New VAT law: Amendments necessary to align with global best practices

The government has finally notified that the new VAT law (VAT and Supplementary Duty Act, 2012 and Rules 2016) will go into effect from July 01, 2019. Consequent upon this, all rules, orders, statutory regulatory orders (SRO) and notices issued under the erstwhile VAT Act 1991 and Rules thereof have been rescinded with effect from that date.

As anticipated, in addition to the present VAT rate of 15 per cent, reduced VAT rates, with no input tax credit, at 05 per cent, 7.50 per cent and 10 per cent have also been introduced on the supply of specific goods and services. However, in order to give relief to the local traders, VAT rate of 05 per cent is continuing in respect of local supply of all goods, even when such goods fall under the VAT rate of 7.50 per cent and above. Tariff based valuation is still continuing in respect of supply of newsprint, bricks, M.S. product and SIM cards. However, effective VAT payable has marginally increased in respect of such product.

Introduction of multi-tier VAT rate would have no major impact on business segments since such reduced VAT rates also prevailed during the previous VAT regime with no corresponding VAT credit. Specifically, the local traders, who are the majority tax payers, would continue to pay VAT at 05 per cent with no corresponding credit and hence there would be no financial impact on their businesses.

THRESHOLD LIMIT FOR REGISTRATION UNDER VAT & SD ACT: Suppliers with turnover less than Tk 5 million have been kept completely outside the purview of VAT. Suppliers with turnover from Tk 5 million to Tk 30 million are liable for enlistment to pay the turnover tax at 04 per cent. As a result, small traders having annual turnover of up to Tk 5 million would enjoy complete exemption of VAT and turnover tax (TOT). However, rate of TOT has been increased to 04 per cent from 03 per cent. It is expected that a large number of small traders with turnover of up to Tk 5 million would be benefitted. At the same time, the government would also save on administrative costs earlier required to recover such petty amount of TOT.

Enhancement of VAT threshold limit from Tk 8 million to Tk 30 million would provide some relief to the large number of small and medium enterprises (SMEs) who would be outside of the VAT net. Moreover, a large number of SMEs having turnover below Tk 5 million would remain outside VAT and turnover tax net and would enjoy tax free environment.

NON-AVAILABILITY OF INPUT TAX CREDIT (ITC): It has been notified that ITC would not be allowed for goods supplied at reduced rates. The present VAT regime is also not allowing ITC for goods supplied at truncated rate. It is pertinent to mention that under the present VAT regime, the supplier may discharge VAT at a standard rate of 15 per cent and claim ITC. However, under the new VAT regime, reduced VAT rates have been notified under the Schedule and therefore the supplier of such goods and services do not have any other option but to charge VAT at the applicable reduced rate. As a result, he or she would not be eligible to claim ITC.

Furthermore, since the local trader as well as a commercial importer would be required to charge VAT at 05 per cent for supplying any goods in Bangladesh, such trader or commercial importer will not be allowed to claim ITC on VAT paid at the time of procurement or import as the case may be. Such VAT would be a cost in the hands of the trader/commercial importer.

Large multinational companies in the fast-moving consumer goods (FMCG) sector having distribution network across the country may be impacted since the FMCG distributors would not be allowed to discharge VAT at 15 per cent and claim credit of VAT paid at earlier stage. Since they have to charge VAT at 05 per cent without corresponding credit of VAT paid by the manufacturer, this 05 per cent VAT would be an additional cost in the entire value chain.

EASE OF DOING BUSINESS: Cross utilisation of input tax credit (ITC) amongst different units of the same company with centralised registration is permissible, resulting in improved cash flow. Furthermore, to avail ITC, it is not necessary to bring the goods to the place of business. ITC now can be taken even when the goods are directly sent to the contract manufacturer/distributors from the place of the supplier/port of import.

VAT deducted at source (VDS) from payment made to the supplier can now be paid through excess ITC if available, resulting in positive cash flow.

ITC AND CURRENT ACCOUNT: The closing balance of accumulated ITC as on June 30, 2019 maybe allowed to be adjusted, subject to the Commissioner's approval, against monthly output of VAT liability under the VAT & SD Act, 2012 to the extent of maximum 10 per cent of net tax payable. Manufacturers liable to pay VAT at 15 per cent under the VAT & SD Act, 2012 on goods that were earlier taxed at tariff value would be allowed to claim ITC only on inputs lying in stock as on the date of transition. No ITC would be allowed on inputs used in work in progress (WIP) and finished goods lying in stock.

Though the requirement of filing price declaration has been done away with, every manufacturer is required to file input output co-efficient declaration on finished goods lying in stock as on June 30, 2019.

ITC is now allowed on the procurement of construction services, repair and maintenance service and procurement of goods such as furniture, air conditioners, generators, stationery, etc. As such, the ITC net has been widened. Further, cap of 80 per cent of ITC on gas, insurance, audit and accounting, banking services, etc., has been abolished and full credit is now available on these.

VALUE DEDUCTED AT SOURCE (VDS): VDS is to be deducted by the VAT withholding entity only when goods and services are received from a VAT registered non-VAT withholding entity valued more than Tk 10,000. When goods or services are supplied at 15 per cent, one-third of such VAT is to be deducted as VDS by the recipient. When goods or services are supplied at VAT rate other than 15 per cent, the entire VAT has to be deducted as VDS.

In addition, when a VAT unregistered person imports services into Bangladesh and such services are not covered under section 17 of the VAT & SD Act, the authorised dealer bank would be required to deduct applicable VAT before remittance.

Earlier, all the business entities, irrespective of whether they were VAT registered or not, were required to withhold VAT from payment made to specified service providers and this was deposited to the government. This was a huge compliance requirement for all the business entities. As such, the new VAT law would provide a compliance relief to all segments of business entities as they would not be required to withhold VAT and deposit it to the government. This would result in some ease in doing business in the country.

SUPPLY OF SPECIFIED GOODS AND SERVICE BY NON-RESIDENTS (NR):

The following supplies are considered as supply made in Bangladesh:

* Supply made by a NR carrying on an economic activity from or through a fixed place of business.

* Supply related to goods transferred, conferred, installed or assembled in Bangladesh.

The following services provided to a VAT unregistered person is also considered as supply made in Bangladesh:

* Services physically provided in Bangladesh by the NR staying in Bangladesh at the time of supply.

* Electronic services delivered to a person located in Bangladesh at the time of supply.

It has been notified that when a NR is providing service not from a fixed place of business in Bangladesh, it will be necessary to appoint an individual VAT agent. However, guidelines in respect to roles and responsibilities of such VAT agents are yet to be stated.

Online services/ electronic services inter alia provided by the NR to a VAT unregistered person would be considered as supply made in Bangladesh. Therefore the NR would be required to appoint a VAT agent to discharge the VAT compliance.

In the absence of a robust mechanism or guidelines from the government, multinational companies engaged in providing online electronic services to a large number of individual customers who are not VAT registered are likely to face challenges related to VAT compliance in Bangladesh.

OTHER SIGNIFICANT CHANGES:

* Supply of goods and services without any consideration shall be valued at fair market price on which VAT would be payable.

* Limitation of time for initiation of audit proceeding for 100 per cent export unit has been restricted to three years from the last day of the financial period.

* Advance Trade VAT at 05 per cent on the value of import plus 33.33 per cent has been abolished. Instead, advance tax at 05 per cent will now be levied on the value of import.

* Service provided by the promoter or director of a company is considered as an "economic activity" and VAT is payable on the remuneration received by such officials.

* For warranty services, consideration received by an Authorised Service Centre (ASC) from a NR warrantor for supply of goods and services will be treated as zero-rated supply, subject to following conditions:

* Goods or services supplied to customers under an agreement with NR warrantor; and

* Goods or services supplied to customers without any consideration

* Few heavy industries like automobile, refrigerator, freezer, air conditioner, motorcycle, mobile industries will continue to get VAT exemption.

* The new law shall be on-line based and therefore, it will be mandatory for the shop owners and business entity to keep records of VAT Challan/Invoice at the time of sale/supply through Electronic Fiscal Device (EFD) and Sales Data Controller (SDC) or Point of Sales (POS) software.

The government has taken various steps to ensure implementation of the long-awaited VAT & SD Act 2012. However, since the budget has continued to focus on the present VAT structure, various detractions have taken place from the original VAT & SD Act 2012. Therefore, the VAT & SD Act will require a lot of amendment in order to align with global best practices.

Pulak Saha, Dibyendu Das and Prabir Mitra are partner-indirect tax, associate director and manager respectively at PricewaterhouseCoopers (PWC) in Kolkata, India and Shahadat

Hossain is a senior associate at PWC office in Dhaka