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Ending VAT confusion

MS Siddiqui | December 16, 2018

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 simpl icity 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 t he 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 s upplier 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 hav e 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) i n 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 confli ct
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 pric es. 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

mssiddiqui2035@gmail.com