Playing too much with law or anything else does always bear the risk of producing unpalatable results. That is what a noted economist Prof. Wahiduddin Mahumd, as the media reported, reminded the country's revenue authority at a pre-budget view-exchange meeting last Sunday.
The warning came from Prof. Mahmud as the government is set to put into effect one new tax law -- the Value Added Tax (VAT) and Supplementary Duty (SD) Tax Act-2012 from July 01 next and another -- the Direct Tax Code (DTC) from July 01 in the year after, that is, 2017.
He has cautioned all concerned that 'too much of improvisation in the tax front may backfire'.
Since the enforcement of the new VAT and SD law - that is intended to enhance VAT rates on consumer products and services and cut protection so far given to domestic industries -- is only months away, debates and discussions would obviously be centred on it.
The DTC too will take away many exemptions and rebates. The debates over, and opposition to, that law are expected to gather momentum as its enforcement draws nearer.
Taxmen, it is understood, are also not sure about the success of the DTC. In neighbouring India, the DTC was introduced in parliament in 2009 but it is yet to be enforced. Some provisions of the DTC Bill have already been incorporated into the archaic income tax law of that country and indications are galore that the DTC in India would be abandoned, finally.
So, in the Bangladesh context, what is relevant now is the new VAT & SD Act that many tend to believe has come at the insistence of the International Monetary Fund (IMF). Its formulation and enforcement had figured in the conditions set by the Fund, ahead of its approval of the extended credit facility worth $987 million for Bangladesh in April 2012. The tax-related changes were suggested as part of the Bangladesh government's structural reforms aimed at mobilising a greater volume of resources. The Bangladesh authorities agreed to create fiscal space by increasing tax revenues and containing subsidy costs, reinvigorate the financial sector through strengthened governance and oversight, and take other reforms aimed at catalysing additional resources.
The government, in line with the promise it had made to the IMF, asked the NBR to frame a new VAT and Income Tax (IT) law. But opposition came instantly from the businesses which would have to bear with possible-ill-effects of the tough new laws. The government was forced to hold talks with the trade bodies that led to a few amendments to the draft VAT and SD Act. It was on the horns of a dilemma with businesses on the one side and the IMF on the other. However, despite being a bit watered down, the VAT & SD act was finally passed by the parliament. But businesses continued their opposition to the law.
As if to prove Prof. Mahmud right, the NBR has lately prepared a paper for the Finance Minister where it has noted that the enforcement of the VAT & SD Act is likely to produce quite a few unpalatable developments. The Act is loaded with enough ammunition to release such results.
'The cost of doing business may rise and local industries may face stiff competition with imported products as the level of protection for domestic industries will be reduced', NBR says in its analysis paper.
The observations made in the NBR about the possible impact of the new tax law at this stage will raise a few eyebrows among the stakeholders.
Maybe, the fear expressed by the NBR is justified. But it is none but the NBR that has prepared the Act and held a series of meetings with the businesses and other stakeholders prior to its adoption by the national parliament. The trade bodies have repeatedly opposed a number of provisions, including the 15 per cent flat rate of VAT on all products and services and reduction of protection level extended so far to domestic industries. Now the NBR itself is expressing fear about the negative impact of the same provisions!
In addition to mobilising a greater amount of revenue, one major objective of the new VAT & SD Act is to stop large-scale evasion of VAT. Prof. Mahmud has reportedly expressed the fear that any radical move taken in haste might trigger unwanted results and jeopardise the past achievements, in terms of revenue mobilisation.
The same is true in the case of the IT law. Actions, no doubt, are necessary to reduce the level of tax evasion. But the prime task of the taxmen should be to bring the maximum number of potential taxpayers under the tax-net. There must be a few other simple ways of getting a sizeable volume of tax revenue. The NBR needs also to explore those.
But a change in the tax benefits now being extended to domestic industries is a must. Instead of making sincere efforts to acquire the ability to compete with imports, these industries are finding the tax and duty exemptions extended to them as their right. But they, in most cases, are reluctant to pass on the benefits of tax exemptions to the general consumers. There cannot be any one-way traffic.
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