One VAT rate for most products, services from next fiscal

The National Board of Revenue (NBR) plans to introduce a single 15% value added tax (VAT) rate on almost all goods and services in the next fiscal year to comply with an IMF-advised law enacted in 2012, highly-placed officials say.

Initially, the enforcement is set to start in the remaining half of the current fiscal with more than 20 items expected to lose the privilege of reduced VAT rates within this month.

These products and services, which are now charged VAT at 5%-10% rates, will come under 15% VAT, a standard set by the law.    

At the same time, most of the exemptions currently provided to certain industries may be revoked and supplementary duties could rise, sources within the NBR say.

However, certain services, such as electricity and gas, may still have reduced rates to shield consumers from additional cost burden when inflation remains stubbornly high, officials said.

"We are planning to go for a 15% unified rate across the board starting this month," a senior NBR's VAT policy official told The Business Standard yesterday.  

Sources indicate that the advisory committee tasked with NBR reforms also may support a unified VAT rate but at a rate lower than 15%.

While a single rate could increase VAT collection and simplify the process for the NBR, experts and business owners are concerned that the burden may pass on to consumers of all goods and services. It will add to the inflation pressure further, they warned.

Currently, around 120 goods and services, including powdered milk, various spices, food items, LPG, internet services, and ride-sharing services, are subject to VAT rates ranging from 5% to 10%. Most of these may soon be brought under the unified VAT rate.

A senior official from the VAT wing of the NBR told TBS, "In line with IMF conditions, we expect a significant number of products to transition to a single VAT rate by the end of this month."

"Following that, in the upcoming budget, most exemptions are likely to be removed, and nearly everything will come under the unified rate," he added.

NBR Chairman Abdur Rahman Khan declined to comment on the issue.

However, he told a recent event in Dhaka that the revenue authority was under pressure to drastically cut tax exemptions to meet IMF's conditions.

 Single VAT rate first planned over a decade ago

In 2012, Bangladesh promised to the IMF to implement a unified VAT rate as part of a $99 million loan agreement. As part of this commitment, the government prepared a new VAT and Supplementary Duty Act in 2012 which proposed a single rate for all goods and services to be implemented starting in 2015.

However, business owners strongly opposed the unified VAT rate citing concerns about price hikes of products and services, and waged street protests. In FY12 and FY15, general inflation in the country stood at 8.69% and 6.41%, respectively.

Despite efforts in 2017 to move forward with the planned act, the government was unable to implement it due to strong opposition from businesses. Responding to the business community's concerns, some goods and services were subject to reduced rates (below 15%) under the Act which was implemented in 2019.

As part of a $4.7 billion loan approved in early 2023, the IMF has imposed over 30 major and minor conditions on Bangladesh, one of which includes raising the revenue contribution to GDP.

The single VAT rate is being planned once again after more than a decade to increase revenue collection to fulfill the IMF's conditions.

Concerns over inflation

Currently, in addition to the 15% VAT, there are around 120 goods and services subject to VAT rates ranging from 5% to 10%. Apart from this, specific taxes are applied based on the quantity, known as specific taxes, for some products. Additionally, a 5% VAT rate is imposed on annual turnover or sales above a certain threshold.

Moreover, VAT is currently being collected from certain sectors at a rate or system which is not covered under the existing law. For example, in some places in Old Dhaka, a VAT of Tk150 is collected on the selling of steel products worth Tk150,000 per tonne.

In the 2012 movement against the unified VAT rate, business leaders from Old Dhaka played a leading role.

Amir Hossain Noorani, an Old Dhaka-based business leader and president of the Bangladesh Steel Importers and Merchants Association, told TBS, "It is unreasonable to impose the same VAT rate on the food at Sonargaon Hotel and a regular service at a small shop."

When asked about the opportunity for businesses to claim input tax credit, Noorani responded, "My own company is owed a rebate of Tk58 lakh from the NBR for imports, but they won't let us offset that amount. So, where is the law?"

He added, "Many countries around the world have multiple VAT rates. In our neighboring country, there are various tax rates ranging from 1% and above."

Ashraf Ahmed, president of the Dhaka Chamber of Commerce and Industry (DCCI), told TBS, "A single 15% VAT rate across all sectors would be disastrous. Since Bangladesh is an import-dependent country, the price of many products, from food items to other goods, could increase by 10% to 12% due to this alone."

He added, "Although the law allows for input tax credit, the process is complicated and difficult due to various complexities. As a result, consumers will be burdened with the additional VAT."

Another business leader said, "To claim a rebate, businesses must maintain proper accounting at every stage of the supply chain. In Bangladesh's economic context, this is not feasible for all businesses. This will be particularly challenging for producers."

Lutfor Rahman, a former NBR member, told TBS, "If the unified VAT rate is set at 15%, the prices of several products may rise, which could further drive inflation."

However, owners of large businesses say they support the idea of a unified VAT rate.

Advisory committee supports unified rate with a lower percentage

According to sources, the recently formed advisory committee for the reform of the NBR supports a single VAT rate but advocates for a lower rate than 15%.

Md Farid Uddin, a member of the committee, told TBS, "We believe there should be a standard VAT rate. It is not because the IMF is pushing for a standard or unified VAT rate that the commission will propose it. The commission feels a single rate is necessary for the sake of VAT discipline."

"However, this rate could be set lower than the existing 15%, as this rate seems too high to many which discourages them from paying VAT or leads to tax evasion," he added.

The DCCI president also said if a unified rate is introduced, it should not exceed 5% to 6%.

Products and services likely to be affected

Currently, products under the 5% VAT rate include powdered milk produced from liquid milk, chili powder, spices like coriander, ginger, turmeric, and spice blends, various food items, LPG, bulk imported petroleum bitumen, various types of paper, cotton yarn waste, fabric made from man-made fibres, CR coil sheets, diesel engines, transformers, passenger buses, trucks, and cargo mechanical vessels.

If brought under a 15% single VAT rate, the prices of these products and services will increase.

On the other hand, products and services under the 7.5% VAT rate include internet services, furniture manufacturing, transport contractors, English medium schools, electricity distributors, ride-sharing services, ITES, home appliances, facial or pocket tissues, non-AC hotel restaurants, sweet shops, and private brand clothing retailers.

Products and services under the 10% VAT rate include motor vehicle garages, dockyards, printing presses, repair and servicing businesses, AC vessel services, automatic sawmills, sports event organisers, transport contractors, and more.

In addition, products subject to specific taxes include newsprint paper, cotton yarn, man-made fibres, bricks, brick chips, scrap sheets, MS products, and billets.

Additionally, about 20 products and services enjoy reduced VAT rates through SROs.

Most of these products and services may be brought under a unified VAT rate.