VAT law a tool to fetch revenue, not fleece taxpayers
The Value-Added Tax (VAT) system was initiated about 25 years back and an updated new VAT law is waiting for its enforcement by July, 2016. VAT is a replacement of sales and excise tax. It was a German businessman, Wilhelm Von Siemens, who, in the 1920s, had first innovated the idea of imposing tax on additional value of output at each stage of its creation, rather than just at the retail sales end. But it was a Frenchman, Maurice Lauré, a tax official, who was the first to implement it in 1954. VAT is now implemented in over 150 countries, where it accounts on average for as much as a fifth of the total tax revenue. Today, all OECD countries, with the exception of the US, have VAT systems in place. In fact, revenues from VAT represented, on an average, 18.7 per cent of total tax revenues of the OECD countries in 2008, compared to 8.8 per cent in 1975.
Many developing countries around the world have introduced VAT in the hope of raising revenues efficiently at the least collection cost. VAT is intended to be a neutral, efficient and buoyant revenue-raising tax. It is effective in terms of raising revenue and is cost-effective to administer compared with other taxes. It is actually collected by businesses at each stage of production and distribution chain.
VAT is a secure tax to collect, compared to conventional sales taxes which can be lost if evasion happens right at the final sales stage. It is also an attractive tax from the taxpayers' perspective because of its transparent nature. The consumers know what they pay, and if they don't buy the goods, they don't pay the tax.
The revenue gains from VAT are likely to be higher in an economy with higher level of per capita income, lower share of agriculture, and higher level of literacy. It proves to be an efficient tool for revenue collection. Compared to alternatives in indirect taxation, the VAT has more revenue potential.
Bangladesh introduced VAT in 1992 with an aim to increase tax collection. The result was very encouraging since VAT and Supplementary Duty (SD) collection doubled its share as percentage of gross domestic product (GDP) within one year from 1.5 per cent in FY1992 to 2.9 per cent in FY 1993. The trend gradually increased over time and in FY2010, it crossed 5 per cent of GDP. VAT and SD contributed about 81.3 per cent in FY2014 and VAT singularly added about 57.9 per cent. During this period, the collection of VAT increased by 10 times. But since 2000, the earnings from direct tax (e.g. income tax, travel tax and others) grew at 21.1 per cent but VAT collection increased by 15.6 per cent. The slowdown in annual increase of VAT collection, compared to direct taxes, has drawn attention of the policymakers. Bangladesh is now in the process to implement revised VAT Act with a hope to increase income from this source.
The existing and forthcoming laws have many regressive clauses. The law and rules seek to make VAT a 'workhorse' of future revenue generation against the backdrop of the country's policy of continuous trade liberalisation.
The VAT law has been set to increase tax collection mostly focusing on a mindset of trading character of business in Bangladesh but there is no policy support for industrialisation. There is no effort to make fair calculation of tax. Fair collection of tax will make fair competition among business houses and will increase economic activities by ensuring a level-playing field which is a pre-condition for increased economic activities.
Conventionally, a tax system is considered to be regressive if the share of tax burden in one's total income is reduced as income rises. Defined this way, regressivity is inherently applied to VAT, a tax on consumption. The poor generally spend a greater portion of their income on consumption than the rich. Thus, VAT has been considered as a regressive tax, affecting lower-income earners more than the higher ones. This is countered by the argument that consumers have a choice to buy or not to buy certain items and where daily essentials, such as food and shoes, are concerned, policymakers can intervene for equity purposes. It is a particularly easy way for governments to raise tax revenue because it can be 'hidden' in the consumer price.
The law has exempted tax on import for personal consumption (Sec 27) and assets for private purpose (Sec 70). VAT is a consumption tax but import for consumption under baggage rules has been set to be exempted from it. This is really conflicting to the philosophy of VAT. The argument made in the note/clarification of the draft that import for private consumption is not in course of economic activities.
Any official of the NBR having the rank of Assistant Commissioner (AC) has the authority to freeze bank accounts of businesses. This means, the AC can exercise discretionary power to stop bank transaction, thus closing down of economic activities with an allegation of violation of any rules (Sec 83-3).
Appeal, revision and references have been made difficult for the tax-payers by imposing restriction on burden of proof (Sec 121). The aggrieved persons must pay 10 per cent of the tax specified in the impugned order or if no such tax is specified therein, 10 per cent of the monetary penalty should be imposed. Again aggrieved persons must deposit further 10 per cent of claimed VAT before appeal to the High Court division of the Supreme Court. This is against basic human rights enshrined in the Constitution. None is guilty until declared by a court.
The Section 97 makes representatives of taxpayers personally liable for the payment of amounts. They include relative of persons and beneficiary of trust. The word 'relative' is yet to be defined. This condition will make all the unexplained relatives liable for liability of a person and the innocent beneficiary of any trust fund liable which is against other laws prevailing in the country. The law did not define 'relative' and the NBR has got a free hand to make any one of even far distant relatives liable.
VAT is one of major taxes in revenue system. Tax policy units and tax administrations should develop their capacity in projecting the VAT revenues, estimating compliance, and assessing the revenue impact of any proposed changes in the tax laws and/or tax administration practices.
The law should have massive reform in VAT administration, tax return and calculation, valuation of end products, payment of tax, rebates, carry-forward of advance or excess tax paid and settlement of dispute on tax related issues. But the new act could not address all the shortcomings of the existing law.
Moreover, police, Border Guard, Coastguard, Ansar and all local government institutions, narcotics department and all other offices will 'extend co-operation'. This seems like war against business houses. An IMF report says the existing VAT Act has failed due to ineffectiveness of the NBR but under the law, the NBR has been authorised to go aggressive against business houses instead of addressing its own weaknesses and utilising the legal system for fair judgment.
The Alternate Dispute Resolution (ADR) is also not fair to the taxpayers. The Section 125 empowers the NBR to select facilitators and business houses can select a facilitator from listed facilitators. The documentation process will, however, remain with the NBR. This is also against the hundreds-year old traditional arbitration system of our society. The facilitators or arbitrators must be independent.
VAT may become a 'money machine,' as usually claimed. Its rate structure should be designed as simple as possible, preferably with one or-at most-two positive rates, few exemptions, and zero rating being exclusively granted to exports. Broadening base, in general sense, reduces deadweight loss and provides an opportunity for lowering the rates, and, thereby, increasing compliance. If so designed, VAT will be buoyant and efficient. It is to be noted that zero-rating generally provides strong incentives for frauds, creates excessive burden on tax administration, and effectively erodes the base.
The provision of realisation of outstanding VAT from undefined 'relatives', burden of proof on taxpayers and appeal against payment of 10 per cent of claimed VAT incorporated in the proposed law violate the fundamental rights guaranteed in the Constitution.
The declared preamble of the law appears to have a wrong vision. The law has been enacted to increase tax collection. But there is no effort to make fair calculation of tax.
Writer:Mr. M S Siddiqui