VAT law could spell trouble

Prices of consumer goods are set to rise with the introduction of a flat 15 percent value added tax (VAT) by the government. The Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), the apex trade body has called for amendments to be made to it under a joint panel. The concern is that the new proposed law will bring exemption on more than 1,900 goods and services and the introduction of a uniform, flat rate of 15 percent VAT will send prices of many goods and services soaring. This will adversely affect the competitiveness of many local industries that will then struggle to compete against imported products.

Obviously, the average consumer will be adversely affected. The price of electricity and edible oil will become dearer, as will paper and MS rod (used in construction), all of which are now VAT-exempt will have to count the cost of an additional 15 percent out-of-pocket expense for consumers. And the rise in prices will indirectly affect the government, as some of these items are needed for the several mega projects that the government has initiated, including the metro rail, the Padma Bridge, flyovers and other construction works. 

That the government needs to increase revenue is understandable, given that we are looking at wholesale promotions within the bureaucracy and a new revised wage board that has to be implemented for state officials. However, one has to take into account at what cost will revenue be increased. Going by what has been published in the press, everything from electricity to apparels will be more expensive – products and services will boast at least a 15 percent increase in selling price. 

Indeed if we go by what has been presented by the National Board of Revenue (NBR), consumers will be hit by price increases on almost all essentials should the new law be implemented in its present form. It will lead to a rise in living cost for citizens, but the downside, as already mentioned before, will affect government expenditure too – as cost of raw materials will rise. The rise in the cost of living is something that should have policymakers worried. Most consumers at present are paying 4 to 5 percent VAT, and what has been proposed is a jump to 15 percent. It does not require Einstein's acumen to do the math as to how much more consumers will have to pay. As pointed out by NBR, VAT at 15 percent will end up at consumer level, a rise in prices up to 20 percent.

Experts have been quick to point out that thousands of items that had once been exempt are now going to be coming under the new law, products and services across the board will become pricier. What is perhaps not being looked into is that incomes of the middle class are not going up at the same rate as the new VAT ceiling and consequently, there is fear that demand for many products will come down as the family budget will have to be reassessed, i.e. consumption of some items will have to be curtailed to take into account the price regime. That puts producers and businesses, mostly small and medium enterprises in a fix. What are they going to do? Will they lose customers or will they bring in less profit by not charging customers to the full brunt of the revised VAT? And if so, will they still be in the green with regards to profit? This is a tricky question, which can probably be better answered by economists.

Cost of electricity is a constant headache for consumers. It has risen systematically over the course of the last few years, regardless of the reduction of prices of crude in the international markets. The reduction in price of furnace oil has only just started and that too will be introduced in phases. The little benefit that consumers could have had is now being shot down with a flat VAT surcharge of 15 percent. Going back to NBR's assessment, we find that with the passage of the new law, some 1,973 products will come under the purview of VAT. These products will cost more and consumers will pay more. Local industry will face an increase in production costs as prices on 85 products will rise. To cite an example from a report of Prothom Alo on May 15: MS rod (an essential prerequisite to construction) will see a retail price hike at Tk. 7,000. A Tk. 7,000 rise per ton is BIG news for commercial builders to would-be home owners to, as stated before, the government implementing several mega projects. 

Perhaps, there is need for a review of this flat rate VAT that is being proposed. We certainly do not wish to end up in a situation where the upcoming budget will have to be revised once again because we failed to do our homework on cost escalations that will come thanks to this proposed 15 percent rise in VAT.

The writer is Assistant Editor, The Daily Star.