Unhealthy VAT & SD Law Dilemma

When late Finance Minister Saifur Rahman, in 1991, first introduced Value Added Tax (VAT) as a means to mobilize more resources for bankrolling the national budget, he faced a barrage of criticism coming from all directions, including the then main opposition political party at the time, the Awami League (AL). Bangladesh was the first country in the region to employ VAT as the new source of revenue. Many, however, deemed this move to be too radical a change.
When Awami League came to power in 1996, they did not scrap the system. Rather 20 years after its introduction, in 2012 the AL-led grand alliance government enacted a new VAT and Supplementary Duty (SD) law to enlarge the VAT net and introduce a uniform VAT rate of 15% by replacing the multiple rates. That was the beginning of a problem that the government had failed to foresee.
With revenue from import duty shrinking unabatedly and Income tax revenues being close to stagnation, the government found VAT to be the most potential conduit for raising resources to meet an ever-increasing recurring and development expenditure.
The International Monetary Fund (IMF), the multilateral lender, also wanted the government to bring about reforms in the 1991 VAT law to plug the leakages and beef up the revenue collection. When the government approached the IMF for extended credit facility worth about $1 billion, the latter tagged the credit with the condition of reforming the VAT law. With no other credit source available, the Bangladeshi government obliged.

“In 2012 the AL-led grand alliance government enacted a new VAT and Supplementary Duty (SD) law to enlarge the VAT net and introduce a uniform VAT rate of 15% by replacing the multiple rates.”

When the government launched discussions on the draft of the new VAT and SD laws with various stakeholders, the businesses opposed the idea of uniform VAT and disputed the level of exemption given in the turnover tax. The government incorporated some of the features of the new VAT regulations into the 1991 VAT law with the intention of putting them in effect by the year 2015. However, this was not to be.
The enforcement was delayed for two years, much to the disappointment of the IMF, fearing adverse reaction from both businesses and consumers. In the meantime, the National Board of Revenue (NBR) engaged itself in intense negotiations with the representative bodies of businesses. One of the leading spokesman for businesses, the Federation of Bangladesh Chamber of Commerce and Industry (FBCCI), placed a long list of proposals seeking amendments to the new VAT law. The government accepted some of the demands but disputes over the uniform VAT rate continued. Yet the Finance Minister in his last budget speech announced the government’s plan to enforce the new VAT law from the current financial year (2017-18) that incorporates provision for a uniform VAT rate of 15%.
However, the announcement of the budget led the minister to face blistering attacks. This was further exacerbated due to his proposal to impose excise duty on bank account balances for amounts exceeding Tk 100,000. Hence, not surprisingly the new VAT law also became the target of widespread criticism. Finally, the Finance Minister under the guidance of the Prime Minister Sheikh Hasina, deferred the enforcement of the new VAT law for another two years.
The deferral, though made under somewhat uneasy circumstances, was a right move for a number of reasons. Had the government enforced the new VAT act, in all probability, the NBR might have placed itself in a position of great embarrassment. The reason mainly being the unwillingness and unpreparedness of both the taxmen and the businesses to meet certain requirement of the law.
For instance, many businesses are yet to be adequately familiar with the requirements under the new VAT law. Furthermore, the introduction of electronic cash register (ECR) machines in business establishments is one of the main conditions of the new law. NBR promised to import ECR machines and make those available to businesses at effective prices. Since the import of these ECR would be done over several months, immediate implementation of the decree was unreasonable.
More importantly, the postponement of VAT law unsettled all the math the Finance Minister had done to bankroll the budget for the current fiscal year. The NBR estimated mobilization of an additional revenue of Tk 200 billion due to the enforcement of the new VAT bill. It was expected that the Finance Minister would make a revision of the estimates prior to the adoption of the budget by the national parliament. With this promise not being acted upon, the plan is centered on reviewing the current year’s budget earlier than scheduled.
The government’s decision to enforce the new VAT law from this fiscal year and later postponing the same for reasons of upcoming national election had surprised many. With the ruling party leaders and opposition groups being fully aware of the backlash from a higher VAT rate and with elections looming in the horizon, how the VAT increment law was approved remains a mystery. Moreover, the budget is a collective responsibility of the entire cabinet and the government. And the Finance Minister should not have to shoulder the blame alone for the guffaw.
Now that the new VAT law is shelved, the scope of mobilizing a greater volume of revenue has become very limited. During the last few years, the tax revenue growth was more than the previous year’s, even though it fell short of the annual targets.
The revenue from import duty was more or less stagnant and that from income tax did record growth but it was well below its potential. After that, VAT and income tax remain the major source of government revenue. But, because of built in deficiencies in the tax administration and general propensity to evade tax payment, the income tax growth has remained more or less unsatisfactory.
The government has skipped the enforcement of VAT law to avoid annoying the businesses and the consumers ahead of the next general election. But it has failed to appease one of the greatest financial bodies in the world-the IMF. The last tranche of the $1.0 billion IMF’s ECF has not been disbursed. The government is likely to face a very tough situation while managing the same.
Critics of the international multilateral institutions might take comfort in the postponement of the new VAT law that was designed to reform the entire VAT system and stop revenue leakages. But they, apparently, tend to forget the issue of the need for higher volume of revenue to finance development projects, big and small. The Executive Committee of the National Economic Council (ECNEC) over the last few years approved mega projects worth over a trillion taka.The government has put forward no plans on how they intend to finance these projects. To hope that these projects will be successful without the intervention of these international bodies would be naïve.
There is no denying that tax reforms do, in most cases, cause great pain to the general consumers and low income people. Perhaps, the blow would be lessened if the money they pay to the government is utilized properly for attaining the right objectives.


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