Unlike Customs laws which are governed by multilateral frameworks of WTO (World Trade Organisation) and WCO (World Customs Organisation), there is no universally accepted international VAT (Value Added Tax) framework with any obligation or commitment to comply with.
Since its inception in France in 1954, value added tax regimes are based on some principles and practices followed by individual countries, including EU, BRICS and other developing countries accounting for 95 per cent of global GDP, with flexibilities according to their respective economic needs.
The common principles of VAT practised worldwide is that except for the import stage, where VAT is imposed on duty paid value of imported goods and services, VAT is the tax imposed on the value added portion of the transaction price as under:
1. VAT paid on input is to be deducted from the output vat to be calculated on the transaction price resulting from the respective business process.
2. VAT is to be paid on the value added portion of the input cost against the transaction price resulting from the respective business process (compensating for input deduction), general applied in EU in the form of multiple reduced VAT rates as under:
EU SYSTEM: MULTIPLE RATE OF VAT STRUCTUIRE
In this connection it may be pertinent to have a look at the multiple rate VAT structure and some of the flexibility provisions incorporated in the EU VAT system. The current EU multiple rate VAT structure was adopted by the EU Council in 1992. Under this system, Member States are required to apply a single standard rate of at least 15 per cent and may have a maximum of two reduced rates set no lower than 5 per cent, which Member States may apply at their discretion. In Bangladesh, our VAT Law 2012 denies the benefit of application of multiple VAT rates prevailing around the world with the misconceived plea that "it is a distortion of principles of VAT", "establishing VAT chain is not possible for truncated rate and tariff value" and "limited scope of input tax credit".
EU VAT law only requires that the standard VAT rate must be at least 15 per cent and the reduced rate at least 5 per cent (only for supplies of goods and services referred to in an exhaustive list). Actual rates applied vary between Member States and between certain types of products. In addition, certain Member States have retained separate rules in specific areas. Member States should remain free to apply a special scheme involving flat rate rebates of input VAT to farmers not covered by the normal scheme. Business process involving sourcing of inputs from the reduced vat rate (in Bangladesh so called truncated vat rates) regime is entitled to proportionate deduction from the output vat of the transaction cost at such rates as to be fixed by regulation (EU-VAT Directive 2006/112/EC: Article 173, 174 and 175). This proportionate deduction of input VAT is practised in EU since 1992 to avoid cost distortion of the product due to sourcing of inputs irrespective of normal vat rate or from reduced vat rate regimes. But in Bangladesh, proportionate deduction of input VAT is denied altogether in both the VAT Laws of 1991 and 2012 with the misconception that "establishing VAT chain is not possible for truncated rate and tariff value" and "limited scope of input tax credit".
In the case of goods or services used by a taxable persons both for transactions in respect of which VAT is deductible (pursuant to Articles 168, 169 and 170 of the EU VAT Directive) and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible. The deductible proportion shall be determined, in accordance with Articles 174 and 175, for all the transactions carried out by the taxable persons. In this connection Member States may take the following measures:
(a) authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;
(b) require the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;
(c) authorise or require the taxable person to make the deduction on the basis of the use made of all or part of the goods and services;
(d) authorise or require the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph of paragraph 1, in respect of all goods and services used for all transactions referred to therein;
(e) provided that, where the VAT which is not deductible by the taxable person is insignificant, it is to be treated as nil.
The deductible proportion (pursuant to Article 174) shall be made up of a fraction comprising the following amounts:
(a) as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible pursuant to Articles 168 and 169;
(b) as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.
Member States may include in the denominator the amount of subsidies, other than those directly linked to the price of supplies of goods or services referred to in Article 73. Deductions made on the basis of such provisional proportions shall be adjusted when the final proportion is fixed during the following year. In order to ensure compliance with the principle of neutrality, the proportional deduction should ideally reflect actual use of goods and services for the purposes of carrying out taxed transactions.
SPECIAL VAT PACKAGE IN EU AND BANGLADESH
In EU, small enterprises, by reasons of the activities or structure of such enterprises, who encounter difficulties in applying the normal VAT, are entitled to special package under EU-VAT Directive 2006/112/EC: Article 281 since 1992: "Member States which might encounter difficulties in applying the normal VAT arrangements to small enterprises, by reason of the activities or structure of such enterprises, may, subject to such conditions and limits as they may set, apply simplified procedures, such as flat-rate schemes, for charging and collecting VAT provided that they do not lead to a reduction thereof."
Although Bangladesh introduced special Vat package in 2005 but this special package is denied altogether in the VAT Law of 2012 with the under baked perception that it is out side the scope of so called vat principles although there should not be any problem in including supplementary duty in the VAT Law.
DENIAL OF TAX EXEMPTION TO LOCAL INPUTS FOR EXPORTS
The definition of Export in the VAT Act 2012 is inconsistent with the Export Policy Order and as a result, the provision of tax exemption allowed to imported inputs of our exports/deemed exports are denied to local inputs in gross violation of WTO National treatment (equal treatment to local and imported goods) obligation. The finance Minister has already directed the NBR to extend equal tax exemption facilities to local inputs for our exports and deemed exports.
The new VAT Law is required to ensure the international practice of risk based audit oriented investigations replacing current rule of summery seizure of documents goods and vehicles at the sole discretion of the VAT officials. This discretion often leads to rent seeking drive creating havoc in business circles mostly SMEs.
DISCRETION OF VAT OFFICIALS
The new VAT Law must also rectify its bias towards total discretion of VAT officers in freezing of bank accounts, confiscation of property, seizure of goods and vehicles even by forcibly breaking doors, imposing penalty on various grounds, including alleged incorrect statements. In order to establish rule of law to ensure a business friendly environment the new VAT regime must ensure that all such punitive actions are to be acted upon on the basis of the order of an appropriate court.
In the NBR seminar on new VAT Act of 2012, held on September 10, 2014, the finance Minister and the Commerce Minister rightly called for formation of an expert committee with the NBR and FBCCI as co-chair to examine and evaluate VAT Act 2012 and finalise appropriate proposals for consideration of the government, taking into account the proposals put forward by FBCCI in the seminar.
By incorporating international best practices outlined above, the NBR-FBCCI expert committee will be able to come up with most appropriate and suitable set of proposals to usher in a compliance-friendly VAT regime that will ensure and promote fair and competitive business process in Bangladesh.
The writer is Trade Policy Advisor, Federation of Bangladesh Chambers of Commerce and Industries. mahmed019@hotmail.com
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