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New VAT law to fuel living costs

May 4, 2016

Prices of many goods and services will soar, while various local industries will face increased competition with imported goods once the new VAT and supplementary duty law comes into effect in July.

Framed at the prescription of the International Monetary Fund, the new law envisages a flat 15 percent value-added tax, replacing different rates of VAT.

The revenue authority shared the views in a document presented to the government high-ups, including Finance Minister AMA Muhith, citing the challenges of the new law.

However, the new law will boost the state’s revenue collection by as much as 20 percent from Tk 32,276 crore in fiscal 2014-15, finance ministry officials said.

People may have to spend more for MS rod, edible oil and electricity, among others, after the VAT exemption for nearly 2,000 products and services as well as the privilege of reduced VAT rates end.

“There can be implications on the prices of commodities due to the abolition of the VAT exemption benefit,” said the National Board of Revenue.

Under the new law, the VAT waiver benefit will be limited to certain products such as basic foodstuffs, selected life savings drugs, public transport, public health, education and farming. 

The withdrawal of VAT waiver will not put the burden on businesses as there will be scope to claim input tax credit.

“But the abolition of the benefit may create fear among businesses and ordinary people that the burden of VAT will increase upon them. And dishonest businesses, by taking the opportunity, may demand higher prices from consumers.” The NBR also observed that although there is scope for claiming VAT rebates, entrepreneurs will still be required to pay 15 percent VAT to import capital machinery.

As a result, the cost of doing business will increase for the time being.

ABOLITION OF REDUCED VAT PRIVILEGES

The abolition of the system of tariff value or administered value of certain products is also likely to impact consumers.

Currently, the tax administrator collects VAT on 85 products such as LP gas, paper and MS rod based on the tariff value system.

But after the abolition of the system, people will have to pay VAT at the market price instead of the administered one.

Citing the case of MS rod, the revenue authority said the prices of the construction item will rise as a result. The elimination of the truncated base will also have an impact on the prices of services.

At present, 20 types of service providers such as suppliers, construction firms, electricity distributors and land development authority pay VAT based on a truncated value and it is much lower than 15 percent.

The NBR said there is scope to dodge VAT under the truncated system as businesses that get the benefit do not have to maintain records properly.

However, once the new law comes into effect, they will have to maintain accounts and keep records. “So, they will have to pay more VAT, which is likely to cause a spike in prices and the cost of doing business.”

For instance, electricity is subject to 5 percent VAT at present but it will rise to 15 percent under the new law.

“As a result, the households’ expenses and industries’ operational costs may rise.”

DOMESTIC INDUSTRIES TO FACE COMPETITION

The new law will lead to drastic cuts in the number of imported items for which supplementary duty is applicable.

Only 170 products will face SD at the import stage under the new law, down from the existing 1,362, according to the NBR.

It means domestic manufacturers will be less protected than before against imports. “The local industries that enjoy high protection may face tough competition.” 

Source: http://www.thedailystar.net/