News and Update: WB wants VAT to extend its reach to small businesses: Economists see ominous signs

Nazmul Ahsan, NewAge, October 7, 2007. Dhaka, Bangladesh

The World Bank has asked the government to extend the reach of value added tax to small businesses like hotels and tailoring shops — a step, which, economists believe, will make living costlier for the masses.

Professionals like physician and lawyer, tourism and hospitality industry, classified advertisement, travel agency, insurance company and dental clinic are among the services and businesses which the global lender wants to come under extended VAT net, sources in the government have told New Age.

The wish list has recently been sent to the chief adviser’s office, which has forwarded it to the finance ministry for necessary actions, they informed. And the National Board of Revenue seems to have started acting on as it has brought about 30 service sectors, currently enjoying immunity from 15 per cent VAT applied to many businesses, under its close watch, revenue officials said.

‘The World Bank now wants to see no sector enjoys VAT exemption,’ a high official at the National Board of Revenue told New Age. Bringing small service industries under VAT net might trigger countrywide resentment, the official, however, feared.

Economists have also echoed the same view. They have warned that imposition of VAT on businesses like small hotels, restaurants and tailoring shops will affect small traders and poor consumers at a time when the economic activities show signs of slump.

Revenue officials said currently, small ill-furnished tin-shed hotels and restaurants, which use two electric bulbs and no fan, are exempted from VAT. Tourist spots have also been kept out of VAT’s reach as the government is keen to encourage private investments for developing the hospitality industry.

Construction firms, which are engaged in the government-funded construction activities, are also free from VAT. No VAT has so far been in force on classified advertisements to help small businesses and common people spread information of their products and services to a wider audience at affordable prices.

VAT does not apply to dental clinics and physicians in the belief that people will get healthcare services at affordable prices, although it does not happen in most cases. Even then, fresh imposition of VAT would give the service providers an excuse to charge higher from users in general, revenue and finance officials said, terming the World Bank’s prescription unrealistic.

‘We should not go for wholesale withdrawal of current VAT exemptions now being enjoyed by service sectors,’ a finance ministry official said, guessing that the World Bank’s wish list might be linked to its development support credit scheme somehow.

Suppliers of foods for schoolchildren, entry fee (less than Tk 100) for cultural programmes, food item suppliers through transports, electricity used for irrigation, tailoring shops having no air-conditioned facility and insurance premiums of private sector power generation are now exempted from VAT, sources in the revenue board said. Finance ministry officials said the government might opt for ending VAT immunity for a number of service sectors, if not all, to comply with the World Bank’s wish list.

‘Such a decision, however, has not been taken yet,’ a ministry official said. Zaid Bakht, research director, Bangladesh Institute of Development Studies, said timing for imposing VAT on small hotels and restaurants was not suitable taking into consideration the present state of economy. He added that small hotels and restaurants are important elements of the economy and keeping them out of VAT purview ultimately benefits the poor customers. ‘Both small traders, poor consumers and the economy as a whole will be affected if VAT is imposed on them,’ Zaid said.

The World Bank suggestion, if implemented, will fuel the inflationary trend since the small service industries, particularly many booming sub-sectors, serve the poor and the marginal most, the economist pointed out.

Professor Anu Muhammad said the proposed measure would increase the cost of living of the masses, particularly the low-income group. He said the World Bank desires the expansion of VAT as it wants to make the country’s economy entirely an import-dependent one. ‘The very concept of VAT is to lessen the earnings from import duties and pave the way for unfettered access of cheap foreign goods to destroy the local economy,’ said Anu, who teaches economics at Jahangirnagar University.

The so-called economic reforms made during the last two decades opened the floodgate of imports of foreign goods and ended up in raising the expenditures of the people. He called upon the government to come out from the mire of the multilateral lending agencies and stop thinking of extending VAT’s reach to small businesses, which will affect the life of poor consumers and small traders.

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