FOREIGN DEBT VS DOMESTIC RESOURCES: CHOOSING THE BEST OPTION FOR THE LONG RUN GROWTH: According to Ahmed, Z., Latifee, E. H., et al. (2024), Bangladesh's reliance on foreign debt has provided short-term economic support, but in the long run, it poses significant challenges for sustained growth. The research document 'Foreign Debt and Economic Growth Nexus: Evidence from Bangladesh' highlights the negative impact of prolonged foreign debt accumulation on economic development. It shows that over time, excessive reliance on external borrowing can lead to debt-servicing burdens, currency depreciation, and reduced government fiscal flexibility. To counter these issues, Bangladesh must prioritise domestic resource mobilization by increasing tax and VAT revenue collection.
Domestic VAT, which already forms a substantial part of the tax structure, can become the cornerstone for reducing foreign borrowing. A significant increase in domestic VAT collection by invoice automation will bring Taka 799 billion additionally by FY2036, more than that of the growth of domestic VAT collection if automation is not introduced. Expectedly, this will strengthen the national economy, reduce fiscal deficits, and allow the government to fund essential development projects without resorting to foreign loans. This invoice automation system will increase domestic VAT collection in all segments, i.e., manufacturing, service vendor-level, trading of imports and locally produced items in the following way.
GLOBAL PERSPECTIVE: VAT AUTOMATION SUCCESS STORIES: Countries like Brazil, Mexico, and Turkey have already demonstrated the immense potential of centralised invoice automation systems, proving that such measures significantly improve VAT collection. For instance, Brazil's Nota Fiscal Eletronica (NF-e) system transformed VAT collection by mandating that all commercial transactions be tracked online in real time. This initiative not only curbed VAT fraud but also resulted in a massive boost in tax revenues. Mexico's Comprobante Fiscal Digital por Internet (CFDI) increased tax collection by over 50 per cent, and Turkey's e-Fatura system similarly boosted transparency and compliance, increasing tax revenues manifold.
Bangladesh can learn from these global practices. The National Invoice Automation System is designed to be a centralised solution that facilitates real-time VAT calculation, reporting, and compliance across businesses. This system will help overcome VAT evasion and improve the transparency of tax collection, aligning Bangladesh with the global best practices in tax administration.
THE PROPOSED CENTRALISED INVOICE AUTOMATION SYSTEM IN A NUTSHELL: The proposed invoice automation framework is set to revolutionise VAT collection in Bangladesh by integrating real-time submission capabilities for manufacturers and service vendors. Through API integration, businesses can automatically generate invoices, even in the event of central server issues, ensuring that VAT payments are submitted without delay. This seamless process not only prevents disruptions but also ensures compliance with the National Board of Revenue's (NBR) standards.
One of the standout features of this framework is its ability to reconcile VAT submissions with monthly returns, drastically improving the accuracy of tax reporting. Additionally, to encourage voluntary compliance, the NBR may offer incentives to businesses and buyers who consistently submit their VAT on time. This dual approach motivates both ends of the transaction to participate fully in the system.
The framework also includes a robust error detection mechanism that cross-checks submitted VAT with invoiced amounts, ensuring that discrepancies are flagged and fines imposed when necessary. Business owners will be able to use the system through a mobile app, improving compliance and ease of use.With NBR granted full oversight, this system fosters transparency and accountability, while ultimately boosting government revenue and helping reduce Bangladesh's reliance on foreign debt.
NATIONAL INVOICE AUTOMATION OVERVIEW: A PHASED IMPLEMENTATION: The rollout of the National Invoice Automation System may follow a carefully structured, phased approach over 57-60 months. The initiatives proposed to begin with a Test Group Piloting phase after the solution portal is developed and tested in-house, where a small group of manufacturers, service vendors, and traders will participate.
The scope is expected to gradually expand through piloting with a broader group keeping in mind that only 3 companies pay around 25 per cent of VAT, while, 110 businesses pay 58 per cent, 500 companies pay 80 per cent and almost 1,000 businesses account for 95 per cent of VAT collected. A soft launch of the system portal can be implemented after going through a trial and error process to modify the solution accordingly from the field level and users' experiences.
By the end of the implementation, 1,100 businesses across the country will be fully on boarded, including manufacturers, service vendors, and traders. This phased approach ensures that the system is thoroughly tested, optimized, and ready for national use before full-scale deployment.
ECONOMIC IMPACT OF THE NATIONAL INVOICE AUTOMATION SYSTEM: The National Invoice Automation System, once fully implemented, will bring both mid-term and long-term benefits to Bangladesh's economy which are as follows--
A) Mid-Term Benefits:
i) Transparency and Accountability: The system will ensure transparency in invoicing, reducing VAT evasion and ensuring that businesses report their earnings accurately.
ii) Improved Revenue Forecasting: With more accurate reporting, the government will be able to forecast business earnings more realistically, aiding in the development of effective fiscal and monetary policies.
iii) Enhanced Corporate Tax Collection: As businesses can no longer hide earnings, corporate tax collections will increase, helping to boost government revenue.
iv) Compliance Incentives: By making it easier for businesses to comply with VAT regulations, the system will foster a more cooperative tax environment, reducing non-compliance.
B) Long-Term Benefits:
i) Prevention of Money Laundering: The system will provide a clear, traceable value chain across all industries, limiting the potential for money laundering and other illicit financial activities.
ii) Creation of a Non-manipulable National Dashboard: Real-time, accurate data on transactions will be available at the national level, offering a comprehensive and secure view of the economy that cannot be tampered with.
iii) Strengthened Policy-Making: With access to detailed, reliable data, the government will be in a better position to develop and adjust policies that reflect the true state of the economy.
iv) Economic Growth: The automation system will create an environment of transparency and fairness, leading to sustained economic growth, financial integrity, and long-term fiscal stability for Bangladesh.
In the light of the foregoing, one can expect that this system will create a fair economic landscape by curbing tax evasion, enhancing corporate accountability, and enabling the government to channel resources towards targeted goals, ultimately fostering an equitable and sustainable future for all Bangladeshis.
Dr. Md. Abdur Rouf, Member (VAT Implementation & IT), National Board of Revenue (NBR). roufvat@gmail.com.
Enamul Hafiz Latifee, Trade and Policy Development Economist, Lifetime Member, Bangladesh Economic Association. ehlatifee@gmail.com.