Why are we paying taxes twice when we shop at supershops?

Non-government engineer Naushad Hossain, a resident of West Rampura in Dhaka, shops for groceries at a super shop in his neighbourhood. Finding most commodities and necessities on his shopping list under a single roof is extremely convenient for Naushad. 

However, it is the cash receipt that startles him every single time. "Why am I being double-taxed?" Naushad murmurs. 

Shoppers at the superstores pay an additional 5% Value Added Tax (VAT) on their shopping of packaged products. Most packaged products' retail prices already include 15% VAT. 

Naushad said, "The end customers bear the burden of the duty on imported products. On top of that, we already pay 15% VAT for purchasing the products." 

Unlike Naushad, customers in general do not read or analyse cash receipts. They do not do the numbers on individual items they put in a cart. As a result, most end up carrying a double tax burden, unknowingly.     

At best, superstore managers encounter curious customers who enquire: "Why are you charging for products a bit higher than an [average] grocery shop?" 

Answers offered to the customers may differ, depending on quality maintenance and standard of service.

"When you see that the subtotal is Tk2,000 [for example] while the net payable amount is Tk2,100, suddenly you realise that you have been taxed, and naturally a question arises in your mind," said a senior outlet operation manager of the country's largest chain shop Shwapno, requesting anonymity. 

The manager continued that in such cases, he responds: the government is collecting additional VAT for the development of the country. 

As part of expanding revenue coverage for developmental projects, Bangladesh Government imposes VAT on customers of superstores. Between 2005 and 2019, the VAT law witnessed at least seven amendments, raising VAT on superstores from 1.5% to 5%.    

For the last couple of years, Bangladesh Supermarket Owners Association has been demanding the government revoke the 'discriminatory' tax system imposed on superstores, which continue to exempt grocery shops. In a series of meetings, the association leaders placed their demands before the National Board of Revenue (NBR).

The government's explanation is that the average customer at superstores is comparatively more solvent than those at grocery shops and the VAT imposed upon the superstore customers should not be an issue.  

Muhammad Abdul Mazid, former Chairman of NBR, argued customers do not get receipts (which is their right) nor a guarantee of quality at grocery shops, where sellers and buyers bargain on a volatile price chart. 

On the other hand, a superstore is accountable to ensure quality products. The price charts are fixed there and the customers are provided with cash receipts. "Although there is a mixed reaction about the 5% VAT, customers can pay this considering the value-added services," Mazid argued.  

Consumers Association of Bangladesh (CAB), a watchdog of consumer rights, is demanding that the government reduce, in phases, the burden of indirect tax on customers. "The 5% VAT policy is confusing. Why does a consumer pay double tax for the same product? Isn't it unfair?" said SM Nazer Hossain, Vice President of CAB.  

Dr Ahsan H Mansur, Executive Director at Policy Research Institute of Bangladesh, also disagrees with the policy of imposing 5% VAT at the retail grocery level. 

He said the markup in a grocery shop is generally not more than 10%-15%. So the tax incidence at 15% VAT should be in the range of 1.5%-2.25%.

"Accordingly, the 5% VAT [on supershops], if it is not creditable, would be quite a bit high. Taking that into consideration, it should have been kept at 2.5%-3%. If the system allowed for full input tax credit, even with a 15% VAT, the additional tax incidence at the retail level would not have been too high," Ahsan said. (creditable VAT is the portion of VAT paid on purchases and expenses that a business can claim as a credit against the VAT collected on sales. This helps to ensure that the VAT system is fair and that businesses are not taxed twice on the same transaction.)

Citing the examples of a full VAT system in the rest of the world, he continued, "If we had a full VAT system, the tax incidence at the retail level would not have been more than 1.5%-2.5%. Because then there would be full input tax credit, and the net increase in VAT at the retail stage would not be more than 1.5%-2%."

This sector in Bangladesh has the potential to generate around Tk5,000 crore in revenues, Supermarket owners claim. 

"We want the superstores and grocery shops to be brought under the same tax policy. Because of a discriminatory 5% VAT policy, supermarkets in Bangladesh have not thrived as expected," said Sabbir Hasan Nasir, Executive Director of Shwapno. 

In 2020, Bangladesh's retail market was worth $16 billion while the supermarket industry accounted for only 1.6% of this total, or around $256 million. Sabbir cited that super shops account for 43% of the overall retail market in Sri Lanka. "In India, the proportion is 8-9%," he said. 

In 2018, the total revenue generated by the country's super shop sector was TK1937.40 crore. 

The revenue growth rate declined drastically from 15.4% to 2.04% during 2015-16 after the increase of VAT in 2015. Again, the rate declined from 5.575 to 3% during 2017-18 when the VAT was raised to 5%. The analysis was carried out in 2019 with the data collected from Shwapno.

To minimise the 'discrimination' – the government assured they would pursue unorganised grocery shops to install Electronic Cash Register (ECR) machines. "For the last six or seven years, we have been hearing a monotonous story of ECR installation. Nothing has happened yet," Sabbir said. 

He believes that the installation of ECR at more than two million existing grocery shops is not possible. "Because there is no plan from the government's side in this regard." 

"If the 5% VAT is so important, it should have been added to the MRP. The product prices would be the same in all groceries and supermarkets," Sabbir said. 

Md Farid Uddin, who worked at NBR in different capacities and retired as a Senior Member, said the 5% VAT policy is discriminatory. At the same time, he said the VAT authority should scrutinise whether the super shops are really providing the 'value-added' services or not. 

"If a customer purchases a product worth Tk100, he or she should receive service worth Tk133 and then pay Tk5 VAT. That way, the VAT would be justified," Farid said. 

He added that the VAT should not be more than 3%. 

TBS journalist Nasif Tanjim contributed to this report.