Uncertainties over VAT payment by end-users

Value Added Tax (VAT) is initially payable to the government by three categories of people-the manufacturers or producers, suppliers and then the buyers and service providers apart from the end-users. The time schedule for payment of VAT by classified people has been stipulated in Section 6(2) of the VAT Act. Payment of VAT is discussed by the authority. But who are eligible to pay VAT and whom to pay back the VAT are not indicated clearly in the law. So there is still confusion in the minds of the people regarding payment of VAT.
To understand it better, let us note some words in the VAT Act, 1991. "VAT" is defined under the head 'Tax' u/s 2 (ddd) of the VAT Act, 1991. "VAT-able goods" are defined in Section 2(f) as taxable goods while "VAT-able services" are defined in Section 2(g) of the Act. VAT is payable on 'Pon' which is described as consideration i.e. all money or value measurable in terms of money received or receivable against the supply of goods or rendering services. For better understanding of VAT, let us note the word "Total Receipt" as defined u/s 2(x) which is the base value of determining VAT.
Now, we are to see who are eligible for paying VAT. According to sub-section 3 of Section 3, it is the importer at the point of import, it is the supplier at the point of production or manufacturing of goods in Bangladesh and it is also the service provider. The suppliers and end-users are also eligible for VAT. Here also the VAT authority did not specify the payment of VAT by service recipients clearly and distinctively.
Payment of VAT to the government by manufacturers, producers, suppliers and service providers is discussed in section 6(2) of the VAT Act. This is as under:
Section-6: Time and method of payment: The sub-section (1) reads: VAT on imported goods shall be paid at the same time and in the same manner as import duty is paid in accordance with the provisions of Customs Act and Rules made there under, as if it were an import duty under that Act (partly cited).
The sub-section (2) reads: VAT on goods manufactured or produced for carrying out or for expansion of business or VAT on goods imported, purchased, acquired or procured in any manner by a registered or registerable person shall be payable at the time of any of the following activities whichever occurs first-
(a) when the goods are delivered or supplied
(b) When an invoice relating to supply of goods is issued
(c) When goods are used for personal purpose or supplied from the use of others.
(d) When payment is received either in full or part.
From the above reading we find that a manufacturer or producer is required to pay VAT to the government account at the time of delivery of goods or invoice issued or clearing goods for personal use, and finally when payment is received in full or part. From the viewpoint of a manufacturer or producer, if the goods are delivered on the basis of cash they receive full value of the goods plus VAT from the buyers. Thus, the transactions appear to be clear and complete. No problem arises with respect to payment of VAT by the buyer. The seller gets full value of the goods as well as VAT.
But what will be the situation in the event of goods sold on credit by the producer or manufacturer? According to the above method of VAT payment, the producer is required to pay VAT first before clearance of the goods from the godown. Here VAT is paid in advance by the manufacturer.
In the Section 6 (3) the payment of VAT by service providers is discussed, whereby time and payment of VAT are stipulated. The relevant section is enacted as under:
"Value Added Tax shall be payable when taxable service is rendered by a registered or registerable person during operation of expansion of his business at the time of any of the following activities, whichever occurs first, namely:
(a) When the service is rendered;
(b) When a challan patra (invoice) to the service is issued;
(c) When part or full payment is received;
(d) When part or full payment is made
(e) At the time of receiving service from outside the geographical territory of Bangladesh, the service receiver is to pay VAT.
(f) In other cases, the suppliers and service recipients.
From the above paragraph of Section 6 (3), we have come to a conclusion that VAT is to be paid by the manufacturer or producer or supplier at the time of delivery of goods from the premises of the factory godown, whichever occurs first as per (a) (b) (c) & (d). If the cost of goods plus VAT is paid in cash, there is no problem with the producer, manufacturer, or supplier in respect of VAT.
But if the goods are sold on credit, the producers, manufacturers and suppliers are required to pay VAT first and before delivery of goods, issuance of invoice for supply of goods, personal consumption of goods and receipt of part payment on goods by the producers. But in that case recovery of the cost of goods plus VAT from buyers remains uncertain.
Goods are sold on credit with expectation that the cost of goods sold along with VAT will be paid by the buyer in the due course. As per the tradition of business as prevalent in the country, sometimes we find that payments are not made by buyers instantly and at the time of closing accounts large outstanding amounts are found due from buyers. In that case, the producers, manufacturers and suppliers are deprived of their outstanding dues as well as the refund of VAT so far paid against the full cost of goods delivered. In practice, we find that a businessman has to wait for making his payment for a long time without substantial recovery of the cost of goods as well as VAT. This is a big problem a businessman faces in reimbursement of VAT from a buyer. The businessman also fails to get refund of VAT, as in the VAT Act, due to peculiar conditions and insufficient time for the refund facility. The Section 10 also does not provide for sufficient time and period for smooth refund of the VAT.
We feel the VAT authority should review the matter for the sake of VAT collection as well as to allow manufacturers, producers and suppliers to get back the refund of VAT under a simplified procedure.
Similarly, in the case with service providers we noted that services were taken by the service recipients, but payment of fees and VAT was not made to the service providers in time, whereas the service provider is required to pay VAT before the cost of service is received. In some cases, the service recipients refused to pay VAT against claims by service providers as per sub-section 2(e) of Section 3. More audacity is shown by the service recipient in addition to contravention of the VAT Act, when he declines to pay VAT. The service recipients in writing refuse to pay VAT to the service providers. It is a great apathy for the service providers, when they cannot insist on payment of VAT for the sake of mutual respect. On the other hand, the service recipients sometimes deduct VAT from the bills of the service providers and hold up the 15 per cent VAT for a long time without payment to the government. Consequently, the service provider is to face stringent measures from the VAT authority-2.0 per cent interest per month plus fine 1.5 times the VAT payable. This sort of attitude is mostly found in the cases with banks, big private companies, the companies under state-owned corporations etc. They are found to be very much adamant to pay VAT which may be considered direct violation of the VAT Act, 1991. The VAT authority should ensure payment of VAT to service providers for the sake of protection of the service providers and the business communities of the country with respect to reimbursement of VAT regularly and properly.
In both the cases, as stated above, the producers, manufacturers and suppliers as well as service providers are the worst sufferers with respect to payment of VAT. If we consider VAT in principle, we find that the burden of VAT is on the end-users of the goods. So the sections of the VAT Act should be framed in a way that none loses any amount in respect of VAT. Considering the free exchange of VAT, we can safely say one is to pay this form of tax on goods or services, but at the same time such VAT is recoverable for buyers for goods and services received. Besides, this principle is not good all the time and from our experience we understand that the accounts of registered persons always show "VAT in Advance" at the end of closing accounts and recovery of VAT in large amounts unpaid by the buyers and service recipients. In order to end this situation and for smooth transactions, the VAT authority may take necessary steps to overcome the above problem and help the business communities as well as service providers avoid an unhealthy situation regarding VAT payment.
It is true that manufacturers, producers and suppliers pay VAT at certain points and recover the VAT from next buyers. If the manufacturer gets the VAT on sale of goods, he has no further liability to the VAT authority. Similarly, the service providers are also not affected from the viewpoint of VAT. The problem arises only when the VAT is not paid by the buyers or service recipients in time.
This piece is intended just to point out this particular problem now the business communities are facing, avert the large amounts of VAT remaining outstanding in the hands of registered persons and end discrimination in payment of VAT by the buyers and service recipients.
Akhter Zamil FCA    is proprieter of Akhter Zamil & Co., a CA firm. [email protected]