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The VAT impasse: Determination of threshold

Md Abdur Rouf | May 16, 2019 00:00:00

Few issues have arisen regarding the implementation of the new VAT law (Value Added Tax and Supplementary Duty Act, 2012). Determination of threshold is one of them. There are several questions regarding determination of the threshold. How much should be the primary blanket exemption threshold? How much should be Turnover Tax threshold etc are the questions that need to be resolved.

In the 1991 VAT law (Value Added Tax Act, 1991), there is no such primary blanket exemption threshold. Cottage industry benefit can be called an exemption threshold under 1991 VAT law. But there are three stringent conditions to obtain cottage industry benefit. Those are: (a) a registered entity with the Registrar of Joint Stock Companies can not obtain cottage industry benefit i.e., this benefit is given only to partnership a firm and proprietorship firm, (b) its capital machinery value must not exceed BDT 4.0 million any time in a year; and (c) yearly turnover of the entity must not exceed BDT 6.0 million in a year. Presently, only few entities enjoy cottage industry facility complying with the above conditions under the 1991 VAT law.

The question needs to be addressed whether it is required to allow primary blanket exemption under VAT. If we look at international practices, we will find that in some countries there is such blanket exemption but in many countries there is none. Generally, such primary blanket exemption is required in the VAT system where small and medium enterprises (SMEs) dominate the economy. In 1991, it was more so in Bangladesh compared with our economy of today but it is not clearly understood why at the time of introduction in 1991 no such primary blanket exemption was incorporated in the VAT law. Presumably, expansion of VAT base was the concern even during that nascent stage of VAT. However, on one hand, we require facilitating the SMEs, and on the other, we need to broaden our tax base. Keeping these two aspects in view, in my opinion, the primary blanket exemption threshold needs to be kept lower, in between BDT 2.5 million to BDT 4.0 million, provided that the turnover is properly estimated and provisions strictly enforced.

Turnover Tax threshold is at present BDT 8.0 million annually. In 1991, it was BDT 0.5 million, in 1995 it was BDT 1.5 million, it was gradually revised upwords since then and in 2010 it was BDT 8.0 million. Since then, it was not revised. It was lost in the noise of the new VAT law. In the new VAT law, Turnover Tax threshold was kept the same, i.e., BDT 8.0 million. If you consider the progress of its growth since 1991, it can be concluded that today Turnover Tax threshold can be fixed at highest BDT 15 million, provided that the turnover is properly estimated to determine the threshold.

There is another threshold -- package VAT threshold in the 1991 VAT law. It may be mentioned here that under the 1991 VAT law, package VAT provisions have been incorporated only for the small traders, i.e., small shops. Small traders located in the Dhaka (North and South) and Chattogram City Corporation areas will require about BDT 0.8 million turnover to qualify for paying package VAT, in other City Corporation areas of the country, the threshold is about BDT 0.6 million, in the municipal areas of district towns, it is about BDT 0.4 million and in other areas of the country, BDT 0.2 million. It can be mentioned here that these small traders pay yearly fixed amount of VAT, presently BDT 28,000, BDT 20,000, BDT 14,000 and BDT 7,000 in the aforementioned four areas respectively. It can be further mentioned here that revenue collection under Turnover Tax and package VAT is barely minimum, with no impact on revenue, approximately BDT 200 million in a year.

In the new VAT law, a blanket exemption of BDT 3.0 million has been allowed to all entities. Reportedly, there is demand from the business community to raise blanket exemption threshold to BDT 5.0 million. In the new VAT law, Turnover Tax threshold stands at BDT 8.0 million. Reportedly, there is demand from the business community to raise it to BDT 50.0 million. Determination of these thresholds has become one of the stumbling blocks in our VAT system for a pretty long time.

Experience shows that other than deciding insertion of provisions in the law regarding threshold, it is important how to practically estimate real turnover and enforce the provisions of law properly. If adequate provisions are there in the law but those are not properly implemented, it gives no benefit to the society. Rather, it gives rise to irregularities and harassment.

There are many traders, especially in the business hubs of old Dhaka and Khatungonj of Chattogram, with huge yearly business turnover but they remain under package VAT payment system. Worse still, there are some of them who pay no VAT. These are some of the many cases of the failure of actual turnover determination in our VAT system, plaguing the system. So, ultimately, the basic problem lies not in the insertion of threshold provision in VAT law but in the implementation of the provisions in its truest spirit.

Both in the 1991 VAT law and in the new VAT law, there is no method regarding how to properly estimate the actual turnover of any entity. While auditing the big entities, such turnover is somehow determined examining the data of import, purchase, sale etc. But with regard to thousands of small and medium entities, audit could not be done; it is also not desirable to do so. Then, how to determine turnover?

A mechanism can be devised to determine a near-accurate turnover of these thousands of small and medium enterprises. On the basis of per square meter area of the business entity, number of manpower employed, amount of utility bills paid, banking transactions, amount of purchase, nature of business etc., a criteria can be arrived at to determine their near-actual turnover. Whatever be the amount of turnover, i.e., the threshold, it needs to be practically well determined and enforced. Regarding determination of actual turnover of these entities, there should not be any lacunae in the law; transparent formula requires to be devised.

At the present juncture of VAT discourse, it is more important to devise a criterion to comfortably determine actual turnover of all business entities under the VAT net and revise the turnover upward or downward as per real business situations. Insertion of provisions in the law regarding how much shall be exemption threshold or Turnover Tax threshold and then letting it remain undetermined or loosely determined shall not pull our VAT system out of the present state of discomfort.

Dr Md. Abdur Rouf currently works at a World Bank-financed VAT-related project as a Specialist. Opinion expressed in this article is his own. roufvat@gmail.com

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