Proposed VAT, Tax Measures: Major changes likely

Unlike previous budgets, which were passed by parliaments with minor changes, this year's proposed budget could have major changes to tax measures. 

The measures proposed for fiscal year 2017-18 were scheduled to be passed on June 28 but the government might seek to defer implementation of the much-talked-about new VAT law.

The new VAT law, which the government took five years to get ready, was supposed to come into effect on July 1.

Holders of bank accounts were also likely to see cuts in the proposed rate of excise duty for the coming fiscal year, said officials of the finance ministry.

Officials involved in the budget preparation said the finance minister places budget proposal in early June every year and minor changes are made during its passage.

This year, Finance Minister AMA Muhith placed the budget proposal on June 1, with the new VAT and Supplementary Duty law, which seeks to impose flat 15 percent VAT instead of multiple rates.

The government, at the prescription of International Monetary Fund (IMF) in 2012 and to fulfil the conditions of $1 billion loans, framed the new VAT law but it re-fixed the deadline for enforcing the legislation twice. The last deadline was July 2017.

Finance ministry officials said initially policymakers had planed to reduce the flat rate of VAT to 12 percent during the passage of the budget in case there was opposition against the proposed 15 percent.

But in the face of opposition from businesses, lobby groups and fear of rise in living cost, policymakers now prefer deferring the new VAT law for the third time and continuing with the existing VAT Act 1991 by bringing some changes to it, said insiders.

In the second half of 2015, the government made a commitment to IMF that it would enforce the new law in July 2017. The IMF Executive Board approved the last two instalments of $1 billion Extended Credit Facility (ECF) based on the written commitment.

Of the two, the IMF kept one instalment on hold for delay in implementation of the new VAT law. A further delay might put the finance ministry officials in an awkward position when it sits for negotiations in future.

Zahid Hussain, lead economist at the World Bank Dhaka office, said the new VAT law was a case of a well prepared policy reform being blocked even after going through the key legislative and administrative approval processes as well as extensive consultations with major stakeholders.

“If the new VAT law is dropped, it will be an unprecedented backtracking, from such an advanced stage of implementation readiness, in the history of economic reforms not just in Bangladesh but also elsewhere, at least in recent times,” he said.

“It goes to show that reform, like cricket, is a game of huge uncertainties. In cricket the uncertainty is regarded as glorious, but in the case of policy reforms such uncertainties signify the massively underestimated power of entrenched interests in preserving the status quo,” said Zahid. 

The government had aimed at collecting additional Tk 63,190 crore in the 2017-18 fiscal year with a target of Tk 248,190 crore total collection. Its last year's revised target was Tk 185,000 crore.

Of the Tk 63,190 crore, Tk 22,579 crore was supposed to be from the new VAT law.

Officials said economic growth and rise in prices of goods and services usually generate nominal growth of revenue collection every year.

To ensure collection of the additional money, the National Board of Revenue (NBR) would now have to work on finding out areas of revenue based on the existing VAT Act 1991, said officials.

Insiders said the truncated VAT rates, now applicable to nearly 20 items, including flats, might be increased for some items.

VAT based on tariff value or minimum value of products might be increased for some products as well.

At present, the indirect tax is collected for 85 products such as biscuit, paper and exercise books, rods and bricks based on tariff value.

The government might also withdraw exemption from VAT for some items to increase revenue collection, said officials of the Ministry of Finance.

The government plans to carry on with its VAT system automation scheme, a Tk 550 crore project most of which is financed by the World Bank.

But it might take a couple of months to reconfigure the software to incorporate provision for multiple rates of VAT instead of the flat rate, said revenue officials.

The excise duty on bank accounts might not increase. But the tax on bank accounts with up to Tk 100,000 debit or credit balance a year might be waived.

Ahsan H Mansur, executive director of Policy Research Institute (PRI) of Bangladesh, said implementation of the new VAT law was one of the major supporting pillars of the government's mid-term reform targets to attain accelerated economic growth.

He said the prospect of attaining increased revenue collection goal would reduce if the government returned to the existing VAT law.

“But inner strength of the new law will erode if it is amended. Already the inner strengths of the law have been compromised by making some revisions,” he said, citing increase in upper ceiling for VAT registration by businesses and high tariff protection for domestic industry.

He recommended not dissecting the new VAT law anymore.

“It is better not to put a new law if the new becomes a bad law because of changes,” said Mansur.

Instead of further dilution of the new law, he said it would be better to go back to the present VAT law, withdraw the system of package or fixed VAT and continue automation of VAT system as planned, he said.