NBR plans to widen dragnet for VAT at source in FY25, hopes to add Tk5,000cr revenue

TBS Illustration

The National Board of Revenue (NBR) plans to bring all business and service entities with annual transactions exceeding Tk10 crore under the system for deducting VAT at source in the upcoming fiscal 2024-25, aiming to collect an additional Tk5,000 crore in revenue.

Currently, only government and autonomous bodies, banks, insurance and other financial institutions, certain NGOs, and companies registered with the Registrar of Joint Stock Companies and Firms are required to deduct VAT at source.

According to the NBR's new plan, more entities will now have to deduct VAT at source during payments of 43 specified services, officials closely involved with the fiscal policy say.

"We expect the new plan to add more than 5,000 new entities for VAT deduction at source in the next fiscal year generating an additional Tk5,000 crore in revenue," a senior NBR official told TBS seeking anonymity.

The NBR hopes the new plan will improve compliance among businesses and other entities with larger turnovers, he said.

The 43 services, subject to VAT deduction at source at rates ranging from 5% to 15%, include hotels, restaurants, motor vehicle workshops, construction firms, advertisement agencies, printing presses, land developers, furniture sales centres, couriers, servicing centres, consultancy and supervisory firms, leaseholders, suppliers, audit and accounting firms, legal advisers, transport contractors, vehicle rental providers, architects, interior designers and decorators, advertisement through satellite channels, information technology-enabled services, human resources supply or management entities, according to the NBR.

How VAT deduction at source works

An example of VAT deduction at source can illustrate how the system works in practice.

As a government-owned company, the Dhaka Mass Transit Company Limited that is responsible for operating Dhaka Metro Rail, currently deducts VAT at source from payments made for any of the 43 services.

Let's assume the Dhaka Mass Transit authorities have contracted a large firm to construct a section of the Dhaka Metro Rail and have issued a bill of Tk100 crore. The bill will include a 7.5% VAT deduction of Tk7.5 crore at source, which will be paid directly to the NBR. The construction firm will not be responsible for paying the VAT. This is the current practice in VAT deduction at source.

Another example can demonstrate how the VAT deduction at source will work for new entities that will possibly come under the system.

Let's assume that a diagnostic centre has fallen into the category of being an entity under the VAT deduction at source mechanism. If the establishment pays a bill of Tk1 crore for an IT-related service, it will be required to deduct 5% VAT at source from the bill, amounting to Tk5 lakh, and deposit it directly to the government treasury.

Consequently, the IT firm providing the service will not be responsible for paying any additional VAT. This eliminates the need to determine the IT firm's VAT registration status or collect VAT directly from it, as the VAT has already been deducted at source.

Target: Preventing VAT evasion

A senior NBR official, speaking to TBS about the NBR plan regarding the VAT deduction at source mechanism, explained how the inclusion of more entities under the system will widen VAT collection.

"There are fixed VAT rates for these 43 services and the NBR can collect revenues in the system from compliant establishments. But many establishments either fall outside the VAT system or pose challenges for the NBR to collect VAT from them. To address this and ensure VAT collection, the provision for deduction at source is being introduced at the time of bill payment. This aims to prevent VAT evasion," he said.

Mixed reactions from experts

Experts have mixed reactions to the plan. Some believe it will create an opportunity to ensure compliance among a large number of entities that currently do not show their actual turnover and do not collect VAT at source. Others believe it may increase business harassment and be difficult to implement due to the informal nature of a significant portion of the country's economy.

Md Farid Uddin, a former NBR member of the VAT policy wing, told TBS, "If the new plan is implemented, there is little chance of collecting a substantial amount of revenue because only a few entities will probably show turnovers exceeding Tk10 crore."

Through the new initiative, business harassment may increase, and a section of officials may put further pressure on businesses and other entities, potentially leading to chaos at field levels, rather than ensuring compliance, he said. "The NBR is taking an easy way out to collect more revenue rather than being innovative."

Criticising revenue authorities' increasing reliance on VAT deduction at source, the former NBR official termed it as a "distorted system".

Ahsan H Mansur, executive director of the Policy Research Institute (PRI), believes that the implementation of NBR's plan would create an opportunity to ensure compliance among a large number of entities that currently do not show their actual turnover and do not collect VAT at source during payment for listed services.

"However, it has to be implemented not by creating an atmosphere of fear, but by taking VAT payers into confidence," said Mansur, who also worked as a senior economist of the International Monetary Fund.

According to the NBR, there are presently over five lakh business identification number or BIN holders, also known as VAT registration holders in the country. In the last fiscal year (FY23), the revenue authorities collected about Tk1.25 lakh crore in VAT. Out of the amount, Tk56,000 crore or about 45% was collected from VAT deduction at source.

Of the collected VAT, more than 80% came from government entities during payments to suppliers for development projects or other work. The majority of the remaining amount came from companies including those in the mobile telecom sector.

Implementation can be challenging

Field-level VAT officials see little hope for the success of the new initiative because a significant portion of the country's economy is informal and many entities do not disclose their actual turnover to avoid paying VAT.

A senior VAT official from a Dhaka VAT Commissionerate told TBS on condition of anonymity, "The number of entities showing a turnover of even Tk3 crore or more annually is very low. In the current situation, it is very challenging to classify these entities as VDS [VAT deduction at source] entities and collect VAT accordingly."

He also said, "It would be easier to implement if all or most of the transactions could be conducted through formal channels, but unfortunately, that is not happening in the country. Instead, if the NBR can implement an automation system for some VAT-related processes including e-invoicing, e-refund, and e-rebate, it could yield better results in revenue collection.