VOL 22 NO 58 REGD NO DA 1589 | Dhaka, Thursday, January 08 2015

http://www.thefinancialexpress-bd.com/2015/01/08/74811

VAT law a tool to fetch revenue, not fleece taxpayers

M S Siddiqui
The Value-Added Tax (VAT) system was initiated about 25 years back and an updated new
VAT law is waiting for its enforcement by July, 2016. VAT is a replacement of sales and excise
tax. It was a German businessman, Wilhelm Von Siemens, who, in the 1920s, had first innovated
the idea of imposing tax on additional value of output at each stage of its creation, rather than
just at the retail sales end. But it was a Frenchman, Maurice Laur, a tax official, who was the
first to implement it in 1954. VAT is now implemented in over 150 countries, where it accounts
on average for as much as a fifth of the total tax revenue. Today, all OECD countries, with the
exception of the US, have VAT systems in place. In fact, revenues from VAT represented, on an
average, 18.7 per cent of total tax revenues of the OECD countries in 2008, compared to 8.8 per
cent in 1975.
Many developing countries around the world have introduced VAT in the hope of raising
revenues efficiently at the least collection cost. VAT is intended to be a neutral, efficient and
buoyant revenue-raising tax. It is effective in terms of raising revenue and is cost-effective to
administer compared with other taxes. It is actually collected by businesses at each stage of
production and distribution chain.
VAT is a secure tax to collect, compared to conventional sales taxes which can be lost if evasion
happens right at the final sales stage. It is also an attractive tax from the taxpayers' perspective
because of its transparent nature. The consumers know what they pay, and if they don't buy the
goods, they don't pay the tax.
The revenue gains from VAT are likely to be higher in an economy with higher level of per
capita income, lower share of agriculture, and higher level of literacy. It proves to be an efficient
tool for revenue collection. Compared to alternatives in indirect taxation, the VAT has more
revenue potential.
Bangladesh introduced VAT in 1992 with an aim to increase tax collection. The result was very
encouraging since VAT and Supplementary Duty (SD) collection doubled its share as percentage
of gross domestic product (GDP) within one year from 1.5 per cent in FY1992 to 2.9 per cent in
FY 1993. The trend gradually increased over time and in FY2010, it crossed 5 per cent of
GDP. VAT and SD contributed about 81.3 per cent in FY2014 and VAT singularly added about
57.9 per cent. During this period, the collection of VAT increased by 10 times. But since 2000,
the earnings from direct tax (e.g. income tax, travel tax and others) grew at 21.1 per cent but
VAT collection increased by 15.6 per cent. The slowdown in annual increase of VAT collection,
compared to direct taxes, has drawn attention of the policymakers. Bangladesh is now in the

process to implement revised VAT Act with a hope to increase income from this source.
The existing and forthcoming laws have many regressive clauses. The law and rules seek to
make VAT a 'workhorse' of future revenue generation against the backdrop of the country's
policy of continuous trade liberalisation.
The VAT law has been set to increase tax collection mostly focusing on a mindset of trading
character of business in Bangladesh but there is no policy support for industrialisation. There is
no effort to make fair calculation of tax. Fair collection of tax will make fair competition among
business houses and will increase economic activities by ensuring a level-playing field which is a
pre-condition for increased economic activities.
Conventionally, a tax system is considered to be regressive if the share of tax burden in one's
total income is reduced as income rises. Defined this way, regressivity is inherently applied to
VAT, a tax on consumption. The poor generally spend a greater portion of their income on
consumption than the rich. Thus, VAT has been considered as a regressive tax, affecting lowerincome earners more than the higher ones. This is countered by the argument that consumers
have a choice to buy or not to buy certain items and where daily essentials, such as food and
shoes, are concerned, policymakers can intervene for equity purposes. It is a particularly easy
way for governments to raise tax revenue because it can be 'hidden' in the consumer price.
The law has exempted tax on import for personal consumption (Sec 27) and assets for private
purpose (Sec 70). VAT is a consumption tax but import for consumption under baggage rules has
been set to be exempted from it. This is really conflicting to the philosophy of VAT. The
argument made in the note/clarification of the draft that import for private consumption is not in
course of economic activities.
Any official of the NBR having the rank of Assistant Commissioner (AC) has the authority to
freeze bank accounts of businesses. This means, the AC can exercise discretionary power to stop
bank transaction, thus closing down of economic activities with an allegation of violation of any
rules (Sec 83-3).
Appeal, revision and references have been made difficult for the tax-payers by imposing
restriction on burden of proof (Sec 121). The aggrieved persons must pay 10 per cent of the tax
specified in the impugned order or if no such tax is specified therein, 10 per cent of the monetary
penalty should be imposed. Again aggrieved persons must deposit further 10 per cent of claimed
VAT before appeal to the High Court division of the Supreme Court. This is against basic human
rights enshrined in the Constitution. None is guilty until declared by a court.
The Section 97 makes representatives of taxpayers personally liable for the payment of amounts.
They include relative of persons and beneficiary of trust. The word 'relative' is yet to be defined.
This condition will make all the unexplained relatives liable for liability of a person and the
innocent beneficiary of any trust fund liable which is against other laws prevailing in the country.
The law did not define 'relative' and the NBR has got a free hand to make any one of even far
distant relatives liable.

VAT is one of major taxes in revenue system. Tax policy units and tax administrations should
develop their capacity in projecting the VAT revenues, estimating compliance, and assessing the
revenue impact of any proposed changes in the tax laws and/or tax administration practices.
The law should have massive reform in VAT administration, tax return and calculation,
valuation of end products, payment of tax, rebates, carry-forward of advance or excess tax paid
and settlement of dispute on tax related issues. But the new act could not address all the
shortcomings of the existing law.
Moreover, police, Border Guard, Coastguard, Ansar and all local government institutions,
narcotics department and all other offices will 'extend co-operation'. This seems like war against
business houses. An IMF report says the existing VAT Act has failed due to ineffectiveness of
the NBR but under the law, the NBR has been authorised to go aggressive against business
houses instead of addressing its own weaknesses and utilising the legal system for fair judgment.
The Alternate Dispute Resolution (ADR) is also not fair to the taxpayers. The Section 125
empowers the NBR to select facilitators and business houses can select a facilitator from listed
facilitators. The documentation process will, however, remain with the NBR. This is also against
the hundreds-year old traditional arbitration system of our society. The facilitators or arbitrators
must be independent.
VAT may become a 'money machine,' as usually claimed. Its rate structure should be designed
as simple as possible, preferably with one or-at most-two positive rates, few exemptions, and
zero rating being exclusively granted to exports. Broadening base, in general sense, reduces
deadweight loss and provides an opportunity for lowering the rates, and, thereby, increasing
compliance. If so designed, VAT will be buoyant and efficient. It is to be noted that zero-rating
generally provides strong incentives for frauds, creates excessive burden on tax administration,
and effectively erodes the base.
The provision of realisation of outstanding VAT from undefined 'relatives', burden of proof on
taxpayers and appeal against payment of 10 per cent of claimed VAT incorporated in the
proposed law violate the fundamental rights guaranteed in the Constitution.
The declared preamble of the law appears to have a wrong vision. The law has been enacted to
increase tax collection. But there is no effort to make fair calculation of tax.
The writer is a legal economist. shah@banglachemical.com