Report on Public Finance

7/27/2019 Report on Public Finance

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AssignmentOn

Impact of VAT on the economic growth

inBangladesh

Course Title: Public FinanceCourse No: 306

Submitted To: Tanvir MohammadHaider Arif

Assistant ProfessorDept of Finance and

Banking

University ofChittagongSubmitted By: Group-J

Dept of Finance &Banking


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3rd year (mid term)University of

Chittagong

Submission Date: 21/04/2012 Letter of submission:Date: April 21, 2012To,Tanvir Mohammad Haider Arif

Assistant Professor

Dept of Finance and BankingUniversity of Chittagong

Subject: submission report on impact of VAT oneconomic growth in BD.

Dear Sir,

With immense pleasure we would like tosubmit our report on impact of VAT oneconomic growth in Bangladesh. This programassigned us which we have enjoyed fully. Wehave prepared this report highlighting impactof VAT on economic growth in BD. Though wehave tried all of our best to analyze different

aspects of economic growth in Bangladesh.

We wish to thanks for your kind co- ordinationto make this report if there in any deviation &mistake in the report.


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Thanking you.

Sincerely yours,

Group-JDept of Finance & Banking3rd year (mid term)University of Chittagong

Acknowledgement:

We have the immense pleasure and satisfaction inpresenting this report on impact of VAT on

economic growth in Bangladesh which istermination of our B.B.A program especially in publicfinance course.

First of all, we would like to express our heartiestgratitude to our honorable teacher and coursesupervisor on public finance Tanvir MohammadHaider Arif, Assistant Professor, Dept of Finance and

Banking, University of Chittagong. We would also liketo give thanks to our honorable teacher and courseinstructor of income tax Mrs. Suraiya Nazneen,Associate Professor, Dept of Finance and Banking,University of Chittagong for giving her importantadvice about it. We were enriched by their kindencouragement and co-operation. We could notcomplete this report successfully without theirresponsible guidance, instruction, persuasion andadvice. We would like to extend our heartfelt thanksto the contributors of generous help we havereceived from many sources of NBR office inChittagong.


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Finally, we thanks our honorable teacher TanvirMohammad Haider Arif & friends for their cordial cooperation, who have helped & contributed inpreparing the report effectively.

.Group-J

Dept of Finance & Banking3rd year (mid term)

University of Chittagong

Executive summary:Our report topic Impact of VAT on the economic growth

in Bangladesh has been prepared under theguidance of Tanvir Mohammad Haider Arif,Assistant Professor, Dept of Finance and

Banking, University of Chittagong. Thought it isdifficult to conclude this topic under the shortrange, we have tried at our level best topresent it better.

On the whole report we have classified intothree chapters. In first chapter, we try tohighlight the basic information about VAT, itshistory, definition, reasons for introducing VATin Bangladesh, argument for and against VAT,important features, goods and services subjectto VAT in BD.etc.


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In second chapter, we try to highlight data &information about impact of VAT on theeconomic growth in Bangladesh, decision

regarding VAT in budget 2011-12 inBangladesh, which are very much needed forour public finance students.

At last chapter, we focused on impact of VATon economic growth in different sector inBangladesh such as government revenue,subsidy, saving and investment, businessorganization, import & export, governmentemployment and soon.

Finally we want to say that this report willprovide some suggestion for which we havegiven our efforts to making it best one.

Methodology of the study:

In the mission the concepts and definitionshave been taken by consulting with ourhonorable teacher tanvir mohammad haiderarif and course instructor of income tax Mrs.Suraiya Nazneen, Associate Professor , Dept ofFinance and Banking , University of Chittagongand from different books, annual reports and

websites. Information was collected fromprimary and secondary sources. Themethodologies that have been followed in thestudy stated below:


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Data selection: At first required data for thestudy was identified. Our friends advice wasfollowed in this regard.

Data collection: Both primary and secondarysources have been used for collecting data,these are:

Primary sources:a) Group discussionb) Interview of different officialsc)Advices of our senior brothers in our

department.

Secondary sources:a) Using various librariesb) Used different kinds of books on

income tax, VAT, economics, statistics,and development of Bangladesh etc.

c)Website of NBR, bureau of statistics,and so on.

Objective of the study:The main and foremost objective of the study is to be with the

economic growth of Bangladesh through VAT application

followed by the Bangladesh government. To achieve the main

objectives, the present study covers the following specificobjectives.

Analyzing data and information about impact of VAT on

economic growth in Bangladesh.

Evaluating the impact of VAT in different sector in

Bangladesh:


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Impact of govt. revenue

General consumer

Government employment

Import & exportSaving & investment of Bangladesh.

Impact on education sector

Tax revenue of Bangladesh.

Decision in budget 2011-12.

Problems and perspectives. Limitation of the study:

The present study is a part of academic curriculum.

Observable the study is far from being perfect. Inface of our sincerest attempt in preparing a perfectreport, some of the limitations are unavoidable.

These are as follows:I. Due to short term, we could not collect enough

necessary data about the study to prepare thereport.

II. There was the shortage of adequate literature of

NBR.III. Lack of financial support.IV. Lack of experience of our group member

because it is the first time for us to make suchkind of report.

Despite of numerous problems with limitation &bottlenecks, we tried our best to make the

report more informative with recent data, so asto arouse high satisfaction to our respectableteacher as his expectation.

Group Information:


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S.N

Name ID E-Mail

1 Ahasan Ullah(Group

leader)

0930309

9

[email protected]

2 Md.Mozammel Hossen 09303104

[email protected]

3 Abu Mohiuddin 09303078

[email protected]

4 Md. Mostafizur Rahaman 09303040

[email protected]

5 Misbah-ul-karim ChyRoakon

09303027

[email protected]

6 Md. Sha Alam Raju 09303047

[email protected]

7 Md. Monawer Uddin 09303108

[email protected]

8 Kyakhin Rakhain 0930309

4

[email protected]

9 Kyathowai Prue Marma 09303092

[email protected]

10 Mohammed LokmanHossain

09303048

[email protected]

Table of contents:

Chapter

Subject PageNo

Chapter-1

1.1 Introduction1.2 History Background1.3 Definition1.4 Features1.5 Arguments for & Against VAT .

1010111112
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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1.1 Introduction:Value Added Tax (VAT) is imposed on value added by a

manufacturer of a firm or distributors. Value added for a firm isnothing but its gross receipts from sales minus all expenditure ongoods and services purchased from other firms. In the production and

distribution process a firm buys materials from other firms. Thesematerials may include principal raw materials, auxiliary raw materials,chemical, electricity and capital goods such as machinery, equipment,buildings, furniture, vehicles, etc. the firm adds value to thesepurchased materials by processing or handling them with the help ofits own factors of production such as labour, land, capital, etc. suchincrease in the value of outputs over inputs is the value added by thefirm. Since the VAT is mostly introduced as a consumption type, it isusually considered as an indirect tax. In general, value added tax is analternative form of sales tax and in its usual form, it is a multi-stageconsumption tax imposed on goods and/or services, which is collected

at every stage of production and distribution rather than at the retailstage alone.

1.2 Historical Perspective of VAT:As an indirect tax VAT belongs to the group of sales tax which

include turnover tax and sales tax at different levels of production anddistribution. In such a case, the oldest tax of this type, a turnover taxwas first introduced in Spain in 1342. The manufactures sales tax wasintroduced in Canada in 1923, the wholesale sales tax was introducedin Australia in 1930, and the retail sales tax was introduced in USA at

sale level in Mississippi in 1932. VAT is seen as the outcome of effort torefinement of multipoint sales tax. In such a situation VAT in itspresent multi stage form was first introduced in Japan in 1950 at alocal govt. level. There after it was introduced in France in 1954,Denmark and Brazil in 1967, Netherland in 1969, Luxemburg in1970,Belgium in 1971,etc.Now a days it is found in about 90countries of the world including our neighboring countries India andPakistan.

The VAT was introduced in Bangladesh on 01 July, 1991 at its initialform is a sort of consumption tax, extending its coverage up to the

level of import, production or manufacture and service rendering butnot to expert (which is zero-rated ),wholesale or retail level(videsection 3 of the VAT Act,1991).But since the financial year 1996-97,VAT in Bangladesh has been a broad-based consumption expendituretax by covering the wholesale and retail levels. A brief history ofintroducing VAT in Bangladesh now follows.Govt. of Bangladesh in 1976 formed a nine member taxation Enquiredcommission which in its report discussed different aspects of VAT


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including its advantages &limitations. But commission in this regardconcluded that time has not yet come for its introduction. B thisbrought the concept in discussion latter on since 1979.In1986,a WorldBank mission visited Bangladesh and among others it recommendedintroduction of VAT. Based on this recommendation a tax mission from

Bangladesh visited many countries in 1989 and in 1990.Theyrecommended adaptation of VAT thereafter based on a series ofdiscussion with relevant parties, chambers, etc. The VAT ordinancewas promulgated on 31st may, 1991 which combined excise duty andsales tax to a large extent subsequently. The value added tax bill 1991was introduced on the Jatiya Sangsad (National assembly/parliament)on 1st June, 1991 (I.e. after 30 days of the promulgation of the VATordinance). The then finance minister in his statement of objects andreasons for bringing the VAT bill said that it was being consideredproper and necessary to introduce VAT in place of present sales tax atthe import level and exercise duty at the local production and service

level in order to remove inconsistency and defects of the currentindirect taxation system in the country. The opposition protested theintroduction of the VAT bill. However, as a routine process of theparliament, the value added tax bill, 1991 was passed by theparliament as the 22nd Act of 1991 on 09 July, 1991.

1.4 What is VAT?Value added tax refers to the tax applied on value added

as per prescribed rate. In fact, it is a multi-stage indirect tax

imposed on the value added at different stages starting fromproduction to distribution process. In this connection let us referto the definitions advanced by different authorities and authors.

The oxford Dictionary of current English: Value added tax meansa tax on the amount by which the value of an article has beenincreased at each stage of its production.

D. K. Stout: Value added tax is a multiple tax imposed at a flatrate upon the annual sales proceeds of a company less all itspurchases from other business (I.e. excluding direct imposed)

B. H. Bhatia: VAT is a tax not on the total value of the goods

being sold, but only on the value added to it by the last seller.The seller, therefore, is liable to pay a tax not on its gross value,but on net value, that gross value minus the value of inputs.

Canadian Royal Commission on Taxation (CRCT): A tax on valueadded might best be described as a sophisticated turnover tax,where the cumulative tax factor is removed by taxing eachtransaction only in respect of the addition to sales value which


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has occurred in the stage immediately prior to the transaction inquestion.

************************.

1.5 Some important features of VAT inBangladesh:

An analysis of VAT act and rules reveals the followingfeatures:

It has been framed by incorporating sales tax on imported goodsand excise duty on domestic produced goods.

It is changed at rate of 15% on taxable goods. But for certainsectors and goods and for annual turnover lower than Tk. 15 lakhturnover tax and supplementary duties at some other ratesinstead of VAT is charged.

Some goods and service have been exempted from VAT such as:a) Agricultural products of the country.b) Utensils from aluminum and materials produced cotton and

synthetics.c) Ball pen produces, books binding enterprises.d) Cottage industry where investment in machinery, factory and

other related items do not exceed Tk. 3 lakh.e) Small restaurant, sweet shop and decorators of upazilla level.f) Leasing company engaged in renting factory of capital goods.g) Scientific instruments imported by educational institutions.h) Cold storage:

for all export VAT is zero i.e. exempted VAT assesses need to be registered as per provision of the

act.*********..

1.6 Argument for & against VAT:Proponents of VAT give a number of arguments as to the

merits of VAT. For example evans, Taylor & Hozman listed themerits of VAT. Some of the important points are as follows:

It increases the cost of consumption, thus stimulating, savingsand investment.

The government gets its money earlier; it doesnt have to waituntil after the final sale.

It is used to stimulate exports; the exporter gets a rebate for thetax paid.

Importers pay the VAT based on the prices of their imports. Thetax is paid on goods purchased, whether manufactured


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domestically or imported. Thus imported goods are not given anadvantage over locally manufactured products.

It catches service companies, which historically have beenexempted from sales taxes. A service company has to charge thetax to its customers in order to recover the tax paid on its

purchase of supplies and equipment.

VAT has several disadvantages from the view of raising price,administrative difficulties resulting from number of collecting points,complex recording, etc. in such a context the demerits of VAT havebeen pointed out by various authors. For example, Evans, Taylor, andHolzman pointed out a number of disadvantages, some of which are asfollows:

It is a regressive tax, like sales taxes, its impact on the tax payerdecreases as income increases and the portion of income spentin consumption decreases.

It may be administratively difficult to enforce, practically when alarge number of classes of tax payers are given exemption fromtax.

It also difficult to administer in applying it to large numbers ofsmall tax payers, who are usually themselves administratively ill-equipped to comply with the tax.

It is unpopular with local governments, since it competes withsales taxes as a consumption tax, and sales are an importantsource of local government revenues.

An additional tax may reduce a countrys rate of capitalformation, leading to a relatively tax may reduce a countrysrate of capital formation, leading t a relatively decreasedcompetitiveness of the economy and a reduction in exports.

.**************..


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2.1 Goods and service subject to VAT inBangladesh:According to section 3 of VAT act, VAT is imposed on the followinggoods and services:

All goods imported in Bangladesh except those mentioned in thefirst schedule of the VAT act;

All goods supplied except those goods mentioned in the firstschedule of the VAT act;

All services provided in Bangladesh except those servicesmentioned in the second schedule of the VAT act[vide section3(1) of the VAT act]

Under section 3 of VAT following services come within the orbit of VAT :o Hotel and restaurant-big and medium ones situated in

metropolitan city or district head quarters.o Decorators-situated in metropolitan city or district head quarters.

o Motor garage workshop.o Construction firm.o Godown serving on commercial basis.o Advertising firm.o Telephone, Telex and Fax-serving on commercial basis.o Mechanized laundry.o Indenting firm.o Printing firm except where tax exemption is given for printing

educational materials and journals.o Auction firm.o

Video-cassette shops.o Travel Agency.o Community center.o Cinema, studio and colour photo manufacturer.o Sweet shops-big and medium situated in metropolitan city or

district head quarters etc.***************

2.2 goods and services exempted from

VAT:In the first schedule, following goods are mentioned as exemptedgoods:

I. All goods as specified in the first schedule of the excises and saltact, 1994(1 of 1994), in case of manufacturing or productionthereof in Bangladesh.


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II. All goods as mentioned in the second schedule of the narcoticscontrol act, 1990(Act no.20 of 1990), in case of manufacturing orproduction thereof in Bangladesh.

III. Goods under harmonized commodity description and codingsystem(H.S. Code)***

The above goods are mainly primary goods of the agricultural sector,live animals and meats thereof, fishes, etc, such as: natural honey,vegetables, oil seeds, animals hides, silk, living horse and animals,meats of animals, fish dry fish, horns of deer, etc. besides under SRO204/91/22 & different circulars issued from time to time followinggoods have been exempted;

Cloths made of cotton and synthetics.

Malaria, TB, cancer preventive medicine.

Homoeopathic medicine.

Family planning items.

Chemical fertilizer and pesticides. Books and periodicals.

Animal feed, etc.There were 65 services listed in the second schedule for tax exemptiontill 1999-2000. But in the FY 2000-2001, the second schedule has beenreplaced by a new schedule in which the list of exempted services wasincluded, by keeping similarity with the first schedule.

In the second schedule list of services exempted from VAT has beenprovided under 7 categories, this in brief are as follows;

Fundamental services for livelihood: cultivation work of agricultural land

Irrigation in agricultural land

Works relevant to procurement, packaging of agriculturalproducts.

Fishing & allied agricultural work etc.

Social welfare service:

Govt. provided medical assistance work

Govt. provided educational services

Pollution preventive works.

Rehabilitation, child care & other social works, etc. Cultural services:

Broad casting service(exempting video casting, audio recording,advertising agency services etc)

Book publication(exempting printing & binding)

Basic artistic work.


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Cultural ceremonies (excepting community centre & professionaloriented cultural activities), etc.

Activities relevant to money & finance service:

Receiving saving

Life insurance policy

Stock exchange Discount card issue, etc.

Transport service:

Passenger transfer (excepting air conditioned transport)

Goods transport(excepting shipping agent & courier service)

Air lines(excepting charted air & helicopter service)

Personal service:

Actors, sportsmen, media reporters, plumbers, electrician, etc.

Researcher in different types of transports

Drivers of different types of transports

Designer(architects, interior designer )etc

Other services:

Religious activity

Postal service activity(except courier service)

Charitable services

Social welfare activities of local govt. etc...*************..

2.3 VAT rate and VAT assessee:

VAT is imposed on goods and services at import stage,manufacturing wholesale and retail level.A uniform rate of VAT rate at 15% is applicable for both goods andservice.15% VAT is applicable for all business and industrial unit with anannual turnover at TK. 2 million and above.Turnover tax at 4% is leviable where annual turnover is less than Tk.2million.VAT is payable at the time of supply of goods and services.Tax paid on inputs is creditable / adjustable against output tax.Export is exempted.

Cottage industry (defined as a unit with an annual turnover at less thanTk. 2 million and with capital machinery valued up to Tk. 300000) isexempted from VAT.Tax returns are to be submitted on monthly or quarterly on half yearlybasis as notified by the govt.Supplementary duty (SD) is imposed at local and import stage underthe VAT act, 1991 existing statutory SD rate are as follows:On goods - 20%, 35%, 65%, 100%, 250%, 350%.


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On services: 10%, 15%, &35%.

2.3.1 Tax base of VAT:Customs assessable value import stage+ customs duty +

supplementary duty +domestic/local stage;

Goods (manufacturing): product cost + profit and commission+(supplementary duty)Service:[total receipts excluding VAT but including supplementaryduty.

2.3.2 Truncated base/fixed value addition:In some of the cases of goods and services producers and

sellers face difficulties in avoiding VAT credit adjustment facilities dueto non availability of invoices from the sellers of inputs. In order toremove this operational difficulty fixed bases such as 10%, 25% 30%,60% value addition is taken into account for calculation of VAT for anumber of goods and services. In such a circumstance, net VAT rate for

different rate at value additions comes to 15%, 2.25%, 45%, and 9%VAT at the wholesale and retail stage.

In case of wholesaler & retailer, there is a special provision for a 15%VAT known as a trade VAT on the total sale, provided that thewholesaler retailer do not avail the facility at inputs credit. Such tax isalso imposed collected at the import stage from importers at finishedgoods as an advance trade VAT.

2.3.3Tariff value for imposition of VAT:Under the VAT law, govt. is empowered to fix tariff value for

some items for the collection of VAT.

Example:Tariff value for mild-steel products produced from imported/locallyprocured re-rollable is Tk. 4000.00 per MT normal VAT input credit isalso not available under this system.

Deduction of VAT at source :As deduction at source is also practiced in case of VAT, on certainservices, govt., semi govt., autonomous, bodies, NGOs insurancecompanies limited are authorized by the govt. to deduct applicableVAT on the service at source.

Excise duty:At present excise duty applies to only two items: bank deposits anddomestic air ticket ( To. 250 per journey)

2.3 Computation of VAT:


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There are different procedures of computing VAT depending onsituation and methods. The important formulate for computationdepending on situation are shown below:

Computation of value added tax at different stages:

Computationstage Importer Producer Wholesaler retailer

(1) (2) (3) (4) (5)A Value of goods

imported[column(2)] orproduced[column(3),wholesale[column(4) andretail[column(5)

Tk.0300*

Tk. 600* To. 800* Tk.1000*

B Gross VAT@15% Tk. 45 Tk. 90 Tk. 120 Tk. 150C Tax credit[tax

paid at paid atpreceding stage]

Tk. 0 Tk. 45 Tk. 90 Tk. 135

D Net VATpayable[B-C]

Tk. 45 Tk. 45 Tk. 30 Tk. 15

E Billing inclusiveof VAT[A+B]

Tk. 135 Tk. 690 Tk. 920 Tk. 1150

F Governmentrevenue[row dshows VAT total

taka 135, whichis borne by theconsumer]

- - - -

*Import duty leviable value plus import duty plus supplementary duty,if any,* Inclusive of profit margin

2.5 Decisions regarding Indirect Tax in2011-12 Budget in Bangladesh:


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2.5.1 Decisions on VAT:Establishing Digital Bangladesh is a key priority of the

present Govt. In order to digitize the taxation system, financeminister has proposed to introduce online VAT registration andreturn submission. Specific software (Bangladesh VAT system e-

VAT) will be used for this purpose which will be developed by aprivate firm under the direct supervision of NBR.

In order to impose penalty under the existing VAT Act, heproposed to add new provisions to this Act to take up judicialproceedings in the court of special Judges appointed under thecriminal law Amendment act 1958.Currently there is no provisionin the VAT Act for protection of information provided by thetaxpayers. Considering the demands of taxpayers, our honorablefinance minister has inserted a new provision in a new provisionin the existing law for protection of information given by the

given.

Reforms in VAT System:

To modernize the VAT system, our govt. has declared priceprocedure and introduced amendments in the law for payment oftaxes using various means at the same time, it has beenproposed to take necessary amendments in VAT act to imposeVAT on e-commerce.

To augment collection of VAT from domestic sources, thefollowing measures:

In order to broaden the scope for collection ofVAT at source , Govt. proposed to include under it any purchaseof goods or services through tender by government organizationssemi-government organizations, autonomous bodies, NGO, bank,insurance company or any other financial institutions, limitedcompanies and educational institutions.

After review of truncated base value in certain cases, Govt. want

to with draw truncated base value for some services. Besidesthey want to include some goods and services under VAT net.This goods and services are shown in annex B.

In order to standardize VAT system on the basis of tariff value, aproposal has been made to increase tariff value in some cases.


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Taking tobacco related health risk into account; they proposed aration enhancement of price-slab and supplementary duty ofcigarettes. Besides they also want to impose and enhancesupplementary duty on few goods at the local manufacturingstage.

In 2004, small businesses were given the opportunity to pay VATat low fixed rate remained unchanged till to date. The rates ofminimum VAT.


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Encouraging Heavy Industry:With a view to encouraging investors to build heavy industries, govt.exempt manufacturers of refrigerators, freezers, motor cycles andenergy saving bulbs along with its raw materials from VAT.

Expanding the Coverage of Turnover Tax:At present, turnover tax facility is given to small and medium industries(SMEs) up to the limit of Tk. 40 lakh per year at the rate of 4 percentconsidering the role of SMEs in the industrialization of the country. Theyhave expanded annual turnover limit for turnover tax up to Tk.60 lakh.

Withdrawal of VAT:Govt. has proposed to withdraw VAT from plastic and rubber made

sandals up to the price limit of Tk.80 per pair.

Imposition of supplementary Duty:

At present, excise duty is imposed on domestic airline ticket per seatfor single journey at the rate of Tk. 300.They imposed exercise duty onthe deposit balance of any account of leasing and financingorganization as shown in annex-B. Simultaneously, VAT on the servicesrendered by travel agencies.

Administrative Reforms:Since, collection of VAT is administered by BCS Customs and Exercisecadres, it has been renamed as BCS (Customs, Excise and Value AddedTax) cadre. To expand VAT net, we are taking steps to set up more VAToffice and to create a small VAT office in each upazila consisting of 1

inspector, 1 Data Entry Operator and 2 Sepoys as part of restructuringmanpower. Newly created outfits (already approved by ministry ofEstablishment ) like two customs houses, two Custom bondCommission rates, one VAT survey Directorate, one ICT commissionrate, three Appellate Tribunal, customs offices in 10 foreign missions,fifty-six VAT Divisional Offices and one hundred and forty-six VAT Circleand restructured existing offices will start functioning from 1 July 2010.

2.5.2Decision on Import Duty

About 38 percent of Domestic Revenue Income Comes

from Import Stages

Although Bangladesh has, over the years, continued to graduallyreduce the rates of duty and taxes at the import stage as a member ofthe World Trade Organization, customs revenue still contributes toabout 38 percent of the total internal revenue collection in the country.Finance minister has proposed to continue with the four-tier customstariff structure. However, paying close attention to the issues of


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facilitating trade, supplying goods to consumers at a fair price, andpromoting domestic industries, Bangladesh now present before thisaugustHouse the budget proposals relating to import duty for FY 2010-11.

Maintaining Zero Tariff for Major Food Items, Medicine,Cotton and Fertilizer

With a view to keeping the prices within the reach of the generalpeople, VAT propose to maintain the 0 percent customs duty rate oncommodities like rice, wheat, onion, pulse and edible oil, seeds,fertilizer, medicine and cotton. Considering the sudden exorbitantincrease in the world price of milk powder, VAT authority proposes toreduce import duty from 12 percent to 5 percent and withdraw 5percent regulatory duty on milk powder.

Protecting Domestic Industries

Against the backdrop of the gradual reduction of trade taxes followingWTO guidelines, 5 percent regulatory duty was imposed in theprevious budget on all the products with the highest customs duty of25 percent in order to protect local industries and also to ensure aconsistent growth in revenue collection. However, the categories ofcommodities that attract concessionary duty benefits were kept

outside its purview. Responding to the requests of the major tradebodies in the country, this proposes to continue that 5 percentregulatory duty for another one year.

Rendering Assistance to Domestic Transport Industry

In order to provide support to the development of local industries, thisproposes to impose 15 percent VAT on import of CBU/diesel/petrol/CNGbuses having 40 seats or more. To encourage the growth of the localmotor cycle industry, present govt. has proposed to enhance thesupplementary duty rate on both completely built up (CBU) and

completely knocked down (CKD) motor cycle from 20percent to 30percent.

Increased Revenue Income from Sugar Industry

The specific rate of duty on raw sugar was withdrawn last year inresponse to the sudden price hike of sugar at the world market.However,due to a good crop this year, its world price hasgone down.Therefore, to ensure higher revenuecollection to meet government's


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developmentalneeds, a proposal has been made to impose specificrate of duty on raw sugar and refined sugar at the rate of Tk. 2,000and Tk.4,000 per metric ton respectively.

In order to discourage tobacco cultivation in agricultural land, this

proposes to impose 10 percent export duty on un-manufacturedtobacco.

Tariff Reduction Facilities for Some Items of Electricityand Power Sector

VAT Proposal would like to propose to continue the benefits of duty-taxexemptions given earlier to encourage investment in power and

energysectors in the country. In this budget, govt. present forconsideration of this House the proposals of reducing customs duty forenergy saving four products in the power sector and three products inthe energy sector (Table-2).

Restructuring the Tariff Rates for Discouraging theImport of Motor Vehicles Correction of the First Scheduleof the Customs Act for Simplifying Customs Procedure

Imported by the foreign airlines operating in Bangladesh for their own

use govt. also proposes to simplify the baggage rules to facilitateclearance of the baggage of wage earners. Again, this propose toamend two licensing rules relating to freight &forwards and customs agents (both C&F and shipping).

Again, measures have been proposed for simplification,rationalization, harmonization, withdrawal, reduction, andenhancement ofcustoms duty and supplementary duty on a number ofproducts. Reasonsfor undertaking such measures and the nature ofchanges proposed havebeen illustrated in various tables in Annex C.

Considering persistent traffic jams causing innumerable sufferings tocity dwellers, this propose to revise the rates of supplementary dutyand reclassify motor cars and micro buses based on cylinder capacity(cc) [Annex C-1]. Govt.Also propose to continue the flat rate-based depreciation systemimposed in the last years budget and to reduce the consolidated rateof depreciation from 40 percent to 35 percent making it applicable onlyfor cars of up to 4 years old. In order to prevent misdeclaration in the


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customs valuation of new motor cars, Ithis propose to make itmandatory for the submission of price certificate from themanufacturer or from the trading agent with at least 30 percentownership of the manufacturer.

The transshipment and transit activities are increasingly gainingimportance in international trade. In order to facilitate customsformalities of such goods in Bangladesh and to determine relatedtransshipment or transit fee, govt. has propose to promulgate a newSRO.(Table-1)Source:BUDGET SPEECH 2010-11 Ministry of Finance, Government of

Bangladesh.

..


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VAT yielded 28,657 crore taka in FY 2008-07. VAT now accounts for 4.3% ofGDP while the total contribution of tax revenue to GDP is 8.36%.Generally VAT are charged 20%, 35%, 65%, 100%, 250% & 350% on goodsand 10%, 15% & 35% on services which contribute to the govt. revenues.(Relevant table given Chapter 3.3)

3.1.2Impact of VAT in savings and Investment:Savings is one of the important components of capital formation. If there aremore savings,there will be more availability of capital for investment purpose. Income ofan individual can be normally divided into savings and consumption. In this

case, if majority of income is used for consumption, amount of saving isbound to decrease. As VAT is a tax on consumption, it plays a key role inincreasing expenditure of consumption. People lose their intention to expendfor the goods in which high rate of VAT is imposed. Moreover, for makingsaving in financial institution, depositors are paid interest at different rate indifferent compounds and most of the people prefer saving to unnecessaryconsumption. For high rate of VAT in different luxurious goods, people arerunning towards the interest paying institutions such as banks, insurances,NBFI etc. therefore, though Bangladesh being least developed country Bankshave been going to door-to-door of borrowers. Businessmen are beingbenefitted for being offered in different loan packages and export-oriented

organizations which are out payment of VAT makes finance by taking loanfrom such organization. We cannot imagine formation any large and midsized business without bank loan. RMG sector which is the life-blood export ishighly depended on outer source which is made available by those lendingorganizations and corporate houses and conglomerates for increasing EPSuse the method of financial leverage. For this purpose these organizationshas procure the large portion of capital through borrowing money.

The major two components of govt. revenue are income tax and VAT. Fromthese sources Bangladesh govt. meets not only public expenditures butinvestment of public projects. Through establishment of such projects huge

amount of investment are made around the country. Such investment hastremendous impact on national income of Bangladesh.

3.1.3 Impact of VAT on Business Organizations:


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It is matter of debate whether the VAT has any influence on the businessorganizations or on their profit. As VAT is imposed on their goods or servicesproduced. They need not to make any payment of VAT to administration. Butas VAT is imposed on in different rates on in their products, these getincreased significantly. Depending on types of products and consumers of

those products, demand of these VAT imposed products varies. As VAT isimposed on few products in higher rates, demand may be affected whencustomers are affordable enough such as alcohol and cigarettes. But in caseof other few products which are consumed by higher and higher-middle classholder are not influenced not much, there is high rate of VAT. Besides, assome business firms have to pay import duty in case of importing rawmaterials and machineries such import of all kinds of fabrics and RMGarticles have to pay 45% import duty(increased by20%), domestic supplydependent firms get benefitted as they need not to pay any sorts of indirecttax like VAT for their supplies. And those organizations which are 100%export-oriented are out VAT imposition recognized by law.

3.1.4 Subsidy:Subsidy is a benefit given by the government to groups or important sectorsspecially to decrease the production cost for producers and to provideservices for marginalized people. In the context of Bangladesh, the mostprioritized sectors of the government are agriculture, fuel & electricity andpublic health.

3.1.4.1 Agriculture:Govt. declares subsidy huge amount of capital in every budget foragriculture. Farmers demand fertilizer, seeds, fuel etc. in low price though

price of these materials is increasing as they can produce crops in low costand can make profit. Board of Finance Ministry separate a substantial portionof fund from public revenue for the subsidy of agriculture. the amount ofagricultural subsidy in the FY11 was 11.1% higher than the allocation madein the previous years budget. In the budget of FY2011-12, though theprovisions for agricultural subsidies has undergone a decline but in view ofthe continuous increase in the fertilizers and other input prices in theinternational market, a significant increase in subsidies in the may soon beneeded during the year.

Table1: Amount of Disbursed Agricultural Subsidy


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FiscalYear

Subsidy (incrore Tk.)

2001-02 125

2002-03 195

2003-04 365

2004-05 500

2005-06 1127

2006-07 1400

2007-08 2178

2008-09 5500

2009-10 4750

2010-11 3945


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3.1.4.2 Public Health:Besides agriculture, govt. needs allocate a large amount of fund as subsidyin public health sector also. There are .Medical College Hospitals andthousands satellite clinics where govt. provides all sorts of treatmentservices, primary medicines and even catering services for serious patientswith very low fees.

3.1.4.3 Power &Fuel:

Power and fuel have been important part of civilized life. Not only businessorganizations but also day-to-day normal life has been dependent on thesetwo materials. For ensuring electricity govt. needs to use natural gas andmost discussed one is Quick Rental System which is based on diesel oil. Asgeneral people cant afford to bear these expenses to be availed, hugeamount of subsidy is being distributed. In case fuel also, there is subsidyfrom govt. for decreasing cost transport, production and agriculture. TheBoard of Agricultural Ministry request for budgetary resources of Tk. 750Crores for diesel subsidy appears to be a right decision.These subsidies for the mentioned sectors are being funded from govt.revenue. As area of VAT is increasing govt. has been able to declare in large

amount. To bear this big burden govt. utilizes VAT. And VAT is playingindirect role to booster these sectors.

3.1.5 Impact of VAT on Import and Export:It is really an indirect and explainable impact of VAT. Such impact

plays a role in the balance of payment positively. Our govt. is imposing VATat different rates in case of importing goods which are not necessary andurgent goods. So that it is difficult by consumer to expend for the purpose of


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buying these luxurious goods. Moreover, importers also face in making theavailability of capital for importing luxurious products in large quantity. Ifdemand decreases, importers will lose their intention to open LC (Letter ofCredit).The more they try to capitalize their savings for investing in theexport-oriented projects, the more foreign currency come inside. Besides,

importers will contribute to the certainty of food security as no duty isimposed on import of rice, wheat, edible oil and other common foods.As exporters are exempted from the payment of VAT, entrepreneurs areencouraged to invest in export-oriented business. They are paid for theirexported goods in terms of dollar ($) which is considered as the standard ofpayment. In this way foreign reserve has been stronger for few previousyears though is now facing problem. But Bangladesh is experiencing thegrowth of FDI (foreign direct investment) in few specific sectors in recentyears as govt. offered zero rate VAT for the huge of contribution of thatsectors in the increment of exports though there export duty of 5% in case oftobacco.

3.1.6 Impact of VAT on Govt. Employment:VAT has good impact on employment especially on govt. employment.

After the introduction of VAT, there have been various types of employmentin different designation for the collection, calculation and execution of VAT.In 2005-06, there were 5328 persons employed in the area of indirect taxadministration encompassing custom duty, VAT and turnover tax. As thearea of VAT is widening, there are increasing VAT related jobs. Thoughadministration cost is too low as per Tk. 100 collected of VAT costs only0.58(.58%) in the FY2007-08.Moreover, to make the payment of salaries for employees of mostunproductive govt. bodies Ministry of Finance needs to relay on public

revenue. VAT has a big contribution on the increment of VAT. In the few lastyears, govt. increased the salaries of all govt. posts substantially. Besidethis, there have been thousands of recruitments in govt. bodies with theprogress and broadening. As most of these bodies are unproductive VATthrough contribution to public revenue has a mentionable impact in thepayment of salaries. Beyond govt. organizations, business organizations alsoappoint auditors and accountants to operate auditing and computation ofVAT. The bigger the organizations operations, the more the jobs are beingcreated on VAT execution and administration.

3.1.7 Covering Service Economies:t catches service companies, which historically have been exempted

from sales tax. A service company has to charge the tax to its customers inorder to recover the tax paid on its purchase of supplies and equipment.With the expansion of Bangladesh economy, service sector is enlarging day-by-day. Specially growing middle is contributing to such expansion. Govt.imposed sales tax only on manufacturing sectors before the introduction of


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VAT. VAT is being imposed on the service firm. After the advancement oftelecom sector, govt. is earning a huge amount of VAT from these mobileservice operators. As they are offering different types in their product line, itis one of the big sources of VAT. Besides, with the development of traveland tourism and expansion of international business, there have been many

hotels and motels around the heritage and beautiful places like Cox-s-bazaar, Dhaka, Chittagong, and Shundorbans etc. Govt. is imposing VAT onservices provided to their consumers. Aircraft business has also beenbrought under the purview of VAT. As migrating workers and travelers areincreasing rapidly, this service industry is providing huge amount of indirecttax. Some new emerging service industries such as beautician service, eventmanagement, community center advertising firms etc. have been imposedVAT on their offered service products. Another mentionable sector ineconomy under the imposition of VAT is real estate and land developmentfirms. As the transactions in this industry are in larger amount of payment,VAT collections is being in huge amount.

3.1.8 Special Scheme for Tobacco and Alcohol:The board may impose any special scheme for the payment of

supplementary duty on supply of dutiable goods manufactured inBangladesh if the goods are:-Cigarettes, tobacco, or similar products, including blended products; orAlcohol beverages, ingredients for alcohol beverages or similar products.

Any special scheme imposed under this section shall set a maximum retailprice for the goods, which shall be the dutiable value for the goods.Note1: this means that the amount of supplementary duty paid by themanufacturers is not linked to the price at which it makes its supplies.Note2: the VAT treatment of supplies of tobacco and alcohol will not beaffected by the scheme.Example 1: the MRP for the particular cigarettes is Tk. 104 and the rate ofthe supplementary is 58%. The amount of supplementary duty paid by themanufacturer will be Tk. 60.32Any special scheme by the board under this provisions requiring themanufacturer to affix on or to the body of the package, pot, bottle, or other

container in which the goods are supplied a stamp, banderol, or special signor mark of a particular size and design, manifesting measures of security andfor that purpose the board may determine all producers relating to thescheme, in relation to the use, distribution, preservation, supervision,observation, accounting and packaging of stamps, banderols, or special signor marksFor VAT purpose the of any supply to which a special scheme under thesection relates shall not be less than the maximum retail price, irrespective


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of whether the supplier is the manufacturer, wholesaler, retailer, or any otherregistered person.Note: this rule over-rides the normal rule for working out the value of supplyin section 32.Example 2: although the MRP for the cigarettes in example 1 is Tk. 104, the

selling prices are in fact higher. Presume, for illustration, that themanufacturers selling price is Tk. 100, the wholesale price is Tk.105 and theretail price is Tk.110. The value of each of these supplies the price minus thetax fraction of the price, i.e. 86.96, 91.30,and 95.65 respectively. All of theseare MRP, even though the wholesale and retail prices exceed the MRP. (thisis because under the normal rule value is the price minus the tax fraction).Thus, all of the suppliers must treat the MRP as the value of the supply, mustpay output tax on the basis of that price (i.e.15.60). if all of the supplierswere registered, the consequence would be that the wholesalers net VATwould be nil, because its output tax on the supply to the retailer would beexactly equal to the input tax credit for its purchase from the manufacturer.

The VAT collected will be the same whether or not the retailer andwholesaler are registered because all are required to use the MRP as thevalue of supply.

3.1.9 Enhanced Audit:As VAT is based upon self-assessment, in a country like Bangladesh

where attitudes to tax compliance are poor and tax evasion is widespread,regular audit is likely to contribute to better enforcement. Effective auditsare dependent upon the appropriate selection of the audit process is alsocritical to that goal. Taxpayers face slight threat that they will be audited and

thus there is little deterrent effect arising from VAT audits.Another issue is the depth of the VAT audits. Of 334firms audited in 2001-2002, 282 of the audits resulted in no additional revenue being collected thissuggests that the audit process may have been very simple (such as merelychecking of the correctness of the VAT returns). In more recent years, specialaudits have been conducted at the field level in some service units (such aspathology, laboratories, restaurants etc.), which has positive results. Therecent establishment of a separate Directorate of Intelligence, investigationand audit of VAT headed by a senior VAT officer suggests that greaterresources are being devoted to the audit function.

3.2 VAT in Bangladesh: Perspectives andproblems

It is well know that VAT is imposed to realistic tax and not to regulate tradein most developing countries and therefore, it is a trade-neutral tax i.e. more


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money you pay as price, more tax you are to pay on it, irrespective of originof the commodity. Locally manufactured goods and imported goods attractthe same rate of VAT. In each case, the buyer or consumer pays for the costof production, cost of marketing including storage and transportation cost,profit made by the manufactured and /or stages of traders and VAT on the

total of those. Rate of VAT doesnt vary for local or imported goods.

All these are ideal and theoretical assumptions. However, for nationalinterest some countries exempt local produces from VAT. But in Bangladeshthis is not done.

VAT has a unique in built arrangement of self-regulation and self-monitoringin the ideal form. It also discourages tax evasion and smuggling.

In Bangladesh, there are lots of deviations from this ideal situation. In a truesense, we realize VAT from imported goods and from the manufacturers and

not beyond that. The rest of VAT is realized in a manner that was prevalentwhen the excise duty was there. But theoretically, it must go down to theconsumer. In each level of transaction, the seller is to realize VAT from thebuyer and deposit to the govt. treasury and take credit of the VAT he paid toprocure or manufacture the commodity. The consumer is the last buyer andnaturally he does not have an opportunity to get any credit of relief. Here inBangladesh tax evasion in different stages prevail & consumers in somecases in the present form of VAT give more & in some cases get unduebenefit too.

As regards administration of VAT, Bangladesh VAT administration polices all

through a price declaration, accompanying invoice with the transportcarrying commodity up to the destination, conditions on taking tax credit etc,are police measures. These are against self-compliance and it increasescompliance cost.

Failure to submit return and pay VAT in time is treated as an offence and24% annual interest is charged, in addition to any probable penalty but thereis no clear and specific mention of any remedy or excuse for the cases ofinadvertence of accident. Though Bangladesh is the pioneer of VAT in theSAARC region, it still remains in the preliminary stage of VAT which is moreakin to the excise than to VAT proper. These loopholes, inefficiencies & flaws

need to be addressed so as to make it akin to ideal situation as far aspossible.


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3.3 Data & Information on VAT inIntroductory Years & Current Years

3.3.1Introductory Years:

Table 1: Contribution of VAT and Income Tax from FY91-92 to99-00

Financial Year VAT (Tk. Incrores)

Income Tax (Tk.In crores)

1991-92 3530 18101992-93 3750 17731993-94 3940 18601994-95 3985 1929

1995-96 4085 21751996-97 4248 22151997-98 4270 24301998-99 4373 27451999-00 4556 3027

Source: Bangladesh Bureau of Statistics 2007


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Table 3: Share of revenue types to TotalRevenue

Revenue Type % of total revenue in FY91-92Tax on Income and Profit 18%Value Added Tax(VAT) 24%Import Duty 21%Supplementary Duty 1%Export Duty 16%Excise Duty 19%others 1%

Source: Bangladesh Bureaue of Statistics 2007


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Table 4: % of VAT to Total Revenue

Financial Year VAT as % of Total Revenue

1991-92 24%1992-93 30%

1993-94 31%

1994-95 33%

1995-96 35%

1996-97 34%

1997-98 36%

1998-99 35%

Source: Bangladesh Bureau of Statistics 2007

Current Years:

Table 5: Share of Total Revenue in FY11-12


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Revenue Type (%)of Total Revenue inTax on Income and Profit 28.3%Value Added Tax(VAT) 33.0%Import Duty 10.7%

Supplementary Duty 13.7%Export Duty 0.7%Non-NBR Tax 7.3%Non-Tax 5.6%Other Taxes and Duties 1.7%

Source: CPD Analysis 2011-12

Table 6: VAT as % Total Revenue and NBR


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Fiscal VAT as %0f total

Revenue

Vat as %of NBR

Growthrate ofVAT (%)

GrowthRate ofTax (%)

Years

2001-2002 25.15 74.92 13.5 12.51

2002-2003 25.93 76.32 15.82 13.77

2003-2004 24.22 76.41 6.38 13.43

2004-2005 27.05 77.81 23.67 12.9

2005-2006 27.63 76.79 16.91 13.22

2006-2007 27.66 75.76 10.36 8.49

2007-2008 28.1 75.93 24.34 22.33

2008-2009 29.08 76.61 18.24 10.11

2009-2010 28.55 76.39 13.32 20.97

2010-

2011(p)

29.18 78.18 18.85 18.9

Source: Bangladesh Economic Review 2010


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Table 7: Contribution of VAT to Total

Revenue

Fiscal year Total Revenue(Tk. In

crore)

IncomeTax (Tk.In crore)

VAT (Tk.In crore)

2001-2002 27670 4100 6960

2002-2003 31120 4788 8071

2003-2004 35400 5370 8575

2004-2005 39200 5850 10605

2005-2006 44868 6960 12398

2006-2007 49472 8924 13683

2007-2008 60539 1105 17013

2008-2009 69183 13538 20116

2009-2010 79848 16560 22795

2010-2011 92847 21005 27092


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Source: Bangladesh Economic review 2010

3.5 Conclusion:Finally we want to say that this report on Impact of VAT onEconomic growth in Bangladesh may be tools for academicpurposes for public finance students. Every public financestudents should realize their study on impact of VAT inBangladesh. With the help of this report we can evaluateeconomic growth of our country. By broadening and improvingVAT base system in economic sectors our government can

squeeze more revenue, which helped to improve our economicgrowth. In this regard, government should follow proper VATsystem and take appropriate steps to develop VAT sectors in ourcountry. One thing is most important that, for improving oureconomic growth government should reduce corruption in VATsector and as a citizen of Bangladeshis everyone must pay their


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imposed VAT in due time. Otherwise it is not possible to developour economic growth.

3.6 Appendices

Table-8 (rationalizing Duty-Tax for Motor Cars)

Description of motor car(proposed)

SD (present) SD (proposed)

Cylinder capacity up to 1000 cc 30% 30%Cylinder capacity from

(1)1001 cc to 1500cc

(2)1501 cc to 1650cc

30%

100%

45%

Cylinder capacity 1651cc to2000cc

100% 100%


250% 250%


350% 350%

Cylinder capacity 4001 & above 500% 500%Microbus with Cylinder capacity

1800cc20% 30%

Microbus with Cylinder capacityfrom 1801cc to 2000cc 60% 60%

CKD motor car, jeep and stationwagon

30% 45%


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Table-9 (Duty tax reduction in electricity and energy sector)

Description of Goods Duty

Type

Existing Duty

(%)

Proposed Duty

(%)

Parts of energy savinglamps imported by

VAT Regd. Ind.

CD 0 0

Parts of energy savinglamps imported bycommercial firms

CD 0 12

Solar operated storageheater

CD 25 12

Pressure regulator/valve for

LPG

CD 25 5

Safety or relief valve forLPG

CD 25 5

Submerge welding flux CD 12 5Energy saving light with

blast & fittingsSD 60 0

REFERENCE1. Dr. Monjur Mrshed Mahmud, Dr. Kanchan Kumar Purohit, Dr.

Milon Kumar Bhattacharjee, dr. Md. Abdur rahaman. Taxationin Bangladesh 9th edition 2011.

2. BUDGET SPEECH 2010-11 Ministry of Finance, Government ofBangladesh.

3. BUDGET SPEECH 2011-12 Ministry of Finance, Government of

Bangladesh.

4. Paper prepared under the CPD programme IndependentReview of Bangladesh development (IRBD) Released to themedia on 10th June 2011.

5. www.nbr-bd.org/Valueaddedtax.html6. www.bbs.gov.bd7. Group Research8. By following different kinds of term paper.9. Bangladesh Economic review 2010.
http://www.nbr-bd.org/Valueaddedtax.htmlhttp://www.nbr-bd.org/Valueaddedtax.htmlhttp://www.bbs.gov.bd/http://www.nbr-bd.org/Valueaddedtax.htmlhttp://www.bbs.gov.bd/


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10. Bangladesh Economic Update, growth, Tax, inflation andconsumers, Unnayan Onneshan, www.unnayan.org.

11. Draft_ Vat_ law 2012 English12. Bangladesh Institute of Development Studies13. Board of Ministry of Finance of Bangladesh

14.Consumption Tax in Developing Countries- The case of theBangladesh VAT,working paper series, M C Smith, School of accountingand Commercial Law, Victoria University of [email protected].
http://www.unnayan.org/mailto:[email protected]:[email protected]://www.unnayan.org/mailto:[email protected]

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