On the issue of VAT on superstores

An analytical article was published on Sunday, February 23, 2014, on page-6 of The Financial Express under the heading 'VAT on superstore sales: Why it doesn't make sense'. It was written by Md Jamal Hossain from the University of Denver, USA. The write-up is a good piece of analysis, but what it misses is the spirit and principle of VAT, and does not suggest on how to offset the VAT going to be lost in this sector, given the need for increasing domestic resource mobilisation.
The article starts with the question as to why VAT on superstores should not be waived to assist the businessmen to flourish in this sector. Even it has been argued in favour of 'package VAT arrangement' for the sector. We need to remember that VAT system in Bangladesh has turned out to be a success, although some 'distortions' are there, violating the basic principles of VAT. Otherwise, it could have been a money generating means as real VAT always is. One such 'distortion' is package VAT. Package VAT was introduced for small shops violating the basic principle of VAT (input tax credit) with the hope that soon these shops will gain the capacity to keep records, and they will opt for the ideal practice of input tax credit. But that 'soon' is yet to materialise. Now the big shops, even the superstores, have got a point to argue that they also should be given this facility of package VAT. This is an irony. This will not solve problems, rather it will aggravate those.   
The writer has deftly shown the time-bound pattern of the market, and argued that malfunctioning of the market has given rise to formalin. In making the market function, Md Jamal Hossain wants to see the onus lying with VAT. Here, a point that rises in my mind is that other than VAT, are there no issues in the society, the economy, the polity, culture etc., that push the superstores into malfunctioning and prevent them from growing? Other than market malfunctioning, is there no relationship between the spread of the use of formalin and unethical behaviour, greed for profit etc?
I appreciate the writer for his use of analytical tools to prove how the super-shops grow. He argues that the markets must be transformed over time into superstore-based sales of those products that are now being sold at small vending shops. For this transformation, VAT suspension has been seen as the principal panacea. VAT is a multiple-stage consumption tax. VAT mechanism is like a chain. As malfunctioning of a single ring in the chain causes the entire chain to fail, so in a VAT system, malfunctioning of the credit mechanism causes the entire VAT system to falter. The writer is arguing that these superstores gradually will sell almost all the commodities of the economy. Then how the government will work keeping this big segment of the economy untaxed. Now, if they are kept untaxed, when they will develop then they might argue that they are not yet habituated to paying tax. So, they need more time to learn how to pay. On the other hand, taxmen hold the view that from this initial stage, they need to be habituated to paying. Given this, when they transform themselves to adopt big volumes of transactions, they feel comfortable in paying tax. VAT is not paid by the super-shops or any sellers, rather VAT is paid by the consumers. I find these superstores using advanced technology like Electronic Cash Register (ECR), Point of Sales (POS) to keep their accounts. It is very easy for them to make programmes in line with input tax credit mechanism of VAT. Thus, they do not require paying VAT, but the customer pays, the government gets revenue and the economy steps forward to adopt a standard and ideal VAT system. We should keep in mind that the superstores need to grow, and at the same time the government needs to increase revenue, broaden the revenue-base and develop tax culture.
In the 'JUST PRICE AND SUPERSTORES' segment of the article, where the writer is discussing the fall in recent prices of potato and woes of the potato farmers, he finds the actions of the NBR totally 'ridiculous'. I do not understand when at superstores potato sale does not attract any VAT, then how NBR's action becomes 'ridiculous'. NBR works under many limitations. Even under all these limitations, if one analyses the growth of revenue during the last couple of years, one can understand the sincerity and seriousness of NBR in executing the responsibility given to it.
VAT is a modern taxation system. It is very scientific. The VAT system stands on several principles, one being lowest possible single rate and wide possible coverage. To get maximum benefit out of the system, its coverage has to be as widest as possible. There should be very few exemptions. And the rate should be a single one and the lowest as possible. If there is single rate, it is easy to administer, and if it is the lowest, it is easy to pay. If one looks at countries where VAT/GST has been a success, amid many other things such has been the case there. Singapore, not far from us, is a distinctive example.
To establish an ideal and modern VAT system, the businessmen have to keep their accounts. In this age of revolution in information technology, if we do not use technology for the purpose of VAT, we can never have a modern VAT system. Our tax-GDP ratio is till today one of the lowest -- even in South Asia. The international aid climate is not favourable to us. To finance development, we have to mobilise more domestice resources.
Of the taxes, VAT is one which can help tremendously in this situation. In an ideal VAT system, VAT spreads through almost all transactions of the economy. It rather becomes an invisible tax.
If input tax credit mechanism is allowed to function properly, at the end of all transactions there can be huge amount of revenue that we badly need. It would be pragmatic if we suggest that facilitation of businessmen and payment of VAT should go hand in hand. We should keep in mind that finally we want to establish a taxation system that is both revenue-friendly and business-friendly.   
Dr. Md. Abdur Rouf is director of the Central Intelligence Cell and deputy project director of the VAT and Supplementary Duty                 Act, 2012 Implementation Project, National Board of Revenue (NBR). roufcus@yahoo.com