Synergy Business Consultants

02/08/2019

13/02/2017

VAT-able price in the new VAT law

THE new VAT law will be effective from July 01, 2017. It is an improvement on the current law.

VAT is imposed on the price of goods or services. This price is called VAT-able price. If the VAT-able price is high, there will be more VAT and contrarily, if the VAT-able price is low, there will be less VAT. The sellers tend to show lower VAT-able price but the VAT authorities tend to argue for a higher VAT-able price. So, VAT-able price is very important in any VAT system. With regard to VAT-able price, the new law incorporates some easier provisions than these have been so far.

VAT is collected on the supply of goods and services. Goods or services are sold in exchange of money payment. VAT is imposed on the sale price. At the price in which a seller sales goods or services is not always VAT-able one under the current VAT law. The price is often fixed by the local VAT authorities or by the National Board of Revenue (NBR) without regard to the actual sale price. Such price fixation gives rise to multiple complications in the conduct of business. More government control is established on the economic activities which is not desired in free market economy. This aspect has largely been addressed in the new VAT law.

In the new VAT law, VAT will be imposed on the fair market price of goods or services sold. Fair market price has been defined in the new VAT law (Section 2, Clause 58). Fair market price is the price which is fixed between the purchaser and the seller on the basis of their normal business relationship where there will be no impact of other relationship. Any item can be sold today at Taka 10 per piece but it may be sold at Taka 12 per piece tomorrow on the grounds of business relationship and market forces. There may be short supply of the item in the market or there may be increased demand in the market. On that basis price may rise.

Under the existing law, provisions are complex with regard to sale of goods at reduced price. Advertisements are required to be published in the national dailies with the details of such discount sale. But in the new VAT law, there is no condition on such sale. The seller can give discount in the sale or can increase the price as decided by the market forces. The VAT authorities do not have anything to do with the increase or decrease in prices of goods and services. The seller is only to keep the records and evidence of the genuine causes of such rise in prices or discount sale. The price rise or discount sale must be caused by business relationship and market forces.

Under the existing VAT law, there is Tariff Value on some goods and there is truncated VAT base on some services. Goods with Tariff Value can be sold at any price but VAT is to be paid on the basis of the Tariff Value of the goods fixed earlier. It may be mentioned that Tariff Value on some goods is fixed by the NBR. Generally, Tariff Value is lower than the market price of any item. If VAT is imposed on the truncated base of any service, then effectively the rate of VAT gets reduced. Maximum Retail Price (MRP) is also the base of VAT on some items. In the new VAT law, all these considerations have been done away with. Tariff Value or truncated base or MRP will not be a consideration for imposing VAT. VAT will be imposed only on the fair market price of goods and services. There is only one case in the new VAT law where there is truncated base. It is joint venture for property development. A landowner engages a property developer on his land to construct building. Then, the spaces are shared by the land owner and the property developer as per their agreement. This is a very common economic activity now-a-days. On the sale amount of such space, VAT-able base will be 50 per cent of the actual sale value, i.e, there will be 7.5 per cent effective rate of VAT under the new VAT law.

Holistically, the provisions for fixing the VAT-able price of goods and services have been made much simpler in the new VAT law than these have been so far. Such provisions have also been made friendly to the businesses.

Dr. Md. Abdur Rouf is First Secretary of the National Board of Revenue (NBR).

13/02/2017

VAT: Introducing a single rate

Regarding the rate of VAT there have been some stir recently in the country. There are demands for cut in the rate of VAT from 15.0 per cent to 7.5 per cent and there are demands for multiple short rates in addition to the standard rate. There are also demands for truncated VAT base. We shed some lights on these issues.

At present there is VAT/GST in about 154 countries worldwide. In almost all VAT systems, there is a standard rate, a few reduced rates and some exemptions. The question is how much will be the standard rate. There are 3.0 per cent to 25 per cent standard VAT rates worldwide. In the European countries the VAT rates vary around 20 per cent, in the south and south-east Asian countries VAT rates are from 5.0 to 15 per cent. The global average VAT rate is 16.5 per cent.

There is a demand in the country that the VAT rate has to be reduced to 7.5 per cent from the present 15 per cent. We have a VAT gap of about 55 per cent. Our VAT-GDP (gross domestic product) ratio is 3.7 per cent. In a standard VAT system, the VAT gap is much lower and the VAT-GDP ratio is much higher than that of ours. We have to reduce the VAT gap and increase VAT-GDP ratio to standard level. Our tax-GDP ratio is one of the lowest even in South Asia.

Under these circumstances, the moot question is: what is to be done first? If rate of VAT is reduced first and consequently people pay more VAT, VAT gap will be reduced and VAT-GDP ratio will increase. Or VAT gap need to be reduced first and consequently VAT-GDP ratio will increase and then VAT rate can be decreased. Hypothetically, if at present VAT rate is reduced from 15 per cent to 7.5 per cent without ensuring compliace, the collection of VAT will be reduced by a half. The government can not endure that now provided the need for domestic resource to finance development expenditure. People usually tend to evade taxes. Of course, there are some people who pay their due taxes as per law. But their number is small. So, systems need to be developed so that people can not evade tax or VAT. Our taxation mechanism is not so strong.

There are rates lower than 15 per cent in some countries. But in those economies, compliance rate is much higher than ours. Without ensuring compliance we can not cut VAT rate. To ensure compliance, we have to simplify the regulations, make the procedure information technology enabled and train the VAT payers and VAT officials in the VAT matters, i.e, we have to carry out reforms. All stake-holderes should join hands to do the reforms first, then when compliance is ensured, perhaps the government may think of reducing the rate.

In the VAT system, reduced rate should not cover a big share of the economy. Only a small share of the economy may be allowed reduced rate on the grounds of overriding social, economic, religious or cultural realities. The basic principle of VAT is - the lowest possible single rate and widest possible coverage. VAT can not be properly administered if the coverage is not wide. If there are many reduced rates and exemptions then the credit chain can not function and the system gets crippled. So, there may be multiple reduced rates, but the area has to be small. We need to decide that first in our new VAT law implementation.

In consonance with the same principle of widest possible coverage, the exemptions also need to be on small portion of the economy. Where there is overriding social, economic, religious and cultural realities, exemptions may be allowed on these areas. Even to keep the VAT machine functioning, it is better to effect exemptions through drawback rather than going for straight exemptions crippling the system. Drawback is a mechanism to pay VAT first but later take it back from the government.

In such an environment of small area of the economy under reduced rates and exemptions and overwhelming portion of the economy under standard VAT rate, the VAT system can operate smoothely. In other words, it is called single-rate system. We are undergoing VAT reforms. The reforms must not be mere changes. These should lead to the adoption of standard features of the VAT system.

Dr. Md. Abdur Rouf is First Secretary of the National Board of Revenue (NBR).

10/03/2016

02/11/2015

Major Difference between Universal Self and Normal Tax Return: Under Universal Self (82BB) return, tax payers assess their payable tax in their own way voluntarily. On the other hand, under normal tax return, Tax authority assess the payable tax of assessee. In Case of 82BB tax payers are prone to audit risk for their inaccurate, manipulated or non-disclosure of income for which tax are payable.