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Assignment On Impact of VAT on the economic growth in Bangladesh

Course Title: Public Finance Course No: 306

Submitted To: Haider Arif Banking Chittagong Submitted By: Banking

Tanvir Mohammad Assistant Professor Dept of Finance and University of Group-J Dept of Finance &

Chittagong

3rd year (mid term) University of

Submission Date: 21/04/2012

Letter of submission: Date: April 21, 2012 To, Tanvir Mohammad Haider Arif Assistant Professor Dept of Finance and Banking University of Chittagong Subject: submission report on impact of VAT on economic growth in BD. Dear Sir, With immense pleasure we would like to submit our report on impact of VAT on economic growth in Bangladesh. This program assigned us which we have enjoyed fully. We have prepared this report highlighting impact of VAT on economic growth in BD. Though we have tried all of our best to analyze different aspects of economic growth in Bangladesh. We wish to thanks for your kind co- ordination to make this report if there in any deviation & mistake in the report.

Thanking you. Sincerely yours, Group-J Dept of Finance & Banking 3rd year (mid term) University of Chittagong
Acknowledgement: We have the immense pleasure and satisfaction in presenting this report on impact of VAT on economic growth in Bangladesh which is termination of our B.B.A program especially in public finance course. First of all, we would like to express our heartiest gratitude to our honorable teacher and course supervisor on public finance Tanvir Mohammad Haider Arif, Assistant Professor, Dept of Finance and Banking, University of Chittagong. We would also like to give thanks to our honorable teacher and course instructor of income tax Mrs. Suraiya Nazneen, Associate Professor, Dept of Finance and Banking, University of Chittagong for giving her important advice about it. We were enriched by their kind encouragement and co-operation. We could not complete this report successfully without their responsible guidance, instruction, persuasion and advice. We would like to extend our heartfelt thanks to the contributors of generous help we have received from many sources of NBR office in Chittagong.

Finally, we thanks our honorable teacher Tanvir Mohammad Haider Arif & friends for their cordial co operation, who have helped & contributed in preparing the report effectively. . Group-J Dept of Finance & Banking 3rd year (mid term) University of Chittagong

Executive summary:
Our report topic Impact of VAT on the economic growth in Bangladesh has been prepared under the guidance of Tanvir Mohammad Haider Arif, Assistant Professor, Dept of Finance and Banking, University of Chittagong. Thought it is difficult to conclude this topic under the short range, we have tried at our level best to present it better. On the whole report we have classified into three chapters. In first chapter, we try to highlight the basic information about VAT, its history, definition, reasons for introducing VAT in Bangladesh, argument for and against VAT, important features, goods and services subject to VAT in BD.etc.

In second chapter, we try to highlight data & information about impact of VAT on the economic growth in Bangladesh, decision regarding VAT in budget 2011-12 in Bangladesh, which are very much needed for our public finance students. At last chapter, we focused on impact of VAT on economic growth in different sector in Bangladesh such as government revenue, subsidy, saving and investment, business organization, import & export, government employment and soon. Finally we want to say that this report will provide some suggestion for which we have given our efforts to making it best one.

Methodology of the study:

In the mission the concepts and definitions have been taken by consulting with our honorable teacher tanvir mohammad haider arif and course instructor of income tax Mrs. Suraiya Nazneen, Associate Professor , Dept of Finance and Banking , University of Chittagong and from different books, annual reports and websites. Information was collected from primary and secondary sources. The methodologies that have been followed in the study stated below:

Data selection: At first required data for the study was identified. Our friends advice was followed in this regard. Data collection: Both primary and secondary sources have been used for collecting data, these are: Primary sources: a) Group discussion b) Interview of different officials c)Advices of our senior brothers in our department. Secondary sources: a) Using various libraries b) 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 specific objectives. Analyzing data and information about impact of VAT on economic growth in Bangladesh. Evaluating the impact of VAT in different sector in Bangladesh:

Impact of govt. revenue General consumer Government employment Import & export Saving & 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. In face of our sincerest attempt in preparing a perfect report, 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 the report. 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 such kind of report. Despite of numerous problems with limitation & bottlenecks, we tried our best to make the report more informative with recent data, so as to arouse high satisfaction to our respectable teacher as his expectation.

Group Information:

S. Name N 1 2 3 4 5 6 7 8 9 Ahasan Ullah(Group leader) Md.Mozammel Hossen Abu Mohiuddin

ID

E-Mail

0930309 Ahasan99_cu@yahoo.com 9 0930310 Mmhb_cufb_17@yahoo.com 4 0930307 Mohid_univctg@yahoo.com 8

Md. Mostafizur Rahaman 0930304 Mostafizrahaman.cu@gmail.c 0 om Misbah-ul-karim Chy Roakon Md. Sha Alam Raju Md. Monawer Uddin Kyakhin Rakhain Kyathowai Prue Marma 0930302 Roakon_univctg@yahoo.com 7 0930304 Rajucu100@yahoo.com 7 0930310 8 0930309 4 0930309 2 0930304 8 Monaweruddin@gmail.com kyawkhinbd@gmail.com kya@gmail.com mrmunnactg@gmail.com

10 Mohammed Lokman Hossain

Table of contents: Chapte r Chapter -1 Subject 1.1 Introduction 1.2 History Background 1.3 Definition 1.4 Features 1.5 Arguments for & Against VAT . Page No 10 10 11 11 12

Chapter -2

2.1 Goods and services subject to VAT in BD 2.2 Exempted goods of VAT. 2.3 VAT rate and VAT assesse.. 2.3.1 Tax base of VAT.. 2.3.2 Truncated base/fixed value addition. 2.3.3Tariff value for imposition of VAT 2.4 Computation of VAT 2.5 Decision regarding VAT in 2011-12 Budget in Bangladesh 2.5.1Decision VAT 2.5.2 Decision on Import Duty 3.1 Impact of VAT in different sector in Bangladesh. 3.1.1 Government Revenue. 3.1.2 Saving and Investment 3.1.3 Business Organization. 3.1.4 Subsidy. 3.1.4.1 Agriculture 3.1.4.2 Public Health .. 3.1.4.3 Power &Fuel .. 3.1.5 Import & Export . 3.1.6 Government Employment .. 3.1.7 Covering service economies . 3.1.8 Special scheme for tobacco & alcohol 3.1.9 Enhanced Audit 3.2 Problems & Perspective of impact of VAT in Bangladesh.. 3.3 Data & Graph about impact of VAT in BD.. 3.3.1At Introduction time.. 3.3.2---Current Years 3.4 Conclusion 3.5 appendices

15 15 17 17 18 18 18 19 21 25 25 25 26 26

Chapter -3

28 28 29 29 30 31 32 32 34 39 40

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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 is nothing but its gross receipts from sales minus all expenditure on goods and services purchased from other firms. In the production and distribution process a firm buys materials from other firms. These materials 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 these purchased materials by processing or handling them with the help of its own factors of production such as labour, land, capital, etc. such increase in the value of outputs over inputs is the value added by the firm. Since the VAT is mostly introduced as a consumption type, it is usually considered as an indirect tax. In general, value added tax is an alternative form of sales tax and in its usual form, it is a multi-stage consumption tax imposed on goods and/or services, which is collected at every stage of production and distribution rather than at the retail stage 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 and distribution. In such a case, the oldest tax of this type, a turnover tax was first introduced in Spain in 1342. The manufactures sales tax was introduced in Canada in 1923, the wholesale sales tax was introduced in 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 to refinement of multipoint sales tax. In such a situation VAT in its present multi stage form was first introduced in Japan in 1950 at a local govt. level. There after it was introduced in France in 1954, Denmark and Brazil in 1967, Netherland in 1969, Luxemburg in 1970,Belgium in 1971,etc.Now a days it is found in about 90 countries of the world including our neighboring countries India and Pakistan. The VAT was introduced in Bangladesh on 01 July, 1991 at its initial form is a sort of consumption tax, extending its coverage up to the level of import, production or manufacture and service rendering but not to expert (which is zero-rated ),wholesale or retail level(vide section 3 of the VAT Act,1991).But since the financial year 1996-97, VAT in Bangladesh has been a broad-based consumption expenditure tax by covering the wholesale and retail levels. A brief history of introducing VAT in Bangladesh now follows. Govt. of Bangladesh in 1976 formed a nine member taxation Enquired commission which in its report discussed different aspects of VAT

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including its advantages &limitations. But commission in this regard concluded that time has not yet come for its introduction. B this brought the concept in discussion latter on since 1979.In1986,a World Bank mission visited Bangladesh and among others it recommended introduction of VAT. Based on this recommendation a tax mission from Bangladesh visited many countries in 1989 and in 1990.They recommended adaptation of VAT thereafter based on a series of discussion with relevant parties, chambers, etc. The VAT ordinance was promulgated on 31st may, 1991 which combined excise duty and sales tax to a large extent subsequently. The value added tax bill 1991 was introduced on the Jatiya Sangsad (National assembly/parliament) on 1st June, 1991 (I.e. after 30 days of the promulgation of the VAT ordinance). The then finance minister in his statement of objects and reasons for bringing the VAT bill said that it was being considered proper and necessary to introduce VAT in place of present sales tax at the import level and exercise duty at the local production and service level in order to remove inconsistency and defects of the current indirect taxation system in the country. The opposition protested the introduction of the VAT bill. However, as a routine process of the parliament, the value added tax bill, 1991 was passed by the parliament 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 from production to distribution process. In this connection let us refer to the definitions advanced by different authorities and authors. The oxford Dictionary of current English: Value added tax means a tax on the amount by which the value of an article has been increased at each stage of its production. D. K. Stout: Value added tax is a multiple tax imposed at a flat rate upon the annual sales proceeds of a company less all its purchases 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 value added might best be described as a sophisticated turnover tax, where the cumulative tax factor is removed by taxing each transaction only in respect of the addition to sales value which

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has occurred in the stage immediately prior to the transaction in question. ************************.

1.5 Some important features of VAT in Bangladesh:

An analysis of VAT act and rules reveals the following features: It has been framed by incorporating sales tax on imported goods and excise duty on domestic produced goods. It is changed at rate of 15% on taxable goods. But for certain sectors and goods and for annual turnover lower than Tk. 15 lakh turnover tax and supplementary duties at some other rates instead 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 the merits of VAT. Some of the important points are as follows: It increases the cost of consumption, thus stimulating, savings and investment. The government gets its money earlier; it doesnt have to wait until after the final sale. It is used to stimulate exports; the exporter gets a rebate for the tax paid. Importers pay the VAT based on the prices of their imports. The tax is paid on goods purchased, whether manufactured

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domestically or imported. Thus imported goods are not given an advantage over locally manufactured products. It catches service companies, which historically have been exempted from sales taxes. A service company has to charge the tax 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 have been pointed out by various authors. For example, Evans, Taylor, and Holzman pointed out a number of disadvantages, some of which are as follows: It is a regressive tax, like sales taxes, its impact on the tax payer decreases as income increases and the portion of income spent in consumption decreases. It may be administratively difficult to enforce, practically when a large number of classes of tax payers are given exemption from tax. It also difficult to administer in applying it to large numbers of small tax payers, who are usually themselves administratively illequipped to comply with the tax. It is unpopular with local governments, since it competes with sales taxes as a consumption tax, and sales are an important source of local government revenues. An additional tax may reduce a countrys rate of capital formation, leading to a relatively tax may reduce a countrys rate of capital formation, leading t a relatively decreased competitiveness of the economy and a reduction in exports. .**************..

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2.1 Goods and service subject to VAT in Bangladesh:

According to section 3 of VAT act, VAT is imposed on the following goods and services: All goods imported in Bangladesh except those mentioned in the first schedule of the VAT act; All goods supplied except those goods mentioned in the first schedule of the VAT act; All services provided in Bangladesh except those services mentioned in the second schedule of the VAT act[vide section 3(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 exempted goods: I. All goods as specified in the first schedule of the excises and salt act, 1994(1 of 1994), in case of manufacturing or production thereof in Bangladesh.

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II. III.

All goods as mentioned in the second schedule of the narcotics control act, 1990(Act no.20 of 1990), in case of manufacturing or production thereof in Bangladesh. Goods under harmonized commodity description and coding system(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 SRO 204/91/22 & different circulars issued from time to time following goods 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 exemption till 1999-2000. But in the FY 2000-2001, the second schedule has been replaced by a new schedule in which the list of exempted services was included, by keeping similarity with the first schedule. In the second schedule list of services exempted from VAT has been provided 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 agricultural products. 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 & professional oriented 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 and service. 15% VAT is applicable for all business and industrial unit with an annual turnover at TK. 2 million and above. Turnover tax at 4% is leviable where annual turnover is less than Tk.2 million. 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 than Tk. 2 million and with capital machinery valued up to Tk. 300000) is exempted from VAT. Tax returns are to be submitted on monthly or quarterly on half yearly basis as notified by the govt. Supplementary duty (SD) is imposed at local and import stage under the 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 supplementary duty.

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 due to non availability of invoices from the sellers of inputs. In order to remove this operational difficulty fixed bases such as 10%, 25% 30%, 60% value addition is taken into account for calculation of VAT for a number 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 the wholesaler retailer do not avail the facility at inputs credit. Such tax is also imposed collected at the import stage from importers at finished goods 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/locally procured re-rollable is Tk. 4000.00 per MT normal VAT input credit is also not available under this system. Deduction of VAT at source: As deduction at source is also practiced in case of VAT, on certain services, govt., semi govt., autonomous, bodies, NGOs insurance companies limited are authorized by the govt. to deduct applicable VAT on the service at source. Excise duty: At present excise duty applies to only two items: bank deposits and domestic air ticket ( To. 250 per journey)

2.3 Computation of VAT:

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There are different procedures of computing VAT depending on situation and methods. The important formulate for computation depending on situation are shown below: Computation of value added tax at different Computation Importer Producer stage (1) (2) (3) A Value of goods Tk.0 Tk. 600* imported[colum 300* n(2)] or produced[colum n(3), wholesale[colum n(4) and retail[column(5) B Gross VAT@15% Tk. 45 Tk. 90 C Tax credit[tax Tk. 0 Tk. 45 paid at paid at preceding stage] D Net VAT Tk. 45 Tk. 45 payable[B-C] E Billing inclusive Tk. 135 Tk. 690 of VAT[A+B] F Government revenue[row d shows VAT total taka 135, which is borne by the consumer] stages: Wholesale retailer r (4) (5) To. 800* Tk. 1000*

Tk. 120 Tk. 90 Tk. 30 Tk. 920 -

Tk. 150 Tk. 135 Tk. 15 Tk. 1150 -

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

2.5 Decisions regarding Indirect Tax in 2011-12 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, finance minister has proposed to introduce online VAT registration and return submission. Specific software (Bangladesh VAT system eVAT) will be used for this purpose which will be developed by a private firm under the direct supervision of NBR. In order to impose penalty under the existing VAT Act, he proposed to add new provisions to this Act to take up judicial proceedings in the court of special Judges appointed under the criminal law Amendment act 1958.Currently there is no provision in the VAT Act for protection of information provided by the taxpayers. Considering the demands of taxpayers, our honorable finance minister has inserted a new provision in a new provision in the existing law for protection of information given by the given.

Reforms in VAT System: To modernize the VAT system, our govt. has declared price procedure and introduced amendments in the law for payment of taxes using various means at the same time, it has been proposed to take necessary amendments in VAT act to impose VAT on e-commerce. To augment collection of VAT from domestic sources, the following measures: In order to broaden the scope for collection of VAT at source , Govt. proposed to include under it any purchase of goods or services through tender by government organizations semi-government organizations, autonomous bodies, NGO, bank, insurance company or any other financial institutions, limited companies and educational institutions. After review of truncated base value in certain cases, Govt. want to with draw truncated base value for some services. Besides they 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, a proposal has been made to increase tariff value in some cases.

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Taking tobacco related health risk into account; they proposed a ration enhancement of price-slab and supplementary duty of cigarettes. Besides they also want to impose and enhance supplementary duty on few goods at the local manufacturing stage. In 2004, small businesses were given the opportunity to pay VAT at low fixed rate remained unchanged till to date. The rates of minimum 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 and energy 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 percent considering the role of SMEs in the industrialization of the country. They have 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 seat for single journey at the rate of Tk. 300.They imposed exercise duty on the deposit balance of any account of leasing and financing organization as shown in annex-B. Simultaneously, VAT on the services rendered by travel agencies. Administrative Reforms: Since, collection of VAT is administered by BCS Customs and Exercise cadres, it has been renamed as BCS (Customs, Excise and Value Added Tax) cadre. To expand VAT net, we are taking steps to set up more VAT office and to create a small VAT office in each upazila consisting of 1 inspector, 1 Data Entry Operator and 2 Sepoys as part of restructuring manpower. Newly created outfits (already approved by ministry of Establishment ) like two customs houses, two Custom bond Commission rates, one VAT survey Directorate, one ICT commission rate, three Appellate Tribunal, customs offices in 10 foreign missions, fifty-six VAT Divisional Offices and one hundred and forty-six VAT Circle and 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 gradually reduce the rates of duty and taxes at the import stage as a member of the World Trade Organization, customs revenue still contributes to about 38 percent of the total internal revenue collection in the country. Finance minister has proposed to continue with the four-tier customs tariff structure. However, paying close attention to the issues of

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facilitating trade, supplying goods to consumers at a fair price, and promoting domestic industries, Bangladesh now present before this august House 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 general people, VAT propose to maintain the 0 percent customs duty rate on commodities like rice, wheat, onion, pulse and edible oil, seeds, fertilizer, medicine and cotton. Considering the sudden exorbitant increase in the world price of milk powder, VAT authority proposes to reduce import duty from 12 percent to 5 percent and withdraw 5 percent regulatory duty on milk powder.

Protecting Domestic Industries Against the backdrop of the gradual reduction of trade taxes following WTO guidelines, 5 percent regulatory duty was imposed in the previous budget on all the products with the highest customs duty of 25 percent in order to protect local industries and also to ensure a consistent growth in revenue collection. However, the categories of commodities that attract concessionary duty benefits were kept outside its purview. Responding to the requests of the major trade bodies in the country, this proposes to continue that 5 percent regulatory duty for another one year. Rendering Assistance to Domestic Transport Industry In order to provide support to the development of local industries, this proposes to impose 15 percent VAT on import of CBU/diesel/petrol/CNG buses having 40 seats or more. To encourage the growth of the local motor cycle industry, present govt. has proposed to enhance the supplementary duty rate on both completely built up (CBU) and completely knocked down (CKD) motor cycle from 20percent to 30 percent. Increased Revenue Income from Sugar Industry The specific rate of duty on raw sugar was withdrawn last year in response to the sudden price hike of sugar at the world market. However, due to a good crop this year, its world price has gone down. Therefore, to ensure higher revenue collection to meet government's

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developmental needs, a proposal has been made to impose specific rate of duty on raw sugar and refined sugar at the rate of Tk. 2,000 and 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-manufactured tobacco.

Tariff Reduction Facilities for Some Items of Electricity and Power Sector VAT Proposal would like to propose to continue the benefits of duty-tax exemptions given earlier to encourage investment in power and energy sectors in the country. In this budget, govt. present for consideration of this House the proposals of reducing customs duty for energy saving four products in the power sector and three products in the energy sector (Table-2). Restructuring the Tariff Rates for Discouraging the Import of Motor Vehicles Correction of the First Schedule of 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 facilitate clearance of the baggage of wage earners. Again, this propose to amend 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, and enhancement of customs duty and supplementary duty on a number of products. Reasons for undertaking such measures and the nature of changes proposed have been illustrated in various tables in Annex C. Considering persistent traffic jams causing innumerable sufferings to city dwellers, this propose to revise the rates of supplementary duty and reclassify motor cars and micro buses based on cylinder capacity (cc) [Annex C-1]. Govt. Also propose to continue the flat rate-based depreciation system imposed in the last years budget and to reduce the consolidated rate of depreciation from 40 percent to 35 percent making it applicable only for 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 it mandatory for the submission of price certificate from the manufacturer or from the trading agent with at least 30 percent ownership of the manufacturer. The transshipment and transit activities are increasingly gaining importance in international trade. In order to facilitate customs formalities of such goods in Bangladesh and to determine related transshipment or transit fee, govt. has propose to promulgate a new SRO.(Table-1) Source: BUDGET SPEECH 2010-11 Ministry of Finance, Government of Bangladesh.

..

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3.1 The impact of VAT in different sector of Bangladesh

Value added tax or VAT is an indirect tax, which is imposed on goods and services at each stage of production, starting from raw materials to final product. VAT is levied on the value additions at different stage of production. VAT is widely applied in the European countries. However, now a number of countries across the globe have adopted this tax system. The VAT was introduced in Bangladesh on 01 July, 1991 at its initial form is a sort of consumption tax, extending its coverage up to the level of import, production or manufacture and service rendering but not to export (which is Zero-rated), wholesale or retail level. But since the financial year 1996-97 VAT in Bangladesh has been a broad-based consumption expenditure tax by covering the wholesale and retail levels

3.1.1 Government Revenue:

Value added tax (VAT) in Bangladesh now has very vast area of Governments revenues collection. The major earnings of governments revenue is coming from value added tax (VAT). So the Governments has given due importance to VAT and the fate is that the days to come shall have importance no less than others fields. VAT has been introduced not only because of its revenue raising potentials but also because of its simplicity, effectiveness and efficiency, transparency, equity and progressiveness all of which complement the establishment of good governance. The revenue-GDP ratio in Bangladesh is one of the lowest (8.5%) in the world. Of all the tax revenues, VAT at present is the single largest contribution to GDP. It has been found that VAT funds the Government expenditure more than any other tax. In the very first year of its introduction, VAT yielded revenue 5.43% more than the previous year. Starting from 3190 crore taka in FY 1991-92,

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VAT yielded 28,657 crore taka in FY 2008-07. VAT now accounts for 4.3% of GDP while the total contribution of tax revenue to GDP is 8.36%. Generally VAT are charged 20%, 35%, 65%, 100%, 250% & 350% on goods and 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 are more savings, there will be more availability of capital for investment purpose. Income of an individual can be normally divided into savings and consumption. In this case, if majority of income is used for consumption, amount of saving is bound to decrease. As VAT is a tax on consumption, it plays a key role in increasing expenditure of consumption. People lose their intention to expend for the goods in which high rate of VAT is imposed. Moreover, for making saving in financial institution, depositors are paid interest at different rate in different compounds and most of the people prefer saving to unnecessary consumption. For high rate of VAT in different luxurious goods, people are running towards the interest paying institutions such as banks, insurances, NBFI etc. therefore, though Bangladesh being least developed country Banks have been going to door-to-door of borrowers. Businessmen are being benefitted for being offered in different loan packages and export-oriented organizations which are out payment of VAT makes finance by taking loan from such organization. We cannot imagine formation any large and mid sized business without bank loan. RMG sector which is the life-blood export is highly depended on outer source which is made available by those lending organizations and corporate houses and conglomerates for increasing EPS use the method of financial leverage. For this purpose these organizations has procure the large portion of capital through borrowing money. The major two components of govt. revenue are income tax and VAT. From these sources Bangladesh govt. meets not only public expenditures but investment of public projects. Through establishment of such projects huge amount of investment are made around the country. Such investment has tremendous 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 business organizations or on their profit. As VAT is imposed on their goods or services produced. They need not to make any payment of VAT to administration. But as VAT is imposed on in different rates on in their products, these get increased significantly. Depending on types of products and consumers of those products, demand of these VAT imposed products varies. As VAT is imposed on few products in higher rates, demand may be affected when customers are affordable enough such as alcohol and cigarettes. But in case of other few products which are consumed by higher and higher-middle class holder are not influenced not much, there is high rate of VAT. Besides, as some business firms have to pay import duty in case of importing raw materials and machineries such import of all kinds of fabrics and RMG articles have to pay 45% import duty(increased by20%), domestic supply dependent firms get benefitted as they need not to pay any sorts of indirect tax 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 sectors specially to decrease the production cost for producers and to provide services for marginalized people. In the context of Bangladesh, the most prioritized sectors of the government are agriculture, fuel & electricity and public health.

3.1.4.1 Agriculture:
Govt. declares subsidy huge amount of capital in every budget for agriculture. Farmers demand fertilizer, seeds, fuel etc. in low price though price of these materials is increasing as they can produce crops in low cost and can make profit. Board of Finance Ministry separate a substantial portion of fund from public revenue for the subsidy of agriculture. the amount of agricultural subsidy in the FY11 was 11.1% higher than the allocation made in the previous years budget. In the budget of FY2011-12, though the provisions for agricultural subsidies has undergone a decline but in view of the continuous increase in the fertilizers and other input prices in the international market, a significant increase in subsidies in the may soon be needed during the year.

Table1: Amount of Disbursed Agricultural Subsidy

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Fiscal Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Subsidy (in crore Tk.) 125 195 365 500 1127 1400 2178 5500 4750 3945

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3.1.4.2 Public Health:

Besides agriculture, govt. needs allocate a large amount of fund as subsidy in public health sector also. There are .Medical College Hospitals and thousands satellite clinics where govt. provides all sorts of treatment services, primary medicines and even catering services for serious patients with very low fees.

3.1.4.3 Power &Fuel:

Power and fuel have been important part of civilized life. Not only business organizations but also day-to-day normal life has been dependent on these two materials. For ensuring electricity govt. needs to use natural gas and most discussed one is Quick Rental System which is based on diesel oil. As general people cant afford to bear these expenses to be availed, huge amount of subsidy is being distributed. In case fuel also, there is subsidy from govt. for decreasing cost transport, production and agriculture. The Board of Agricultural Ministry request for budgetary resources of Tk. 750 Crores 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 playing indirect 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 VAT at different rates in case of importing goods which are not necessary and urgent 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 the availability of capital for importing luxurious products in large quantity. If demand decreases, importers will lose their intention to open LC (Letter of Credit).The more they try to capitalize their savings for investing in the export-oriented projects, the more foreign currency come inside. Besides, importers will contribute to the certainty of food security as no duty is imposed on import of rice, wheat, edible oil and other common foods. As exporters are exempted from the payment of VAT, entrepreneurs are encouraged to invest in export-oriented business. They are paid for their exported goods in terms of dollar ($) which is considered as the standard of payment. In this way foreign reserve has been stronger for few previous years though is now facing problem. But Bangladesh is experiencing the growth of FDI (foreign direct investment) in few specific sectors in recent years as govt. offered zero rate VAT for the huge of contribution of that sectors in the increment of exports though there export duty of 5% in case of tobacco. 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 employment in different designation for the collection, calculation and execution of VAT. In 2005-06, there were 5328 persons employed in the area of indirect tax administration encompassing custom duty, VAT and turnover tax. As the area of VAT is widening, there are increasing VAT related jobs. Though administration cost is too low as per Tk. 100 collected of VAT costs only 0.58(.58%) in the FY2007-08. Moreover, to make the payment of salaries for employees of most unproductive govt. bodies Ministry of Finance needs to relay on public revenue. VAT has a big contribution on the increment of VAT. In the few last years, govt. increased the salaries of all govt. posts substantially. Beside this, there have been thousands of recruitments in govt. bodies with the progress and broadening. As most of these bodies are unproductive VAT through contribution to public revenue has a mentionable impact in the payment of salaries. Beyond govt. organizations, business organizations also appoint auditors and accountants to operate auditing and computation of VAT. The bigger the organizations operations, the more the jobs are being created 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 in order to recover the tax paid on its purchase of supplies and equipment. With the expansion of Bangladesh economy, service sector is enlarging dayby-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 of telecom sector, govt. is earning a huge amount of VAT from these mobile service operators. As they are offering different types in their product line, it is one of the big sources of VAT. Besides, with the development of travel and tourism and expansion of international business, there have been many hotels and motels around the heritage and beautiful places like Cox-sbazaar, Dhaka, Chittagong, and Shundorbans etc. Govt. is imposing VAT on services provided to their consumers. Aircraft business has also been brought under the purview of VAT. As migrating workers and travelers are increasing rapidly, this service industry is providing huge amount of indirect tax. Some new emerging service industries such as beautician service, event management, community center advertising firms etc. have been imposed VAT on their offered service products. Another mentionable sector in economy under the imposition of VAT is real estate and land development firms. 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 in Bangladesh if the goods are:Cigarettes, tobacco, or similar products, including blended products; or Alcohol beverages, ingredients for alcohol beverages or similar products. Any special scheme imposed under this section shall set a maximum retail price for the goods, which shall be the dutiable value for the goods. Note1: this means that the amount of supplementary duty paid by the manufacturers is not linked to the price at which it makes its supplies. Note2: the VAT treatment of supplies of tobacco and alcohol will not be affected by the scheme. Example 1: the MRP for the particular cigarettes is Tk. 104 and the rate of the supplementary is 58%. The amount of supplementary duty paid by the manufacturer will be Tk. 60.32 Any special scheme by the board under this provisions requiring the manufacturer 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 sign or mark of a particular size and design, manifesting measures of security and for that purpose the board may determine all producers relating to the scheme, in relation to the use, distribution, preservation, supervision, observation, accounting and packaging of stamps, banderols, or special sign or marks For VAT purpose the of any supply to which a special scheme under the section 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 other registered person. Note: this rule over-rides the normal rule for working out the value of supply in 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 the manufacturers selling price is Tk. 100, the wholesale price is Tk.105 and the retail price is Tk.110. The value of each of these supplies the price minus the tax fraction of the price, i.e. 86.96, 91.30,and 95.65 respectively. All of these are MRP, even though the wholesale and retail prices exceed the MRP. (this is 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, must pay output tax on the basis of that price (i.e.15.60). if all of the suppliers were registered, the consequence would be that the wholesalers net VAT would be nil, because its output tax on the supply to the retailer would be exactly equal to the input tax credit for its purchase from the manufacturer. The VAT collected will be the same whether or not the retailer and wholesaler are registered because all are required to use the MRP as the value 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 audits are dependent upon the appropriate selection of the audit process is also critical 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 20012002, 282 of the audits resulted in no additional revenue being collected this suggests that the audit process may have been very simple (such as merely checking of the correctness of the VAT returns). In more recent years, special audits have been conducted at the field level in some service units (such as pathology, laboratories, restaurants etc.), which has positive results. The recent establishment of a separate Directorate of Intelligence, investigation and audit of VAT headed by a senior VAT officer suggests that greater resources are being devoted to the audit function.

3.2 VAT in Bangladesh: Perspectives and problems

It is well know that VAT is imposed to realistic tax and not to regulate trade in 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 origin of the commodity. Locally manufactured goods and imported goods attract the same rate of VAT. In each case, the buyer or consumer pays for the cost of 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 national interest some countries exempt local produces from VAT. But in Bangladesh this is not done. VAT has a unique in built arrangement of self-regulation and self-monitoring in the ideal form. It also discourages tax evasion and smuggling. In Bangladesh, there are lots of deviations from this ideal situation. In a true sense, 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 prevalent when the excise duty was there. But theoretically, it must go down to the consumer. In each level of transaction, the seller is to realize VAT from the buyer and deposit to the govt. treasury and take credit of the VAT he paid to procure or manufacture the commodity. The consumer is the last buyer and naturally he does not have an opportunity to get any credit of relief. Here in Bangladesh tax evasion in different stages prevail & consumers in some cases in the present form of VAT give more & in some cases get undue benefit too. As regards administration of VAT, Bangladesh VAT administration polices all through a price declaration, accompanying invoice with the transport carrying commodity up to the destination, conditions on taking tax credit etc, are police measures. These are against self-compliance and it increases compliance cost. Failure to submit return and pay VAT in time is treated as an offence and 24% annual interest is charged, in addition to any probable penalty but there is no clear and specific mention of any remedy or excuse for the cases of inadvertence of accident. Though Bangladesh is the pioneer of VAT in the SAARC region, it still remains in the preliminary stage of VAT which is more akin 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 as possible.

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3.3 Data & Information on VAT in Introductory Years & Current Years
3.3.1Introductory Years:

Table 1: Contribution of VAT and Income Tax from FY91-92 to 99-00

Financial Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 VAT (Tk. In crores) 3530 3750 3940 3985 4085 4248 4270 4373 4556 Income Tax (Tk. In crores) 1810 1773 1860 1929 2175 2215 2430 2745 3027

Source: Bangladesh Bureau of Statistics 2007

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Revenue

Table 3: Share of revenue types to Total

Revenue Type Tax on Income and Profit Value Added Tax(VAT) Import Duty Supplementary Duty Export Duty Excise Duty others

% of total revenue in FY91-92 18% 24% 21% 1% 16% 19% 1%

Source: Bangladesh Bureaue of Statistics 2007

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Table 4: % of VAT to Total Revenue Financial Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 VAT as % of Total Revenue 24% 30% 31% 33% 35% 34% 36% 35%

Source: Bangladesh Bureau of Statistics 2007

Current Years:
Table 5: Share of Total Revenue in FY11-12

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Revenue Type Tax on Income and Profit Value Added Tax(VAT) Import Duty Supplementary Duty Export Duty Non-NBR Tax Non-Tax Other Taxes and Duties

(%)of Total Revenue in 28.3% 33.0% 10.7% 13.7% 0.7% 7.3% 5.6% 1.7%

Source: CPD Analysis 2011-12

Table 6: VAT as % Total Revenue and NBR

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Fiscal Years

VAT as % 0f total Revenue

Vat as % of NBR

Growth rate of VAT (%) 13.5 15.82 6.38 23.67 16.91 10.36 24.34 18.24 13.32 18.85

Growth Rate of Tax (%) 12.51 13.77 13.43 12.9 13.22 8.49 22.33 10.11 20.97 18.9

2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 20102011(p)

25.15 25.93 24.22 27.05 27.63 27.66 28.1 29.08 28.55 29.18

74.92 76.32 76.41 77.81 76.79 75.76 75.93 76.61 76.39 78.18

Source: Bangladesh Economic Review 2010

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Table 7: Contribution of VAT to Total

Fiscal year Total Revenue (Tk. In crore) 27670 31120 35400 39200 44868 49472 60539 69183 79848 92847 Income Tax (Tk. In crore) 4100 4788 5370 5850 6960 8924 1105 13538 16560 21005 VAT (Tk. In crore)

2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

6960 8071 8575 10605 12398 13683 17013 20116 22795 27092

Revenue

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Source: Bangladesh Economic review 2010

3.5 Conclusion: Finally we want to say that this report on Impact of VAT on Economic growth in Bangladesh may be tools for academic purposes for public finance students. Every public finance students should realize their study on impact of VAT in Bangladesh. With the help of this report we can evaluate economic growth of our country. By broadening and improving VAT base system in economic sectors our government can squeeze more revenue, which helped to improve our economic growth. In this regard, government should follow proper VAT system and take appropriate steps to develop VAT sectors in our country. One thing is most important that, for improving our economic growth government should reduce corruption in VAT sector 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 develop our economic growth.

3.6 Appendices
Table-8 (rationalizing Duty-Tax for Motor Cars) Description of motor car (proposed) Cylinder capacity up to 1000 cc Cylinder capacity from (1)1001 cc to 1500cc (2)1501 cc to 1650cc Cylinder capacity 1651cc to 2000cc Cylinder capacity 2001cc to 2750cc Cylinder capacity 2751cc to 4000cc Cylinder capacity 4001 & above Microbus with Cylinder capacity 1800cc Microbus with Cylinder capacity from 1801cc to 2000cc CKD motor car, jeep and station wagon SD (present) 30% 30% 100% 100% 250% 350% 500% 20% 60% 30% 100% 250% 350% 500% 30% 60% 45% SD (proposed) 30% 45%

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Table-9 (Duty tax reduction in electricity and energy sector) Description of Goods Parts of energy saving lamps imported by VAT Regd. Ind. Parts of energy saving lamps imported by commercial firms Solar operated storage heater Pressure regulator/valve for LPG Safety or relief valve for LPG Submerge welding flux Energy saving light with blast & fittings Duty Typ e CD CD CD CD CD CD SD Existing Duty (%) 0 0 25 25 25 12 60 Proposed Duty (%) 0 12 12 5 5 5 0

REFERENCE
1. Dr. Monjur Mrshed Mahmud, Dr. Kanchan Kumar Purohit, Dr. Milon Kumar Bhattacharjee, dr. Md. Abdur rahaman. Taxation in Bangladesh 9th edition 2011. 2. BUDGET SPEECH 2010-11 Ministry of Finance, Government of Bangladesh. 3. BUDGET SPEECH 2011-12 Ministry of Finance, Government of Bangladesh. 4. Paper prepared under the CPD programme Independent Review of Bangladesh development (IRBD) Released to the media on 10th June 2011. 5. www.nbr-bd.org/Valueaddedtax.html 6. www.bbs.gov.bd 7. Group Research 8. By following different kinds of term paper. 9. Bangladesh Economic review 2010.

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10. Bangladesh Economic Update, growth, Tax, inflation and consumers, Unnayan Onneshan, www.unnayan.org. 11. Draft_ Vat_ law 2012 English 12. Bangladesh Institute of Development Studies 13. Board of Ministry of Finance of Bangladesh 14.Consumption Tax in Developing Countries- The case of the Bangladesh VAT, working paper series, M C Smith, School of accounting
and Commercial Law, Victoria University of Wellington. andrew.smith@vuw.ac.com.