New law to boost tax receipts by 20pc: study
The implementation of the new VAT law will boost revenue collection from domestic sources by as much as 20 percent, according to a government-sponsored study.
Conducted by the Policy Research Institute, the study found that revenue receipts from local sources will rise by up to Tk 8,481 crore over the amount recorded in fiscal 2013-14. Some Tk 42,900 crore was collected that year.
In a modest scenario, the revenue gain is estimated to be 15 percent, or Tk 6,394 crore, over the collected amount in fiscal 2013-14, according to the study, which was submitted to the National Board of Revenue.
The domestic revenue gains would primarily result from abolishing the tariff value system and replacing it with market values, it said.
The move alone would account for more than 90 percent of the increase in domestic VAT and supplementary duty revenues.
The study was conducted to estimate the impact of implementing the Value Added Tax (VAT) and Supplementary Duties Act on tax revenue and consumer price index.
Passed in December 2012, the law is expected to be effective from July 1 next year and replace the present law passed in 1991, which analysts and revenue officials say suffers from shortcomings.
Businesses however are not happy with some of the provisions of the new legislation and are seeking revision before its execution.
The latest law, which was framed at the prescription of the International Monetary Fund, is envisaged to eliminate the truncated tax base for certain products and services and tariff values established in an ad-hoc manner on certain imports.
It also aims to reduce the list of products subject to SD at the import stage, withdraw many of the exemptions and bring some products under the 15 percent VAT from the present 10 percent.
The changes will have impacts on revenue collection from the VAT system as well as on the final prices of related products, it said.
The overall cost of living measured in terms of consumer prices may also be impacted through these changes on the tax base and rates, said the PRI study.
The impact at the general price level (economy wide) may vary from 0.7 percent to 0.4 percent. The corresponding impact at the consumer price level may vary from 0.9 percent to 0.5 percent.
Accordingly, the overall price increase to be faced by the consumers is likely to be limited to less than 1 percent, it said.
On the basis of these two estimates, it may be argued that if the reforms embodied in the new VAT law are phased over a two-year period, the impact on the domestic price level would be limited to less than 0.25 percent to 0.5 percent a year.
On supplementary duties or SD, it said the number of goods subject to it at the import stage is expected to be cut to less than 200 from almost 1,400 now. The reduction of SD rates from 13 slabs to nine and exclusion of products from SD may also lead to a large revenue loss at the import level.
The study estimates it will be around 40 percent from the amount collected in fiscal 2013-14, which was Tk 4,170 crore.
However, the overall revenue collection at the import stage will rise 3.7 percent, or Tk 1,224 crore, from that recorded in fiscal 2013-14 for implementation of the new law.
Imports fetched Tk 33,100 crore that year.
PRI also said the reduction of products under SD will lead to a decline in the average nominal protection rate (NPR) -- the percentage tariff imposed on a product as it enters the country.
For example, if a tariff of 20 percent of value is collected on clothing as it enters the country, then the nominal rate of protection is 20 percent.
The substantial reduction of items subject to SD will obviously reduce the average nominal protection rates for all the related categories of products and the impact will be significantly more for finished consumer goods, according to the study.
It said the average NPR will decline 13 percentage points to 15.2 percent primarily because of the rationalisation of SD structure.
The loss of protection will primarily be limited to final consumer goods, which currently enjoy an average NPR of 50.7 percent, one of the highest in the world.
After the customs duty rationalisation, the average NPR on final consumer goods will come down to 23.3 percent, it added.
From trade policy and resource allocation perspectives, this reform will be very important and will also support the export-led growth strategy that the government is currently pursuing, it said.
At the same time, some industries which are operating under the current highly protective trade regime will face enhanced competition and may resist this move, said PRI.
The government started reducing SD rates from fiscal 2014-15.
The new VAT law also aims to reduce the list of VAT exempted items.
But the study said there are uncertainties regarding the scope and extent of possible withdrawal of VAT exemptions at the import and domestic stages given the political sensitivity, diplomatic protocols, humanitarian considerations, sensitive consumables due to consumers' interest protection.
In its study, PRI also said the comparative static analysis, which does not and cannot capture the potential systemic improvements, suggests moderate revenue gains from the new structural shifts in SD rates and the VAT tax base.
Significantly higher revenues may be collected in subsequent years with efficient functioning of the VAT chain, improvements in VAT registration and compliance, modernisation and reforms of the VAT administration. However, the potential gains cannot be quantified, although the upside revenue potential is enormous, the study added.
Ahsan H Mansur, executive director of PRI, and Bazlul Haque Khondker, an economics professor of Dhaka University, conducted the study.
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