VAT law with no definition

http://www.eobserverbd.com/2014/07/10/index.php

M S Siddiqui
Publish Date : 2014-07-10, Publish Time : 00:00, View Count: 8 10 hours ago
Bangladesh introduced VAT in 1991 and the law has many shortfalls in it. The situation aggravated by the
National Board of Revenue (NBR) issued rule and circular and made the law ineffective and cumbersome.
Government relies on outdated administrative practices which are burdensome for businesses to comply with
and for the NBR to apply arbitrarily without any accountability. The weaknesses of the existing VAT law have
been described by the IMF technical assistance report Bangladesh Implementing a New Value-Added Tax,
June 2011. The report said, "It generates relatively little revenue compared to the VATs in other countries, both
developed and developing. If not effectively implemented and administered, the tax will become harmful to
economic growth by taxing different sectors at different effective rates and, thereby, distorting production and
consumption choices."

Bangladesh Parliament passed new VAT Act 2012 for implementation by 2015. The new law, unable to address the weakness of
existing law, has drawn attention of all stakeholders. It has given more authority to NBR without addressing the real problem and
going to further headache of business persons.

The declared preamble of law seems with a wrong vision. The law has been enacted to increase tax collection. There are no efforts to
make fair calculation of tax. The fair collection of tax will make fair competition among business houses and shall increase economic
activities in level playing field which is precondition for increased economic activities.

Surprisingly both existing and forthcoming laws do not define VAT causing a law without direction. VAT is a consumption tax levied
on value added by the tax payer. In contrast to sales tax, VAT, an indirect tax, is neutral with respect to the number of passages that
there are between the producer and the final consumer; where sales tax is levied on total value at each stage, the result is a cascade
(downstream taxes levied on upstream taxes), and hence it is tax on tax.
NBR declared that at the domestic or local stage VAT will be on manufacturing goods. There is no provision of deducting the cost of
raw materials. The tax already paid must be deducted with calculating on value added by the concerned business. The poor credit of
already paid VAT and cascading effect is one of the major concerns of present law. It causes double VAT on raw materials used in
production. Unfortunately the loophole will remain with the new law.

There are three types of value-added tax used around the world. The methods are calculated in the way that taxes on expenditure are
handled with a few exceptions of basic and social needs like food, food and agricultural products, animal products, poultry sector,
agriculture imputes medicine, shelter and education. The uniform VAT is also neutral as it avoids distortion in production associated
with taxation on inputs to production. The most common is the consumption method which allows businesses to immediately deduct
the full value of taxes paid on purchases. The second is the net income method allowing gradual deduction of VAT paid on purchases
over a number of years, much like depreciation. The third type, gross national product method, provides no allowance for taxes paid
on purchases.

The name of this type of tax is derived from the fact that the tax base is approximately equal to private GNP. The consumption
method is most favoured among general population because of its most equal taxation on income from labour and capital, and
promoting capital formation. VAT is designed to ensure that all forms of consumer spending, with the exception of expenditure on
exempt supplies, are taxed evenly and fairly.

The existing VAT system is on consumption in principal but the rule and application of the act does not match the adapted theory. The
existing VAT system is an excise tax system in reality since the cascading effect i. e. VAT on VAT, lack of rebate and proper credit
system, fixed tax like fixed trade VAT at import stage etc.

The section 15 (1) for imposition of VAT said value added tax shall be imposed and payable on the taxable import and taxable supply
and 15(2) the payable amount of VAT shall be assessed and determined by multiplying the rate specified in sub-section (3) with the
value of the taxable import or of the taxable supply. This means NBR will not take the Invoice value for assessing the VAT.
Moreover, the law proposed for single rate of VAT at 15% but allowed imposition of supplementary duty on import and supply of
goods etc. This is again conflicting with single rate of VAT.

The section 97 makes every representative of tax payer personally liable for the payment of amounts including 'relative' of person and
beneficiary of trust. The word 'relative' is very wide and un-interpreted. This condition will make all the un-explained relatives liable
for liability of a person and the innocent beneficiary of any trust fund liable which is against other prevailing in the country. The law
did not define 'relative' and NBR got a free hand to make liable any one of far distend relatives for any probable liability.

The NBR will decide on preservation of documents of business enterprises but the deadline must be fixed by for maximum 5 years
(sec 54). Any officials of NBR from Assistant Commissioner (AC) have authority to freeze Bank account of businesses. This means
AC can exercise discretionary power to stop bank transaction meaning close down of economic activities with an allegation of
violation of any rules Sec (83-3). NBR empowered to seize materials in trade for violation of rule (sec 84), lien of properties (sec 99)
but the seizure must be in front of at least two neutral witnesses. The lien order should come from court not from NBR otherwise its
power may be misused.

NBR has got full authority for collection of outstanding VAT, penalty VAT and interest (Sec 95) but the business must have option
for self defence. NBR will determine the VAT, penalty and interest and collect these entire amounts. Both the judicial and judicial
powers will be misused in the social and ethical standard of our society. Business should have constitutional rights of self defence.
The NBR seems to be given more than enough authority without accountability. There are enormous conditions and punishments for
business for failure of compliance but NBR is immune from any responsibility (sec 79).

Moreover, Police, BGB, Coast Guard, Ansar and all local governments, Narcotics departments and all other offices will "extend co-
operation". This seems like war against business houses. The IMF report says the existing VAT act failed due to ineffectiveness of
NBR but under the law NBR has been authorized to go aggressive against business houses instead of addressing the weakness of it
and utilizing the legal system for fair judgment.

The Appeal, Revision and References have been made difficult for the tax payers by imposing restriction burden of proof (sec 121).
The aggrieved persons must pay 10 percent of the tax specified in the impugned order or if no such tax is specified therein, 10 percent
of the monetary penalty should be imposed. Again aggrieved persons must deposit further 10% of claimed VAT before appeal in High
court division of Supreme Court. This is against basic human rights enshrined in the constitution. None is guilty until declared by
court.

The Commissioner (Appeal) may uphold, change or set aside the impugned decision or order, or may pass such order as he thinks fit
and proper, provided that he shall not, de novo, send the case on remand for reconsideration.

The Alternate dispute resolution (ADR) is also not fair to the tax payers. The section 125 is empowered to select facilitators by NBR
and the Business house can select facilitator. The documentation process will remain with NBR. This is also against the hundred year
old traditional SALISH system of our society. The facilitators or Salisdars shall be independent and selected by both NBR and Tax.

The new VAT will fall short of expectations if the new law continues to be administered using the current outdated and ineffective
methods. From this perspective, the introduction of the new law provides both an opportunity and a need for modernising the way the
VAT is administered.
The new law does not have the potential to substantially increase tax revenue, facilitate business operations, and reduce non-
compliance but can increase hassle for business and obstacle the economic activities.

The writer is a Legal Economist.
He can be reached at shah@banglachemical.com

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