Value Added Tax

Department of Accounting
Term Paper
On
(Value Added Tax)

Submitted To
Supervisor
Mrs. Ummea Hazera Khatun
Assistant Professor
Lalmatia Mahila College
Submitted By
Nilima Akther
BBA (Honors) 2nd year
Roll No. - 9808944
Registration No. 1860636
Session 2010-2011
Date of Submission 21 May 2014
Acknowledgement
At first I would like to express my gratitude to the almighty Allah. It is

the part of BBA program to submit a term paper. And as a student of
BBA program of Lalmatia Mahila College, I have to submit a term paper
report. My term paper topic is Value Added Tax. I have completed
this term paper with the supervision of the Department of Accounting
of Lalmatia Mahila College. Her cordial assistance and advice have
influenced me much to complete this task.
I would like to express my sincere gratitude to all my teachers of the
Department of Accounting of Lalmatia Mahila College, who have
conveyed all the knowledge and necessary information to make enable
to complete my Term paper successfully and provide me the
opportunity to prove myself in the vigorously competitive modern area.
I would like to deliver my special thanks to all my classmates and my
entire well-wishers for their inspiration without which I would not be
able to complete this term paper report.
Declaration
I do hereby declare that this report titled Value Added Tax has written
by me during the year of 2014 under the valuable guidance of the
Department of Accounting, Lalmatia Mahila College in fulfillment of the
requirements for the award of BBA. I am also declaring that I have not
submitted this report for any degree, diploma and title recognition
before.
Nilima Akther
Roll No.Reg. No.SessionDepartment of Accounting
Certificate of Supervisor
This is to certify that Nilima Akther a student of BBA (Honors)

successfully completed her term paper program entitled titled Value
Added Tax under my supervision as the partial fulfillment for the
award of BBA degree.
She has done her job according to my supervision and guidance. She
has tried her best to do this successfully. I think her program will help
her in future to build up her career. I wish her success and prosperity.
Assistant Professor
Letter of Transmittal
To
Assistant Professor
Lalmatia Mahila College, Dhaka
Subject: Submission of the term paper on Value Added Tax.
Dear Madam,
Here I present my term paper titled Value added Tax with due
gratitude and appreciation. As per partial fulfillment of the requirement
for the BBA (Honors) Degree, I have completed the term paper.
The term paper program has given me the opportunity to learn about
different aspects of a reputed organization. Before facing the real
business world, I have gathered a pre-idea about the organization
culture.
To prepare this report both the primary and secondary data have been
used. A survey was conducted for getting real information from the
customers who have already taken the Consumer Credit Scheme.
However, I have gathered all the facts that I could within this short
period and have tried my best to present them clearly and logically.
Despite of limitations, I sincerely hope that my report will meet the
requirements that you set for me.
For further query please do contact with me.
Yours faithfully
Nilima Akther
Roll No.Reg. No.SessionDepartment of Accounting
Table of Contents
Sl. No.
Topics
Page No.
01
01
01
01
01
02
02
Introduction
Background of the Report
Objective
Scope of the study
Sources of Information
Limitations
Methodology
Chapter One Value Added Tax
1.1
Introduction
03
1.2
Value added tax
03
1.3
VAT in Bangladesh
04
1.4
National Board of Revenue: The Tax Central Collection
05
Authority
1.5
Introduction of VAT in Bangladesh
06
1.6
VAT & its necessity
09
1.7
VAT features in Bangladesh
09
1.8
VAT Wing
11
1.9
VAT Administration
12
1.10
VAT Mechanism
12
1.11
VAT Collection Trends
13
Chapter Two Tax Expenditures in Bangladesh
2.1
Introduction
14
2.2
Existing Tax Expenditure measures in Bangladesh
14
2.2.1
Tax expenditure measures under direct taxes
15
2.2.2
Tax expenditure measures in indirect taxes
15
Chapter Three Vat System in Bangladesh
3.1
Revenue Structure
16
3.1.2
Tax Structure
22
3.2
Tax Return
25
3.3
Corporate Tax
25
3.4
The tax structure for individual tax payers
26
3.5
Tax holiday
27
3.6
Other tax incentives in Bangladesh
27
3.7
Tax rates on other companies
27
3.8
Turnover Tax
27
3.9
Tax Structure: Institutions and the Reality
28
3.10
Necessity of Tax Reform in Bangladesh
30
3.11
Why the VAT is preferred for Bangladesh
30
Chapter Four The Salient features of the VAT in Bangladesh
4.1
Policy Issue
31
4.2
Import cum Manufacturing and Services
31
4.3
Single Rate
32
4.4
Exemptions and Exclusions
32
4.5
4.6
4.7
4.8
4.9
4.10
4.11
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
5.13
5.14
6.1
6.2
6.3
6.4
6.5
7.1
7.2
7.3
7.4
7.5
7.6
8.1
8.2
8.3
8.4
8.5
8.5
8.6
Treatment of Small Firms

Service
Broader Coverage
Treatment of Export
Operational Issues
Suppliers of Goods
Suppliers of Services
Chapter Five Advantages of VAT
Neutrality
Certainty and Transparency
In Widespread Use
Harmonized System of Taxation
Better Revenue Collection and Stability
Exports
VAT as an Aid to Tax Reform
Planning Skills
Increased Administrative Capabilities
New Relationship with Taxpayers
Better Record Keeping by the Business Community
Use of Unique Numeric Identifiers
Training: An essential element of progress
Other benefits of VAT
Chapter Six Disadvantages of VAT
Price Effect of VAT on Retail Price
Cost of Administration to State
Compliance cost to the Dealers
Increase in working capital requirement
Regressive
Chapter Seven Economic Effects of the VAT
Price Effects of VAT
Distribution Effects
Revenue Effects
Effects on Equity, Efficiency and Neutrality
Effects on the Balance of Trade
Effects on Investment and Economic Growth
Chapter Eight Tax Reform
Tax reform
Why VAT?
VAT and the Tax Yield
Obstacles and the Objectives
Revenue Administration Modernization and Reform
Program
The VAT Modules
General Equilibrium Formulation of the VAT System
Conclusion
32
33
33
34
34
36
36
38
38
39
39
39
39
39
40
40
40
40
41
41
41
42
42
42
42
43
44
46
46
47
47
48
49
51
53
53
53
55
55
59
CHAPTER ONE
Introduction
Taxation one of the major sources of public revenue to meet a countrys
revenue and development expenditures with a view to accomplishing some
economic and social objectives, such as redistribution of income, price
stabilization and discouraging harmful consumption. It supplements other
sources of public finance such as issuance of currency notes and coins,
charging for public goods and services and borrowings. The term tax has
been derived from the French word taxe and etymologically, the Latin
word taxare is related to the term tax, which means to charge. Tax is a
contribution exacted by the state. It is a nonpenal but compulsory and
unrequited transfer of resources from the private to the public sector, levied
on the basis of predetermined criteria.
Background of the Report
This report entitled The Impact Study of VAT in Bangladesh is a
fundamental requirement for the completion of the course FRL-403. The main
purpose of this report is to extract the information of the Value Added Tax
practiced in Bangladesh. Under the instruction and guidance of the course
instructor Professor Feroz Iqbal Faruque, we have taken the initiative to
conduct the research and prepare this report with much precision and by
being completely unbiased.
Objective
The general objective of this report is to provide a synopsis of how Value
Added Tax is practiced in our country and related consequences. It is also
required for the completion of this course. Beside the general objective, the
objectives behind this report are given below:
Primary Objective:
The primary objective of the report is
To analyze on the issue The Impact Study of VAT in Bangladesh.
To disclose the precise scenario of the The Impact Study of VAT in
Bangladesh.
To analyze and recommend on the mentioned issues.
Secondary Objective:
The secondary objective to prepare this report is
To fulfill the requirements of our course FRL-403.
To have a clear understanding about the activity of specific descriptive
research technique that is personal interview.
To gather experience and knowledge of doing a professional report.
Scope of the Study:
This research study will cover the topic The Impact Study of VAT in
Bangladesh and its related issues. It also includes recommendations against
the selected issues. This report can be used as a secondary source for further
purposes.
Sources of Information:
To fulfill the objective of this report collection of relevant, accurate,
standardized and needful information was required. To make this report
reliable we have collected data from both primary sources and secondary
sources. Special consideration was given so that chances of biasness could
not arise. The sources used were:
Primary Sources:
Primary data is defined as data, which originates as a result of that particular
investigation. We have collected primary data through depth Inter with
various people. The primary data related to The Impact Study of VAT in
Bangladesh was collected from the audiences by the method of personal
interview that we conducted. Both structured and unstructured questions
were constructed to extract the primary data.
Secondary Sources:
Secondary data represents the data which are made by others but it is useful
for another purpose or research. As a part of collecting data from secondary
sources, we have referred different books of Tax and VAT. We collected our
data from the magazine, news paper, libraries and also from the websites.
Limitations:
No study is beyond any limitations. While doing this research study we had to
face some difficulties. The limitations of the research activities are as follows
We did not have so much experience for conducting research and

preparing the report very frequently, though we are in learning position.
In depth interview some participants were unenthusiastic to provide
enough information.
There was no current information related to Bangladesh on the Website.
There was lack of precise information; both primary and secondary.
There was not enough time to analyze the selected issues.
Our resources (such as, human resource, financial resource, etc) were
limited. So it was hard for us to prepare a professional report with our limited
resources.
Methodology
This report covers the different aspects and activities that are required for the
collection of VAT by the Govt. However, the report is prepared based upon the
information collected from several persons and organizations who are
involved in the relevant business like dealing with VATable goods and
services, the researchers own judgments and also from the Internet. Some
surveys have been conducted and some interviews were taken. The findings
are strictly structured upon information provided by these sources and some
secondary sources. The focus here is on presentation of facts as discovered.
CHAPTER TWO
Introduction
Value Added Tax is emerging as an effective tool of taxation in the hands of
Governments internationally. In fact more than 100 countries around the
world have accepted this as a way of taxation on commercial activities. Our
neighboring countries like India, Bhutan, Nepal and Pakistan have already
recognized VAT. Developed countries including Australia, United States, USSR,
and UK have already introduced VAT successfully.
The origin of Value Added Tax (VAT) can be traced as far back as the writings
of F Von Siemens, who proposed it in 1918 as a substitute for the then newly
established German turnover tax. Since then numerous economists have
recommended it in different contexts. Also, various committees have
examined the tax in great detail. However, for its rejuvenation, the tax owes
much to Maurice Faure and Carl Shoup. The recent evolution of VAT can be
considered as the most important fiscal innovation of the present century1.
VAT was first introduced in France in 1954. With the imposition of Taxe sur la
Valeur Adjoutee, France become the first European country to implement VAT
on an extensive scale. It was not, however, at first a complete system of VAT,
since it applied only to transactions entered into by manufacturers and
wholesalers. It was supplemented by a separate tax on services (Tax sur les
Prestations de Services). In addition, there were special excises (Taxes
uniques) which were levied on services and distribution in lieu of the taxes
sur les presentations de services.
Value Added Tax (VAT)

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 a country. Once instituted, it was immediately
clear that revenues collected from the VAT system constituted a substantial
share of the governments revenue in the 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.
Value Added Tax (VAT) a percentage tax on the value added of a commodity
or service as each constituent stage of its production and distribution is
completed. VAT may be classified in three ways:
(i) On the basis of coverage of stages throughout the production and
distribution stages, or confined to limited stages manufacturing plus
wholesale, or wholesale plus retail;
(ii) On the basis of the method of calculation tax credit method, subtraction
method, and addition method; and
(iii) On the basis of tax treatment of final-product capital goods such as
machinery, equipment, and supplies the consumption form, the income
form, and the product variety.
Thus the three broad types of VAT are the gross national product (GNP) type,
income type and consumption type. A consumption type VAT is an indirect
tax. An income type or a GNP type VAT might be considered as a direct tax
but a commodity tax cannot be considered so. Consumption type VAT is also
considered as an alternative form of sales tax.
VAT is intended to be levied or charged whenever there is some value
addition to raw material. The taxpayers on the other hand, will get credit for
the amount of tax paid off at the stages of procurement. The value added tax
system has proven to be effective in avoiding problems that normally might
arise out of the double taxation of goods and services. The value added tax
system is designed to address various problems associated with the
conventional sales tax system. In sales tax, there is no provision for input tax
credit, which means that the end consumer may pay tax on an input that has
already been taxed previously. This is known as cascading and leads to
increases consumer tax and price levels, which increases the rate of evasion
and can be detrimental to economic growth. 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.
The value added tax system allows for input tax credit, or ITC, on the amount
of tax levied at the preceding stage of the value addition chain. The
allowance for ITC is normally appropriated from the value added tax liability
imposed on the following stage of the sale of the product.
VAT in Bangladesh
The main components of indirect tax in Bangladesh are Value Added Tax
(VAT), Supplementary Duty and Excise Duty. VAT is imposed on producer,
manufacturer, importer, exporter or service render under the Value Added
Tax Act, 1991, on goods or specified services, at the rate of 15% at every
stage of transfer. VAT paid against the input is adjustable against the VAT on
output to be collected from the buyers and the net sum stands payable on
delivery of goods or specified services to the VAT authority. Exemption is
allowed to certain goods or service or certain taxpayers. All cottage
industries, except those producing particular products, are exempted from
VAT. But, manufacturer, producer or service render (other than cottage
entrepreneurs), whose annual turnover does not exceed Taka 1.5 million are
required to pay Turnover Tax at the rate of 2.5 per cent in lieu of 15 per cent
VAT. This limit is too low for small industries.
As a result, small industries are subjected to the same 15 per cent VAT as
their large-scale counterparts. In addition, supplementary duty is imposed at
variable rates on certain categories of consumption goods across all size
categories. Finally, excise duty applies to a limited number of items
irrespective of size classification.
National Board of Revenue (NBR): The Tax Central Collection
Authority
The National Board of Revenue (NBR) is the central authority for tax
administration in Bangladesh. It was established by Presidents Order No. 76
of 1972. Administratively, it is under the Internal Resources Division (IRD) of
the Ministry of Finance (MoF). MoF has 3 Divisions, headed by 3 permanent
Secretaries to the Government, namely, the Finance Division the Internal
Resources Division (IRD) and the Economic Relations Division (ERD). The
Secretary, IRD is the ex-officio Chairman of NBR.
NBR is responsible for formulation and continuous re-appraisal of tax-policies
and tax-laws, negotiating tax treaties with foreign governments and
participating in inter-ministerial deliberations on economic issues having a
bearing on fiscal policies and tax administration. The main responsibility of
NBR is to collect domestic revenue primarily, Import Duties and Taxes, VAT
and Income Tax for the government. Other responsibilities include
administration of all matters related to taxes, duties and other revenue
producing fees. Under the overall control of IRD, NBR administers the Excise,
VAT, Customs and Income-Tax services consisting of 3434 officers of various
grades and 10195 supporting staff positions (Approved set up as on 09 Feb.,
2000 AD).
National Board of Revenue (NBR) is the apex authority of the government
responsible for collecting tax revenue, administering taxation administration
and framing taxation policies and laws for the government. The main
responsibility of NBR is to mobilize domestic resources through collection of
Import Duties, VAT, Excise and Income Tax for the Government. NBR through
its different taxation sources collects more than 95% of the tax revenue for
the government.
NBR was created by a Presidential Order in the year 1972 and placed under
Internal Resource Division (IRD) of Ministry of Finance. Secretary of IRD acts
as the Chairman of NBR. Four Members (top position of the hierarchy) of NBR
from Direct Tax wing and four Members from Indirect taxation wing assist the
chairman in executive, legislative and policy matters.
CHAPTER THREE
Introduction of VAT in Bangladesh

In April 1979, the Taxation Enquiry Commission (TEC) officially took up the
issue of introducing VAT in Bangladesh as an alternate to sales tax. Until
1982, sales tax was being collected under the Sales Tax Act 1951, which was
replaced by the Sales Tax Ordinance 1982 with effect from 1 July 1982. The
World Bank played the pioneering role in introduction of VAT in Bangladesh. A
World Bank Mission visited Bangladesh for preparing an agenda for tax
reform in Bangladesh in December 1986. The mission submitted its final
report on 15 October 1989. The report recommended the introduction of a
manufacturing-cum-import stage VAT at a single standard rate within three
years. Thereafter, a Bangladesh Tax Mission visited India, Indonesia, the
Philippines and Thailand during 13 November 04 December 1989. The
Mission submitted its report in January 1990. The government discussed the
issues relating to introduction of VAT with all related private and public
agencies including the various leading Chambers of Commerce and Industry

from time to time. The government prepared the Value Added Tax Act 1990
(Draft) in June 1990.
Final version of the Value Added Tax Act was promulgated 31 May 1991 as a
Presidential Ordinance with eight sections (relating to registration under VAT
system and the appointment and powers of VAT authorities). It was made
effective from 2 June 1991. The Value Added Tax Bill 1991 was introduced in
the Parliament on 1 July 1991 and the Parliament passed it on 9 July 1991.
With the Presidential assent to the bill on the next day it came into effect as
The Value Added Tax Act 1991. The VAT Act 1991 replaced the Business
Turnover Tax Ordinance 1982 and the Sales Tax Ordinance 1982 with effect
from 1 July 1991. It imposed VAT @ 15% on importer or supplier (producer) of
taxable goods and provider of taxable services having annual turnover of Tk
1.5 million or more. It imposed Turnover Tax (TT) @ 2% (currently 4%) on
supplier of taxable goods and provider of taxable services having annual
turnover of less than Tk 1.5 million (Tk 2 million at present). The new law
imposed VAT at zero-rate on export sales of any goods and services, brought
excise duties on most goods under the VAT net, and imposed Supplementary
Duty (SD) @ 10% to 85% on goods and services which are luxurious and nonessential and are socially undesirable.
The objectives behind introducing VAT in Bangladesh were to(a)
Bring transparency in the taxation system;
(b) Prohibit cascading taxation at different stages of production;
(c)
Consolidate the tax administration;
(d) Activate the overall economy by mobilizing more internal resources; and
(e)
Bring a consistency in the tax-GDP ratio.
VAT introduced in Bangladesh in its initial form was a sort of consumption tax
(by allowing purchase of capital goods as input), which extended 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. Since the
financial year 1996-97, VAT in Bangladesh has become a broad-based
consumption expenditure tax by covering the wholesale and retail levels. 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 mentioned in the First Schedule of the VAT Act;
and all services provided in Bangladesh except those mentioned in the
Second Schedule of the VAT Act.
The standard tax rate for VAT has been fixed all along at 15% (for taxable
goods and services). The adoption of truncated value-bases caused
multiplicity of practical tax rates, but VAT rate is a single, flat or uniform one.
The rate of turnover tax (TT) is also uniform at 4% (2% up to 11 June 1997).
But the rates of supplementary duty (SD) are multiple. At the beginning (FY
1991-92), there were five different rates which ranged from 10% to 85%.
Next rates were eleven in number and ranged from 5% to 350%. For FY 200001, there are 31 different rates that ranged from 2.5% as on coffee to 350%
as on cigarettes.
The computation of actual value-addition requires detailed recording of
payments for goods/services bought, which is not properly done in
Bangladesh. To ease the administrative steps for taxation of services, in
specified cases, a truncated value-base was fixed with the option of waiving
input tax credit. Under the VAT system, tax points depend on the stage of
production and distribution. For goods imported by any importer, VAT is to be
paid at the time of paying import duty under the Customs Act 1969.
For goods produced or manufactured or imported, purchased, acquired, or
otherwise collected by any registered persons in the course of business
operation or expansion, VAT is to be paid at the time of one of the following
activities whichever occurs first:
(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;
and
(d) When the price is received in part or full.
For services rendered by any registered persons in the course of business
operation or expansion, VAT is to be paid at the time of one of the following
activities whichever occurs first:
(a)
When the services are rendered;
(b)
When an invoice relating to the rendering of service is given; and
(c)
When the price is received in part or full. For goods or class of goods for
which the NBR has ordered through the official Gazette notification to use
stamp or banderole or special sign or mark having security system of
specified value on package or carrier or container of the goods, VAT is to be
considered as paid equivalent to the value of the stamp or banderole or
special sign or mark used.
For services rendered by construction firms, indenting firms, travel agencies,
motor garages and workshops, and dockyards and other services determined
by the official Gazette notification, VAT is to be paid as withholding tax and
VAT is collected, deducted and deposited by the receiver of the services or
the persons paying the price or commission as the case may be. For any
other goods and class of goods or services, VAT is to be paid at the time as
indicated in the NBR rule.
Taxation remains a poor tool of government revenue collection in Bangladesh.
Taxes to GDP (gross domestic ratio) ratios are usually not high in South Asia.
But in case of Bangladesh the figure is alarmingly low only a little higher
than 9%, while the average for South Asian countries is 11%, the developing
countries more than 15%, the industrialized countries 30%, and high income
countries 24%. The introduction of VAT contributed significantly to raise the
tax revenue collection in Bangladesh. The joint contribution of sales tax and
excise duty to in the increase of total tax was Tk 696.9 million (28.8% of total
increase) in 1979-80 and Tk 3.9 billion (44.8% of total increase) in 1989-90. In
absolute volume, the annual increase in revenue from VAT and excise duty is
more than the previous annual increase in revenue from sales tax and excise
duty. However, in relative term, the share of sales tax and excise duty in total
tax in the 1980s was almost similar to the share of VAT and excise duties in
that under the VAT regime. The share of VAT as a per cent of different
indicators (internal trade tax, external trade tax, indirect tax, total tax, total
GDP and non-agricultural GDP) has usually an increasing trend and the shares
are significant. On an average, around 75% of total tax come from indirect
taxes, and more than a half of the indirect taxes is collected in the form of
VAT. The scope of VAT mainly covers the non-agricultural sector but with a
standard tax rate of 15% the share of VAT as a percent of non-agricultural

GDP is only 3% to 4%.
VAT was introduced in Bangladesh as a consumption tax and allowed the full
deduction of machinery as an input from the output value (sale proceeds of
taxable goods and services) to compute the tax-base (i.e., value added).
Although the initial coverage was up to import and production stages, the
VAT-net is now expanded to wholesale and retail stages. Initially, the number
of VAT taxable services were 25 (under 21 Heading numbers), but now the
number is theoretically unlimited, although for practical purposes this
number is kept limited to 70 services under 57 heading numbers for which
the scope is defined. Goods other than primary unprocessed agricultural
products and food items listed in the First Schedule of the VAT Act (live
animals or poultry, human or animal hair, parts of animal body or animal
products, parts of plant, green or dried vegetables, fruits, unprocessed
spices, food items, oil seeds, natural gums or like products, wood, uncared
wool or cotton, and raw jute, etc) are subject to VAT. Thus almost the whole
economy falls under the VAT-net and as a consumption tax, VAT is supposed
to streamline the economic activities with corrective measures by applying
supplementary duty.
VAT & Its Necessity
VAT is a multi-point tax system but without the effect of double taxation. Tax
is chargeable at rate prescribed at each point of sale. In Valued Added
Taxation system, the tax is calculated at different points of production and
distribution of a commodity. It is collected in installment on the basis of value
added at each point of production and distribution. Since an input is taxed
only once VAT avoids the cascading effect, which is the chief demirt of a
generalized system of taxation i.e. excise and sales tax.
There are several objectives associated with VAT, foremost being its revenue
raising quality, due to inclusion of items such as wages, interest, profits etc.
in its base. It shall also bring in more discipline in the indirect tax regime. It is
also imperative that VAT will take care of the demerits of the existing system.
Value Added Tax Features in Bangladesh
The main features of VAT in Bangladesh are as follows:
1.
VAT is imposed on goods and services at import stage, manufacturing,
wholesale and retails levels;
2.
A uniform VAT rate of 15 percent is applicable for both goods and
services;
3.
15 percent VAT is applicable for all business or industrial units with an
annual turnover of Taka 2 million and above;
4.
Turnover tax at the rate of 4 percent is leviable where annual turnover
is less than Taka 2 million;
5.
VAT is applicable to all domestic products and services with some
exemptions;
6.
VAT is payable at the time of supply of goods and services;
7.
Tax paid on inputs is creditable/adjustable against output tax;
8.
Export is exempt;
9.
Cottage industries (defined as a unit with an annual turnover of less
than Taka 2 million and with a capital machinery valued up to Taka 3,00,000)
are exempt from VAT;
10.
Tax returns are to be submitted on monthly or quarterly or half yearly
basis as notified by the Government.
11.
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%.
Cigarettes, natural gas and petroleum products which were the major sources
of excise duties, initially were kept beyond VAT net work. In 1992-93 these
items were brought under VAT. It may be mentioned that at present manually
made cigarettes (known as Biri), part of textile items & services rendered by
commercial banks are still under excise system. 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.
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. Payments of taxes are 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.
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 receipts are 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.
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
is 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 payments of VAT for goods
(output tax) are 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. Each taxpayer is 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. 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 is
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).
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
Value Added Tax (VAT) Wing
Value Added Tax (VAT) was first introduced in Bangladesh in the year 1991 by
partially replacing the Excise Duty and wholly the sales tax at the import
stage. In Bangladesh, only a single rate of VAT 15% is prevailing. However in
some cases base value for VAT is truncated.
VAT Administration
VAT administration is one of the three wings of National Board of Revenue
(NBR). Under the direct supervision and control of the Chairman NBR,
Member (VAT) of NBR works as the head of operational and administrative
activities of VAT administration. At present there are eight VAT
Commissionerates all over Bangladesh each headed by a Commissioner of
VAT.?
The Commissionerates are Dhaka (south), Dhaka (North), Rajshahi, Jessore,
Khulna, Sylhet Chittagong, and VAT Large Taxpayers Unit (LTU). Each VAT
Commissionerates has five to eight divisions which are headed by Divisional

Officers who may be Deputy Commissioners or Assistant Commissioners.
Under each VAT Division there are two to five circles which are headed by
Superintendents. These circles are the basic building block of VAT
administration. However, the head of each VAT division plays the most
significant role for VAT collection and administration in the field level.
Commissioners, Additional Commissioners, Joint Commissioners usually
monitor and supervise the functions of VAT circles.
VAT Mechanism
VAT system in Bangladesh operates under the legal framework of Value
Added Tax Act 1991 and Value Added Tax Rules 1991 made under Value
Added Tax Act 1991. As per VAT Act at a flat rate of 15% is chargeable on all
goods and services imported in Bangladesh and on all goods and services
produced in Bangladesh at every stage when the title of the goods and
services of the concerned transaction is transferred. However there is
exception for certain the goods and services listed in the first schedule and
second schedule of VAT act 1991 respectively. The exempted items are basic
agricultural products, live animals and animal products, education, books,
magazines, newspapers, postal services and passengers and goods
transportation services etc.
Besides, according to the law, any person engaged in the business of goods
and services subject to VAT having yearly sale of less than Taka two million
has to pay Turn-over Tax (TT) instead of VAT, at the rate of 4% on the amount
of the yearly sale. Any person doing the business in goods and services
subject to VAT has to pay VAT under self clearance procedure.
The person is required to comply with following procedures prior to clearing
goods and services from taxpayers premises:
Get registered with VAT authority, collect Business Identification Number
(BIN) which is referred in all matters relating to VAT.
Submit value declaration the basis for imposing VAT i.e. price per unit on
which rate of VAT to be charged- and get it approved of VAT authority
(basically Divisional Officer).
Maintain prescribed books and record.
VAT Collection Trends
VAT at this moment, is the most dominating revenue sources of the
government. In FY2005, VAT revenues constituted 36% of the total tax
revenue and 27% of the total revenue collection, making it to be the largest
piece of the tax revenue pie. VAT collection is growing very rapidly over the
last decade. In FY 2005 VAT achieved an impressive 23.7% growth.
Table 1: VAT Collection Scenario
FY200
1
VAT Collection
61.32
Growth in VAT Collection
13.6
VAT
Collection
as
25.4
percentile
of
total
revenue
FY200
2
69.6
13.5
25.2
FY200
3
80.71
16.0
25.9
FY200
4
85.75
6.2
24.2
FY2005
106.05
23.7
27.1
Total revenue receipt
241.7
276.7
311.19
354
392
CHAPTER FOUR
Tax Expenditures in Bangladesh

In recent years, the study of tax expenditures has gained increased
importance in the literature of public policy, particularly in developing and
transition economies. Such studies are primarily concerned with reduction in
tax liabilities resulting from various tax preferences such as preferential tax
rates, exemptions, deductions, rebates, deferrals, credits, etc. These
measures are often used as part of an efficient tax policy in order to achieve
certain fiscal/social objectives, e.g., generating revenue at socially efficient
and equitable level that minimizes its disincentive effects on economic
activities, reducing pressure on public sector borrowing and substituting
direct government expenditures (Cavalcanti and Li, 2000; Tanzi and Zee,
2000). These incentives may also be viewed as subsidy payments or
government spending towards preferred taxpayers channeled through the

existing tax system, besides direct expenditures of the government. Thus, it
is necessary for a government to analyze tax expenditure accounting on a
regular basis for maintaining efficiency, accountability and fiscal
transparency of the country.
Tax expenditure measures are tax provisions, liabilities or concessions that
fall outside a benchmark tax system. Tax expenditures may take a variety of
forms such as tax exemptions, deductions, exclusions, allowances, credits,
deferrals, relief, etc (OECD, 1996 and WB, 2003).
Tax holidays and tax free zones are also examples of tax expenditures subject
to specific periods and geographical areas (Swift 2006). Technically, tax
expenditures may be defined as the gap between potential tax revenue,
which does not contain tax provisions, and net tax revenue and tax revenue
received. However, application of the definitions of tax expenditures differs
among countries.
The establishment of an efficient and effective tax system by giving special
attention to tax preferences plays an important role for a developing
economy like Bangladesh, which faces constraints to requisite revenue
generation due to lower domestic tax bases and increased integration with
the world economy. The analysis of tax expenditure accounting is necessary
broadly from two perspectives: first, it gives an indication about potential
areas for further revenue generation; and second, it gives additional
information about actual budget expenditures of the government that is not
reflected in spending program of the budget documents. This policy note
attempts to analyze the concept and size of tax expenditures in the context
of Bangladesh with special references to India and Pakistan for FY05. It also
finds the necessity to re-examine a few existing tax.
Existing Tax Expenditure Measures in Bangladesh
The tax system of Bangladesh includes several tax expenditure measures
under the broad headings of direct taxes and indirect taxes. These provisions,
introduced with the enactment of the tax law, have been subject to changes
from time to time. The major policy objectives behind the tax expenditure
measures in Bangladesh are to accelerate the process of industrialization, to
attract foreign currency through increasing exports and foreign direct
investment (FDI) and to ensure social security and welfare of low and modest
income groups.
Tax expenditure measures exist in sectors such as Public Services,
Agriculture, Labour and Employment Affairs, Transport and Communication
and Social Security and Welfare, etc.
Tax Expenditure Measures under Direct Taxes

Various tax expenditure measures exist for corporate and personal income
taxpayers under the existing income tax law. These are summarized below
Corporate Income Tax
Tax holiday facility is allowed to newly set-up industrial undertakings, physical
infrastructure facilities and tourism industry subject to certain specified
conditions in order to promote industrialization and employment generation.
Exemptions and deductions are applicable to incomes from firms in Export
Processing Zone (EPZ), 50 per cent of income for export earnings, power
generation companies, computer software businesses, agriculture-related
industry, micro credit for NGOs, local government, welfare activities, etc. In
particular, concessionary rate is allowed at the rate 20 per cent for those who
do not enjoy tax holiday or accelerated depreciation, 15 per cent for textile
and jute industries and 25 per cent for local authority, etc. Accelerated
depreciation is allowed at the rate 100 per cent for new firms.
Personal Income Tax
Exemptions and deductions are admissible to individual incomes from
agriculture-related activities, income of foreign technicians in EPZs,
remuneration of diplomats and foreign employees of an embassy, income of

an indigenous person of Hill Tracts region as individuals, income from
specified savings instruments, etc. In addition, 15 per cent tax rebate is
allowed on investment in provident fund, Deposit Pension Scheme (DPS),
insurance, shares, bonds, etc.
Tax Expenditure Measures in Indirect Taxes
Under the various acts of indirect taxes, exemptions and deductions are given
in the area of customs duty, supplementary duty and Value-Added Tax (VAT).
Customs and Supplementary Duty
Exemptions are granted to local industrial units of a few specific sectors, viz.
EPZ enterprises, power generation companies, poultry and dairy farms, etc.
Concessionary rates are applicable to agro-processing, textile and leather
industry, educational institutions, hospitals, privileged persons, etc.
Incentives are also given to those sectors, which are complying with the
international and bilateral agreements and conventions.
ValueAdded Tax
Goods and services exempted from VAT include food and agricultural
products, animal products, poultry sector, agriculture inputs, basic services
for living, social welfare services, culture related services, finance and
financial activities related services, transport services, personal services, etc.
CHAPTER FIVE
VAT System in Bangladesh

As mentioned earlier, Bangladesh introduced the VAT as a radical reform in
the indirect tax system. The then government tried to familiarize people with
this new tax system and to make the reform successful. Before judging the
success of this reform, some important issues should be discussed.
Revenue and Tax Structure in Bangladesh
A. Revenue Structure
Total internal resource generation of a country consists of tax and non-tax
revenues. National performance, therefore, regarding mobilization of internal
resources may be assed by relating the overall tax and non-tax revenue to
national income and comparing these ratios over time. Table 2 gives a picture
of the revenue structure of the country.
Table 2
Revenue Structure of Bangladesh, 1972/73 1990/91 (per cent)
Year
Total Revenue / GDP
Tax Revenue / Total
Revenue
72/73 74/75
5.2
83.0
75/76 79/80
8.8
85.3
80/81 84/85
9.2
84.0
85/86 87/88
9.0
83.9
88/89 90/91*
9.3
83.3
As indicated, the revenue GDP ratio rose from a low of 5.2 per cent in the
early seventies to 8.8 per cent in the late seventies and then increased only
marginally and remained at less than 10 per cent even in 1988/89 1990/91.
Also tax receipts accounted, as table 2 shows, for more than eighty per cent
of the total revenue earning of the country during this period. Thus, it is
evident that the internal resources generation effort of the country is low and
the loans share of it is borne by the tax revenue.
a) Tax Revenue
National Board of Revenue (NBR), under Ministry of Finance is the apex
authority of the government for collecting tax revenue. In FY 2005
government collected 77.8% of revenue through NBR sources. Import duty
together with supplementary duty is still cater the largest share of tax
revenue for the government. Value Added Tax (VAT) is second largest source
followed by Income Tax. In FY 2005 VAT accounted for 36% of total NBR tax
revenue where share of Income Tax was only 19%. These figures reveal the
fact that government is largely dependant on indirect tax sources.
Government also collects tax, duty and fees through different central
government and local government organizations. Non judicial stamps,
interest, dividends, profits, are few other major sources of government
revenue.
Table 3: Tax and Non Tax Revenue Collection by Major Heads
Taka
NBR Tax Revenue
Income Tax
VAT
Import duty
Excise duty
Supplementary tax
Other tax and duty
Total NBR tax
Non NBR tax Revenue
Narcotics duty
Vehicle tax
Land revenue
Non judicial stamp
Total Non NBR tax
revenue
Non Tax Revenue
Dividend and Profits
Interest
Administrative fees
Service fees
Non commercial sales
Railroads
Telegraph
and
Telephone board
Other non tax revenue
Total non tax receipts
Total revenue receipt
Billion
FY2001
36.0
61.3
47.7
2.8
33.6
1.6
183.0
FY2002
41.0
69.6
53.5
3.0
38.5
1.7
207.3
FY2003
47.9
80.7
58.8
3.1
43.9
3.2
237.5
FY2004
52.7
85.8
73.0
1.7
54.3
3.1
270.5
FY2005
58.5
106.1
80.0
1.5
56.0
3.0
305.0
0.40
1.44
2.14
7.92
11.90
0.30
1.45
2.14
8.11
12.00
0.35
2.25
2.06
7.34
12.00
0.40
2.41
2.59
7.10
12.50
0.45
2.67
3.26
8.12
14.50
7.74
5.50
10.22
2.56
2.13
-1.34
12.60
11.62
4.49
8.72
2.74
2.52
3.90
16.03
8.32
7.25
7.79
4.72
2.96
4.15
16.00
10.54
7.50
9.64
4.82
3.10
4.53
17.02
11.65
6.36
9.88
4.33
2.64
4.79
16.50
7.42
46.83
241.73
7.38
57.40
276.70
10.51
61.70
311.19
13.85
71.00
354.00
16.35
72.50
392.00
b) Government Receipts
Tax revenue is the main source of the government revenue. Tax revenue
accounts for about 80 percent of total government revenue. In FY 1996-97,
revenue/GDP ratio was 9.62 percent, which rose to 10.21 percent in FY200102. In FY 2006-07 the revenue/GDP rose to 10.58 percent. Table 4 shows tax
and non-tax revenue receipts and tax-GDP ratio during the period from
FY1996-97 to FY2006-07.
Table 4: Revenue Receipts
(In crore Tk.)
Particul
ars
Total
Revenue
Tax
Revenue
Non-tax
Revenue
199
6
199
7
173
85
142
61
312
4
199
7
199
8
190
20
153
90
363
0
199
8
199
9
197
67
161
67
360
0
199
9
200
0
200
74
160
79
399
5
200
0
200
1
243
42
197
78
456
4
200
1
200
2
278
93
213
32
656
1
200
2
200
3
311
20
249
50
617
0
200
3
200
4
354
00
283
00
710
0
200
4
200
5
392
00
319
50
725
0
200
5
200
6
448
68
361
75
869
3
200
6
200
7
494
72
392
47
102
25
As percentage of Gross Domestic Products (GDP)

Total
Revenue
Tax
Revenue
Non-tax
Revenue
9.62
9.5
9.0
8.47
9.6
7.89
7.69
7.36
6.78
7.8
1.73
1.81
1.64
1.69
1.8
10.
21
7.8
1
2.4
10.3
5
8.30
10.6
3
8.5
10.5
7
8.62
10.7
9
8.70
10.5
8
8.40
2.05
2.13
1.96
2.09
2.19
Source: National Board of Revenue, Finance Division and BBS. Figures are
based on revised budget.
(c) Tax Management

Determination of tax policy of the government and its implementation are
reposed on the National Board of Revenue (NBR). During FY 2006-07, various
steps were taken to rationalize direct and indirect taxes to achieve
accelerated economic growth aimed at reducing poverty, infusing more
dynamism in the agriculture sector, expansion of export-oriented industries
and exports, development of domestic industries, enhancing industrial
productivity and creation of employment opportunities.
Measures under Direct and Indirect Tax System for FY 2006-07
Measures under Direct Tax system
Limit for tax exempt-income for individual assesses has been increased
from Tk. 1,20,000.00 to 1,50,000.00
For self occupied housing property, interest expense against house
building loan up to Tk. 20,00,000.00 is to be treated as deductible expenses
Collection of Advance Income Tax (AIT) from credit card bill abolished
Introduction of Universal Self-Assessment System
Deduction of the amount of penalty for non-submission of income tax
return.
Income tax investment rebate for non-resident Bangladeshis introduced
Deadline for depositing of AIT extended from I week to 3 weeks
Like woven and knit garments, collection of AIT at the rate of 0.25% from
the sale proceeds of any good or commodity exported at source level
Tax exemption on Zero Coupon Bonds
Abolition of upfront AIT from the Treasury bill and Treasury bond issued
by the government
Threshold limit for paying AIT increased from Tk. 2,00,000.00 to
3,00,000.00
Deduction of AIT at the rate of 10% from trustee fee and deduction of AIT
at the rate of 7.5% from freight forward agency commission
Tax Holiday for Solar Energy Plants
Tax exemption period for agricultural industries extended up to 30 June
2008
Exemption facilities for inward remittances in Bangladesh for foreign
nationals withdrawn
In case of jute and textile industries rebated tax at the rate of 15%
extended up to 30 June 2008
Special tax rate of 15% for diamond cutting & polishing industries
introduced
Transfer of capital for new assesses availing and self-assessment system
restricted to prevent tax evasion
10% tax rebate allowed in case of assesses paying tax at the highest
rate of 25% and showing 10% higher income than the previous year
Minimum tax rate for companies introduced by inserting a new section
16cc
New sections of laws introduced for courier services, cash incentives for
exports and credit card
Bangladesh has so far signed agreements with 25 countries to avoid
double taxation
Measures under Indirect Tax System
Customs Duty
Four tier duty structure and the highest duty rate of 25% of last fiscal
year (FY06) remained unchanged in fiscal year 2006-07. However, customs
duty on intermediate goods and basic raw materials reduced from 13% to
12% and from 6% to 5% in fiscal year 2006-07
Six-tier supplementary duty rates of 20%, 35%, 65%, 100%, 250% and
350% prevailing in the last fiscal year reviewed. Number of tiers remained
unchanged, while two slabs @ 20% and 35% reduced to 15% and 25%
respectively
Tax incidence on sugar in FY2006-07 reduced. Specific duty at the rate of
Tk. 2250.00/MT imposed on raw-sugar, while Tk. 5000.00/MT imposed on
refined sugar in FY 2006-07
Specific duty on mobile phone reduced from Tk. 300.00 to Tk. 200.00 per
set
Import duty and taxes exempted from capital machinery and raw
materials for poultry industries
Customs duty rate reduced in some raw materials for plastic, melamine
and electronics industries in FY 2006-07
Some reforms initiated in the Customs Act to mitigate container
congestion at port
Value Added Tax (VAT)
(a) In order to ensure quicker disposal of appeal cases, the time limit
reduced from one year to
nine months for Commissioner, Customs,
Excise & VAT (Appeal) and VAT Appellate Tribunal
(b) A provision introduced for taxpayers to get any VAT documents by
providing certain fees
(c) The time limit for submitting challan/invoice (musuk- 11) extended from
72 hours to 3 (three) working days.
(d) In the VAT Act, there is a provision for imposition of a minimum fine
ranging from an amount equal to the amount of tax evaded to a maximum
of two and a half times of tax evaded. It is binding for VAT officials to impose
a minimum penalty equal to the amount of tax evaded even for minor
offences. In order to remove this inconsistency, the amount of fine and
penalty reduced in FY2006-07 to a minimum of half and maximum of the

twice evaded tax. On the other hand, in case of relative minor irregularities
the amount of fine and penalty reduced to a minimum of Tk. 5,000 from Tk.
10,000 and for minor offences to Tk. 20,000.00 from Tk. 25,000.00
VAT exempted on some new items at import and production stages. The
items include sugar, petroleum bitumen (in drum and bulk), waste paper,
synthetic staple fiber, synthetic filament tow at the import stage and
chimney for using kerosene lantern at the production stage
With a view to increasing domestic revenue, VAT network expanded in
FY2006-07 by introducing some new goods and services under the VAT.
These are as follows:
(a) VAT on smart card and infusion set at import stage withdrawn
(b) VAT exemption on land development agencies withdrawn and imposed
@1.5%
VAT imposed on some services for expanding VAT base. These are:
(1) black and white photo studios,
(2) graphic designers,
(3) cellular fixed wireless telephone (a portable telephone set with antenna,
which can be connected with mobile and land telephone system)
To encourage the development of telecommunication sector, tax reduced
from Tk 900 to Tk 800 for each cellular mobile phone connection to ensure
availability of telecommunication facilities to the people at an affordable
price
To encourage the development of local dairy industries, supplementary
duty withdrawn from local production on packed powder milk sold in packs
of 2.5kg and over
To remove distortion and to ensure equity among taxpayers, exemptions
were withdrawn from turnover tax on some services, such as,- residential
hotel, decorator and caterer, community center, beauty parlor, shipping
agent, air-conditioned bus and railway service and transmitting
advertisement through satellite channels under VAT system
Source: NBR
(d) Revenue Collection Activities
Analysis of revenue collection activities for FY2006-07 by categories shows
that the bulk of revenue collection comes from value added tax (VAT). Income
tax occupies the second place in the row. Next positions are held by import
duties, supplementary duty, other taxes and excise duty. Overall, the share of
VAT in the total revenue collection is gradually increasing. It may be mention
that for the first time, income occupies second position over import duties.
In FY 2004-05, the total revenue collection under NBR amounted to Tk.
29988.66 crore. The collection was Tk. 3795.76 crore higher than that of the
previous fiscal year showing 14.49 percent growth. In FY 2005-06, total
revenue collection stood at Tk.33987.04 crore, which was Tk. 3998.38 crore
or 13.33 percent higher than that of the previous year. In FY 2006-07, total
revenue collection stood at Tk. 37030.79 crore, which was Tk. 3043.75 crore
or 8.96 percent higher than the collection of the previous year. Item-wise tax
collection from FY2004-05 to FY 2006-07 is presented in Table 5.
Table 5: Item wise Revenue Collection
(In crore Taka)

Items
of
Revenue FY 2004-05
Collection
Import Duty
7910.04
VAT (at import level)
5347.06
Supplementary
Duty
(at
1853.50
import level)
Total
15110.60
Excise Duty
143.91
VAT (Local)
5106.35
Supplementary Duty (Local)
3702.94
Total
8953.20
Income Tax
5672.30
Other taxes and duties
252.56
Grand Total
29988.66
Source: National Board of Revenue (NBR).
FY 2005-06
FY 2006-07
7825.43
5885.65
1563.42
8161.02
6292.65
1188
15274.50
161.15
6472.52
4665.77
11299.44
7141.56
271.54
33987.04
15641.67
183.78
7445.83
4775.58
12405.19
8668.91
315.02
37030.79
Table 6: Item-wise Revenue Collection for FY 2006-07

Supplementary Duty
16.1%
Excise Duty
0.5%
VAT
37.1%
Other taxes and duties
0.9%
Import Duty
22.0%
Income Tax
23.4%
B. Tax Structure
The tax structure in the country consists of both direct (income tax, gift tax,
land development tax, non-judicial stamp, registration, immovable property
tax, etc) and indirect (customs duty, excise duty, motor vehicle tax, narcotics
and liquor duty, VAT, SD, foreign travel tax, TT, electricity duty,
advertisement tax, etc) taxes. Since direct taxes represent only about 19% of
total taxes, tax-structure is heavily dependent on indirect taxes, which are
usually of regressive nature. Of the direct taxes, around 69% come from
income tax, 19% from non-judicial stamp, 5.7% from land revenue, 5.6% from
registration and balance from gift tax and other direct taxes.
Indirect taxes (representing 81% of total taxes), on the other hand, are
mainly import-dependent. Around 67% of indirect taxes are collected at
import stage by customs authorities as customs duty (38.0% of indirect tax or
30.7% of total tax), VAT (24.3% of indirect tax or 19.6% of total tax), and SD
(4.7% of indirect tax or 3.8% of total tax). Balance of indirect taxes
(representing around 26.64% of total taxes) include taxes collected on
domestic production, consumption or transactions such as VAT (11.4%), SD
(11.6%), excise duty (1.5%), foreign travel tax (0.7%), electricity duty (0.6%),
motor vehicle tax (0.7%), narcotics duty (0.2%), TT (0.03%), air ticket tax
(0.01%) and advertisement tax (0.001%). Public revenue also comes from
non-tax receipts such as surplus of sector corporations, financial institutions,
railways, postal department, telegraph and telephone, judicial stamp, etc,
and these non-tax revenues represent around 19% of total revenues.
1. Direct Taxes
Income Taxes
Other direct taxes
2. Indirect Taxes
Taxes on foreign trade
i) Import Duty
ii) Export Duty
iii) Sales (import) Taxes
iv) Other Customs Taxes
Taxes on domestic goods and services
i) Taxes on domestic goods
ia) Excise Duties
ib) Sales(domestic)tax
ii) Tax on domestic services
(a) Direct Tax
Direct tax in Bangladesh comprises taxes on income and taxes on property.
Table 7shows that the percentage of direct tax in total tax revenue increased
from 16.5 per cent in the early seventies to 22.70 per cent in 1988/89
90/91.
Table: 7
Tax Structure of Bangladesh, 1972/73 1990/91
(Percentage of total tax)
Tax Head /
Period
1. Direct Tax
a. Income Tax
b.
Other
Direct Tax
2. Indirect Tax
a.
Foreign
Trade Taxes
(i)
Import
Duty
(ii)
Export
Duty
(iii) Sales Tax
(iv)
Other
Customs Tax
b. Taxes on
Domestic
Goods
&
Services
I. Taxes in
Domestic
Goods
Ia.
Exercise
Tax
Ib.
Sales/
72/73
74/75
16.5
7.6
8.9
75/76
79/80
18.0
12.6
5.4
80/81
84/85
19.7
13.7
6.0
85/86
87/88
22.3
15.0
7.3
88/89
90/91
22.7
-------
83.5
43.8
82.0
55.9
80.0
56.0
77.7
52.1
77.30
----
32.8
37.4
38.9
38.2
----
0.6
2.2
1.0
0.0
----
9.6
0.8
15.9
0.4
15.5
0.6
13.2
0.7
11.86
----
39.6
25.5
24.0
25.6
----
36.5
24.2
23.5
25.1
----
31.8
22.2
23.2
25.1
----
4.7
2.0
0.3
0.0
----
Domestic Tax
II. Taxes on
Domestic
Services
3.2
1.2
0.5
0.5
----
Therefore, revenue earnings from the individual income tax have been very
low. The major reason for such a low tax collection from individual income tax
is the very narrow tax base. Less than 0.5 per cent of the population is
covered in the tax net.
(b) Indirect Tax
Although the contribution of indirect taxes as a proportion of total tax yield
has been declining over the years. It still bears the lions share in overall tax
receipts of the country by accounting for more than three quarters of the
overall tax yield. Indirect taxes may broadly be divided into taxes on
domestic goods and services and taxes on foreign trade.
(c) Taxes on Domestic Goods and Services
Table shows that the share of the taxes on domestic goods and services
remained stable at around a quarter of total tax revenue after falling from a
high of 39.6 per cent in the early seventies. The sales tax on domestic goods
does not exist any more. In fact, as table 2 shows, excise taxes accounted for
almost the entire revenue yield form this source which stands at a quarter of
total tax receipts of the country.
Another interesting feature of taxes on domestic goods and services is that
only a few items generate the total tax yield for excise taxes. In fact, only
four items namely- tobacco, petroleum, petroleum gas and jute manufacture
accounted for more than 70 per cent of total excise tax yield of Bangladesh in
1984/85. These findings thus clearly indicate that taxes on domestic goods
and services are low and the base is also very narrow.
(d) Taxes on Foreign Trade
Foreign trade tax has continued to play a dominant role in the tax structure of
Bangladesh over the years. Table shows that it has accounted for more than
50 per cent of the total tax yield of the country in recent years.
(e) Others
Excise Duty
Excise duty is currently imposed in Bangladesh under the Excise and Salt Act
1944 introduced to levy and collect duties of excise on domestically
manufactured goods and also to salt. Before introducing VAT since July 1991,
the excise constituted the second largest source of revenue for the
government (about 22% of total revenue), but out of 99 excisable items, 74
were shifted under VAT in 1991-92. The goods and services subject to excise
duty are listed with the tax rates in the First Schedule of the Excise and Salt
Act 1944, which now include bidi, cloth and cloth goods, and bank services.
Narcotics duty continued to be collected from all kinds of produced alcohol at
rates specified in the Second Schedule of the Narcotics Control Act 1990 and
alcohol products are not subject to excise duty or VAT.
Sales Tax
The first sales tax was introduced in the former Central Provinces of India in
1938. In Bengal, sales tax was adopted in 1941. In 1948, sales tax was
transferred as a central tax under the General Sales Tax Act of 1948. The
Sales Tax Act 1951 came into force on 1 July 1951 by repealing the Pakistan
General Sales Tax Act of 1948. Until 1982, sales tax was being collected
under the 1951 Act, which was replaced by the Sales Tax Ordinance 1982.
The VAT law was promulgated by repealing the Business Turnover Tax
Ordinance 1982 and the Sales Tax Ordinance 1982 with effect from 1 July
1991 by imposing three types of taxes, viz, VAT, SD and TT. Now VAT is being
imposed at 15% on value added at import and all production and
distribution stages of taxable goods and services and collected from VATregistered persons having annual turnover of Tk 2 million or more. In case of
annual turnover of less than Tk 2 million, TT is imposed at 4% on gross
turnover.
Goods and services, which are luxurious, non-essential and socially
undesirable, are subject to SD at rates ranging from 2.5% to 350%. Exports
are subject to imposition of VAT at zero-rated, ie, VAT paid at pre-export
stages is refunded to the exporters. The VAT authority has also been
collecting another tax called infrastructure development surcharge at the
rate of 2.5% since 1997-98 on the value of goods produced in Bangladesh as
specified by the government in this regard.
Income Tax
Income tax was first introduced in the subcontinent by the British in 1860 to
make up the revenue deficit caused by the sepoy revolt, 1857. After
independence of Bangladesh, income tax was made effective under the
Income Tax Act 1922 passed on the basis of the recommendations of the AllIndia Income Tax Committee appointed in 1921. Currently, income tax has
been imposed under the Income Tax Ordinance 1984 (ITO) promulgated on
the basis of recommendations of the Final Report of the Taxation Enquiry
Commissionsubmitted in April 1979. Income taxpayers (assessees) are
classified as individuals, partnership firms, Hindu undivided families (HUF),
associations of persons (AOP), companies (publicly traded and private), local
authorities, and other artificial juridical persons. Tax rates and scope of
taxable income differ on the basis of residential status of an assessee
(resident or non-resident).
Tax Return
Taxpayers can submit tax return under self-assessment or normal scheme.
In the classified income tax return, an assessee has to show his/her total
taxable income under 9 heads of domestic income and 1 head of foreign
income. Individuals having limited income from salary, wages and/or selfemployment can use a one-page tax return to be submitted only under selfassessment scheme, where only 3 heads of income are to be shown 2
heads for domestic salary income (gross and taxable) and other head for all
other domestic/foreign incomes. Tax-base for income taxation is annual total
income computed with consideration of a number of exclusions provided in
Part-A, Sixth Schedule of the ITO.
Corporate Tax
Corporate tax rates for industrial companies whose shares are publicly traded
is 35% and the rate of those whose shares are not publicly traded is 40%
Deduction of VAT at Source:
The authority for deducting VAT at source has been given to the Government,
Semi-Government,
Autonomous
Organizations,
Non-Government
Organization (NGOs), Bank, Insurance or Limited Company. The services on
which deduction at source applicable are listed in the following page:
Head #
S 003
Service Code
#
S 003.10
S 004
S 007
S 003.20
S 004.00
S 007.00
S
S
S
S
S
S
S
S
S
S
S
008
020
032
033
034
037
048
049
053
060
065
S 066
S
S
S
S
S
S
S
S
S
S
S
008.10
020.00
032.00
033.00
034.00
037.00
048.00
049.00
053.00
060.00
065.00
S 066.00
Service Provider
Garage and workshop of motor
car
Dockyard
Construction Contactor/Sangstha
Advertisement
Organization:
Government, Semi-Government,
Autonomous Body, Nationalized
Bank and Insurance Sector
Private
Organization,
NonGovernment Sangstha (NGO),
Private Bank & Insurance, Limited
Company,
Any Sangstha or
Person
Others
Printing firm/organizations
Survey Sangstha
Consultancy and Supervisory Firm
Lessee
Audit and Accounting Firm
Procurement Service Provider
Transport Contactor:
For carrying Petrol and Petroleum
goods
Others
Transport rent provided
Participants of Board Meeting
Buyer of Auction Goods
House clearing and maintenance
organization
Lottery ticket seller
Rate of
Deduction (%)
4.5%
4.5%
4.5%
4.5%
9%
15%
4.5%
15%
4.5%
15%
4.5%
2.25%
2.25%
4.5%
4.5%
15%
1.5%
2.25%
15%
CHAPTER SIX
The Tax Structure for Individual Tax Payers

If an individual has been in Bangladesh for a period/period totaling 182 days
or more in the income year, he/she is considered a resident. In case an
individual has been in the country for 90 days in the income year and 365
days in four years preceding this year, he/she will also be considered a
resident.
Each individual is entitled to an investment tax credit of 15 percent of the
total income or Tk 100,000 whichever is less. Incomes from small and cottage
industries are entitled to a 5 to 10 per cent tax rebate depending on the
production volume.
On the first Tk. 165,000.00 of total income no tax obligation
On the next Tk. 275,000.00 of total income 10%
On the balance of total income 25%
Tax Holiday
Tax holiday is allowed to industries subject to the relevant rules and
procedures set by the National board of Revenue (NBR) for the following
period
according
to
the
location
of
the
establishment.
In Dhaka and Chittagong Divisions (excluding 3 hill districts): 5 years. In other
divisions (including 3 hill districts of Chittagong Division): 7 years.
The period of such tax holiday will be calculated from the month of
commencement of commercial production. The eligibility of tax holiday to be
determined by the NBR and the time of the commencement of commercial
production is certified by the respective sponsoring agencies. The industrial
establishment should be registered under the companies Act. 1994.
Tax holiday facility can be availed by industries coming into commercial
production within 30 June 2000 A.D.
Other Tax Incentives in Bangladesh
Other tax incentives:
Exemption of tax on interest of foreign loan.
Exemption of tax on Royalty/Technical know-how.
Tax exemption on capital gains. Avoidance of double taxation.
Liberal investment allowance for tax assessment.
An accelerated depreciation instead of a tax holiday of a tax holiday is
allowed at the rate of 80 per cent of the actual cost of the machinery or plant
from the year the plant starts production and 20 per cent for the following
year provided the industry is located within a developed area. The
depreciation is 10 per cent if the industry is set up in a location considered
less than a developed area.
Tax Rates on Other Companies
Tax rates on income of all other companies including banks, financial
institutions, insurance companies and local authorities are 45%.
Investment requirement by companies enjoying tax holiday: Companies
enjoying tax holidays are required to invest only 25% to 30% of their income
in other activities as per rule of N.B.R.
Turnover Tax
Persons other than those specified by National Board of Revenue (NBR)
through official gazette notification, who produce taxable goods or provide
taxable services but not required to register under section 15 of the Value
Added Tax Act, 1991, and having annual turnover of less than Tk. 20 lacs
shall have to enlist with the superintendent and to pay 4% as turnover tax in
advance.
Following restrictions apply to persons enlisted for turnover tax payments:
a)
Persons enlisted for turnover tax cannot pay tax on the basis of tariff or
truncated value
b)
They cannot obtain input rebate and VAT registered persons purchasing
from turnover taxed persons on the basis of tax challan cannot also obtain
input rebate.
An application for enlisting has to be made to the superintendent of
concerned local VAT office, in form Mushak-6. The superintendent is satisfied
on the turnover declared by the applicant shall issue an enlistment certificate
in form Mushak-8.
Records to be Maintained
Persons enlisted shall maintain accounts of daily buy-sale transactions in

formMushak-17A and shall also preserve number wise sale cash memo
including enlistment number. Further, declaration of turnover, challan of
treasury deposit, returns etc. shall have to be preserved for at least 4 years.
Deduction of Turnover Tax
Turnover tax can not be deducted at source against supply of goods or
services. However, it is to be ensured through presentation of treasury
challan and certificate about deposit of due tax in advance for the concerned
tax period.
Tax Period for Turnover Tax
Tax period can be annual, quarterly, or monthly. It fully depends on the
convenience of the Turnover tax enlisted person to choose his tax period and
mention the same while declaring annual turnover in form Mushak-2B on the
basis of his own selection, enlisted person shall have to submit return to the
concerned circle.
Payment of Turnover Tax
In the case of annual declaration, within 30 days of declaration of turnover
and for quarterly or monthly declaration within 15 days of such declaration
tax calculated @4% on the turnover declared, shall have to deposited to the
treasury and the return together with the main copy of treasury challan have
to be submitted to the concerned circle in form Mushal-3. Tax is payable
from the date of enlistment and in absence of any transaction in any tax
period for any reason, tax has to be paid.
Turnover tax is payable in advance within certain days of the commencement
of tax period. Default to pay in due time may attract a penalty not exceeding
Tk. 5000 and 2% of additional tax for each month as additional tax.
Claming of Drawback
Any registered or enlisted person is entitled to drawback against export from
duty exemption and drawback office (DEDO).
Tax Structure: Institutions and the Reality
Internal resource is the key for sustenance and development for a nation.
Revenue collection scenario in Bangladesh is not yet reached to any
impressive stature. For very poor Tax-GDP ratio, government has to finance
growing budget deficit through substantive amount of foreign loans and
public debts. In FY 2005, Tax GDP ratio was 8.7, while Revenue GDP ratio
stood at 10.64. These figures indicate the poorest performance even among
the South East Asian subcontinent countries. However, for substantive growth
in tax revenue collections, in the recent years, Tax-GDP ratio is increasing
steadily.
Table 8: Revenue-GDP Ratio
Revenue as percentage of GDP
Tax revenue as percentage of
GDP
FY2001
9.6
7.8
FY2002
10.21
7.8
FY2003
10.35
8.3
FY2004
10.63
8.5
FY2005
10.64
8.7
Tax revenue constitutes more than 80% of government revenue receipts.

National Board of Revenue (NBR), the authority for collecting tax revenues,
registered impressive tax collection growth during the recent years. Over the
last few years tax revenue form NBR grew steadily, while growth in non tax
revenue sources remained stagnant.
Necessity of Tax Reform in Bangladesh
For socio-economic and infrastructural development in Bangladesh, the
importance of an increase in domestic revenue is well recognized. Since more
than 80 per cent of total revenue comes from taxes, restructuring the tax
system by introducing the VAT was thus critical.
Bangladesh relies on heavily on trade taxes. But studies of the tax structure
of certain developing countries suggest that the economic cost of trade taxes
is much higher than domestic consumption taxes. The trade taxes lead to the
creation of inefficient domestic industries by penalizing exports.
The tax structure (before introducing the VAT) was inelastic, unresponsive to
the growth in overall economic activity. Taxes on agricultural income and
property incomes are negligible and poorly administered.
Therefore, in order to ensure self reliant growth and reduce external
dependence, the domestic resource mobilization efforts in Bangladesh have
to be graded up. Although tax revenues account for more than 80 per cent of
total revenue in Bangladesh, the tax efforts i.e. tax-GDP ratio in Bangladesh
was only 7.2 per cent in 1985/86 which is far from satisfactory, from the point
of view of tax collection, even by an Asian Standard.
So to keep pace with the ever growing public expenditure (which is required
to meet public needs) and make the resources available for development
efforts, there is no substitute for a comprehensive tax reform. Such a reform
should aim at raising revenue as well as eliminating the tax induced
distortions in the structure of the economy. The introduction of the VAT is the
center-piece of this reform effort.
Why the VAT is Preferred for Bangladesh
The reasons for preferences of the VAT for Bangladesh are: it has more
advantages than disadvantages compared to other taxes. Moreover, the tax
structure prior to July 1991. In Bangladesh was highly defective which is,
more or less, discussed above. Tax evasion was widespread particularly
among the rich. The tax structure was also discriminatory against export and
biased towards inefficiency. The tax system was also inequitable and there
were large scale allegation of corruption.
Moreover, there was more than one rate in the tax system which would result
in economic inefficiency and administrative complicacy. The cascading effect
of the indirect taxes would increase the production costs, induce the
producers to evade taxes and generate some problems which have been
discussed earlier. It would also reduce the consumers welfare through the
price-rise.
Therefore, due to intrinsic problems of the indirect tax system, revenue
collection of the government was never satisfactory. To overcome this
deficiency and to make the indirect tax system more dynamic and fruitful, the
VAT has been introduced.
CHAPTER SEVEN
The Salient Features of the VAT in Bangladesh

1.
A. Policy Issue
Consumption Type, Destination Principle and Invoice Method.
The VAT that has been introduced in Bangladesh is of the consumption type
(as opposed to the income or gross product type) under which the VAT shall
amount to a tax on the consumer goods only leaving out capital goods. This
has been done to ensure neutrality with regard to the choice of techniques.
With regard to the regime for international trade, the destination principle (as
opposed to the origin principle) has been adopted, under which a VAT taxes
all value added, at home and abroad, in relation to goods that have as their
destination the consumers of Bangladesh. Under this system exports are zero
rated and imports are subject to VAT. The destination principle is compatible
with the consumption type of VAT. The other reasons for adopting the
destination principle are that it emphasizes employment more than
consumption and ensures neutral treatment of imported and domestic goods
by taxing imports and domestic goods going into domestic consumption at
the same rate. In a country like Bangladesh where the exchange rate does
not adjust quickly and the factor prices are also not flexible, the destination
principle has to be favored. In respect of the method by which a tax paying
firm may compute its tax liability, the invoice or tax credit method (as
opposed to the account based method) has been adopted in Bangladesh in
view of its compatibility with a consumption destination type of VAT. The tax
credit method avoids the direct calculation of value added, instead, the tax
rate is applied to a component of value added (output and inputs) and the
resultant tax liabilities are subtracted to get the final net tax payable. Its
other advantages are that the tax liability is attached to the transaction and
the invoice becomes the crucial documentary evidence and that it creates a
good audit trail. Further, any tax period (monthly or quarterly) can be used
under this method, while the account based VAT would focus on the annual
profit and loss account.
1.
B. Import-cum Manufacturing and Services
With regard to the tax on goods, the VAT in Bangladesh was restricted to the
import and manufacturing stage since the accounting system at the other
levels of operation is weak. Certain selected services (mentioned in the
2nd schedule to the VAT Act, 1991 where financial services are not included)
have also been brought under the VAT system. This would mean relatively
few registered traders, clearly identifiable taxable commodities and a less
complex administration. The disadvantages here are that the revenue base is
relatively small implying a higher rate of tax and those firms in collusion with
wholesalers or retailers might understate the true value of sales and thus
cause erosion of VAT revenue. In 1996-97 fiscal budget measures retail level
has come under VAT and now only nine groups of goods are VATable at retail
sale. In future the retail level VAT will be expanding.
1.
C. Single Rate
The standard rate of value added tax (VAT) is 15 percent. However, taxpayers whose annual turnover is lower than taka 2000,000 pay a turnover tax
at 4 per cent instead of a VAT at 15 per cent. In addition, supplementary duty

at 10 per cent to 85 per cent is imposed on specific luxuries, unnecessary
and socially undesirable goods and services. It is zero rated for goods
exported. In addition, all input taxes, if inputs are used for exported
commodities, would be rebated. There are reduced rates of nine percent, five
percent, 4.5 percent, 2.25 percent, 1.5 percent and zero percent which apply
to, for example, certain categories of advertisement (nine percent), the
supply of electricity (five percent), engineering services, security services,
services rendered by construction contractors, audit and accounting firms,
consultants, printing press, architects, interior and graphic designers (4.5
percent), supplies of goods and services through participation in a
tender/quotation and for pathological laboratory work, supplies of goods and
services by hospitals and petroleum carriers, maintenance and cleaning of
building floors/premises (2.25 percent), trading services, land development
and construction of apartments, retail sales of furniture (1.5 percent) and
exports of goods and services (zero percent). Supplies of certain goods and
services are exempt from VAT, for example, certain food items (such as meat,
fish, potatoes, vegetable and fruits), jute and jute goods and social welfare,
cultural, training, rehabilitation services and agricultural development.
1.
D. Exemptions and Exclusions
Some imported commodities, specific excisable goods and services,
agricultural insecticides and pesticides, books, newspapers, journals,
periodicals, yarn and textiles, educational items, scientific equipment
imported by educational institutions, aluminum utensils, primary agricultural
produce and milling of rice, wheat and pulses are exempt from the VAT. To
derive the maximum benefits from VAT as non-cascading, efficient and
buoyant revenue raising tax system, exemptions and exclusions should be
kept at the minimum. Exemptions not only cause erosion of the tax base
requiring imposition of higher rate to generate a given amount of revenue,
they introduce cascading by bringing about breaks in the credit chains
something the VAT is designed precisely to avoid. Exemptions necessitate
extra record keeping to separate the taxable from the exempt sales. Further,
the distinction between what is exempt and what is taxed is often tenors or
arbitrary. The use of exemptions can introduce ambiguity into the structure of
tax rates by making the effective tax rate on a commodity a function of the
structure of production, rendering the rate irrelevant. As a matter of principle,
exemptions under VAT are not justified except on overriding administrative
expediency or equity grounds. In fact distributive goals would be better
achieved if there exists necessary capacity to administer a comprehensive
transfer system.
1.
E. Treatment of Small Firms
In Bangladesh, for administrative and record keeping reasons, small forms
have been kept outside the purview of the VAT. Specific industries with
installed capital machinery valued at Taka 300,000 or below are exempt from
the VAT. For administrative and record keeping reasons, small firms have
been kept outside the purview of the VAT in Bangladesh. There are two bases
for exempting the small firms. Specified industries with installed capital
machinery valued below Taka three lacs and with annual turnover below Taka
fifteen lacs, are exempt from VAT. Secondly, all manufacturers or services
renderers having turnover below Taka fifteen lacs are exempt from VAT. This
way of exempting economic activities from the purview of VAT is not however
free from problems. There is the potential danger of under reporting sales or
understating the value of capital machineries. The borderline cases are also
hard to deal with. This also creates competitive imbalance, since the
exempted firms have artificial price advantage over the taxable firms leading
to market distortions.
1.
F. Service
Certain selected services were brought under the VAT system in Bangladesh
during the introduction of the system in 1991. A few more services have also
been added to the list in 1992 and in 1996. Since organized manufacturing
accounts for only 15 percent of value added in Bangladesh, in order to have a
meaningfully broad based VAT, it is essential to expand the VAT system to
cover as large an area of services as possible. But although the total value
added by services is quite high in Bangladesh (about 40 percent) only a small
proportion of this value added could come under the potential VAT base.
Services like education, public administration, and health would certainly
remain outside the tax net leaving only 15-20 percent of total value added in
service sectors that could be covered under VAT. The services however
belong to the difficult tax area. It is difficult to define the service sector
precisely and to measure its output. The location or time of supply or
consumption of services is often elusive or even meaningless. Since the
service sector is characterized by high value added than in the stage of
production, it is immediately susceptible to evasion as well. Again, the
predominance of labor intensive production in service limits economies of
scale thus leading to the creation of a large number of difficult to tax small
service renderers. Nevertheless, for distributional, efficiency and welfare
reasons services should be brought under the VAT net as far as possible.
Further efforts in base expansion would therefore lie principally in this
direction.
1.
G. Broader Coverage
The VAT in Bangladesh has a broader coverage compared with the bases of
taxes it has replaced. All goods except those mentioned in the First Schedule
to the VAT Act 1991 are subject to VAT (some more items have, however,
been declared exempt by specific notifications). Theoretically, a tax that has
consumption as its base has the desired property of being elastic. Since
consumption is the largest component of GDP or value added, increase in
revenue is expected to keep pace with the GDP growth. With regard to the
services also, the VAT base is larger than the excise base it has replaced.
1.
H. Treatment of Export
Exports are zero rated under the VAT system in Bangladesh. This implies that
there would be no VAT on exports. In addition, all input taxes (VAT, customs
duty, excise duty etc.) would be rebated. Under the VAT system, it would be
possible to determine the hidden taxes with more confidence. As such, the
rebate procedure would be more efficient and the amount rebated would
approximate the actual input tax content of any export consignment.
1.
I.
Operational Issues
1.
a.
Taxability
Except those goods and services specifically exempted by notification, all
imported or domestic goods and all services are subject to the VAT. In the
case of imports, the importer and in the case of domestic supply, the
manufacturer supplier is liable to pay the VAT. In case of a service, it is the

service supplier who is liable to pay the VAT (VAT Act 1991).
1.
b.
Time and Manner of Payment
At the import stage, the VAT is leviable and payable before the clearance of
the imported goods from customs. In the case of domestic supply, although
the payment of the VAT takes place at the time of clearance of the goods
from the production premises (Rules 23 of the VAT Rules 1991), the liability
could be born earlier [section 6(2) of the VAT Act, 1991]. Similarly, although
the liability is generated earlier [section 6(3) of the VAT Act 1991], the VAT on
services can be deposited into the treasury any time before the submission of
the monthly return.
1.
c.
Input Tax Credit
A registered tax-payer is eligible to take instant credit of the VAT paid on
inputs against the VAT payable on outputs (section 9 of the VAT Act 1991). For
access to the credit against the VAT on domestic supplies or services, one
needs to have in his possession the VAT paid invoice in the case of
domestically produced intermediate inputs / raw materials and the Bill of
entry in the case of imported inputs (Rule 20 of the VAT Rules 1991).
1.
d.
Registration
For the ease of administrating all procedure or suppliers of vatable goods or
services or traders or importers of goods or exporters of goods or services
shall have to be registered with the concerned divisional VAT office. The office
allocates a particular number to each of the procedures, suppliers, importers
or exporters or traders to identify as a VAT payer and this is registration. The
certificate in which it is communicated (Mushak-8) is called registration
certificate.
Compulsory Registration
Concerned divisional VAT office can register and inform a person under
section 15(4), when he does not apply for registration though required by law
to do so. He shall be deemed to be registered from the day condition for his
registration becomes apparent. In orther words, he would be liable to pay
output VAT after allowable adjustment of input tax not from the day of actual
registration, but from the day he fulfills the condition for compulsory
registration.
Importers or exporters of any goods (other than listed for turnover tax and
within the scope of cottage industry) producers, traders and suppliers of
vatable goods or services must be registered as a compulsory requirement.
Only one registration is necessary when more than one taxable goods are
supplied or services provided or imported or exported from the place of
production of vatable goods or supply of services.
Self- Registration
For producers or suppliers of vatable goods or services with annual turnover
below Tk. 20 lacs, and for those within the scope of cottage industry,
registration is not a lawful requirement. Even then some of them want to
register, they can and this is called self- registration. The only advantage of
registration, whether self or legally imposed, is that the registered producer,
supplier or trader can adjust input tax against output tax which can have a
significant role in pricing and selling the goods or services.
Requirement for Registration

Application in form Mushak-6 shall have to be filed with concerned divisional
VAT officer for registration, Name and address of the organization, taxpayers
class, name of goods produced or procured, trade license No., TIN, if available
IRC / ERC No. (where applicable) shall have t be mentioned in the application.
Following documents shall be enclosed with the application:Trade License
TIN Certificate (if available)
IRC / ERC Certificate (where applicable)
List of all sale center when applied for central registration.
A declaration in form Mushak-7 regarding place of production or
purchase sale or stock of goods and its inputs
Central Registration
When supply of vatable goods or services or export-import business is
conducted from more than one place but the accounts are centrally
maintained, NBR can, by a special or general order direct to register only the
head office of business. It is known as central registration. Thus, NBR through
SRO No. 167-local/95/119-Mushak directed for registration of head offices of
insurance companies when accounts and records are centrally maintained.
Necessity of Registration
When the annual turnover or sale of producer or trader of vatable goods or
supplier of vatable services exceeds Tk. 20 lacs registration is a legal
necessity. Turnover of any person, registered under turnover tax, when
exceeds in any continuous 12 months Tk. 20 lac, he shall have to apply to the
divisional VAT officer for registration within 30 days after the end of the tax
period. In the case of a person carrying on his business where VAT has been
newly imposed, he shall be required to be registered from the day of such
imposition.
Following service providers and suppliers of goods are required to be
registered for VAT even when annual turnover is less than Tk. 20 lacs. (SRO
No. 172-Law/2003/380-Mushak)
Suppliers of Goods
Cigarette containing tobacco manufactured mechanically or manually.
Suppliers of Services
Motor garage and Workshop
Film Studio
Dockyard
Survey Firm
Construction Firm
Sales Centers of Furniture
Advertising firm
Gold Smith and Silver Smith, shop owner and gold refiner
Printing Press
Medical Center
Architecture Firm
Pathological Laboratory
Indenting Firm
Consultancy and Supervisory Firm
Freight Forwarder
Lease holder
Clearing & Forwarding Firm
Banking Service Provider
Audit and Accounting Firm
Electricity distributor
AC launch service
Glass Cutting Firm
Procurement Provider
Buyer of Auction Goods
Satellite Cable operator
Organizing issuing credit card
Security Service
Money changer
Transport Contractor
Tailoring shop and Tailor
Lessor of transport vehicle
Architect, Interior designer or decorator
Person joining the board meeting
CHAPTER EIGHT
Advantages of VAT Concept

The rise of the value added tax (VAT) is a spectacular fiscal phenomenon.
Within a rather short span, this tax has exploded from its rudimentary form to
become the state-of-the-art tax on goods and services all around the globe.
Today the VAT has come to be acclaimed more and more as the most
efficient, broad based and revenue-productive system of indirect taxation. In
recent times VAT has been increasingly adopted by many developing
countries around the world that share with Bangladesh the same policy
objectives of development and socio-economic stability and are subject to the
same constraints that may affect the efficiency of the tax administration. VAT
is a tax on the value added by a firm to the goods and services it buys from
other firms. Operationally, the taxpayer adds VAT at a given rate to its sales
and then deducts the amount already paid as VAT on its purchases before
paying the net amount to the tax department. VAT thus avoids the taxation of
inputs and its base is the final goods.
1. Neutrality
The greatest advantage of the system is that it does not interfere in the
choice of decision for purchases. This is because the system has anticascading effect. How much value is added and at what stage it is added in
the system of production or distribution is of no consequence. The system is
neutral with regard to choice of production techniques, as well as business
organization. All other things remaining the same, the issue of tax liability
does not vary the decision about the source of purchase. VAT facilitates
precise identification and rebate of the tax on purchases and thus ensures
that there is no cascading effect of tax. In short, the allocation of resources is
left to be decided by the free play of market forces and competition. A
significant factor in the importance attached to VAT in the EU countries is its
ability to treat intra-commmunity trade as also trade with other countries
with complete neutrality, that too without any distortion by taxation. This is
possible when the VAT is applied where the goods are consumed and not at a
place where goods are produced.
2. Certainty and Transparency
The VAT is a system based simply on transactions. Thus there is no need to
go through complicated definitions like sales, sales price, turnover of
purchases and turnover of sales. The tax is also broad-based and applicable
to all sales in business, thus there is little room for different interpretations.
Similarly, due to the basic feature that it gives credit of tax paid on earlier
stage, the buyer will always ask for invoice. Thus the scope of tax avoidance
or evasion will be much less. The disputes will also be fewer. This system
brings certainty to a great extent. So also, the buyer knows, out of the total
consideration paid for material, what is tax component. Thus, the system
ensures transparency also.
3. In Widespread Use
VAT is in use in well over sixty countries throughout the world. In its usual
form, it is a transaction-based consumer tax applicable to both goods and
services, with the invoice (on which the VAT liability may be shown
separately) acting as the basic evidential document. It is neutral in effect, the
tax liability on sales (outputs) being offset by the tax paid on purchases
(inputs). It thus avoids cascading; tax being paid again on goods which
have already borne tax, which frequently occurs in the case of general sales
taxes.
4. Harmonized System of Taxation
Vat became popular because of its built-in advantage of harmonizing the tax
structure. It leaves very small room for interpretation. Even the entries prone
to varied interpretations, under VAT, do not make any difference either to
dealers or the Government. Ideally under VAT, there should be only one basic
rate. In any case, typically, VAT involves lowering the number of tax
slabs/rates resulting in reduction of litigation/
5. Better Revenue Collection and Stability
The Government will receive its due tax on the final consumer/retail sale
price. There will be a minimum possibility of revenue leakage, since the tax
credit will be given only if the proof of tax paid at an earlier stage is
produced. This means that if the tax is evaded at one stage, full tax will be
recovered from the person at the subsequent stage or from a person unable
to produce to proof of such tax payment. Thus, in particular, an invoice of VAT
will be self enforcing and will induce business to demand invoices from the
suppliers. Another attribute of VAT is that it is an exceptionally stable and
flexible source of government revenue. The stability of VAT as a revenue
source stems from the fact that if consumption is less volatile the income
system provides a flexible instrument of taxation, since it is collected on a
current basis. The decision about revenue can also be taken correctly as
variance in rate of tax has directed relation with revenue collection.
6. Exports
VAT frees exports from the burden of tax in that the tax paid on inputs can be
identified and recovered by the exporter. Consequently, goods enter into
international trade on an equal footing in this respect with those from other
countries.
7. VAT as an Aid to Tax Reform
A full VAT paid on importations and extending throughout manufacturing,
wholesale/distribution and retail businesses and including services
provides a wide tax base and, depending on the state of the economy, a
buoyant source of revenue. Because of this revenue-generating capability,
the introduction of a VAT can be used to reform or modify other taxation
structures. For example, high customs tariffs may be lowered, a complex
series of excise-type rates of tax simplified, or an unsatisfactory sales tax
removed.
8. Planning Skills
In order to produce good results, the introduction of a VAT, whether a full or
partial (credit) system, needs to be carefully planned. This requires the
setting up of a team dedicated to the work and allows new skills to be
developed, possibly with the assistance of consultants who have been
involved in such projects in other countries.
9. Increased Administrative Capabilities
The introduction of a VAT will require the drafting of new law and new
regulations. For the administration, this will involve the setting up of new
organizational structures, the designing of new procedures and forms, writing
of new instructions, arranging for the provision of better management
information and statistics, etc. This gives the administration the opportunity
to develop new skills and abilities which can subsequently be deployed right
across the tax systems. A necessary feature of a VAT is the introduction of
computer systems or the enhancement of those currently in operation. In
country experience may be limited in this area of work and the gradual
approach to the taxation system can be of real benefit here.
10. New Relationship with Taxpayers
In some developing countries, contacts between the administration and the
taxpayers are limited to routine control duties and to enforcement and audit
activities. Introducing a new tax allows a fresh approach to be made. Publicity
campaigns can be designed with a view to improving the taxpayers view of
officialdom. Simple explanations as to why a new tax is required and how it
will work may improve the image of the taxation authorities. Different
approaches to the education of taxpayers can be adopted, and the use of
explanatory leaflets in easily understood language and in eye-catching layout
can help. Many steps can be taken to improve the administrator/taxpayer
relationship which may lead in the longer term to improved trader
compliance.
11. Better Record Keeping by the Business Community
The control of VAT rests on the use of invoices and the keeping of records by
the taxpayers. Larger companies in most countries generally keep adequate
records, usually held on computers. Often it is the small companies,
frequently sole proprietorships that are not keeping proper records. It is these
people that are the most difficult to control effectively for the purposes of
taxation. In this connection, much will depend on the level of turnover at
which businesses are required to register for tax. If the level is set too low,
the cost of adequate control may become excessive. Good publicity aimed at
the education of taxpayers in the requirements of the tax will facilitate its
administration and can lead, in time, to a general improvement in business
procedures.
12. Use of Unique Numeric Identifiers
For a VAT it is essential that each business registered for the tax is identified
by means of an identification number unique to that business. Where a
suitable system of numbering already exists, it should be used for the VAT.
Where it does not, a system of unique numbers (incorporating check digits)
will have to be developed. Once established the VAT system of unique
numbers can be extended to other tax and associated areas. This can lead to
each business using one number for most of its transactions with
government.
13. Training:
An Essential Element of Progress A neglected area in many administrations is
training. Good training is expensive to design and carry into effect, but the
rewards are great. Work is done better and complaints are fewer; there is
greater flexibility in the use of staff whose morale and motivation are
improved. As a result, costs are reduced. To introduce a new tax with any
degree of success, staff at all levels must be well trained from junior clerks
to top management. This provides a further opportunity to improve on past
performance. In the case of VAT, experience is gained in such matters as
reviewing and re-designing training organizations, obtaining accommodation
where this is currently inadequate, obtaining modern training equipment,
preparing new course material, examining and improving training methods.
Careful selection of a central core of trainers is essential since they will be
responsible for training the staff, and some expert assistance may be
necessary. Here again, much of the training experience and the strategies
adopted for VAT can be used, after any necessary adaptation, to improve the
situation in regard to other taxes.
14. Other Benefits of VAT
The VAT avoids most of the negative features of the sales tax and excise
taxes. It removes cascading, allowing the tax content of any product to be
known with greater degree of certainty and thus leading to better resource
allocation decisions as the investment decisions can be taken independent of
the tax policies. The self policing and cross checking properties of VAT as well
as its collection in stages, leave less incentive for evasion. There is no

frequent change in tax policies allowing investors to operate in a certain and
stable tax environment. VAT simplifies tax administration and increases
efficiency in resource allocation.
Disadvantages of VAT
Despite having the above advantages, the VAT is not free from its limitations.
It has the following limitations:
1. Price Effect of VAT on Retail Price
A persistent criticism of the VAT form has been that since the tax is payable
on the final sale price, the VAT usually increases the price of the goods.
However, there appears to be an intrinsic reason as to why should have any
inflationary impact if it merely replaces the existing equal yield tax. It is
possible that the final price under the VAT system may not be more than the
price under the sales tax system. A survey of the price effect of introducing in
more than 130 countries resulted in a conclusion that in more than 80%
countries it did not alter the rate of inflation. It may also be pointed out that
with the introduction of VAT; the tax impact of raw material is to be totally
eliminated.
2. Cost of Administration to State
Another point which needs consideration is the question of the cost of
administration to the state. Because of introduction of VAT, the administration
cost to the state can increase significantly as the number of dealers to be
administered will g up significantly. However, this increase is required to be
evaluated against the likely gains under the VAT.
3. Compliance cost to the Dealers
It is argued that for compliance with the VAT provision, the accounting cost
will increase. The burden of this increase may not be commensurate with the
benefit to traders and small firms. Though under sales-tax laws, it may be
stated that a transaction of sale is liable to tax, but for the purpose of the
liability, the purchase nucleus is required to be found out. If the purchases are
from a registered dealer, it will be a resale., if purchases are from outside the
state, the sale will be a first sale. Therefore, even without the introduction of
VAT, for taxation of a sale transaction, the source of purchase has to be
considered. Under the VAT also, a closed account of the purchase will have to
be maintained. Therefore, there may not be significant increase in the cost as
compared with the
4. Increase in Working Capital Requirement
Another possible weak point in the introduction of VAT, which will have an
adverse impact on it is that, since the tax is to be imposed or paid at various
stage and not on last stage, it would increase the working capital
requirements and the interest burden on the same.
5. Regressive
Opponents of the VAT argue that the VAT, like ant other consumption basedrevenue source, is inherently regressive. Those least able to pay face the
highest overall burdens. Because it is believed that the VAT is a broad based
tax levied on essential goods and as such must be regressive. Other demerits
of VAT system are- The VAT needs a formal economy where all economic units
from importers to retailers document their transactions, and maintain
accurate records. However in developing countries, the informal economy
covers substantial trading which is not documented and registered. Moreover,
the low literacy rate may result in poor compliance of the VAT Act and Rules.
Therefore, the VAT in such countries may fail to achieve its objectives. From
the perspective of equity and justice, necessities and small units are
exempted from the VAT. Although this reduces administration costs of the
government, and the burden of compliance on the small units, such
exemption narrows the tax base, distorts the system and limits its success.
CHAPTER - NINE
Economic Effects of the VAT

The performance of the old tax system was not at all satisfactory from the
revenue point of view. While increased revenue is ever demanding for
infrastructural, social and institutional development for this poor country, the
tax-GDP ratio is only half of our neighboring countries (In India, Pakistan, and
Srilanka the tax-GDP ratio is 17, 14 and 15 percent respectively). So, though
the purpose of introducing the VAT is overall reform of indirect taxation, the
main objective of the government is to raise the revenue maintaining
possible equity and efficiency of the taxation. The various effects of the VAT
are discussed below. Price Effects of VAT The most sensitive aspect of VAT
introduction is its effect on prices. It is because of this, the policy makers of
different countries are often reluctant to introduce VAT in their countries. This
fear is essentially groundless. VAT can lead to a once-for-all increase in prices
if more revenues are desired. But there is nothing inherently inflationary
about VAT. A study on international experience involving thirty nine countries
shows that there was no price increase in twenty two countries. In the rest of
the countries, there were one time price increases. Since VAT is a very big
structural change, it often creates uncertainties in the minds of the
businessmen and the consumers the consumers anticipate inevitable price
increase, while the businessmen use the across the board tax increase to
widen profits. Prices could rise for reasons other than VAT as well, depending
on the timing of VAT introduction. Although price increases were also
apprehended in Bangladesh, the experience suggest that there has not been
any significant rise in prices that could be attributed to VAT. The Vat can lead
to a once and for all increases in prices and if more revenues are desired but
there is nothing inherently inflationary about the VAT. A study on international
experience conducted by Alan Tait of the IMF shows that out of 31 countries
there is no price increase at all in 21 countries. In the rest of the countries,
there were one time price increases. It is very difficult to find out how much
price has increased in Bangladesh due to the VAT. An in-depth study required
for this purpose. However, 5 percent and 4.5 percent inflation rates in 199192 and 1992-93 respectively in Dhaka city compared to 9.3 percent and 6.3
percent in 1989-90 and 1990-91 respective indicate no adverse effect of the
VAT on domestic price level. Another way of finding the effects VAT on price
level is to compare the consumer price indices (CPI) before and after the
introduction of VAT. For this purpose, CPI of middle income group of Dhaka
city and CPI for rural families at Dhaka are taken into consideration.
Table 9 Annual Average consumer price indices for Middle Income Group in
Dhaka City
Year
1998199920002001200220031999
2000
2001
2002
2003
2004
Food
566
606
648
684
676
679
Rate
of --7.07
6.93
5.56
-1.17
0.44
Increase
Clothing
348
374
399
410
422
431
&
Footwear
Rate
of --7.47
6.68
2.76
2.93
2.13
Increase
General
579
633
689
724
734
747
Index
Rate
of --9.33
8.85
5.08
1.38
1.77
Increase
Table 10 Consumer Price Index for Rural Familities at Dhaka
Year
199819992000200120021999
2000
2001
2002
2003
Food
449
463
493
526
516
Rate
of --3.12
6.48
6.69
-1.90
Increase
Clothing
830
936
1025
1082
1120
&
Footwear
Rate
of --12.77
9.51
5.56
3.51
Increase
General
480
510
556
591
593
Index
Rate
of --6.25
9.02
6.29
0.34
Increase
20032004
526
1.94
1151
2.77
606
2.19
Both the Tables show the rates of increase of CPI are much lower in post VAT
periods compared to pre-VAT periods. To examine the price effects VAT from
the point of view of groups of commodities, indices of wholesale of
agricultural and industrial products have been considered. Table 11 gives the
picture.
Table 11 Indices of wholesale of agricultural and industrial products in
Bangladesh
ear
1998199920002001200220031999
2000
2001
2002
2003
2004
Agricultur
1175
1276
1297
1333
1353
1437
al
Products
Rate
of --8.60
1.65
2.77
1.50
6.21
Increase
Industrial
1034
1118
1233
1303
1331
1361
Products
Rate
of --8.12
10.29
5.68
2.15
2.25
Increase
All Groups 1129
1225
1276
1323
1346
1413
Rate
of --8.5
4.16
3.68
1.74
4.98
Increase
Table 11 also shows that the rate of increase of indices of wholesale price of
industrial products is lower in podt-VAT periods though it shows slightly
different picture in 1993-94. The rate of increase of indices of wholesale price
of agricultural products of post-VAT periods show inconclusive trend. This may
be due to the fact that agricultural commodities have been kept outside the
purview of VAT. However, it is noticed that price could rise for reasons other
than the VAT as well. For example, expansionary wage and credit policies are
often associated with a price rise. Distribution Effects It is usually argued that
VAT is a regressive tax, as it is applied at uniform rate and there are few
exemptions. But it can be made progressive if the items consumed by the
rich are taxed more. In fact, the taxes replaced by the VAT were no less
regressive. VAT is not designed to correct inequities. It is a part of the overall
tax system in the country and as such the impact of VAT should be
considered in the context of the overall tax system. In fact, tax system is not
an efficient instrument for ensuring equity. If more revenues are available to
the government, equity aspect could be better taken care of by increasing
the supply of government services targeted to the poor better housing,
improved medical care and better education. Revenue Effects In the
developing countries, VAT has been acclaimed as a money machine. In India,
revenue growth was twenty eight percent, in the first year of the introduction
of MOD VAT compared with twelve percent in the year before. In Indonesia,
revenue collection just doubled during the first year of introduction of the
VAT. In Argentina, Chile, Costa Rica and Korea, the ratio of revenue to GDP
grew by fifty percent during the first three years compared with revenue from
indirect taxes replaced by the VAT. In Bangladesh, VAT has been found to be
moderately revenue augmenting during the first years of introduction. In
terms of complexity of development, demand for human resources and the
impact it will have the society, the implementation of VAT in Bangladesh will
rank as one of the most significant development projects ever undertaken in

this country. The introduction of VAT in any country poses a gigantic
management problem. The transitional issues need special attention which
often span over 3-4 years. Once the transitional phase is over, and the base
is consolidated, then the benefits of the system come into full play. It is,
therefore, imperative to strive hard to lay the system firmly in place, initiate
related changes and integrate the same into socio-economic mosaic of the
country as surely and as smoothly as possible so that the tax induced and
related distortions are removed, paving the way for industrial expansion
along economically justified lines and at the same time enough revenues are
generated to reduce external dependence and contribute to the building of a
self-reliant Bangladesh. The Vat has been acclaimed as the money machine.
Most of the countries introducing the VAT have achieved remarkable success
in internal resource mobilization. In India, revenue growth was 28.5 percent in
the first year of the introduction of MODVAT compared with 12 percent in the
year before. In Indonesia, revenue collection was just doubled during the first
year of the introduction of the VAT. In Argentina, Chile, Costa Rica and Korea,
the revenue of ratio to GDP grew by at least 50 percent during the first three
years of the Vat adoption, compared with revenue from the indirect taxes
replaced by the VAT. The VAT was in UK raising by 19 percent of central
government revenue from taxation. An al pervasive tax base and efficient
system of administration and direction helped to increase revenue
substantially. In Bangladesh, VAT is also proved to be augmenting. The
following table gives a clear picture:
Table 12 Revenue from
Head
199798
Sales tax/VAT
5359
sales tax / VAT (in million taka)

989900-01 01-02
99
00
5059 5318 1014
1116
1
5
i)
On 5359 5059 5318 1014
--imports/expor
1
ts
ii)
Locally --------2002
manufacturing
iii) Import VAT --------7892
02-03
03-04
04-05
2866
1
---
4065
0
---
4390
0
---
8987
1035
0
1740
0
1290
0
1140
0
1825
0
1425
0
1532
8
4364
iv)
--------1271
Supplementar
y duty
The table 12 shows that tax revenue has increased about 3 times in 1992-93
and 4 times in 1993-94 compared to 1990-91. The VAT on imports as well as
local manufacturing is increasing every year at respectable rate.
a) Effects on Equity, Efficiency, and Neutrality:
As mentioned earlier, VAT is a proportional tax to lifetime income. Even if it
considered as regressive, this regressive effects can be reduced by applying a
zero rate to products with a higher weight in the consumption basket of the
low income groups. Equity can be maintained by exempting necessities and
small units from the VAT. In Bangladesh, for example, wholesalers, retailers,
and the firms whose annual sale is less than Taka 1.5 million are exempt from
the VAT. For egalitarian reason, supplementary duties at different rates are
imposed on luxuries in addition to the VAT. Equity of VAT can also examined
by comparing the tren of CPI of rural-urban population after the introduction
of VAT. Table 4 and table 5 show that the rate of increase of CPI of middle
income group at Dhaka city and that of rural families at Dhaka have the
similar trends in post-Vat periods in Bangladesh. So the VAT in Bangladesh
does not adversely affect the consumption pattern of any particular group
and hence, it is equitable. However, equity of Vat from the point of view of
vertical income groups could not be examined due to data limitation. The VAT
in Bangladesh is levied at a uniform rate of 15 percent. Although, a few goods
and services are exempted from the VAT for equity reasons, it could be
argued that VAT in Bangladesh generally bears high marks of neutrality.
b) Effects on the Balance of Trade:
A destination based VAT requires a border tax adjustment, which levies the
VAT on imports and rebates the VAT on exports. This border tax adjustment is
commonly perceived as providing a trade advantage, but this adjustment
does not improve the balance of trade. Apparently, it seems that taxing
imports and exempting exports would create a cost advantage for domestic
industries that would in turn improve the balance of trade. However, this
apparent cost advantage resulting from border tax adjustments would be
quickly offset by an adjustment in exchange rate if the changes in other
macroeconomic policies do not occur. The balance of trade in Bangladesh has
been shown in table 13. The table shows that the balance of trade does not
differ significantly before and after the introduction of VAT, though it is
slightly better in 2000-01, 01-02, and 02-03 compared to 1999-2000. This
suggest that appropriate changes in macroeconomic policies are required to
have the benefit on the balance of trade from VAT and for this purpose,
further research is essential.
Table 13 Balance of Trade
Year
98-99
Export
4268.6
Import
9507.5
Balance
-5238.9
of Bangladesh (Crore Taka)

99-00
00-01
01-02
5141.5
6027.2
7419.8
11330.5
11187.7
13275.6
-6189.0
-5160.5
-5855.8
02-03
8821.5
13819.8
-4998.3
c) Effects on Investment and Economic Growth:

The VAT has increased revenue in Bangladesh and this increased revenue
could be used to reduce the fiscal deficit, reduce the public sector borrowing
requirement, allow interest rate to fall and thus stimulate investment.
Investment will be further increased as capital goods are exempted from the
VAT in Bangladesh. This resulting increase in investment wil in turn
accelerates economic growth. Table 14 shows investment stimulation in
Bangladesh.
Table 14 Investment in Bangladesh (million Taka)
Year
99-00
00-01
01-02
02-03
03-04
Investme 94427
95955
109851 135214 158937
nt
04-05
194651
05-06
221200
a) Private
b) Public
47275
47152
48562
47393
60063
49788
74406
60808
80676
78261
110172
84479
139343
81857
It is observed from the table 14 that investment in Bangladesh is increasing

over the years, and the rate of increase is higher in the post-VAT periods than
pre-VAT periods. For example, the rate of increase of investment was only 1.6
percent in 2000-01 against 23.0 percent in 2002-03 and 22.5 percent in
2004-05. However, the VAT is not the only contributor to this increased
investment. There are many factors like interest rate, govt. policies etc.,
which work behind this success. A detail study is certainly needed to see the
net effect of VAT on investment. Nevertheless this study finds a positive
correlation between VAT and investment. 13.0. Tax Reform Introduction of
value added tax (VAT) in July 1991 replacing sales tax on imports and many
domestic excises, at a rate of 15 percent of the manufacturing-cum-import
stage is a major tax reform in the country. It is argued that among others it
will raise revenue yield by increasing the tax base and improving the
elasticity of the tax structure of the country. Sales tax on import covered
under VAT accounted for about 12.2 percent of the total tax estimates for
1991/92 and the commodities previously under excise coming under VAT,
accounted for about 8.1 percent of the total tax yield. The major contributor
to the excise taxes (about 70 percent), namely, tobacco, natural gas and
petroleum were initially left out of the VAT net. Thus 60 percent of the VAT tax
yield came from sales tax on import which was already the most efficient tax
head since, once the import duty is paid, one cannot avoid paying sales tax.
Given the tax rate, tax yield under this head will be similar by whatever name
it is collected. VAT replacing excises show that it still accounts for only around
8 percent of the total tax yield and as such the tax base remains very narrow.
Unless VAT net is comprehensive it cannot achieve among other, the
objectives of being a general tax covering, as far as practicable, all goods and
services and be levied on all stages of production and distribution including
the retail stage. A piece meal introduction of VAT negates its theoretical
superiority over other tax handles because effect of an exemption prior to
final stage is accumulation of tax caused by including previously paid VAT in
the base upon which a later VAT is applied. Thus the cascading effect, which
VAT was supposed to have avoided, is reintroduced. In fact, almost all the
attributes to VAT such as being neutral, non-discriminatory between products
etc. on which it is theoretically justified to be superior to other tax systems
are completely destroyed unless it is a comprehensive one. Theoretically
there is no reason as to why the tax structure of Bangladesh should not be
elastic. Direct tax rates are very progressive while ad valorem tax rates imply
proportional tax rates for indirect taxes. Therefore, as national income
increases, yield from direct taxes should increase at a faster rate since higher
proportion of increased income would be paid in taxes. Elasticity of tax bases
should determine the overall income elasticity of indirect taxes. We have
noted that all the major tax bases of indirect taxes are elastic. Hence there is
no reason as to why even overall indirect tax yield should be inelastic. The
problem was identified to lie primarily on administrative capability. The
success of VAT, on the other hand, crucially depends on efficient
administration and developed accounting system. One need not argue about
the state of accounts keeping in ordinary transactions in Bangladesh while
poor administration is the major weakness of our tax system. Thus poor tax
administration and narrow tax base remain to be the crucial stumbling blocks
in improving our tax revenue and elasticity of the tax structure. Composition
of indirect tax yield, on the other hand, still remains similar to what it was
before the tax reform. Excise taxes still accounted for about a quarter of total
tax revenue in 1991/92 and about 70 percent of it was contributed by
tobacco, natural gas and petroleum which were left out of VAT net. VAT
replacing excise show that it still accounts for only around 8 percent of total
tax yield implying that the tax base under this head is still very narrow. To get
full advantage of VAT it should be comprehensive covering both the
production and distribution and unto the retail stage. The elasticity of the tax
system can be ensured only if it covers all sales. If the tax is truly general, no
matter what part of the economy is expanding, the VAT will respond at once
to that activity. During a transitional period, such as the one Bangladesh is
passing through now, a zero rate of tax at the retail stage or to goods and
services that are to be exempted from paying taxes may be imposed. This is
a technical device to operate a complete VAT structure while still exempting
some commodities entirely from tax. The zero rates is an actual tax rate of
the VAT, the same as 15 percent, 10 percent etc. Thus, the credit offset on
purchases can be claimed against the liability i.e., zero. On the other hand, a
good which is exempt cannot claim any credit and has no tax liability against
which to offset it and thereby pays tax on input which must be wholly passed
on or absorbed. In this way, the zero rates allows consumers complete
exemption because, for instance, the retailer can claim full amount of tax he
has paid on his input and, therefore, pays no tax, while all the previous
stages have passed their tax liability fully forward. Initially it will involve the
required cost of administration without yielding any revenue. But this will
bring all economic activities under the VAT system which will help achieving
the ultimate objective of having an elastic tax system for the country.
Inevitability of the imports as a tax base was reinforced when value added
tax (VAT) was introduced in the country. In relation to the domestic
production, excises, and in relation to the imports, sales tax and development
surcharge were replaced by a very simple form of Value Added Taxes in 1991.
Introduction of VAT was the result of global popularity of the system as a
modern tax and the increasingly felt need for harmonization of the tax
systems across the world. It is interesting to note that the replacement of the
sales taxes and the DSC at the import stage by the VAT resulted in a higher
effective rate of duty, but went rather unnoticed for obvious reasons.
However, the single flat rate of VAT is ideally simple in nature, but
inconsistent with the broader policy of differential treatment of different
commodities for obtaining non-revenue socio-economic goals of the nation.
VAT at the import stage confirms the inescapability from the foreign trade
bias of the prevailing tax-structure. Starting with Caves who analyzed
Canadas Tariff structure from a political decision making perspective, various
alternative tax reform models have been developed for explaining the
existing tax structures. On the face of it, the reform activities in Bangladesh
illustrates an environmental dependency model where the changes occur in
response to the political and economic environment in the context of which
the tax policy makers operate. But a deeper analysis reveals a Niskanian
rational model where the individual bureaucrat is assumed to be rational
actor seeking to maximize personal gain and self-interest in course of day to

day activities. In this light, tax reform in Bangladesh, appears of to be mainly
the product of bureaucratic polity who seeks to protect their position by
minimizing the political cost of tax program while preventing a budget shortfall. They are constrained by the nexus of the political-government and the
income-earners cum consumers as the interest groups. Any substantial
reform would that the political government affords to break this nexus and
comes forward with reform package purported to make a breakthrough in
revenue mobilization. In a variant of this model, it has been suggested that
minimization of political cost may be considered an objective function of the
governments. Political cost in essence is the untoward possibility of
displacement from authority. Any political regime coming to power through
an illegitimate way is destined to face significant level of threat. Given that
the power regime is aware of it, it has been asserted that some political
behavior organized around the goal of risk reduction is quite likely to take
place. In the prevailing circumstances, the foremost target of any revenue
augmenting reform would be to set up a long run pattern of revenue growth
which is not lower than the growth of national income and in addition,
commensurate with the annual growth of the expenditure budget. The long
run trend should be at such a level that any minor fluctuation would not
threaten with a budget deficit and would not call for ad hoc fiscal measures.
This would require a linkage of the tax to its base and choosing a base which
is well linked to the growth of national income. After a successful linking of
the taxation mechanism with the growth of income, comes the second target
of harmonizing the tax program with the broader socio-economic objectives
of the country. Operationally this would require comprehensive rationalization
of the tax structure in conformity with the national plans for growth and
development. This would demand an integration of the tax planning with the
tax policy making. This integration would be required at the official level and
would call for re-organization of the entire tax policy sector. Unless such steps
are taken, it is feared that the formulation of reform oriented tax policy would
continue in the traditional incremental pattern and the source of the problem
would continue to exist. Finally, any major revenue augmenting tax reform is
expected to raise the tax liability of the people in direct or indirect way. This
would, therefore, require political will and capability of a stature that
transcends the capacity of the bureaucratic polity. Consequently, unless there
is a political leadership of the reform movement, it is unlikely that any
worthwhile reform program will materialize.
CHAPTER TEN
Why VAT?
A striking feature of recent tax reforms world-wide has been the steadily
growing number of countries adopting the Value Added Tax (VAT). Since the
1960s, more than 60 industrial and developing countries have embraced the
VAT and it has become the main consumption tax across the globe. 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. VAT
does not influence the methods of doing business, it ensures neutrality in
international trade by freeing exports of tax, treats import and domestic
goods the same, and is much harder to evade in comparison to other
consumption taxes. There can be no doubt about the significant advantages
to be gained from the introduction of VAT. This is borne out by many of the
studies carried out in countries which have introduced it, showing a growth in
revenue yield and stimulation of the economy. If a developing country needs
to review its taxation strategy, the use of a VAT as a first step should be given
serious consideration. The widespread use of this tax in highly industrialized
and developing nations alike indicates that it has a basic effectiveness that
cannot be ignored. However, it is not a simple tax, and needs care in its
introduction and administration. There is much to be said for making a virtue
of necessity, and if it is decided to adopt a VAT then the opportunity should
be taken to upgrade the government department which is being made
responsible for its administration. The benefits of all the introductory work
(improved procedures, forms design, computer systems, training, publicity
campaigns, etc.) can then not only produce a better performance of the tax
itself, but can also serve as a valuable guide and example to be used to carry
out improvements in the working arrangements of other taxation regimes in
force in the country. Furthermore, an effective VAT can, in time, lead to
improvements in record keeping and reporting by businesses which benefits
the whole of the trading community. In introducing a VAT many countries
have encountered serious difficulties due to two main causes. The first is that
the basic tax structure has been made too complex, e.g. too many rates of
tax, too many exemptions from tax, etc. The second is that the administration
has found itself unequal to the task of making the tax operate with a
reasonable degree of success.
VAT AS AN INSTRUMENT OF TAXATION POLICY Taxation forms only one part of
the economy of a country, and the proportion of gross domestic product
(GDP) it absorbs will vary according to the requirements and dictates of the
state. What is certain, however, is that an adequate and assured flow of
revenue is essential to any government. This is perhaps particularly true in
those cases where industrialization remains limited, domestic savings are too
small to provide sufficient investment for economic growth, and terms of
trade are adverse with balance-of-payments difficulties arising. Such
problems are often of concern to developing countries, and therein we
examine the position of Value Added Tax (VAT) as a factor in their taxation
strategies.
A GRADUAL APPROACH TO CHANGES IN TAXATION STRUCTURE 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.
THE ADVANTAGES FOR DEVELOPING COUNTRIES In the case of developing
countries, the approach recommended has many advantages. The likely
outcome of the exercise can be more accurately assessed and, because the
number of potential VAT taxpayers is likely to be fewer, the workload imposed
on the administration is much reduced. As an introductory measure, the
adoption of a VAT can be extremely valuable in carrying through subsequent
changes in other areas of taxation.
VAT and the Tax Yield

VAT AS A PROPORTION OF TOTAL TAXATION The revenues arising from the
imposition of VAT can be considerable and, in those countries in which it has
been introduced, it has provided a large proportion of the total tax yield. In
the case of the European Community (EC), the percentage of total revenue
provided by VAT in 1988 varied between member states from over 14% to
over 24%. The tax also formed a considerable proportion of GDP, between
over 5% and over 9% (ignoring Portugal and the Netherlands). In Bangladesh
VAT (local and import stage including supplementary duty) constituted about
44% of total tax revenue in 1995-96. THE IMPORTANCE OF INDIRECT
TAXATION The position of VAT in the taxation systems of developing countries
is not so clear, as separate figures for that tax are not readily available.
Nevertheless, figures available, related to domestic taxes on goods and
services, and taxes on general sales or on turnover, or VAT show wide
variations, but clearly emphasize the importance of indirect taxation in the
economies of developing nations. The indications are that the adopting of VAT
could, in some instances, facilitate revision of certain excise-type taxes and
also those imposed on particular types of services.
Obstacles and the Objectives of VAT
OBSTACLES
FACING
THE
REVENUE
ADMINISTRATIONS:
inefficient
management and organizational systems; weaknesses in revenue collection
procedures; un-consolidated or inconsistent legislation; evasion and
corruption; information systems handling risk profiling; inadequacy of staff
incentives, and shortage of skills and training.
OBJECTIVES: strengthening the organization and administration management;
improving duties and tax collection; introducing information technology
solutions; drafting laws and regulations; improving staff terms and condition,
and facilitating the movement of goods.
Revenue Administration Modernization and Reform Program
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 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 governments to carry out their functions efficiently. To deal with
such problems, and to strengthen enforcement and investigation measures
following steps can be useful: introducing new administrative, supervisory
and auditing procedures; introducing risk analysis and profiling techniques;
improving the co-ordination and exchange of information, both in-country and
internationally; improving the quality of recruitment, remuneration packages,
promotion and personnel practices; introducing improved collection systems;
enhancing detection and investigative system and procedures, and designing
and delivering appropriate training programs. Training is a fundamental

component of capacity building, being a mechanism by which knowledge,
experience, skills and technology is transferred; creating indigenous ability to
take control and continue to develop functions independent of external help.
For this reason a strong training component embracing a variety of
techniques from seminars, classroom learning, and distance learning
packages, through to on-the-job training by the utilization of counterpart staff
during all stages of development is necessary.
Legislation
To ensure that the revenue collection and administration legislation is
adequate to enable the Income Tax, Sales Tax/Value Added Tax, and Customs
and Excise Departments to undertake their delegated responsibilities
effectively, and prepare amendments where shortcomings exist.
Development Planning
To define an administrative and operational framework for the organization
around which the program of reform and modernization will develop.
Prganization & Structure An analysis and where necessary, modification of
the structure and prganization to ensure that it can meet the requirements
placed upon it.
Business Process Re-engineering/Personnel/Instructional Manuals
A thorough review of all operational and administrative issues designed to
reflect the objectives of the Revenue Department to enable change to take
place efficiently, effectively and with the support of staff at all levels within
the organization. Automation Design, development and implementation of a
program of automation that will optimise the efficiency of the organization
and ensure that all relevant information is captured and utilized effectively.
Anti Corruption Activities
Implementation of specialist teams with the objective of targeting areas of
abuse and ensuring that corrective action is implemented, and that revenue
collection is enhanced in the short term. Investigation Development of an
effective Investigation Division to operate within the organizational
framework of the Revenue Department. Enforcement Implementation of
effective enforcement procedures throughout the organization. Publicity
Development and implementation of publicity program designed to inform,
educate and demonstrate the transparency of the organization.
Internal Audit
Creation and training of an Internal Audit Department designed to ensure that
all procedures and controls are properly and correctly applied by all staff in
the organization.
The VAT Modules
The basic modules comprise:
Registration and De-registration
Return Processing
Automatic Processing of Penalties, Assessment and interest
Trade Accounting
Visits to Traders
Control and Verification
General Equilibrium Formulation of the VAT System

The theory of value added tax (VAT) suggests three broad types of value
added taxes which differ in their treatment of capital goods and depreciation
of the capital stock in calculating respective tax bases (Ferh et al, 1994 and
Shoup, 1990). These are consumption, income, and gross product type VAT.
For instance, under the consumption type, each firm computes its tax base
by subtracting all its purchases of intermediate and capital goods and
depreciation of the capital stock from its total sales. The tax base for an
income type VAT is calculated by deducting purchases of intermediate inputs
and depreciation of the capital stock from total sales. The gross product type
VAT base is computed by subtracting only the purchases of intermediate
inputs from total sales. The purchases of capital goods and depreciation are
not subtracted. Thus the difference between the three types of value-added
tax bases is in their treatment of capital goods and depreciation of the capital
stock. Under the consumption type VAT, both purchases of capital goods and
depreciation are deductible. In the case of income VAT, only the depreciation
of the stock is subtracted. The deduction of purchases of capital goods or
depreciation is not allowed under the gross product type VAT. Sullivan (1965)
argues that three concepts of national income accounts are related to the
three bases suggested for the value-added tax. These are: personal
consumption expenditures; national income proper; and gross national
product. The corresponding tax bases are the consumption-type, income-type
and gross product-type respectively. To show the linkages between national
income accounts and the tax bases, Ferh et al (1994) consider a closed
economy at an aggregate or macro level. At an aggregate level, total sales
minus total outlays on intermediate inputs yields the gross national product.
Purchases of capital goods are equal to gross investment expenditures (net
investment and depreciation). When gross investment is deducted from gross
national product, one obtains aggregate consumption as the aggregate tax
base. Under the income VAT, only the depreciation is subtracted from gross
national product. In this case, the aggregate tax base equals aggregate net
value added or national product. In the case of gross product type VAT, gross
investment is not deductible from gross national product. The aggregate tax
base, therefore, equals the gross national product. With respect to
international trade taxation, two distinct principles are in operation (Ferh et
al, 1994 and Shoup, 1990). Under the destination principle, exports leave a
country free of any VAT, while imported commodities are subject to (import)
VAT at the rate applied to comparable domestic goods. The destination
principle ensures that commodities are taxed in a country where they are
consumed (the country of destination), regardless of the country where they
are produced. Exports are zero rated under this principle. This means that no
VAT is charged on export sales, and that VAT on all inputs used in the
production of exports is rebated. In contrast, under the origin principle there
is no rebate for VAT on exports, and imports are not taxed in the importing
countries. If this principle is applied, commodities are taxed in the country
where there are produced, regardless of the country where they are
consumed. There are three methods by which a taxpaying firm can assess its
tax liability. These are subtraction, tax credit and addition. However, tax
credit method is widely used as it is compatible with consumption VAT
system. Almost all countries that have introduced the value-added tax
system, adopt the consumption-type VAT because it is easier to compute and

all purchases including purchase of capital goods from other firms are
deductible from a firms sale (Shoup, 1990). However, certain countries such
as Argentina, Peru and Turkey have adopted the income type VAT. On the
other hand Finland, Morocco and Senegal have employed a gross product
type VAT. The gross product VAT, as it does not allow deduction of both
purchases of capital goods and depreciation, discriminates against the use of
capital goods which perhaps explain its restricted use (Shoup, 1990). The
developed and semi-industrialised economies mostly use the VAT system in
its comprehensive form. A comprehensive VAT refers to a system that
includes producers, wholesaler and retailers. The Government of Bangladesh
introduced the value added tax (VAT) in 1991. Like many developing
economies, the VAT is restricted to domestic manufacturing activities and
imports. The VAT system introduced in Bangladesh is of the consumption type
and is based on the destination-principle. Thus, all imports and domestic
production, excluding primary agriculture type products and most services,
intended for final consumption, are subject to VAT. In accordance to the
destination-principle, exports are zero-rated. This means that no VAT is
charged on export sales, and that VAT and other indirect tax on all inputs
used in the production of export goods is rebated. The VAT is consumptiontype since all VAT paid on intermediate inputs and capital machinery is
creditable against VAT payable on the sale of domestic output. To incorporate
the VAT system in the model, we start with revenue specification of the VAT
system. Under the VAT formulation, the excise duty on domestic
manufacturing activities and sales taxes on import are replaced by VAT, and
the VAT paid on intermediate and capital goods are credited to the domestic
manufacturers as offset against the VAT on domestic output. Thus, only the
domestic sales are subject to the VAT and there is no VAT on intermediate
and capital inputs. In a generalized framework, assuming that domestic sales
equal the sale of the its manufactured product and that the VAT paid on
composite intermediate inputs are rebated against the VAT on domestic sales,
revenue under the VAT system (VATREV) equals:
(I) where, is the uniform value-added tax rate. The first component of the
above equation denotes revenue from domestic VAT base; second part shows
the VAT from the imports and the third component captures the rebated
amount of VAT paid on composite intermediate inputs. The government
income equation of the model incorporates revenue from the VAT system (i.e.
VATREV).
(II) The rebate or credit mechanism is specified through the composite
intermediate input price equation. The adjusted composite intermediate input
price is defined as:
(III) The second part of the right hand side of depicts the amount of VAT paid
on composite intermediate inputs which are deducted from the gross price of
composite intermediate inputs. The domestic price of import is also modified
by the value added tax payable on c.i.f. imports:
(IV) The other price that is directly influenced by the VAT system is the
domestic sale or activity price. Thus, the domestic sale or activity price is
adjusted to include the VAT specification
(V) Subject to the condition that when, and when, so that, the VAT and excise
duty can not be applied on the same product simultaneously. The export
supply equation is also modified to include the value added tax;
(VI) Similarly, in order to incorporate the supplementary duty, all the above 6
equations are modified to represent supplementary duty into the system.
20.0. Conclusion Effective management of VAT will do away with multiple
levies like Entry Tax, Turnover Tax, Additional Sales Tax, Surcharge, CESS,
Octroi etc. There is no place for any other kind of taxation. One window tax
reduces the collection cost to the States with easy compliance by taxpayers.
In view of the anticipated advantages over a period of time all states and
Union Territories including special category states have in principle agreed to
shift to VAT from April 1, 2003.
Conclusion
However, some of the states are still attempting to push forward the deadline
as this will allow all states to effect the transition to VAT at the same time.
This will also provide some more time to the central government to amend
central sales tax act, bring legislative changes for implementation, taxation
of services at state level and settlement of procedure for compensation to
states on account of losses in revenue collection due to implementation of
VAT. The delay would also give the states more time to put administrative
arrangement into place and training employees for the new system. Clearly,
there is a need to popularize the scheme of VAT through persuasion, allaying
the genuine fears of all the parties. New regime will be theoretically superior
to the existing regime known to all. If effectively implemented, it will ensure
greater transparency. It will also have the great merit of being simpler to
monitor. Even from the revenue angle, it should increase the revenue in the
hands of the State Governments.

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Department of Accounting

(Value Added Tax)

At first I would like to express my gratitude to the almighty Allah. It is

This is to certify that Nilima Akther a student of BBA (Honors)

Treatment of Small Firms

We did not have so much experience for conducting research and

Value Added Tax (VAT)

Introduction of VAT in Bangladesh

agencies including the various leading Chambers of Commerce and Industry

standard tax rate of 15% the share of VAT as a percent of non-agricultural

Commissionerates has five to eight divisions which are headed by Divisional

Total revenue receipt

Tax Expenditures in Bangladesh

government spending towards preferred taxpayers channeled through the

Tax Expenditure Measures under Direct Taxes

remuneration of diplomats and foreign employees of an embassy, income of

VAT System in Bangladesh

As percentage of Gross Domestic Products (GDP)

(c) Tax Management

penalty reduced in FY2006-07 to a minimum of half and maximum of the

(In crore Taka)

Table 6: Item-wise Revenue Collection for FY 2006-07

The Tax Structure for Individual Tax Payers

Persons enlisted shall maintain accounts of daily buy-sale transactions in

Tax revenue constitutes more than 80% of government revenue receipts.

The Salient Features of the VAT in Bangladesh

at 4 per cent instead of a VAT at 15 per cent. In addition, supplementary duty

manufacturer supplier is liable to pay the VAT. In case of a service, it is the

Requirement for Registration

Advantages of VAT Concept

as its collection in stages, leave less incentive for evasion. There is no

Economic Effects of the VAT

rank as one of the most significant development projects ever undertaken in

sales tax / VAT (in million taka)

of Bangladesh (Crore Taka)

c) Effects on Investment and Economic Growth:

It is observed from the table 14 that investment in Bangladesh is increasing

actor seeking to maximize personal gain and self-interest in course of day to

VAT and the Tax Yield

and delivering appropriate training programs. Training is a fundamental

General Equilibrium Formulation of the VAT System

system, adopt the consumption-type VAT because it is easier to compute and

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