Ending VAT confusion

Value-added tax (VAT) is a consumption tax on a product declared by tax authority of a country whenever value is added at each stage of the supply chain, from production to the point of sale. VAT is an ultimate tax on consumer's expenditure. The beauty of VAT is that each person or company along the supply chain has an incentive and obligation to ensure that every other person or company in the supply chain pays the VAT. The process ensures that each transaction is recorded in a transparent manner.

It is an indirect consumption tax that is ultimately paid by consumers or buyers on their purchases of goods and services. In other words, VAT is levied on the gross margin at each point in the manufacturing till distribution to retail sale and the customer in the end.

As such, VAT is a modern version of sales or excise tax. In case of sales or excise tax on business transactions, the tax is not shown on the bill paid by the buyer. But VAT is different from sales tax in various aspects and the sellers and buyers declare the amount of VAT in the invoice making the entire system transparent. The consumers understand the total VAT paid by him upon purchase or consumption. The tax department can easily manage the tax system with the documents of transactions. Due to the simplicity of the VAT system, the entire taxation system on products and services has become easier.

If the tax system is perfectly implemented, VAT can resolve historical dispute between tax payers and revenue department. As the tax is assessed and collected at each stage at a certain rate, the amount of VAT should be the same percentage of VAT rate on sales price, to be paid by end consumer. 

A calculation can clarify the nature of the tax. For example, a manufacturer makes and sells candy in one country. Say the rate of VAT is 10 per cent in that country. The manufacturer bought the raw materials for Tk 2.00. The supplier added a VAT of Tk 0.20. The cost of raw material is Tk 2.00 including an earlier paid VAT. The manufacturer then sells the candy to a retailer for Tk 3.00 plus a VAT of Tk 0.30 for a total of Tk 3.00. The manufacturer has added value of Tk 1.00. He has calculated VAT of Tk 0.30 and deducted Tk 0.20. He will pay VAT of Tk 0.10.  Now the total price of candy stands at Tk. 3.00. The raw materials supplier and manufacturers has paid a total VAT of Tk 0.30 (Tk 0.20 + Tk 0.10) which is again 10 per cent of sale price of the manufacturer. 

Finally, the retailer sells candy to consumers for Tk 4.00(including a VAT of Tk 0.10). The total VAT calculated is Tk 0.40. This is exactly 10 per cent of the sale value of the candy to the consumer.

Value-added tax was introduced in Bangladesh in 1991 after replacing sales tax and most excise duties. The Value Added Tax Act, 1991 was enacted that year and consumers began to pay VAT from July 10, 1991 after the National Board of Revenue (NBR) imposed VAT on imports and domestic transactions.

There is dissatisfaction among the business community and consumers regarding the law and its implementation. This could be due to the lack of clarity about the definition of VAT and its importance as the definitions of VAT in existing law of 1991 and the new Value Added Tax & Supplementary Duty Act, 2012 are confusing.

The Value Added Tax and Supplementary Duty Act 2012 does not have an appropriate definition of VAT. Section 79 of the Act says-"VAT means the value added tax imposed under Section 15." This means any tax imposed under this law is VAT. But Section 15 is related to procedure and rate of imposition of VAT. Moreover the same section refers to business of import and taxable supply. On the other hand, according to Section 16, VAT should be paid by persons, (a) in relation to taxable import: the importer; (b) in relation to any taxable supply in Bangladesh: the supplier; (c) in relation to any taxable supply of imported service: the recipient of such supply;

(d) in relation to any sale, in the prescribed manner, of any good by an auctioneer on behalf of a registered person: the auctioneer. Clause 16, however, does not address value addition by manufacturers.

In the Value Added Tax Act 1991, Section 6 (4aa) states that VAT is "payable by any service rendering person selected in this behalf by the Government, by notification in the official Gazette, from time to time, shall be collected or deducted at source."

There are many exemptions and impositions of VAT. Recently, NBR has also imposed VAT on Trade Licence, Import licence and other government services. In reality, government or local government in fact adds no value by issuing licence to a business concern.

Interestingly, in a recent order, NBR has exempted travel agents from paying VAT on their commission earnings from sales of air tickets, according to Statutory Regulatory Order (SRO) on November 14, 2018. Earlier, there was a 15 per cent VAT, imposed in Fiscal Year (FY) 2016-17, on commissions of travel agents which they receive from airline operators for selling air tickets. According to an article in The Financial Express on November 18, 2018, officials of NBR said that the travel agents were exempted from paying VAT on commission earnings following demands from the Association of Travel Agents of Bangladesh (ATAB). Their argument was that the collection procedure of VAT from air tickets is very complex and is not in practice anywhere in the world.

VAT should be paid by the consumer. But NBR is not willing to collect VAT from end consumer. But VAT is collected from ticket-sellers. NBR believe it is illogical to shift the liability of VAT to passengers, which is again in conflict with the Value Added Tax and Supplementary Duty Act of 2012.

Reportedly, the Finance Minister (FM) initially agreed on the proposal by ATAB for shifting the liability of VAT on commission earnings to passengers by adding the amount of VAT to ticket prices. But later, he decided to waive the VAT to avoid any additional financial burden on air passengers. The earlier decision by the FM was in line with the concept of VAT. However, the logic behind the exemption of VAT on travelling is again confusing as travelling is considered a luxury for Bangladesh. The decision will ultimately lead to a loss of revenue for the national exchequer.

The nation needs to come to a conclusion about the definition of Value Added Tax.

M S Siddiqui is a legal economist

[email protected]