VAT measures to boost economy facing Covid-19

Facing the impacts of Covid-19 disrupting the economy, a major concern now lurking around the world is how to boost the economy. Bangladesh is no exception. 

Fighting coronavirus has been a stupendous task, and at the same time, streamlining the economy has been more so. Measures are being suggested and implemented in different sectors to overcome this crisis. The government has announced huge measures, including relief operations, that are now being implemented with great vigour.

The National Board of Revenue (NBR) has an important role to play since it directly works with the economy. In fact, tax measures are a very important tool to manoeuvre the economy. In the face of novel coronavirus, in my opinion, in the area of Value Added Tax (VAT), the NBR can adopt tax measures and managerial measures to revamp the economy.

In the area of tax, the reality is, we cannot afford to collect lesser tax since the government's expenditure is hugely on the increase and domestic tax collection has seen a decreasing trend during the last couple of months. However, the government is taking more loan from external sources. It is a good start to offset the domestic revenue loss. 

Our debt-GDP ratio is still relatively low. So, it would not be unwise to accept more foreign loans at this crucial time. Taking loan from domestic banking system by the government would make obtaining loan by private enterprises challenging and that would again jeopardise growth.

In the taxation arena, to boost the economy, avoidance of tax collection from those areas from where tax collection is not so significant could be the way to go. In the area of VAT, there are about 159,000 registered entities. But about 80 percent of the domestic VAT collection comes from about 500 entities only. Only 164 entities registered under the Large Taxpayers Unit-VAT (LTU-VAT) Commissionerate contribute to about 55 percent of the domestic VAT collection. 

So, do we really need to run after thousands of business entities, whose contribution to the revenue collection is very insignificant, engaging huge government machinery at this crisis period? As mentioned above, we can offset this revenue loss by borrowing from external sources. 

These medium and small entities have to be given free hand to play for at least three years, i.e., complete exemption from VAT network. This may require legislative intervention. With such incentive, they can produce more, employ more manpower, and then consumption shall increase. This is how the economy gets boosted. 

Even in the income tax arena too, if you analyse the trend of revenue collection, you will see that the smallest number of Taxpayer Identification Number (TIN) holders contribute to the highest amount of revenue. So, the same holds true there.  

This has a long-term positive significance. Suggested measures in the VAT area may continue for one to three years corresponding to other measures of the government. One of the basic principles of VAT is the lowest possible single rate and the widest possible coverage. So, after say about three years, these small and medium entities will hopefully get stronger. Then VAT coverage can be extended widely. 

Hopefully, these entities can then contribute more revenue than paying less during this crisis time.  

In the area of managerial measures, new VAT registration has to be issued easily, change in the registration has to be done easily, search and seizure can be discouraged unless overwhelmingly needed, collection of current revenue can be emphasised rather than collection of arrears, return submission has to be made easier, payment of tax has to be made easier, and tax-payers are to be given patient attendance by the field officials to address their day-to-day challenges and responding to them over e-mail and mobile phone etc are necessary during this crisis period to continue daily activities boosting production.  

With the above measures, on one hand, domestic VAT collection shall not be noticeably harmed, and on the other, the large number of small and medium enterprises can avoid the challenges of VAT compliance during this crucial time. This shall be a great incentive for them. 

The government has already announced financial packages for them. So, they can produce more, can employ more manpower and consumption shall hopefully rise. This will lead to a boost in the economy.

Dr Md Abdur Rouf currently works at a World Bank-financed VAT-related project as a specialist.