Feb 22
Big Promises, Tightened VAT Grip PDF Print E-mail

By Ziaur Rahman

Almost every year the government announced a bloated budget, imposing more tax and duties, that reflects its desperation to sustain the momentum of development activities. The initiation of the novel idea, the government hopes, would bolster its welfare credentials. But the ground reality is somewhat different.

This year also the finance minister presented a huge national budget of over Tk 4.0 trillion for the next fiscal year (2017-18) with an ambitious development target banking on an unprecedented revenue target for about Tk 2.88 trillion.

Of the total revenue, the National Board of Revenue (NBR) is expected to come up with Tk 2.48 trillion. To meet the ambitious expenditure focusing on the next general election, the proposed budget targets to generate the highest chunk of revenue from VAT, followed by income tax and customs duty.


This year budget is undoubtedly a crucial one for the current Awami League government because of the ensuing national election as the government has to go for a hefty expenditure spree riding on a redesigned VAT regime to boost revenue collection.


To meet the ambitious expenditure targets, the finance minister has proposed full implementation of new Value Added Tax (VAT) and Supplementary Duty Act 2012 with a uniform 15 percent VAT rate despite widespread opposition from the business community.


Businesses opposed the new VAT law arguing that it will push up commodity prices and add to the financial hardship of the general public. But the finance minister remained steadfast in implementing the VAT law, though he had earlier promised to lower the uniform VAT rate. The new VAT law will come into force from July 1, 2017.


The new VAT law imposes the same uniform tax rate, instead of the existing truncated rates, at every stage of value chains from production and import to the wholesale and retail sale points along with the provision of claiming deductions for VAT already paid at earlier stages.


The government is going to introduce the new VAT law although businesses are yet to fully understand the new VAT system and there remains only three weeks for the new law to come into effect. Many of them expressed doubts about the implementation of the new VAT law appropriately.


Implementation a major challenge

Economists, businesses and a good number of private think tanks also expressed their doubt over achieving the revenue collection target in the proposed budget marking it the biggest challenge for the government.


Debapriya Bhattacharya, distinguished fellow of private think-tank Centre for Policy Dialogue, was critical of the ambitious revenue target, which is an increase of 34 percent from the current year.

The budget targets 7.4 per cent of GDP growth in next fiscal, which analysts say, is not reasonable given the current investment-GDP ratio in the country. To achieve the targeted GDP growth, the investment-GDP ratio should be 33 per cent; whereas, the country's investment-GDP ratio in the last fiscal was 30.3 per cent. It is very unlikely that this ratio would dramatically jump three per cent in a single year.

The country's GDP growth should be accompanied by increase in employment, labour demand and real wages. But this is not the case with the proposed new budget.

The tax structure proposed in the new budget would fuel inflation which could have negative impacts on the overall economic growth and investment, said CPD distinguished fellow while addressing a post-budget press conference in the capital on June 2.

The budget proposal has allocated Tk 20 billion for the recapitalisation of financial institutions such as Sonali Bank and BASIC Bank, faced with capital shortfall for unprecedented loan scams in the recent past. If the government keeps injecting funds, public money that is, into the banking system without taking punitive action against the people responsible for the financial crimes, the recapitalisation of the errant banks would only encourage mis-governance and continue to cut down on the economy.

Economists and experts were critical about the excise duty on bank-account balance, which they said would be a disincentive for those using banking channel at a time of falling interest rate on savings.

The Finance Minister proposed increasing excise duty on bank deposit and air tickets in the new budget. As per the proposal, excise duty of Tk 800 will be imposed instead of existing Tk 500 in cases where the balance, whether debit or credit, exceeds Tk 1 lakh but does not exceed the limit of Tk 10 lakh.

Similarly, Tk 2,500 will be imposed instead of existing Tk 1,500 in cases where the balance exceeds Tk 10 lakh but does not exceed the limit of Tk 1 crore; Tk 12,000 will be imposed instead of existing Tk 7,500 in cases where the balance exceeds Tk 1 crore but does not exceed the limit of Tk 5 crore and Tk 25,000 will be imposed instead of existing Tk 15,000 in cases where the balance exceeds Tk 5 crore.

In addition, the Finance Minister proposed revising the existing excise duty on airline tickets except for domestic travels and travel to the SAARC countries which is proposed to keep the same as present.

Mentioning that supplementary duty has been increased for some major industries, CPD officials noted that although it is expected to generate additional revenue, the measure may increase tax burden on importers while a number of sectors will suffer from higher cost of doing business.

The CPD distinguished fellow observed that that it would not be possible to implement this budget without direct involvement of the public representatives. Currently, he said, parliamentarians or local-government representatives do not have any role to play in the monitoring of project implementation.

"It would be wrong to think that such big budget will get implemented only through public administration and without any true involvement of public representatives," he added. CPD officials also lamented what they said the absence of any specific guidelines for reforming the banking sector or for rejuvenating the capital market in the latest budget.

"We always have called for taxing those who are smuggling their money abroad and not increasing the tax burden on ordinary taxpayers." But, the latest budget would mainly work to increase the tax burden on middle- and lower-middle-income people,” said the private think tank in its observation.

Cost of living, inflation to go up

From July 1, people from all walks of life will have to pay 15 percent VAT (Value Added Tax) on most goods and services.

The new fiscal measures, particularly tax measures, suggested in the proposed budget, would increase cost of living and cost of production affecting overall economic growth and investment.

The burden of taxation will go more on middle class and lower middle class. The budgetary measures along with rising price of rice and non-reduction of oil price might push up the rate of inflation in the next financial year.

The new tax structure will increase the prices of some essential services like power, water, gas, digital services, flats, mobile phones and some food items. The finance minister proposed to impose 10 percent supplementary duty on some food items such as pasta, lasagna, burger, sandwiches, hotdogs and pizza in the budget for 2017-18.

Electricity, branded garments, paper, biscuits, rod, jewellery, furniture, tissue paper and apartments will see their VAT rates go up to 15 percent from varied rates that have been applicable to them under the existing VAT Act 1991. It said the proposed tax structure would also make some digital services more expensive.

Imports of mobile handsets would be costlier owing to the increase in customs duty from 5 percent to 10 percent. The budget has proposed to double the customs duty to 10 percent on computer software services, which will make IT-enabled services dearer.

Imports of mobile handsets would be costlier owing to the increase in customs duty from 5 percent to 10 percent. The budget has proposed to double the customs duty to 10 percent on computer software services, which will make IT-enabled services dearer. The proposed 15 percent VAT, from 4.5 percent now, on the domestic supply of IT-enabled services will also make the services costlier, according to the analysis.

Other imported items whose prices would go up because of the rise of supplementary duty by 5 percent include mobile SIM cards, colour television sets, footwear, tyres, detergent, paints and varnishes. The steel industry will be affected because of increase in prices of rod following imposition of 15 percent VAT. “Our production cost will also rise owing to increase in VAT on electricity, gas and other utility”, said an industry insider.

In addition, 15% VAT on English medium schools would create stress on the middle-income group over the expenditure of their children’s education.

Meanwhile, the Consumers Association of Bangladesh (CAB) at a press conference on June 8 demanded withdrawal of value-added tax imposed on electricity, gas, fuel oils like diesel, kerosene and petrol, and pubic-supply water to relieve the consumers from the extra burden of tax.

CAB president Ghulam Rahman said that the prices of gas, electricity, fuel and water should not be increased due to the implementation of the new VAT law. “We want relief as well as development but not such prosperity that will ruin our sleeps at night.” He said.

He apprehended that prices of goods would go up and the cost of living of consumers would increase if the budget proposals including imposition of VAT at 15 per cent are approved. He, however, hoped that the government would bring necessary amendments to make the tax policy consumers-friendly before giving approval to the proposals.

People have been suffering from some sort of restlessness after the budget, said CAB president Ghulam Rahman at a programme organised by the VAT Online Project of the National Board of Revenue in Dhaka on June 8.

“It is feared that the prices of goods and services will rise and will fuel the cost of living with the new VAT in place.”  The platform of consumers demanded that the value added taxes on government utility services be waived, as many people will be affected because of the rising prices of gas, electricity and water.

The water tariff was hiked by 22 percent last year although many people still do not get the utility service, Rahman said. The government has also increased the price of gas, he said. “Now, it will be unfortunate if the cost of electricity increases because of the 15 percent VAT.”

Rahman also criticised the government's plan to increase excise duty on debit or credit balances in bank accounts. He wanted to know whether the real values of deposits are rising with the interest rates on savings falling below the inflation rate. He said looting is going on in banks. The government remains silent about the board of directors of different banks who are creating problems in the sector.

Until now, the revenue authority collects 5 percent VAT from people on electricity bills under the VAT Act 1991, which is going to be replaced by the VAT and Supplementary Duty Act 2012 on July 1.

The government now wants to do away with the multiple or reduced rates of VAT applied on more than 100 goods and services. The new VAT will increase the prices of various items of daily necessities such as electricity, processed spices, household plastic goods, biscuits and paper.

Prices of construction materials like iron rods and bricks are also going to rise.

Goods exempted from VAT

Considering the hardship of people, the NBR, however, exempted some 1034 primary and many essential commodities from VAT so that the financially insolvent and low-income groups do not suffer from it.

But the items kept outside the purview of the 15 per cent value-added tax include mostly commodities hardly used by ordinary people. “We have seen that many irrelevant products have been exempted from VAT. This has raised many questions,” the CAB president said.

According to sources, goods and services exempted from the 15 percent VAT include, among others, canned animal meat such as camel and lamb, canned fish, oyster and crab, imported fruit such as cherry and peach, sea-weeds and seas-moss, scrap collection from street urchins, consultancy for agriculture and fisheries.

The use of electricity for projects such as the Roopur Nuclear Power Plant and the Bangladesh High Tech Park has also been exempted from the 15 per cent value-added tax but the VAT rebate is absent from electric bills for ordinary consumers.

The government has increased the VAT exemption repertoire with many goods and services that are of no use to ordinary people. Businesses are yet to fully understand the new VAT system and the implementation of the law even though only three weeks remain for the legislation to come into effect, said analysts yesterday. “It is pertinently important to question whether the businesses are ready to comply with the VAT law,” said Kamrul Islam, vice-president of Dhaka Chamber of Commerce and Industry.