Saturday, June 3, 2017

http://dailyasianage.com/news/65321/anomalies-in-the-new-vat-law

Anomalies in the new VAT law

M S Siddiqui

'The Value Added Tax and Supple-mentary Duty Act 2012' does not have an appropriate definition
of VAT. Section 89 of the act defines as such--"VAT means the value added tax imposed under
Section 15." This means any tax imposed under this law is VAT. But Section 15 is related to
procedure and rate of imposition of VAT. Moreover the same section refers to business of import
and taxable supply. According to Section 16 every person specified below shall be liable to pay VAT:
Persons---

(a) in relation to taxable import: the importer;

(b) in relation to any taxable supply in Bangladesh: the supplier;
(c) in relation to any taxable supply of imported service: the recipient of such supply;
(d) in relation to any sale, in the prescribed manner, of any good by an auctioneer on behalf of a
registered person: the auctioneer. It has also no mention of value addition by manufacturers.

The law has details of VAT on import and supply. The anomaly in definition has been reflected in the
procedure of application of the law, and the problem created with the application of law has been
raised by the business community. The standard use of law is to impose responsibility on business
houses to collect tax. The standard practice is to pay VAT calculating tax on own value added part of
the products and services they are manufacturing or trading with. This means business
establishments are paying VAT in advance and collecting the amount from consumers at a later
date. This is a voluntary work of collection of VAT from consumers. The question may arise on why
business community opposes the new VAT law.

The conservative statistics finds Bangladesh economy is at least 50% dependent on informal sector.
The small traders are in informal sector and have no capacity to maintain proper records of
transactions. The problems mainly arise in the application of a smart modern tax system to an
economy where there is a poor tax compliance, business record-keeping is often dubious and
unreliable, and informal business intermediaries often flourish. The sections in Chapter six on tax
invoice and other documents and compliances (Chapter nine) of recoding and reporting of
transactions are very good for a developed economy but not for a country like Bangladesh.

The new law, in short, proposes collection of VAT at the full rate from the retail and wholesale
businesses while allowing deductions for the VAT paid at the earlier stages of value chains. But the
credit of VAT paid as per law is complicated record-keeping and reporting methods.

The small traders and SMEs cannot maintain such records and report through online. The law
requires business houses to maintain a few number of staffs and computers in order to comply with
the rule to get credit of VAT paid in earlier stages in horizontal line of transactions (from importer of
raw materials to wholesaler to manufacturer to wholesaler of finished products to retailers and finally
to consumers). In the existing supply chains, if any of the stakeholders is in the informal or tax-
evading businesses can offset the VAT credit system and the next business house in line will have
to pay full amount of VAT again on his purchase.

The SMEs cannot comply with the record-keeping part of the law. The Section 107 is made for the
keeping of records and accounts. It states---(1) every taxpayer shall, in such form and manner as
may be prescribed, keep, for a period of 5 (five) years, all accounts, documents and other records of
his economic activities so as to facilitate assessment of his tax liability and other obligations. (2)
Without prejudice to the extent of coverage of sub-section (1), the records maintained and accounts
kept shall include the following documents, namely:-

(a) all statements of purchase of goods, services or immoveable property, whether taxable or
exempted from tax, and all tax invoices related thereto;
(b) all statements of sale of goods, services or immovable property;
(c) all tax invoices, credit notes, debit notes, and integrated tax invoices and withholding certificates
issued and received by such person;
(d) all customs documentation relating to imports and exports of goods by such person;
(e) all records showing, at any particular time, the prices at which the person sells the products
manufactured by him, the input-output coefficient for such products, and all records of, discounts
offered by the manufacturer of such products or, of credits;
(f) all records relating to the supply of services subject to supplementary duty or the manufacture of
goods subject to supplementary duty and related documents;
(g) all treasury challans (receipts) showing the deposit of tax imposed or, where payment was made
in ways other than by treasury challans (receipts), appropriate documentary evidence in support of
such payments;
(h) all returns for every tax period; and
(i) any other prescribed documents or records.

All these conditions of compliance are impossible for small business houses in manufacturing and
trading of goods and services. The law may be flexible in allowing credit of VAT paid by relaxing the
rule with small penalty. The law may show thumb to value addition of 25% at any stage of
transaction. This will be good in the context of our economy. Government will get more than 15%
VAT and non-compliant business can be penalized with higher tax. This penalty tax will encourage
businesses at every stage to be tax compliant.

The law has given unusual authority to VAT officials under section 83. It states VAT officials have
the power to enter and search by VAT officers (1) to carry out the purposes of this act or the rules
made thereunder, a VAT officer not below the rank of an Assistant Commissioner, having been
authorized by a Commissioner, may, in the prescribed manner, exercise any of the following powers,
namely:- (a) to enter into any place or premises of any economic activity or into any house,
transport, etc. and make search therein; and (b) to inspect any economic activity and examine its
records, files, documents and accounts and (C) to freeze the bank account of such person. Again
the section 91 authorizes VAT officers to seal any record or good; and to take steps, in the
prescribed cases and manner, to freeze up bank accounts of any person.

Under the existing VAT law the small traders were being harassed by VAT officials entering into
business establishment and finally the small traders demanded fix trade VAT and Advance VAT at
import stage and NBR agreed to such demand although any such fixed VAT is against concept of
value added tax. Again the small traders is opposing the new law due to fear of similar harassment
by visiting VAT officials since the now law has given unconditional authority to the officials.

The possible fear of harassment of business persons and corruption may be reduced by small
amendment in the law by keeping a provision of credit of VAT without too many formalities and
documentations (with small penalty tax on non-compliant business), reduction of bureaucratic
discretionary authority and joint assessment procedure of yearly turnover small business houses
between VAT officials, trade associations and business establishments concerned. Government can
take these interim measures for next 5 years allowing the economy to accept a modern and
standard law of a developed country.

The writer is a legal economist