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FOCUS ON THE ECONOMY

Is Timing Right for VAT ?

by Jamal Uddin Ahmad
**8Simply put, VAT it a tax an the firm's contribution to the market value of the product it produces or services it provides. Contribution is measured by the value addition in financial terms, to make it a saleable commodity. Rather than the tax being levied in one stage, VAT gets accrued at every stage where there is any value addition until the product or the service is ultimately con framed.***
THE conceptual faun Mm Iw VAT to — preMed tn Article 9 of
EEC directive 67/227/EEC issued on 11 April 1967 ns foltows :
"The principle of common system of wdue added tax involves the application of goods and services of a general tax on consumption exactly proportionate to the price of goods and services whatever the number of transactions which take place in the production and distribution proceaa before the stage at which tax is charged. On each transaction, value added tax is calculated on the goods and services at the rate applicable to such goods or services shall be chargeable after deduction of the amount of value added lax borne directly by the various cost components."
This system of lax was originally conceived and introduced in France, for the first time in 1936, after many years' of academic and practical experimentation, as a single stage tax. It was extended to wholesale stage in 1954 and to the retail stage in 1966. in a highly developed country like France, it took 30 years for this tax to be fully Implemented to cover all manufacturing, trading and service industries.
VAT was adopted by EEC as a system of indirect taxation in 1967 and it is now fully preva lent throughout the Commu nlty. Approximately 50 countries including most of the countries of OECD have adopted VAT in some form or the other. The standard rate varies between 5% and 25% and different rates are applicable in different countries. Furthermore rates also vary from product to product and from service to service. Exemptions arid zero rating are also adopted by different countries to suit their special needs. The only exception is perhaps New Zealand which allows apparently no exemption or zero rating. Complex though it ts both in perception and application, no country apparently went back on it after having adopted ft. This probably speaks of its success. .
Simply put. VAT is a tax on the firm's contribution to the market value of the product it produces or services ft provides. Contribution is measured by the value addition in
financial terms, to make it a saleable commodity. Rather than the lax being levied in one stage. VAT gels accrued al every stage where there is any value addition until the product or the service is ultimately consumed. The fact that ft is accrued and collected over a wide spectrum. It naturally becomes difficult to establish efficient administrative and col lection machinery. The problem Is further compounded by the inherent credit system which is vital to the scheme of VAT To understand and fully pul Into practice the modall-Oes of value addition al each stage as well as giving effect to credit for tax already paid, re
quires a high degree of education and understanding of the complex taxation system. This is the reason why VAT has so far remained restricted In countries where literacy rate are high and there arc strong business traditions and fiscal awareness.
Bangladesh Scenario
VAT has been talked about and discussed on and off in some quarters for about a year more as an academic curiosity than as a serious matter. Apart from a few professionals trained abroad particularly in the EEC, hardly anybody was found who knew how VAT worked tn all Ils forms. The National Board of Revenue has a few senior officials who claim that they have had enough training and expertise tn this system of taxation. To my knowledge, none of them have, however, had any practical experience In working with the system. All they know, is mostly from various seminars, workshops and guided tours they have undertaken in various countries at the cost of the national exchequer or trips financed by UNDP From their talks at some of the workshops tn which they attempted to
explain the system and from their Television appearances, one gets the feeling that VAT was really a very simple form of taxation which was easy and very cheap to administer as well as to comply With, even by unlettered people. As if. in fact, ft needed no education, no training and no orientation. To the informed, however, nothing could be farthest from truth- Either they were loo naive to spell out all its essential pre requisites or they were in a hurry to push it down the throat of the nation, regardless of the consequences. Without trying to undermine the great
features of VAT. let it be said quite plainly and candidly that its introduction without fully preparing the grounds and un dcrslandtng Its pros and cons, will bring disrepute lo the sys tern.
Now what arc the pre-requisite* of its Introduction ? First and foremost Is I hr- extensive Informal Ion campaign to be launched by Inc Government to fully explain and educate people about the system. This is a time eonsum Ing effort and should not be hurried through The Income Tax law that we have tn this country was Introduced In 1923. How many people in this country, literate or Illiterate, can claim to know the simple features of this law, let alone-Ils complexities after years of Ils cxistcncx- 7 Compared lo Income Tax law. VAT will be far more embracing and. al some stage, will affect nearly all people in sons way or an other The people I have talked lo since the Budget speech of the Finance Minister can be roughly divided Into two broad groups. The first group comprises of pcoplc who have tried to understand the complexities of the system but got thoroughly confused In
the process because of lack of guidance and availability of training materials. People in the second group seem confident that they would discover escape routes to evade wholly or gel away with paying only token amounts as they presently do for other taxes e.g. Income Tax. Custom Duly. Excise Duty, Sales Tax etc. They just could not be bothered to spend time to know about the nk-ctica of any taxation laws, let atone VAT. They an people who can always buy their way through. But the fact remains that there is genuine fear that VAT would probably
open up another big channel for widespread corruption.
Secondly and most impor-lanlly. the success of VAT depends entirely upon maintenance of reliable and detailed documentation and on accounting system. VAT content of each input and output will be required lo be shown on the Invoices and the tax liability computed as the difference between the amount of tax collected from customers fess the amount of lax paid to the suppliers. White on the subject of keeping accounting records In Bangladesh, the less said, the belter. How many business enterprises In this country maintain books of accounts, let alone correct accounting records 7 A review of the Income Tux assessments on a natural Mate will reveal that excepting for multinational companies, sector corporations, - government companies, banks, financial institutions and some nationally known companies, there are not many lax payers who maintain any form of accounting records. Nearly all income lax assessments arc made on national or presumptive Income basis. Even 1n the 1991-92 budget proposals, measures have been
prorided to use presumptive tax on business enterprises which do not maintain proper books of accounts to bring them in line with the highly qualified professionals like doctors, engineers, lawyers etc. How on earth a sophisticated system of taxation Hkc VAT is going to succeed in Bangladesh where nearly all the business transactions are conducted without documentation or with false or forged documentation 7 How about those businessmen who maintain no accounts 7 How does, for example, one account for smuggled goods ? Or. for that matter hoarded goods sold at a high price for which VAT was
neither paid nor collected.
Thirdly, as earlier said, the network of VAT is bound lo be very much largcr than any other form of taxation. There will be literally millions of people, when II will be in full operation, who will be either paying or receiving VAT which would be needed lo be accounted for. What kind of bureaucratic machinery will be needed to handle VAT administration lo deal with inspection. filing of returns, collection of tax. appeals and their adjudication etc 7 Instead of a small government promised by the Finance Minister, the nation might finally be landed up with another monster.
Last but not the least, VAT presupposes a certain amount of honesty and integrity both for the people who will be subjected to this form of taxation as well as those who will provide efficient administration of the system. Without trying lo be unfair to anytxxiy. let us al) ponder seriously if we. as a nation. have attained that kind of refinement.
Indian Scenario
India has a system which Is known as MODVAT. ft is a system of granting credit for the
exetoe^ duty-paid on^materials ft is incorrect to describe ft as
J Indus has come to the con- , chiaion that India is still not* ready for VAT. But there are’ serious academic and professional discussions going on for introduction of VAT after preparing aultobte grounds
Pakistan Scenario
National Taxation Reforms Commission in Pakistan had examined the VAT system for; Introduction but came upi» against certain basic problems. These were : (a) The exemptions envisaged would make It difficult for the system to operate satisfactorily, (b) Lack of proper documentation and ac-< counting records, audit and in4 spectlon etc. (c) Incredibly large number of tax payers would make the existing revenue administration Incapable to cope with the situation, (d) Lack of public awareness. The system presupposes a high degree of education and an orien/ tation towards maintaining proper accounting records which did not presently exist in the country.
However, an expert stud/ undertaken in 1988 had advo-J cated a brood booed tax In ihei nature of VAT but to be known* as Goods and Services Ta* (OST) to be introduced/ Although this measure has' been accepted in principle by; the Government, ft is yet to be implemented
Conclusion : Let me end this write up with a quotation front Adam Smith on what h<^ thought to be right criteria fotil an effective levy of tax. “
Tax which each individual; is bound to pay ought to be? certain, and not arbitrary.; Time of payment, quantity to-be paid ought lo be clear and-plain to contributor and to ev-! ery other persan. Where it i< otherwise, every person sub-; jccl to tax Is put more or fess> in power of lax gatherer, who can cither aggravate tax upon any obnoxious contributor, ott extort, by terror of such aggra-; valion. some present or; perquisite to himself."
Accountant and financial consul-\
Prime Minuter and the Minuter, for Industries in Ihe BNP govern--ment from 1977 lo 1982.