VAT in easy language: 49

Question: An organisation has sponsored another organisation to arrange a talk show in a television channel purchasing airtime from the television. Gratitude is expressed to the sponsoring organisation in the midst of the talk show or it is said or displayed on the TV screen that the talk show is sponsored by such an organisation. Please let me know whether Value Added Tax (VAT) requires to be deducted at source from the sponsorship money, if yes, whether it should be considered as sponsorship service or advertisement service. [Ebarot Hossain Swapon, Manager, Stock Bangladesh VAT Center, Dhaka Trade Cener, 99 Karwanbazar, Dhaka-1215.]
Answer: The services remain codified and defined in the Value Added Tax (VAT) system of Bangladesh. Of those definitions of services, few of the definitions are close to each other. In such cases of nearly close definitions, questions arise regarding the inclusion of the service under a certain service code and definition. For instance, there are some similarities among the definitions of Consultancy Firm and Supervisory Firm under service code S032.00, the definition of Architect, Interior Designer or Interior Decorator under service code S050.10 and the definition of Engineering Firm under service code no. S051.00. There are some similarities between the definition of Advertising Firm under service code no. S007.00 and the definition of Information Technology Enables Services (ITES) under service code no. S099.10. There are some similarities between the definitions of Tenant of Space and Establishment under service code no. S074.00 and Izaradar (Lessee) under service code no. S033.00. There are some other definitions of similar nature. The problem of inclusion of the economic activity under a certain service code and definition arises because in the cases of services, 11 rates of VAT in truncated base remain effective. Those rates are: 1.5, 2.0, 2.25, 4.0, 4.5, 5.0, 5.5, 6.0, 7.5, 9.0 and 10 per cents. The service Advertising Firm attracts 15.0 per cent VAT while Information Technology Enabled Services (ITES) that has some similarities of Advertising Firm service attracts 4.5 per cent of VAT. The service Tenant of Space and Establishment attracts 9.0 per cent of VAT, while Izaradar service, which has some similarities with Tenant of Space and Establishment, attracts 15 per cent of VAT. Therefore, the VAT payers always try to include the service rendered by them under the service definition and code that attracts lower per cent of VAT. The rate of VAT on the service of Advertising Firm is 15 per cent but on Sponsorship service VAT rate is 7.5 per cent. So, the question arises whether the activity described in the above question should fall under the service code and definition of Advertising Firm or Sponsorship service.
If we deeply delve into various aspects of those economic activities enshrined in the definitions, we can differentiate among those services in spite of having some apparent similarities among them. Our current question stands regarding the definition of Advertising Firm and the definition of Sponsorship service. A close look at the economic activity described by you in the question reveals that the service falls under Sponsorship service under service code S099.30. Let us have a look at the definitions of the two services to clearly understand the differences between the two. The definition of Advertising Firm in our VAT system is as follows:       
'Advertising Firm means any individual, establishment or organisation engaged in the preparation of advertisement of any type or name or in the publicity of any advertisement prepared with the same objective in any media or by any other means or in the assistance of any publicity on commercial basis with the objective of publicity of any goods or service or any other publicity; and if any advertisement is published in the website or in the online version of any newspaper, periodical, magazine, etc. of any individual, organisation or establishment, that would also fall under Advertising Firm.' On the other hand, the definition of Sponsorship service stands as follows:
'Sponsorship services include naming an event after the sponsor, displaying the sponsors company logo or trading name, giving the sponsor exclusive or priority booking rights, sponsoring prizes or trophies for competition; but does not include any sports event involving national teams of Bangladesh. It also excludes any financial or other support in the form of donations or gifts, given by the donors subject to the condition that the service provider is under no obligation to provide anything in return to such donations'.
If we analyse the two definitions we find that, the main theme of Advertising Firm is preparation of advertisement, to make publicity or assist in the work of preparation or publicity. Such publicity can be in any media. On the other hand, one of the main aspects of Sponsorship Service is displaying the company logo or commercial name of the sponsor. The activity described in your question is commensurate with this part of the definition. In the midst of the talk show, sometimes the name or logo of the sponsor is displayed on the TV screen or sponsor's name is announced when gratitude is expressed to him. So, this service shall be considered as Sponsorship Service. The rate of VAT is 7.5 per cent on this service. As per provisions regarding VAT deduction at source, VAT on sponsorship service falls under the list of compulsory deduction. So, the portion of VAT has to be deducted at source. In the case of sponsorship service, it is a bit difficult to understand who provides service. In this case, the television channel provides sponsorship service. The organisation making payment receives the sponsorship service. So, while making payment, the organisation has to deduct 7.5 per cent VAT at source.
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