Report on VAT in Bangladesh


Taxation one of the major sources of public revenue to meet a country’s 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.


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.


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.


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 researcher’s 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.


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 government’s 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 President’s 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.

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 non-essential 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 2000-01, 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 taxpayer’s 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







VAT Collection






Growth in VAT Collection






VAT collection as percentile of total revenue







Total revenue receipt







 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 channelled through the existing tax system, besides direct expenditures of the government. Thus, it is necessary for a government to analyse 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 or 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.

Value–Added 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.

 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

  1. 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)


Total Revenue / GDP

Tax Revenue / Total Revenue

72/73 – 74/75



75/76 – 79/80



80/81 – 84/85



85/86 – 87/88



88/89 – 90/91*



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 loan’s 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    Billion Taka

NBR Tax Revenue FY2001FY2002FY2003FY2004FY2005
Income tax36.041.047.952.758.5
Import duty47.753.558.873.080.0
Excise duty2.
Supplementary tax33.638.543.954.356.0
Other tax and duty1.
Total NBR tax 183.0207.3237.5270.5305.0
Non NBR tax Revenue
Narcotics duty0.400.300.350.400.45
Vehicle tax1.441.452.252.412.67
Land revenue2.
Non judicial stamp7.928.117.347.108.12
Total Non NBR tax revenue 11.9012.0012.0012.5014.50
Non Tax Revenue
Dividend and Profits7.7411.628.3210.5411.65
Administrative fees10.228.727.799.649.88
Service fees2.562.744.724.824.33
Non commercial sales2.132.522.963.102.64
Telegraph and Telephone board12.6016.0316.0017.0216.50
Other non tax revenue7.427.3810.5113.8516.35
Total non tax receipts 46.8357.4061.7071.0072.50
Total revenue receipt 241.73276.70311.19354.00392.00

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 FY2001-02. 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.)





















Total Revenue












Tax Revenue












Non-tax Revenue












As percentage of Gross Domestic Products (GDP)

Total Revenue












Tax Revenue












Non-tax Revenue












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 parlour, 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 Collection

FY 2004-05

FY 2005-06

FY 2006-07

Import Duty




VAT (at import level)




Supplementary Duty (at import level)








Excise Duty




VAT (Local)




Supplementary Duty (Local)








Income Tax




Other taxes and duties




Grand Total




Source: National Board of Revenue (NBR).

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

Supplementary Duty                16.1%
Excise Duty




Other taxes and duties


Import Duty


Income Tax


 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

72/73 –


75/76 –


80/81 – 84/85

85/86 –


88/89 –


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/ Domestic Tax






II. Taxes on Domestic







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 lion’s 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 VAT-registered 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 All-India 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 Commission submitted 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 self-employment can use a one-page tax return to be submitted only under ‘self-assessment’ 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 #

Service Code #

Service Provider

Rate of Deduction (%)

S 003

S 003.10

Garage and workshop of motor car



S 003.20



S 004

S 004.00

Construction Contactor/Sangstha


S 007

S 007.00

Advertisement Organization: Government, Semi-Government, Autonomous Body, Nationalized Bank and Insurance Sector




Private Organization, Non-Government Sangstha (NGO), Private Bank & Insurance, Limited Company, Any Sangstha or Person






S 008

S 008.10

Printing firm/organizations


S 020

S 020.00

Survey Sangstha


S 032

S 032.00

Consultancy and Supervisory Firm


S 033

S 033.00



S 034

S 034.00

Audit and Accounting Firm


S 037

S 037.00

Procurement Service Provider


S 048

S 048.00

Transport Contactor:




For carrying Petrol and Petroleum goods






S 049

S 049.00

Transport rent provided


S 053

S 053.00

Participants of Board Meeting


S 060

S 060.00

Buyer of Auction Goods


S 065

S 065.00

House clearing and maintenance organization


S 066

S 066.00

Lottery ticket seller


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 next Tk. 325,000.00 of total income – 15%

      On the next Tk. 375,000.00 of total income – 20%

      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 accding 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 form’Mushak-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


FY 2002

FY 2003

FY 2004

FY 2005

Revenue as percentage of GDP






Tax revenue as percentage of GDP






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 consumer’s 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.

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, tax-payers 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


      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

 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 anti-cascading 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 taxpayer’s 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. 11.0. Disadvantages of VAT Despite having the above advantages, the VAT is not free from its limitations. It has the following limitations: I. 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. II. 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. III. 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 IV. 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. V. Regressive Opponents of the VAT argue that the VAT, like ant other consumption based-revenue 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. 12.0. 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 infrustructural, social and institutional development for this poor country, the tax-GDP ratio is only half of our neghbouring 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 incresed in Bangladesh due to the VAT. An in-depth study required for this purpose. However, 5 percent and 4.5 percent inflation rates in 1991-92 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 Food Rate of Increase Clothing and Footwear Rate of Increase General Index Rate of Increase 98-99 566 — 348 — 579 — 99-00 606 7.07 374 7.47 633 9.33 00-01 648 6.93 399 6.68 689 8.85 01-02 684 5.56 410 2.76 724 5.08 02-03 676 -1.17 422 2.93 734 1.38 03-04 679 0.44 431 2.13 747 1.77 Table 10 Consumer Price Index for Rural Familities at Dhaka Year Food Rate of Increase Clothing and Footwear Rate of Increase General Index Rate of Increase 98-99 449 — 830 — 480 — 99-00 463 3.12 936 12.77 510 6.25 00-01 493 6.48 1025 9.51 556 9.02 01-02 526 6.69 1082 5.56 591 6.29 02-03 516 -1.90 1120 3.51 593 0.34 03-04 526 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 Year Agrl. Products Rate of Increase Indust. Products Rate of Increase All Groups Rate of Increase 98-99 1175 — 1034 — 1129 — 99-00 1276 8.60 1118 8.12 1225 8.5 00-01 1297 1.65 1233 10.29 1276 4.16 01-02 1333 2.77 1303 5.68 1323 3.68 02-03 1353 1.50 1331 2.15 1346 1.74 03-04 1437 6.21 1361 2.25 1413 4.98 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, exppansionary wage and credit policies are often associated with a prise 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, Costarica 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 rasing 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 sales tax / VAT (in million taka) Head 1997-98 98- 99 99-00 00-01 01-02 02-03 03-04 04-05 Sales tax/VAT 5359 5059 5318 10141 11165 28661 40650 43900 i) On imports /exports 5359 5059 5318 10141 — — — — ii) Locally manufacturing — — — — 2002 8987 10350 11400 iii) Import VAT — — — — 7892 15328 17400 18250 iv) supple mentary duty — — — — 1271 4364 12900 14250 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 Bangladsh 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 Bangladsh generallybears 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 rebats 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 of Bangladesh (Crore Taka) Year Export Import Balance 98-99 4268.6 9507.5 -5238.9 99-00 5141.5 11330.5 -6189.0 00-01 6027.2 11187.7 -5160.5 01-02 7419.8 13275.6 -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 accelerate economic growth. Table 14 shows investment stimulation in Bangladesh. Table 14 Investment in Bangladesh (million Taka) 99-00 00-01 01-02 02-03 03-04 04-05 05-06 Investment 94427 95955 109851 135214 158937 194651 221200 a) Private 47275 48562 60063 74406 80676 110172 139343 b) Public 47152 47393 49788 60808 78261 84479 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 22.5percent 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 Canada’s 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 short-fall. 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. 14.0. 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. 15.0. 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. 16.0. Obstacles and the Objectives 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. 17.0. 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 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. 18.0. The VAT Modules The basic modules comprise: u Registration and De-registration u Return Processing u Automatic Processing of Penalties, Assessment and interest u Trade Accounting u Visits to Traders u Control and Verification 19.0 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 firm’s 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 consumption-type 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 generalised framework, assuming that domestic sales () equal the sale of the i-th 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.


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.