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Bangladesh is finally going to implement a single and uniform VAT rate, ending the two-and-a-half-decade system of multiple VAT rates for different goods and services.
From July 1, people from all walks of life will have to pay 15 percent VAT (Value Added Tax) on most goods and services.
Over the last several years, the government dithered over the introduction of a uniform VAT rate amid fears that such move would cause a spike in living costs.
However, Finance Minister AMA Muhith yesterday offered VAT waiver on a host of essentials and services, including edible oil, sugar, basic education, healthcare and medical services as well as life-saving drugs.
He also tried to make the business community happy by fulfilling most of its demands.
Despite the waiver and the revenue authorities' repeated assurance of price stability, concerns of a price spiral remain in the country where allegations of low ethical standards and price manipulations are rife.
Many consumers fear that unscrupulous businesses may charge them higher prices than usual on the excuse of imposition of a flat VAT rate.
Electricity, branded garments, paper, biscuits, rod, jewellery, furniture, tissue paper and apartments will see their VAT rates go up to 15 percent from varied rates that have been applicable to them under the existing VAT Act 1991.
The National Board of Revenue recently suggested that the Power Division don't hike tariff, and that it claim rebate so electricity price doesn't go up for the increase in VAT to 15 percent from 5 percent now.
Eating at non-air-conditioned restaurants would be costlier as VAT on those would go up to 15 percent from 7.5 percent.
Rod and brick prices may also increase due to an end to the existing tariff value-based VAT.
Many consumers fear they would have to pay more for biscuits, paper and exercise books.
Muhith, however, said the prices of essential commodities are likely to come down as those are exempted from VAT.
Their prices are not supposed to increase under any circumstances, he said.
The new VAT system uniformly spreads the tax burden at every stage of transaction and doesn't create unnecessary tax burden at any particular stage, claimed the finance minister.
“It allows the taxpayers to pay VAT only on the value addition they make at their end.”
But Azharul Haque Azad, president of Fashion Entrepreneurs Association of Bangladesh, said it would be difficult for many businesses to claim rebate.
He said 80 percent of the suppliers of local fashion houses are weavers, and they don't have VAT registration and usually don't keep records.
“So, we will not be able to claim rebate,” said the president of the lobby group of local boutique houses.
“Ultimately, the burden of the additional VAT will fall on the buyers' shoulders.
“If 15-percent VAT is imposed on handloom saris, their prices would automatically rise. Customers would feel discouraged to buy them and the weavers' production will be affected,” he said, adding that only 4 percent VAT is now imposed on branded garments.
Azharul, who owns fashion house Sadakalo, also feared that some businesses may start charging buyers extra before July 1 when the new VAT law comes into effect.
VAT was introduced in 1991. More than two decades later, the government formulated the VAT and Supplementary Duty Act, which provides for imposition of a uniform VAT rate.
The government had initially planned to implement the new law from July 2015, but it backtracked twice amid opposition from businesses, which said their concerns were not addressed properly in the law.
Revenue officials say the new law has been framed to boost revenue collection from domestic economic activities, as the existing law suffers from various limitations such as package VAT.
The economy has expanded a lot over the last several years but potentials for increasing revenue collection cannot be tapped fully without going for a new VAT law.
VAT is now the biggest source of revenue. It accounted for nearly 36 percent of the NBR's total revenue collection of Tk 150,000 crore in fiscal 2015-16.
The government has set a VAT collection target of Tk 91,344 crore in the coming fiscal year, around 33 percent higher than the revised VAT collection target of Tk 68,768 crore in the outgoing fiscal year.
At present, VAT rates ranging from 1.5 percent to 10 percent are applicable to more than 80 products, including newsprint, biscuits, paper, rod and bricks, and nearly 20 services.
But the VAT rates would go up to 15 percent with the imposition of a uniform VAT rate from fiscal 2017-18.
“This rate will be 15 percent, which will be unchanged over the next three years,” said the finance minister.
Many consumers and businesses have already become accustomed to paying 15 percent VAT since 1991, he said.
A considerable milestone towards implementing the new act was achieved by incorporating some structural changes in the new law, proposed by the business community on several occasions, mentioned the minister.
“Now the business community is also ready to accept and welcome the new VAT.”
VAT appears to be one of the best forms of tax. But some businesspeople don't want to keep accounts at different stages of production and service delivery under the VAT system, he said.
Of the 8.5 lakh registered firms, only 32,000 pay VAT, the minister pointed out.
The government hopes the number of return filers would go up to 60,000 within the next two years.
To make businesses happy, Muhith suggested raising the VAT-free turnover ceiling to Tk 36 lakh from Tk 30 lakh. The firms with this annual turnover will be completely out of the scope of tax.
He also proposed raising the threshold for registration under VAT to Tk 1.5 crore a year from the existing Tk 80 lakh, and also imposing 4 percent turnover tax on the businesses.
Revenue officials say the raise in threshold would cause an estimated loss of Tk 10,000 crore in revenue.
The minister termed the increase in the turnover ceiling “a unique opportunity for small entrepreneurs”, which is not available in other countries.
Several changes have been incorporated in the new law to simplify the VAT collection procedures according to the proposals of the business community, he said.
He also suggested keeping 1,666 items under the scope of supplementary duty on import, instead of bringing down the number to 170 as envisaged in the new law, to protect the interest of domestic industry.