated, a project financed by the World Bank, although the whole software shall now have to be adapted with the change in VAT plans and complicate the whole process with different VAT rates.

 

The back-tracking towards the decision for a unified VAT system has also breached the government’s previous commitment to the International Monetary Fund (IMF), during its negotiations for the last two installments of the Extended Credit Facility of USD 1 billion.

 

Amongst the current top payers of VAT in the country, Petrobangla and Bangladesh Power Development Board (BPDB) have been contributing significantly to the LTU. The top three telecom operators, Grameenphone, Robi Axiata and Banglalink, have also contributed significant amounts.

 

There have been large gaps in the revenue collection statistics between the NBR and LTU in the past, which has created confusion for policy makers and economists, something which should be minimized with the planned implementation of the automation of the VAT system.

 

It is yet to be seen what shall be the real implications for the NBR and LTU, with the unchanged VAT system, and if the government shall truly implement the unified system in two years time.

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