1. Problem & perspective of pro-poor approach through VAT www.equitybd.org Domestic Resource Mobilization

2. Objective of this presentation A general overview of existing Tax system & Practice in Bangladesh Present a brief discussion on VAT and Impact Make recommendation on pro poor strategies in view of domestic resource mobilization 1 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

3. Bangladesh is a low-income economy of South Asia In FY 2011-12, Bangladesh had a GDP of US$ 114.34 billion. The real GDP growth rate is 5.9 percent and per capita GDP is US$ 782. In recent years, Bangladesh has achieved significant gain in human development. Bangladesh aspires to become a middle income economy by 2021 according govt. declared “Vision-2021” Bangladesh: Our economy and GDP 2 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

4. - Achieving Vision-2021 required an investment at least 30- 35 % GDP (6 th FYP) where revenue mobilization as one of the major part of domestic resource. - But the performance is still less satisfactory as compared to other countries at a similar stage of economic development. -The existing weak tax structure and its performance are based on the following characteristics; 3 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

5. Direct tax payers are few The population of our country is near about 150 million where direct registered tax payer is only 02 million. Even theses people don’t paying their tax regularly and in accordance with real tax assessment. According to the information of NBR (National Board of Revenue) only 0.8 million people are paying their tax regular basis. Government heavily relies on indirect tax: The total tax and revenue mobilization performance is very much dependent on indirect taxes. The contribution of indirect tax in total revenue mobilization is 82% in 91-92 fiscal years and it is still observing as very slow pace (Stag at 75% in 2012) during last years despite bringing changes in taxation policy and system. 4 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

6. Type of Taxpayer in Income Tax Structure Type of TaxpayerNo of Taxpayer% Corporate61,9982.98% Other Tax payer7,78,75037.53% Minimum Tax payer3,90,96418.83% Only Tax File Holder8,43,54840.66% Total Tax Payer20,75260100% Source: NBR annual report 2011 5 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

7. Sector wise Tax performance in Revenue mobilization 6 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization Fiscal Year% of total revenue% of VAT in total revenue Direct or Income Tax Indirect Tax 2000-200119.40%80.56%31.56% 2004-200519.49%80.51%35.00% 2008-200927.17 %72.83%38.36% 2009-201028.09%71.90%39.50% 2010-201129.49%70.51%38.23% 2011-201224.42%75.58%37.30% Source: NBR AR 2011

8. Tax is near zero in agriculture sector The another potential and prime tax source is our agriculture sector which provides a contribution of 22 percent of GDP along with retaining 75% population and 65% of total employment but virtually pays little in the form of direct or income tax. Because….. - Since the independence this sector is getting extra protection in view of self sufficiency and poverty reduction approach. -But concern is that, many rich people lying in the agricultural sector and making income and avoiding taxes showing their entire income as a means of agriculture. -It is also widely evident that some people even among the registered taxpayers paying no tax showing fake engagement of their activities with agriculture that’s a major cause of less revenue from earning from this sector. 7 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

9. Culture of tax exemption loosing government revenues - The major policy objectives behind the tax exemption in Bangladesh are to accelerate the process of industrialization, increasing exports and Foreign Direct Investment (FDI) and to ensure social security (in case of employment creation and poverty reduction). -In FY 2000-2005 total number of tax exemption cases were 1531 and the estimated loss of revenue was about 3.5 billion US$ that was estimated as about 9.6 percent of total income-tax earning during that period. Inequality of Taxing Urban and Rural Sectors -Tax is being collected in urban areas based on present different type of business activities, amenities that imposed huge tax by the govt. comparing rural area. 8 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

10. Weak Tax-GDP Ratio among developing countries Tax-GDP Ratio CountriesTax: GDP ratio Maldives20.5 % India17.7 % Sri Lanka15.3 % Pakistan14.6 % Nepal10.9 % Bangladesh10.52 % Developed countries Average Tax-GDP 30- 40% 9 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

11. - The Government of Bangladesh has initiated some administrative and policy reforms in her existing tax system and administration in 1991. Introducing VAT was a major milestone. - The objectives behind introducing VAT in Bangladesh were to; - Bring transparency in the taxation system - Prohibit cascading taxation at different stages of production - Consolidate the tax administration - Activate the overall economy by mobilizing more internal resources; and - Bring a consistency in the tax-GDP ratio 10 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

12. VAT and its major field of exercise by NBR a.VAT is imposed on goods and services at import stage, manufacturing, wholesale and retails levels; b.A uniform and standard VAT rate of 15% is applicable for both goods and services c.Standard 15% of VAT is applicable for all business or industrial units with an annual turnover of BDT 02 million and above; d.Turnover tax at the rate of 2.5% percent is applicable where annual turnover is less than BDT 02 million; e.VAT is applicable to all domestic products, sales and services @ 2.5% at retail level. f.VAT is payable at the time of supply of goods and services; g.VAT is exempt on Export-sales on goods and services 11 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

13. VAT Act 2012: Targeted to grabbing and grapple of all -Prepared to fulfillment of IMF condition -The new VAT act 2012 empowered to impose VAT on all sort of product, services and supplies including immovable property, lease, grants, license, permit, right, facility and import of services in order to consume in the country -The draft law proposed scrapping the existing package VAT that result to increasing the calculated & quantity of VAT on the same products than previous. -VAT proposed 15% on all product & services in general and @ 4% percent on annual turnover is less than BDT 06 million; -Empowered Tax men to seize the asset, inquiry any where anytime and force the tax payer to attend physically. This enforcement might undermine human rights situation as weak governance. -Allow appointment of private companies to process returns and data management and collection. -Will come into action by 2015 12 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

14. 13 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization Conditions of IMFGovernment has implemented Impact in livelihood 1.Withdraw interest rate (13% ceiling) from commercial bank. 2. Follow the contraction Monetary policy 1.Implemented and the banks already increased interest rate. 2. Increase cash reserve rate in Bangladesh bank for other commercial banks. 1.As a result, loan for investment will be decreased. 2.Interest rate will be increased due to huge demand. 3.Increase of short term loan that will create imports and market liberalization. 4.SME sector will be hampered due to more supervision and monitoring cost. 3. Impose condition of VAT expansion. 1.Government has made declared draft law publicly. It will be approved in ongoing parliament. 1. VAT will be increased and collected from poor and marginalized people during any purchases of daily goods and services. 4. Increase monitoring in BPC, BCIC and BPDB in order to reducing subsidy from power, fertilizer and patrol through price adjustment. 1. Government already increased the price of electricity and decreased the subsidy from power and petroleum sector. 1. Price is increased of power and petroleum. As a result increased the cost of daily necessaries due to transportation and production cost and made hardship of poor people.

15. 14 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization VAT exercise in different countries -Bangladesh15% -Singapore05% -Thailand07% -Indonesia, Myanmar, Lebanon, Vietnam and South Korea 10% -New Zealand12% -Nepal13% All these countries keep essential goods out of VAT considering the poor, but the situation is completely different here in Bangladesh.

16. Impact of VAT in developing countries -The evidence shows that the VAT has increased the price “once- for- all” if more revenues are desired by the government. - Apart from this price could be raised through imposing VAT due to many cases in the poor and developing countries. - Weak market mechanism that creating uncertainties in the minds of the businessmen and the consumers and they anticipate of inevitable price increase. - Less control of regulatory authority on pricing policy - Corruption in both govt. official & business level; and - Even vested political interest are playing to these issues. 15 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

17. 16 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization Incident of VAT on House Hold in South Africa Annual HH income level (‘000) Total Vat paid VAT paid as % of total tax VAT paid as % of annual income R1817998610 R3029105410 R7561412508 R140102411807 Source “One size fits all" Christian aid report 2009

18. 17 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization Source: Institute of Fiscal Study-UK

19. 18 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization CountryPerformance of Tax-GDP ratio (%) in Sub Saharan Africa (Target 18% of GDP) 19932008 Ethiopia8.310.4 Ghana16.919.9 Kenya19.319.7 Malawi15.616.9 Mozambique18.214.5 Nigeria2.33.9 Senegal12.320.9 Source: “One size fits all" Christian aid report 2009

20. Impact of VAT in developing countries So, VAT could be a regressive nature if… - The VAT imposed with an uniform rate among the rich and poor at the consumption level. - A uniform VAT ignores equity, or more specifically, income distributional issues, which are particularly relevant for developing countries like Bangladesh. - Because low performance of income tax make limit the asset transfer to the poor and high performing VAT is creating income inequality between rich and poor in developing countries - Bangladesh people are not experienced yet the VAT impact that imposing in the different essential services especially in case of health, water and education etc except the retail level consumption. 19 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

21. Is Self-finance possible through domestic resource mobilization? Economic recession in EU and other developed countries is a major cause of reducing AID in developing countries. Bangladesh is receiving Aid (Actually loan) less than 1% of GDP which could be adjust in our development finance easily. Because…….. - Satisfactory growth of Remittance - Growing Export Earnings - Prepare effective planning and priority setting in our development finance program. 20 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

22. what will be the pro poor strategies for domestic resource mobilization? Increase direct tax and tax net Withdrawal VAT imposition on essential commodities also withdraw new enhanced VAT law Decrease revenue expenditure to channel more and more finance in development finance Impose punishment tax on the black money Effective and appropriate utilization of national resources Develop national consensus and mass mobilization 21 www.equitybd.org Problem & perspective in pro-poor approach through VAT Domestic Resource Mobilization

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