The government should conduct an in-depth cost benefit analysis of the possible changes in the new VAT law, and focus on transition of the existing VAT payers to the new regime, the International Monetary Fund (IMF) opined.
The fiscal impact of any change to the existing rules should be analysed for detailed revenue forecasting of the VAT reform, it also said.
"The NBR should, without delay, carry out a fiscal analysis of the VAT reform package as a whole, including any policy change, yet to be announced, in order to inform the government's decision-making and revenue forecast for the fiscal year 2019-20 and beyond," it added.
In a recently submitted report on 'Modernising Revenue Administration', the multilateral development partner also found significant compliance risks in introducing the multiple rates of VAT instead of the IMF proposed uniform rate of 15 per cent.
The report was prepared by an IMF mission, led by Aksel Sorensen of its Fiscal Affairs Department and comprising of Janos Nagy, Mark Jackson, Annette Chooi, Darryn Jenkins and John Middleton.
The mission has completed its review on the country's revenue administration modernisation from March 11 to March 24, after discussing with the departments concerned.
The IMF mission sent the report to the NBR on March 27, seeking opinions of its Income Tax, VAT and Customs wings.
The VAT and Supplementary Duty Law 2012, passed by the parliament in 2012, is scheduled to come into effect from July 1, 2019.
The government framed the law as per condition of the IMF's extended credit facility.
According to the government's recent decision, the new VAT law will be implemented with multiple VAT rates instead of the IMF's prescribed single rate of 15 per cent.
"The experience of many countries with a multi-rate VAT system is that it is more vulnerable to significant revenue leakages," the IMF report said.
Taxpayers, selling goods chargeable at different rates, often misclassify goods, either accidentally or deliberately, and report VAT outputs at a lower rate than the law requires, it added.
"A single-rate VAT structure, with a few exemptions, is most apt to facilitate compliance and to ensure high revenue efficiency."
Multiple rates give rise to many administrative complications and impair the revenue administration's ability to efficiently enforce the legislation, the IMF added.
Manzur Ahmed, Trade Policy Adviser of the Bangladesh Chamber of Industries (BCI) and an expert on VAT law, however, expressed his different views on the IMF's report.
He said revenue collection will increase with the planned amendments of the VAT law with multiple rates. The best provisions of the new law will be incorporated in the amended law.
All of the developing countries, including India, have multiple rates of VAT, he also said.
The amended provisions of the new VAT law will facilitate growth of the small and medium enterprises (SMEs), he added.
However, Dr Ahsan H Mansur, Executive Director of the Policy Research Institute (PRI), said the IMF's concern is valid, as there will be significant decline in revenue collection with the introduction of multiple rates of VAT.
"With the planned amendments, the new VAT law will be even worse than the existing VAT law, framed in 1991."
The government has planned to incorporate four VAT rates in the new law - 5.0, 7.5, 10 and 15 per cent.
Dr Mansur said even expansion of VAT net will hardly help the government to coup with the loss, to be incurred due to the change in VAT rates.
He also suggested an impact analysis before implementing the new law with the amendments.
"There is realistically inadequate time before July 1, 2019 to conduct this analysis, and to implement the required education and registration processes for a significant number of new VAT payers," the IMF opined.
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