A look at how your shirt price goes up with new VAT system

Shahanoor Collection, a wholesaler at Dhaka's Gawsia market, which manufactures women's garments for the local market, sees its cost of production to go up substantially due to the proposed value added tax (VAT).

Abdul Malek who owns the business used to pay a nominal package VAT on his total annual sale. This means he used to pay a fixed amount Tk 28,000 as Vat irrespective of his sales.

But from July 1 he will have to pay VAT at 7.5 percent rate on his sale.

Malek will have to pay 5 percent as advance VAT on purchase of fabric from the local market. But if he imports the fabric, he will have to pay at 15 percent.  He will have to pay VAT at the same rate on other raw materials such yarn and buttons.

Malek will have to pay extra 10 percent VAT on the tailors' bill.

So following the new system let's check back on how Malek's product price will go up with the new VAT system.

If he buys imported raw materials for a dress for Tk 100, he will have to pay Tk 15 in VAT at source.

If he pays Tk 200 as tailoring bill, he will have to pay Tk 20 to the government as VAT.

If he wants to profit Tk 100 and pay 7.5 percent VAT at sale, the price of the dress will be Tk 467.65.

So in total he will have to pay Tk 67.65 in VAT.

However, he can now sell the same dress for Tk 415 as he only pays 15 percent VAT on imported raw materials and is exempted from other stages of VAT payment.

This means, he will have to pay an additional Tk 52.62 in VAT which will then pass on to the consumers.

The ultimate loser will be the buyer and also Malek himself as with the rise in his garment price, his sales would dip if one follows the logic of economics.

So in various stages he will have to pay VAT, none of which is refundable, meaning he cannot claim back any of the tax.

But VAT in essence should be a system in which its ultimate burden falls on the consumer while the rest in the production chain can get VAT refund.

In the proposed VAT law, the tax rebate has been announced only if the rate is 15 percent at the final stage which means if only the consumer pays 15 percent on goods and services.

"The VAT law states that tax refund should be considered in each stage but here, only 15 percent tax regime has been considered," Manzur Ahmed, advisor of Bangladesh Chamber of Commerce and Industry (BCCI), told The Business Standard.
"While proposing the VAT law, 4 stages of the law have been mentioned but there are actually 8 stages," he added.

He demanded that the law should be introduced without any amendment to protect businessmen from severe loss as the refund mechanism is limited.