Good governance of VAT system in Industrial undertaking & Trading houses.

By

Good governance of VAT system in Industrial undertaking and Trading houses

Prepared for: Hasina Nargis Lecturer Department of Management Jagannath University Dhaka. Prepared by:

Name:

ID Numbers:
06671720 06671664 06671558 06671628 06671680 06671624

Signature:

Md. Kabir Uddin (Group leader) Mohammad Robiul Hasan Md. Atique-Bin-Zohur Md. Ruhul Amin Sakib Ahmed Md. Tariq Bin Zoha

Date of submission: 28 March, 2010

Dedicated To Our
Respective Parents & Wishers

Declaration

We hereby declare that Assignment entitled Good governance of VAT system in Industrial undertaking and Trading houses was carried out by us under the supervision and active guidance of Hasina Nargis, Lecturer, Department of Management, Jagannath University,Dhaka.

LETTER OF TRANSMITTAL
28th March, 2010 To Hasina Nargis Lecturer Department Of Management Jagannath University, Dhaka. Sub: Submission of Assignment on Good governance of VAT system in Industrial undertaking and Trading houses

Dear Madam, We the undersigned students were assigned to prepare a assignment on Good governance of VAT system in Industrial undertaking and Trading houses; we gladly want to inform you that we have prepared this assignment. For preparing this assignment, we have followed your guidelines. From this assignment, we have achieved a lot of practical knowledge and we hope that it will help us a lot in our future career. We sincerely hope this assignment will fulfill the requirements suggested by you under the course Taxation. Lovingly yours Signature

Md. Kabir Uddin Mohammad Robiul Hasan Md. Atique-Bin-Zohur Md. Ruhul Amin Sakib Ahmed Md. Tariq Bin Zoha

ACKNOWLEDGEMENT
We are grateful to our creator for what we are now. We like to thank our honorable course teacher Hasina Nargis for her kind co-operation and loving guidance. On behalf of our group, I (Atique) want to thank each of the members of this group, especially Robin for his hard work, technical, informative support & optimism. Kabir, for his always support with snacks. Ruhul, for his 24 hours mental support and guidance. Shakib, for being with us. Special thanks to Tushar for providing us an extra laptop (with lot of viruses). Again, we reason, all mates and drawing are remembering our parents for every of our teachers, our friends, partners, soul mates with whom we are still our footprints in this way.

CONTENTS
Serial Topics 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Objective & Limitations of the sutdy Abstract Definition of VAT Process of VAT assessment Characteristics of VAT Benefits of VAT Meaning of Governance Definition of good governance Elements of good governance Good governance in Bangladesh Methodology Introduction Why VAT VAT in Bangladesh Policy issue of VAT in Bangladesh Obstacles & objectives to collect VAT Why public benefit foundation suffer under the current VAT system Latest news Findings & Overview Summary of VAT Burden Recommendation References Page No 1 2-3 3-4 4 5 5-6 6-7 7-9 10 10 11 12-13 13-14 14-16 16-19 19 19-20 21-22 22-23 23 24 25

OBJECTIVES OF THE STUDY:

We can gain knowledge about the Good Governance of VAT system in industrial undertaking and trading houses by studying these topics. As following aspects of Good governance of VAT, we can learn from this study: 1. To get the idea about VAT system and the steps of Good governance in Bangladesh to develop the VAT system. 2. What are the advantages of VAT? 3. About the VAT system in Industrial undertaking and trading houses. 4. Effect of the VAT system of Bangladesh in economic development. 5. What should be the VAT system which has positive impact on our Industrial Undertaking and Trading houses? 6. To serve our academic purpose.

LIMITATIONS OF THE STUDY:

There are some limitations of this study. Therefore the assignment may lack some crucial data. Such as.. 1. Necessary data and information neither adequate nor well furnished. 2. The duration that is for assignment program is not enough to learn about the VAT system of Bangladesh. 3. As usual problem, which is load shedding. The assignment has encountered these limitations that may have hindered the progress. But with constant effort, these limitations were beaten due to our heartiest effort.

ABSTRACT:
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'. 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. 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.

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 taxGDP 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. 2

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. 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.

DEFINITION OF VAT:
Value added tax or VAT is an indirect tax, which is imposed on goods and services at each stage of production, starting from raw materials to final product. VAT is levied on the value additions at different stages of production. VAT is widely applied in the European countries. However, now about every countries across the globe have adopted this tax system. It was first introduced in Bangladesh in 1st July, 1991. VAT was first introduced in France as taxes sur la valeur ajoutee or TVA. In 1954, the French economist, Maurice Laure, the joint director of the French tax authority, the Direction generale des impost, initiated the concept of VAT, which came into effect on April 10, 1954. Initially introduced for large businesses of France, with the passage of time, VAT was employed for all business sectors of the country. In France, value added tax is considered to be one of the major sources state finance. Value added tax, also known as goods and services tax or GST proves to be beneficial for the government. Through implementation of this tax system, government can raise revenues invisibly, where the tax is not shown on the bill paid by the buyer. VAT is different from sales tax in various aspects. While sales tax is to be paid on the total value of the goods and services, VAT is levied on every exchange of the product, so that consumers do not have to carry the total cost of tax. However, VAT is generally not applied on export goods to avoid double taxation on the final product. However, if VAT is charged on export goods, the tax amount is usually refunded to the tax payer. Value added tax can also be recovered. The individual consumers cannot recover VAT on purchases made by them. However, businesses can recover VAT on the services and materials, which are bought by them in order to continue the supply of the products and services.
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VAT was introduced to arrest the increasing smuggling and cheating, which were resultants of high sales tax and tariffs. Initiated in France, VAT is used as an instrument of taxation in all the member states of the European Union. Different VAT rates are employed in different member states of EU. The minimum VAT rate for the EU members is 15%. However, the reduced rate of VAT can be as low as 0%. The rate is determined by the VAT authorities of different countries. There are also some countries, where VAT has been introduced to replace sales tax. India is one such country, where the system of VAT has been adopted for replacing the sales taxation system. The value added tax serves as the solution for different problems related to the sales tax system. Unlike sales tax, in VAT, there is provision for input tax credit or ITC. Due to the simplicity of the VAT system, the entire taxation system on consumer products and services has become easier.

PROCESS of VAT ASSESMENT:

The process of assessing value-added tax occurs roughly as follows:
1. Manufacture adds value to a product; the amount of value added can be described as the difference between the cost of the materials used to make the product and the price charged to the customer (often a wholesaler). 2. The manufacturer pays value-added tax (a percentage of the value added), which is then included in the purchase price charged to the customer (wholesaler). 3. The manufacturer gets a rebate from the government for VAT paid on the materials. 4. The customer (wholesaler) pays a VAT on the value they add, which can be described as the difference between what they paid to the manufacturer and the price they at which they sell it to their customer (retailer). This VAT amount is included in the price charged to the retailer. 5. The wholesaler gets a rebate for VAT from the government for the VAT paid to the manufacturer. 6. The retailer pays value-added tax on the value they add, which can be described as the price charged to customers less the wholesale cost, and includes the VAT in the final sales price of the product. 7. The retail store collects value-added tax from the person buying the product (retail price thus includes all VATs collected at each stage of this process) and gets a rebate for the VAT paid to the wholesaler.

CHARACTERISTICS OF VALUE-ADDED TAX

There are three types of value-added tax used around the world, each different in the ways those taxes on investment (capital) expenditures are handled. The most common is the consumption method, which allows businesses to immediately deduct the full value of taxes paid on capital purchases. The second is the net income method, which allows gradual deduction of VAT paid on capital purchases over a number of years, much like depreciation. The third type, gross national product method of valueadded tax, provides no allowance for taxes paid on capital purchases. The name of this type of tax is derived from the fact that the tax base is approximately equal to private GNP. The consumption method is most favored among general populations because it most equally taxes income from labor and capital and promotes capital formation. In theory, value-added tax systems with a uniform rate are neutral to all forms of productive input. However, countries across the world have had to modify the VAT system with multiple rates and exemptions to meet political, economic, and social needs. Most nations do not assess any tax on necessities such as food, medicine, and shelter. And because of the difficulty in computing value added, professional services such as banking, accounting, and insurance are often exempt. The largest variation from uniform tax rates is the zero tax rate on exports. Since taxes will likely be assessed at a product's destination, many do not impose a tax on the final selling price of exports. To compensate, the VAT is applied to imported products. Working together, countries seek more balanced trad

BENEFITS OF VALUE-ADDED TAX

One of the best reasons for instituting a value-added tax, according to VAT proponents, is that the system encourages personal savings and investmentprincipal elements of a healthy economyby taxing only consumption. In the current United States tax structure, citizens pay taxes twice on money they saveonce when income tax is withdrawn from their paycheck, and again when they pay taxes on the interest earned from savings and gains from investments. Similarly, the tax system in place in the United States encourages corporations to use debt financing, in which interest payments made by the company are tax deductible. Any dividends earned are subject to double taxation. And because taxes on capital purchases cannot be immediately deducted (only later as depreciation expense), the costs of capital investment increase. If a company does have a large asset base, it must generate more income to increase investor returns, subjecting itself again to higher tax payments. Another benefit touted by VAT supporters is a more constant revenue flow. Tax revenues under the current U.S. structure rise and fall as a result of 5

changing economic conditions, decreasing during recessions and growing during an economic boom. During recessionary periods, revenues may fall enough that government financial requirements utilize all available funds, and economic recovery becomes further delayed. Proponents of value-added tax believe it results in more financial stability and revenue flow. Supporters of VAT for the United States view the system as a supplementary tax that could help make up for revenue lost due to personal income taxes, and believe imposition of a VAT may also result in general lowering of income-tax rates. They also assert that items such as food, medicine, and shelter should be exempt (as they are in other countries with a value-added tax structure) in order to maintain fair practices for those who must expend the majority of their income on basic necessities. It would also mean people who save and invest money realize benefits. Finally, VAT advocates maintain that the current tax system in the United States cannot raise sufficient revenue to support minimal government expenses. A value-added tax would in theory eliminate the need for federal tax expenditures, which are largely responsible for depletion of federal revenues and increases in the national debt. Also, since the VAT is a consumption tax, people will be more motivated to save and invest disposable income. Additionally, a VAT would in some way reduce bias toward those who earn higher incomes. Tax write-offs can usually be taken advantage of only by those who itemizemeaning that they are available only to a small percentage of U.S. citizens, usually those with the highest incomes.

MEANING OF GOVERNANCE:
The concept of "governance" is not new. It is old as human civilization. Simply put 'governance' means the process of decision are implemented (or not implemented)1. Governance can be used in several contexts such as corporate governance, international governance, national governance and local governance. In recent years there have been numerous attempts to define the term, but these efforts have not resulted in any universal consensus as to the precise meaning of governance. In general sense governance means exercising political power to manage a national affair. Today governance is seen as a reflection of the role of the state in giving direction to the development, a country and political regime.

According to land-ell-Mills and Serageldin, governance may by taken to denote "how people are ruled how the affairs of a state are administered and regulated; it refers to a nation's system of politics and how this functions in relation to public administration and law." According to the World Bank,

Governance is "the manner in which power is exercised in the management of a countrys economic and social resources for development."

According to Goran Hyden: Governance was never allowed to become a conceptual straight-jacket but was expected to function as a rather loose framework within which each researcher could creatively explore political issues of significance. The problem that we encounter, therefore, is not the limitations stemming from the imposition of a confining concept, but rather the opposite: The challenge of making sense of the wide range of interpretations of governance that the authors bring to the agenda. According to World Bank booklet reports, governance as the "manner in which power is exercised in the management of a countries economic and social resources for development". Governance can be viewed both in positive and negative terms. Good governance and poor or bad governance. For better understanding of good governance, we should known what is poor governance. Because it has been claimed that bad governance is regarded as one of the root causes of all evil within societies. A World Bank booklet cogently summarized the major symptoms of poor governance. These are: 1. Failure to make a clear separation between what is public and what is private hence a tendency to direct public resources for private gain; 2. Failure to establish a predictable frame work of law and government behavior conducive to development or arbitrariness in the application of rules and laws; 3. Executive rules, regulations, licensing requirements and so froth, which impede, functioning of markets and encourage rent seeking; 4. Priorities, inconsistent with development, resulting in a misallocation of resources; 5. Excessively narrowly based or non-transparent decision making.

DEFINITION OF GOOD GOVERNANCE:

Governance nowadays occupies a central stage in the development discourse but is also considered as the crucial element to be incorporated in the development strategy. However, apart from the universal acceptance of its importance, differences prevail in respect of theoretical formulations, policy prescriptions and conceptualization of the subject itself. Governance as a theoretical construct, separate from the theory of state, is not only in an embryonic stage, but its formulation also differs among researchers depending on their ideological convictions.

Policy analysis based empirically on the historical experiences of governance gives prominence to government failures to deliver, leading to propositions for downsizing or rightsizing, while policy prescriptions for good governance take an evolutionary view of the matter questioning relevance of public sector management of certain activities in a changed context. Good governance is the term that symbolizes the paradigm shift of the role of governments. Moreover, governance is not only about the organs or actors as affirmed by Hasnat Abdul Hye. More importantly, it is about the quality of governance, which expresses itself through elements and dimensions, which will be listed in this study. Nevertheless, he states that: Just as the dancer cannot be separated from the dance, the organs or actors executing governance in their respective spheres cannot be relegated to the background.

Good governance is perhaps the single most important factor in eradicating poverty and promoting development.
-UN Secretary-General Kofi Annan-

In its report, Governance for Sustainable Human Development, the UNDP acknowledges the following as core characteristics of good governance. (For further explanation, see annex II). 1) Participation 2) Rule of law 3) Transparency 4) Responsiveness 5) Consensus orientation 6) Equity 7) Effectiveness and efficiency 8) Accountability 9) Strategic vision Accordingly, the key dimensions of governance identified by the World Bank are: - Public sector management, - Accountability, - Legal framework for development, and - Transparency and information.

By Dr Palamagamba John Kabudi, Faculty of Law, University of Dar es Salaam Good governance as a concept has steadily entrenched itself in the 8

political and development discourse. It has permeated all sectors and become part of the common shared principles and virtues of different countries in the world. It has attained universality as an indicator of adherence to democracy and rule of law. There is a danger, however, that good governance has become a catchword and that few bother to consider its implications. Good governance is given a broad definition that encompasses an array of issues in the sociopolitical and economic order of a country. The United Nations Committee for Development Planning in its report issued in 1992 entitled Poverty Alleviation and Sustainable Development: Goals in Conflict? identified the following as being part of the attributes of good governance:

1. Territorial and ethno-cultural representation, mechanisms for conflict resolution and for peaceful regime change and institutional renewal; 2. Checks on executive power, effective and informed legislatures, clear lines of accountability from political leaders down through the bureaucracy; 3. An open political system of law which encourages an active and vigilant civil society whose interests are represented within accountable government structures and which ensures that public offices are based on law and consent; 4. An impartial system of law, criminal justice and public order which upholds fundamental civil and political rights, protects personal security and provides a context of consistent, transparent rules for transactions that are necessary to modern economic and social development; 5. A professionally competent, capable and honest public service which operates within an accountable, rule governed framework and in which the principles of merit and the public interest are paramount; 6. The capacity to undertake sound fiscal planning, expenditure and economic management and system of financial accountability and evaluation of public sector activities; 7. Attention not only to central government institutions and processes but also to the attributes and capacities of sub-national and local government authorities and to the issues of political devolution and administrative decentralization.

ELEMENTS OF GOOD GOVERNANCE:

A number of multilateral organizations (e.g. UNDP, World Bank, OECD) and bilateral organizations have reflected on the elements of good governance and on their relation to development. Multilateral organizations generally equate good governance with sound economic management based on (i) accountability; (ii) Participation; (iii) Predictability and (iv) Transparency.12 However, there are some bilateral donors who are not satisfied with this narrow economic definition of good governance. They would like at least five more elements to be included as an essential part of good governance, namely (i) democratization; (ii) human rights; (iii) the rule of law; (iv) cuts in military expenditure and (v) probity. According to D. Bandyopadhyay, some of the main elements of 'good governance' are: 1. Accountability - both financial and political; 2. Transparency both financial and political; 3. Easy access to information; 4. Popular participation in decision making and implementation; 5. Responsiveness; 6. Efficient delivery system of services and goods; 7. Enforcement of rule of law supplanting the rule of whims and caprices of rulers whether stipendiary or elected; 8. Client/ citizen satisfaction; and 9. An overall caring and humane ambience promoting an equalitarian and equities social and economic order.

Good Governance in Bangladesh

At present, Good governance in Bangladesh is far from the actual consonance of the term. There are several factors and issues that are constraining the very process of good governance. The major factors are corruption, inefficiency of bureaucracy, politicization of administration, nonobservance of the rule of law etc. The main issues and problems for ensuring good governance in Bangladesh are bellows: 1. Corruption 2. Inefficiency of Bureaucracy 3. Political interference in administration 4. Nepotism 5. Improper and non-observance of the rule of law 6. Improper use of resources

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METHODOLOGY:

Web addresses : (A) Web address of Bangladesh national Board of revenue. (B) www.wikepedia.com (C) www.thedailystar.com/forum (D) www.thefinancialexpress.com (E) www.quickmba.com (F) www.supro.org Topic: Good governance of VAT system in industrial undertaking and trading houses Statistical tool : Statistical Year Book, 2008-2009 MS Office Graphics : Office XP : Adobe Photoshop Adobe Illustrator.

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INTRODUCTION:
Bangladesh, a relatively young country in the South Asian subcontinent, emerged with high expectations of establishing an effective system of government by resolving the problems that had been hindering its development as a province of Pakistan for twenty-four years. However at the end of thirty years of independence, Bangladesh is still facing many challenges that impede her from realizing her full economic potential. Among other things, good governance is expected to streamline the role of the government and public organizations. Strengthening the internal revenue collection and mobilization of internal resources is crucial component to mitigate the problem. The most significant feature of the Bangladesh tax scenario is its heavy dependence on indirect taxes. Nearly 80% of all revenue of the government comes from the indirect taxes while the balance is from direct taxes. The tax-GDP ratio in Bangladesh is less than 10% and is the lowest among the South Asian countries. However, in order to mobilize internal resources, a strong and efficient tax system is necessary. There are a number of laws relating to both direct and indirect taxes. The major direct tax is income tax while indirect taxes are VAT, and customs and excise duties. There are other minor taxes such as travel tax, gift tax, etc. The lions share of the indirect taxes comes from customs duty at the import stage and the amount of tax collected depends on the volume of import. This again depends to a great extent, in the case of Bangladesh, on the flow of foreign aid. It should be noted that Bangladesh has signed the World Trade Organization (WTO) agreement, and this entails scaling down and/or abolition of duties and taxes on a wide range of items. This will severely affect the present tax structure of Bangladesh resulting in a greater emphasis on revenue generation from direct taxes. Failure to do so will severely affect the attainment of various national priorities like poverty alleviation, industrialization, human resource development, etc. and the following economic vulnerability will increase social unrest which amongst others will jeopardise national security. Understanding the facts, Bangladesh is now seriously trying to reform her taxation policies. The main objective is to facilitate new investment through both internal and external sources. To do so, Bangladesh is currently undergoing a major public sector financial management reform process and this is viewed as a very important and successful component of the overall public sector reforms in Bangladesh. Bangladesh is receiving technical assistance in fiscal affairs from international organizations like the World Bank, International Monetary Fund (IMF), etc. and also specific technical assistance from countries such as the United Kingdom, Norway, Japan, etc. Since its Independence in 1971 and up to the financial year 1999/2000, the total foreign aid received by Bangladesh amounts to around USD 36,344 million

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(Appendix 1). Project aid has always formed the bulk of the aid at more than 50% and is basically used for infrastructure and agricultural development. Although the operation and role of such projects cannot be underemphasized, this article will concentrate on the segment of such technical assistances in respect of Bangladeshs fiscal affairs.

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 rasies 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 industrialised 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 regims 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

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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 industrialisation 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.

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.

VALUE ADDED TAX IN BANGLADESH

The main features of VAT in Bangladesh are as follows: (1) A single stage VAT for import cum manufacturing. (2) A uniform rate of 15 per cent is applicable for both goods & services. (3) VAT for whole sellers/retailers is compulsory (for selected items). (4) VAT is applicable for all items (except some of the unprocessed agricultural products) & thirty five listed services. (5) Exports are zero rated. (6) VAT is leviable at the time of supply of goods and services. (7) Turnover tax @ 2 per cent is leviable where turnover amount is less than 1.5 million taka. (8) Cottage industries are exempt from VAT. (9) Tax paid on inputs are creditable against output tax. (10) Tax returns are to be submitted on monthly or quarterly basis. (11) Luxurious and socially undesirable goods are subject to supplementary duties at different rates ranging from 5 per cent to 350 per cent. ADVANTAGES OF VAT: 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 14

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. PROBLEMS OF THE PREVIOUS SYSTEM: Bangladesh had a relatively complicated indirect tax system. It failed to provide the domestic resources needed for achieving the macro economic goals of the government. The system relied too heavily on the taxation of imports which essentially taxed the raw materials and intermediate goods. The import based taxation performed two related functions. It was both revenue raising and protective. The structure of protection again afforded unintended protection to industries, not justified on economic grounds. It thus led to inefficiencies in production and created an overwhelming ant export bias. Since, around sixty percent of the total tax revenue is collected from the import based taxation, revenue collection in Bangladesh effectively became a hostage to the balance of payments situation. The system of excise taxation used for collecting revenue from domestic production and services was also badly flawed. The base was very narrow, there were too many rates and exemptions. In the absence of a credit mechanism substantial cascading was prevalent. There was also a lack of harmony in regard to the tax treatment of the imports and the domestically produced goods. The resultant effects of all these were that the tax-GDP ratio in Bangladesh was one of the lowest in the world and the system of taxation was inefficient, distortion and inelastic.

PRICE EFFECT OF VAT Price effect of VAT at the retail level is usually insignificant. In Bangladesh the effect of 15% VAT at retail level on sale of cars was calculated assuming a profit margin of 25% where the selling price was Tk. 287,500.00 and it was found that the price increase at the retail level was only 2.68%. Experiences of other countries are shown in following table:

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Examples of Effects on Prices of Introduction of VAT Immediate Price Change Country to VAT2 (In percent) Argentina Brazil Chile Denmark France Indonesia Israel Korea Madagascar Morocco Netherlands Norway Spain Jan. 1975 Jan. 1967 Mar. 1975 July 1967 Jan. 1968 Apr. 1985 July 1976 July 1977 Jan. 1969 Jan. 1962 Jan. 1969 Jan. 1970 Jan. 1986 37.2 15.8 146.7 8.0 2.1 3.5 17.9 4.1 3.2 2.4 5.2 7.8 2.8 Minor Nil Minor 5.0 1.0 Nil (9.0) Minor Nil Nil 1.5 5.8 2.0 Date VAT Introduced

General1 (In percent)

Attributed

Source: IMF data and various country reports.

POLICY ISSUES OF VAT IN BANGLADESH:

Consumption type, destination principle and invoice or credit 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

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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 favoured. 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 payble. 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.

IN IMPORT CUM MANUFACTURING: 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. 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 that firm 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 group of goods are VAT able at retail sale. In future the retail level VAT will be expanding. IN 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 characterised 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

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scale thus leading to the creation of a large number of difficult to tax small service reindeers. 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.

SINGLE RATE: The VAT in Bangladesh has a single rate of 15 percent, the exports being zero rated. A single rate has both administrative and accounting advantages and the multiple rates are to be avoided for many reasons. In a VAT system up to the manufacturing stage, multiple rates would distort producers choice. With multiple rates, the problems of classification and definition arise. Multiple rates are also an inefficient way to protect the poor as they protect the rich as well. Thus, instead of having multiple rates, the progressively of the rate structure in respect of VAT in Bangladesh is designed to be brought about by the built-in exemptions and the imposition of supplementary duties in case of goods with high income elasticity of demand.

EXEMPTIONS FROM 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 tenuous 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.

TREATMENT IN CASE OF SMALL FIRMS: 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 rederers having turnover below Taka fifteen lacs are exempt from VAT. This way of exempting economic activities from the purview of VAT is not however

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free from problems. There is the protential 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.

TREATMENT IN CASE 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.

OBSTACLES AND OBJECTIVES TO COLLECT VAT:

OBSTACLES FACING THE REVENUE ADMINISTRATIONS: 1. Inefficient management and organizational systems; 2. Weaknesses in revenue collection procedures; 3. Un-consolidated or inconsistent legislation; 4. Evasion and corruption; 5. Information systems handling risk profiling; 6. Inadequacy of staff incentives, and 7. Shortage of skills and training.

OBJECTIVES: 1 Strengthening the organization and administration management; 2. Improving duties and tax collection; 3. Introducing information technology solutions; 4. Drafting laws and regulations; 5. Improving staff terms and condition, and 6. Facilitating the movement of goods.

WHY PUBLIC BENEFIT FOUNDATIONS SUUFER UNDER THE CURRENT VAT SYSTEM:
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When the current VAT system was developed, the special position of publicbenefit organizations, including foundations, was not considered. Foundations main concerns are:

Foundations face irrevocable VAT costs: they are treated as the final consumer, even when they are not Public-benefit foundations often provide services that are either exempt under the VAT Directive6 or are outside the scope of VAT because they do not charge for their services. In both cases the organizations do not charge their customer or beneficiary VAT and so cannot recover the VAT on spending which supports their public-benefit aims. In fact public-benefit foundations are in a worse position than companies, which can charge VAT and pass it on to their customers. They are also often treated worse than local authorities (public bodies), which do not charge VAT but in many EU countries may claim back the VAT they incur. Calculating VAT is complicated and onerous They are also exposed to the most complicated VAT regime because they provide a mix of fully-taxable business supplies, exempt business supplies and non-business supplies. The task of calculating which bit of VAT relates to which kind of service is onerous for foundations. It is much easier for companies, which almost exclusively offer taxable services. Disincentives to collaborating The VAT system also penalizes collaboration between foundations. If one foundation supplies services to another it must charge VAT on the supply, but the foundation buying the service cannot recover the VAT. And collaborative activity may generate no business. This discourages charities from seeking economies of scale on shared services (unlike the commercial sector). To minimize VAT inefficiencies, foundations must ensure partnerships with other foundations are carefully planned. This might involve setting up a Special Purpose Vehicle, itself a costly and time-consuming process and a disincentive to collaborate. For fund-raising organizations - VAT cost on fund-raising The British Government gives generous tax relief on donations to foundations, but that money is then subject to VAT when it is spent. For example, in 2004, Oxfam spent some 20m on fund-raising and in the process lost about 2m in irrecoverable VAT.

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LATTEST NEWS:
Dhaka, Feb 11, 2010 - Income tax and VAT nets will be expanded to bring
to raise the government revenue income; Finance Minister AMA Muhith told a view exchange meeting in the city.

The base of public expenditure is the collection of revenue and this depends on internal resources like income tax and VAT. The income tax as well as VAT nets should be expanded to raise the government income, Muhith said.
Exchanging views with leaders of the business community on Change of VAT Law and Customs Tariff Rationalization at BIAM Auditorium the Finance Minister said at least 40,00,000 people should be brought under income tax net from existing 30,00,000.

Of the 15 crore people, only 30,00,000 people give income tax. This is not at all acceptable. There are 4 crore people in the middle income group. At least ten percent of them should pay income tax, he added. He viewed that the VAT system is in a bad situation. About 30 lakh organisations should be brought under the VAT net. But now there are only about 6.5 lakh organisations under the VAT net. This is also not acceptable. Muhith said NBR has four tasks ahead. These are registration of more firms and institutions, formulating such system that doesnt allow any symptom like truncated system, cascading effect and to reduce the import dependency. He viewed that the existing VAT law should be changed to make it easy for collection. He indicated change in the VAT law is in the offing. Customs tariff system also needs certain changes, which will be done after the next budget, he said. About the in-house work of the NBR Task Force on VAT and customs tariffs, Muhith said initial steps have been taken on public inputs. The process will continue.

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Economic Affairs Adviser to the Prime Minister Dr. Mashiur Rahman said more attention would given to improve the accounting system of the private institutions in a bid to reasonably implement the VAT system. The government could bear the cost of improving their accounting system. In doing so, the expenditure of the government may increase initially, but this may result in increase of VAT collection, He said. NBR Chairman Dr. Nasiruddin Ahmed said the Task Forces on VAT Law and customs rationalization were continuing discussions. They will soon sit with FBCCI, DCCI and MCCI to speed up the process. Gazi Golam Dastagir MP of ruling AL said that the relationship between the taxpayers and tax collectors should be friendly. He also underscored the need for strengthening the Tariff Commission. DCCI president Abul Kasem Khan said that the net of VAT and income tax should be expanded. He thought that many sectors are still out of the tax nets. Enamul Huq, First Secretary of VAT, made a power-point presentation on Toward A Taxpayer Friendly Modern VAT System in Bangladesh. He thought that the VAT rate should remain at existing 15 percent. Around 77% countries in the world have basic VAT rate of 15 percent and above. Dr. Zaidi Sattar of Policy Research Institute (PRI) and former NBR member Abdul Latif Shikder jointly made another power point presentation on Structure of Customs Tariffs Imperative of Rationalization. NBR member (VAT) Abdul Mannan Patwari and NBR member (tax) Fariduddin also spoke on that occasion.

Findings and Overview:

The on-going fiscal year has been a very productive one for the National Board of Revenue (NBR). Its earning from income tax has gone substantially up and indication is that it might well achieve the annual target relating to the value added tax (VAT) at the end of the fiscal. The facility offered by the incumbent government to legalize untaxed money by paying a penal tax of 5.0 per cent in addition to normal rate of tax and the NBR move to make more and more people tax-compliant have started paying dividend. According to a report published in the Financial Express, the VAT collection from the country's big enterprises recorded nearly 23 per cent increase in the first nine months of the current financial year over that of the corresponding period of the previous fiscal. The government in the budget for the fiscal 200708 has fixed a VAT collection target of Tk. 158.90 billion of which Tk 101.44 billion is supposed to come from the big enterprises overseen by the large tax

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payers' unit (LTU) of the NBR. During the July-January period of the current fiscal, the large units paid Tk. 63.48 billion as VAT. However, only five big enterprises engaged in cigarette manufacturing and telecom services were the major contributors to the LTU. The incumbent chairman of the NBR, apparently, happy with the higher collection of VAT from large enterprises, has noticed the return of business confidence which was substantially eroded in the wake of the present caretaker government's anti-graft and anti-tax evasiondrives. There is no denying that commercial activities have been picking up in the recent months. But the situation is still far from normal. It remains debatable whether the higher collection of VAT from a few big enterprises indicated the return of business confidence. For higher sale of cigarettes or increased amount of revenues coming from phone calls does not anyway refer to increased commercial activities. The collection of VAT from other manufacturing units and from shops and establishments at the retail level could be the better barometer for measuring the consumer spending trend. Many tend to believe that fear factor rather than genuine sense of obligation to pay tax, and that too in right amount, played a key role in the higher collection of both income tax and VAT this year. In the immediate past tax assessment year, the number of tax returns submitted by individual taxpayers, with incomes above the tax-exempted limit, was well below the expectation. But the revenue collected from income tax was quite large than the previous years. One cannot expect full disclosure of assets and income in most tax returns under the circumstances in Bangladesh. Yet taxpayers had been relatively fair in paying tax this time. The same could be true in the case of the VAT paid by the large enterprises. However, the country which has one of the lowest tax-GDP ratios in the world does deserve higher rate of tax compliance by the eligible taxpayers. For the failure to do so creates a lot of fiscal management problems for the government which is often forced to fall back up on expensive bank borrowing. But higher compliance rate in case of income tax would not be that easy. The taxpayers would certainly demand some individual benefits/ incentives of the government in return. But the situation is altogether different in case of VAT. Continuous, honest and sincere drive by the officials concerned, particularly at the retail level, can help earn far greater revenue from VAT.

SUMMARY OF VAT BURDEN:

1. Foundations face irrevocable VAT costs: they are effectively treated as the final consumer, even when they are not 2. VAT calculation is complicated and onerous 3. Distortion of competition between foundation and corporate sectors in delivering services 23

4. Disincentives to collaborate with other partners 5. Irrecoverable VAT can amount to 10% of a charitys overall spending

WHAT CAN BE DONE?

There are various possible solutions to the issue of irrevocable VAT costs: a) Bringing charities into the VAT system (abolishing exemptions) but allowing a reduced rate on both outputs and inputs b) Giving the option of switching to reduced-rate tax c) Allowing exemption with refund (equivalent to zero-rating) d) Providing the right to recover input VAT on non-business supplies e) Establishing general refund schemes to compensate for foundations VAT losses at national level in line with EC rules f) Setting up a mandatory EU refund scheme or a mix of the above.

Besides these points, If we want to solve the problems of VAT system from Bangladesh as well as from the world, we have to follow some rules and regulations. In this case, we have to notice about the condition of particular country because VAT system differs from country to country. However, we are now suggesting some process to alleviate the problems of VAT system from Bangladesh at the same time from the World:
(a) Developing economic structure (b) Eradication of Corruption (c) To formulate a proper VAT system which can bring benefit for Government, General public, Industrial undertaking as well as Trading houses. (d) Creating public awareness about VAT system and the positive impact of VAT.

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(e) Proper financial planning. (f) Providing proper training to the personnel who collect VAT on behalf of Authority. (g) Development of the collecting process. (h) Take proper steps against Mismanagement. Motivate the target people to pay the VAT accurately and so on.

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REFERENCES:
1. "What is good governance", http://www.unescap.org/huset/gg/governance.htm 2. "What is good governance", http://www.unescap.org/huset/gg/governance.htm 3. Khan, M.M., "Urban local Governance in Bangladesh: An overview", Journal of Administration and Diplomacy, Vol.4, No.1 Jan-Jun, p.1, 1996. 4. D. Bandyopadhyay, "Administration decentralization and good governance", Towards Good Governance, eds; chopa, S.K., Konark publishers Pvt. ltd. Delhi-110092, p.32, 1997 5. Graham, J.; Amos, B. and Plumptre T., "Principles for Good Governance in the 21st century", http://www.unpan.org/whatsnew_bulletin.asp, August 2003. 6. DR. RAFIQUL ISLAM First Secretary VAT: Policy National Board of Revenue Government of Bangladesh. 7. Three Taxes and customs Duties of Bangladesh. By Fazlul Haque, M.A Akkas & A.S.M Ashif. Edition--- 2009-2010. 8. Mc Carten, William (2005), Reforming the Tax Administration in Sadiq Ahmed (eds.) Transforming Bangladesh into a Middle Income Economy, New Delhi: Mac Millan India Ltd. 9. World Bank (2003) Why Worry about Tax Expenditures? PREM Notes Economic Policy, No. 77, the World Bank, Washington: Poverty Reduction and Economic Management.

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**The End**

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