Input Output Coefficient shows Value Added Tax (VAT) officials the quantity of raw materials needed (wastage included) for production of each unit of a product. There are provisions for filing of Input Output Coefficient (I-O Coefficient) in the VAT law. A manufacturer is required to file the names of raw materials, prices of raw materials and packing materials, the rate of wastage and the rate of value addition of a unit of product in Mushak-4 (Mushak is the short form of Value Added Tax in Bangla). Input-output coefficient administration is essentially based on the "self-declared" approach in Bangladesh's VAT system. The VAT department has no standard (i.e. pre-tabulated standard) coefficients and it is reasonably so given the heterogeneity of goods and inputs. The I-O Coefficient concept is not used in all countries. It is known by different names.
Declaration of this co-efficient is required under section 32(5) and Rule 21 of the VAT & Supplementary Duty (SD) Act 2012 & VAT & SD Rules, 2016 respectively. Registered and enlisted persons are under compulsion to submit this Mushak-4.3 to the field level VAT offices before production or supply of goods to the divisional officer before the production or supply. Evidence of purchase of inputs such as Bill of Entry or VAT invoice is to be enclosed with Mushak-4.3. Without the Bill of Entry of VAT invoice, input tax is not creditable in Bangladesh's invoice-based credit VAT system. No approval of the coefficient is required from the VAT authority. The Input-Output coefficient does not need to mention the supply price.
Description, quantity and purchase price of raw materials and packaging materials usable for each unit of product is declared in the aforesaid form. It also includes the input-wise percentage of wastage. Although submission of I-O coefficient is mandatory for VAT registered or turnover enlisted firms, there are few implementation issues that need clear understanding.
As an analyst and trainer of VAT, the author has got the impression that there is lack of clarity, differences of understanding, even misunderstanding on the following issues with regard to Mushak 4.3: (a) which items are to be shown on the input part of the Mushak-4.3; (b) which are the components of value addition (VA); (c) does a commercial importer need to submit Mushak-4.3; (d) what is the consequence if Mushak-4.3 is not submitted before the supply of goods; (e) is it necessary to submit new declaration (Mushak-4.3) if the price of a few raw materials change by more than 7.5 per cent but the total change in price is not more than 7.5 per cent; (f) how can inputs such as machinery, lab equipment be shown as in 4.3 as input; (g) is Mushak-4.3 necessary for 'group of product' or 'each sku/type under the group'; (h) is it necessary to include 'exempted' items in Mushak-4.3; (i) the source of information to fill in Mushak-4.3.
With regard to the issue of items to be shown as input on the 4.3, the inputs defined in the Act [2(18 ka)] have to be shown on the form. As such, all raw materials, lab re-agent, packaging materials, fuel, service (e.g. electricity, transport), telephone, WASA, insurance costs etc. will be shown on the input side. Of the service items, some are divided between input and some are value addition. For example, electricity (100 per ent) is considered input while transport (80 per cent) is input.
Confusions are also seen about the components of value addition. Costs except expressly mentioned inputs are value addition (VA). The main components of VA include: wages, salary, administrative expenses, overhead, bank charges, interest, repair and maintenance, depreciation, office and godown rent, entertainment and profit etc. Among these, depreciation is a non-cash item (expenditure). But no VAT is paid on it i.e., there is no invoice for depreciation. It is notable to mention that 'electricity' falls under both 'input' and 'value addition' as per SRO. If gas is used as 'fuel', that should be on the input side as per the definition of 'inputs'; but in reality, most VAT registered persons show it as an item of value addition.
The National Board of Revenue (NBR) has exempted 100 per cent export oriented industries and service from filing I-O coefficient declaration to the VAT authorities on description, quantity and prices of raw materials (including wastage) required to produce per unit of finished goods (2020-21 budget/SRO 142 dt. 11/06/2020). This benefits exporters as it reduces their documentation burden.
MACHINERY AND SPARE PARTS ON MUSHAK-4.3: Machinery, spare parts and lab equipment are defined as inputs and can also be shown under the list of inputs. In the case of machinery or spare parts, the total cost of machinery/spare parts procurement over a period (say in a 5-year period) has to be divided by the units of output in that period to show unit-wise input cost. The accuracy of inputs shown in Mushak-4.3 is critical because registered entities will be entitled to input tax credit subject to the accuracy of inputs. Inputs have either HS codes or Service codes. Inputs are shown in Section 4 of the Mushak Return (Form 9.1).
COMMERCIAL IMPORTERS AND I-O COEFFICIENT: All registered and enlisted persons are required to file I-O Coefficient. As such, commercial importers (who pay VAT at less than standard rate) are also under legal obligation to submit Mushak-4.3
NEW DECLARATION: A question is often raised by business and VAT practitioners whether a revised 4.3 form is to be filed if few input/raw material price changes by more than 7.5 per cent but the total changes in prices remain below 7.5 per cent. An analysis of the form 4.3 makes it clear that there will not be a necessity to file I-O Coefficient afresh if the price of goods/total inputs does not change more than 7.5 per cent despite increase in price of few raw materials is more than 7.5 per cent. It is a facilitation step by the NBR.
IS MUSHAK 4.3 NECESSARY FOR 'GROUP OF PRODUCT' OR 'EACH PRODUCT: It is also an area where confusions are seen in officials/business entities. If the products are of identical size, quality and specifications, a single I-O Coefficient suffices the purpose. However, if the size and features of the product (i.e. Stock Keeping Unit or SKU) are different, it appears necessary to file separate I-O Coefficient for each class of goods with identical features. For example, separate I-O Coefficient seems necessary for say 500 ml and 1000 ml bottles of water.
EXEMPT ITEMS AND THEIR INCLUSION IN MUSHAK 4.3: Exempt items are to be included in the I-O Coefficient in order to reflect the total value addition of the goods. For instance, factory rent is a cost which adds value to the product. In this context, it needs to mention that value addition is nothing but costs that transform raw materials into finished goods or increase value of the input or utility of goods/services. Factory rent (s074) is exempt from VAT (SRO 144/mushak, dated 11 June, 2020). It is exempted for the manufacturer but not for the consumer of the goods. As such it should be added in the cost of the product as a component of value addition. Similarly, wages are usually shown as a component of value addition although any services rendered by an employee to his/her employer (payment for such services is known as 'wages/salaries') is not considered as 'economic activity'.
BASIS OF INFORMATION: Books of accounts (such as purchase register, procurement invoices, concept of 'input' are the main source of information for Mushak- 4. Manufacturing experience of the industry with regard to the raw materials used for each unit of output helps provide I-O Coefficient. The expertise of sector specialists/production technology engineers may also be used in providing the ratio in Mushak-4.3 reliably.
DO CONTRACT MANUFACTURERS NEED TO FILE MUSHAK-4.3: The recently issued (Nov 5, 2020) clarification letter on contract manufacturing by the NBR suggests that Mushak-4.3 is also necessary for the contract manufacturer. A contract manufacturer shall file Input-Output Coefficient to the divisional official of the concerned area before he supplies the goods (after manufacturing) to the main owner of the goods. According to the guidelines of the NBR, both the main owner of the goods and contract manufacturers must maintain records as per VAT law.
SIGNIFICANCE OF I-O COEFFICIENT: As VAT is largely an accounts-based tax system, VAT authority assesses the amount of tax based on records and documents of business activities. Auditing of records is the main tool for the authority to determine tax. The I-O Coefficient provides the tax authority with necessary information about the volume of output by using a certain amount of raw materials. This helps the authority determine the volume of output and amount of VAT payable justifiably. This coefficient also aims to determine the VAT imposable price of a product to prevent VAT evasion, if any. This is the primary reason for the tax authority to require I-O Coefficient.
A registered person shall not be entitled to input VAT credit for taxable import and taxable supply made if inputs are not shown in input-output coefficient. Moreover, input-output coefficient helps the VAT authority determine the amount of output/production against use of a certain amount of raw materials. Additionally, for registered manufacturers, it is a legal obligation for the tax payers to submit I-O declaration. Failure to submit the coefficient will result in a penalty of Tk. 10,000 fine.
Finally, although I-O Coefficient is very vital for determination of proper amount of VAT, it is not a universal requirement across countries where VAT is in practice. Some countries get an impression about the usage of inputs and their costs indirectly from VAT Valuation Manual.
Dr Mohammad Abu Yusuf is Joint Secretary, Finance Division, Ministry of Finance. The views and opinions expressed in this article are those of the author.