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TAXING THE DIGITAL ECONOMY

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It is safe to say that the budget speech delivered by the honorable Finance Minister AHM Mustafa Kamal, on 13th June 2019, had all of us reeling. The budget will be the first for the Finance Minister, who took charge of the ministry in January this year. It is also the first one of the current government since retaining power in the national elections in December last year.
The new budget will provide directives on reforms in education and financial sectors and incentives for the stock market, the finance ministry added. The budget has come up with new directives for the National Board of Revenue on how to simplify the revenue-generating process. It will also have directives on implementing the new VAT law, which will have more than one VAT rate. Even if the targets in the budget are far-reaching there will be wholehearted efforts to attain them, the finance ministry stated.
Perhaps this zeal to attain these overarching goals is what encouraged the government to propose a 7.5% VAT on e-commerce entrepreneurs. Under the new proposed budget, e-commerce businesses have been ascribed under ‘Social Media and Virtual Businesses’. By definition, any kind of sales transactions made by usage of electronic media, through the internet, by means of social media or mobile applications, belongs to this category.

VAT IS HAPPENING?
The proposed VAT rate has been met with extreme opposition by members of the e-commerce industry in Bangladesh who have labeled the planned 7.5% VAT as a ‘travesty’. They cite that the imposition of the new VAT is in direct contradiction to the governments vision of ‘Digital Bangladesh’.
Members of the Bangladesh Association of Software and Information Services (BASIS) and e-CAB (e-Commerce Association of Bangladesh) have strongly voiced their disapproval regarding the new tax and have urged the government to revoke it. Didarul Alam, Director of BASIS have been quoted to say that, “Imposition of such an amount of VAT will reduce the growth rate, and act as a restraint for e-commerce entrepreneurs to promote employability.” Indeed, this is true for a price sensitive consumer market such as Bangladesh where retail margins stand currently in single digits. In fact, in order to bolster the industry, VAT should be held at 0% till the year 2024. This view is held by industry leaders as well, Adnan Imtiaz Halim, CEO of Sheba.xyz, has said that while the government’s efforts to further the work of startups is much appreciated, a 7.5% VAT is ill advised and will set back the industry.
A closer look at the past VAT shows that this is not the only time that the government has tried to impose VAT on e-commerce. Ex-Finance Minister, AMA Muhith proposed a VAT on e-commerce at 5% in the budget for fiscal year 2018-19. The businesses included those that operated on Facebook. However, National Board of Revenue (NBR) chairman Md. Mosharraf Hossain Bhuiyan, went on to save the day when he pointed out that the budgetary provision to impose 5% Value Added Tax on e-commerce businesses was a “printing mistake”. He clarified that a process has been initiated to bring virtual businesses like Facebook, YouTube, and Google under tax net. E-commerce businesses were exempted from this tax bracket. Similar effort was made in 2015, when a VAT of 4% was attempted to impose on e-commerce, but failed due to increased protests from the stakeholders.

VAT YOU NEED TO KNOW
Government’s continued efforts to impose a VAT on e-commerce sectors takes its root in the profitability of the sector and the NBR’s despair to generate greater revenue from VAT collection. The size of the e-commerce market crossed TK 17 Billion in 2017 from TK 4 Billion in 2016 according to the data provided by e-CAB. All this growth has been generated by the customers in Dhaka alone. Expansion of e-commerce to other cities and even the rural regions means the possibility of exponential growth for the sector. It is expected that the industry will further grow to TK 70 Billion by the year 2021.
Couple this information with the National Board of Revenue expectation to collect about TK 11,000 crore more from VAT on various goods and services and increasing rates on many others, the 7.5% VAT on the e-commerce suddenly makes sense. The NBR’s collection target from VAT in the incoming fiscal year is TK 117,672 crore. This year, it is expecting to collect TK 81,820 crore, meaning it has to come up with new ways to bring home an additional TK 35,852 crore in fiscal 2019-20.
However, what is equally frustrating is the flippy floppy stance of the government which has been accused of sending confusing messages to members of the e-commerce sector and thus put them in an uncertain business environment. At the beginning of this year, commerce ministry took up a plan to train up about 5,000 e-commerce entrepreneurs. Furthermore, global reports clearly state that 70% of the businesses across the globe would be conducted online by 2025. “Does the ideology of creating 5,000 e-commerce entrepreneurs and the 7.5% VAT not controvert?”asked Fahim Mashroor, ex-President of BASIS.
Uncertainty in a business environment means greater instability for the businesses operating in a particular sector. This in turn means fewer businesses will be investing in the sector and growth either dwindles down or stops all together. In other words, say goodbye to receiving investment (both foreign and local) in the future. Deligram, an e-commerce startup raised US $2 Million in series A investment. Just before Eid, we came across the piece of news that local e-commerce platform, Sindabad.com has received $4.15 million from Aavishkaar Frontier Fund (AFF), a venture fund managed by Aavishkaar, a leading Asian impact investment company. Continued threats of VAT imposition of 7.5% can seriously hurt such investments in the future.

The proposed VAT rate has been met with extreme opposition by members of the e-commerce industry in Bangladesh who have labeled the planned 7.5% VAT as a ‘travesty’. They cite that the imposition of the new VAT is in direct contradiction to the governments vision of ‘Digital Bangladesh’.

VAT WILL YOU DO WHEN THEY COME FOR YOU?
But the e-Commerce industry is not going to take the new proposed VAT sitting down. e-CAB organized a press conference to discuss the new budget. It was attended by some of the leading companies such as Chaldal, Pathao, Daraz, Sheba.xyz, Ajker Deal, Bagdoom and Priyoshop to show support to withdraw the proposed VAT.
Shumi Kaiser, President of e-CAB, has stated that the importance of e-commerce in adhering to the vision of ‘Digital Bangladesh’. She highlighted how the burden of the VAT falls unfairly on the entrepreneurs as they will have to shoulder the incidence of the VAT twice. The entrepreneurs pay a VAT when they are buying the product and then again when the product is sold. This tax incidence can either be borne by the entrepreneurs or passed on to the consumers as a form of high prices. Either way the end result is that the business suffers. She also highlighted that our neighbor, India has an e-commerce sector which is much more advanced than that of Bangladesh, yet VAT is still not implemented as the sector is considered to be crucial for the development of the country.
The case against the VAT was further strengthened when members of the government also voiced their concern. State Minister for Post, Telecommunications and Information Technology Zunaid Ahmed Palak, has requested National Board of Revenue (NBR) to withdraw the 7.5% VAT from e-commerce businesses. The minister took it upon himself to write to the NBR to request the withdrawal of the VAT, a mere five days after the budget was presented before the parliament.

VAT NOW?
The NBR hopes to collect half of their target by introducing four main VAT rates. The government proposed multiple rates of VAT under the VAT and Supplementary Duty Act 2012, diverting much from the spirit of the law when it was formulated in 2011.
A new VAT law will take effect from July 1. Under the new law, the NBR has proposed 5% VAT on most of the 84 products on which it collected the tax on tariff or assumed value. These include spices, biscuits, paper, LP gas, transformers, buses and water vessels.
Unfortunately, these revenue generating efforts takes focus away from the imposing problem of the poor collection of income tax in Bangladesh. Only 1.5 million people pay tax, causing Bangladesh to have the lowest tax-to-GDP ratio in South Asia. The country has failed to collect tax and non-tax revenues in line with its economic growth momentum. The end result is a disproportionate reliance on VAT to generate revenue for the government.
“The budget will promise to turn the dreams of 16 crore people into reality. This is not a budget for just a single year; it has been prepared keeping in mind the far-reaching goals, including the 2041 goal”, stated the new Finance Minister. While being ambitious has its virtues, haphazard ideas of slapping taxes on small but flourishing sectors of the country will not help the country move forward.

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