Establishing coordination between Tax, VAT, Customs and Excise

VALUE ADDED TAX RATES AROUND THE GLOBE:  Information on update of VAT rates in 160 countries have been collected and documented in a tabular form. It shows that in the seven ASEAN countries the average rate of VAT is 9.43% - with the highest rate in Philippines (12%) and the lowest in Singapore and Thailand (7%). Among the 19 Asian countries, the average rate is 12.82% - with the highest in Tajikistan (20%) and lowest in Japan and Taiwan (5%). VAT rates in other Asian countries are: Bangladesh (15%), India (12.5%), Sri Lanka (12%), Pakistan (16%), Nepal (13%), and South Korea (10%). In the 53 European countries, the average VAT rate is 19.69% - with the highest in Iceland (25%) and lowest in Jersey (5%). In the Oceania region, the average rate in seven countries is 12.57% - with the highest (15%) in Fiji and the lowest in New Zealand (5%). The average VAT rate in 44 African countries is 16.79% - with Gambia raking the highest (40%) and Nigeria, the lowest (5%). In the 11 South American countries the average rate is 15.36% - with Uruguay ranking the highest (22%) and Brazil, the  lowest (10%). The average rate of 19 Caribbean, Central and North American countries is 13.34% - with the highest (17.5%) in Barbados and the lowest in Canada (5%). The data grouping of 160 countries into seven regions indicates that average VAT rates ranges from 9.43% to 19.69%, Asian average is 12.82% while the ASEAN's, which is the fastest growing area of the globe, is 9.43%.
The 15% VAT rate in Bangladesh is the second highest in the South Asian Region after Pakistan (16%). Independent economic think tanks, leaders of professional business, trade, and industrial bodies have been criticising this high rate since the inception of the VAT law in 1991 with no results. We must not forget that the 1991 VAT law was drafted during the autocratic regime of HM Ershad in 1990. After the fall of the autocratic regime, the newly-elected government in the second quarter of 1991 passed the law for VAT with 15% rate. Many point out that law was not crafted following the best VAT principles and continues without any reform over the past 24 years. Mainly based on so-called Statutory Regulatory Orders (SROs), which, critics allege, are used by departmental officials to determine tariff value and allow exemptions to the favoured, mostly out of connivance. Many argue that under the parliamentary system of government none can exercise such arbitrary power.    
There is ample opportunity to increase the VAT net with the expansion of manufacturing and services in the economy. Many say that if the increased volume of business and service sector are brought under the VAT net while reducing the existing rate of VAT, the National Board of Revenue (NBR) can collect 3-5 times more revenue. For example, NBR currently records 750,000 registered licenses out of which only 40-50 thousand licensees' pay VAT Accumulating to approximately BDT 46,000 crores. If the 750,000 of registered licenses are genuine, then NBR should start bringing the remaining 700,000 under the VAT net in a gradual manner: first year, adding 150,000 more; second year, 250,000; third year 150,000; and so on. It is said that 50% of national consumption is out of VAT net which is also a gold mine for NBR to increase the VAT net as well as revenue.
1991 VAT RULES AND INTERNATIONAL PRACTICE:  Bangladesh introduced VAT system in 1991 and subsequent development is considered as an amalgamation of compromises with the basic principles of VAT. The politicians and the parliamentarians were against the VAT law in 1991. Their perception about this law was that it was induced by the IMF. However, enacting this law was one of the conditions from IMF to get its credit facility. The Finance Minister, who tabled the draft VAT Act, was severely criticised by parliament members from both the treasury and opposition benches. Business community vehemently protested. Despite the protest the VAT law was passed by parliament.
Scholars and practitioners at NBR criticise the current VAT law and practice in Bangladesh from the legal, regulatory, management and administrative contexts. VAT is now a new name for excise - Current Self Assessment and Payment Functions, Control and Formality getting priority every day. Accounting books required by the VAT law are structured differently. The current VAT law and rules do not comply with International Best Practice, and the Registration Process is not congruent with ideal VAT system.
VALUE ADDED TAX AND SUPPLEMENTARY DUTY ACT 2012: Parliament passed the new VAT and SD Act 2012 (Act No. 47 of 2012) on November 27, 2012 which is expected to come into effect from July 01, 2015 according to the existing implementation plan. The Act was also one of the conditionality of IMF's Extended Credit Facility (ECF) programme which is currently being carried out. Accordingly, during the last two years a number of adjustments have been made in the present VAT Act 1991 as part of preparing the relevant stakeholders for the proposed new one. The new Act will cover three forms of taxes, VAT, SD and TT. The key changes brought by the new Act are: broader coverage, VAT will not be applied for certain goods and services, existing price declaration provision has been discarded, VAT registration thresholds have been changed, truncated value base will be discontinued, no existence of the provision for 'Package VAT', no time limit for discount sale, etc. New VAT and SD Act will bring in the automated VAT challan, povide a broader scope to use up input tax credits. There will be no Account Current Register under the new Act, withholding VAT is applicable, will apply standard calculation method, allow the tax to be remitted to Government when the return is due, document preservation for five years will be mandatory, VAT refund system will be simplified, NBR will be vested with additional powers to hold company directors liable to recover tax arrears,  and alternative dispute resolution (ADR) will be introduced.
RECOMMENDATIONS: The NBR officials do not confirm implementation of the new law (2012) even after three years of its enactment by parliament. However, media reports, quoting NBR and Finance Ministry sources, indicate its implementation from July 2015.
1. Immediate implementation: The government can fix the uniform rate (10% +- in line with GoB schedule) and go for implementation of the new act to collect revenue 4 to 5 times larger than the current figure by introducing automated and uniform VAT.
2. Motivate VAT-payers and arrange training: The government may target various points in the country and arrange public hearing and talk-shows on the current problems and exchange views on the economic rationale of the uniform VAT rate and limitation of the existing rates. This will generate revenue for building infrastructure.
3. Delaying the implementation for one year (July 2016): The government may go for structured mass campaign on the new VAT law and spread the economic rationale of uniform VAT among the professionals, business community, educational institutions. Training programmes for the economic bureaucracy detailing international practices of VAT may be oraganised and then those may be customised for use in Bangladesh.
4. Form an Independent Revenue Commission: Organisational reforms based on functions within VAT should immediately be undertaken. Bangladesh needs fund for developing infrastructure to attain the status of a middle income country. The GoB should form an Independent Revenue Commission, headed by a public finance professional and comprising members from diverse professions with economic, accounting, legal and ICT background, to see the position from the outside. If needed, international consulting firms like McKinsey & Company, etc., could be hired on competitive basis to suggest a doable system.
5. Fiscal bureaucracy with economic knowledge: The entry in the fiscal service should be restricted to people with economic and commerce background who are interested to build career in VAT, Tax and Excise service. The entry of generalists should be discouraged.
6. Economic impact of withdrawal of Supplementary Duty: There needs to be careful scrutiny with regard to the growth and development of local industries and export competitiveness of Bangladesh.
7. NBR should establish a quantitative projection: Revenue collection for the next five-year period should be projected under the new law. This should be publicised in the print and electronic media by arranging round table and publishing papers and articles in newspapers. This campaign should be conducted in line with the way Bangladesh Bank is doing currently on different changes and programmes on inflation, monetary management and foreign exchange reserve. This technique reduces confusion among the public.
8. Establishing rewards and punishments: There should be policy guidelines in the revenue administration for rewarding the best performers and punishing the non-performers. The policy of 3-year rotation of officers should be complied with.
9. Substantial increase in coordination: Coordination between Tax, VAT, Customs and Excise authorities is highly essential for reconciliation of revenue from these departments on monthly, quarterly, half-yearly and annual figures.
Jamaluddin Ahmed PhD, FCA, General Secretary of the Bangladesh Economic Association, is Chairman, Emerging Credit Rating Limited.
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