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Value Added Tax: Theoretical and Value Added Tax: Theoretical and

Bangladesh PerspectiveBangladesh Perspective

CPD SEMINAR:CPD SEMINAR:

ICAB, 14 October 2010ICAB, 14 October 2010

ICAB AUDITORIUM (9TH FLOOR)ICAB AUDITORIUM (9TH FLOOR)

DR M ABDUR ROUFDR M ABDUR ROUF

Joint Commissioner (VAT), Joint Commissioner (VAT), Dhaka (North) Dhaka (North)

Commissionerate, NBR-GOB Commissionerate, NBR-GOB

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VALUE ADDED TAX: THEORETICAL AND VALUE ADDED TAX: THEORETICAL AND BANGLADESH PERSPECTIVEBANGLADESH PERSPECTIVE

ABSTRACTABSTRACT

In this article, the Value Added Tax (VAT) In this article, the Value Added Tax (VAT) system has been studied with its theoretical system has been studied with its theoretical and Bangladesh perspective. In this course, and Bangladesh perspective. In this course, the system has been explored to know how the system has been explored to know how the VAT has developed as a modern taxation the VAT has developed as a modern taxation system with some new features – prominent system with some new features – prominent of them is the credit mechanism. The article is of them is the credit mechanism. The article is divided into three parts. Part-I elaborates the divided into three parts. Part-I elaborates the theory of taxation and continues till VAT – an theory of taxation and continues till VAT – an indirect tax of consumption type. indirect tax of consumption type.

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It also explores taxation systems in the pre-VAT era, examines It also explores taxation systems in the pre-VAT era, examines its emergence as a new system of taxation and describes how its emergence as a new system of taxation and describes how the system quickly expanded worldwide since its adoption in the system quickly expanded worldwide since its adoption in France in mid-last century. In Part-II, to weigh the VAT France in mid-last century. In Part-II, to weigh the VAT system with other taxation systems, its pros and cons have system with other taxation systems, its pros and cons have been examined to see how the VAT system has accommodated been examined to see how the VAT system has accommodated all modern features to fit itself as a modern system of taxation. all modern features to fit itself as a modern system of taxation. The basic features of the VAT system of Bangladesh have been The basic features of the VAT system of Bangladesh have been presented in Part-III of this article to see few distortions presented in Part-III of this article to see few distortions prevalent in Bangladesh. Notwithstanding, the article prevalent in Bangladesh. Notwithstanding, the article concludes with the observation that since its adoption in July concludes with the observation that since its adoption in July 1991, the VAT has presented tremendous growth in the 1991, the VAT has presented tremendous growth in the realization of revenue outpacing the rate of national economic realization of revenue outpacing the rate of national economic growth and therefore, in concluding remarks, the VAT system growth and therefore, in concluding remarks, the VAT system of Bangladesh is termed a success. of Bangladesh is termed a success.

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The present international system is composed of The present international system is composed of nation-states. A specific territory, population, nation-states. A specific territory, population, government and sovereignty are the elements of government and sovereignty are the elements of a state. The government is bestowed with the a state. The government is bestowed with the responsibility of running state affairs which calls responsibility of running state affairs which calls for huge amount of revenue. Governmental for huge amount of revenue. Governmental revenue can at first be divided into tax revenue revenue can at first be divided into tax revenue and non-tax revenue. Tax revenue is collected and non-tax revenue. Tax revenue is collected without giving any direct facility to the tax-without giving any direct facility to the tax-payers such as Customs Duty, Supplementary payers such as Customs Duty, Supplementary Duty etc. but non-tax revenue is collected in Duty etc. but non-tax revenue is collected in exchange of some direct benefits such as License exchange of some direct benefits such as License fees, registration fees etc.fees, registration fees etc.

INTRODUCTIONINTRODUCTION

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Tax can be divided into direct tax and indirect Tax can be divided into direct tax and indirect tax. When the burden of tax can not be shifted by tax. When the burden of tax can not be shifted by the person paying tax, it is called direct tax. the person paying tax, it is called direct tax. Income Tax, Wealth Tax, Gift Tax etc. have been Income Tax, Wealth Tax, Gift Tax etc. have been examples of direct taxes. On the other hand, examples of direct taxes. On the other hand, when the burden of tax can be forward shifted, it when the burden of tax can be forward shifted, it is called indirect tax. Customs Duty, is called indirect tax. Customs Duty, Supplementary Duty, VAT are the examples of Supplementary Duty, VAT are the examples of indirect taxes. VAT is imposed on the provision of indirect taxes. VAT is imposed on the provision of goods and rendition of services. Whenever, a goods and rendition of services. Whenever, a supplier of goods or renderer of service delivers supplier of goods or renderer of service delivers goods or renders service, VAT is imposed on goods or renders service, VAT is imposed on them.them.

INTRODUCTIONINTRODUCTION

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But the supplier of goods or renderer of service But the supplier of goods or renderer of service forward shifts the burden of VAT on the forward shifts the burden of VAT on the consumers i.e. the ultimate consumers are consumers i.e. the ultimate consumers are required to pay VAT. The VAT has been an required to pay VAT. The VAT has been an innovative phenomenon in the history of innovative phenomenon in the history of taxation. Since its adoption in France in 1936 on taxation. Since its adoption in France in 1936 on limited scale, it has quickly spread over Europe limited scale, it has quickly spread over Europe and then throughout the world. This calls for an and then throughout the world. This calls for an exploration of the principles inherent in the VAT exploration of the principles inherent in the VAT system and the process through which the system and the process through which the system developed and emerged as a popular system developed and emerged as a popular revenue collection mechanism worldwide.revenue collection mechanism worldwide.

INTRODUCTIONINTRODUCTION

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(A) The Theories of TaxationGovernments require huge amount of revenue to run Governments require huge amount of revenue to run

the affairs of states. Governmental revenue can at the affairs of states. Governmental revenue can at first be divided into two categories as tax revenue first be divided into two categories as tax revenue and non-tax revenue. A tax is “a compulsory and non-tax revenue. A tax is “a compulsory contribution imposed by a public authority, contribution imposed by a public authority, irrespective of the exact amount of service irrespective of the exact amount of service rendered to the tax payer in return, and not rendered to the tax payer in return, and not imposed as a penalty for any legal offence” imposed as a penalty for any legal offence” (Dalton, 1978: 23). Tax revenue consists of various (Dalton, 1978: 23). Tax revenue consists of various duties and taxes, such as Income Tax, Gift Tax, duties and taxes, such as Income Tax, Gift Tax, Customs Duty, Supplementary Duty etc. License Customs Duty, Supplementary Duty etc. License fees, registration fees etc. are non-tax revenue. fees, registration fees etc. are non-tax revenue. From the perspectives of tax stages and incidence, From the perspectives of tax stages and incidence, tax can be of several types as follows.tax can be of several types as follows.

PART-IPART-I

The Theory and History of VATThe Theory and History of VAT

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Single vs. Multiple Tax

Proportional, Progressive and Regressive Tax

Direct vs. Indirect Tax

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(B) The Pre-VAT Taxation System

(C) Emergence of VAT in European Countries

The First Directive:The First Directive: This aims at the establishment of This aims at the establishment of a common market whose characteristics are similar a common market whose characteristics are similar to the characteristics of a domestic market. It to the characteristics of a domestic market. It emphasized upon harmonization of taxes of the EEC emphasized upon harmonization of taxes of the EEC countries and adoption of VAT.countries and adoption of VAT.

The Second Directive:The Second Directive: This Directive establishes the This Directive establishes the form of VAT as a tax-credit method that depends on form of VAT as a tax-credit method that depends on invoices for records and calculation of tax. It invoices for records and calculation of tax. It provides definitions to some basic terms for instance: provides definitions to some basic terms for instance: taxable persons, supply of goods etc.taxable persons, supply of goods etc.

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The Third Directive:The Third Directive: This Directive extended the This Directive extended the deadline for implementation of the First and Second deadline for implementation of the First and Second Directives until 1972.Directives until 1972.

The Fourth and Fifth Directives:The Fourth and Fifth Directives: These two directives These two directives were necessary to extend time limits for Italy. The were necessary to extend time limits for Italy. The VAT was eventually introduced in Italy in 1973.VAT was eventually introduced in Italy in 1973.

  

The Sixth Directive:The Sixth Directive: This Directive was promulgated This Directive was promulgated to cover most of the areas that needed precise to cover most of the areas that needed precise definition to achieve harmonization of national VAT definition to achieve harmonization of national VAT laws including the aspects like territorial application, laws including the aspects like territorial application, taxable transactions, chargeable events, rates and taxable transactions, chargeable events, rates and exemptions etc.exemptions etc.

(D) Expansion in Other Countries of the World

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(A) What is VAT?

(B) Advantages of VAT

(C) Disadvantages of VAT

(D) Different Forms of VAT

- Gross-Product VAT

- Income-Type VAT

- Consumption-Style VAT

(E) Exemptions, Zero-Rating and Multiple Rates

PART-IIPART-II

Basic Features of VATBasic Features of VAT

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(A) Introduction of VAT in Bangladesh

(B) Tax CoverageAccording to the provisions of section 3 of the VAT According to the provisions of section 3 of the VAT

Act 1991, VAT is imposed on the following goods Act 1991, VAT is imposed on the following goods and services:and services:

(a) all goods imported in Bangladesh except those goods mentioned in the First Schedule of the VAT Act;

(b)all goods supplied except those goods mentioned in the First Schedule of the VAT Act;

(c) all services provided in Bangladesh except those services mentioned in the Second Schedule of the VAT Act.

PART-IIIPART-III

VAT in BangladeshVAT in Bangladesh

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(C) Tax-Base

(D) Tax Points

Under the VAT system, tax points depend on the stage of production and distribution as follows:

(1) For goods imported, VAT is to be paid at the time of paying import duty [under section 6(1) of the VAT Act].

(2) For goods produced or manufactured or imported, purchased, acquired, or otherwise gathered by registered persons [under section 6(2) of the VAT Act 1991], VAT is to be paid at the time of one of the following activities whichever occurs first:

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(a) When the goods are delivered or supplied;

(b) When an invoice relating to the supply of goods is given;

(c) When any goods are used personally or given for use to another person;

(d) When the price is received in part or full.(3) For services rendered by registered persons [under section 6(3) of the VAT Act 1991], VAT is to be paid at the time of one of the following activities whichever occurs first:

(a) When the service is rendered;(b) When an invoice relating to the

rendering of service is given;(c) When the price is received in part or

full.

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(a) When the goods are delivered or supplied;

(b) When an invoice relating to the supply of goods is given;

(c) When any goods are used personally or given for use to another person;

(d) When the price is received in part or full.(3) For services rendered by registered persons [under section 6(3) of the VAT Act 1991], VAT is to be paid at the time of one of the following activities whichever occurs first:

(a) When the service is rendered;(b) When an invoice relating to the

rendering of service is given;(c) When the price is received in part or

full.

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(E) Tax-Rate

(F) Exemptions/Exclusions

(G) The Credit Mechanism

(H) Accounting

(I) Auditing

VAT is a document-based modem taxation system. The importance of audit under the VAT system is unbounded in consideration of revenue protection and taxpayers’ training. Examination, verification and ensuring of the following matters are the main aims and objectives of audit function:

(1) Maintenance of proper documents;(2) Whether there is any devaluation in price

declaration;

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(1) Maintenance of proper documents;(2) Whether there is any devaluation in price declaration;(3) Whether the goods supplied for export have really been exported;(4) Whether the selling price is kept undisclosed or disclosed at a lower rate;(5) Whether credit taken on inputs or drawback claimed against export has been proper;(6) Whether the supply/provision of “zero-rated”, “taxable” and “exempted” goods or services is properly done;

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(7) Whether tax payment or submission of return has properly and timely been done;(8) Whether the inputs have been utilized duly and the amount of wastage has been proper; and(9) Whether any secret events of purchase of inputs, manufacturing/production or release have been occurred.

(J) Return Submission

(K) Distortions in the VAT System of Bangladesh

(L) Revenue Implications:

Below is a chart depicting the collection of sales tax, Below is a chart depicting the collection of sales tax, excise duty and VAT since 1972-73 to 1998-99.excise duty and VAT since 1972-73 to 1998-99.

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Financial Year

Sales Tax Excise Duty

VAT (Import)

VAT (Local)

VAT Total at import and local stage

Growth Rate of

VAT

(1)(1) (2)(2) (3)(3) (4)(4) (5)(5) (6)(6) (7)(7)

1972-73 20.99 59.18 -- --

1973-74 42.79 83.38 -- --

1974-75 61.57 145.78 -- --

1975-76 119.98 181.97 -- --

1976-77 125.27 207.75 -- --

1977-78 172.33 234.97 -- --

1978-79 143.31 255.63 -- --

179-80 283.70 284.93 -- --

1980-81 351.72 386.05 -- --

1981-82 325.02 452.99 -- --

1982-83 297.71 497.51 -- --

2020

Financial Year

Sales Tax Excise Duty

VAT (Import)

VAT (Local)

VAT Total at import and local stage

Growth Rate of

VAT

(1)(1) (2)(2) (3)(3) (4)(4) (5)(5) (6)(6) (7)(7)

1983-84 350.36 597.57 -- --

1984-85 445.61 691.92 -- --

1985-86 460.49 772.41 -- --

1986-87 538.52 914.30 -- --

1987-88 542.82 1171.78 -- --

1988-89 503.54 1388.16 -- --

1989-90 632.11 1649.35 -- --

1990-91 798.39 1747.44 -- --

-- --

-- --

-- --

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