IDENTIFYING MECHANISMS FOR ENSURING PAYMENT OF VAT TO THE GOVERNMENT

TABLE OF CONTENTS

CONTENTS INTRODUCTION
ADVANTAGES OF VAT

Page No 3 4 6 7 11 15 16 27 29

NECESSITY OF VAT IN BANGLADESH EVOLUTION OF VAT IN BANGLADESH CURRENT VAT STRUCTURE OF BANGLADESH THE VAT SYSTEM OF BANGLADESH, HOWEVER, HAS SCOPEFOR FUTURE IMPROVEMENT MECHANISMS FOR ENSURING PAYMENT OF VAT TO THE GOVERNMENT CONCLUSION REFERENCES

INTRODUCTION

Value Added Tax, or VAT, is levied on top of the cost of a product or service and generates revenue for a government. Value Added tax, popularly known as VAT, is a special type of indirect tax in which a sum of money is levied at a particular stage in the sale of a product or service. In 1954, the value added tax system was initiated by the then joint director of the tax authority of France, Maurice Laure. VAT came into effect for the first time on 10th April, 1954. From its inception, the value added tax system was imposed on all major sectors of France the first country to use this system. Once instituted, it was immediately clear that revenues collected from the VAT system constituted a substantial share of the governments revenue in the French economy. Not surprisingly, due to the ease of payment and ready comprehensibility, the value added tax system has been adopted by different nations across the world. Over 130 countries worldwide have introduced VAT over the past three decades and Bangladesh is amongst the last few to introduce it. The value added tax system deals with these problems quite efficiently. As VAT is imposed on value addition - at every single stage - there is no incidence of cascading. In this way, the final consumers bear the burden of paying value added tax. This system involves absolute transparency at every stage of taxation, thereby making the tax system quite comprehensible and simple.

ADVANTAGES OF VAT

1. Coverage: If the tax is carried through the retail level, it offers all the economic advantages

of a tax that includes the entire retail price within its scope, at the same time the direct payment of the tax is spread out and over a large number of firms instead of being concentrated on particular groups, such as wholesalers. If retailers do evade, tax will be lost only on their margins because customers that are registered firms gain nothing if their suppliers fail to collect tax, except delay in payment; they will pay more to the government themselves. Under other forms of sales tax, both seller and customer gain by evading tax. One particular advantage is that of the widening of the tax base by bringing all transactions into the tax net. Specifically, VAT gives the new government the opportunity to bring back into the tax system all those persons and entities who were given tax exemptions in one form or another by the previous regime.

2. Revenue Security: VAT represents an important instrument against tax evasion and is

superior to a business tax or a sales tax from the point of view of revenue security for three reasons. In the first place, under VAT it is only buyers at the final stage who have an interest in undervaluing their purchases, since the deduction system ensures that buyers at earlier stages will be refunded the taxes on their purchases. Therefore, tax losses due to undervaluation should be limited to the value added at the last stage. Under a retail sales tax, on the other hand, retailer and consumer have a mutual interest in under declaring the actual purchase price. Secondly, under VAT, if payment of tax is successfully avoided at one stage nothing will be lost if it is picked up at a later stage; and even if it is not picked up subsequently, the government will at least have collected the VAT paid at stages previous to that at which the

tax was avoided; while if evasion takes place at the final stage the state will lose only the tax on the value added at that point.

3. Selectivity: VAT may be selectively applied to specific goods or business entities. We

have already addressed essential goods and small business. In addition the VAT does not burden capital goods because the consumption-type VAT provides a full credit for the tax included in purchases of capital goods. The credit does not subsidize the purchase of capital goods; it simply eliminates the tax that has been imposed on them.

4. Co-ordination of VAT with direct taxation: Most taxpayers cheat on their sales not to

evade VAT but to evade personal and corporate income taxes. The operation of a VAT resembles that of the income tax more than that of other taxes, and an effective VAT greatly aids income tax administration and revenue collection. It is interesting to note that when Trinidad and Tobago set out to introduce VAT it chose one of its top income tax administrators as the VAT Commissioner. It must be stressed once again that if properly implemented VAT can ultimately lead to a reduction in overall rates of tax. Revenues will not be sacrificed but would in fact be enhanced as a consequence of the broadened tax base. This does not seem to be a bad idea at all.

NECESSITY OF VAT IN BANGLADESH

Bangladesh, particularly a trading community, has believed in accepting and adopting loopholes in any system administered by the state or the Centre. If a well - administered system comes in, it will close avenues for traders and businessmen to evade paying taxes. They will also be compelled to keep proper records of their sales and purchases. Many sections hold the view that the trading community has been amongst the biggest offenders when it comes to evading taxes. Under the VAT system, no exemptions will be given and a tax will be levied at each stage of manufacture of a product. At each stage of value-addition, the tax levied on the inputs can be claimed back from the tax authorities. At a macro level, there are two issues, which make the introduction of VAT critical for Bangladesh. Industry watchers say that the VAT system, if enforced properly, forms part of the fiscal consolidation strategy for the country. It could, in fact, help address the fiscal deficit problem and the revenues estimated to be collected could actually mean lowering of the fiscal deficit burden for the government. The International Monetary Fund (IMF), in its semi -annual World Economic Outlook released on April 9, expressed its concern over Bangladesh's large fiscal deficit. Further any globally accepted tax administrative system will only help Bangladesh integrate better in the World Trade Organization regime.

EVOLUTION OF VAT IN BANGLADESH

Value Added Tax (VAT) was introduced in Bangladesh from the 1st of July, 1991. This tax is levied, as a substitute for excise duty, on most of the goods and services which are now subjected to excise duty. It may be mentioned here, at the import stage, sales tax was abolished and VAT levied and collected in its place. However, for some initial administrative difficulties, a few selected commodities, such as, tobacco products, natural gas, petroleum products, etc., and also a few "services" remained within the purview of excise duty for some time. Now they are under VAT. Value Added Tax in Bangladesh is mainly confined to the import and manufacturing stages. In most of the countries of the world where there is VAT it is compulsory in both wholesale and retail distribution of goods and services. At present the Turn over Tax and the Cottage Industry exemptions are of the same limit. Cottage industries up to a turnover of Tk. 15 lakh are exempt. Small industries with a turnover of Tk. 15 lakh pay tax at the rate of 2%. There is a Turn over Tax Determination Commission, which determines on a yearly basis the minimum tax payable by specific units and settles disputes between turnover units and VAT offices. There were about four hundred and twenty six items of manufacture on which Supplementary Duty was leviable at various rates ranging from five per cent to 350%. Supplementary Duty was introduced to keep the total quantum of revenue intact, to discourage the importation of luxury goods and goods use of which were considered harmful on social, moral or religious grounds.

Though many years have elapsed by now, the system could not achieve a considerable dynamism because of the absence of strong measures and improved management. Indirect taxes collected from local sources viz. excise duty, VAT and supplementary duty now account for almost 26.32 percent of the total revenue collected by the National Board of Revenue. VAT has not been extended to cover all the economic sectors. One of the striking and pro-clientele features of VAT system is its credit mechanism. In order to ensure that trade sector benefits from this system it is essential that the VAT network is expanded, phase by phase, up to wholesale and retail levels. A legal provision for optional VAT registration by the wholesalers and retailers was introduced in FY 94-95, but no such registration was reported to have been taken. If VAT is introduced at all the

levels of consumption- import, production, wholesale and retail- then the taxpayers themselves will be able to get credit on the input-taxes thus reducing the incidence of tax.

At present, excise duty is levied on bank deposits. In cases where the balance exceeded Taka five thousand and does not exceed Taka one lakh, the leviable duty till FY 96-97 was Taka one hundred and twenty; in other cases it was Taka two hundred. The depositors having small deposits would thus pay more taxes as compared to the depositors having big ones. Nominal amount of taxes was collected in cases where the balance exceeds crores of Taka. With a view to give relief to the small depositors, excise duty from the accounts were withdrawn where the balance does not exceed Taka ten thousand and having considered the financial capability, the rates of excise duty on bank services were made progressive in FY 96-97. Excise duty leviable on biri was Taka 22 per thousand sticks. The rate was Taka 19.25 in 1993-94. This was increased to Taka 25 in 96-97 FY. On cigarettes, at present the supplementary duty rates are 35 percent, 50 percent and 53 percent. Keeping the highest rate as it is, the lower rates were made progressive in FY 96-97.

Until July 1996, there were twenty nine services on which VAT is leviable. During the last few years there has been a considerable expansion of different services. These have not, however, been brought under VAT network. Services like that of Shipping Agents, Audit and Accountancy firm, Consultancy and Supervisory firm, Leasing Deeds (Ijaradar) were brought under the network of Value Added Tax. Besides, the trading activities of luxury items like motor cars, air conditioners, dish antennas, etc. have been brought under the purview of VAT at the retail level.

A number of qualitative and important changes have been brought about in the VAT law. There were no incentives for the use of locally produced capital machinery in the export oriented industries. Necessary provisions in the VAT Rules were made in order to extend facility for the use of locally made capital machinery in the export oriented industries.

Timely realization of government revenue is very important. In many cases, persons and agencies empowered to collect VAT refrain from depositing the amount with the government exchequer, having collected it from the consumers. In order to encounter this tendency effectively, legal provision to take proper punitive measure has been incorporated in the Value Added Tax Act.

VAT officials inspect different VAT units but since the inspections were not carried out following predetermined methodology, there were hardly any follow-up actions taken. To make the inspection procedure systematic and result-oriented now a VAT unit can be inspected without giving any notice, but the inspecting officer will have to submit an inspection report within 48 hours of the completion of the inspection and for the sake of transparency, a copy of the report will be given to the unit owner within the same time frame.

VAT registered tax units were to submit return on monthly basis. Because of the uniqueness of business, production of many VAT units is seasonal. In view of this in cases of construction firms, export-oriented industries and brick manufacturers, now returns can be submitted quarterly. Tax Identification Number (TIN) has to be mentioned in the application form for VAT registration and in the VAT registration certificate so that the exchange of information between taxation and VAT departments becomes easier than before. Tax structure in Bangladesh is still heavily dependent on indirect taxes. Import duties during the fiscal years 1990-91, 91-92 and 92-93 constituted 51.57%, 55%, 54.34% respectively of the total revenue collection. The components were import duties, sales tax, VAT and supplementary duty at import stage. Indirect taxes from the domestic economy collected in the form of Excise, VAT and Supplementary Duty in the years 1990-91, 91-92 and 92- 93 contributed 28.40%, 25.79% and 25.11% respectively of the total tax revenue. The share of direct taxes in those years was 20.03%, 19.21% and 20.55% respectively of the total revenue collected by the National Board of Revenue. About 88 per cent of VAT and Supplementary Duty on goods and services still come from those sectors which were previously covered under Excise Duty and Sales Tax. The goods and services

which were included in the VAT for the first time contribute only 12 per cent of the domestic VAT. In 1992-93 there were 48,987 VAT registered units and in July 1996 this number was 1,06,022 out of which 73,011 units are from construction sector. VAT records show that there were 13,094 importers and 1,107 exporters registered in 92-93 FY. In the VAT administration work is under way to prepare VAT profiles for each VAT registered unit. The VAT administration will become transparent significantly when the job of computerization will be completed. Intrasectorial analysis will be possible by identifying the inputs, outputs, prices, VAT payable, VAT realized through treasury chalan and the rebates/refunds enjoyed by the VAT registered units. The VAT information bank will be useful to the client groups as well.

CURRENT VAT STRUCTURE OF BANGLADESH

The main features of VAT in Bangladesh are as follows:

(1) (2)

A single stage VAT for import cum manufacturing, A uniform rate of 15 per cent is applicable for both goods & services,

(3) (4)

VAT for whole salers/retailers is compulsory (for selected items), VAT is applicable for all items (except some of the unprocessed agricultural products) & thirty five listed services, Exports are zero rated, VAT is leviable at the time of supply of goods and services, Turnover tax @ 2 per cent is leviable where turnover amount is less than 1.5 million taka, Cottage industries are exempt from VAT, Tax paid on inputs are creditable against output tax, Tax returns are to be submitted on monthly or quarterly basis, Luxurious and socially undesirable goods are subject to supplementary duties at different rates ranging from 5 per cent to 350 per cent, Cigarettes, natural gas and petroleum products which were the major sources of excise duties, initially were kept beyond VAT network. In 1992-93 these items were brought under VAT. It may be mentioned that at items & system. present manually made cigarettes (known as Biri), part of textile services rendered by commercial banks are still under excise

(5) (6) (7)

(8) (9) (10) (11)

(12)

Requirements under VAT system in Bangladesh are as follows:

(1) The primary requirement under VAT system in Bangladesh is to have registration numbers

by all taxable persons from the local VAT authorities. Such registrations are compulsory for each location of a business. The taxable persons are to apply in a specific form to the VAT authority if their annual turnover exceeds 1.5 million taka. The taxpayers are given a registration number through a specific certificate. The registration certificate contains along

with other information the activity codes in which the person is related. The registration numbers are used by the taxpayers in their business transactions. Registrations are done free of cost and are not subject to renewal. Any person whose annual turnover is less than 1.5 million taka or any person outside VAT may also apply for registration voluntarily. Any registration may be cancelled if the person discontinues his business or if his annual turnover is found to be less than 1.5 million taka.

(2) Under the VAT system in Bangladesh all tax payers are required to maintain books of

accounts regarding purchases, sales, raw materials, finished products etc. They are also to maintain an account current book to help them to determine the amount of VAT due and the amount actually paid for taxable goods. Payment of taxes is made through adjustments in the account current book. Credit available for input taxes and refund against export can be used to settle the liability for output tax.
(3) The value of imported goods for levy and collection of VAT is considered to be the

assessable value for levy of custom duties plus other duties and taxes. While for domestic goods, this value is consideration (the money value) at which the goods are supplied by the manufacturer, this value includes all costs, charges, commission, duties and taxes except the VAT amount. On the other hand, the gross receipt is considered to be the basis for determining the VAT liability for services in general. But in special cases, some narrow base values instead of gross value are taken into account for VAT calculation. Again in some cases, tariff values are fixed as base value for determining VAT.
(4) Each tax payer is required to issue a tax invoice, as proof of payment of VAT, for each

supply of goods or services. However, the importers are not required to issue any tax invoice. But when importers sell their goods they may issue a supplementary tax invoice to a VAT registered person. VAT on imported goods are to be paid by the importers at the time when the customs duties on it are paid. In other words, VAT at import stage is paid before clearance of goods. But for the local manufactured goods VAT is payable at the time of supply of goods and services. Each registered supplier of goods or services is

eligible to take instant credit of the VAT paid on inputs. The payment of VAT for goods (output tax) is made through adjustment in the account current book. Taxpayers are to keep sufficient balance in their credit in the current account book either through deposition of money to the Govt. treasury or through their input tax credit. System have also been introduced to collect taxes on certain services like Construction, Motor Garages & Workshops, Printing, Indentors, etc. at the source point of payment.
(5) Each taxpayer is required to submit a tax return for each tax period (each calendar month)

within 20 days of a month following the tax period. The VAT authorities examine the returns, and enter the data into the computer.
(6) All exports of goods & services are zero rated under VAT system. Moreover, all input

taxes (VAT, Customs duty, Excise duty etc) paid on the inputs used for manufacturing the exported goods are refundable. Such input taxes against export are refunded either in actual or on a flat rate basis. Refund claims of input taxes are dealt with by a Duty Exemption and Drawback Office (DEDO).
(7) Value added tax system in Bangladesh gives special treatment to the small firms. Under the

system, small manufacturers and services whose annual turnover is less than 1.5 million taka is exempt from VAT but they are to pay turnover tax @ 2 per cent. Such turnover tax can be paid either at a time or on quarterly basis. But they are not entitled to get credit benefit of their input taxes. Moreover, a small firm whose annual turnover is less than 1.5 million taka and whose investment in capital machineries only during a particular year does not exceed 300,000 taka are treated as a cottage industry and is fully exempt from VAT or turn over tax. They are also free from VAT formalities. It is easy to have the benefits of VAT in an economy where it is implemented in a comprehensive form covering all tiers of production and distribution as well as to all economic activities. The single stage VAT in Bangladesh has undoubtedly widened the tax base as compared to excise or sales tax system and has brought a favorable result in collection of taxes but it had limited further results due to some limitation and distortion in its application.

THE VAT SYSTEM OF BANGLADESH, HOWEVER, HAS SCOPEFOR FUTURE IMPROVEMENT

Despite significant gains on the VAT front, for the reasons discussed below, it is time to modernize the tax administration and the tax system to make it more taxpayer friendly and efficient in terms of revenue generation1.

Collection mechanism is old-fashioned excise-type and based on control over physical shipment/production/delivery of goods and services,

2. The VAT payment system based on account current register and treasury receipts (chalans)

is most outdated, error prone, and burdensome for the taxpayers,

3. The tax system is inefficient in generating revenue for the government given the basic rate

of 15 percent,
4. Tax administration is inadequate, outdated, and less responsible to taxpayers interests,

5. Given Bangladeshs VAT rate of 15%, one would expect revenue productivity to be higher than revenue productivity of countries with lower nominal tax rates, 6. The low efficiency in revenue is primarily attributable to structural deficiencies in tax design and old- fashioned tax administration.

MECHANISMS FOR ENSURING PAYMENT OF VAT TO THE GOVERNMENT

Rectification of the problem and encouraging different sources to pay taxes will require multidimensional strategies. The changes will have to be done in consolation with the major stakeholders. The key elements of the strategies include: a) Modernizing the VAT Law and Rules to reflect international best practices, b) Simplifying the procedures for tax compliance, including payment of taxes, maintenance of accounts, submission of returns and registration of taxpayers,
c) Adopting modern accounts based tax administration and minimizing ad-hoc

interactions leading to difficulties for taxpayers.

All these strategies are discussed under different focused segment in the subsequent project 1. Reform of the VAT Law and Rules will entail: Empowering the government and the NBR as the implementing agency, to bring about necessary changes to modernize VAT administration in a taxpayer friendly manner. Re-establishing the input credit mechanism through all points/levels of sales to ensure: Avoidance of cascading (tax on tax) effect, Encourage broadening of horizontal integration, Enhance documentation through built-in the incentive mechanism and improve tax compliance. Simplifying the negative list for goods and services and phasing out avoidable exemptions.

2. Changes in VAT administration and restoring the basic principles of VAT operations are interlinked:

Moving away from price declaration, physical control and account current based clearance of goods, which are characteristics of an excise tax system, will require substitution or phasing out of these arrangements by a proper account based system,

Minimizing contacts with tax officials by ensuring effective selfassessment, including submission of tax returns, taking input tax credit, and refunds or adjustments for refund of taxes will also require establishment of a proper account based system,

Account and ICT-based system relies on in-office reviews and crosschecking of information by replacing physical inspection-type operations.

3. A broad-based VAT input credit system constitutes the core of the accounts and ICTbased VAT system: The longer and broader are the production and distribution networks, the lower is the incidence of VAT at every stage of sales and the higher would be tax compliance, Incidence of tax avoidance at the intermediate stage would be minimal once the invoice based VAT is in place. There would be little to gain by avoiding the VAT. Importers, manufacturers and wholesalers are simply acting as the tax collector on behalf of the government; and generally in moderate amounts,

4. Current practice of truncated base is incompatible with the ICT and accounts based VAT system: Since VAT is final at the truncated stage, and sellers cannot take input tax credit if goods and services are from such persons (operating on truncated base):

 The incentives for using/issuing invoices is lost, Tracking of transaction and checking of accounts through invoices is also lost, Scope for tax evasion and noncompliance increases, Genuine tax complying VAT registered firms are at a disadvantage. Phasing out of truncated base and restoration of tax chain will not necessarily increase tax burden for complying VAT registered firms, Phasing out of the truncated system will also help tax compliance.

5. The ICT-accounts based tax system will allow for modernization of tax administration, away from current physical control/inspections.

The primary focus will be on developing tax culture and improving tax compliance. This will entail:
Processing of tax returns within a week to identify the non-

filers, stop-filers, and irregular filers. At the moment all focus is an account current and tax returns are not even examined and there is no regular follow up based on returns,
Sending out automatic computer generated official notices to

the registered taxpayers who did not file for the month,
Processing of returns for internal consistency and against

certain industry specific tax incidence criteria. 6. The ICT and accounts based tax system will help develop tax culture: The objective will be to increase submission of tax return by several folds. Currently there are 650,000 VAT registered persons/firms. Out of that only about one third submit VAT tax returns, By first weeding out the unidentified registered persons/firms, and putting all remaining firms under close

monitoring, the reformed VAT administration will focus on increasing tax compliance to 70-80 percent in line with other countries. Processing operations may be easily outsourced, by allowing the government tax officials to focus on accounts and audit based administration. 7. Tax payment process will be significantly simplified: Present system of account current will be replaced by return based tax payment. This will entail: No advanced payment of VAT before clearing the goods from factories or services rendered, Taxes will be paid only once a month along with the submission of tax return, Shipment of goods however will be accompanied by shipping documents, and in the event of sale also with sales invoices, In addition to treasury chalans, payments can be made through:
Certified checks, Wire transfers from the registered persons bank accounts,

Credit cards and other electronic means.

8. Input tax credit and tax refund will be greatly simplified in the interest of taxpayers and exporters. Taxpayers will be able to deduct input tax credit themselves based on valid invoices, Tax obligations against domestic sales may be offset against export related refunds,

Export refunds would be based on actual taxes paid on inputs, supported by documents.

9. The process of VAT registration will be made simpler and faster: VAT registration may be given through a single unified electronic registration system, Persons engaged in taxable activities should be able to register electronically.

10. Return preparation, submission and processing will be greatly simplified: Return forms will be reviewed and simplified, as appropriate, Returns may be submitted electronically as well as by mail to processing centers. Persons may also drop their returns at the drop box in VAT offices, Non-filers will be notified through computer generated letters sent by mail and e-mails, Preliminary return processing may be done centrally at processing centers based on standardized criteria.

11. The VAT rate should still be at 15 percent: VAT rates generally range between 10-20 percent, with most countries charging VAT at rates more than 15 percent.

12. Phasing of truncated base should not increase net tax incidence but increase compliance: Generally truncated base has been determined on the basis of average tax incidence based on value added at that stage, This is essentially based on the assumption that if no credit is allowed actual tax collection would be equivalent to what could be obtained through proper VAT procedure after allowing for input tax credit, By inducing taxpayers to issue invoices and buyers to get those invoices for collecting input tax credit at the next stage of production or sale, the process will reestablish the input credit chain and enhance reliance on accounts and invoices,

Since retailers, manufacturers and service renderers would demand proper tax invoices at the time of purchases, the system would gradually reduce the size of grey market, i.e., sales outside the VAT network will shrink over time due to the built in incentive mechanism.

Broad-based use of invoices will bring transparency in accounts and increase the recorded volume and value of transactions leading to increased tax compliance.

13. Administrative efficiency through increased dependence on IT will be key to revenue generation and relief for taxpayers: In the case of India, introduction of IT contributed 2.5 % of GDP increase in tax collection, Almost all forms and their submission process will be modernized to reduce burden on taxpayers and improve administration.

14. In the context of Digital Bangladesh, NBR has initiated steps to develop computer software for the VAT and TIN systems: The VAT software has been designed, in line with the ICT Policy 2009, in modules of different duration (short-, medium- and long-term). At the first phase, work is progressing on three short-term modules: Registration Module to introduce online registration under which taxable persons can apply and get forms his office/home. Module development is complete and testing is going on, Return Module to allow taxpayers to submit VAT tax returns on line by logging in www.nbr.gov.bd. Module development is complete and testing is going on. Revenue Analysis Module to analyze developments in revenue collection by taxpayer, VAT Circle, VAT Division and VAT Commissionerate. Testing is going on.

15. Medium- and Long-term Modules have been designed under NBRs MAP project, and will be developed in the coming months: These Modules will help improve tax administration in the following areas:

 Valuation and Assessment, Risk Management, Improvement in Tax Refund Process, Computerization of the Audit Process, Accredited Client Module for large taxpayers, Management Management. 16. Administrative measures would need to be put in place in a phased and irreversible manner: While the reformed law and rules will lay the foundation for introduction of modern tax administration, legal reform alone will not automatically yield higher revenue and tax elasticity, Administrative reforms would need to be introduced in a phased but irreversible manner entailing: Broad-based computerization of key aspects of tax administration (registration; on line submission of VAT returns and electronic processing); Reliance on use of modern banking instruments for the purpose of tax payments (away from treasury chalans); Efforts will be made to ensure electronic tracking and reconciliation of large payments among the taxpayers and with the tax department. Information System/Human Resource

17. Promotion of financial instruments will be an important element of this strategy: Use of financial instruments will be promoted for settlement of obligations among taxpayers. This will entail requiring/encouraging payments among

VAT-registered persons only through financial instruments. Possible steps may include: Encouraging all purchase of inputs to be made through checks and other financial instruments, Encouraging/promoting transactions through banking channels, making all financial instruments as much as possible tax free; allowing deductibility of the VAT paid on financial transactions from VAT on sales as input tax credit, Payments for purchases in excess of certain specific amount, if made in cash or other informal arrangements, may not qualify for input tax credit.

18. The Government will have consultations with the stakeholders and launch an education campaign: Representatives of the business community will sit with the VAT Reform Task Force to discuss all aspects of the VAT Law, VAT rules, and administrative procedures, Stakeholders/representatives of the business community and NBR officials will visit selected countries to learn about the VAT administrative practices and legal provision in those countries, The Government is committed to building consensus on this important initiative.

19. Taxpayers education campaign will be a central element of the new initiative: The new law, rules and forms will be directly available in the NBR website, NBR team will hold consultations with all major chambers and federations about the new changes and their benefits for the taxpayers NBR will print booklets on all major activities such as :

 Input tax credit mechanism, VAT return preparation and filling, Maintaining VAT accounts, The VAT registration process, Frequently Asked Questions (FAQ) on VAT All these materials may also be downloaded from the website.

20. The Need for Administrative Reform:

The shift to a true and modern VAT would require changes to virtually all operations and processes involving tax administration, NBR should not implement this kind of major tax policy (legal) changes without simultaneous administrative reforms within the NBR and safeguards to avoid revenue loss,

NBRs modernization program will require additional manpower (VAT and Customs), skill development of tax officials, and other resource commitments for the success of the VAT modernization program.

CONCLUSION

A striking feature of recent tax reforms world-wide has been the steadily growing number of countries adopting the Value Added Tax (VAT). Although the specific reasons for adopting the VAT differ from one country to another, the main argument is that properly designed VAT raises more revenue with less administrative and economic cost than other broadly based taxes.

Effectiveness of a revenue collection system is achieved by a clear understanding of, as well as, a consistent interpretation of the appropriate legislation. Proper legislation and legal drafting is necessary to ensure that revenue collection and enforcement officers have the necessary powers to perform their functions effectively. It is also essential to have an implementation plan to improve the effectiveness and efficiency of a tax collection procedure. It is important to review and prepare administration, management and human resource strategies. Taxes and duty evasion, corruption and noncompliance severely reduce potential revenue yield and weaken the ability of the government to carry out their functions efficiently. To deal with such problems, and to strengthen enforcement and investigation measures following mechanisms (in short) have been identified in this report: introducing new administrative, supervisory and auditing procedures, introducing risk analysis and profiling techniques, improving the co-ordination and exchange of information, improving the quality of recruitment, remuneration packages, promotion and personnel practices,

introducing improved collection systems, enhancing detection and investigative system and procedures, Designing and delivering appropriate training programs, etc.

It conclusion we can sate that - It would be inappropriate to review one tax in isolation. An initial review of the total taxation structure (direct and indirect taxes, including customs tariffs and any relevant local or state taxes) is advisable. This does not mean, however, that action should be taken to change all the taxation regimes at the same time. A step by step approach is both safer and more certain of achieving the desired end result of improved revenue yield from an increasingly compliant taxpaying fraternity.

REFERENCES

1. Income Tax Ordinance and Rules 1984, 2. Value Added Tax Act and Rules 1991,
3. http://www.nbr-bd.org/ 4. Structure, Administration of VAT in Bangladesh with special reference to evasion control

and measurement of VAT potential, by Dr. Rafiqul Islam, first secretary, NBR, Bangladesh.
5. The Income Tax Ordinance, Rules & Procedure of Income Tax Assessment and Rules &

Regulations for at source deductions of Income Tax & VAT (first part), by Md. Mahfuzar Rahman Akandha.

Department of Accounting & Information Systems Faculty of Business Studies University of Dhaka

4201: Business Taxation (Assignment)

Submitted to: Prof. Dr. Dhiman Kumar Chowdhury (DKC), Department of Accounting & Information Systems, Faculty of Business Studies, University of Dhaka.

Submitted by: Md. Noor-A-Alam, ID# 11119010,