The battle over VAT

Finance Minister AMA Muhith on October 27 last had expressed his deep dissatisfaction over the substantial shortfall, nearly Tk.58 billion, in tax revenue collection during the first quarter of the current fiscal year (FY), 2015-16.
He had reasons to be worried. If the trend of the first quarter in collection of taxes persists in the remaining months of the fiscal, the shortfall will be a staggering one and the government would be forced to borrow heavily from the banking system to meet the deficit.
The tax revenue target for the current fiscal has been set at an ambitious level of Tk. 1.76 trillion.
Mr. Muhith, obviously, discussed the revenue shortfall issue with the Chairman of the National Board of Revenue (NBR) immediately after the collection figures were made available to him and issued a few directives.
Since the shortfall in value added tax (VAT) collection, estimated at Tk. 24.17 billion, in the first quarter was greater than that of any of the two other heads of NBR revenue collection, namely, income tax and customs, officials concerned were asked to improve the situation through intensive efforts.
Accordingly, a taskforce comprising NBR officials started visiting the shopping malls, super markets, sweetmeat shops, Chinese restaurants and other business firms across the country since November 01 last. The members of the taskforce during their visits are reportedly going through cash transaction registers, sale receipts, records of VAT payments etc., to detect any evasion.
The drive has paid dividends albeit far less than the potential one. The VAT officials during the first seven days of their drive detected tax evasion of more than Tk. 600 million.
Obviously, the physical presence of VAT officials at their establishments to detect evasion has created resentment among the businessmen. And they vented their anger in presence of the NBR chairman Nojibur Rahman at a function, styled, 'Partnership Dialogue', organised jointly by the NBR and the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) last Monday.
One business leader speaking at the 'Dialogue' alleged that a sense of panic was being created through 'sudden raids' and examination of trade-related documents and registers of the business firms. He issued a veiled threat of launching movement if the NBR continued such activities.
The trader, however, raised a pertinent issue -- the existence of a large number of business units beyond the coverage of VAT. He sought to know from the NBR why only 1,100, out of about 45,000 business firms, in the southern part of Dhaka are on the VAT register.
The NBR chairman did not give answer to the question. But he did admit that some field level officials were creating problems and assured that 'warning messages' would be sent to the officials asking them not to harass the businesses unnecessarily.
The allegation of non-inclusion of a large number of business firms in the VAT list was made to show that an unscrupulous section of tax officials deliberately exempted many business firms and establishments from VAT payments in exchange for undue pecuniary benefits.
The fact remains that neither of the two sides are clean. The number of businesses evading VAT payments is quite large and those who pay it do not pay in right amount. But evasion, in full or partial, is not without a cost. The businesses concerned are required to make unofficial payments to the tax officials. The practice which is an open secret has been going on for decades, may it be VAT or any other form of taxation.
However, the taxmen's observation about the collection of lower than projected volume of VAT in the first quarter of this fiscal cannot be dismissed outright. They said the fixation of tax revenue targets for this fiscal does not match the realities on the ground as far as business activities and investment are concerned.   
Moreover, imports have a bearing on the VAT revenue collections. The international prices of most commodities have been on a declining trend for the past many months. The lower import costs of raw materials also make the domestically produced goods less expensive and hence requiring lower VAT payment.
The overall trade and investment environment in the country is not adequately supportive of the efforts for collection of the projected VAT revenue for the current fiscal.
However, if the weaknesses with regard to unwillingness among the businesses to pay VAT either in full or partial amounts and dishonest practices on the part of the tax officials could be remedied, the reaching of the tax targets would not have been that difficult. The much sought-after remedy, at least partially, is possible, but not within such a short time.  
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