VAT is again at the centre of pre-budget discussions as the day of budget presentation is drawing nearer. The discussion has gained momentum as media reports indicate that a new law envisaging a single VAT rate has been drafted by the National Board of Revenue (Revenue) presumably in line with the views of the International Monetary Fund (IMF).
Indications are there that a flat rate of 15 per cent VAT will replace the differential rates in the existing structure of VAT and supplementary duty. Already concerns are being raised about the probable impact that a single rate of VAT is going to make on various sectors of the economy. A single rate VAT, as envisaged in the new law, is generally applied to the broadest possible base and becomes essentially a proportional tax on consumption and therefore regressive. Multiple rates of VAT are offered along with a range of exemptions to address this problem even though such provisions have a negative impact on the effectiveness and efficiency of VAT. But being regressive is usually a greater issue for developing countries where a large proportion of the population lives in poverty. For this reason, our country, like many developing countries, adopted multiple VAT rates with the lower rates applying to necessities such as food and utilities as well as exempting a wide range of goods and services. Empirical studies on VAT adopted in developing countries have revealed that such measures address the problems of regression and make tax more progressive.
It is feared that many local industries will be faced with increased competition against imported products and may be forced to curtail production if the new law comes into effect from the next fiscal. If the entrepreneurs are required to pay VAT on import of capital machinery a flat rate of 15 per cent, as proposed in the draft new law, cost of business will go up augmenting prices of many commodities and services. It is not the cost of business alone, living costs will also rise with rise in commodity prices pushing the household expenses higher alongside operating costs of business. For example, VAT on current rate of electricity is 5.0 per cent and if it is raised to 15 per cent under the new law, not only the cost of operating businesses will rise, household expenses will also be upped.
In common with many other countries, Bangladesh has introduced VAT to raise sufficient tax revenues to fund its economic and social development. Therefore, the intention of the government to raise revenue collection is understandable. The new law on VAT is expected to raise revenue collection by 20 per cent which will help us pursue our development activities and achieve higher growth in the coming days. But the flat rate of 15 per cent is going to create a few problems which should also be taken into consideration to maintain parity in economic arena.
The experience in Bangladesh regarding VAT is somewhat mixed. Simplification of VAT rules is necessary. This simplification may be done through expanding the tax net so that more and more people can see what others are doing in respect of VAT and compare their position with those of others. Imposition of single rate of VAT, on the other hand, may jeopardise the profit situation of many industries. The policymakers should give it a serious thought and contemplate expanding the list of exemptions before introducing a single rate of VAT on all sectors of goods and services.
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