One of the fastest growing countries in the world and a promising player in the steel industry, Bangladesh stands at a defining moment in time as it prepares to reconstitute its archaic tax structure and usher in a new era of development. The government, through the tax regime change, hopes to bring about a paradigm shift towards a stronger, more improved system of taxation which may well propel the beleaguered steel industry out of doldrums. The recently approved VAT Act 2012 replaces Vat Act 1991 and primarily aims to increase tax revenue while bolstering economic growth in the country.
However, far from being smooth, this transition has rather been riddled with opposition from the very beginning and has drawn flak from consumers and businesses alike. Experts based in Bangladesh have voiced their concern against the new uniform VAT 2012, which they fear, may trigger a negative ratcheting effect for the country’s economy and its steel industry which had just began to gain traction.
VAT Act 1991 vs VAT Act 2012
As opposed to the 1991 Value Added Tax structure, which levied different taxes for different products, the uniform VAT system has imposed a 15% tax on all goods and services. On the contrary the erstwhile system of taxation provided different tax slabs for different goods and services so as to aid and shield certain sectors and add to GDP growth. Another major difference between the two is the number of commodities and services for which taxes would not be levied.The VAT 2012 has included more than 1000 services and commodities in the exemption list which is almost twice as compared to VAT 1991.
Traders express discontent
Many leading trade organizations within the country have further strengthened the legitimacy of these concerns urging the government to reconsider the new tax system in its present form. Steel makers in particular have warned the government of the impacts of the steep increase in tax rates and have said the sudden change would adversely affect both public and private sector infrastructure development. According to Bangladesh Auto Re-Rolling and Steel Mills Association
(BRRSMA) this may even have a snowballing effect on other sectors. According to information tax levied on rod under Value Added Tax 1991 was between 2 to 3 per cent and it has now been brought under the umbrella of 15 per cent universal tax.
According to media reports the tax to be paid on one tonne of steel rod would increase from merely BDT 900 to a whopping BDT 7500. Steel Millers Association said that the increase would deter home owners and infrastructure companies from building new homes and projects, inadvertently leading to a slowdown in ancillary industries as well. To make matters worse the additional tax on gas and electricity would increase production cost, traders said.
Sustainability of GDP growth under question Trade organizations have even raised concern over the GDP growth rate declining in near future; BRRSMA recently estimated that the GDP growth rate may decline by as much as 2 per cent, dipping down to 5% per cent due to the tax regime change On the other hand, refusing to budge from its stance, the Bangladesh government and the finance ministry is resolved about the tax reform. According to the ministry, implementation of the revised tax rates would not impact the Country’s GDP growth as producers would now be able to take tax credit for the tax paid on inputs thus softening the blow from increase in rates. The World Trade Organization had earlier issued an estimated growth rate of 6.8 per cent which now according to experts may prove to be a mammoth target for the government to achieve.
Public spending to be affected?
According to government statistics almost 40 per cent of the total consumption of steel in Bangladesh is for public projects. Moreover 70 per cent of steel rods in particular are used by the Government for infrastructure development. The increase in tax would prove to be a major hurdle for public projects, deterring large scale projects from taking off. The government on the other hand believes that the increase in tax revenue would balance the increased cost thus allowing public
projects to continue undeterred.
Automotive sector on cross roads
The new budget and increased taxes would deliver a blow even to the automotive sector.According to representatives of the automotive industry the move to raise supplementary duty on completely Knocked Down (CDK) cars is likely to result in a slowdown in the automobile assembling industry in the country. The hike would take away the competitive edge from local auto assemblers. The decision is to hit the sports utility vehicles and pickup vehicle segment the hardest.
According to media reports, managing director of Pragoti Industries Limited, Abdul Khayer Sardar had said that the duty is being increased from 60% to 150% in the 2000-3000 cc segments and as a result price of SUVs would go up by 45%. Similarly for pickup vehicle of the same cc the duty has been increased from 40% to 100% thus rendering the vehicles dearer.
“We would have no option but to increase the price. Also, this will have an adverse impact on the orders we are currently working on,” he added. “People will be more interested in importing new cars rather than develop the facilities here to assemble vehicles,” Sardar said. Countries like Thailand developed their local automobile industry by keeping the import duty on CKD cars much less than that for CBU and extending other incentives, according to operators.
“But we are seeing the exact opposite of what needs to be done,” he said, adding that increasing the SD on CKD units would hinder the progress of the local assembly industry.
Salient features of VAT 2012
Even though the new tax has faced criticism from several quarters, there are certain elements of the new tax system, which would help businesses and improve the tax collection process as a whole. The new tax has exempted businesses with an annual turnover of less than BDT 3 million, from both payment and registration, thus allowing small enterprises to continue functioning comfortably. Apart from this the provision for receiving input tax credit would prove beneficial for manufacturing
sector and would curtail the cascading effect of taxation.
One of the key achievements for VAT 2012 would be the efforts to iron out the kinks in the earlier tax collection system. As part of VAT 2012 the entire system has been digitized and thus enabling tax payers to complete the entire process of tax payment within a few clicks.
Source : Steel 360 July’17 Issue