How Does VAT Work in Bangladesh?

Introduction

Value Added Tax (VAT) is a broad-based consumption tax levied on the value added to goods and services at each stage of the production and distribution chain. It is a significant source of revenue for the government of Bangladesh and plays a crucial role in the country's fiscal system. Understanding the intricacies of how VAT works is essential for businesses operating in Bangladesh, as it directly impacts their pricing, accounting, compliance obligations, and overall financial management. This article provides a comprehensive overview of the VAT system in Bangladesh, explaining its key features, mechanisms, and implications for businesses.

Value Added Tax (VAT)

VAT is fundamentally a tax on consumption, meaning that the ultimate burden of the tax falls on the final consumer of goods and services. However, unlike a retail sales tax that is collected only at the final point of sale, VAT is collected in stages throughout the supply chain. Each business in the chain charges VAT on its sales (output VAT) and is entitled to deduct the VAT it has paid on its purchases (input VAT). This mechanism ensures that VAT is ultimately levied only on the value added at each stage of production and distribution.

How VAT is Applied to Goods and Services:

• Input VAT: When a registered business purchases goods or services for use in its business operations, it pays VAT to the supplier. This VAT paid on purchases is referred to as "input VAT." Businesses are generally entitled to deduct the input VAT they have paid from the output VAT they have collected, subject to certain conditions and exceptions.
• Output VAT: When a registered business sells goods or services, it is required to charge VAT on those sales at the applicable rate. This VAT charged on sales is known as "output VAT."
• VAT Payable: The difference between the output VAT collected by a business on its sales and the input VAT paid on its purchases is the net amount of VAT that the business must pay to the government. This is typically calculated and paid on a monthly or quarterly basis.
• VAT Refund: If, in a particular tax period, a business's input VAT exceeds its output VAT, the business may be entitled to a refund of the excess VAT paid. This can occur, for example, when a business makes significant capital investments or exports a large portion of its output.

Example:

To illustrate the VAT mechanism, consider a simplified supply chain involving a manufacturer, a wholesaler, and a retailer:

1. Manufacturer:
   • Buys raw materials for 1,000 Taka + 150 Taka VAT (15%). (Input VAT = 150 Taka)
   • Processes the materials and sells the finished product to a wholesaler for 2,000 Taka + 300 Taka VAT (15%). (Output VAT = 300 Taka)
   • VAT payable to the government: 300 Taka (Output VAT) - 150 Taka (Input VAT) = 150 Taka.
2. Wholesaler:
   • Buys the product from the manufacturer for 2,000 Taka + 300 Taka VAT. (Input VAT = 300 Taka)
   • Sells the product to a retailer for 2,500 Taka + 375 Taka VAT (15%). (Output VAT = 375 Taka)
   • VAT payable to the government: 375 Taka (Output VAT) - 300 Taka (Input VAT) = 75 Taka.
3. Retailer:
   • Buys the product from the wholesaler for 2,500 Taka + 375 Taka VAT. (Input VAT = 375 Taka)
   • Sells the product to the final consumer for 3,000 Taka + 450 Taka VAT (15%). (Output VAT = 450 Taka)
   • VAT payable to the government: 450 Taka (Output VAT) - 375 Taka (Input VAT) = 75 Taka.

In this example, the government collects a total of 300 Taka in VAT (150 + 75 + 75), which is equivalent to 15% of the final selling price to the consumer (3,000 Taka). Each business in the supply chain has effectively paid VAT only on the value it added to the product.

Regulated by the Value Added Tax Act, 1991

The VAT system in Bangladesh is primarily governed by the Value Added Tax Act, 1991, and the Value Added Tax Rules, 1991. This legislation, along with subsequent amendments, circulars, and notifications issued by the National Board of Revenue (NBR), establishes the legal framework for VAT, outlining the:

• Scope of VAT: The Act defines the goods and services that are subject to VAT, including those that are zero-rated or exempt from VAT.
• VAT Rates: The Act and subsequent notifications specify the standard VAT rate (currently 15%) and any reduced rates that may apply to specific goods or services.
• Registration Requirements: The Act outlines the criteria for businesses to register for VAT. Businesses exceeding a certain turnover threshold are generally required to register.
• VAT Calculation and Payment: The legislation provides detailed rules for calculating VAT liabilities, including the treatment of input VAT and output VAT, and the procedures for making VAT payments to the government.
• Record-Keeping: The Act mandates that businesses maintain specific records related to their VAT transactions, including VAT invoices, purchase records, sales records, and VAT returns.
• VAT Returns: Registered businesses are required to file regular VAT returns, typically on a monthly basis, providing details of their input VAT, output VAT, and the resulting VAT payable or refundable.
• VAT Refunds: The Act and Rules establish the procedures for claiming VAT refunds in cases where input VAT exceeds output VAT.
• Offenses and Penalties: The legislation outlines various offenses related to VAT non-compliance, such as failure to register, failure to charge or pay VAT, and failure to maintain proper records. It also prescribes penalties for these offenses, including fines and imprisonment.
• Dispute Resolution: The Act provides mechanisms for resolving disputes between taxpayers and the VAT authorities, including procedures for appeals and alternative dispute resolution.

Key Provisions of the Act:

• VAT Registration Threshold: Businesses whose annual turnover exceeds a certain threshold (currently set at Taka 80 lakh) are required to register for VAT with the NBR.
• VAT on Imports: VAT is generally levied on the import of most goods into Bangladesh, in addition to any applicable customs duties.
• Zero-Rated Supplies: Certain supplies, such as exports of goods and certain services, are zero-rated. This means that no VAT is charged on these supplies, but businesses can still claim credit for the input VAT paid on purchases related to these supplies.
• Exempt Supplies: Some goods and services are exempt from VAT, such as basic food items, healthcare services, and education services. Businesses dealing exclusively in exempt supplies are not required to register for VAT, but they cannot claim credit for input VAT paid on their purchases.
• Input Tax Credit: Registered businesses can generally claim credit for the input VAT paid on their purchases of goods and services that are used in making taxable supplies. However, there are restrictions on claiming input tax credit for certain goods and services, such as entertainment expenses or goods used for personal consumption.
• VAT Invoice: Registered businesses are required to issue VAT invoices (also known as "Mushak-11") for all taxable supplies, containing specific information as prescribed by the VAT Rules.

Conclusion

VAT is a crucial component of the tax system in Bangladesh, impacting businesses across various sectors and contributing significantly to government revenue. Understanding the intricacies of how VAT works, including the concepts of input VAT, output VAT, VAT payable, and the various compliance requirements, is essential for businesses to operate effectively and avoid potential legal and financial repercussions. The Value Added Tax Act, 1991, and the Value Added Tax Rules, 1991, provide the comprehensive legal framework for the VAT system in Bangladesh, outlining the rules, regulations, and procedures that businesses must follow. Staying informed about changes to VAT legislation and seeking professional guidance from experienced tax advisors, such as those at Afzal and Associates, is highly recommended. Their expertise can help businesses navigate the complexities of VAT compliance, optimize their VAT positions, and ensure that all VAT-related matters are handled accurately and in full accordance with the law.

Call to Action

Do you need expert assistance with VAT in Bangladesh? Contact Afzal and Associates today. Our team of highly skilled and experienced tax professionals can provide comprehensive guidance on all aspects of VAT, including registration, compliance, calculation, payment, refunds, and dispute resolution. We are dedicated to helping you understand your VAT obligations, minimize your VAT liabilities, and ensure that your business remains fully compliant with all applicable VAT laws and regulations. Let us be your trusted partner in navigating the complexities of VAT in Bangladesh and achieving your business objectives.

Afzal Hosen Mandal

Position: Lawyer at Afzal and Associates

Specializations: Civil Litigation, Criminal Defense, Property Law

Location: Narsingdi Judge Court, Bangladesh

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