Value Added Tax Act, 1991 vs Value Added Tax and Supplementary Duty

Act, 2012: A Comparison

Dr. Md. Abdur Rouf

The Value Added Tax Act, 1991 was introduced in Bangladesh in July, 1991. It is in vogue in
Bangladesh for the last 22 years. During this period, a number of distortions gradually have
creped into the system; namely: cascading effect, tariff value, truncated value base, Maximum
Retail Price-based value, price declaration, Advance Trade VAT (ATV) at import stage,
definition of services, deduction of VAT at source etc. In conformity with the sixth five-year
plan (2012-16) of the government, NBR adopted a modernization plan in 2011, a component of
which was reviewing of the taxation laws to eliminate these distortions and to establish standard
taxation system in Bangladesh. In that process, drafting of a new VAT law started. It was felt
that introduction of a VAT system with all modern features is a necessity. Input tax credit
mechanism is the very basic of a modern VAT system. A person pays VAT on his purchased
inputs. He makes value addition on the inputs processing those. He pays VAT on the total sale
price with value addition. He takes credit of the VAT paid on the inputs. Thus, he ultimately
pays VAT on the value addition at his stage. This is the beauty of a standard VAT system. In
each stage, VAT is paid on the value addition only, thus tax component does not heavily fall
upon any stage; rather it is distributed among all the stages of production and sale. Making the
input tax credit mechanism operational across all economic activities is all about setting up of a
standard VAT system. Under the present Value Added Tax Act, 1991 the operation of the credit
mechanism has been largely stalled in many areas of the economic activities because of those
distortions. So, the VAT and Supplementary Duty Act, 2012 had been adopted to lay down a
system where the input tax credit mechanism will operate across almost all economic activities
which is a prerequisite of a standard VAT system. It took more than two years to finalize the
draft VAT Act. Experienced officers from NBR, Law Ministry, international experts, business
community and other stake-holders were involved with the preparation process. While the draft
was placed to Cabinet, a high-level committee was formed headed by the Economic Affairs
Adviser to the Prime Minister to review the draft. And finally Parliamentary Standing Committee
on the Ministry of Finance did the review being instructed by the Parliament.

The VAT and Supplementary Duty Act, 2012 had been passed by the Parliament. The people
have enough curiosity about what are in the new Act and how is the new law different from the
earlier one. Therefore, in this article, an effort had been made to present a comparison between
the Value Added Tax Act, 1991 and the Value Added Tax and Supplementary Duty Act, 2012 so
that people understand the basic differences between the two. Since this article aims at
presenting to the readers the basic ideas and concepts of the Value Added Tax and
Supplementary Duty Act, 2012 making a comparison with the present VAT Act; so, for the
reasons of simplicity references from sections of the Acts will not be mentioned in this article.

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The title of the new Act has been changed from the previous one. Title of the previous Act is
Value Added Tax Act, 1991. But the title of the present Act is Value Added Tax and
Supplementary Duty Act, 2012. Under the VAT system of Bangladesh, three taxes are collected;
namely: Value Added Tax (VAT), Supplementary Duty (SD) and Turnover Tax (TT). The same
is true with both the Acts. So, the Parliamentary Standing Committee on the Ministry of Finance
felt that it is necessary to add Supplementary Duty with the title of the new Act. The Value
Added Tax and Supplementary Duty Act, 2012 has a wider base compared to the previous one.
This Act imposes VAT at import stage, production stage, trading stage, on rendering of services
and on import of services and on immovable property, lease, grant, license, permit, rights,
facilities etc. Thus the base of VAT has been expanded. In the Value Added Tax Act, 1991, VAT
was imposed on imports, production, trading and services. Price declared by the VAT-payers and
approved by the VAT authorities was the basis of VAT under the Value Added Tax Act, 1991 in
most of the cases but under the new Act transaction value will be the basis for imposition of
VAT. This will be in conformity with the best international practices. The new Act has abolished
the provision of declaring prices of the goods and getting it approved by the VAT authorities.
Instead, it stipulates maintenance of input-output co-efficient by the VAT-payers on the basis of
which audit will be done later by the VAT authorities. Submitting price declaration and getting it
approved by the VAT Divisional Officer is a major difficulty to the VAT payers presently, which
has been done away with under the new law.

Sometimes, the sellers require to sale their goods at discount prices. Under the present law, there
are three conditions to sale at discount prices. Those are: (1) it has to be advertised in a national
daily where and when discount sale will be conducted; (2) the discount must not exceed 15
percent of the declared and approved value; and (3) in 365 days, one can not sale at discount
prices more than 30 days. Under the new law, all these provisions have been done away with.
There is no time limit for discount sale. So, under the new Act, discount sale procedures have
been business-friendly. Truncated value base and tariff value are the major distortions under the
present VAT system. These distortions hinder the operation of input tax credit mechanism across
business activities, thus thwarts the development of a standard VAT system. Under the new Act,
there is no provision for tariff value and truncated value base. This will help to develop a
standard VAT system in the country. There has been change in the time of payment of VAT
under the new law. Under the new law, VAT is payable in all cases before submission of return
which is business-friendly. Under the present system, in the case of services who do not take
input tax credit, by them VAT is to be paid before submission of return but in the case of goods
and in the case of services who take input tax credit, VAT requires to be deposited to the
government treasury in advance and keep balance in the Account Current Register from where
VAT is to be deducted while making supply. But under the new law, there will be no Account
Current Register. All registered persons will require paying VAT while submitting their return
but not in advance through Account Current Register. So, it will be business-friendly.

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In the new VAT law, the scope of input tax credit has been widened. Provisions have been made
so that on almost all raw-materials, input tax credit can be taken. But under the present VAT
system, broadly: land, building, office-equipments, vehicles and labor are not considered as
inputs; so, credit is not allowed on these elements. Moreover, Section 9 of the VAT Act, 1991
lists a number of items where input tax credit is not allowed. The new law liberally allows input
tax credit on almost all elements that will be business-friendly, in conformity with the best
international practices and helpful to establish a standard VAT system in Bangladesh.

The new system will introduce single VAT registration number for all units and centers.
However, if in any unit or center accounts are maintained separately, then separate VAT
registration number could be issued for that unit. This will ensure ascertaining the actual tax
liability of any person globally and facilitate smooth businesses. Under the present system,
establishments require to take VAT registration at every place. However, there are provisions for
central VAT registration of a producer who sells through different sales centers and a trader who
has multiple sales points and a service renderer who renders services through different centers.
But multiple producers under same ownership are not allowed central VAT registration
presently. Under new law, multiple producers at different places under same ownership will get
central VAT registration. Thus, under the new system, the scope of central VAT registration has
been widened to the advantage of the VAT payers, since it will reduce their compliance costs
and soften regulations on their activities. VAT Challan presently requires sending to the VAT
Circle Office within five working days of the issuance. Under the new system, this will be done
away with to the advantage of the VAT payers. Data will be stored and processed in an
automated system. So, sending Challan to the VAT Circle Offices will no longer require.

Small and medium enterprises have been encouraged under the new Act. Any enterprise with Tk.
2.4 million or below annual turnover will remain out of the purview of the new VAT system.
Thus, small enterprises will not require complying with VAT procedures. Establishments with an
yearly turnover exceeding Tk. 2.4 million but not exceeding Tk. 8.0 million will require to pay 3
percent turnover tax. This will allow them to compete with large-scale enterprises. Under the
present system, 3 percent turnover tax is to be paid by them whose yearly turnover does not
exceed Tk. 7.0 million. Only few types of establishments enjoy cottage industry benefits under
some conditions presently. So, Tk. 2.4 million lower level exemption threshold will be of great
advantage to the small enterprises under the new Act. They will not require complying with any
VAT procedures. Moreover, presently, turnover tax payers are not allowed to import but the new
law allows them to import.

Under the present system, VAT returns require to be submitted to the VAT Circle Office.
Presently, returns can not be examined properly because of manual submission and processing.
Under the new system, all VAT returns will be centrally processed that will ensure exhaustive
processing, ensure services to the VAT payers and effectively detect evasion. Under the present
system, with few exceptions, return is to be submitted within 15 th day of the next month. This
time bar can not be withdrawn or extended. But the new system will allow the Commissioner to

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extend time limit for return submission on application of the VAT payers. Payment of VAT also
can be deferred by the Commissioner on some grounds on application by the registered persons
especially in cases of natural calamities. Such provisions are not there in the current VAT law.
However, the late payers will have to be pay with 2.0 percent monthly simple interest. At
present, VAT is to be paid through Treasury Challan only. But under the new system, through
Treasury Challan, bank cheque and through on-line, one will be able to pay VAT. Thus, the new
system of payment will be safe and tax-payer friendly. Under the new system, tax can be paid in
installments if allowed by the Commissioner on application of the tax-payer on the grounds of
natural calamities. The present system does not have any such provision of deferred payment on
installment basis.

The concepts of progressive and periodic supply have been specified under the new Act. This
will be administratively easier. Telecommunications services are a new dimension of today’s
life. In the present Act, there is no special mention of the concept but in the new Act the concept
has been specially treated to accommodate all intricate realities that will be administratively
easier and business-friendly. In the same manner, lottery, lucky draw, raffle draw, or other
similar ventures have been brought into the folds of the new law. Moreover, provisions have
been inserted about providing facilities to the employees in kind other that cash. Provisions have
been made regarding payment of VAT while selling through vending machine, meter or any
other electronic machine that operates through token or note. Special provisions have been made
with regard to services of travel agents and tour operators across national boundaries to ascertain
the taxability of some services and to exempt some other services on global basis.

In the new Act, residents and non-residents have been clearly differentiated and clear provisions
have been inserted making some of their supplies taxable and some zero-rated. Provisions have
been inserted in the new law regarding single and multiple supply and going concern which was
not there in the present law. For non-residents, there will be VAT Agents appointed by the NBR.
The VAT-Agents will perform all VAT related functions of the non-residents. Provisions have
been made regarding imposition of VAT on second-hand goods in the new law. In the present
law, there is no such provision. Under the new system, NBR will publish list of all VAT
registered persons. Having seen the list, the people will be able to know whether his counterpart
is VAT-registered or not. This will be taxpayer friendly. The present system does not have any
such provision.

Under the present system, return once submitted can not be revised but under the new Act on
permission from the Commissioner on application by the VAT payer, revised return can be
submitted that will be business-friendly. Regarding offences and penalties, there have been some
new insertions in the new Act. Departmental proceedings and proceedings of offences have been
differentiated. The offences will be tried by Judicial Magistrate or Metropolitan Magistrate.
Offences have been made non-cognizable and compoundable under the new system.

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Compoundability will help to settle the cases on negotiation. Presently, the Appellate Tribunal
does not have any authority to issue stay order on the realization of taxes where the case is under
trial. Under the new system, the Appellate Tribunal will have such authority. This will be tax-
payer friendly. This will encourage people to settle their disputes at this level of trial. To file
appeal to the High Court, 10.0 percent of the tax due or monetary penalty imposed has to be
deposited under the new system. This will encourage settling the disputes at the lower tiers of
adjudication.

The duty drawback mechanism of the present system will be largely overhauled under the new
system. Presently, Duty Exemption and Drawback Office (DEDO) gives drawback. Under the
new system, drawback will be given by the Commissioners. Refund as well will be given by the
Commissioners. This will lessen difficulties to obtain drawback and refund. To realize arrears,
powers of the VAT officers will be enhanced under the new system that will help reduce arrears
and increase revenue. The Directors of a company will remain liable for any arrear of the
company for a period of 5 years jointly or severally under the new law that will help realize
government arrears.

In the new law, provisions are there regarding seizure of only Supplementary Dutyable goods but
under the present law all goods can be seized. Under the new system, emphasis will be given on
documentary prevention of revenue evasion but under the present system, besides documentary
prevention, there are enough scopes for physical prevention of revenue evasion that is not tax
payer friendly. The new system will function on the basis of information technology. Many of
the activities will be outsourced and tax payer service center will operate centrally to give the
people one-stop, uniform explanations regarding any VAT-related issue.

The VAT base has been expanded squeezing exemption facilities under the new system. The
new law allows exemptions only to meet urgent needs and only government is empowered to
allow exemptions. Exemptions once given will remain effective till the next Finance Act is
passed. If it is not incorporated in the next Finance Act, the exemption order will automatically
be cancelled. Under the present law, NBR enjoys power to allow exemptions which has been
curtailed in the new Act. This will ensure level playing field of the tax payers and will contribute
to the increase of revenue.

The new Act will come into full effect from hopefully July 2015. By this time, preparatory works
i.e., automation of the VAT management system and education of the tax payers and tax
collectors will be done. The NBR is now working to develop an Implementation Plan
encompassing organization, staffing, information system, business process, tax payer services
etc. Hopefully, when the new Act comes into force in July, 2015 within a new environment of
modern and sustainable VAT management, revenue will be significantly increased and tax
payers will get required facilitating services from the VAT management i.e., there will establish
a revenue-friendly and business-friendly VAT management system in Bangladesh. Let us look
ahead.

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 (To know more about VAT, please visit: www.vatbd.com)
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Dr Md Abdur Rouf is First Secretary, Value Added Tax (VAT), National

Board of Revenue (NBR). He can be reached over e-mail: [email protected]