The Value Added Tax (VAT) system is known to be complex in our country. The system is not clearly understood by all. In fact, VAT system being a modern taxation system can not be expected to be understood by all in its entirety. However, since VAT is a mass-level tax, it should be understood by all to the extent needed by them.
People paying VAT requires to know why, where and how to pay? It should be easy and clear to them at least up to this extent. In fact, the system needs to be easy for the compliant VAT payers and should be made difficult for the VAT evaders. Otherwise, a business-friendly and revenue-friendly VAT system can not be established.
With this end in view, our present VAT system needs extensive reforms. Many reform initiatives have so far been undertaken. But the expected level of simplification has not been achieved as yet. VAT reforms have a number of dimensions, of these one is procedural reform. In my opinion, procedural reform is the most importnat aspect of VAT reform in Bangladesh. If this aspect can be properly addressed, need for reforms in other aspects of our VAT system could be largely diminished.
Let us explain what we mean by the term 'procedural reform'. It means, in the first place, simplification of VAT procedure for easy understanding of the VAT payers. Presently, we do not have easily understandable VAT procedure on the one hand, and on the other, in many cases we do not have any procedure at all. These difficultues are rendering the VAT system business-unfriendly, and hence revenue-unfriendly. Difficulties of existing procedure and non-existence of procedure are promoting non-compliance and corrupt practices. So, we need to make the existing procedure simplified and at the same time formulate procedure where we do not have it. In this article, I intend to focus on the latter.
Let us take VAT on house rent as an example. VAT was imposed on house rent in 2010. During the last five years, VAT procedure on house rent has seen several changes. With all these changes, the updated VAT procedure on house rent is described below.
Commonly what we know as house rent has a legal title and definiton in our VAT system. The title of this service is "Lesee of Places and Establishments". It is defined as "lesee of places and establishments mean any such individual, institution or organisation who or which is authorised to use any such place or establishment that is not used for residential purpose for a certain peroid in exchange of consideration. Aquisition of such a right that can be renewed after certian period shall also be included in it." By this definition rent of any house, flat, place, roof-top, office space, space for shops etc., have been brought under VAT network. Through an SRO, rate of house rent VAT has been fixed at 9 per cent. There are few exemptions. House that has been rented on completely residential purposes is exempted from VAT. Commercial rent of space not exceeding 150 square feet is exempted from VAT. If a VAT registered production place is rented, it has been given VAT exemption. The house rent VAT shall be paid by the tenant, not by the landlord. The tenant will pay the rent to the land-lord as per agreement between them. The landlord has no responsibility of paying or deducting VAT on house rent. The tenant will deposit 9 per cent VAT on top of the rent amount to the governemnt treasury and submit the treasury challan to the relevant VAT office. An individulal or establishment who or which only pays house rent VAT but does not have any other VATable activity shall not require to get registered under VAT and shall also not require to submit VAT return. These are the basic procedures regarding house rent VAT.
Existing procedure regarding house rent VAT mentioned above does not answer many questions. For instance, a space has been rented by some one. Then, the space has been decorated and rented out to several offices. What shall be the VAT procedure in this case? Should VAT be paid by the first tenant, and again by the subsequent tenants? An office has rented a house where the consultants of the office stay for a short time. It is used only for residential purpose of the consultnats. What should be the VAT procedure on such house rent? An office has rented a flat. Rent of the flat is being paid by the office. The flat is used as the residence of the Chief Executive Officer (CEO) of that office. What should be the VAT procedure in such case? One person has rented a space. He has rented out a portion of the space to another person at the same rate. What should be the VAT procedure in this case? An agreement has been signed for house rent and another agreement has been signed for security, common services, garage etc. What shall be the VAT procedure in such a case? An agreement has been signed with the land-lord for house rent, another agreement has been signed with flat-owners' society for lift, security, water, generator, common electricity, intercom, maintenance etc. What shall be the VAT procedure in such a case? Questions like these galore.
We need to have answers to all possible questions regarding payment of VAT. We need to lay down detailed procedures on all VATable economic activities. Then the VAT-payers and VAT collectors are to be made fully aware of these procedures. If this could be done, many problems of our VAT system would resolved. With proper knowlwdge of the procedures VAT payers could have paid proper amount of VAT themsevles confidently without paying any heed to others. VAT collection could have got a boost. The VAT collectors only require to pursue the evaders who should have been few in such a system.
When procedural reform is done, it may be less important whether it is administered manually or electronically. However, electronic implementation will certainly give speed, accuracy and therefore more compliance. So, VAT reform is synonymous to procedural reform. This is the need of the hour.
