VAT reform

Value Added Tax (VAT) has been a debatable topic for nearly three decades, with no definitive solution to address concerns within the business community. Despite policy shifts and sporadic changes over the years, a conclusive remedy remains elusive. Against this backdrop, the National Board of Revenue (NBR) is now actively seeking consensus from businesses regarding VAT rates. This week, the NBR Chairman stated that the government is open to implementing a single, universal VAT rate if the business community reaches an agreement. Speaking at a pre-budget meeting with leaders from the Foreign Investors' Chamber of Commerce and Industry (FICCI) and the Metropolitan Chamber of Commerce and Industry (MCCI), he emphasised the need for a more disciplined VAT regime.

Recognising the need for disciplining the VAT regime, the NBR chief suggested a lower rate, if needed. Elaborating NBR's stance, he added that if a single VAT rate can be fixed and if everyone takes input VAT credit, there will be no need to pay VAT at 15 per cent and 7.5 per cent. In this connection he said that implementation of the VAT law had undergone many twists and turns since 2012 amid protests and differing opinions. However, the commitment of the NBR had always been to implement a single VAT rate. It is generally believed that the existence of multiple VAT rates has led to inconsistencies, with some rates appearing arbitrary. Currently, the standard VAT rate in Bangladesh is 15 per cent, but specific goods and services are subject to lower rates of 5.0 per cent, 7.5 per cent, and 10 per cent. Bangladesh depends on VAT for more than one-third of its total tax revenue. Despite the significant role VAT plays, the authorities could not render the VAT law and its implementation business-friendly although the law underwent significant revisions in 2012 and was further amended in 2019.

VAT has been one of the most significant developments in tax administration in recent history. Its widespread adoption across various countries highlights its importance. Like many other middle- and low-income nations, Bangladesh was encouraged by the International Monetary Fund (IMF) to adopt VAT in 1991. This tax replaced excise duties on domestic production and sales tax on imports. Globally, three primary VAT models exist-- the European, New Zealand, and Japanese models. Bangladesh initially adopted the New Zealand model, which is known for its efficiency and simplicity.

The interim government in the meantime has issued several notifications to temporarily revoke or reduce VAT rates for specific products and services. However, the most practical approach would be to achieve a consensus among businesses on the most effective VAT structure. While the NBR advocates for a single VAT rate to ensure simplicity, it is essential to carefully assess the advantages and disadvantages before finalising any changes. A well-structured VAT system can contribute to economic growth while ensuring benefit for both businesses and consumers from a fair and transparent tax regime. Therefore, policymakers must engage in constructive dialogue with the stakeholders to devise a VAT system that balances simplicity, fairness, and economic efficiency.