IMF for 15% VAT on all goods, services for businesses with over Tk3cr turnover

Infographics: TBS

The International Monetary Fund (IMF) has proposed implementing a 15% Value Added Tax (VAT) on all types of goods and services from businesses with turnover above Tk3 crore, removing their reduced VAT rates and exemptions.

In a meeting with NBR officials on Sunday (28 April), a visiting IMF delegation led by Rahul Anand suggested withdrawing VAT exemptions and rate reductions in various sectors, including clothing, footwear, education, health care, liquefied petroleum gas, and mobile phones.

If the global lender's proposal is accepted, sectors such as health, education, agriculture, and daily necessities, which currently enjoy reduced rates or tax exemptions, will face a 15% VAT, according to a top official of the National Board of Revenue (NBR).

This could raise commodity prices, harm local industries, and increase import dependency, putting pressure on foreign currencies, said the official.

The official, who was present at the meeting, added that they would review the proposals and implement reasonable ones. "We are close to meeting the revenue collection target set for us with the current strategy. Therefore, we don't see the reason for imposing a 15% VAT on all sectors."

Earlier, when the VAT Act of 2012 was introduced, the IMF recommended a flat 15% VAT rate for all transactions. Despite initial government acceptance, the proposal faced opposition from businesses.

In 2019, after amendments to the Act, it was implemented with adjustments accommodating trader demands.

Input tax credit

Md Farid Uddin, a former NBR member, said there will be an opportunity for input tax credit under IMF's proposal.

"This means VAT will only be applied to the value added. This approach aims to promote compliance and bring stability to the economy," he added.

NBR officials, however, said businesses must keep detailed records to avail input tax credits. Because Bangladesh's economy is mostly informal, many businesses can't meet this rule.

Ahsan H Mansur, executive director of Policy Research Institute, supports the IMF's proposal for a unified VAT rate without exemptions.

The economist said, "Although the VAT rate is officially 15%, it effectively exceeds 35% in some cases because businesses can't claim input tax credits."

He also said the revenue board officials are hesitant to enforce the 15% VAT.

Current VAT rates

According to NBR data, the standard VAT rate is 15%. However, businesses with an annual turnover of up to Tk50 lakh are exempt from VAT and do not need to register for Business Identification Number (BIN). 

For turnovers above Tk50 lakh but under Tk3 crore, there is a 4% tax. VAT is 15% for turnovers exceeding Tk3 crore.

The NBR has mandated BIN registration for 27 types of businesses, even if their turnover is below Tk50 lakh, requiring them to submit monthly VAT returns. 

Additionally, there are 105 types of goods and services subject to VAT at reduced rates ranging from 10%, 7.5%, to 5%. Sixteen goods and services have specific taxes. 

VAT is at 5% for trading, while health, education, and some sectors enjoy VAT exemption or reduced rates. The export and most agro sectors are VAT exempt. 

Currently, there are 4,50,000 VAT registration holders according to NBR data.

Revising tax limit

The IMF suggests removing tax exemptions for service holders of up to Tk4.5 lakh or one-third of their income (whichever is less). This would increase the tax-free income limit for individual taxpayers from Tk3.5 lakh to Tk5 lakh.

Besides, the IMF suggested taxing remittances, various types of bonds, zero coupon bonds, and capital gains in the stock market. 

It also proposed taxing 27 services in the IT sector. Representatives have asked NBR for specific dates on when these taxes will be implemented.

An official present at the meeting said the IMF representatives will meet with the NBR chairman again on 30 April to discuss the board's position on these matters. 

The officials said the IMF delegation also sought information on the type of taxes to be imposed in each sector and where tax expenditures will be reduced in the next budget. 

However, NBR officials declined to disclose their plans to the delegation, citing fiscal policy confidentiality.

During the meeting, NBR was asked to report on potential tax expenditures in each sector for the next fiscal year by June. 

They were also instructed to devise a tax compliance improvement plan, which must be submitted to the agency by June. Additionally, it was suggested not to renew expiring exemptions.

The IMF has imposed conditions on Bangladesh's $4.7 billion loan, requiring the country to rationalise tax exemptions to increase the tax-to-GDP ratio to 0.5%. 

A mission from the IMF is currently in Dhaka to assess Bangladesh's compliance with these conditions before disbursing the next loan instalment and reviewing future plans.

The mission has held meetings with officials from the Income Tax, VAT, and Customs Wing of NBR. Additionally, they are meeting with other government entities, including the Ministry of Finance.