The new VAT (value added tax) law, adopted by the immediate past parliament in November, 2012, was designed to be enforced from the first day of next fiscal (2015-16). Indications are that it is unlikely to happen.
The National Board of Revenue (NBR) might defer the enforcement of the new VAT Act by another year, making it the longest-awaited piece of legislation in the country's history. The Board has not yet announced but a decision to this effect has already been taken.
The way the discords between the NBR and the local businesses have been developing over certain provisions of the new law, which was framed to accommodate suggestions on the part of the International Monetary Fund (IMF), the wait could even be longer.
However, prior to the drafting of the new law, the NBR had consulted all the stakeholders. Even the draft law was amended once in line with the suggestions coming from trade bodies.
The IMF considers the new VAT act as the 'centerpiece' of the government's tax reform programme. The Fund maintains that the act has the potential to substantially improve the performance provided it is properly implemented and effectively administered.
The IMF suggestion to replace the existing VAT law, framed in 1991, with a new law had come since the former suffers from various shortcomings and inadequacies. The major shortcoming, according to the Fund, is that the existing law generates far less revenue than the actual potential.
Besides, the multilateral lender is strongly opposed to varying rates of VAT, which, it feels, is distorting production and consumption choices. It also finds the practices followed in administering VAT as outdated and also burdensome for businesses.
The new VAT law is different from the existing one in many ways. The new law provides for three tax rates: a creditable 15 per cent VAT that is chargeable by businesses with taxable sales above Tk. 8.0 million, a non-creditable 3.0 per cent turnover tax on taxable sales between Tk. 2.4 million and 8.0 million and a supplementary duty of varying rates on sales of specific goods and services.
The new law also intends to bring about a major change by broadening the tax base. Under the law, all economic sectors will be brought within the purview of the VAT net making tax payment on the basis of actual transaction values instead of values fixed arbitrarily. Besides, many areas that are exempted from payment of VAT now will no more enjoy the benefit.
The new measures, according to an IMF estimate, would help increase the tax yield equivalent to 2.0 per cent of the country's gross domestic product (GDP).
However, such a positive growth of tax revenue would not be possible using an outmoded and inefficient tax administration. The tax machinery would require a drastic overhauling to make a major leap forward. That is why the policymakers had granted almost three years' time to gear up the VAT administration.
The progress in this regard would only be visible when the law would be put into effect. But the developments since the adoption of the law point to a frustrating future.
The country's apex chamber body, which was also consulted prior to the drafting of the law, has demanded amendments to certain provisions of the new VAT law, alleging that many of their recommendations had been bypassed during its adoption.
The government also gave in to their demands and formed a seven-member committee to review the businesses' demands. The committee has recently submitted its report, suggesting 10 major changes in the new law. Some of the proposed changes are contrary to the suggestions made earlier by the IMF. The disbursement of nearly $1.0 billion worth of extended credit facility (ECF) was tagged with the adoption of some tax laws, including the new VAT law.
The move to bring about changes has, apparently, irked the IMF. It has already written to the finance secretary not to 'water down' the new VAT law. Any such move might delay the disbursement of the last two tranches of the ECF, it is feared.
The government, it seems, in a catch-22 situation. On occasions, it has demonstrated indecisiveness on the issue coming under pressure from the businesses.
Sceptics suspect that the new law might finally fail to deliver the intended results because of the changes that are now being pleaded for by various interest groups. An unscrupulous section of tax officials is also not interested in it.
Bangladesh was the first country in the region to introduce VAT in 1991. There were criticisms all around. But VAT has emerged the largest tax revenue provider. It has the capacity to mobilise more, provided the relevant policies are perfect and their implementation fault-free.
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