Five VAT rates on cards

The government is likely to whittle down value-added tax rates to five from existing seven as it is getting ready to implement the new VAT law from the next fiscal year, seven years after its enactment.

This means, the government will move away from a uniform 15 percent VAT rate envisaged in the VAT and Supplementary Duty Act 2012.

The five rates are 2 percent, 5 percent, 7.5 percent, 10 percent and 15 percent.

The multiple rates aim at reducing pressure on consumers and small businesses, according to officials.

To offset the impact of revenue loss, the government is going to keep 15 percent VAT on various goods and services, by automating the VAT system, from July 1.

However, the full implementation of the much-talked-about law would take place in phases.

The finance ministry had initially planned to introduce three VAT rates and informed the IMF about it.

Finance Minister AHM Mustafa Kamal told the media after a meeting on March 31 that the new law would comprise three rates: 5 percent, 7.5 percent and 10 percent. 

At the same event, Md Mosharraf Hossain Bhuiyan, chairman of the National Board of Revenue (NBR), said the 15 percent standard rate would also continue along with the three rates.

Currently, 15 percent VAT is applicable on sectors such as cigarette and telecommunications and these two sectors account for more than 45 percent of the total VAT collection. So, a cut in the rate will cause VAT receipt to decline, said officials of the NBR.

The NBR collects VAT on 84 products, including, powdered spices, biscuits, LP gas, paper, exercise books, bricks and rod based on tariff value, or administered value, in order to keep the prices of the items affordable to consumers.

It realises VAT on 16 services based on truncated, or reduced rates of VAT.  

The tariff value and truncated value-based rates may not continue in the next fiscal year. As a result, the prices of a number of goods and services may go up.

To reduce the impact, the government is considering 2 percent VAT on some essential products and services in the next fiscal year, said officials.

Framed at the prescription of the International Monetary Fund (IMF), the law originally envisaged a uniform 15 percent VAT, sparking protest from businesses, particularly from the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) on grounds that the enforcement of the law would hurt small and medium businesses and stoke inflation.

In the face of the protests, the government thrice deferred the enforcement of the new law, with the latest postponement came in June 2017 that pushed back the enactment by two years.

In order to ensure smooth implementation of the law from 2019-20, Kamal, the NBR and the FBCCI met several times earlier, and all agreed in principle to go for the multiple rates.

To appease businesses, Kamal on several occasions said that the law would be implemented gradually. 

The NBR officials say VAT rebate benefit for goods and services except for the items having 15 percent rate may go as per a government plan. In such cases, the total incidence of VAT may go up for various items.

Muhammad Abdul Mazid, a former chairman of the NBR, said, “It will be challenging to administer the multiple tax system. In the absence of rebate, the scope of VAT will widen.”

He recommended the government form a permanent expert panel to address the problems that will arise during the implementation of the law.

“Focus should be on automating the VAT system fast,” he added.

Ahsan H Mansur, executive director of Policy Research Institute of Bangladesh, said the incidence of tax may go up to 37.5 percent if businesses do not get rebate, or input tax credit. So, it appears that manufacturers will opt for 15 percent VAT to avail the rebate, he said.

He said the multiple VAT rates are present in many countries and a single rate is applied at the all stages of a sector. But, different VAT rates at multi-stage is seen nowhere, he said.

“This is unique in Bangladesh. It is likely to be a convoluted law,” he said.

Apart from imposing multiple VAT rates, the government may also bring more areas under the advance trade VAT and slap 15 percent VAT on all imported items to increase revenue collection. Currently, commercial importers pay 15 percent VAT on imports.

The VAT-free annual turnover limit would be increased to Tk 50 lakh from existing Tk 36 lakh. The ceiling of turnover tax is expected to go up to Tk 3 crore from Tk 80 lakh.

The rate of turnover tax would be increased to 4 percent from 3 percent.