Taxation Course (A408)

Value Added Tax (VAT): Applicability and Exemptions

Prepared for: Mr. Abdul Kafi Course Instructor

Prepared by: Tasnim Abdullah Roll No. ZR-36 BBA 17

November 07, 2012

Institute of Business Administration (IBA) University of Dhaka

PLEASE DEFINE COTTAGE INDUSTRY UNDER VAT SYSTEM. WHO CAN GET IT AND HOW?

Definition of cottage industry A cottage industry is a small and often informally organized industry where the labor force consists of family units or individuals working at home with their own equipment. Cottage industry businesses may be owned by a single or a few families and are often concentrated in producing products that are distinctive in certain ways and hence, cannot be mass-produced. Though the specific concentration or differentiation of products does make the products stand out above their mass produced counterparts, they often confront difficulties related to their distribution and capitalization. The National Board of Revenue, Bangladesh, defines Cottage Industry as a unit with an annual turnover of less than Taka 2 million and with capital machinery valued up to Taka 3, 00,000.

Regulatory body of cottage industries in Bangladesh The development of the small and cottage industries in Bangladesh is monitored by the organization, Bangladesh Small and Cottage Industries Corporation (BSCIC). Created as an autonomous organization through the Act of Parliament in 1957 under the Ministry of Industry, BSCIC is dedicated to providing all the necessary services to the small and cottage business owners in the country and aiding in their holistic development.

Cottage industry of Bangladesh under VAT system According to the Bangladesh Small and Cottage Industries Corporation Act, 1957 (East Pakistan Act No, XVII of 1957), Article 26A (Exemption from Taxes) states, Notwithstanding anything contained in any other law for the time being in force, the Government may, by notification in the official Gazette, exempt the Corporation in respect of any estate established by it or any small or cottage industry registered under this Act from payment of any tax, rate or toll payable under any law for the time being in force: Provided that no such exemption shall be granted unless the proposal for exemption is made by the Corporation.

Exemption of VAT on cottage industries Businesses under the cottage industries are exempted from VAT and SD under the SRO No168-Law/2003/376-VAT, Dated 12 June, 2003 issued under section 14 (1) of VAT Act, if the business fulfills the following criterion: 1. It is not a joint stock company 2. Its annual investment in capital machinery, plant and equipment is less than 25 lacs taka 3. Its annual turnover is less than 40 lacs taka If a business fulfills the above three conditions, it is qualified to be exempted from Tax and has to follow a legal procedure to file for it. The procedure is as follows - Apply to the Commissioner of VAT in for mushak-6 with a declaration in form-ka - The Commissioner analyzes the application and checks if the applicant fulfills the criterions fully as per the SRO - Once convinced, the Commissioner directs the divisional officer of VAT to enlist the business as cottage industry - The divisional officer enlists the business under the Cottage Industry under form mushak-8. - The business is enlisted under the cottage industry Once enlisted, the business will have to record all the transactions in form-kha and should always issue a cash memo with the enlistment number while selling/supplying the goods. Goods not qualifying for VAT benefits under the cottage industry Some of the goods, albeit fulfilling all the three criterions, do not qualify for a tax exemption. These are: Palm Oil (All Sorts) and coconut oil (All Sorts) CDSO, Soya Bean oil Tea, lozenge, biscuit, chanachur Juice, energy drink, mineral water

All types of cigarette, biri, zarda, gul Antiseptic, disinfectant, medicine Paints, pigments, Varnishes, polishes Perfume, water used in cosmetics, cosmetics Sun screen or sun tan materials, hair items Toothpaste and like items Shave and after shave items Deodorant, air freshener Soap (all sorts with liquid) PVC pipe, bricks (all sorts) M.S. products, metal container Super enameled copper wire Household fan (fitted with electric motor of production capacity not over 125 watt) Dry cell battery, storage battery VCR, VCP, Radio and transistor excepting one band Television (all sorts) Electric bulb, wires and cables Transport (all sorts) and its body and chassis Cruise ships (all sorts), excursion boats, ferry boats Cargo ships, Berge and similar ships for carrying passenger and goods; fishing boats Factory ships and other ships, used for preparing and preserving goods like fish Yachts and other boats, rowing boats and canoes for games for entertainments Tugs and pusher craft, rubber and plastic foam

References 1. http://www.investorglossary.com/cottage-industry.htm 2. http://bdlaws.minlaw.gov.bd/sections_detail.php?id=274&sections_id=11200

Please explain the applicable area of VAT

From the very inception, VAT was applicable on most of the goods and a few numbers of services at the rate of 15%. It was imposed by placing the Sales Tax (chargeable at different rates at import stage) and the excise duty (chargeable at different rates on locally produced goods and rendered services) and the Business Turnover Tax (chargeable at a rate of 2% on some local small units). Under VAT Act Supplementary Duty (SD) at a small rate is applicable on some goods and services (SECTION 7) Under VAT Act and Rules a Turnover Tax (TT) at a rate of 2% was introduced on actual turnover goods and services not exceeding tk. 500000. Later on, the rate was upgraded to 4%. Now at 3%, if the yearly turnover is not over 70 lac. (Rule 4) At the early stage some high revenue yielding goods like cigarette, biri, natural gas, petroleum produces etc. were kept under the Excise Duty System to avoid the revenue risks Tax base was broadened time to time by bringing some new goods and new services under the VAT Network. The list of exemptions is being shortened every year. (SECTION 14)

TAX BASE FOR VAT Import Stage: Customs Assessable Value + Customs duty + Supplementary Duty Domestic/Local Stage: a) Goods (manufacturing): [Production cost + Profit and Commission (if any) + Supplementary duty (if any)] b) Services: [total receipts excluding VAT but including supplementary duty (if any)]

Areas of applicability of VAT All exports, deemed exports, all goods under the H.S Nomenclature exception the following: (Section 3, 8) All exports, deemed exports and foods for consumption outside Bangladesh and other Goods supplied to an outgoing conveyance All goods under Second Schedule of Narcotic Control Act, 1990, in case of manufacturing in Bangladesh Goods described under the First Schedule of the VAT Act, such as: Live Animals, meat, fish, fresh milk, unprocessed agricultural products, natural sands, rough timber, raw milk, cocoon, raw wool, raw cotton, raw jute etc Goods and services under the turnover Tax VAT applicable areas under the service sector VAT is applicable on all services excepting the services described under the Second Schedule of the VAT Act, such as: Basic services to live on: - personal services - social welfare services - medical and health services given by the private sector - library, museum, art gallery, zoo, botanical garden - transmission of Radio, TV (excepting other commercial activities) - taking deposit and savings by Bank and Financial Organizations - life insurance policy savings - SEC - Transportation of passenger (without AC) and goods - Air Lines (excepting the farm rents chartered plane and helicopter) - religious activities - postal services (excepting courier and express mail services) - all charitable and scientific service activities provided for public interest

- stevedoring and hand operated laundry and cleaning activities (except services provided in hotel and mechanized laundry etc) Services under First Schedule (Part 2) of the Excises and Salt Act, Such as: Services rendered by Bank or financial institute and services rendered by airline.

Areas at trade level not applicable for VAT The areas at the trade level that are exempted from VAT are: Maize seeds (in package form) Rice of all sorts Protein premix of animal feed Chemical fertilizer Insecticides Fungicides Pesticides Anti sprouting products Plant growth regulator and disinfectants used in agricultural activities

Some important points on VAT applicability I. VAT is imposed on goods and services at import stage, manufacturing, wholesale and retails levels II. III. A uniform VAT rate of 15 percent is applicable for both goods and services 15 percent VAT is applicable for all business or industrial units with an annual turnover of Taka 2 million and above IV. Turnover tax at the rate of 4 percent is leviable where annual turnover is less than Taka 2 million V. VI. VII. VAT is applicable to all domestic products and services with some exemptions; VAT is payable at the time of supply of goods and services Tax paid on inputs is creditable/adjustable against output tax

VIII. IX.

Export is exempt Cottage industries (defined as a unit with an annual turnover of less than Taka 2 million and with capital machinery valued up to Taka 3, 00,000) are exempt from VAT

X.

Tax returns are to be submitted on monthly or quarterly or half yearly basis as notified by the Government

XI.

Supplementary Duty (SD) is imposed at local and import stage under the VAT Act, 1991. Existing statutory SD rates are as follows: a. On goods: 20%, 35%, 65%, 100%, 250% & 350% b. On services: 10%, 15% & 35%

References 1. http://www.nbr-bd.org/valueaddedtax.html