Value Added Tax (VAT) system was introduced in Bangladesh in July 1991. During the last twenty four years, a number of distortions have creeped into our VAT system, reduced VAT rates being one of them.
The VAT system of Bangladesh is considered to be difficult to the common people. Among the matters which have made the VAT system complex for them, the most important one can be identified as reduced VAT rates. Presently, there are nine effective reduced VAT rates on 19 services. Those are: general restaurant (not air-conditioned) 7.5 per cent, motor garage and workshop 7.5 per cent, dockyard 7.5 per cent, construction firm 5.5 per cent, land developer 3.0 per cent, realtor 3.0 per cent, colour laboratory 7.5 per cent, furniture 6.0 per cent at factory level and 4.0 per cent at showroom level, goldsmith 3.0 per cent, procurement provider 4.0 per cent, transport contractor 2.25 per cent for transport of petrolium goods and 7.5 per cent for transport of other goods, electricity distributor 5.0 per cent, purchaser of auctioned goods 4.0 per cent, immigration adviser 7.5 per cent, English-medium school 7.5 per cent, lessee of places and establishments 9.0 per cent, seller of branded ready-made garments 5.0 per cent, information technology-enabled services 4.5 per cent and sponsorship service 7.5 per cent These service renderers do not get input tax credit.
One of the most important weaknesses of pre-VAT excise system was muliple rates. Because of multiple rates of taxation, tax management was complex and discretionary powers of the officers would have been misused more. Ideally, VAT system is a single rate system of taxation. Because of single rate of tax, VAT management is rather easy and the use of discretionary power of the officers is less. But in our VAT system, there are nine reduced rates, there is one 15 per cent rate and one zero rate. So, in other words, there are a total of 11 rates of VAT in our VAT system.
The reduced VAT rates has inflicted enormous harm to the VAT system of our country. Since input tax credit is not applicable to the services with reduced VAT rates, so it is a big hindrance to the establishment of a modern and ideal VAT system. The basic driving force of VAT system is input tax credit mechanism. If input tax credit mechanism does not remain effective, the basic spirit of the VAT system gets shattered - the VAT system does not flourish. This has happened in the case of the VAT system of our country. VAT system is easy taxation system in the light of the basic spirit of VAT. But nine reduced rates have made the VAT system of our country complex. Firstly, the common people find it difficult to understand the cases of so many rates of VAT. The common people do not understand with very general level of knowledge as to which economic activity falls under which service code of VAT and what is the rate of VAT on that service. Secondly, people with better levels of understanding on VAT, if they are prone to evasion, try to hide the actual nature of the business to accommodate the serivce under the service code and definition that attracts less rate of VAT. In such a case, even there remains the possibility of unholy alliance between VAT payers and VAT collectors. Thirdly, there arise various opinions regarding which economic activity shall fall under which service code and definition. Consequently, the matters of case, inquiry, investigation, adjudication, appeal etc. continue to rise rendering the VAT management system more complex.
In our VAT system, there are provisions to deduct VAT on 37 services. Of them, 11 services attract reduced VAT rates. Those services are: motor garage and workshop, dockyard, construction firm, land developer, realtor, furniture shop, procurement provider, transport contractor, purchaser of auctioned goods, information technology enabled services and sponsorship service. Generally, by the term Construction Firm we mean construction contractor. This service attracts 5.5 percent VAT. But at the field level, sometimes we find a tendency to include the work of general servicing under the definition and code of Constructon Firm. On furniture, there is 6.0 per cent VAT at factory level and 4.0 per cent VAT at showroom level. But there is a tendency to include this activity under Procurement Provider service code and definition, since it attracts 4.0 per cent VAT rate. Since, broad range of economic activities has been included under the service definition of Procurement Provider, so there is a tendency of including even transparently defined service under Procurement Provider. On information technology-enabled services, rate of VAT is 4.5 per cent and on internet service the rate is 15 per cent. Therefore, there is a tendency of including internet service and many other similar services under information technology-enabled service. On advertisement, VAT rate is 15 per cent and on Sponsorship Service the rate is 7.5 per cent. So, there is a tendency to include advertisement service or many other similar services under Sponsorship Service. More such examples can be cited where there is a tendency of including the service with higher rate of VAT under the service with lower rate of VAT.
The crux of the above problems is reduced rates of VAT. Contrarily, in a single-rate VAT system, there are many advantages. Such a VAT system is easily understandable and there is less complexity to implement it. Only a few books of accounts are require to be additionally maintained. Maintenance of books of accounts provides additional advantage, i.e., input tax credit. So, net amount of VAT becomes less if input tax credit is taken. In real terms, net amount of VAT stands more in reduced VAT rates since input tax credit is not allowed under reduced rate.
In spite of the above fact, in our country multiple reduced VAT rates have become more popular than the single rate. The causes of such popularity are difficulties in maintenance of books of accounts and associated expenditure, uneven implementation of the provisions of the law due to weaknesses in the VAT management system etc. The Value Added Tax and Supplementary Duty Act, 2012 is scheduled to be fully implemented from July 2016. The new VAT law will be implemented in an automated environment. In the new VAT law, there will be no provision for reduced VAT rates except in the cases of sale of residential buildings and joint undertakings for property development. Input tax credit mechanism has been made extensive under the new VAT law. Since it would be executed through a web-based software, maintenance of accounts would be easier under this system. Provisions of law could be implemented exhaustively in this system. Input tax credit across all economic activites will spread the VAT burden to various stages, so the burden shall become tolerable and easy. In other words, the VAT system will gradually get the features of a modern and ideal VAT system, which will be taxpayer-friendly and revenue-friendly.
Dr. Md. Abdur Rouf is Director of the Central Intelligence Cell and Deputy Project Director of the VAT Online Project, National Board of Revenue (NBR).
roufcus@yahoo.com.
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