The country's value-added tax (VAT) revenue from domestic sources was reduced by an estimated 3.26 per cent of GDP in 2022 due to various waivers and exemptions, according to a study, calling the declining VAT flow "concerning".
The study by the National Board of Revenue (NBR), published on Thursday, analysed revenue forgone, resulting in Tk 1.29 trillion in that year due to VAT exemptions and reduced rates.
The food and beverage sector was the largest beneficiary of VAT exemptions, accounting for 2.25 percent of GDP.
Clothing and footwear followed at 0.20 per cent of GDP, then housing and housing rent at 0.04 percent, fuel and lighting at 0.08 percent and medical expenses at 0.07 percent of GDP.
The education sector received the lowest VAT exemptions benefit -- a meagre 0.02 per cent of GDP.
The study covered 699 consumption expenditure items from the Household Income and Expenditure Survey (HIES) data of 2022, conducted by the Bangladesh Bureau of Statistics (BBS).
The VAT Exemptions and Reduced Rates (VATE) Study Report 2023-24 revealed these findings, underscoring the need for policy revisions following a constant decrease in net VAT revenue as a percentage of GDP, calling it "concerning".
For the first time, the report also compared the VAT exemption scenario for both pre- and post-Covid periods.
The study's scope covered all significant areas of VAT exemptions, including exemptions, reduced rates, statutory regulatory orders (SROs) and others.
The report identified room for improvement in VAT exemption reporting and put forward a set of recommendations.
The recommendations include streamlining exemptions, removing ineffective sectors, redefining eligibility criteria, assessing the distributional impact and conducting periodic assessments and evaluations.
"Regular assessments of revenue forgone due to VAT exemptions should be conducted annually as part of efficient tax policy development and published as part of the regular budget process," the report said.
It also recommended streamlining input tax credit and VAT refund processes.
"The NBR should consider simplifying the input tax credit claims system and expediting VAT refund processing to reduce the reliance on extensive VAT exemptions," it said.
With the aim of increasing transparency and accountability in the VAT system, the revenue board has, for the first time, estimated VAT exemptions. This report incorporates the results and analysis of this estimation exercise into the national budget. This VAT exemption report is a valuable resource for policymakers, providing valuable insights into the fiscal and economic impact of existing VAT exemptions.
It will help lawmakers enhance transparency, assess policy effectiveness, promote accountability, improve decision-making and examine the distributional impact of various VAT exemption-related measures. These will ultimately lead them to informed and evidence-based decision-making when formulating fiscal policies in the long term.
The report was supervised by Hossain Ahmed, member, Value-Added Tax (VAT) Policy. Abul Bashar Md Shafiqur Rahman, commissioner, was the team leader and Md Tariq Hassan, joint commissioner, was the principal contributor.
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