Backtracking on New VAT Law: Big businesses appeased

It was mainly the pressure from big businesses that led to the government's backtracking on its decision to implement the new VAT law. Appeasing the people in general was not much of a reason, which the government has been touting.

The late u-turn of the government last month has left the National Board of Revenue (NBR) in a spot of bother, as it now has to fill a gaping hole in its revenue collection target.

The NBR was working in full swing to implement the unified VAT law two weeks after Finance Minister AMA Muhith had proposed the 2016-17 budget.

It even convened a stocktaking meeting for June 19 to discuss implementation of the new law.

But around the same time, five top businessmen close to the government had parleys with government high-ups. Business and political considerations were all on the agenda, finance ministry officials said.

Then signals were sent to the NBR to back off.

On its Facebook page, the NBR mentioned yesterday that had the board not been so engrossed in the now-deferred implementation plan of new VAT law, its revenue earning would have been greater in the last fiscal year (2016-17).

In fact, a chunk of the expected Tk 22,579 crore extra VAT revenue was supposed to come from big businesses.

Right after the placement of the budget, the business lobby stepped up its activities in favour of deferral of the VAT law implementation. 

As a result, parliament witnessed ministers and MPs coming down heavily on the finance minister for proposing 15 percent VAT across the board. The ruling Awami League, however, termed this a “lively debate”.

This happened even though Muhith's cabinet colleagues collectively endorsed the move to implement the VAT law before he placed the proposal in parliament on June 1. The prime minister was in the loop too.

It was also a popular presumption that if the debate got too intense, the government might go for flat 12 percent VAT from the planned 15 percent.

Since the plan to implement the law fell flat on its face, the NBR is now in a situation where it is least prepared. It has to recalculate how to generate more revenue and compensate for the existing staggered VAT rates.  

Muhith was the one who had on numerous occasions told the media and policy meetings that the government would go for the unified VAT rate from July 1 come what may. He had said it was already five years overdue since Bangladesh introduced the VAT law in 2012.

Economists and experts reckon budging under pressure and putting the implementation of the new VAT law on hold until the next general elections was an unprecedented backtracking from such an advanced stage of implementation readiness.

Muhith had insisted time and again that the unified VAT rate would not pass on any cost burden on consumers and that there would be enough cushion against price hikes.

If the finance minister was right, the government's later argument of deferring it for 2 years to give the people relief does not hold water.

The successful pressure from big businesses came into play at a time when the NBR was all set to go for the unified VAT rate, pinning high hopes on generating not only greater amount of revenue but also taking forward the desired automation of the revenue collection system.

It has huge bearings on other areas of revenue generation, said NBR officials.

The VAT-net expansion, the NBR hoped, would bring to the fold thousands of potential income taxable businesses, who had successfully avoided filing tax returns, the officials said, adding that it was a missed opportunity.

A flat 15 percent VAT instead of multiple rates would have paved the way for automation and many, otherwise low-profile and obscure, businesses would have come under the revenue radar.

The government's deferral move also came in breach of its commitment to the International Monetary Fund (IMF). In the second half of 2015, the government made a commitment to the 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 they sit for negotiations in future.

At IMF's insistence, the government framed the 2012 VAT law but it re-fixed the deadline for enforcing the legislation twice. The last deadline was July 2017.

Zahid Hussain, lead economist at the World Bank Dhaka office, 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.”  

Ahsan H Mansur, executive director of Policy Research Institute (PRI) of Bangladesh, fears the prospect of attaining increased revenue collection goal would reduce with the government sticking to the existing VAT law.

However, the government plans to carry on with its VAT system automation scheme, a Tk 550 crore project mostly financed by the World Bank.

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

Amidst possible confusion and outcry over probable impact on product and service pricing in a post flat-VAT-rate scenario, independent think tanks and experts had suggested that the government go for 12 percent instead of 15 percent.

Muhith had then rejected the idea of any rate-reduction compromise.

What happened in the subsequent weeks after the budget announcement was a reminder of the fact that politics is a great craft of compromise but the skills of politicians are tested when big interest groups come into play.