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The Impact Study of VAT in Bangladesh

Report On

The Impact Study of VAT in Bangladesh

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Taxation one of the major sources of public revenue to meet a country's revenue and development expenditures with a view to accomplishing some economic and social objectives, such as redistribution of income, price stabilization and discouraging harmful consumption. It supplements other sources of public finance such as issuance of currency notes and coins, charging for public goods and services and borrowings. The term 'tax' has been derived from the French word taxe and etymologically, the Latin word taxare is related to the term 'tax', which means 'to charge'. Tax is 'a contribution exacted by the state'. It is a nonpenal but compulsory and unrequited transfer of resources from the private to the public sector, levied on the basis of predetermined criteria.

Background of the Report

This report entitled “The Impact Study of VAT in Bangladesh” is a fundamental requirement for the completion of the course FRL-403. The main purpose of this report is to extract the information of the Value Added Tax practiced in Bangladesh. Under the instruction and guidance of the course instructor Professor Feroz Iqbal Faruque, we have taken the initiative to conduct the research and prepare this report with much precision and by being completely unbiased.


The general objective of this report is to provide a synopsis of how Value Added Tax is practiced in our country and related consequences. It is also required for the completion of this course. Beside the general objective, the objectives behind this report are given below:

Primary Objective:

The primary objective of the report is—

· To analyze on the issue “The Impact Study of VAT in Bangladesh”.

· To disclose the precise scenario of the “The Impact Study of VAT in Bangladesh”.

· To analyze and recommend on the mentioned issues.

Secondary Objective:

The secondary objective to prepare this report is—

· To fulfill the requirements of our course FRL-403.

· To have a clear understanding about the activity of specific descriptive research technique that is personal interview.

· To gather experience and knowledge of doing a professional report.

Scope of the Study:

This research study will cover the topic “The Impact Study of VAT in Bangladesh” and its related issues. It also includes recommendations against the selected issues. This report can be used as a secondary source for further purposes.

Sources of Information:

To fulfill the objective of this report collection of relevant, accurate, standardized and needful information was required. To make this report reliable we have collected data from both primary sources and secondary sources. Special consideration was given so that chances of biasness could not arise. The sources used were:

Primary Sources:

Primary data is defined as data, which originates as a result of that particular investigation. We have collected primary data through depth Inter with various people. The primary data related to “The Impact Study of VAT in Bangladesh” was collected from the audiences by the method of personal interview that we conducted. Both structured and unstructured questions were constructed to extract the primary data.

Secondary Sources:

Secondary data represents the data which are made by others but it is useful for another purpose or research. As a part of collecting data from secondary sources, we have referred different books of Tax and VAT. We collected our data from the magazine, news paper, libraries and also from the websites.


No study is beyond any limitations. While doing this research study we had to face some difficulties. The limitations of the research activities are as follows—

· We did not have so much experience for conducting research and preparing the report very frequently, though we are in learning position.

· In depth interview some participants were unenthusiastic to provide enough information.

· There was no current information related to Bangladesh on the Website.

· There was lack of precise information; both primary and secondary.

· There was not enough time to analyze the selected issues.

· Our resources (such as, human resource, financial resource, etc) were limited. So it was hard for us to prepare a professional report with our limited resources.


This report covers the different aspects and activities that are required for the collection of VAT by the Govt. However, the report is prepared based upon the information collected from several persons and organizations who are involved in the relevant business like dealing with VATable goods and services, the researcher’s own judgments and also from the Internet. Some surveys have been conducted and some interviews were taken. The findings are strictly structured upon information provided by these sources and some secondary sources. The focus here is on presentation of facts as discovered.

1.0. Introduction

Value Added Tax is emerging as an effective tool of taxation in the hands of Governments internationally. In fact more than 100 countries around the world have accepted this as a way of taxation on commercial activities. Our neighboring countries like India, Bhutan, Nepal and Pakistan have already recognized VAT. Developed countries including Australia, United States, USSR, and UK have already introduced VAT successfully.

The origin of Value Added Tax (VAT) can be traced as far back as the writings of F Von Siemens, who proposed it in 1918 as a substitute for the then newly established German turnover tax. Since then numerous economists have recommended it in different contexts. Also, various committees have examined the tax in great detail. However, for its rejuvenation, the tax owes much to Maurice Faure and Carl Shoup. The recent evolution of VAT can be considered as the most important fiscal innovation of the present century1. VAT was first introduced in France in 1954. With the imposition of Taxe sur la Valeur Adjoutee, France become the first European country to implement VAT on an extensive scale. It was not, however, at first a complete system of VAT, since it applied only to transactions entered into by manufacturers and wholesalers. It was supplemented by a separate tax on services (Tax sur les Prestations de Services). In addition, there were special excises (Taxes uniques) which were levied on services and distribution in lieu of the taxes sur les presentations de services.

2.0. Value Added Tax (VAT)

Value Added Tax, or VAT, is levied on top of the cost of a product or service and generates revenue for a government. Value Added Tax, popularly known as ‘VAT’, is a special type of indirect tax in which a sum of money is levied at a particular stage in the sale of a product or service.

In 1954, the value added tax system was initiated by the then joint director of the tax authority of France, Maurice Laure. VAT came into effect for the first time on 10th April, 1954. From its inception, the value added tax system was imposed on all major sectors of a country. Once instituted, it was immediately clear that revenues collected from the VAT system constituted a substantial share of the government’s revenue in the economy. Not surprisingly, due to the ease of payment and ready comprehensibility, the value added tax system has been adopted by different nations across the world.

Value Added Tax (VAT) a percentage tax on the value added of a commodity or service as each constituent stage of its production and distribution is completed. VAT may be classified in three ways:

(i) On the basis of coverage of stages - throughout the production and distribution stages, or confined to limited stages - manufacturing plus wholesale, or wholesale plus retail;

(ii) On the basis of the method of calculation - tax credit method, subtraction method, and addition method; and

(iii) On the basis of tax treatment of final-product capital goods such as machinery, equipment, and supplies - the consumption form, the income form, and the product variety.

Thus the three broad types of VAT are the gross national product (GNP) type, income type and consumption type. A consumption type VAT is an indirect tax. An income type or a GNP type VAT might be considered as a direct tax but a commodity tax cannot be considered so. Consumption type VAT is also considered as an alternative form of 'sales tax'.

VAT is intended to be levied – or charged – whenever there is some value addition to raw material. The taxpayers on the other hand, will get credit for the amount of tax paid off at the stages of procurement. The value added tax system has proven to be effective in avoiding problems that normally might arise out of the double taxation of goods and services. The value added tax system is designed to address various problems associated with the conventional sales tax system. In sales tax, there is no provision for input tax credit, which means that the end consumer may pay tax on an input that has already been taxed previously. This is known as cascading and leads to increases consumer tax and price levels, which increases the rate of evasion and can be detrimental to economic growth. The value added tax system deals with these problems quite efficiently. As VAT is imposed on value addition – at every single stage – there is no incidence of cascading. In this way, the final consumers bear the burden of paying value added tax. This system involves absolute transparency at every stage of ta