The new Value Added Tax (VAT) law is a much talked about issue in Bangladesh business community. One of the key points of discussion (also debate) has been the withholding VAT or VAT deduction at source or VDS. The National Board of Revenue (NBR) has made many changes to the VDS mechanism in the new Act -- and even after the Finance Bill 2019. As a result, business houses have found coping up with the subsequent changes to VDS mechanism challenging. For example, Finance Act 2019 prescribes banks/financial institutions to deduct VDS only from VAT unregistered importers (not from VAT registered importers). However, subsequently published VDS guideline SRO by NBR prescribes banks/ financial institutions to deduct VDS from both registered and unregistered importers. It is in clear conflict with the VDS law and mechanism. Our discussion with one of the largest MNC Bank of Bangladesh reveals that they have raised this issue with the tax authority already and the authority is expected to bring in more changes for the sake of better alignment. Let us see the concept of VDS and some crucial points.
Withholding VAT means VAT deducted upfront by payer while making any payment for any supply of goods or services received. Non-compliance on withholding VAT has been made punishable for both the payer/customer and the seller/service provider. New VAT and SD Act 2012 and Rule 2016 has streamlined but narrowed the scope for withholding VAT compared to the previous regulation of Value Added Tax Act and Rule 1991.
As an indirect tax, Value Added Tax (VAT) is applicable to the whole business chain, though ultimately it is charged on the final consumer. VAT is a multiple-stage tax collected from goods and services. VAT from goods is collected at three stages, namely -- import, manufacturing and trading. VAT from services is collected mostly at source. Under the new regulation though source remains the same, the pattern of deduction at source has significantly changed. The major changes are highlighted below:
Some major points in VDS mechanism are:
- No VAT to be deducted from proper invoices (Form 6.3) with standard 15 per cent VAT rate.
- VDS need to be deducted from invoices with reduced rate or without proper invoice.
- As per VAT Act, there is no provision for deduction of VAT by a bank from outward remittance against import of service by a VAT registered person. As such, bank would no longer be required to deduct VAT from outward remittance against import of service by a VAT registered customer. However, VDS guideline suggests deduction from all importers. From bank perspective, it is safer to deduct from all the importers.
- If an organisation is 100 per cent export oriented or 100 per cent deemed exporter or situated in EPZ, VAT shall be exempted for importation of service for production of export goods.
- If any service is supplied outside Bangladesh by any other service provider, then the said supply shall be zero rated. As such, bank does not require deducting VAT from inward remittance against the said supply to outside Bangladesh by itself or by its customers.
The new VAT Act is more comprehensive and also brings in some good reforms like less input VAT restriction, online platform for VAT payer, removal of price declaration and specific rule for VAT refund. For business community, the major challenge is coping up with the new compliance criteria. Any new law has some resistance in acceptance but too many changes in the mechanism makes it difficult. I request our regulators/tax authority to address it and stick to the already set basic principles of VDS, so that the business community can comply with the changes properly.
It is well known that doing business in Bangladesh is costly compared to many other Asian countries due mainly to time consuming bureaucracy and complications in revenue compliance matters. Bringing in consistency is a must to facilitate businesses to properly understand and comply with the VAT regulations.
Imrul Ehsan is Chief Financial Officer, GREY Global Group.