Added VAT burden looms as govt races to meet IMF's revenue target

Infographics: TBS

Amid high inflationary pressure, consumers may face an added tax burden as the government plans to remove reduced VAT rates on certain products to meet the IMF's target of generating an additional Tk12,000 crore in revenue this fiscal year.

To meet the global lender's revenue target, authorities are considering applying the standard 15% VAT rate on the assembly, raw material imports, and retail stages for locally produced mobile phones and refrigerators.

Abdur Rahman Khan, chairman of the National Board of Revenue (NBR), on Sunday presented a proposal to the Finance Adviser Salehuddin Ahmed detailing plans to withdraw VAT exemptions.

Besides, the standard rate rate could be gradually applied to around 20 other products, including raw materials for making LPG cylinders, cement, ocean-going vessels, household and industrial cleaning products, home appliances, and telecommunications items, all of which currently enjoy reduced VAT rates.

A senior official from the revenue board's VAT wing, speaking on condition of anonymity, said generating additional Tk12,000 as set by the IMF through income tax or customs duty is practically unfeasible in the current fiscal year.

"Therefore, we are considering eliminating VAT exemptions for some items," the official explained, adding that while the initial list of affected goods is relatively small, it may expand.

"Nothing has been finalised yet," he told The Business Standard. "We are scheduled for another meeting with the IMF delegation on 12 December, after which we hope to finalise the list."

He further said businesses paying the standard rate will still have the option to claim input tax credits.

Meanwhile, NBR Chairman Abdur Rahman has been hinting at the removal of some tax exemptions soon. During a press conference yesterday, he said Bangladesh must move away from the culture of tax exemptions.

"Our development partners are advising us to do this for the country's benefit. Exemptions that can be removed immediately should be phased out, but nothing will be imposed forcefully. It will be done with consideration for businesses," he said.  

He mentioned that some statutory regulatory orders (SROs) regarding exemptions have already been canceled and more will be removed soon expressing support for implementing a single VAT rate of 15%.

No alternative to reducing tax exemptions

Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), told TBS that the government must reduce tax exemptions, there is no alternative. 

"However, with high inflation, it's not the right time to increase consumer costs. The government should focus on collecting revenue through direct taxes. Shifting the burden to VAT, an indirect tax, would place the pressure entirely on consumers," added the economist.

Industry concerns

Mohammed Mesbah Uddin, chief marketing officer of Fair Group, a leading manufacturer of electronics and home appliances, told TBS that the current VAT on mobile phones, across different stages of production and sales, amounts to over 12% on consumers. 

"A shift to the standard rate would increase handset prices by 5% at the consumer level," he explained.

Mesbah Uddin noted that this increase, compounded by the devaluation of the Bangladeshi taka, could reduce sales and encourage the use of smuggled devices.

"Implementing such changes suddenly disrupts business plans. While exemptions should be reduced, the timing is critical," he added.

MA Razzaque, chairman of Research and Policy Integration for Development (RAPID), expressed a contrasting view, stating that there is no rationale for granting VAT exemptions on items such as mobile phones, electronics, or home appliances. 

He proposed, "Rather than placing additional strain on the general public, VAT could be increased on these durable goods."

Current VAT policies and exemptions

The standard VAT rate in Bangladesh is 15%. However, to support local industries, the government had initially provided full VAT exemptions at import, production and trading stages for sectors like electronics and home appliances. 

These exemptions were intended to foster competitiveness. Additionally, customs duties and income taxes on imports in these sectors were relaxed.

Over the past three years, however, some exemptions have been gradually reduced. For instance, certain goods now have VAT rates ranging from 2% to 10%, commonly referred to as "truncated rates".

M Masrur Reaz, chairman of Policy Exchange Bangladesh, also expressed concerns stating that raising taxes at this point in the fiscal year is not advisable. 

He told TBS, "Investors are deeply concerned about policy inconsistency and lack of predictability in Bangladesh. Abrupt policy changes at this stage could disrupt their business plans."

Reaz also pointed out that while reducing taxes mid-year is rare, increasing taxes during such a period is even less common. 

He added, "The government needs to communicate plans to reduce VAT exemptions well in advance informing investors of the timeline and the exact rates at which exemptions will be phased out."

IMF's stance and pressure

The IMF has long been urging Bangladesh to adopt a uniform standard VAT rate. 

As part of a $4.7 billion loan approved in early 2023, the IMF has imposed over 30 major and minor conditions on Bangladesh, one of which includes raising the revenue contribution to GDP, or the tax-to-GDP ratio, by 0.5% each year until 2026.

Earlier this month, an IMF delegation met with the NBR chairman and reiterated its stance, emphasising the need to phase out all exemptions. The IMF treats tax exemptions as government expenditure.

The IMF had set Tk4,10,400 crore revenue target for Bangladesh in FY24. However, actual revenue collection last year was lower, amounting to Tk3,62,000 crore. 

As a result of this shortfall, the NBR has been given a target of increasing revenue collection by 0.6% of GDP instead of the previous 0.5%, which means an additional Tk12,000 crore, bringing the total target to Tk4,60,000 crore. 

During a seminar on Thursday, the NBR chairman said, "Our economy is at a critical juncture. Negotiations with the IMF reveal the extremely difficult position we are in." 

He added, "Our reputation for granting excessive tax exemptions, many of which are misused, necessitates drastic reforms rather than gradual changes."

Products likely to get higher VAT rates

Other than mobile phones, VAT exemption on raw materials imported for manufacturing refrigerators, blenders, juicers, mixers, grinders, electric kettles, irons, rice cookers, pressure cookers, washing machines, and microwave ovens, could be removed, replacing the existing 5%  to 10% VAT with the standard 15% rate.  

Additionally, the exemption on limestone, a key raw material for cement production, may be revoked with a 35% supplementary duty potentially imposed. This alone is expected to contribute nearly Tk3,000 crore in revenue collection.  

Other items, including LPG cylinders, telecommunication materials, ocean-going vessels, polypropylene staple fiber, hot-rolled stainless steel, four-stroke three-wheelers, and optical fiber cables, may also see their reduced VAT rates replaced with the standard 15%.