Value Added Tax (VAT)

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Introduction
Taxation one of the major sources of public revenue to meet a country’s revenue and
development expenditures with a view to accomplishing some economic and social objectives,
such as redistribution of income, price stabilization and discouraging harmful consumption. It
supplements other sources of public finance such as issuance of currency notes and coins,
charging for public goods and services and borrowings. The term ‘tax’ has been derived from
the French word taxe and etymologically, the Latin word taxare is related to the term ‘tax’, which
means ‘to charge’. Tax is ‘a contribution exacted by the state’. It is a nonpenal but compulsory
and unrequited transfer of resources from the private to the public sector, levied on the basis of
predetermined criteria.
Background of the Report
This report is a fundamental requirement for the completion of the course ACC 1001. The main
purpose of this report is to extract the information of the Value Added Tax practiced in
Bangladesh. Under the instruction and guidance of the course instructor Helaluddin Ahmed, I
have taken the initiative to conduct the research and prepare this report with much precision
and by being completely unbiased.
Objective
It is required for the completion of this course. Beside the general objective, the objectives
behind this report are given below:
Primary Objective:
The primary objective of the report is—
To analyze on the issue “The Impact Study of VAT in Bangladesh”.
Secondary Objective:
The secondary objective to prepare this report is—
To fulfill the requirements of my course ACC 1001.
To gather experience and knowledge of doing a professional report.
Scope of the Study:
This research study will cover the topic “The Impact Study of VAT in Bangladesh” and its related
issues. It also includes recommendations against the selected issues. This report can be used
as a secondary source for further purposes.
Sources of Information:
To fulfill the objective of this report collection of relevant, accurate, standardized and needful
information was required. To make this report reliable we have collected data from both primary

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sources and secondary sources. Special consideration was given so that chances of biasness
could not arise. The sources used were:
Primary Sources:
Primary data is defined as data, which originates as a result of that particular investigation.My
class lecture is only my primary source.
Secondary Sources:
Secondary data represents the data which are made by others but it is useful for another
purpose or research. As a part of collecting data from secondary sources, I have used different
books of Tax and VAT. I collected my data from mostly through websites as well as internet.
Limitations:
No study is beyond any limitations. While doing this research study I had to face some
difficulties. The limitations of the research activities are as follows—
I did not have so much experience for report very frequently as I am in learning position.
There was no current information related to Bangladesh on the Website.
There was lack of information in internet.
Methodology
This report covers the different aspects and activities that are required for the collection of VAT
by the Govt. However, the report is prepared based upon the information collected from several
websites who are involved in the relevant business like dealing with VATable goods and
services, the researcher’s own judgments which are also from the Internet.

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Introduction
Value Added Tax is emerging as an effective tool of taxation in the hands of Governments
internationally. In fact more than 100 countries around the world have accepted this as a way of
taxation on commercial activities. Our neighboring countries like India, Bhutan, Nepal and
Pakistan have already recognized VAT. Developed countries including Australia, United States,
Russia, and UK have already introduced VAT successfully.
The origin of Value Added Tax (VAT) can be traced as far back as the writings of Carl Friedrich
von Siemens, who proposed it in 1918 as a substitute for the then newly established German
turnover tax. Since then numerous economists have recommended it in different contexts. Also,
various committees have examined the tax in great detail.
However, for its regeneration, the tax owes much to Maurice Faure and Carl Sumner Shoup.
The recent evolution of VAT can be considered as the most important fiscal innovation of the
present century. VAT was first introduced in France in 1954. With the imposition of Taxe sur la
Valeur Ajoutée(Tax Adjoutee Value), France become the first European country to implement
VAT on an extensive scale. It was not, however, at first a complete system of VAT, since it
applied only to transactions entered into by manufacturers and wholesalers. It was
supplemented by a separate tax on services name as Tax sur les Prestations de Services(Tax
on Benefits Services). In addition, there were special excises which were levied on services and
distribution in lieu of thé taxes sur les présentations de services(the taxes on presentations of
services).
Value Added Tax (VAT)
Value Added Tax or VAT is levied on top of the cost of a product or service and generates
revenue for a government. Value Added Tax, popularly known as ‘VAT’, is a special type of
indirect tax in which a sum of money is levied at a particular stage in the sale of a product or
service.
In 1954, the value added tax system was initiated by the then joint director of the tax authority of
France, Maurice Laure. VAT came into effect for the first time on 10th April, 1954. From its
inception, the value added tax system was imposed on all major sectors of a country. Once
instituted, it was immediately clear that revenues collected from the VAT system constituted a
substantial share of the government’s revenue in the economy. Not surprisingly, due to the ease
of payment and ready comprehensibility, the value added tax system has been adopted by
different nations across the world.
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

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(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’.
Introduction of VAT in Bangladesh
VAT was introduced in Bangladesh as a consumption 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. The
mission submitted its final report on 15 October 1989. The report recommended the introduction
of a manufacturing-cum-import stage VAT at a single standard rate within three years.
Thereafter, a Bangladesh Tax Mission visited India, Indonesia, the Philippines and Thailand
during 13 November – 04 December 1989. The Mission submitted its report in January 1990.
The government discussed the issues relating to introduction of VAT with all related private and
public agencies including the various leading Chambers of Commerce and Industry from time to
time. The government prepared the Value Added Tax Act 1990 (Draft) in June 1990.
Final version of the Value Added Tax Act was promulgated 31 May 1991 as a Presidential
Ordinance with eight sections. 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. With the Presidential assent to the bill on the next day it came into effect as The
Value Added Tax Act 1991. The VAT Act 1991 replaced the Business Turnover Tax Ordinance
1982 and the Sales Tax Ordinance 1982 with effect from 1 July 1991. It imposed VAT @ 15%
on importer or supplier (producer) of taxable goods and provider of taxable services having
annual turnover of Tk 1.5 million or more. It imposed Turnover Tax (TT) @ 2% (currently 4%) on
supplier of taxable goods and provider of taxable services having annual turnover of less than
Tk 1.5 million (Tk 2 million at present). The new law imposed VAT at zero-rate on export sales
of any goods and services, brought excise duties on most goods under the VAT net, and
imposed Supplementary Duty (SD) @ 10% to 85% on goods and services which are luxurious
and non-essential and are socially undesirable.
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. The rate of turnover tax (TT) is also uniform at 4% (2% up to 11
June 1997). But the rates of supplementary duty (SD) are multiple. At the beginning (FY 1991-
92), there were five different rates which ranged from 10% to 85%. Next rates were eleven in
number and ranged from 5% to 350%. For FY 2000-01, there are 31 different rates that ranged
from 2.5% as on coffee to 350% as on cigarettes.

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National Board of Revenue (NBR):The Tax Central Collection Authority
The National Board of Revenue (NBR) is the central authority for tax administration in
Bangladesh. It was established by President’s Order No. 76 of 1972. Administratively, it is under
the Internal Resources Division (IRD) of the Ministry of Finance (MoF). Secretary of IRD acts as
the Chairman of NBR. Four Members (top position of the hierarchy) of NBR from Direct Tax
wing and four Members from Indirect taxation wing assist the chairman in executive, legislative
and policy matters.
NBR is responsible for formulation and continuous re-appraisal of tax-policies and tax-laws,
negotiating tax treaties with foreign governments and participating in inter-ministerial
deliberations on economic issues having a bearing on fiscal policies and tax administration. The
main responsibility of NBR is to collect domestic revenue primarily, Import Duties and Taxes,
VAT and Income Tax for the government. Other responsibilities include administration of all
matters related to taxes, duties and other revenue producing fees.
National Board of Revenue (NBR) is the apex authority of the government responsible for
collecting tax revenue, administering taxation administration and framing taxation policies and
laws for the government. The main responsibility of NBR is to mobilize domestic resources
through collection of Import Duties, VAT, Excise and Income Tax for the Government. NBR
through its different taxation sources collects more than 95% of the tax revenue for the
government.
The objectives behind introducing VAT in Bangladesh were
(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 tax-GDP ratio.
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.

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For services rendered 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 services are rendered;
(b) When an invoice relating to the rendering of service is given; and
(c) When the price is received in part or full.
VAT & Its Necessity
 VAT is a multi-point tax system but without the effect of double taxation. Tax is chargeable
at rate prescribed at each point of sale.
 In Valued Added Taxation system, the tax is calculated at different points of production and
distribution of a commodity.
 It is collected in installment on the basis of value added at each point of production and
distribution.
 Since an input is taxed only once VAT avoids the cascading effect, which is the chief demirt
of a generalized system of taxation i.e. excise and sales tax.
There are several objectives associated with VAT, foremost being its revenue raising quality,
due to inclusion of items such as wages, interest, profits etc. in its base. It shall also bring in
more discipline in the indirect tax regime. It is also imperative that VAT will take care of the
demerits of the existing system.
Value Added Tax Features in Bangladesh
The main features of VAT in Bangladesh are as follows:
1. VAT is imposed on goods and services at import stage, manufacturing, wholesale and
retails levels;
2. A uniform VAT rate of 15 percent is applicable for both goods and services;
3. 15 percent VAT is applicable for all business or industrial units with an annual turnover
of Taka 2 million and above;
4. Turnover tax at the rate of 4 percent is leviable where annual turnover is less than Taka
2 million;
5. VAT is applicable to all domestic products and services with some exemptions;
6. VAT is payable at the time of supply of goods and services;
7. Tax paid on inputs is creditable/adjustable against output tax;
8. Export is exempt;
9. Cottage industries (defined as a unit with an annual turnover of less than Taka 2 million
and with a capital machinery valued up to Taka 3,00,000) are exempt from VAT;
10. Tax returns are to be submitted on monthly or quarterly or half yearly basis as notified by
the Government.
11. Supplementary Duty (SD) is imposed at local and import stage under the VAT Act, 1991.
Existing statutory SD rates are as follows
A. On goods: 20%, 35%, 65%, 100%, 250% & 350%

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B. On services: 10%, 15% & 35%.
Cigarettes, natural gas and petroleum products which were the major sources of excise duties,
initially were kept beyond VAT net work. In 1992-93 these items were brought under VAT. It
may be mentioned that at present manually made cigarettes (known as Biri), part of textile items
& services rendered by commercial banks are still under excise system.
Primary requirement
The primary requirement under VAT system in Bangladesh is to have registration numbers by
all taxable persons from the local VAT authorities.
Such registrations are compulsory for each location of a business. The taxable persons are to
apply in a specific form to the VAT authority if their annual turnover exceeds 1.5 million taka.
The taxpayers are given a registration number through a specific certificate. The registration
certificate contains along with other information the activity codes in which the person is related.
The registration numbers are used by the taxpayers in their business transactions. Registrations
are done free of cost and are not subject to renewal. Any person whose annual turnover is less
than 1.5 million taka or any person outside VAT may also apply for registration voluntarily. Any
registration may be cancelled if the person discontinues his business or if his annual turnover is
found to be less than 1.5 million taka.
Under the VAT system in Bangladesh all tax payers are required to maintain books of accounts
regarding purchases, sales, raw materials, finished products etc. They are also to maintain an
account current book to help them to determine the amount of VAT due and the amount actually
paid for taxable goods. Payments of taxes are made through adjustments in the account current
book. Credit available for input taxes and refund against export can be used to settle the liability
for output tax.
The value of imported goods for levy and collection of VAT is considered to be the assessable
value for levy of custom duties plus other duties and taxes. While for domestic goods, this value
is consideration (the money value) at which the goods are supplied by the manufacturer, this
value includes all costs, charges, commission, duties and taxes except the VAT amount. On the
other hand, the gross receipts are considered to be the basis for determining the VAT liability for
services in general. But in special cases, some narrow base values instead of gross value are
taken into account for VAT calculation. Again in some cases, tariff values are fixed as base
value for determining VAT.
Each tax payer is required to issue a tax invoice, as proof of payment of VAT, for each supply of
goods or services. However, the importers are not required to issue any tax invoice. But when
importers sell their goods they may issue a supplementary tax invoice to a VAT registered
person. VAT on imported goods is to be paid by the importers at the time when the customs
duties on it are paid.
Taxpayers are to keep sufficient balance in their credit in the current account book either
through deposition of money to the Govt. treasury or through their input tax credit. System have
also been introduced to collect taxes on certain services like Construction, Motor Garages &
Workshops, Printing, Indenters, etc. at the source point of payment.

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Each taxpayer is to submit a tax return for each tax period (each calendar month) within 20 days
of a month following the tax period. The VAT authorities examine the returns, and enter the data
into the computer. All exports of goods & services are zero rated under VAT system.
Value added tax system in Bangladesh gives special treatment to the small firms. Under the
system, small manufacturers and services whose annual turnover is less than 1.5 million taka is
exempt from VAT but they are to pay turnover tax @ 2 per cent. Such turnover tax can be paid
either at a time or on quarterly basis. But they are not entitled to get credit benefit of their input
taxes
Moreover, a small firm whose annual turnover is less than 1.5 million taka and whose
investment in capital machineries only during a particular year does not exceed 300,000 taka
are treated as a cottage industry and is fully exempt from VAT or turn over tax. They are also
free from VAT formalities. It is easy to have the benefits of VAT in an economy where it is
implemented in a comprehensive form covering all tiers of production and distribution as well as
to all economic activities.
The single stage VAT in Bangladesh has undoubtedly widened the tax base as compared to
excise or sales tax system and has brought a favorable result in collection of taxes but it had
limited further results due to some limitation and distortion in its application
Value Added Tax (VAT) Wing
Value Added Tax (VAT) was first introduced in Bangladesh in the year 1991 by partially
replacing the Excise Duty and wholly the sales tax at the import stage. In Bangladesh, only a
single rate of VAT 15% is prevailing. However in some cases base value for VAT is truncated.
VAT Administration
VAT administration is one of the three wings of National Board of Revenue (NBR). Under the
direct supervision and control of the Chairman NBR, Member (VAT) of NBR works as the head
of operational and administrative activities of VAT administration. At present there are eight VAT
Commission rates all over Bangladesh each headed by a Commissioner of VAT.
VAT Mechanism
VAT system in Bangladesh operates under the legal framework of Value Added Tax Act 1991
and Value Added Tax Rules 1991 made under Value Added Tax Act 1991. As per VAT Act at a
flat rate of 15% is chargeable on all goods and services imported in Bangladesh and on all
goods and services produced in Bangladesh at every stage when the title of the goods and
services of the concerned transaction is transferred. However there is exception for certain the
goods and services listed in the first schedule and second schedule of VAT act 1991
respectively. The exempted items are basic agricultural products, live animals and animal
products, education, books, magazines, newspapers, postal services and passengers and
goods transportation services etc..
The person is required to comply with following procedures prior to clearing goods and services
from taxpayer’s premises:

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 Get registered with VAT authority, collect Business Identification Number (BIN) which
is referred in all matters relating to VAT.
 Submit value declaration – the basis for imposing VAT i.e. price per unit on which rate
of VAT to be charged- and get it approved of VAT authority (basically Divisional
Officer).
 Maintain prescribed books and record.
VAT Collection Trends
VAT at this moment, is the most dominating revenue sources of the government. In FY2005,
VAT revenues constituted 36% of the total tax revenue and 27% of the total revenue collection,
making it to be the largest piece of the tax revenue pie. VAT collection is growing very rapidly
over the last decade. In FY 2005 VAT achieved an impressive 23.7% growth.
Table 1: VAT Collection Scenario
FY2001 FY2002 FY2003 FY2004 FY2005
VAT Collection 61.32 69.6 80.71 85.75 106.05
Growth in VAT Collection 13.6 13.5 16.0 6.2 23.7
VAT collection as percentile
of total revenue
25.4 25.2 25.9 24.2 27.1
Total revenue receipt 241.7 276.7 311.19 354 392
Tax Expenditures in Bangladesh
Tax Expenditure Measures under Direct Taxes
Various tax expenditure measures exist for corporate and personal income taxpayers under the
existing income tax law. These are summarized below
 Corporate Income Tax
 Personal Income Tax
Tax Expenditure Measures in Indirect Taxes
Under the various acts of indirect taxes, exemptions and deductions are given in the area of
customs duty, supplementary duty and Value-Added Tax (VAT).
 Customs and Supplementary Duty
 Value–Added Tax
VAT System in Bangladesh

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As mentioned earlier, Bangladesh introduced the VAT as a radical reform in the indirect tax
system. The then government tried to familiarize people with this new tax system and to make
the reform successful. Before judging the success of this reform, some important issues should
be discussed.
Revenue and Tax Structure in Bangladesh
1. A. Revenue Structure
Total internal resource generation of a country consists of tax and non-tax revenues. National
performance, therefore, regarding mobilization of internal resources may be assed by relating
the overall tax and non-tax revenue to national income and comparing these ratios over time.
The revenue GDP ratio rose from a low of 5.2 per cent in the early seventies to 8.8 per cent in
the late seventies and then increased only marginally and remained at less than 10 per cent
even in 1988/89 – 1990/91. Also tax receipts accounted, as table 2 shows, for more than eighty
per cent of the total revenue earning of the country during this period. Thus, it is evident that the
internal resources generation effort of the country is low and the loan’s share of it is borne by
the tax revenue.
a) Tax Revenue
National Board of Revenue (NBR), under Ministry of Finance is the apex authority of the
government for collecting tax revenue. In FY 2005 government collected 77.8% of revenue
through NBR sources. Import duty together with supplementary duty is still cater the largest
share of tax revenue for the government. Value Added Tax (VAT) is second largest source
followed by Income Tax. In FY 2005 VAT accounted for 36% of total NBR tax revenue where
share of Income Tax was only 19%. These figures reveal the fact that government is largely
dependant on indirect tax sources.
Government also collects tax, duty and fees through different central government and local
government organizations. Non judicial stamps, interest, dividends, profits, are few other major
sources of government revenue.
b) Government Receipts
Tax revenue is the main source of the government revenue. Tax revenue accounts for about 80
percent of total government revenue. In FY 1996-97, revenue/GDP ratio was 9.62 percent,
which rose to 10.21 percent in FY2001-02. In FY 2006-07 the revenue/GDP rose to 10.58
percent. Table 4 shows tax and non-tax revenue receipts and tax-GDP ratio during the period
from FY1996-97 to FY2006-07.
(c) Tax Management
Determination of tax policy of the government and its implementation are reposed on the
National Board of Revenue (NBR). During FY 2006-07, various steps were taken to rationalize
direct and indirect taxes to achieve accelerated economic growth aimed at reducing poverty,

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infusing more dynamism in the agriculture sector, expansion of export-oriented industries and
exports, development of domestic industries, enhancing industrial productivity and creation of
employment opportunities.
(d) Revenue Collection Activities
Analysis of revenue collection activities for FY2006-07 by categories shows that the bulk of
revenue collection comes from value added tax (VAT). Income tax occupies the second place in
the row. Next positions are held by import duties, supplementary duty, other taxes and excise
duty. Overall, the share of VAT in the total revenue collection is gradually increasing. It may be
mention that for the first time, income occupies second position over import duties.
In FY 2004-05, the total revenue collection under NBR amounted to Tk. 29988.66 crore. The
collection was Tk. 3795.76 crore higher than that of the previous fiscal year showing 14.49
percent growth. In FY 2005-06, total revenue collection stood at Tk.33987.04 crore, which was
Tk. 3998.38 crore or 13.33 percent higher than that of the previous year. In FY 2006-07, total
revenue collection stood at Tk. 37030.79 crore, which was Tk. 3043.75 crore or 8.96 percent
higher than the collection of the previous year
B. Tax Structure
The tax structure in the country consists of both direct (income tax, gift tax, land development
tax, non-judicial stamp, registration, immovable property tax, etc) and indirect (customs duty,
excise duty, motor vehicle tax, narcotics and liquor duty, VAT, SD, foreign travel tax, TT,
electricity duty, advertisement tax, etc) taxes. Since direct taxes represent only about 19% of
total taxes, tax-structure is heavily dependent on indirect taxes, which are usually of regressive
nature. Of the direct taxes, around 69% come from income tax, 19% from non-judicial stamp,
5.7% from land revenue, 5.6% from registration and balance from gift tax and other direct taxes.
Indirect taxes (representing 81% of total taxes), on the other hand, are mainly import-
dependent. Around 67% of indirect taxes are collected at import stage by customs authorities as
customs duty (38.0% of indirect tax or 30.7% of total tax), VAT (24.3% of indirect tax or 19.6%
of total tax), and SD (4.7% of indirect tax or 3.8% of total tax). Balance of indirect taxes
(representing around 26.64% of total taxes) include taxes collected on domestic production,
consumption or transactions such as VAT (11.4%), SD (11.6%), excise duty (1.5%), foreign
travel tax (0.7%), electricity duty (0.6%), motor vehicle tax (0.7%), narcotics duty (0.2%), TT
(0.03%), air ticket tax (0.01%) and advertisement tax (0.001%). Public revenue also comes from
non-tax receipts such as surplus of sector corporations, financial institutions, railways, postal
department, telegraph and telephone, judicial stamp, etc, and these non-tax revenues represent
around 19% of total revenues.
1. Direct Taxes
Income Taxes
Other direct taxes
2. Indirect Taxes
Taxes on foreign trade

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i) Import Duty
ii) Export Duty
iii) Sales (import) Taxes
iv) Other Customs Taxes
Taxes on domestic goods and services
i) Taxes on domestic goods
ia) Excise Duties
ib) Sales(domestic)tax
General Requirements for VAT System:
1. Compulsory issue of tax invoice and retail invoice: Tax invoice is issued to a
dealer/consumer who has to take input VAT Credit whereas retail invoice is meant for
inter state sales or sale to a consumer who does not require input credit of VAT.
2. Registration: There is a compulsory registration of the dealer if the aggregate turnover
exceeds a certain specified limit.
3. Composition scheme: A small dealer whose turnover does not exceed a specified limit
(say in Delhi Rs. 50 lakhs) can opt for composition scheme where he shall have to pay
tax himself at a small percentage of gross turnover and in this case buyer of
goods with not get input VAT Credit.
4. Tax payer identification Number (TIN): There will be a taxpayer’s identification number of
11 digit numericals which will be unique to each dealer.
5. Simplified returns of VAT are to filed monthly or quarterly as specified by each state.
6. Selfassessment by dealers.
7. Audit under VAT has been made compulsory by various States.
8. No requirement of any declaration form as bill will be raised for each sale and VAT shall
be levied.
9. Comprehensive coverage as only few commodities have been exempted from VAT.
Why the VAT is Preferred for Bangladesh
The reasons for preferences of the VAT for Bangladesh are:
It has more advantages than disadvantages compared to other taxes. Moreover, the tax
structure prior to July 1991. In Bangladesh was highly defective which is, more or less,
discussed above. Tax evasion was widespread particularly among the rich. The tax structure
was also discriminatory against export and biased towards inefficiency. The tax system was
also inequitable and there were large scale allegation of corruption.

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Moreover, there was more than one rate in the tax system which would result in economic
inefficiency and administrative complicacy. The cascading effect of the indirect taxes would
increase the production costs, induce the producers to evade taxes and generate some
problems which have been discussed earlier. It would also reduce the consumer’s welfare
through the price-rise.
Therefore, due to intrinsic problems of the indirect tax system, revenue collection of the
government was never satisfactory. To overcome this deficiency and to make the indirect tax
system more dynamic and fruitful, the VAT has been introduced.
Advantage of VAT in Bangladesh
VAT being a broad based tax levied at multiple stage is generally perceived as an explicit
replacement of State sales tax for raising additional revenue for the Government. The purpose
of a tax system is to bring in revenues to the Government. Tax revenues can be raised in
many ways. However, the main characteristic of good tax system should be –
1. The tax system should be fair or equitable;
2. It should cause the least possible harmful effects to the economy and to the extent
possible; it should promote growth to the economy.
3. It should be simple both for its compliance by the payer and for its administration by the
Government.
4. It should be income elastic.
Keeping in view the above objectives, VAT is being implemented in various states in place of
the local sales tax payable by the seller. VAT is also expected to be more effective and
efficient for every person including Government, manufactures, traders and consumers and
hold the following advantages:
1. Easy to Administer & Transparent: This system of charging tax is easy to administer
because of its simplicity. It also reduces the cost of compliance by the dealers and is
transparent, as tax is to be charged in every bill and there will be no local statutory forms.
2. Less Litigation: There will be no litigation with respect to allowability of items, as under
VAT no items will be specified in the registration certificate of the dealer. The dealer will be
allowed to purchase any of the items of his choice in which he intends to deal. He will also
be allowed to purchase any item he requires as raw material for the purpose of
manufacturing or for packing.
3. Tax Credit on purchase of Capital Goods: The dealer will be allowed to purchase capital
goods for manufacturing after paying sale tax and will be entitled to get set off sales tax
paid on such purchases from his sales tax liability, which will arise on the sales made by
him.
4. Abolition of Statutory Forms: There are no forms under VAT. Therefore, all problems
related to forms automatically get resolved.
5. Self Assessment: Dealers are not required to appear before the Assessing Authority for
their yearly assessments, as under VAT there is provision for self assessment. All the
cases will be accepted by the department as correct and only a few will be selected for
audit as is being done by Income Tax Department and Excise Department at present.
6. Deterrent against Tax Avoidance: It will act as deterrent against tax avoidance. Under
the present system, tax is charged either on first point basis or at last point basis hence the
incentive to evade tax is high because the dealer saves the whole amount of tax due on

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such transaction, whereas under VAT the incentive to evade tax is low because the dealer
saves only a part of tax i.e. (tax amount which he is liable to pay less the amount of tax he
has already paid on his purchases).
7. No Cascading Effect: It does not have cascading (tax on tax) effect due to system of
deduction or credit mechanism. Since VAT does away with cascading, it avoids distorting
business decisions; the need for vertical integration is dictated only by the market forces or
technical considerations, and not by the tax structure.
8. Effective Audit & Enforcement Strategies: The input credit method by generating a trail of
invoices is argued to be system that encourages better compliance since the purchaser
seeks an invoice to get input tax credit. Further, this trail of invoices supports effective audit
and enforcement strategies.
9. Minimum Exemptions: The system will be more effective because of minimum exemptions.
10. Removal of Anomaly of First Point Taxation: VAT eliminates the limitations of single point
tax either at first point or last point. In the case of last point goods, the temptation to evade
tax is high. Firstly, the quantum of tax at one point is high. Secondly, as the exemption is
available against statutory forms, possibility of misuse of forms cannot be ruled out.
Similarly, under first point tax system, tax avoidance by way of selling the goods at first pint
to their sister concerns at lower rates and thereafter increasing the price of the goods
because subsequent sales being exempt as tax paid. This anomaly is also being taken care
or under VAT, without introducing cascading.
Disadvantage of VAT in Bangladesh
Inherently there are certain limitations of VAT due to which it being opposed by some of the
trade associations. Moreover VAT undoubtedly has many advantages but without taking note of
the limitation of VAT, one is just looking only at one side of the coin. The limitations of VAT are
discussed hereunder.
1. Detailed Records: Like any other system VAT is also not free from all evils. Though on
record it is said to be the simplest method, however, it is more complicated than a simple
first point tax. Many small dealers maintain only primitive accounts and it is very difficult for
them to keep proper and detailed records required for VAT purposes.
2. Cause Inflation: It is also argued that VAT causes inflation. It’s impact will depend on
various factors such as inventory holding period, demand supply position of that particular
product, number of intermediaries etc. Investment in stock is bound to increase as tax will be
paid at the time of purchase, hence one will have to carry tax paid stock.
3. Refund of Tax: Credit of tax paid on inputs/capital goods is available to be utilized against
tax liability which will be calculated on the sale of final product. VAT credit can not be availed
if no tax is payable on final product being exempt or taxable at lower rate.
4. Functional Problems: The functional problem of VAT is that input tax credit is allowed on
the basis of the invoices issued by the dealer. In respect of invoices where tax at the earlier
stage is charged and collected, but not remitted to the State by the concerned dealer, the
dealer who has paid the tax and who is entitle to take credit for the tax paid should not be
made to suffer. Provisions to protect the interest of the dealers who have paid the tax should
be made.

15. Page 15 of 15
5. Increase in Investment: Dealer will be making purchases after paying tax, therefore
investment in stock will go up the extent of tax paid. Under old system the dealer was
making purchases against statutory forms, hence was not liable to pay tax on it’s purchases.
6. Not Credit for Tax paid on Inter-state Purchases: The biggest problem of introduction of
VAT is the non-availability of credit for tax paid on interstate purchases in initial years. It will
also result in some cascading effect, which goes against the basic spirit of VAT.
7. Audit under VAT: Most of the states introduced VAT on 1.4.2005 and they have
incorporated audit provisions in the Legislation itself. Audit under VAT is important for better
and effective implementation of the VAT system.
Conclusion:
However, some of the states are still attempting to push forward the deadline as this will allow
to the central government to amend central sales tax act, bring legislative changes for
implementation, taxation of services at state level and settlement of procedure for
compensation to states on account of losses in revenue collection due to implementation of
VAT. The delay would also give the states more time to put administrative arrangement into
place and training employees for the new system. Clearly, there is a need to popularize the
scheme of VAT through persuasion, allaying the genuine fears of all the parties. New regime
will be theoretically superior to the existing regime known to all. If effectively implemented, it
will ensure greater transparency. It will also have the great merit of being simpler to monitor.
Even from the revenue angle, it should increase the revenue in the hands of the State
Governments.