Some thoughts on proposed VAT Act 2011

Bangladesh introduced the value-added tax (VAT) about two decades ago, replacing the excise duty in a bid to collect more revenue. But it has so far failed to make any major impact on revenue generation. Bangladesh's tax to gross domestic product (GDP) ratio has averaged between a low 8.0-9.0 per cent for the last two decades, despite the introduction of VAT and a number of reforms of the taxation system and at the National Board of Revenue (NBR). The basic idea of VAT is to impose tax on value addition and tax payable at the sales stage. This was ignored in the original VAT Act of 1991 and the regulations made by the NBR with imposition of VAT from retail level and import stage at port as fixed advance VAT and trade VAT without giving rebate and ignoring the cascading effect, causing resentment among the business community. VAT is a primary source of tax revenue in many countries. 'Massive changes' should be made in the existing VAT laws and rules to boost growth of tax revenue collection, which remains one of the lowest in the region. The reform proposal of the World Bank is to bring massive changes in the VAT laws and rules to make VAT a "workhorse" of future revenue generation against the backdrop of the country's policy of continuous trade liberalisation. On the other hand, the VAT rules and regulations should be business-friendly and technology-based, such as the electronic cash registers to collect VAT and online tax return system, so that tax officials and taxpayers do not require face to face interaction. It has to be designed properly so that the businessmen and others have easy access to the system. The process of assessing VAT: A manufacturer adds value to a product; the amount of value-addition can be described as the difference between the cost of the materials used to make the product and the price charged to the customer (often a wholesaler). The manufacturer pays a percentage of the VAT which is then included in the purchase price charged to the customer (wholesaler). The manufacturer gets a rebate from the government for VAT paid on the materials. The customer (wholesaler) pays a VAT on the value they add, which can be described as the difference between what they paid to the manufacturer and the price at which they sell to their customer (retailer). This VAT amount is included in the price charged to the retailer. The wholesaler gets a rebate for VAT from the government for the VAT paid to the manufacturer. The retailer pays value-added tax on the value they add, which can be described as the price charged to customers less the wholesale cost, and includes the VAT in the final sales price of the product. The retail store collects VAT from the person buying the product and gets a rebate for the VAT paid to the wholesaler. There are three types of VAT used around the world. The methods are calculated in the ways that taxes on expenditures are handled with a few exceptions on basic and social needs like food and agricultural products, animal products, poultry sector, agriculture inputs, medicine, shelter and education. The most common is the consumption method, which allows businesses to immediately deduct the full value of taxes paid on the purchases. The second is the net income method, which allows gradual deduction of VAT paid on purchases over a number of years, much like depreciation. The third type, gross national product method of value-added tax, provides no allowance for taxes paid on purchases. The consumption method is the most favoured among the general population. The existing VAT system is based on the consumption method in principal, but the rule and application of the Act does not match the adopted theory. The existing VAT system is an excise tax system in reality and thus has a cascading effect. Bangladesh even imposed VAT on basic needs like education in private institutions and medical services. A few years back, the High Court gave a verdict against the imposition of VAT on medical services. No citizen has yet filed a writ petition against the imposition of VAT on education, another basic need. The existing VAT law should have massive reform in VAT administration, tax return, tax calculation, valuation of end products, payment of tax, rebates, carry forward of advance or excess tax paid and settlement of dispute on tax related issues. But the proposed new VAT Act 2011 could not address all the shortcomings of the existing law. The proposed Act suggests imposing tax on taxable imports (Sec 18- 1-b), proposing VAT on purchase at raw materials stage, ignoring the method of tax at the sales stage. Moreover, the law exempts tax on import for personal consumption (Sec 27) and assets for private purpose (Sec 70). VAT is a consumption tax but the import for consumption under baggage rule and other personal consumption has been set to be exempted from the purview of VAT which is really conflicting with the very spirit of VAT. The argument made in the noteclarification of draft says that import for private consumption is not in course of economic activities. The mindset of the policy makers (in fact, the bureaucrats) is to impose tax on business people -- not on consumers. Again, Section 44 says that the Act applies the destination principle, under which the objective is to impose VAT only on consumption in Bangladesh. Sections 27 and 44 of the draft Act are in contradiction with each other. Section 61 of the proposed Act suggests withholding of VAT by recipient of goods and services. This section makes it obligatory for government entities, NGOs, banks, limited liability companies, etc. to collect "VAT" from the service providers. This means the tax is imposed on the service provider -- not the service recipients or consumers. This again is a deviation, imposing tax on the service provider, wherein the methods should be to collect VAT from the consumers by the service providers. It seems that the system is set backwards, making the law complex and contradictory. The framers of the proposed Act are kind enough to allow the service providers to adjust the 'withheld tax' with other business within a limited timeframe (Sec 62). But Section 62-2 has given a discretionary power to the Tax Commissioner to disallow if not "satisfied". The satisfaction of the Tax Commissioner is unexplained and too flexible. The draft Act proposes for a single rate of VAT at the rate of 15 per cent but it allows imposition of supplementary duty on import and supply of goods etc. This is again conflicting with the single rate of VAT. The draft Act is civil in nature in all purposes as mentioned in Section 124 explaining the recovery of unpaid tax to follow the same powers which a civil court possesses. But Sections 118 - 10 have the provision of delegation of power of a Magistrate to the VAT officer as specified in the Schedule III to the Code of Criminal Procedure, 1898 (Act V of 1898) to exercise the power under Section 36 of the Criminal Procedure Code (CrPc). This is against the concept of separation of the judiciary from the executive branch of government. There are some words in the proposed Act such as tax 'evasion' and 'fraud' etc. in Section 119. The dispute of tax is a calculation of tax between taxpayer and tax official or a dispute of civil nature but the wordings are from CrPc. Section 133 of the draft makes every the taxpayer personally liable for the payment of amounts due and this is more particularly mentioned in the Section 135 to make liable the directors of the companies. The liability is jointly for amount, interest and penalty thereof. As per the Companies Act, the director or shareholders are liable to the face value of their shares in the company, not more than the amount of face value of their shares. The provisions for appeal, revision and references have been made difficult for the taxpayers by imposing restrictions. The burden of proof will rest on the taxpayer to rebut the content of the depositions of the tax authority (Sec 181). There will be no appeal unless getting decision or order thereon from the Tax Commissioner (Appeal) or the Appellate Tribunal (Sec 180). No appeal in the High Court will be allowed without payment of 10 per cent of the imposed tax. This is against the basic human rights enshrined under the Constitution. None is guilty until found guilty by the court. The proposed alternate dispute resolution (ADR) procedure also is not fair to the taxpayers. Section 176 and Sub-section-2, empower the NBR to appoint a committee consisting of VAT officer and two persons appointed by the NBR to examine the application for ADR. The decision shall be taken to the "appropriate forum" for decision (Sub-section-5). As per the proposal, the NBR may, on the recommendations of the facilitators (committee), also nominated by the board, pass order as it "deems appropriate" (Sub-Section-6). This will make the ADR meaningless for the taxpayer. This is also against the century-old traditional "shalish" system of arbitration practiced in our society. The facilitators or 'shalisdars' should be independent and selected by both NBR and the taxpayer and the verdict of the ADR should be mandatory on both the NBR and taxpayer. The proposed act has been drafted to increase tax collection mostly focusing on trading, but there is no policy support for industrialisation. There is also no effort to make fair calculation of tax. Fair collection of tax will make fair competition among business houses and shall increase economic activities, creating a level-playing field, which is a precondition for increased economic activities. Finally, the proposed act provides the rule-making authority to NBR under Section 188. The policy and rule-making as well as its implementation simultaneously shall give undesirable authority to the NBR. The rule and policy-making authority should be either with the Parliamentary Standing Committee on Finance or with the Ministry of Finance. There should be a check and balance. Bangladesh needs a modern VAT Act, not a modern Excise Act. The writer is a part time teacher of Leading University and is pursuing PhD in Open University, Malaysia. He can be reached at email: shah@banglachemical.com