VAT: Prospect of integration with social security
Published : Tuesday, 26 June, 2018 at 12:00 AM Count : 20844
The national budget of Bangladesh for the fiscal year 2018-19 was presented by the finance minister AMA Muhith just a few days ago. Still there are many discussions going on regarding the size of the budget and several changes or provisions of it. One of the most important targets to accumulate the earnings for the expenditures in the proposed budget is by collecting tax revenue from the citizens, a job National Board of Revenue (NBR) is doing with immense precision.
It was said that, the government targets to have 10 million registered taxpayers by the fiscal year 2022-23. Right now, we are having around 3.5 million registered taxpayers as 34.6 lakh citizens have e-TINs. While respecting all the information, we think the actual number of taxpayers in Bangladesh is much more than the stated figure and there are serious justifications behind this claim.
We are not saying that the NBR is providing us the wrong figures. They are absolutely right in their data presentation. But we believe Value Added Tax (VAT) is also a form of tax and the rate of VAT is not very low in Bangladesh. Almost all of the urban population and even many of the rural population pays VAT of some sort throughout a year. By doing that, they are actually paying taxes but they are not simply recognized as the taxpayers. We are only considering the income taxpayers as the registered taxpayers. But we should not forget thousands of taka we pay as VAT every year. If we calculate the number of people who are paying VAT, the number of taxpayers will be much higher than the presented information in our proposed budget.
VAT is a consumption tax placed on a product or service whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product or service, less any of the costs of materials used in the product that have already been taxed.
In developed countries, VAT is related to the social security of the citizens. The state provides a lot of benefits to its citizens through social security, medical care, unemployment allowance, old age allowance and many other ways. Hence, the citizens of those countries are willing to pay VAT on the products and services they purchase and consume. There have been several researches on relation of VAT with social security like; Leonard E Burman did in his book 'A Blueprint of Tax Reform and Health Reform' in 2008 where he suggested utilization of VAT to reduce individual tax, corporate tax and self-employment tax.
Actually this policy works well in many countries and the key here is to provide the citizens something in return to the taxes they pay. But unfortunately for Bangladesh, the citizens receives very little from the state and for such they are actually unwilling to pay the taxes.
It is a typical scenario of Bangladesh that we often try to avoid paying VAT. This shows our non-commitment to the tax laws and our lack of trust on the government over the issue of getting something in return. When we go to a restaurant, we often do not want a proper receipt as that will include VAT. The customers sometimes request the shop owners to not prepare a bill as by doing so the VAT payment can be avoided.
This scenario could have changed totally if the citizens knew that paying the VAT today would help them someday. But we all know very well that there is no social security system in our country. We do not receive an unemployment allowance or old age allowance or medical care security. We even do not get the proper respect from the government officials who are run by the tax of the citizens. So, it is very logical that paying any form of taxes is not welcome by the Bangladeshi citizens.
Right now, to collect VAT and income tax, we are using a pressure technique. Like; if we start a fixed deposit scheme at a bank, if there is no tax identification number or TIN, a big part of our interest payment will be cut from us. If we have a TIN, then we have to pay less and need to pay the income tax instead. In many ways, we are forcing to increase the number of registered taxpayers. We are pushing the people, pushing the employers, pushing the institutions. But the current technique is not actually a sustainable process.
The taxpayers must be satisfied to pay the tax with the confidence that the paid tax today is well justified in terms of future return.In most of the European countries along with many countries of Asia, Middle East and other parts of the world, the VAT on products and services for the tourists are refunded at the time of their departure. It shows the VAT is actually a commitment to the citizens only. As there is no commitment of state services for the tourist, a refund is made.
For example, in European countries, the VAT ranges between 8 per cent (in Switzerland) and 27 per cent (in Hungary). Upon purchase of a minimum amount, the VAT is refunded at departure. The VAT paid in a foreign country will not provide any return to the foreign nationals and hence they need not pay it. But for the citizens, VAT is required to be paid as that can be linked directly with social security benefits.
VAT can be represented positively to the citizens by creating a process to use that for state provided benefits for all citizens. It can also be promoted as savings. Bangladesh Association of Banks (BAB) recently declared to lower the deposit rate to 6 per cent and people will find it non-beneficiary to create a savings at banks though they want to. VAT can here play a vital role if promoted as a savings of today which will come back with a profit tomorrow.
To implement that idea, it is required to prepare a social security plan for the citizens. They should receive benefits like; unemployment support, old age support, medical support, disability support etc. They can receive pension like benefits after retiring from any sort of jobs. These will form a responsible relationship between the state and the citizens. For these services, VAT can be a good source of funds and if the citizens can be communicated properly about the services they will receive by paying VAT, they will not deny paying this tax. But for that firstly if someone pays VAT, he or she must be recognized as taxpayers.
We need to develop a process of calculating the VAT paid by individual taxpayers and introducing a social identity card can help a lot in that purpose as it does in developed countries. The citizens can be advised to pay the VAT while they purchase something and options should be there to include the information of paid VAT by an individual against his social identity card later. This will reduce the unwillingness of paying VAT, the corruption in VAT collection, money laundering etc. People will be happier to consume and also to pay this consumption tax as it will provide them several benefits in the future.
There can be a benefit based policy attached to VAT payment and claim of social benefits. Attaching VAT to the personal credit will definitely change the viewpoints of the citizens as taxpayers. They will be paying the VAT willingly. If we are not recognized for the contribution we are making for our country and also do not receive any guarantee of security in our bad times, then there is no justification for paying taxes.
It is often argued in our country that, the state provides you utility like; electricity or gas and other benefits. But each of that includes VAT or other related taxes. Hence, we are paying for what we are receiving and that is not a favor. For approaching development in different indices, additional improvement will be required especially in human areas. The state need to comfort the citizens and establish a strong relationship with them while ensuring security to move forward. With uncertainty among the citizens, drive for developments cannot sustain. Whatever the state does, all must focus on the welfare of its citizens only and we cannot be any exception to that idea.
During the last decade, Bangladesh has developed a lot with implementation of many development projects, launching own satellites with many other large projects in pipeline. This development is mostly credited to the farsighted and bold approach of Bangladeshi Prime Minister Sheikh Hasina -- daughter of Father of the Nation Bangabandhu Sheikh Mujibur Rahman.
Despite having some huge challenges like corruption, our forward movement has been very speedy. But it is a long way to reach the targets stated in Vision 2021 and 2041 especially in human contexts. So, we hope our government will initiate social security programs like other developed or developing countries of the world and will be more committed to the welfare of the citizens. If so, the citizens will be happier to pay VAT and other taxes.
The writer is the Chief Editor at Mohammadi News Agency (MNA), Editor at Kishore Bangla and Vice-Chairman, Democracy Research Center (DRC)