VAT-GDP gap: Tk1.5 lakh crore remains out of grasp

More than Tk1.50 lakh crore from VATable goods and services annually remains unrealised because of weaknesses in VAT collection measures. Various initiatives taken by the government to increase revenue are also apparently proving futile.

According to the National Board of Revenue (NBR), around Tk2.5 lakh crore was supposed to be mobilised at 15% on VATable transactions of Tk16.6 lakh crore in 11 sectors based on their contribution to GDP in FY21. 

But the actual VAT collection amounted to only a little over Tk97,000 crore – only about 40% of the projected amount.  

Economists shed light on an even grimmer picture, saying the gap in reality is even greater. 

Dr Ahsan H Mansur, executive director at the Policy Research Institute, told The Business Standard that the shortfall in VAT collection is at least Tk2,50,000 crore.

Businesspeople have put down a poor performance in VAT collection mainly to a lack of automation, a big number of traceless transactions, limitations in the new VAT law, VAT evading tendency, higher VAT rates, and unpopularity of electronic fiscal devices.

Mostofa Azad Chowdhury Babu, senior vice-president at Federation of Bangladesh Chamber of Commerce and Industries (FBCCI), said, "Many businesses are also staying away from VAT registration fearing harassment."

Against all the backdrops, the NBR has formed a committee, led by Dr Md Abdur Rouf, director general at Customs Intelligence and Investigation Directorate, to find ways of how to increase VAT collection.

According to sources familiar with the matter, the committee has been asked to submit a report on various issues, including structural reforms of VAT management and any possible impacts on revenue collection from an increase or decrease in VAT rates.

In FY21, 15 sectors contributed nearly Tk30 lakh crore to GDP. Of them, 11 sectors are entitled to pay VAT at different rates, while the remaining four, such as agriculture and livestock, fisheries, public administration and defence, and health and social safety, enjoy 100 VAT exemption with a 20% of GDP contribution in FY21, according to Bangladesh Bureau of Statistics (BBS).

Besides, nine out of the 11 sectors get a VAT waiver between 5% and 99%, the BBS said.

Talking about the NBR-estimated shortfall in VAT collection, on condition of anonymity, a senior NBR VAT official told TBS. "This calculation is not 100% accurate. We have only tried to get an idea about the situation. In reality, the gap could be more than the calculation."

The collection from the VAT sector apart, the overall revenue mobilisation is very low in line with the GDP size. 

Even five years ago, the country's revenue collection was 10% or more of GDP, which came down to 9% in the last two years, according to NBR data.

VAT officials suggest bringing discipline in the financial sector to boost revenue collection.

Syed Mushfiqur Rahman, commissioner at Customs Excise and VAT Commissionerate (Dhaka West), said, "Scandinavian countries collect 90% or more of their GDP in revenue. In Bangladesh, VAT collection will increase if we make structural reforms in revenue administration. We also need to bring the whole process under automation."

The country introduced the first VAT law in 1991. The government came up with another act in 2012 to improve VAT management, which was supposed to be implemented from 2015. But in the face of strong objections from traders on various issues of the act, it came into effect in 2019 with some major changes.

Reasons behind low VAT collection

According to the latest BBS survey, there are about 80 lakh small and large economic units in the country. 

But only about 3 lakh of them got Business Identification Number (BIN) after the new VAT law took effect and one-third of them do not submit monthly returns.

Former NBR chairman Dr Muhammad Abdul Mazid the failure to turn the transaction process online is one of the reasons behind low VAT collection.

Ali Ahmed, former member of the NBR, said, "Many people tend to avoid VAT payment fearing harassment. In many cases, even if you want to pay your VAT without bribing officials, there is a risk of harassment."

However, Md Farid Uddin, another former member of the NBR, blamed three specific factors for poor VAT collection, including many distortions in the implementation of the VAT law enacted in 2012, lack of proper implementation of VAT automation project and a poor coordination between VAT, customs and income tax departments within the NBR.

The government has also introduced electronic fiscal devices to keep accurate accounts of transactions in 26 types of businesses, including shops. But over the last three years, only about 3,500 business organisations have installed such devices. 

There are also allegations that all transactions are not done using electronic devices.

NBR officials said the new law will be effective if the process can be fully automated.