Complexity, Compliance Costs and Non-Compliance with VAT by Small and Medium Enterprises (SMEs) in Bangladesh: Is there a Relationship?
Author Faridy, Nahida
Published 2016
Thesis Type Thesis (PhD Doctorate)
School Griffith Business School
DOI https://doi.org/10.25904/1912/1553
Copyright Statement The author owns the copyright in this thesis, unless stated otherwise.
Downloaded from http://hdl.handle.net/10072/367891
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Complexity, Compliance Costs and Non-Compliance with VAT by Small and Medium Enterprises (SMEs) in Bangladesh: Is there a Relationship?
Nahida Faridy
Bachelor in Economics (Hons), Dhaka University Masters in Economics, Dhaka University Masters in Taxation Policy and Management, Keio University
Department of Accounting, Finance and Economics
Griffith Business School
Griffith University
Submitted in Fulfilment of the Requirements of the Degree of
Doctor of Philosophy
September 2015
Abstract
The Value Added Tax (VAT), which has existed for 24 years in Bangladesh, has contributed some 37% on average to total tax revenue over the last 15 years (Saleheen,
2012; National Board of Revenue, 2014). Although, the introduction of a VAT has increased tax revenues and expanded the tax base in Bangladesh, many small and medium enterprise (SME) taxpayers do not comply with the VAT legislation, not only failing to register with the tax authorities as taxpayers but also failing to pay the VAT
(Faridy et al., 2014; The Centre for Policy Dialogue, 2014). This non-compliance by
SMEs could be intentional or unintentional (NBR, 2011; McKerchar, 2003). Also it may be due to excessive compliance costs (Abdul-Jabbar & Pope, 2009; Governance
Institutes Network International, 2014), which could be a result of real or perceived legislative or administrative complexity (Yesegat, 2009), to inefficient VAT administration (Barbone et al., 2012), or to other factors. Alternatively, SME non- compliance could be due to ineffective or under-enforcement of the VAT legislation by the Bangladeshi tax authorities (Saleheen, 2013c).
This non-compliance by SME taxpayers represents a substantial opportunity cost in terms of foregone taxation revenue for the Bangladeshi government. In Bangladesh
SMEs are a key engine of economic growth in Bangladesh (Rahman, Mondal & Iqbal,
2011; Bhattachrya & Khan, 2008),helping to mobilise small and scattered private savings (GOB, 2012; Murgai & Zaidi, 2005) in order to generate large scale low-cost employment opportunities using mainly local inputs, technologies, and entrepreneurship.
This thesis investigates the nature and extent of relationships between the complexity of
Bangladesh’s VAT legislation, and the costs of compliance as well as the non- i
compliance (either intentional or unintentional) with the VAT legislation by
Bangladeshi SMEs. The research is significant on a number of fronts. First, while there is a large and growing body of research into entrepreneurship in SMEs and on SME performance, the impacts of VAT law and policy on these constructs are not clearly understood. Second, while there are considerable bodies of research on tax compliance costs and taxpayers’ non-compliance in developed countries (including in relation to broad-based consumption taxes such as VAT), there is little research about compliance costs and the extent of taxpayer non-compliance in relation to VAT in developing countries such as Bangladesh. Moreover, the measurement of compliance costs in the taxation literature, which has been influenced predominantly by thinkers from developed nations, and has largely ignored factors that may be more relevant to developing countries such as potential corruption and psychological costs. It is important to consider these tax compliance costs in developing nations such as
Bangladesh. This is because the introduction of a broad-based consumption tax like a
VAT is seen by supranational organisations such as the Organisation for Economic
Cooperation and Development (OECD) and the World Bank in being a critical element in providing a sufficient tax revenue base for public spending by governments (Bird,
2013). Third, there has been no in-depth empirical research in developing countries such as Bangladesh about the perceptions of compliant, as distinct from non-compliant, SME taxpayers about the legislative or administrative complexity of a VAT, or about VAT compliance costs or the deterrence effects of government enforcement activities.
This thesis employs a variety of research methods. First, several focus group discussions were held with VAT payers from the SME sector (identified as either compliant or non-compliant) and VAT Officials from the National Board of Revenue
(NBR). Second, a survey was conducted to obtain qualitative and quantitative data from
ii
both compliant and non-compliant SME taxpayers. Third, in-depth semi-structured interviews were conducted with SME taxpayers and VAT officers from the NBR.
The main research findings were as follows. Most compliant taxpayers reported the main drivers of VAT non-compliance by SMEs in Bangladesh to be the complexity of the VAT Law and the costs of compliance. In contrast, non-compliant taxpayers found the main driver of VAT non-compliance to be the nature of their relationship with the government’s VAT Officials, many of whom were reported to be open to bribery and corruption. For non-compliant taxpayers, complexity of the law and their cost of compliance with it were not practically relevant issues, provided the VAT Officials with whom they dealt were open to bribery or corruption. From a societal (or the government’s) perspective, however, the costs of such bribery or corruption form part of the total costs of compliance with the legislation, and must be taken into account in any assessment of the legislation’s effectiveness.
Second, while compliant taxpayers reported that they would expect non-compliance by
SME taxpayers to decline with the imposition of more audits, penalties and sanctions, non-compliant taxpayers reported that, for them, the imposition of audits, penalties and sanctions was unlikely to reduce their non-compliance with the VAT legislation
(presumably because the cost of bribing NBR officials was less).
Third, both compliant and non-compliant VAT taxpayers reported that they experienced significant psychological costs, which they estimated represent about 15% of their total
VAT compliance costs (including the costs of bribing officials).
All these findings have practical policy implications, as they can assist policymakers and administrators to better understand the interrelationships between legislative and regulatory complexity, and the true costs of compliance and non-compliance with VAT legislation by SMEs in Bangladesh. Since a robust and functioning VAT system is seen iii
as important for a developing economy, these findings are likely to be important not only for Bangladesh, but also for similar developing economies.
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Statement of Originality
This thesis contains no material that has been accepted for the award of any other degree or diploma in any university or equivalent institution, and to the best of my knowledge and belief, contains no material previously published or written by another person, except where due reference is made in the text of the thesis.
(Signed)______
Nahida Faridy
This Dissertation is based on The VAT Law1991 and The VAT Rules1991 in
Bangladesh.
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Contents
Abstract ...... i
Statement of Originality...... v Contents ...... vi
List of Tables ...... x
List of Figures ...... x
List of Abbreviations ...... xi
Glossary of Terms ...... xiii
List of Published Works ...... xv
Acknowledgments ...... xvi
Chapter1 ...... 1
Introduction ...... 1 1.1 Introduction ...... 1 1.2 An Overview of the Bangladesh Tax System ...... 3 1.3 Problem Statement and Justification for the Thesis ...... 8 1.3.1 Problem Statement ...... 8 1.3.2 Justification for the Thesis ...... 12 1.4 Objectives of Thesis ...... 14 1.5 Research questions and research methods ...... 14 1.5.1 Research Questions ...... 14 1.5.2 Research Methods ...... 15 1.6 Contribution and Scope of the Thesis ...... 16 1.6.1 Contribution of Thesis ...... 16 1.6.2 Scope of Thesis ...... 17 1.7 Structure of Thesis ...... 18 1.8 Conclusion ...... 18
Chapter 2 ...... 20
VAT in Bangladesh ...... 20 2.1 Introduction ...... 20 2.2 VAT: the Background ...... 20 2.2.1 Benefits of a VAT ...... 21 2.2.2 Disadvantages of a VAT ...... 23 2.3 Historical Context of VAT in Bangladesh ...... 24 2.3.1 The VAT in practice ...... 26 2.3.2 Rates of VAT ...... 28 2.3.3 Offences and Penalties ...... 30 2.3.4 Taxation Audits and Appeals ...... 32 2.3.5 VAT Administration and Enforcement ...... 34 2.3.6 Collecting Costs of VAT...... 35 2.3.7 The Deviations of VAT System in Bangladesh ...... 37 2.4 SMEs in Bangladesh ...... 41 2.4.1 Definition of SME in Bangladesh ...... 41
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2.4.2 Issues Confronting SMEs...... 43 2.5 Conclusion ...... 46
Chapter 3 ...... 48
Conceptual Framework ...... 48 3.1 Introduction ...... 48 3.2 Theoretical Underpinnings ...... 48 3.2.1 Non-compliance Theory ...... 49 3.2.2 The Economic Deterrence Models ...... 52 3.2.3Social-Psychological Models ...... 55 3.3 Simplicity and Complexity ...... 58 3.4 Compliance Costs ...... 63 3.4.1 Types of Compliance Costs ...... 65 3.4.2 VAT Compliance Costs in Bangladesh ...... 68 3.4.3 Leading Compliance Costs Studies ...... 69 3.4.4 Tax Compliance Costs Studies in Bangladesh ...... 74 3.4.5 Psychological Costs ...... 78 3.4.6 Corruption in Taxation ...... 82 3.4.7 Government Price-Setting Powers ...... 84 3.4.8 Deterrent Effects ...... 87 3.4.9 A model: Complexity, Compliance Costs and Non-compliance ...... 90 3.5 Conclusion ...... 91
Chapter 4 ...... 94
Methodology ...... 94 4.1 Introduction ...... 94 4.2 Research Questions ...... 94 4.3 Empirical indicators ...... 96 4.4 Research Methods ...... 100 4.4.1 Disciplinary Approach of the Taxation Research ...... 100 4.4.2 Nature and Approach of the Research ...... 100 4.4.3 Mixed Methods ...... 102 4.4.4 The Role of the Researcher ...... 105 4.5 Data and Methods ...... 107 4.5.1 Data Source and Methods of Data Collection ...... 107 4.5.2 Primary Data ...... 109 4.5.3 Stage 1: Focus Group Discussions ...... 112 4.5.3.1 Discussion Guide and the Participants ...... 112 4.5.3.2 Testing the Discussion Guide ...... 114 4.5.4. Stage 2: Survey ...... 114 4.5.5 Stage 3: In-depth Interviews ...... 116 4.5.6 Sampling ...... 116 4.5.7 Sample Size ...... 117 4.5.8 Data Analysis ...... 119 4.6 Ethical Considerations ...... 120 4.7 Conclusion ...... 120
Chapter 5 ...... 122
Focus Groups Discussions ...... 122 5.1 Introduction ...... 122 5.2 Demographic Characteristic ...... 122 vii
5.3. Results ...... 124 5.3.1. Reasons for Complying ...... 124 5.3.2 Reasons for Non-compliance ...... 132 5.3.3. Costs of VAT Compliance ...... 137 5.3.4 Complexity and Non-compliance ...... 143 5.3.5. Deterrent Effects ...... 147 5.3.6 The Relationship between Complexity, Compliance Costs and Non-compliance ...... 155 5.4 Summary of Findings ...... 158 5.5 Conclusion ...... 159
Chapter 6 ...... 160
Survey Results...... 160 6.1 Introduction ...... 160 6.2 Descriptive Statistics ...... 160 6.3 VAT Compliance Costs ...... 163 6.3.1Compliance Costs Based on Value-Added Tax Payment ...... 165 6.3.2 Compliance Costs by Annual Turnover ...... 166 6.3.3 Industry wide VAT Compliance Costs ...... 167 6.3.4 Breakdown of money spent on VAT compliance activities ...... 169 6.3.5 Breakdown of time spent on VAT compliance activities ...... 173 6.3.6 Psychological Costs of VAT ...... 175 6.3.7 External Assistance ...... 180 6.4 VAT Non-compliance ...... 182 6.4.1 Reasons for non-compliance with the VAT Law ...... 183 6.4.2 VAT Compliance Costs and Non-compliance ...... 192 6.4.3 Complexity and Non-compliance ...... 195 6.4.4 Deterrent Effect and VAT Compliance ...... 199 6.4.5 The Perceptions of Corruption and Taxpayers’ Voluntary Compliance ...... 200 6.5 Summary of Findings from Survey ...... 202 6.6 Conclusion ...... 206
Chapter 7 ...... 207
In-depth Interviews ...... 207 7.1 Introduction ...... 207 7.2 Demographic Characteristic ...... 207 7.3 The Role of VAT Law Complexity in VAT Compliance ...... 209 7.4 VAT Compliance Costs and Non-compliance ...... 215 7.4.1 Psychological Costs of VAT ...... 219 7.4.2 Cost of VAT Non-compliance ...... 224 7.5 Deterrent Effects ...... 228 7.6 Relationship between Complexity, Compliance costs and VAT Non-compliance ...... 235 7.7 Documentary Analysis ...... 239 7.8 Summary of Findings ...... 244 7.9 Conclusion ...... 247
Chapter 8 ...... 248
Conclusions and Policy Recommendations ...... 248 8.1 Introduction ...... 248 8.2 Overview of Major Findings...... 248 viii
8.3 The New VAT and Supplementary Duty Act’ 2012 ...... 255 8.4 Recommendations...... 257 8.5 Contributions ...... 264 8.6 Limitations ...... 265 8.7 Future Research Directions ...... 267 8.8 Conclusion ...... 268
Appendix A -Ethics Approval ...... 270
Appendix B - Letter from NBR ...... 271
Appendix C- Focus Group Discussion Guide ...... 272
Appendix D- Survey Questionnaire ...... 278
Appendix E – In-depth Interviews ...... 288
References ...... 290
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List of Tables
Table 1.1: Contribution of the Different Taxes as Percentage of Total Tax Revenue ..... 4 Table 1.2: Bangladesh’s Tax Revenue as a % of GDP ...... 6 Table 3.1: Earlier Tax Compliance Costs Studies in Bangladesh ...... 77 Table 5.1: Focus Groups Demographics ...... 123 Table 5. 2: Possible Relationship Between Complexity of VAT Law, Compliance Costs and Non-compliance ...... 157 Table 6. 1: Summary of Participants’ Characteristics ...... 161 Table 6.2: Average Compliance Costs of Compliant Taxpayers ...... 165 Table 6.3: Average Compliance Costs of Non-compliant Taxpayers ...... 165 Table 6.4: Average VAT Compliance Costs of CT and NCT ...... 166 Table 6.5: Industry Wide Average VAT Compliance Costs ...... 168 Table 6.6: Average Money Spent on VAT Compliance Activities by CTs ...... 170 Table 6.7: Average Money Spent on VAT Compliance activities by NCTs ...... 171 Table 6.8: Average Time Spent on VAT Compliance Activities by CTs and NCTs ... 174 Table 6.9: Difference Between Psychological Costs and Taxpayers’ Claims to NBR 176 Table 6.10: Psychological Costs of VAT ...... 178 Table 6.11: Reasons for Using VAT Consultants ...... 180 Table 6.12: Reasons for Not Using Assistance from VAT Consultants ...... 181 Table 6.13: Reasons for Non-compliance with VAT Law ...... 184 Table 6.14: Reasons for Non-compliance ...... 187 Table 6.15: Reasons for Compliance with VAT Law in Bangladesh ...... 189 Table 6.16: Reasons for Compliance ...... 191 Table 6.17: Compliance Costs and Non-compliance ...... 193 Table 6.18: Compliance Costs and Non-compliance ...... 193 Table 6.19: Reasons for Complexity of the VAT Law...... 196 Table 6.20: Reasons of Complexity ...... 197 Table 6.21: Deterrent Effect ...... 199 Table 6.22: Corruption and Voluntary Compliance ...... 201 Table 6.23: Role of Corruption in Voluntary Compliance ...... 201 Table 7.1: Demographic Statistics ...... 208 Table 7.2: Non-compliant Cases Based on Monthly Average VAT Payment ...... 240 Table 7.3: Non-compliant Cases Based on the Maturity of the Business ...... 241 Table 7.4: Non-compliant Cases Based on the Business Type ...... 242
List of Figures
Figure 3.1: Towards a Model of Complexity, Compliance Costs and Non-Compliance91 Figure 4.1: Procedures of the Mixed Methods Employed in the Study ...... 105
x
List of Abbreviations
ADB Asian Development Bank
ADR Alternative Dispute Resolution
AIT Advance Income Tax
ATO Australian Tax Office
ATV Advance Trade VAT
BICF Bangladesh Investment Climate Fund
BDT Bangladeshi Taka (1 BDT = 0.013 USD approx.)
BSCIC Bangladesh Small and Cottage Industries Corporation
CD Customs Duty
CIT Corporate Income Tax
CPD Centre for Policy Dialogue
DCCI Dhaka Chamber of Commerce and Industries
DFID Department for International Development
FBCCI Federation of Bangladesh Chambers of Commerce and Industries
FGD Focus Group Discussions
GDP Gross Domestic Product
GINI Governance Institute Network International
GOB Government of Bangladesh
IDB Islamic Development Bank
IFC International Finance Corporation
IMF International Monetary Fund
ITD International Tax Dialogue
IRS Internal Revenue Services
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JICA Japan International Co-operation Agency
LTU Large Taxpayer Unit
MCCI Metropolitan Chamber of Commerce and Industries
MDG Millennium Development Goal
NBR National Board of Revenue
NGO Non-Government Organization
OECD Organization for Economic Cooperation and Development
PIT Personal Income Tax
PRSP Poverty Reduction Strategy Paper
SAARC South Asian Association for Regional Cooperation
SD Supplementary Duty
SME Small and Medium Enterprise
SRO Statutory Regulatory Order
SUPRO Sushanoner Jonnno Procharavizan
TEC Taxation Enquiry Commission
TIB Transparency International Bangladesh
TIN Tax Identification Number
TT Turnover Tax
UNDP United Nations Development Programme
USA United States of America
USD US Dollar
VAT Value-Added Tax
WBG World Bank Group
WTO World Trade Organization
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Glossary of Terms
Cash-flow benefit Cash flow benefits arise for the timing difference between receipt of funds and payment of tax relating to those funds.
Tax compliance costs Tax compliance costs are the costs incurred by taxpayers in meeting the requirements laid on them by the tax law and the revenue authorities. These are the costs over and above the actual payment of tax (Sandford, 1995).
Input-output coefficient A coefficient (input-output) that records the amount of each product (or the amount of output by each industry) used as
input per unit of output of the various products/industries.
LTUs Large Taxpayers Units are generally established to assess tax liabilities of large taxpayers in relation to Value Added Tax, Corporation Tax and Personal Income Tax in Bangladesh.
Managerial-benefit The benefit arising in the form of improved decision making and control over the business as a consequence of the imposition of regular record-keeping for GST.
Package VAT Small business ‘consumers’ or ‘purchasers’ at the wholesale and retail level pay a fixed annual amount of VAT, the quantum of which depends on the geographic location of their business. This is known as package VAT.
SMEs SMEs are enterprises with an annual turnover equal or greater than 8 million BDT (0.11 million USD), but with an annual VAT payment less than 50 million BDT (0.65 million USD) (GOB, 2014).
Speed money Bribe, often in the form of cash given by VAT payers to corrupted VAT Officials.
Statutory Regulatory A Statutory Regulatory Order (SRO) is a subordinate Orders (SROs) legislation, which is issued by the National Board of Revenue (NBR) or any organisations who are empowered to frame their own rules or law or sub-law.
Tariff value Tariff value is a notional value based on value addition. To artificially reduce the market price NBR can determine the tariff value for some products.
Truncated base For a number of services the VAT authority has fixed a notional base commonly known as the truncated base.
xiii
Turnover tax Small business suppliers (with an annual turnover less than 8 million BDT or 0.11 million USD) have the option of
paying a tax of 3% on their annual turnover, in lieu of the 15% VAT. This 3% tax is known as ‘turnover tax’ in Bangladesh.
Value Added Tax A multiple-stage tax under which registered traders are liable for tax on specified supplies, but are then able to claim the tax on their acquisitions. In Bangladesh VAT is known as ‘Mushak’.
Value declaration The suppliers of VAT-able goods in Bangladesh, before making a supply, have to make a declaration to the Divisional officer of VAT, on a prescribed form, of the selling price of their goods.
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List of Published Works
The following papers have been drawn from the thesis:
Faridy, N., Copp, R., Freudenberg, B. & Sarker, T. (2014). Complexity, Compliance Costs and Non-Compliance with VAT by Small and Medium Enterprises (SMEs) in Bangladesh: Is there a Relationship? Australian Tax Forum,29(2), 281– 328.
Faridy, N.(2013). VAT Compliance Costs and VAT Evasion of Small and Medium Enterprises (SMEs) Sectors in Bangladesh: Is there a Link? Paper presented at the 25th Annual Australasian Tax Teachers Association Conference held from January 23-25, 2013 in Auckland, New Zealand.Available at, docs.business.auckland.ac.nz/Doc/20- Nahida-Faridy.pdf (last accessed 8 September 2015).
Faridy, N. (2014). Complexity, Compliance Costs and Non-Compliance with VAT by Small and Medium Enterprises (SMEs) in Bangladesh: Is there a Relationship? Paper presented at the 26th Annual Australasian Tax Teachers Association Conference held from January 20-22, 2014 in Brisbane, Australia.
Faridy, N. (2015). Losing Sleep: The Psychological Costs of VAT- Evidence from SMEs in Bangladesh. Paper presented at the 28th Annual Australasian Tax Teachers Association Conference held from January 19-21, 2015 in Adelaide, Australia.
(Signed) ______(Date)______
Nahida Faridy
(Countersigned) ______(Date)______
Supervisor: A/P Brett Freudenberg
(Countersigned) ______(Date)______
Supervisor: Dr. Richard Copp
(Countersigned) ______(Date)______
Supervisor: Dr. Tapan Sarker
xv
Acknowledgments
My PhD journey would not have been completed without enormous support from a number of people and institutions. First, I would like to extend my gratitude to the supervisory team, Associate Professor Brett Freudenberg, Dr. Richard Copp, and Dr. Tapan Sarker, for their continued support in completing the thesis. Without their inspiration, comments, suggestions, and invaluable assistance, this thesis would not have been possible. Their academic excellence, professional skills and expertise, and vast theoretical knowledge have enriched my research and thesis. I remain ever grateful and thankful to them.
I am greatly indebted to the Griffith University for granting me the scholarship to pursue the higher degree research. I am grateful to the Government of Bangladesh and the National Board of Revenue (NBR) for generously granting me deputation and study leave for the period of my study. I would like to take the opportunity to thank the officials of the NBR for the help they extended me in data collection. I am particularly thankful to all of my 21st batch mates for helping me in arranging focus group discussions in Dhaka. To all those who participated in my focus groups, and the in- depth interviews, and who undertook the survey, I am very grateful to them. I understand participating in a lengthy survey takes commitment, so I appreciate all the time given up by the SME taxpayers in Bangladesh. I extend my thanks to Ms Jennifer Beale for her proof reading of the final version of the thesis. I am thankful to all my friends and peers at Griffith University, and to the staff and members of Griffith Business School.
I am deeply indebted to my family. My deepest gratitude is due to my parents, my parents-in-law, my husband and my brothers for their selfless support over the years. How could I repay the love of my husband, whose dream has been to see me earning a doctoral degree?
I would like to thank my bundle of joy, my daughter Rufaida, for giving me her continuous support and confidence: ‘Mum, you can do it’. Finally, I would like to share with her the joy of completion.
Nahida Faridy September 2015 xvi
Chapter 1
Introduction
1.1 Introduction
Over the past decade, the compliance issues for small and medium sized enterprises
(SMEs)1 have been recognised by governments, businesses and academia due to the important role that SMEs play in fostering economic growth and development
(Eragbhe & Modugu, 2014; Bird, 2013; International Monetary Fund, 2011; World
Bank Group, 2005). Compliance issues are particularly important for developing and transition economies, as SMEs typically account for more than 95% of all firms outside the primary agriculture sector; constituting a major source of employment and generating significant domestic and export earnings (Smulders, Stiglingh, Franzsen, &
Fletcher 2012; Organisation for Economic Co-operation and Development
(OECD),2004, 2015). For developing economies such as Bangladesh, improving tax compliance for SMEs can contribute to economic and social development (WBG,
2005). It has been argued that governments should create an environment that favours
SME growth by strengthening the factors that lead to business success and addressing the problems threatening their existence and advancement (International Finance
Corporation, 2007; Shome, 2004).
Value Added Tax (VAT) is a tax which is regarded as important for developing and developed nations, as it provides a stable and necessary reserve to fund government
1. Small and medium sized enterprises (SMEs) are one of the leading forces of the world’s economic development. It is estimated that more than 95% of enterprises across the world are SMEs, accounting for approximately 60% of private sector employment (Ayyagari, Demirguc- Kunt & Maksimovic, 2011). SMEs for VAT in Bangladesh is made up of enterprises with annual turnover equal to or more than 8 million BDT (0.104 million USD) but with an annual VAT payment less than 50 million BDT (0.65 million USD) (Government of Bangladesh, 2014).
1
expenditure for the provision of social services and important infrastructure (IMF,
2011).Policy makers around the world see VAT as a useful tool to collect at least some taxes from SMEs (IFC, 2007). In Bangladesh, however, SMEs appear to be under- represented in terms of their registration for VAT and their contribution to the VAT revenue collected, despite the introduction of various policy and administrative measures to encourage SMEs to register for VAT (Faridy, Copp, Freudenberg, &
Sarker, 2014; Centre for Policy Dialogue, 2014). International experience suggests that
SMEs in general consider VAT to be problematic in that it can be overly costly for
SMEs as taxpayers to maintain compliance with the legislation (Webley & Ashby,
2012). Bangladeshi SMEs are no exception, and may be unduly adversely affected by high compliance costs for VAT, as well as by the complexity of the Bangladeshi VAT system (IFC, 2002). Compliance costs and complexity could then reduce the potential for a VAT to provide sufficient tax revenue to meaningfully fund infrastructure development and other government expenditure.
In addition, international experience suggests that a VAT can be very costly for tax authorities to administer, adversely impacting the amount of VAT collected (Webley &
Ashby, 2012). Seeking a better understanding of the inter-relationship between VAT compliance costs and VAT non-compliance for SMEs in Bangladesh is central to this study.
A large number of Bangladeshi SMEs appear to be operating outside the formal sector without any type of registration, such as a tax identification number (TIN) and/or a business identification number (BIN) (IFC, 2013). These undocumented and informal enterprises may not be interested in obtaining government support, including tax waivers or lower tax rates, in order to avoid the legal and regulatory frameworks within the economy and the higher costs associated with being compliant (IFC, 2007; Abdul-
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Jabbar &Pope, 2008).To gain a greater understanding, this thesis explores the potential relationship between the complexity of VAT law, the compliance costs and the non- compliance with VAT by SMEs in Bangladesh.
Thus far, this chapter has provided an overview of the context for the thesis. The remainder of the chapter is organised as follows. The next section overviews the
Bangladeshi taxation system to provide an institutional background to the research.
Section 1.3 states the research problem and the rationale for the research. The objectives of the thesis are described in section 1.4, while section 1.5 sets out the research questions addressed in this thesis, as well as the research methods used. Section 1.6 provides an overview of the structure of the thesis, and section 1.7 outlines the scope of the research and the contribution of the thesis. A summary of the chapter is presented in section 1.8.
1.2 An Overview of the Bangladesh Tax System
Bangladesh, which inherited its current taxation system from its colonial past during the
British and Pakistani regimes, has a long tradition of administering both direct and indirect taxes.2 The National Board of Revenue (NBR), one of the largest government agencies in the country, is the apex body for collecting tax revenue in Bangladesh.
Immediately after the independence of Bangladesh, in 1972, the NBR was institutionalized by Presidential Order No. 76. The NBR has three main administrative wings: VAT, Income tax and Customs. In addition, the NBR is responsible for administering revenue administration and designing tax policy.
2. Direct taxes include personal income tax and corporate tax, gift tax, land development tax, non- judicial stamp and immovable property tax. Indirect taxes include – Customs Duty, Excise Duty VAT and Supplementary tax. Except Land Development tax, Non-judicial stamp tax, Registration and immovable property tax and Narcotics tax, all the above mentioned taxes are administered and collected by the National Board of Revenue. 3
The VAT is important in Bangladesh for a number of reasons. First, VAT is the largest source of government revenue, despite only a low proportion of businesses being registered for VAT. Second, the tax/GDP ratio is very low in Bangladesh compared with other developing economies. Third, because the actual tax revenue from VAT is substantially less than the estimated potential VAT revenue, a significant amount of tax revenue is foregone. This represents a substantial opportunity cost to the Government, since tax revenue otherwise collected could be spent on vital infrastructure development for Bangladesh.
Revenue collections of Bangladesh for the last fourteen financial years (FY)3 as a percentage of total tax revenue illustrate that VAT is the largest source of tax revenue collected, ranging from between 32% to 39% (Table 1.1). The data presented in Table
1.1 also show a gradual growth in the proportion of tax collected from income tax, and a decline in customs duty (or ‘international trade tax’ as it is termed in Bangladesh) and supplementary duty (SD).
Table 1.1: Contribution of the different taxes as percentage of Total Tax Revenue
Financial Income VAT Customs Excise Others Total Years Tax (%) (%) Duty (%) SD (%) Duty(%) Taxes (%) (%) 2000-01 18.70 33.90 26.94 18.12 1.47 0.87 100 2001-02 19.80 33.33 25.60 18.57 1.40 1.30 100 2002-03 20.21 33.61 24.47 18.48 1.30 1.93 100 2003-04 19.51 31.70 26.98 20.07 0.62 1.12 100 2004-05 19.18 34.77 26.22 18.36 0.49 1.37 100 2005-06 20.23 35.48 23.90 18.55 0.47 1.37 100 2006-07 23.86 36.50 22.08 16.26 0.49 0.81 100 2007-08 23.47 37.00 20.23 17.33 0.46 1.51 100 2008-09 25.54 37.95 18.02 17.20 0.55 0.74 100 2009-10 27.59 38.84 15.13 17.22 0.56 0.66 100 2010-11 28.89 37.78 14.44 17.08 0.61 0.52 100 2011-12 29.92 37.54 14.12 17.72 0.70 0.53 100 2012-13 31.44 36.13 12.92 17.78 0.88 0.85 100 2013-14 35.49 36.75 10.75 15.32 0.96 0.73 100 Source: Bangladesh Economic Review (2014), Note: SD = Supplementary Duty
3. The Financial Year (FY) in Bangladesh commences from 1st July each year and ends at 30th June of the following year. 4
Table 1.1 demonstrates Bangladesh’s heavy reliance on indirect taxes, and particularly on VAT. The proportionate predominance of indirect taxes over direct taxes as a source of revenue is evident: direct taxes accounted for only 35.49% of the tax revenue in
2013-2014, while indirect taxes accounted for about 64.51%. Indeed, this points to one of the reasons why VAT is seen as an important part of a tax system for a developing nation. Only 1.17% of the total Bangladeshi population is registered for personal income tax (PIT); and of those, less than 1% actually paying income tax (NBR, 2014).In comparison, the ratio of personal income tax (PIT) taxpayers to population in developed countries varies from 40% to 94% (OECD, 2011). Among all the taxes in Bangladesh,
VAT accounts for a substantial share of its tax-revenue collected, despite only 13.07% of the total number of businesses being registered for VAT (NBR, 2011; Bangladesh
Bureau of Statistics, 2012). There have been some studies examining the non- compliance issue in income tax in the context of Bangladesh (Sarker, 2003; Akhand,
2015). However, to date, there is no such study examining the non-compliance issues of
VAT that exclusively focuses on SMEs in Bangladesh. This study aims to fill the gap in the literature.
Table 1.2 illustrates Bangladesh’s tax revenue as a percentage of GDP from 2009-10 to
2014-15: less than 15% is projected for the current financial year. For Bangladesh, the tax/GDP ratio was less than 10% in Bangladesh in 2005-06, and 11% in 2011-12
(Bangladesh Economic Review, 2012). In comparison, in 2005, the average tax/GDP ratio in the developed world was approximately 35%. In developing countries it was
15%, and in the poorest of these countries (the low income countries) tax revenue was
12% of GDP (Fuest & Riedel, 2009).
Almost a half-century ago, Nicholas Kaldor (1963) argued that for a country to be considered ‘developed’ and moving away from a ‘developing’ status, collected taxes
5
need to account for 25% to 30% of Gross Domestic Product (GDP) (cited in Bird, 2013, p.3). The United Nation’s Millennium project (2005) stated that on average
‘developing’ countries needed to mobilise only an additional 4% of GDP in tax revenue to their average level of 18% to give a total of 22%, which would see a ‘developed’ level. However, in terms of growth, Bangladesh is far behind in its ratio of a reasonable percentage of tax to GDP: the overall growth of the tax-GDP ratio from 2001 to 2012 stands at only 2.73% (NBR, 2012). The IMF (2013) explained that Bangladesh’s relatively low revenue to GDP ratio is primarily due to inherent weakness in its taxation system.
Table 1.2: Bangladesh’s Tax Revenue as a % of GDP
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Projections Total Revenue 10.9 11.7 12.4 13.2 13.6 14.2 Tax Revenue 9.0 10.0 10.4 10.9 11.3 12.2 NBR Tax Collection 8.5 9.6 10.0 10.5 10.7 11.8 Of which: 4.9 5.4 5.5 5.5 5.6 6.4 VAT and SD Customs and Excise Duties 1.3 1.4 1.4 1.5 1.4 1.5 Taxes on income and profit 2.3 2.8 3.1 3.5 3.7 3.9 Source: NBR (2014)
Bird and Zolt (2008) argue that this poor performance in revenue mobilisation reflects weaknesses in tax policy as well as revenue administration. As a developing country,
Bangladesh also experiences chronic weaknesses in revenue mobilisation (Sarker,
2015). For instance, in 2010, the estimated tax effort4 index in Bangladesh was 0.41, meaning only 41 percent of potential revenues were collected, significantly below the median level of 0.78 for low-income. The significant amount of tax revenue foregone may be due to the preferential tax treatment through targeted tax deductions, credits, tax exclusions or exemptions given to specific taxpayer groups in respect to their
4. Tax effort index is the ratio of actual revenues to potential. 6
investment expenditures or investment returns. Foregone revenue is estimated to be at least 2.5 percent of GDP (NBR, 2007; IMF, 2011).
Compared to other low-income countries, the C-efficiency ratio5 is very low in
Bangladesh. In low income countries the average C-efficiency ratio is 38%, but in
Bangladesh it is only 23.4% (IMF, 2011). The VAT efficiency (or productivity) ratio is
15.92% in Bangladesh, compared with (according to the IMF) an average worldwide
VAT efficiency ratio of 34% (Smith, Islam & Moniruzzaman, 2011).
In terms of revenue collected from VAT, Bangladesh generates substantially less VAT revenue in relation to its GDP than many other low and middle income countries (IMF,
2011). In terms of VAT productivity, for each point of the standard VAT rate,
Bangladesh generates only 0.22 percent of GDP in revenue compared to 0.34 percent of
GDP in other low income countries (IMF, 2011). If Bangladesh could raise its VAT productivity by 0.12 percent of GDP to the average level of other low income countries, then with everything being equal, VAT could increase government revenues by 1.8 percent of GDP (NBR, 2014).
Keen (2007) argues that citizens and businesses are discouraged to comply with tax obligations due to the absence of a well-designed tax system, the large informal business sector and the corrupted tax administration. In Bangladesh, only 50,000 out of
768,922 registered businesses pay VAT regularly (NBR, 2014). Bird and Zolt (2008) argue that a well-designed VAT and a tax on the informal sector are important for developing countries in addressing the challenges in tax policy and administration.
Emran and Stiglitz (2005) on the other hand claim that the size of the informal sector in developing countries reduces the effectiveness of VAT. It is estimated that the informal economy in Bangladesh accounts for approximately 39% of GDP (TIB, 2012), which
5. C- efficiency ratio is defined as the share of the VAT in consumption divided by the standard VAT rate ( IMF, 2011). 7
can have a negative impact to the macroeconomic stability (Heintz, 2012; Shome,
2004).
Although the collection of VAT is increasing somewhat in Bangladesh, this evidence suggests that the VAT collected in Bangladesh could be considerably higher. Potential reasons for non-compliance for the currently low level of VAT collection, including non-compliance by Bangladeshi businesses, are explored briefly in the following section, and then in more detail in the conceptual framework outlined in Chapter 3.
1.3 Problem Statement and Justification for the Thesis
1.3.1 Problem Statement
The research problem investigated in the thesis can be stated as follows. SMEs, which in Bangladesh are typically highly labour-intensive, are a key engine of economic growth for the country. Some 86% of VAT taxpayers fail to lodge VAT returns. Of the
14% who do, approximately 78% are big companies in highly concentrated industries.
Most businesses by far in Bangladesh, however, are SMEs. Evidence suggests an under- representation of SMEs in terms of VAT revenue collected, reflected in non-compliance with the VAT legislation. This non-compliance could be intentional, unintentional or a mixture of both. The thesis investigates possible reasons for the under-representation of
SMEs in VAT revenue collected. Possible reasons could include the Bangladeshi VAT
Law being overly complex; any public perception that the Government will advise taxpayers what to pay if they cannot determine this for themselves; high levels of taxpayer uncertainty, perhaps coupled with a fear of additional tax being imposed; fear of harassment by NBR officials, including abuse of their discretionary powers; and ineffective monitoring and/or enforcement by the NBR (possibly because their expected costs of doing so exceed the expected benefits).
8
SMEs are frequently identified as a key engine of economic growth in developing countries (Shome, 2004; IFC, 2011). SMEs create large-scale and low-cost employment opportunities using mainly locally available inputs and technologies (Bangladesh
Economic Review, 2010). SMEs assist in developing entrepreneurship by mobilising small and scattered private savings (SME Foundation, 2014). Due to the importance of the SME sector to a country’s economy, governments around the world have commonly emphasised the importance of a healthy SME sector and have geared public policy toward fostering SME development and growth (Hansford, Hasseldine, & Horworth,
2003).
In Bangladesh, a labour-abundant but capital-scarce country, SMEs facilitate the development of labour-intensive industries (Mintoo, 2004). There are 0.9 million SMEs including about 0.8 million cottage industries (Uddin, 2014,). A recent study finds that
SMEs in Bangladesh accounted for about 45% of the total value-added in manufacturing; 85% of industrial employment; about 99% of total industrial units; and approximately 25% of the total labor force (Islam, Zohir, & Hossain, 2011).
Nevertheless SMEs appear to contribute disproportionately little to VAT tax revenue.
Only 11% of the total VAT revenue comes from SMEs, while the SME share of revenue collected from turnover tax is a mere 0.03% of total VAT revenue collected
(NBR, 2012).
According to the 2013 Economic Census the total number of Bangladeshi businesses was 8,075,704 of which only 2,127,613 (26.35%) were registered with the trade licensing authorities (NBR, 2015). In 2013, the number of businesses registered for the
VAT system was 768,922 which are very low compared to the above figures (NBR,
2014). According to NBR statistics, of the 463,212 registered VAT payers in
Bangladesh in the 2009-2010 financial year, only 14% (or 64,850firms) submitted their monthly VAT returns to the NBR on time. This means that approximately 86% of VAT 9
taxpayers failed to comply with their lodgement requirements under the VAT Law. In addition, only 171 large VAT taxpayers registered with the NBR’s Large Taxpayer Unit
(LTU) regularly submitted their VAT returns on time (NBR, 2012). Indeed, nearly 78% of the VAT collected in Bangladesh is sourced from a relatively few large taxpayers, representing highly concentrated industries such as cigarettes and leafy tobacco, natural gas, telephone, construction companies and banks (Faridy, 2011). Overall, these figures suggest a significant under-representation of SMEs in the VAT revenue collected, which may be due to significant non-compliance by SMEs with Bangladesh's VAT Law
(including failing to register for VAT in the first place). This is reinforced by the fact that there was some BDT6 60.24 billion (78.31 million USD) in outstanding VAT in
2011 that was yet to be collected from VAT payers in Bangladesh (NBR, 2012).
Given what appears to be widespread non-compliance with the VAT legislation by
SMEs then, it is so far unclear whether such non-compliance is intentional, unintentional or a combination of these. One possible cause of SME non-compliance could be Bangladesh's VAT Law being too complex for Bangladeshi SME taxpayers to understand, requiring them to seek expert help. This may lead to taxpayers finding the
(private) costs of compliance (for them) to be excessive. The costs of complexity could be exacerbated if the provisions of the VAT Law are frequently amended.
Another cause for SMEs non-compliance could be the fact that, under the legislation, the Bangladeshi government has the power to determine and set regulated prices, and thereby vary the VAT amounts for many products. Thus many taxpayers may fail to pay
VAT initially themselves, simply because they know or expect the government to tell them how much they need to pay later.
6. For this thesis, 1 BDT is considered 0.013 USD (as at 31 December 2013) 10
Other potential reasons for non-compliance include uncertainty, fear of additional taxation, and harassment by NBR officials through misuse of their discretionary powers.
For example, in 2007 the business community reportedly expressed such concerns to the
Chief Advisor of the then-caretaker Government of Bangladesh (“CA allays”, 2007). A need to reduce complexities in income tax regulation and throughout the overall taxation system has also been reported (“Easing income tax”, 2010).
In terms of VAT registrations and the VAT revenue collected by government, SMEs may also be under-represented because of a lack of effective monitoring or enforcement on the part of authorities (Kirchler, 2007) such as the NBR.7 Again in economic terms, any lack of effective monitoring or enforcement on the NBR’s part could imply that the expected costs to the NBR of better monitoring and better enforcement of the VAT Law exceed the perceived benefits,8 including those arising from any deterrent effects that enhanced monitoring and enforcement might have on taxpayers. In this context, deterrent effects arise if VAT taxpayers generally comply more with the VAT Law because they see other (typically high profile) taxpayers being successfully prosecuted or penalised for non-compliance, and are thereby themselves deterred from non- compliance (Polinski & Shavell, 1998, 1999; Posner, 2000; Palmer, 1977; Benson,
Kim,& Rasmussen, 1994).
Since the NBR is government-funded, the costs of enhanced monitoring and enforcement is ultimately borne by all Bangladeshi taxpayers and any public financiers such as the World Bank, the Asian Development Bank (ADB), the Islamic
Development Bank (IDB), or the Japan International Cooperation Agency (JICA).
7. Under section 2 of the VAT Law, the NBR has a legal duty to monitor and investigate taxpayer activities in respect to VAT, and enforce the legislation. 8. Some data also suggest considerable inefficiencies in the administration of the Bangladeshi VAT. For example, there are over 18,000 pending court cases related to VAT and Customs in the Bangladeshi High Court, representing – according to the taxation authorities – about 30 billion taka in potential VAT collections outstanding (Mustafiz, 2012). Having said this, any investigation into the efficiency or otherwise of the administration of the Bangladeshi VAT is beyond the scope of this thesis. 11
While government-funded taxpayer audits may go some way toward discouraging taxpayer non-compliance (Weck-Hannemann & Pommerehne, 1996), it may be administratively more efficient for the NBR to seek to discourage intentional non- compliance through increased penalties for non-compliance or other measures.
All these problems in the VAT system in Bangladesh, along with the gaps in the literature identified in Chapter 3 regarding VAT compliance costs in developing countries in particular, and the potential relationships between complexity, VAT compliance costs and VAT compliance decisions call for extensive research.
1.3.2 Justification for the Thesis
The justification for the research underlying the thesis is as follows. A VAT is seen as vital to a developing country such as Bangladesh as a means of increasing much-needed tax revenue (World Bank, 2012). Equally in developing economies such as Bangladesh,
SMEs are seen as desirable in developing economies, particularly in terms of employment and aggregate output. Although the actual VAT revenue from SMEs in
Bangladesh falls significantly short of estimated potential VAT revenue from that source, there is little or no empirical evidence as to why this is so.
The development of SMEs in developing countries is generally believed to be desirable in light of their contributions to decentralized job creation, generation of output and domestic resource mobilisation (OECD, 2004; IMF, 2007). Observing revenue collection scenarios from different countries, Shome (2004) argues that in developing countries much revenue tends to be collected from large taxpayers, where SME taxpayers should also be a potential source of collectable revenue. If more SME taxpayers were included in the tax system, it may well have positive results for tax administration by raising tax revenue through declining tax evasion or avoidance (Bahl
12
& Bird, 2008; Shome, 2004). This having been said, low SME representation in the
VAT revenue collected may be still attributed to complexity, compliance costs and non- compliance.
In the context of Bangladesh, the compliance burden of taxes is largely unknown, particularly VAT and the resultant impact on the compliance decisions of SME taxpayers. There have been no studies to date about the relationship between the complexity of the VAT Law, compliance costs and VAT non-compliance in
Bangladesh. A number of reasons have been identified for the low representation of
SMEs in the VAT collected by the NBR, all centred on the absence of good governance in the Bangladeshi VAT system. Specific reasons identified include the excise/turnover- type VAT; a narrow tax base (of current taxpayers) in Bangladesh and a relatively small number of VAT payers with a large informal economy; a general lack of awareness of the VAT Law; and a weak monitoring system (Saleheen, 2013a; Smith et al., 2011).
Other relevant features of SMEs may also influence their ability to comply with the
VAT. For example, studies relating to Bangladesh’s SME sector (Uddin, 2008;
Chowdhury, 2007; Miah, 2007) have highlighted major constraints on SMEs as including a lack of adequate investment and modern technology, high interest rates on bank loans, an irregular/inadequate power supply, poor physical infrastructure and high transportation costs. Other constraints for SMEs’ development in Bangladesh include poor information about market opportunities, unavailability of raw materials, lack of skilled professionals, aggressive competition by large firms, credit constraints, low access to business services, low lobbying capacity and rapid changes in policy environments. This thesis aims to better understand the nature of key factors impacting
Bangladeshi SMEs’ interaction with the VAT, particularly in respect of the inter-
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relationships between the complexity of the VAT Law, compliance costs and VAT non- compliance in Bangladesh.
1.4 Objectives of Thesis
The objectives of this thesis are fourfold:
1) To assess VAT compliance costs for SMEs in Bangladesh;
2) To examine whether, in respect of SMEs in Bangladesh, there are any potential
inter-relationships between VAT compliance costs and VAT non-compliance,
including whether higher compliance costs are likely to lead SME taxpayers into
non-compliance with the VAT, or whether there are other factors contributing to
VAT non-compliance by SMEs in Bangladesh;
3) To consider whether there is any relationship between the complexity of the
VAT Law and VAT compliance costs for SMEs in Bangladesh; and
4) To provide policy recommendations for improving the effectiveness of the VAT
system in Bangladesh.
1.5 Research questions and research methods
The research questions of the thesis and the methods used to address these are outlined below.
1.5.1 Research Questions
With the objectives of the thesis in mind, there are seven specific research questions. In relation to research objective 1 the related research questions are:
What are the costs of complying with the VAT Law in Bangladesh for
compliant and non-compliant SME taxpayers? (RQ 1)
This includes the sub research question of:
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What is the value of psychological costs in taxpayers' total compliance
costs? (SRQ 1)
In relation to research objective 2 the related research questions are:
What are the reasons for non-complying with the VAT Law by
Bangladeshi SMEs? (RQ 2)
This includes the sub research questions of:
Is SME non-compliance with the VAT Law in Bangladesh due to the
VAT compliance costs being excessively high for these taxpayers? (SRQ
2)
To what extent are the deterrent measures in the VAT law effective to
ensure compliance with the Law? (SRQ 3)
Are there other factors which contribute to VAT non-compliance by
SMEs in Bangladesh? (SRQ 4)
In relation to research objective 3 the research question is:
Is non-compliance with the VAT Law by some SME taxpayers in
Bangladesh a result of the legislation and regulation being overly
complex? (RQ 3)
1.5.2 Research Methods
A mixed methods research approach has been adopted in order to meet the research objectives. The purpose of using a mixed methods approach is to gather data which could not be obtained by adopting a single method, and to triangulate the findings from multiple approaches. In the case of tax compliance costs and tax evasion, most of the earlier studies used the quantitative research approach. More recently there have been a number of tax compliance and compliance behaviour studies using mixed methods,
15
including Ritchie (2001), Tran-Nam and Glover (2002), McKerchar (2003), Glover and
Tran-Nam (2005), Loo (2006),Yesegat (2008) and Mohdali and Pope (2013).
In light of the research questions, this research will be conducted in three stages. Stage
1 will involve focus group discussions (FGD) with VAT payers from the SME sector
(both compliant taxpayers and non-compliant taxpayers) and with VAT officials. Stage
2 will involve a survey, seeking qualitative and quantitative data, of both compliant and non-compliant SMEs taxpayers. Finally, stage 3 will involve in-depth semi-structured interviews with NBR officers and taxpayers.
1.6 Contribution and Scope of the Thesis
1.6.1 Contribution of Thesis
The thesis aims to make four key contributions to the literature. Firstly, it will provide empirical evidence about the compliance costs of VAT for Bangladeshi SMEs. While a considerable body of literature has developed over the last 40 years about the role of complexity and compliance costs of direct and indirect taxation generally, there has been no research to date that focused on VAT non-compliance in Bangladesh.
Secondly, while there has been considerable empirical work done about non-compliance in the context of income tax, both personal and corporate, there has been little empirical research about non-compliance with indirect taxes such as VAT in developing countries. Thirdly, to date there has been no in-depth empirical research about the psychological costs of VAT and the deterrent effect of taxation, particularly in developing countries such as Bangladesh. Finally, the findings of this thesis will have practical implications for the law and policy reform, not only in Bangladesh but also potentially for other similar developing economies.
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1.6.2 Scope of Thesis
The scope of this thesis is limited to SMEs and VAT in Bangladesh. As such there are a number of areas which are beyond the scope of this investigation. Firstly, while some sources suggest that SMEs are substantially under-represented in the VAT collection
(NBR, 2014), it is also true that VAT is the highest tax revenue-earning source of
Bangladesh. It is entirely possible that other taxation sources, such as income tax, import duty, supplementary duty, and excise duty are also under-represented in terms of total taxation revenue collected. Any investigation into these other areas of taxation is, however, beyond the scope of this thesis.
Second, previous studies have focused on tax evasion or tax avoidance.9 With both concepts assuming that non-compliance is intentional by taxpayers. For the sake of consistency with the legislation, this thesis focuses less on the distinction between VAT avoidance and evasion, and more on whether the non-compliance is intentional or unintentional.
Third, this thesis focuses only on non-compliance by SMEs with the VAT Law in
Bangladesh. Again, while an investigation into LTUs such as large international corporations might well prove a productive area of future research that investigation remains beyond the scope of this thesis.
Fourth, not all SMEs, as conventionally defined in the literature, are within the scope of analysis. Specifically, those SMEs who choose to pay turnover tax in lieu of VAT, and small firms in cottage industries (which are exempt from VAT) are not included. In this way, the analysis of this thesis is on VAT as technically defined by the legislation,
9. Tax evasion refers to intentional but illegal actions by individuals or firms to reduce their legally due tax obligations (Alm, 2012). Tax avoidance, on the other hand, refers to intentional but legal actions by individuals or firms to reduce their tax obligations. 17
rather than what some of the Bangladeshi taxpayer population regard as ‘VAT’, which technically includes turnover tax.
Finally, any significant taxpayer non-compliance plainly has implications for efficiency, equity, and the spending capacity of governments (Musgrave & Musgrave, 1989).
While these implications are undoubtedly important in the context of how Bangladesh's
VAT is operationalized in practice, an investigation of these aspects is not included in this thesis.10
1.7 Structure of Thesis
The remainder of the thesis is structured as follows. Chapter 2 provides an overview of the VAT system in Bangladesh. Chapter 3 reviews the literature about the effects of complexity, compliance costs, and deterrent effects of taxation, including in the context of VAT and developing countries. Chapter 4 outlines the data, research design, research questions, empirical indicators and methodology used in the thesis. The results of focus group discussions are presented in Chapter 5, whilst the results of the survey are presented in Chapter 6. The findings of in-depth interviews are discussed in Chapter 7.
Chapter 8 summarises the main conclusions and recommendations arising from the analysis, as well as identifying other areas for further research.
1.8 Conclusion
This chapter has provided an overview of the thesis in relation to SME businesses and
VAT in Bangladesh – in particular, how VAT plays an important role in the economies of developing nations such as Bangladesh and the importance of SMEs for
10. For example, Kaplow’s (1996) work has highlighted the conceptual relationship between complexity, compliance costs and equity. In particular, Kaplow argued that increasing complexity led to higher compliance costs. If these were too high, many taxpayers would become non-compliant and equity would not be achieved. Kaplow’s contribution was theoretical, rather than empirical in nature (Forest & Sheffrin, 2002; Sawyer, 1996; White, 1990, Cialdini, 1989; Carroll, 1987). 18
Bangladesh’s economy. Noting the importance of VAT-related research, the chapter also explained the rationale of the research in this thesis: that is, the importance of gaining a greater understanding of the nature of inter-relationships between SMEs and
VAT in terms of compliance costs, complexity and non-compliance. The chapter then set out the objectives of the thesis, the research questions considered, and noted the methodology to be employed in their investigation. The scope of the thesis was delineated, and the limitations of the research identified and acknowledged. Chapter 2 provides further contextual detail about the VAT and SMEs in Bangladesh, and the nature of the inter-relationships between the two.
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Chapter 2
VAT in Bangladesh
2.1 Introduction
A Value Added Tax (VAT) is an indirect tax on consumption that is levied on the value addition of goods or services at each point in the supply chain from the input stage to final consumption (Keen, 2007). According to Sandford (2000), “VAT is probably unique in fiscal history. A generation ago it was virtually unknown. Now it is approaching universal” (p.77).In the context of the present research, it is necessary to see how VAT plays a major role as an indirect tax in Bangladesh’s economy.
This chapter provides an overview of VAT and the way it operates in Bangladesh. The chapter first discusses the historical context of VAT, and the advantages and disadvantages of a VAT. Section 2.3 gives a vivid picture of VAT in Bangladesh, VAT legislation, rules and statutory regulatory orders (SROs) and other relevant official documents that shape the VAT in Bangladesh. A comprehensive picture of the SME sector in Bangladesh is discussed in section 2.4. Section 2.5 provides a summary of the chapter.
2.2 VAT: the Background
VAT, is a tax on consumer expenditure, collected on business transactions and is assessed on the basis of the value added to goods and services at each stage of production and of the distribution chain (Shoup, 1990). In 1919, the problem of tax cascading that prevailed with many indirect taxes inspired Dr. Wilhelm von Siemens of
Germany to conceive the idea of a VAT, which he called an ‘improved turnover tax’ or
‘refined turnover tax’ (Schenk & Oldman, 2007, p.4). France was the first country to
20
introduce a VAT in 1954 for large businesses, extending it incrementally to other business sectors after about 35 years of experimentation with the concept (Purohit,
1993).
Since its introduction in France in 1954, VAT has been extended throughout the
European Union (EU) and many other countries in the world at different stages of economic development (Williams, 1996). Despite differences in the features of VAT from one country to another, VAT laws are remarkably similar (Thuronyi, 1996).
Consumption taxes such as VAT or good and service taxes (GST) have become one of the most important revenue mobilizing instruments in both advanced industrialized countries and developing countries (Eccleston, 2007). By 2005, 140 countries around the world have adopted a type of VAT including 33 in Sub-Saharan Africa, 18 in Asia and the Pacific, 17 in the European Union, 27 in Central Europe, 9 in North Africa and the Middle East, and 23 in America (ITD, 2005; Keen, 2007).
While the specific reasons for adopting the VAT may differ from one country to another, the main argument is that a properly designed VAT raises more revenue than other broad-based taxes. Keen and Lockwood (2006) have demonstrated that VAT raised about 18 trillion USD in 2007, representing 20 percent of the world’s tax revenue and affecting approximately 4 billion people. Senior economists of the IMF regard VAT as ‘probably the most important tax development in the latter part of the twentieth century, and certainly the most breath-taking’ (IMF, 2011).
2.2.1 Benefits of a VAT
A review of the literature on VAT reveals some of its salient features: VAT is a multi- stage, self-assessment and self-clearance based tax. A core feature of VAT is an input tax credit mechanism that enables a business to claim back the VAT that was paid on
21
the purchase of inputs, thus avoiding the problem of tax cascading. The non-cascading characteristic of VAT provides a sharp contrast to consumption taxes such as excise tax or turnover tax that were administered in many countries before introducing VAT.
Those taxes were generally characterized by cascading elements as there were no opportunities for businesses to claim input tax credit for purchases.
Proponents of VAT claim that VAT is trade-friendly and trade-neutral because businesses have the opportunity of shifting the tax incidence to the next buyer (Due,
1970; Tait, 1988; Shoup, 1990). It is suggested by Ebrill, Keen, Bodin, and Summers
(2001) that a comprehensive VAT (a single rate broad-based VAT with no or very few exemptions) can act as a self-policing mechanism, because of the desire of businesses’ to have input tax credits for purchases can safeguard the confirmation of payment of
VAT at an earlier stage. There is generally a single rate of VAT, with a zero rate for exports.
VAT has been generally appreciated for its great revenue raising potential for financing governmental services, and the efficiency with which it may be imposed on imports and waived from exports (Williams, 1996). For developing countries, the needs to maximize revenue through expanding the tax base and the concern for trade facilitation have largely driven the adoption of VAT. According to Bird and Gendron (2007), the rapid spread of VAT throughout the world is attributed to two factors: the early adoption of
VAT by the EU countries and its demonstrated success; and the role played by the IMF in spreading its success stories to developing countries. Dosser (1981) considers that
VAT is a good device to enforce full accounting procedures even on small businesses, and to minimize evasion. The cash-flow benefits and managerial benefits of VAT are also acknowledged in current literature (Isle, Freudenberg, & Copp, 2014; Lignier,
2009).
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2.2.2 Disadvantages of a VAT
While there are many proponents for a VAT, it is criticised for its shortcomings, particularly its complexity and regressivity (Keen, 2013). VAT has been described as
‘an intrinsically complex tax, cumbersome to both authorities and the tax payer’ (Ebrill et al., 2001, p.51). For example, Ahmed and Stern (1991) noted that the involvement of everyone in the production and distribution chain is a major disadvantage of VAT, as it imposes substantial administrative cost for tax authorities and businesses. Tait (1988) identified problems of VAT as including extensive book-keeping, delays in the payment of input tax credits, the opportunity cost of funds that are tied up until rebates are paid and the procedural complexity of receiving the refund. The compulsory need to maintain records of all sales and purchases in order to claim credits on intermediate transactions is identified as a frustrating feature of VAT. This especially impacts on smaller businesses as many of them are not used to keeping extensive records (Shome,
2004). However, Bird and Gendron (2007) argue that the problems are not quantitatively significant in most developing countries, especially compared with the problems associated with a possible substitute form of consumption taxation.
Another shortcoming of VAT is that it is a regressive tax.11 The regressivity is generally neutralized through a number of mechanisms: thresholds of annual turnover to leave small businesses outside the VAT net, exemptions on daily necessary items, differentiated rates and the preferential treatment of charity sectors (Bird, 2013). In line with this approach, most VAT-adopting countries have introduced progressivity by exempting basic products such as food, medicine and primary agriculture products and also by imposing more taxes on luxury or socially undesirable goods and services
11. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder. Consumption taxes, which are taxes on consumer goods and services, are usually regressive because individuals with lower incomes spend a larger portion of their income on these goods and services than higher-income individuals do. 23
(Tait,1988; Bickley, 2003; Bird & Gendron, 2007; Keen, 2007). Empirical studies of
VAT in developing countries have also shown that exemptions and rate differentiation measures have been successful in mitigating the regressivity, although this may then increase complexity (Jantscher, 1986).
However, VAT should not be judged in isolation but as a part of the whole tax structure of a country, existing with its counterparts such as income tax, sales tax or excise duty.
Hence, the more important question to ask is not whether a VAT is regressive, but whether it is more regressive than the alternative indirect taxes, such as, sales, excise and turnover tax. The satisfactory implementation of VAT requires sophisticated and capable tax administration, which many developing countries including Bangladesh are said to be currently lacking (IMF, 2011).
Another misconception among some business owners is that VAT is a tax on business
(Webley & Ashby, 2010). Whilst VAT is remitted to the VAT authorities by the seller of the goods or services and the VAT is paid by the buyer to the seller as part of the price charged, what this can mean is that businesses are acting as unpaid VAT collectors
(Ebrill et al., 2001). This is true for Bangladesh as well. In case of SMEs in Bangladesh, this means the consumers are the ones who bear the final burden of VAT and businesses remit the money to the VAT authority. Tait (1988) considered VAT as a fashionable tax: its visible success in many countries in generating buoyant revenues created its own demand among both developed and developing countries. The next section will focus on the historical context for the adoption of VAT in Bangladesh.
2.3 Historical Context of VAT in Bangladesh
From the time of independence in 1971 until 1991, Bangladesh had a relatively complicated indirect tax system. Domestically produced goods were subject to a
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Bangladeshi excise system, which taxed only goods not services. The excise tax base was very narrow, and there were many rates and exemptions. In addition the excise tax caused cascading as it was payable at every stage of the supply chain, with no offsets for the tax payable at prior stages of production on those goods which were later used as productive inputs. Imports of raw materials and intermediate goods were also subject to an indirect sales tax,12which performed two main functions: revenue-raising and protecting local industries. This protection led to considerable economic inefficiencies, exacerbating Bangladesh’s already adverse export and balance of payments position
(Islam, 1995).
In recognition of the complexity of this indirect taxation system and the fact that it was not widely understood, the Government established the Taxation Enquiry Commission
(TEC) of Bangladesh in April 1979, with a brief to investigate and recommend viable alternatives to the existing sales taxes and excise duties in Bangladesh. The TEC proposed the introduction of a VAT in Bangladesh to (a) bring transparency in the taxation system; (b) prohibit cascading taxation at different stages of production; (c) consolidate the tax administration; (d) activate the overall economy by mobilising more in internal resources; and, (e) bring a consistency to the tax to GDP ratio (Government of Bangladesh, 1991). The World Bank (1989) also recommended the introduction of
VAT to raise tax to GDP ratio to a satisfactory level. Although the World Bank described the proposed VAT as a rudimentary VAT, it would cover only manufacture and import stages. These considerations led to the introduction of a VAT in Bangladesh.
On June 1991, the Bangladeshi Parliament (the Jatiya Sangsad) passed The Value Added
Tax Act 1991 and The Value Added Tax Rules 1991. Together, the Act and Rules comprise the VAT Law in Bangladesh. Indeed, Bangladesh was one of the first two
12. These were also subject to customs duties. When the VAT was introduced in 1991, sales taxes on imports were abolished, but customs duties remained. 25
South Asian countries to adopt a VAT, the other being Pakistan, which introduced a
VAT in 1990. Bangladesh’s VAT replaced both the excise duties on domestically produced goods and services and the sales tax on imported goods. Initially, the VAT was introduced only at the manufacturing and import stages, at a standard tax rate of
15%. However, over the years, the VAT coverage has been extended gradually to a large number of service sectors as well as to the wholesale and retail levels. The central legislation for imposing the VAT and implementing the VAT policy is the Value Added
Tax Act, 1991 (referred to as the VAT Act) and the rules, orders, and notifications made pursuant to it. Besides the VAT, an additional two taxes, namely the Supplementary
Duty (SD)13 and the Turnover Tax (TT),14 are also imposed and collected under the same VAT Act.
2.3.1 The VAT in practice
Bangladesh’s VAT is consumption-based, with goods and services generally taxed at the point of destination, rather than at the point of origin.15 Bangladesh has adopted an invoice-based credit or credit-subtractive method16 for calculation of the VAT payable by a business in each tax period. According to this method, each business calculates its
13. Section 7 of the VAT Act1991 provides key guidelines for SD, which covers 48 goods and services mentioned in the Third Schedule of the VAT Act and which are subject to SD at various rates ranging from 20% for powdered milk to 350% for imported cigarettes. 14. Bangladesh in fact has two conceptually distinct taxes which are, in common business nomenclature in Bangladesh, referred to as “VAT”. The first is the official VAT; the second is a turnover tax imposed on small business. However, most businesses in Bangladesh think of both taxes as ‘VAT’. Details on the differences between these two taxes are set out in this Chapter. The central focus of this thesis is on the official VAT in Bangladesh. Much of the analysis will, however, have significant practical and policy implications not only for the Bangladeshi VAT, but also for the Bangladeshi turnover tax imposed on small businesses. For the purposes of this thesis, references to Value-Added Tax or VAT will mean the official or true VAT; and if the discussion relates to ‘VAT’ (in the sense of the true VAT and the turnover tax combined, as used in common business parlance in Bangladesh), that distinction will be evident from the context. 15. There is an exception in respect of certain services, for which Government and semi-government bodies, non-government organisations (NGOs), banks and insurance companies are permitted to deduct VAT at source. 16. Addition method and sales-subtractive method are two other methods for VAT calculation. Addition method applies the tax rate to the value added (wages paid, rent and interest expenses, profit). Sales-subtractive method calculates VAT by applying the tax rate to the difference of all sales and all purchases. 26
VAT liability by applying the tax rate to each individual sale and subtracting all input taxes paid on purchases. Of the three methods of VAT calculation, the credit-subtracting method is the most widespread in use throughout the world (Bickley, 2003).
While all goods and services are subject to VAT, there are exceptions mentioned in the
First Schedule17 for goods and in the Second Schedule18 for services respectively. The
Third Schedule lists the goods and services which are subject to Supplementary Duty
(SD) and the statutory rates applicable to these.
The usual practice of paying the VAT due (that is, the excess of output tax over input tax) to the government is through a monthly return at the end of the tax period on a self- assessment basis by registered taxpayers. The Bangladesh VAT has four distinct methods of paying VAT for different business transactions: an advance payment through an account current, a payment along with VAT returns, advance VAT for commercial goods at the importation stage, and by withholding VAT.
Determination of the appropriate level of the VAT registration threshold is very important in order to maximise revenue as well as minimise distortions of competition between different sized firms (Ebrill et al., 2001). Theoretically, the lower the threshold, the more inclusive the VAT is. The International Finance Corporation (2007) argues that the threshold for compulsory VAT registration is set at a reasonably high level to promote SME development. However, the problem with setting a too high a threshold is that it can create a trade-off between the SMEs (Keen & Mintz, 2004). While an increase of the threshold may save administrative cost of the NBR, the downside has to be considered before fixing the threshold level. An increased threshold may produce a
17. The First Schedule is the list of exempt goods which are basically unprocessed agricultural products like cattle, crops, fruits, seeds and primary products like raw hides and natural sand. 18. Exempt services mentioned in the Second Schedule belong to the following categories: basic services for living; social welfare services; culture related services; finance and financial activities related services; transport service; personal services. 27
loss in VAT revenues and can intensify tax discrimination between exempt and taxable firms. SMEs therefore face incentives to stay below the threshold in order not to forgo the competitive advantage of being tax exempt. In Bangladesh, the annual turnover threshold is BDT 8 million (0.104 million USD). Businesses above this threshold are required to register for VAT.19 While the Bangladeshi VAT threshold is not generally business-specific, section 8(4) of the VAT Act 1991 empowers the NBR to bring any goods or services within mandatory VAT registration irrespective of annual turnover.20
2.3.2 Rates of VAT
Although the standard statutory rate is 15%, the Bangladeshi VAT employs other two fundamental methods, exemptions and zero-rating21, for social equity reasons (Bickely,
2003). For example, a rate of 0% applies to all goods and services to be exported and deemed ‘exported’ from the country. However, the reality is that there are some other rates in practice (4%, 4.5%, 5%, and 9%) that have emerged due to different methods of calculation22 of the VAT (GOB, 2013). For example, for those firms at the wholesale and retail levels which do not declare any input tax credits, a deemed 4% VAT is imposed on the total value of the goods or services sold in lieu of the standard 15%
VAT. This is known as the ‘trade VAT’. In addition, small business ‘consumers’ (that
19. Starting with a threshold of BDT 500,000 (USD 6,500) in 1991, the VAT threshold underwent a number of upward revisions over the last 20 years. 20. Section 15(4) of the VAT Act 1991, a VAT Officer has the legal power to force VAT registration if he or she determines that the taxpayer has under-declared their annual turnover. However, The Commissioner of VAT does have the discretionary power to amend the turnover tax if it appears to him or her that the turnover declared by the taxpayers or fixed by the divisional officer is incorrect (Section 3 (20) of the VAT Rules, 1991). 21. Zero rating means that the goods and services are taxable but the rate of VAT applied to them is 0%. Khadka (2003) states that when some goods and services are required to be kept completely free from VAT, then zero-rated tax should be applied. 22. Though in the standard practices of VAT, the amount of VAT is calculated by applying the VAT rate to the difference between sales and purchases, the Bangladesh VAT contains a number of assessment methods applicable to different groups of businesses. Section 5 of the VAT Act stipulates methods of valuation for the purpose of determining the amount of VAT charged at different stages of business transaction. At the importation stage, the value on which VAT is charged is the value which is arrived at by adding all duties and charges to the assessable value ascertained/ determined under section 25 or 25a of the Customs Act, 1969. 28
is, purchasers) at the wholesale and retail level pay a fixed annual dollar amount of
VAT,23 known as ‘package VAT’, based on the geographic location of their business.
For example, if a small retail shop were based in the capital city or in one of the two major port cities, it would pay BDT 12,000 (USD 156) per year in deemed VAT, and a retail shop located in other City Corporation areas would pay BDT 9,000 (USD 117) per year. In comparison, a retail shop located in a District Municipal area would pay
BDT 6,000 (USD 78), while a small retail shop based in any other remote area would pay 2,400 taka (USD 32) per year in deemed VAT.
Another deviation from the uniform VAT rate is that small business suppliers (i.e. those with an annual turnover less than 8 million BDT) have the option of paying a tax of 3% on their annual turnover, in lieu of the 15% VAT. However, those who choose that option cannot claim input tax credits on purchases. Furthermore, firms in cottage industries24 and their consumers are exempted from VAT, supplementary duty and turnover tax. Businesses in cottage industries can work on a sub-contract basis for other
VAT-registered companies, where those companies pay standard VAT (i.e. cannot access the cottage industry exemption).
Another variation is that, for some taxable products listed in the NBR's ‘special regulatory orders’, if the NBR determines that market prices have increased too much, the NBR can determine and set a lower so-called ‘tariff value’ so that relevant market prices (and the VAT payable) are artificially reduced (Saleheen, 2012).25 Businesses which pay VAT on the basis of this tariff value are not entitled to claim input tax
23. Again, subject to the ‘cottage industry’ exception discussed below. 24. Cottage industries are defined those firms which are not a joint-stock company, invested capital in plant, machinery and equipment not more than 4 million BDT (any time in the year) and annual turnover is not more that 6 million BDT. 25. Products in this category include powdered milk, refined soybean oil, machine-made biscuits, tomato paste, fruit juice, hand-made cigarettes, liquefied petroleum gas, petroleum bitumen imported in bulk (primarily for road building), various types of paper, bricks, cold-rolled corrugated iron sheeting, mild steel products produced from re-rollable scrap metal, and electrical transformers. 29
credits. Saleheen (2012) points out that, under the same legislative provisions, the NBR also has the power to determine and set a higher tariff value if it considers that market prices have fallen too much, so that the VAT payable is artificially increased for some taxpayers. Furthermore, VAT is generally imposed on the invoiced price; where invoices are unavailable, a so-called ‘fixed value addition’ on a ‘truncated base’26 is used to assess the appropriate VAT.
2.3.3 Offences and Penalties
Offences and penalties for persons failing to comply with the VAT law in sections 37 and 37A of the VAT Act 1991 include, for example, failing to submit an application for registration or to submit a VAT return by the deadline specified by the NBR; failing to inform a VAT officer about any change of information in relation to registration; or failing to comply with any summons under section 25. The penalties for these breaches range from 10,000 BDT (130USD) to a maximum penalty of 25,000 BDT (325USD).
Any taxpayer who, after two written notifications from their local NBR branch office, unintentionally fails to give a tax invoice in a timely way, or who fails to pay VAT or supplementary duty on goods or services supplied, is liable to pay a minimum penalty of 10,000 BDT (130 USD) and a maximum penalty of 100,000 BDT (1,300 USD) for their failure to comply.
26. Truncated value is a notional value based on value addition. This is a kind of truncated value for some listed goods and services suppliers which are not entitled to claim input tax credit. But for a number of services the VAT authority has fixed a notional base commonly known as the truncated base. The RRC Report (Government of Bangladesh, 2003) illustrated the truncated base in the following manner: ‘VAT @ 15% is not calculated on its whole value; instead a certain percentage of the whole base (30, 15 and 10) is taken for calculation of VAT. For example, VAT on the construction service is calculated on 30% of the base. Hence VAT rate for this sector is (30*15%) =4.5% of the whole base.’ The difference between the imposition of VAT on a truncated base and that on a tariff value is that while the former is optional the latter is mandatory. These two methods of VAT assessment are presumptive methods which pervade the Bangladesh VAT.
30
In contrast, any taxpayer who intentionally provides a fake invoice or submits a VAT return that is false in important respects is liable to pay, as a minimum penalty, the amount of the tax evaded; and, as a maximum penalty, 2.5 times the amount of VAT that should have been paid. Most occurrences of intentional non-compliance include attempting to evade VAT by supplying goods without recording information in current- account books (Mushak-18)27 or in sales-account books (Mushak-17) and evading or attempting to evade VAT by submitting counterfeit or false documents to a VAT
Officer. Other examples include intentionally failing to retain required documents
(invoices and receipts) or destroying relevant documentation, without the permission of the local VAT office; and intentionally making a false statement or declaration. Also considered as intentional non-compliance are the following: the intentional obstruction or prevention of a VAT officer in the course of their duty; intentionally being involved in receiving, taking possession of, or carrying goods in respect of which VAT or supplementary duty has been evaded; and claiming an input tax credit through a false or counterfeit VAT invoice.
Section 55 of the VAT Act, 1991 allows the taxpayers five years to rectify any unintentional under-payment of VAT or supplementary duty. This five-year time limit does not apply to taxpayers who intentionally falsify their documents or VAT returns
(including intentionally omitting to declare sales). Under the same section, if the NBR, mistakenly under-estimates the VAT payable by a taxpayer or mistakenly refunds too much VAT to the taxpayer, it has five years to rectify its mistake by re-issuing a tax assessment for the correct amount. This applies even if the NBR has wrongly interpreted the VAT Law. Any taxpayer (or agent of a taxpayer) who fails to pay their
VAT by the deadline imposed by the NBR must pay 2% per annum interest, in addition to the VAT amount payable.
27. In Bangladesh VAT is known as Mushak. 31
2.3.4 Taxation Audits and Appeals
Another tool to try to improve compliance is through audits of VAT registrants. This can be seen as important for the Bangladeshi VAT system, which relies more on self- assessment and voluntary compliance than on the tax authority’s assessment.
Greenbaum (1997) specifies auditing as one of the cornerstones of the investigative power of the tax administration. The Bangladesh VAT has specific provisions for the carrying out of audits on business transactions. To this effect, the NBR issued a number of general orders detailing the audit mechanism in 1999 and then published an Audit
Manual in 2006. According to this audit manual, each VAT registrant is supposed to be audited at least once every three years. However, given that a reassessment of VAT registered business can be done within five years from the date of certain business transactions, at least one audit should be done once every five years.
The NBR has a Central Audit Directorate headed by a Director General. In addition, each VAT Commissionerate has an Audit Wing headed by a Joint Commissioner. In addition to the existing organizational set-up for conducting audits in VAT, the NBR constituted a Central Audit Cell in 2006 to facilitate integrated audits through the exchange of information among the VAT, Income Tax and Customs Divisions.
Taxpayer audits are commissioned by the VAT Commissionerate or by any Officer of the Commissionerate with the rank of Joint Commissioner of VAT or above.28
The main role of the VAT Audit and Investigation Department, located in the
Bangladeshi capital Dhaka, is to conduct audits of VAT units, collect taxpayers’
28. In the VAT Commissionerate, there are two relevant levels of executive officer above the Joint Commissioner of VAT. These are the Commissioner of VAT himself, and the Additional Commissioner of VAT. Section 26ka of the VAT Act 1991 provides: A value added tax officer, not below the rank of a Joint Commissioner, may order the auditing of tax and tax related activities of a registered or registrable firm for a specified period and the officer or officers ordered for the purpose shall, after completion of the audit on the basis of orders issued by the Board and the audit manual including the provisions of this Act and the rules made thereunder, within the specified time, submit a report to the ordering officer (Government of Bangladesh, 1991). 32
information, and conduct investigations. Any discrepancies are referred to the VAT
Commissionerate for enforcement action. In addition, regular taxpayer audits are also conducted by the VAT Commissionerate itself, which has branch offices throughout the country. According to NBR statistics, in FY 2011-12, a total of 140 million BDT (1.8 million USD) was collected through the auditing of 410 VAT-paying businesses.
However, the revenue (140 million BDT or 1.82 million USD) collected from auditing is very negligible in comparison to the amount (26,090 million BDT or 339 million
USD) detected by the Audit Directorate (NBR, 2014).
The VAT Law provides for a number of taxpayer rights. According to the VAT Act and
Rules, taxpayers enjoy the right of appeal against any decision of a VAT Officer and taxpayers have the opportunity of being personally heard. Taxpayers who are aggrieved with any decision or order of a VAT Officer can appeal directly to the Commissioner
(Appeal) of VAT and then to the Customs, Excise and VAT Appellate Tribunal. If the taxpayers are not satisfied with the decision of the above two, they can further appeal to the single Judge of the High Court Division of the Supreme Court of Bangladesh and then to the Appellate Division (Full Bench) of the Supreme Court of Bangladesh. Any aggrieved taxpayer intending to appeal against a decision or order relating to a demand of VAT payable on any goods or service or to a fine imposed under the VAT Act, 1991 shall has to pay 10% of the fine imposed or VAT demanded to the Commissioner
Appeal. In the case of an appeal to the Appellate Tribunal against an order given by the
Commissioner or by any other value added tax officer of equivalent rank, taxpayers have to pay 25% of VAT demanded or fine imposed. Additionally, in the case of an appeal preferred to the Appellate Tribunal against an order of the Commissioner
(Appeal), taxpayers have to pay 15% of the tax demanded or fine imposed.
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2.3.5 VAT Administration and Enforcement
The VAT in Bangladesh is administered by the Customs Department under the Indirect
Tax Wing of the NBR. While most VAT-adopting countries administer VAT through their Domestic Tax Department, there are a few countries in which VAT is administered by the Customs Department.29 The operational activities of the VAT administration in
Bangladesh are performed by 254 Circle Offices, defined in the VAT Law and Rules as the local VAT offices. Each Circle Office is headed by a Revenue Officer, having the status of a Class-1 gazetted officer. The Circle Offices are monitored by 84 Division
Offices which in turn are supervised by 12 Commissionerates. More recently there has been some attempt to replace this territorial jurisdiction by a function-based jurisdiction.
As opposed to the traditional geographical jurisdictions, the NBR has formed a Large
Taxpayers Unit (LTU)30 to service large taxpayers selected on the basis of their annual turnover rather than on their geographical location.
Enforcement is a crucial issue for the effective operation of a VAT, as firms liable for paying consumption taxes have for the most part themselves collected the tax from others. Bird and Gendron (2007) assert that if firms do not remit the funds to the government treasury in a timely manner, they are essentially considered to have stolen the money they had collected. Among the enforcement issues in Bangladeshi VAT are the quasi-judicial powers of the VAT Officers, the preventive surveillance, the supervisory clearance of goods and the use of stamp and banderol.31
29. Ebrill et al. (2001) show that by 2001, of the 108 countries studied, 90 countries have VATs administered by the Domestic Tax Department, 4 by the Customs Department and 14 by the VAT Department. Bangladesh is one of the few countries where the VAT is administered by the Customs and Excise Department, or, in other words, the indirect tax wing of NBR. 30. The LTU is meant to be a function-based unit. Currently VAT LTU has 171 registered taxpayers, each remitting a minimum amount of VAT revenue of BDT 50 million to the government exchequer annually (NBR, 2014). 31. Section 6 (4ka) of the VAT Act’1991 has empowered the NBR to direct the use of stamp or banderol or special sign or mark of specified size and design for the purpose of realizing VAT or SD. Currently stamps and banderols are used in cigarettes, cold drinks and mineral water, toiletries and some other packaging items. It is claimed by NBR that the use of stamps and banderols are effective to control VAT evasion and to collect revenue. 34
In dealing with tax enforcement, Bangladesh VAT offers a unique approach. For offences committed under the VAT law, all VAT officers (from Revenue Officer up to
Commissioner) have quasi-judicial powers of adjudication based on their rank and jurisdiction. The VAT Officers therefore act as both prosecutors and adjudicators. As such, the VAT Officers have the power to seize any goods liable for confiscation. For example, a preventive team in each VAT Commissionerate monitors transport movement to ensure that no goods are transported or transferred without the payment of
VAT. Bangladeshi VAT Officers are more active in seizing rather than in auditing, as there a higher number of seizure cases than audits.32
There is a provision of supervisory clearance in Bangladeshi VAT Law which can be made applicable to any goods if the VAT Commissioner thinks large tax evasion by a particular firm is occurring. Presently this supervision is applied to cigarettes which account for the highest amount of domestically collected VAT and SD. Another unique feature of enforcement in Bangladesh VAT is the use of a stamp or banderol for some evasion prone items. Currently, cigarettes (both machine-made and handmade), toiletries, cold drinks and mineral water, are some of the items for which the packages are required to be stamped or banderoled before being supplied from the place of production.
2.3.6 Collecting Costs of VAT
A total of twenty seven Directorates and Commissionerates under the administration of
NBR are accountable for collecting indirect taxes Bangladesh (NBR, 2014). Of them, twenty are directly related to collection of VAT in Bangladesh. Even though customs houses are primarily in charge of collecting all import duties and supplementary duty at the import stage, these are also accountable for collecting both VAT at the import
32. In 2009-2010, the number of seizures was 638 involving an amount of revenue of BDT 158 million, while far fewer audits (176) unearthed an evasion/avoidance of BDT 1719 million. 35
stage.33Similarly, some of the VAT commissionerates collect import duties through the land customs stations and corridors with neighbouring countries. In addition, a considerable amount of supplementary duty, excise duty, is collected through the VAT
Commissionerates. A total of 20.92% of total indirect taxes (VAT, Supplementary
Duty) are collected by the Customs Houses and Bond Commissionerates in Bangladesh.
Put in another way, VAT at import stage accounted for 38.55% of the total VAT collected in FY 2011-12. According to the NBR’s Annual Report 2011-12 (NBR,
2014), import based supplementary duty, also collected mainly by Customs Houses, contributed 6.67% of the total NBR indirect taxes.
According to NBR statistics (NBR, 2014), in the FY 2011-12 the total collection of indirect taxes (CD, VAT, SD, excise duty and turnover taxes) was 659.25 billion BDT
(8.80 billion USD) and the total administrative costs (with the costs of pre-shipment inspection fee for customs duty and stamp and banderole for VAT) was 4.74 billion
BDT ( 63.2 million USD). Consequently, the administrative costs to collect indirect taxes were 0.71 BDT for every 100 BDT. The total administrative cost for indirect taxes
33. The VAT Rule’1991 (sec 18ga) provides for collection of VAT in advance from the importation of commercial goods at 3% that the sale of such goods would accrue in their subsequent sale. This is an amount of VAT in addition to the VAT to be paid at the standard rate of 15% on the assessable value. The registered taxpayers who will pay VAT at the standard rate in their subsequent sale of goods will be able to take the advance VAT paid at the importation stage as input tax credit. But the traders who opt to pay VAT at the retail or wholesale stage on a truncated base are not entitled to any input tax credit. Sec (3) of the VAT ACT’1991 designated that VAT shall be imposed and payable, at the rate of 15% of the value specified in section 5, on all goods imported into Bangladesh, except the goods listed in the First Schedule of this Act, and on the supply of all goods not listed in the said Schedule and on all services rendered in Bangladesh, except services specified in the Second Schedule of this Act. Sec (6) and Sec (7) of the VAT Act’1991 describes the time and mode of payment of VAT and Supplementary Duty in Bangladesh. Sec [6(1)] states- Value added tax on imported goods shall be paid at the same time and in the same manner as import duty is paid in accordance with the provisions of the Customs Act and the rules made thereunder, as if it were an import duty under that Act; and in order to control any matter related to the value added tax or, as the case may be, supplementary duty, the said Act, and the rules, orders or instructions made or issued thereunder shall, subject to the rules, orders or instructions if any, made or issued under this Act, apply, so far as practicable, to value added tax or, as the case may be, supplementary duty in the manner they apply to import duty. Sec [7(3)] states- Supplementary duty shall be payable at same time and in same manner as are applicable for the payment of value added tax.
36
(excluding the costs of pre-shipment inspection fee for customs duty and stamp and banderole for VAT) was 1.57 billion BDT (20.93 million USD), with the administrative costs of indirect taxes as a percentage of revenue being 0.24 BDT. On the other hand, the cost of collection of direct taxes during the same financial year was 0.49 BDT as a percentage of revenue. Findings from other countries suggest that VAT is cheaper to collect as a percentage compared to direct taxes. For example, in Thailand, Australia,
Singapore, Hong Kong, India and the Philippines, the cost of collection for customs and
VAT is much lower than that of direct taxes (Shome, 2006).
Regarding VAT administrative costs, Jantscher (1990) stated that in developing countries the administrative costs of VAT usually range between 1% and 2% of VAT revenue collected. Comparison of the administrative costs of VAT in Bangladesh with other developing countries is not possible due the unattainability of data in Bangladesh.
However, in Bangladesh the average administrative cost of indirect taxes including
VAT was 0.71 percent of the total indirect tax collected in FY 2011-12. This low level of administrative costs may not imply that the VAT system in Bangladesh is simple or that the NBR is efficient in collecting it. It may indicate that the NBR is under- resourced, which in turn may have affected their ability to accomplish the responsibilities delegated to them.
2.3.7 The Deviations of VAT System in Bangladesh
While the introduction of a VAT in Bangladesh has proved to be successful in terms of increasing tax revenues as well as expanding the tax base (Saleheen, 2012), some evidence suggests that VAT has deviated significantly from standard and international best practices (Saleheen & Siddiquee, 2013). Such deviations would suggest greater complexity, which could increase compliance cost and influence compliance.
37
A comprehensive VAT (a single rate broad-based VAT with no or very few exemptions) is self-policing, as motivation for input tax credit automatically safeguards the confirmation of payment of VAT at an earlier stage. Bird (2013) states that efficiency of the VAT/GST system depends on the uniformity of the tax rate and the comprehensive coverage of economic activities. In this respect, New Zealand GST is recommended as the best real-world model for its single rate with a comprehensive coverage of goods and services (White, 2007).Contrary to these conditions, the multiplicities of tax rates as well as the prevalence of widespread exemptions have eroded the efficiency of the Bangladesh’s VAT system. Due to various exemptions and the non-functioning of the supply chain, a cascading effect is still occurring in the
Bangladesh VAT system. Specifically, a single uniform rate of 15% is supposed to ensure efficiency of the VAT system through equal treatment of economic agents.
However, due to the tariff value and truncated base, the VAT system consists of multiple VAT rates that undermine the efficiency objective of the VAT system. These multiple rates in the VAT system could distort producer’s choice, resulting in lower tax revenue. Tait (1998) states that multiple rates in VAT distort both consumers’ and producers’ choice and bring complication to the tax collection procedure.
The credit mechanism principle of VAT34appears problematic in Bangladesh. For example, Section 2 of the VAT Act, 1991 defines input as ‘any raw materials excepting labor, land, building, office equipment and vehicles; packaging materials, any kind of gas or matter used as fuel, services, machinery and spares; any commercial merchandise purchased, imported and acquired or collected’. The definition implies that VAT paid on the purchase of labor, building or vehicles is not entitled to be credited against the
34. The credit mechanism principle requires that prior-stage tax and tax-paid at the import stage are immediately deductible or refundable if it has been directly invoiced to a taxable person and the latter uses the commodities in his/her business (Tait, 1988). 38
output tax. The truncated value and the tariff value also contain inherent limitations to the credit mechanism.
A policy of not refunding the surplus input tax to businesses is another major deviation from the standard international practice of VAT in Bangladesh. Tait (1988) argues that a
VAT is a tax on consumption not on a tax on business. Therefore, in principle, all excess of input tax over output tax should be refunded at once. But in Bangladesh a surplus input tax has been adjusted against output tax in the account current register for the next tax period and can be refunded only on the cancellation of VAT registration
(GOB, 1991).
One of the greatest deviations from the standard practices is the value declaration of
Bangladesh VAT system. VAT is an ad valorem tax, assessed on the basis of transaction value (Tait, 1988). VAT is theoretically a tax on value added, then, the value of goods and services is of paramount importance. However, in Bangladesh, VAT rules provide for a declaration and subsequent approval from the VAT Authority of the value of the product by a supplier on which VAT will be assessed. The supplier is required to provide information about the input-output co-efficient of the product, that is, the quantity of raw materials, the packaging materials used for each unit of the goods, the percentage of wastage and the components of value addition. The VAT Act empowers the authority to determine the value of the relevant good for imposition of VAT.
Another noticeable deviation is the provision of the assessment of VAT on the basis of maximum retail price at the manufacturing stage. Other deviations include advance
VAT at import stage, withholding, payment of VAT by account current, physical control of goods, use of stamp and banderol, package VAT, and fixation of notional value have. Mansur, Yunus, and Nandi (2011) found that VAT underperformed in
Bangladesh due to deviations from the standard format, the old fashioned collection
39
mechanism, the excise-type and the control over physical shipment/production/delivery of goods and services.
Withholding VAT is another deviation of the Bangladeshi VAT system.35Withholding obligations are imposed upon governments, semi-government organisations, non- government organisations (NGOs) and limited companies, in respect of acquiring some services include construction, printing, advertising, leasing professional services and accounting and auditing services. While VAT was supposed to replace the excise duty, excise duty still applies on a limited range of items such as domestic air tickets and on bank deposits.
Saleheen and Siddiquee (2013) argue that deviations and distortions have become so pervasive that they made the VAT system more complex and cumbersome in
Bangladesh. Complexity in compliance, extensive book-keeping, delays in the payment of credits, the opportunity cost of funds that are tied up until rebates are paid, the unnecessary delay of getting refunds, the value declaration procedures all can contribute to a negative perception of the VAT.
These factors could contribute to the low number of VAT registrants in Bangladesh. For example, the ratio of VAT-payers to the total population in Bangladesh is only 0.3%. In comparison the ratio in developed countries, such as in Australia and New Zealand the ratio is 10.92% and 15.04% respectively (IMF, 2011). The presence of deviations and distortions are the main reasons why the IMF classifies the Bangladesh VAT as a ‘so called VAT’ or ‘excise/turnover tax’ (IMF, 2007).
In response to these challenges in the VAT system, a new VAT and Supplementary
Duty Law was passed as a centrepiece of the government’s tax policy reform, by the
National Parliament on the 27 November 2012, with a tentative start date of July, 2016
35. In case of withholding VAT the purchaser is required to deduct VAT at source on certain inputs purchased and pays the VAT directly to the NBR on behalf of the supplier rather than the supplier pay the VAT. The supplier has to show this withholding VAT by the purchaser in their monthly VAT return. 40
(NBR, 2014). Given that the new VAT and Supplementary Duty Act 2012 of Bangladesh has not yet been enforced, this thesis is concerned with the existing VAT Act1991 and
VAT Rules1991. However, using the findings of this research, the new VAT law will be critiqued in Chapter 8 as to whether it is likely to improve the effectiveness of the
Bangladeshi VAT system.
2.4 SMEs in Bangladesh
The focus of this thesis is the effect of Bangladesh’s VAT on SME, and thereby it is important to understand what is an SME; and some of the issues that they commonly face when dealing with their tax obligations.
2.4.1 Definition of SME in Bangladesh
There is no universally accepted definition of SME (GINI, 2014). Countries are prone to defining SMEs according to their own policy perspectives. For example, according to the World Bank a firm with 10 to 50 employees and with turnover and assets between
100,000 USD and 3 million USD is considered as ‘small’. A ‘medium’ business is one with 50 to 300 employees and has turnover and assets between 3 million USD to 15 million USD (International Tax Dialogue, 2007). The EU member state Germany defines an SME as an enterprise with a limit of 500 employees, while in Belgium the limit is only 100 (OECD, 2015).
In developing countries the definitions of SMEs are also diversified. In Cambodia, firms that employ less than 200 employees and that have fixed assets of below USD 500,000 are considered as SMEs; in Indonesia, any firm with less than 100 employees is an
SME; in Malaysia, the definitions of SME depend on both the number of employees and the annual turnover criteria, but these can vary from sector to sector (ITD, 2007).
Gibson and Vaart (2008) recommended a more generalised definition of SME for
41
developing countries: “An SME is a formal enterprise with annual turnover, in U.S. dollar terms, of between 10 and 1000 times the mean per capita gross national income, at purchasing power parity, of the country in which it operates” (p.18). The literature suggests that ‘the threshold’ or the ‘number of employees’ is the most often used criterion for the purpose of defining SMEs by any national government and statistical agencies (ITD, 2007; OECD, 2005).The existence of multiple definitions of SMEs within a country is also not uncommon, as even within countries, different definitions may be adopted for tax or other purposes. These definitions have also varied over time.
For example, the European Union has changed the definition of SME three times in the last fifteen years; it has changed in China four times since the 1950s (ITD, 2007).
In Bangladesh, SMEs are sometimes defined for governmental statistical purposes in terms of whether they are manufacturing-based or non-manufacturing-based. A
‘medium-sized’ enterprise in a manufacturing sector in Bangladesh means an enterprise in which the value/replacement cost of durable resources other than land and factory buildings is between 15 million BDT (0.195 million USD) to 100 million BDT (1.30 million USD). A ‘small’ enterprise means an industry in which the value/replacement cost of durable resources other than land and factory building is less than 15 million
Taka (0.195 million USD). In a non-manufacturing context, a ‘medium’-sized enterprise means an enterprise in which 25 to 100 people work; a 'small’ enterprise means an enterprise in which fewer than 25 people work (BBS, 2005).
Bangladesh Bank (2012) redefined SME in 2011 in conjunction with SME credit policies and programmes. It has proposed separate definitions of SMEs for manufacturing and services sectors according to their fixed assets and numbers of employees. According to this definition, a manufacturing enterprise with fixed assets
(including replacement cost and excluding land and building) of up to 300 million BDT
(7.5 million USD) and the number of employees up to 250 will be considered as an
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SME. For services and business related enterprises, the ceilings are 150 million BDT (2 million USD) and 100 persons respectively (Bangladesh Bank, 2012).36 To be identified as an SME, an enterprise will have to satisfy both of the aforesaid criteria. These definitions are in line with the Industrial Policy 2010. However, VAT law in
Bangladesh uses the criterion of annual turnover of an enterprise to define an SME
(CPD, 2014), which is at present, an SME has to registered with VAT if its annual turnover remains equal to or more than 8 million BDT (0.11 million USD). On the other hand, the NBR has formed a Large Taxpayers Unit (LTU) based on the annual VAT payment. The businesses remitting a minimum amount of VAT revenue of BDT 50 million (0.67 million USD) to the government exchequer annually are considered as
LTU and registered under the LTU (VAT) commissionerate.
While this is a rudimentary definition of SME, given the focuses on VAT this thesis will identify SMEs as those with an annual turnover equal or greater than 8 million
BDT, but with an annual VAT payment less than 50 million BDT. The following section presents some issues regarding SME development in Bangladesh.
2.4.2 Issues Confronting SMEs
Chowdhury (2007) specifies that SMEs in Bangladesh are a group of enterprises that have limited access to formal credit, low capitalisation, incomplete record keeping, a high intensity of cash transactions and poor compliance with regard to tax issues. Other evidence suggests that the development of SMEs in Bangladesh faces several constraints, such as a lack of adequate investment and credit, high rate of interest on bank loans, poor information about market opportunities, constraints on quality of
36. If women own 51 per cent or more stock in a partnership enterprise or in an enterprise which is registered with Registrar of Joint Stock Companies and Firms, the SME will be considered as a woman-owned SME. 43
human resources, and low lobbying capacity with policy makers (Mintoo, 2004; Miah,
2006; Khan, Nazmul, Hossain,& Rahamatullah, 2012).
SME businesses generally face a dearth of financing in Bangladesh (Chowdhury, Azam,
& Islam, 2013). The big firms dominate every opportunity for obtaining loans from the financial institutes and as well as raw materials from the importers, as their bargaining power is greater due to their market share. Large businesses also attract employees by offering better wages and benefits, and secure many government procurement and contracts.
Bhattacharya, Faiz, and Zohir (2000) identified that banks do not consider SMEs as attractive and profitable undertakings. SMEs are also regarded as high risk borrowers because of their low capitalization, insufficient assets, and their high mortality rates
(Rikta, 2007). SMEs are therefore, facing great difficulties in raising fixed and working capital because of the reluctance of banks to provide them with loans. Due to liquidity crises they are far behind with modern technology and the use of a computerised accounting system. The absence of well-established accounting and data management systems, as well as a lack of skilled labour may make it difficult for them to manage their cash flow (Wu & Young, 2003).
As mentioned in Chapter 1, SMEs have contributed insignificantly to the overall VAT yield in Bangladesh. Collecting a smaller amount of taxes from a large number of SMEs may make them less important and a weaker stakeholder in policymaking (GINI, 2014).
Also the lack of any cordial relationship with the government institutions, such as the
NBR or the Ministry of Finance, works as a constraint to getting access to useful information, whether on markets and business opportunities (Chowdhury et al., 2013).
Furthermore, the lack of adequate information, the lack of qualified employees, and limited access to professional tax advice could make it difficult for SMEs to handle the technical tax matters. Also, because of the financial constraints, paying any types of
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taxes may be a burden to SMEs. However, this may not be the case for all SMEs. Of course, some SMEs often do not have credit crises, do have some level of professional management, and may have professional accounting and legal advice. The IMF (2011) considers that from the taxpayer’s standpoint in a developing economy, a low risk of detection and penalization, coupled with high costs of compliance related to VAT, provides poor incentives to SMEs for voluntary compliance.
Arendarski, Mroczkowski, and Sood (1994) state that the overall tax burdens (the total amount of taxes to be paid and the compliance costs) encourage SMEs to non-comply with the taxation law or to move into the informal sector. Analysing survey data of 11
African countries, Stern and Loeprick (2007) identified four issues which influenced
SMEs to be non-compliant with taxes: firms’ perceptions of the advantages/disadvantages of formalising their operations; information asymmetry; burdensome procedures; and inadequate reform measures taken by governments. In addition to these issues, the cost of compliance appears to influence non-compliance.
CPD’s (2014) study stated that the present VAT regime in Bangladesh does not adequately address the issues concerning the SMEs. It was also found that SME owners thought VAT might decrease their profitability and could make them market uncompetitive. Procedural complexities of the VAT law could also encourage SMEs to stay in the informal sector (cash economy).
In Bangladesh about 99% of the enterprises are considered to be SMEs. A total of 8 million registered and unregistered SME establishments with cottage industries account for about 85% of the industrial employment, 48% of the total value added in manufacturing and about 25% of the total labor force (GOB, 2014). Among these 8 million businesses, only 0.7 million are registered with VAT, and according to NBR statistics, only 13% of them pay VAT on time and submit their monthly VAT returns regularly. This research explores the reasons for compliance and non-compliance by
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these SMEs. Bangladesh considers SME development as one of the core policy objectives in the ongoing Sixth Five Year Plan (2011-2015), and it is argued that the impact of VAT compliance for SME development needs to be researched.
2.5 Conclusion
This chapter has outlined the concept and history of VAT, along with its advantages and disadvantages. The main features of the current Bangladeshi VAT system and the way in which it operates were also presented.
More than 140 countries now use VAT as a major source of revenue, due to its revenue-raising potential, the ease with which it can be administered, its non-cascading nature, and its tax credit mechanism. However, criticisms of VAT include its complexity and regressivity.
In Bangladesh the standard rate of VAT is 15%, while exports and deemed exports are zero-rated. Some other rates emerge in practice due to different methods of calculation.
The price on which the VAT is imposed can vary from the invoiced price to the ‘fixed value addition’ on a ‘truncated base’. Small business suppliers (with an annual turnover are less than 8 million BDT, equivalent to approximately USD 104,000) have the option of paying a tax of 3% on their annual turnover, in lieu of the standard 15% VAT.
Depending on the geographic location of the business, small business ‘consumers’ at the wholesale and retail level also pay a fixed annual amount of VAT. Thus the
Bangladeshi VAT does differ from international standard practice, possibly contributing to its perceived challenges inherent to the system.
This chapter also described the current situation for SMEs in Bangladesh, including the fact that only a low proportion of them are registered for VAT and their relatively low contribution to overall VAT revenue collected. The following chapter will review the
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literature on the effects of complexity, compliance costs, and deterrent effects for
SMEs, particularly in the context of VAT in developing countries such as Bangladesh.
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Chapter 3
Conceptual Framework
3.1 Introduction
The previous overview of the VAT system and how it operates in Bangladesh illustrates the nature of the problems to be investigated. This chapter critiques taxpayers’ non- compliance as represented by the major studies in tax compliance research. In order to explain taxpayers’ non-compliance in the context of VAT in developing countries such as Bangladesh, this chapter reviews the literature regarding the effects of complexity and compliance costs, by highlighting the strength and weakness of such studies and identifying common findings about taxpayers’ non-compliance.
The rest of this chapter falls into five sections. Section 2 outlines the theoretical basis of the thesis, including the economic deterrence models and the social and psychological models. Section 3 outlines the importance of lowering the complexity (or increasing simplicity) of a tax system to increase compliance. Section 4 discusses the findings in compliance studies to date regarding such compliance costs issues, particularly considering how these prior studies relate to VAT and SMEs in developing countries such as Bangladesh. Section 4 analyses the methodological approaches to the concept of psychological costs and deterrent effects. Section 5 summarises the chapter’s findings and the gaps in the literature found to be relevant for attention in this study.
3.2 Theoretical Underpinnings
Corbin and Strauss (2008) have acknowledged the importance of applying a theoretical framework to research:
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“After studying a topic the researcher finds that a previously developed framework is closely aligned to what is being discovered in the researcher’s present study, and therefore can use it to complement, extend, and verify the findings”. (p. 39)
This study seeks to use the extant literature and relevant theories about taxpayer non- compliance to provide useful insights into the analysis of the relationship in
Bangladeshi VAT between the complexity, the compliance costs and the non- compliance with VAT in Bangladesh.
In finding appropriate theories for this research, the role and behaviour of SME taxpayers and VAT Officials will be taken into consideration. Aspects of taxation, including tax rates, penalties and other economic and non-economic factors, are also considered. The three theoretical perspectives of this study are: non-compliance theory, the economic deterrence approach, and a social-psychological approach, which are discussed below.
3.2.1 Non-compliance Theory
Compliant taxpayers fulfil every aspect of their tax obligations: registering with the revenue authority as required; filing the required returns on time; reporting tax liability accurately in accordance with the prevailing legislation, rulings, return instructions and court decisions; paying any outstanding taxes as they fall due; and maintaining all records as required by law (McKerchar & Evans, 2009). Non-compliant taxpayers fail to satisfy any one or more of these aspects, thus posing a risk to revenue collection.
Non-compliance may be as a result of a deliberate decision by the taxpayer (Alm, 2012) or may be unintentional (McKerchar, 2003). Individuals can intentionally non-comply with income taxes by underreporting of incomes; by overstating deductions, exemptions, or credits; and by failing to file appropriate tax returns (Ellfers, Weigel,&
Hessing, 1987). Non-compliance, in the case of VAT can include the failure of 49
businesses to register, the under-reporting of sales, the misclassification of sales, or the evasion of VAT by abuse of the credit and refund mechanisms (Keen & Smith, 2007).
In particular, the gradual cumulation of the VAT at each stage of the chain of production and distribution may reduce the amount of declared VAT at risk at each stage. Firms can also present fraudulent invoices that allow them to minimize their VAT liabilities, or can keep a special register to disguise their own personal consumption as purchased inputs (Keen, 2007).
Deliberate tax non-compliance, such as when individuals alter their behaviour to avoid or minimise their taxes, both reduces the total tax collection and creates a misallocation in resources (Alm, 2012). Intentional tax non-compliance can be costly, as it includes the violations of horizontal equity, vertical equity and tax system efficiency (Skinner &
Slemrod, 1985). Tax evasion on a large scale can increase socio-economic inequality by imposing a heavier tax burden on lower income taxpayers and can make the tax structure more regressive (Keen, 2007).
The Internal Revenue Services (IRS) estimated that in 2008-09 the United States of
America’s (USA) tax gap was estimated to be USD 345 billion, with 18% to 19% of income not properly reported (Feige& Cebula, 2011).In the United Kingdom (UK),
VAT revenue losses through evasion increased sharply in 2005-06, reaching £12.4 billion, 14% of potential VAT revenue (Smith, 2007).In Italy the size of VAT evasion in 1977 was estimated to be as high as 40% of VAT revenue (OECD, 2007).
Developing and underdeveloped countries are also losing substantial tax revenues due to intentional tax non-compliance or tax evasion. A study by the Global Financial
Integrity demonstrates that, due to tax evasion and corruption, India has lost USD 213 billion in the period 1948-2008 due to tax evasion and corruption, which is almost 18% of India’s 2008 GDP (KPMG, 2011). Bangladesh is no exception, as Transparency
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International Bangladesh (TIB) estimated that an amount of BDT 210 billion (USD 2.8
Billion) in taxes was evaded or defalcated in the financial year 2009-10. This represents
2.8% of Bangladesh’s national income, which is equivalent to one-third of tax revenues collected during that year. The TIB noted that the NBR would have collected 34% more revenue if this evasion had not occurred. TIB also identified tax evasion as a major reason for the country’s poor tax to GDP ratio. The problem of taxpayer non- compliance is seen to be much more severe in developing countries (Andreoni, Erard, &
Feinstein, 1998), where there may be an absence of tax culture, a large informal sector, corruption of tax officials and a lack of effective enforcement and monitoring of the tax enforcing agencies.
Over the last 40 years, two widely accepted findings have emerged from the considerable body of literature which has developed in the area of taxpayer compliance
(Alm, 2012; McKerchar & Evans, 2009). Firstly, taxpayer non-compliance is a continual and growing global problem that is not adequately addressed in many countries. Secondly, despite a great deal of research originating from a wide variety of disciplines, there is not a great deal of consensus about why people do, or do not, pay their taxes or otherwise comply with their tax obligations. Most of the literature about taxpayer non-compliance has been concerned mainly with direct taxes and has focused on developed countries. The analysis of indirect tax non-compliance is largely ignored
(Alm, 2012; Sandmo, 2005). Indeed, VAT is seen as a neglected area in the compliance behaviour and tax evasion research (Alm, 2012). A reason for the absence of VAT from evasion studies may be due to common belief that VAT has a self-policing mechanism: buyers of intermediate goods have opposing interests to the sellers, thus reducing the scope for VAT evasion (Keen & Smith, 2007). However, in practice, VAT in several countries has not achieved its objective of raising the projected revenue, as VAT, like any other tax, is open to fraud and evasion (Keen, 2007). For these reasons, Hemming 51
and Kay (1981) questioned the ‘self-enforcing’ power of VAT, as both seller and buyer can gain by intentional non-compliance where tax administrations have poor control and auditing (cited in Barbone, Bird,& Vázquez- Caro, 2012, p. 42).
Although there is some research into compliance with consumption taxes in developed economies (such as the UK, OECD Countries, and European Union member countries), there is a lack of research into VAT compliance in developing countries in general, and particularly in Bangladesh. This thesis explores the reasons of VAT non-compliance by
SMEs in Bangladesh by next considering the theories of economic deterrence, and social psychology.
3.2.2 The Economic Deterrence Models
Why do people not pay their taxes or evade taxes? One answer could be ‘for greed’.
Economists assume people will commit an offence to maximize their utility (Webley,
Robben, Elffers, & Hessings, 1991). The neoclassical economic approach to tax behaviour starts from the assumption that individuals and groups are rational agents trying to maximise their outcome by evading taxes. Becker (1968) argues that people become criminals not because their motivations are different from others, but because their cost and benefits differ. When this is applied to the tax situation, it treats people as rational amoral decision makers whose aim, in this as in all other areas, is simply to maximize utility. Enforcement measures, such as audits, or sanctions to detect and control evasion, are perceived to be the dominant instruments that ensure the taxpayer’s co-operative behaviour. The likelihood of audits and sanctions allows a taxpayer to take the tax system as a game in which they choose between (a) a sure loss, namely the taxes due, or (b) a probable gain via evasion and non-detection, or (c) a probable major loss resulting from evasion, detection and punishment. Bernasconi (1998) stated that
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evading taxes is like gambling: there are gains if the evasion is successful and costs if not.
In early tax compliance literature deterrent theory is considered as an influential factor in tax compliance decisions (Allingham & Sandmo, 1972). The classical models
(Allingham & Sandmo, 1972; Cowell, 1985) assume that behaviour is influenced by factors such as the tax rate (which determines the benefits of evasion), the penalties for fraud and the probability of detection (which determines the cost). Individuals have a choice of how much income to declare and how much not. However, the main objective is to maximize the utility of the taxpayer. The Allingham and Sandmo (A-S) model predicts that both the probability of detection and the severity of penalties will affect tax evasion: if detection is likely and penalties are severe, people will be more compliant.
The A-S model suggests that evasion increases with gross income, while the effect on the fraction of income evaded depends on relative risk aversion; that is, if relative risk aversion is constant, the fraction of income evaded will be constant. In advancing their model, Allingham and Sandmo (1972) argued that tax authority can control evasion by two substitute enforcement strategies: increasing either the penalty rate or the probability of being detected.
In addition to the A-S model, other early models included the works of Srinivasan
(1973), Kolm (1973) and Yitzhaki (1974). McKerchar (2003) argues that these earlier models are very much similar to the underlying principles of the Allingham and
Sandmo economic deterrence model. The A-S model was further extended by relaxing some of the basic assumptions and by incorporating agents (such as the tax authority and tax practitioners) playing key roles in the tax compliance decision-making process, in such models as these developed by Cowell (1985); Graetz, Reinganum, and Wilde
(1986); and Scotchmer and Slemrod (1989). However, the A-S model has limitations:
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itis simplistic (as acknowledged by Allingham and Sandmo) in that it ignores other factors relevant to the compliance decision. It reduces human behaviour into a mathematical formula, which could be changed by manipulating the variables of interest. The deterrence model also attempts to explain the change in compliance behaviour rather than in the level of compliance (Cuccia, 1994). Among other things, the model does not incorporate the impact of compliance costs on tax compliance decisions; it focuses only on direct tax non-compliance. Braithwaite (2009) described deterrence as a double-edged sword. Not only can it enhance voluntary compliance because it includes what is the right thing to do; it can also make taxpayers resistant to complying with tax laws because of feelings of oppression.
Non-compliance decisions have been found to be indirectly related to the threat of penalties; larger fines are a more effective deterrent than are frequent audits (Friedland,
Maital, & Rutenberg, 1978).Empirically, the deterrent effect of the enforcement factors appears to be questionable. The observed effects were weaker than expected, and some studies even suggest that an increase of penalties can have unintended undesirable effects, resulting in more tax evasion (Andreoni et al., 1998; Fischer, Warwick, & Mark,
1992; Frey, 2003). Silvani and Baer (1977) found that threats of future enforcement actions, including penalties, have little impact on the compliance behaviour of taxpayers in countries where non-compliance is high. In the USA, the penalty rate on tax evasion between 1980 and 1995 increased from 5% to 30%. Ali, Cecil, and Knoblett (2001) analysed the compliance behaviour of American personal income taxpayers during that period and found that increasing the penalties appeared to have no deterrence effect.
Friedland (1982) reports that audit rates affected compliance more than the amount of the fines. Alm et al. (1995) pointed out that fines are effective only with high audit rates. In an experiment by Park and Hyun (2003), voluntary compliance was more negatively affected by the amount of fines than by audit probabilities. That is, taxpayers 54
were likely to comply when they had a possibility of frequent audits. However, audits need to be free of corruption to be effective. For example, in South Africa informal businesses thought tax officials could be managed with bribes while auditing (IFC,
2008). Long and Burnham (1990) argued that it was difficult to determine the effect of tax audit and the varying probabilities of detection on taxpayer compliance as other possibly influential factors (including other enforcement strategies) generally did not remain constant.
The economic deterrence models generally assume that all taxpayers seek to maximise utility by responding in an identical and predictable manner when exposed to a change in any variable, as the sole purpose of a tax system is seen to be collect revenue
(McKerchar, 2003).Taking into account the empirical evidence, and the experimental studies on economic deterrence models seems to be less effective as it appears that taxpayer non-compliance is not only influenced by economic factors. Consequently, it is important to consider compliance in the context of non-economic factors such as social- psychological models.
3.2.3Social-Psychological Models
Social psychology models are concerned with the prediction and understanding of human behaviour and how people make decisions (McKerchar & Evans, 2009). The purpose of social psychology models is to develop an understanding of human behaviour and attitudes, whereas fiscal psychology models consider the psychological background of financial activities. It has been argued that social and psychological insights are very important to understand the observed level of tax compliance (Alm,
McClelland, & Schulze, 1999; Cullis & Lewis, 1982; McKerchar, 2002). In these models, taxpayer’s actions are influenced by many factors, including their outlook towards public institutions, the perceived fairness of the taxes and their prevailing social 55
norms. Similarly, tax compliance is influenced by a range of factors including attitudes, perceptions, beliefs, personality traits and interactions among the actors. Specifically, fiscal psychological models view tax enforcement as a behavioural problem that can be resolved by the co-operation between taxpayers and tax collectors. To obtain this co- operation, the role of the tax system to provide a positive stimulus is emphasised, for example, by lowering the tax rates or decreasing the penalties. These actions in turn are expected to generate a better taxpayer attitude, which then affect their compliance decisions (McKercher, 2002).
In social psychology models, distributive justice, retributive justice and procedural justice are considered to have vital roles in influencing tax evasion behaviour (Wenzel,
2003).37 Taxpayers will evade less if they believe that government is spending tax revenue on public goods that they value and use (Kirchler, 1997). However,
Wallschutzky’s (1984) study about Australian personal income taxpayers found that people born outside Australia had little belief in distributive justice, as they had a higher tax evasion rates and had little influence on the government services they received.
If tax authorities treat taxpayers fairly, in a respectful and reasonable way, co-operation and trust in the institution are likely to increase at the individual, group and societal levels (Feld & Fray, 2002). Similarly, if taxpayers perceive the formula used to distribute resources (benefits and costs) as fair, then procedural fairness is high
(Murphy, 2003, 2004; Braithwaite, 2003; James, 1998). However, Porcano (1998) did not find any significant effect of procedural justice on the compliant intentions of
37. Distributive justice refers to the give-and-take of resources, both benefits and costs. Retributive justice is concerned with the perceived appropriateness of sanctions in case of norms breaking (Tyler, 2006), and are closely related to the interaction between tax authorities and taxpayers. Procedural justice refers to the quality of treatment in interaction between taxpayers and tax authorities, the quality of information provided by tax authorities, the compliance and administrative costs as well as the dynamic of allocation of revenue (Carnes & Cuccia, 1996). The efficiency of interaction between taxpayers and tax authorities, the satisfaction with enforcement process and the audit treatment determine the perceptions of procedural justice (Wallschutzky, 1984). 56
income taxpayers in the UK. Irrational and intrusive audits and unfair penalties lead to negative attitudes toward the tax office and taxes (Spicer & Lundstedt, 1976; Hasseldine
& Kaplan, 1992). Consequently, it appears that procedural justice and retributive justice may be important factors for tax evasion, but these have rarely been investigated in the field of tax non-compliance and tax evasion, especially in Bangladesh.
Another important factor for tax non-compliance is the perception of what others are doing. If taxpayers are convinced that their co-citizens are paying their right share of taxes, they might be more willing to contribute. Using Swedish individual survey data to understand Swedish people’s perceptions about tax evasion, Hammer, Jagers, and
Nordblom (2009) demonstrated that distrust of fellow citizens and political distrust are very important determinants of perceived tax evasion.
The fiscal psychology approach combines both the economic deterrence and the social psychology approaches, and views tax enforcement as a behavioural problem, one that can be resolved by co-operation between taxpayers and tax collectors (Loo,
McKerchar,& Hansford, 2009). This approach is based on taxpayer’s attitude; tax mentality; feelings of tax tension and tax morale. The more positive the taxpayer’s attitude towards paying tax is, the greater the level of co-operation with the tax authority and the greater the willingness to pay tax. Kirchler’s ‘slippery slope’ approach is based on the interaction between taxpayers and tax authorities, and distinguishes between enforcement and voluntary compliance (Kirchler, Hoelzl, & Wahl, 2008). The framework suggests that the tax climate in a society depends on both the antagonistic climate and the synergistic climate. The former is based on a ‘cops and robbers’ attitude towards tax authority and taxpayers. According to Braithwaite (2003), tax authorities perceive the taxpayers as ‘robbers’, who always try to evade tax, while taxpayers consider tax authorities as ‘cops’ and feel it is right to hide income. In such a climate,
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both the social distance and the intentional non-compliance are likely to increase between the two groups. In comparison, with in a synergistic climate, tax authorities consider taxpayers as ‘clients’ and they provide ‘service’ to the taxpayers (service and client attitude). The tax authority’s supportive treatment to taxpayers helps to improve the voluntary compliance level. Under this model, the power of tax authorities (to detect illegal tax evasion; to conduct frequent and thorough tax audits; to punish tax evaders) and the trust of taxpayers towards tax authority are important for voluntary compliance or intentional non-compliance (Kirchler, Hoelzl, & Wahl, 2008).
Based on prior literature, Kirchler (2007) and Loo (2006) identified factors that are likely to influence tax evasion and tax compliance: tax rates; tax enforcement (audits); complexity; simplicity of the tax forms and returns; the attitude and efficiency of the tax authority; perceptions of fairness and ethics; perceptions of government spending with taxpayers’ money; and socio-demographic characteristics (age, income level, education and gender). As many of these factors are not constant, it is to be expected that compliance behaviour can change over time and a compliant taxpayer one year may be non-compliant the next (Loo, McKerchar, & Hansford, 2009). The next sections explain factors (complexity and compliance costs) that may influence the VAT non-compliance of the SME sectors in Bangladesh.
3.3 Simplicity and Complexity
Musgrave and Musgrave (1989) noted three main features of a good tax system: the tax system should be understandable to the taxpayer; the tax system should be characterised by a fair administration with no arbitrary decisions; and the distribution of the tax burden should be equitable, so that all taxpayers are made to pay their fair share. They also indicate that the revenue yield should be adequate; the tax system should facilitate the use of fiscal policy for stabilization and growth objectives; the taxes should be 58
chosen to minimize interference with economic decisions in otherwise efficient markets, and the administration and compliance costs should be as low as is compatible with other objectives of the taxation system. To satisfy these requirements, a tax system should consider four basic principles: simplicity, equity, ability to pay and efficiency
(Lewis, 1982).
Simplicity is one of the commonly accepted key tenets of any sound taxation system.
Surrey and Brannon (1968) stated that simplicity is the most widely quoted but the least widely observed of the goals of tax policy. Simplicity, or conversely, avoiding complexity in a taxation system, should reduce compliance costs, administrative costs, and taxpayer uncertainty. Such notions are said to lead to improvement in the levels of voluntary compliance (Kasipillai, 2005; Collins, Milliron & Toy, 1992; Vogel 1974).38
Slemrod (1985) argues that it is easier to collect taxes when they are viewed by taxpayers as fair, or when the tax law is simple39 and unambiguous. This is especially the case when tax systems rely on taxpayers to collect and remit taxes, such as required for a VAT system.
Highlighting the importance of the simplicity (and the reduced complexity) for a tax system, the report of The Australian Government Tax Road Map (2012) stated:
Simplicity is the major aim of the Governments tax reform. A tax system buried in red tape and complexity will reduce investment, stifle innovation and risk taking and ultimately reduce productivity and economic growth. Complexity in the tax system will reduce the time an individual or company has for other
38. Conversely, complexity may also lead to intentional non-compliance (Cuccia, 1994; Franzoni, 1999; Erich, Niemirowski & Wearing, 2006). 39. The term “simple” is not well defined in the tax literature (Slemrod & Yitzhaki, 1996). More than half century ago, Blough (1952, p.430) makes a direct attempt to define it by arguing, “Tax simplification has been a loudly demanded objective. A good deal of discussion of simplification reflects a misunderstanding of what makes a tax complex. Emphasis is often placed on cumbersome and complicated language. The most important quality of a well-drafted statue is that it shall not be open to more than one interpretation. The ordinary taxpayer does not need to read the tax statue. More simple statements areavailable for his use. The language of the law is for administrators and courts. Whenever possible, the language should be simple rather than complex, but the matter is relatively unimportant. Lack of clarity, on the other hand, is of very great importance. Simple language, which proves to be ambiguous, may result in great complexity and uncertainty”. 59
pursuits, and detract from further participation in the work force. It also makes the system unfair, as it imposes a higher burden on lower income households. (p. 5) Miller (1993) points to three main types of complexity inherent in many taxation systems: technical, compliance and structural. Technical complexity is the pure intellectual difficulty of ascertaining the meaning of the relevant tax law, and learning about the legal requirements and tax planning.40 Compliance complexity relates to the difficulty of maintaining sufficient records to satisfy the law, such as preparing and filing tax returns and responding to the tax authority’s notices and audits (Graetz, 1997).
Structural complexity denotes the ability of some taxpayers to circumvent the law through careful tax planning.
The first two types of complexity in particular appear to be problems in Bangladesh, given the general population’s relatively low educational standards and low levels of financial literacy (BBS, 2012). Both types of complexity can be manifested in cumbersome and complicated statutory or regulatory language, for example in forms or taxpayer instructions that cannot be readily understood by the ordinary taxpayer
(Blough, 1952; McKerchar, 2002). This can include highly specific language, verbose wording, the use of mathematical formulae, indeterminate language and indefinite phrases, or tax authority’s interpretations of judicial decisions (Miller, 1993; Edmiston,
Mudd, & Valve, 2003). Compliance complexity can also be manifested in requirements for multiple filings per year (Coolridge, 2012); multiple tax rates and special provisions
(Warskett, Winer, & Hettich, 1998; Coolridge, 2012); and frequent changes in tax rates or tax bases (Partlow, 2013; Edmiston et al., 2003).
Complexity, a universal problem, has been cited as the most serious problem for income taxpayers in the USA (Oveson, 2000). Excessive complexity increases filing and
40. For example, manufacturers in Bangladesh, who produce goods that are simultaneously subject to tariff value and the standard VAT rate, pay multiple VAT rates, thereby reflecting the technical complexity of the VAT system (Holcombe, 2010). 60
administrative costs and may impact on voluntary compliance (Collins et al., 1992;
Vogel, 1974). However, several studies have failed to find such a relationship (e.g.
Porcano, 1988; Yankelovich & White, 1984). Porcano (1988) found that legislative complexity was not a significant cause of income tax evasion in the UK, whereas the level of education and related socio-economic factors were (Porcano, 1988). However, this may not be the case in Bangladesh, where the level of education and financial knowledge among the general population is considerably lower by international standards than that in the UK (IFC, 2011). In an empirical study of personal income tax in Australia, the level of complexity was found to be directly related to taxpayer compliance and hence to taxpayer commitment to compliance (McKerchar, 2003). A similar empirical result by Loo et al. (2009) indicated that in a Malaysian income tax context the complexity, ambiguity, uncertainty and lack of knowledge of tax law were the main causes of either unintentional non-compliance or over-compliance. However, most of these studies were limited to personal or corporate income tax rather than to
VAT.
Complexity of the tax legislation can be affected by information asymmetry. The more complex the tax legislation and regulation is, the greater the knowledge gap – or information asymmetry – between legislators and taxpayers, and the greater the level of possible (at least unintentional) non-compliance (McKerchar, 2003). Balch (1980), a researcher in political psychology, identified information strategy (apart from regulations, facilitation and incentives strategy) as one method which governments can use to change people’s behaviour about taxation. He asserted that if the lack of information is the main gap between the potential and the new behaviour, information is what must be provided by the enforcing agencies. White, Curatola, and Samson (1990) also emphasised the importance of tax knowledge and successful communication to increase voluntary compliance. Slemrod (2003) argued that the level of voluntary 61
compliance can be enhanced through improved performance of the tax authorities, such as a successful interaction climate and a smaller communication gap, as well as by winning the trust of the taxpayer. If better information is provided to the taxpayers about the tax law, they may be more confident about complex tax legislation. There is as yet no empirical evidence on the extent to which compliance with Bangladesh's VAT
Law is affected by information asymmetry between the government and the NBR on the one hand, and the SME taxpayers on the other. Simplicity and complexity, and the information asymmetry arising from these, are after all relative concepts and what is a simple rule to one may not be as simple to another (Cooper, 1993).
In Sandford’s view (1993), complexity is closely related to the costs of compliance.
Kaplow (1996) argued that increasing complexity leads to higher compliance costs, which in turn could change taxpayers’ compliance behaviour. If the compliance cost burden was so high, the taxpayer would reach a trade-off between being compliant and being non-compliant. Kaplow also stated that complexity made the tax system difficult to enforce and therefore reduced its efficiency. However, Kaplow did not produce any empirical evidence to support his argument. Laffer, Winegarden, and Childs (2011) state that the complexity of tax law imposes significant costs on affected taxpayers and is reflected in the amount of time and money that people spend each year preparing and filing their taxes. It is argued that complexity has a greater effect on small and medium businesses, as they can be more severely affected by red tape than large businesses are
(Shome, 2004). This can be due to SME businesses being less proficient in dealing with the complexities of regulations and being unable to spread the costs of compliance across large-scale operations (Chittenden, Kauser,& Poutziouris, 2003). However, no empirical evidence has been provided to date to support the relationship between complexity and compliance costs in Bangladesh.
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Very few studies conducted in Bangladesh have considered the role of complexity with
SME taxpayers and their non-compliance. In 2014 Sushanoner Jonnno Procharavizan
(SUPRO) found that 78% (590 out of 757) of people surveyed thought that the tax payment system is complex and unfair in Bangladesh.41 Also 63% of the respondents noted that people are not encouraged to pay taxes (personal income tax, corporate income tax or VAT) because of the complexities in the tax system (“unfriendly tax”,
2014). However, the results of the survey need to be reviewed with some caution as that survey did not focus on VAT and the SME sector. The survey took into account the opinion of the general population, not just the taxpayers. The findings of the study did not reflect the opinions of the taxpayers who belong to the city areas (79% of the total taxpayers belong to the capital city and other major cities). It is not unlikely that the general public outside the city areas may have a lower level of tax knowledge to measure the complexities of the taxation system.42 Another 2014 study conducted by
The Centre for Policy Dialogue (CPD) found that a total of 32% of respondents from
262 SME enterprises listed regulatory (procedural) complexity of the tax law as one of the main reasons for taxpayer non-compliance in Bangladesh. However, this study also did not focus only on VAT; nor did it consider differences between compliant and non- compliant taxpayers.
3.4 Compliance Costs
Broadly, the compliance costs of taxation have been defined by Sandford (1995) as follows: Tax compliance costs are the costs incurred by taxpayers in meeting the requirements laid on them by the tax law and the revenue authorities. There are costs over and above the actual payment of tax and over and above any
41. The survey was conducted in some district areas outside the capital and main cities, such as, Barisal, Kushtia, Rangamati, Hobiganj, Rajshahi, and Shariatpur to create baseline data on different tax related issues and raise voices to establish a pro-poor tax system. 42. The literacy rate outside the city is lower in Bangladesh. According to BBS (2010) the literacy rate is 67.7% in city area and outside the city it is 42%. 63
distortion costs inherent in the nature of the tax; costs which would disappear if the tax law was abolished. For businesses they include the costs of collecting, remitting and accounting for tax on the products and profits of the business and on the wage and salaries of its employees; and also the costs of acquiring and updating the knowledge to enable this work to be done, including knowledge of legal obligations and penalties. (p. 1)
The Americans for Fair Taxation (2007) group defines tax compliance cost as the total time and money spent on filling out tax forms, keeping records, learning tax rules, and other tax-related matters. Compliance costs include three major components, namely monetary costs, time costs and psychological costs to the taxpayers (Pope, 1993).
Monetary costs include money spent on tax professionals and expenses relating to taxation guides, books, communication and other incidental costs. Time costs are incurred by the taxpayer mainly on record keeping for tax purposes, completing the tax return and preparing the tax details for the tax authorities or for tax professionals.
Psychological costs comprise costs such as the anxiety of handling tax matters
Sandford, 1973, 1995; Cléroux, 1992; Evans, 2003; Klun, 2004; O’Keefe & O’Hare,
2008; Barbone et al., 2012).
Sandford, Godwin, and Hardwick (1989) stated that the compliance costs for a business include the costs of collecting, remitting, and accounting for tax on the products or profits of the business, and on the wages and salaries of its employees. The tax compliance costs for a business also include the costs of acquiring the knowledge to enable this work to be done, including the knowledge of their legal obligations and penalties. Yet the costs of complying with taxation legislation are not limited to taxpayers. Where the tax authorities have a legal duty to monitor and enforce the legislation (as does the NBR in Bangladesh), the tax authorities themselves also face costs of discharging their duties in accordance with the legislation. In a very real sense, these too can be regarded as administrative costs (Sandford, 1995, p.2).
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The growth in interest about tax compliance cost has been attributed to several factors: the introduction of VAT in a number of countries (with high and visible compliance costs), the growth of enterprise cultures involving the small business sector (where compliance costs can be regressive), and the increasing complexity of the tax systems
(Sandford, 1995). Below is an analysis of the types of compliance costs found in the prior literature and about what should be included in compliance costs research.
3.4.1 Types of Compliance Costs
Conceptually, compliance costs can be distinguished as commencement, temporary and recurrent costs. Commencement costs are those incurred when a new tax is introduced or a major change is made. As Tran-Nam and Glover (2002) noted, such costs include the costs of initial training of staff to deal with proposed changes and the costs of upgrading the physical facilities such as computers and office space. Temporary costs are the resources expended after the commencement of a new tax, or a change in the existing ones while learning is taking place. Recurrent or regular costs, on the other hand, are the continuing costs of operating a tax system, without the additional transitory components of the tax change. It is onerous to allocate operating costs to these components, because there is not always a definite boundary between transitional
(commencement and temporary) and recurrent compliance costs (Tran-Nam, 2000).
Compliance costs can also be categorised into unavoidable (or involuntary) and avoidable (or voluntary) costs. Unavoidable costs, sometimes termed computational compliance costs, are those necessarily incurred if taxpayers are to meet the legal requirements laid upon them, while avoidable costs are (legal) tax planning costs taxpayers choose to undertake in order to minimise their tax obligations. The inclusion of avoidable costs in the measurement of compliance costs is disputable. There are those who contend that avoidable costs should be isolated from unavoidable compliance costs 65
on the grounds that the former are incurred by taxpayers willingly in their attempt to minimise their tax payments. However, Sandford et al., (1989), Evans, Ritchie, Tran-
Nam, and Walpole (1997), and Slemrod and Sorum (1984) have argued that the boundary between the two categories is unclear, leading to difficulty in identifying them. These costs are caused by the taxes, in that if the taxes were abolished these costs, along with the involuntary ones, would disappear.
Evans (2008) also notes that compliance costs may sometimes be divided into computational and tax planning costs. In the case of businesses, planning costs are essential elements of compliance costs as they are incurred in an effort of achieving business goals and profit maximisation through minimisation of costs including tax expenses. However, most of the modern compliance cost studies have not distinguished computational and tax planning costs as it is very difficult to disentangle these. Slemrod and Sorum (1984) stated that, “both kinds of costs are real resource costs of collecting the taxes” (p. 461).
Compliance costs may also be distinguished as inevitable and preventable costs, based on how taxpayers and third parties combine their resources in dealing with the tax system. As Evans and Tran-Nam (2004) stated, preventable costs are incurred because the parties involved in operating the tax system have departed from what is believed to be the best practice. This departure may be caused by lack of knowledge and/or technical inefficiency in combining resources to deal with their tax matters. These preventable costs may vanish as taxpayers, tax administrators and third parties become accustomed to the tax system. On the other hand, according to Evans and Tran-Nam
(2004), inevitable costs arise even when those parties use the prevailing best practice to deal with tax matters. These costs tend to continue as long as the tax is in operation.
Compliance costs may be divided into internal (in-house) compliance costs and external
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costs (Hansford & Hasseldine, 2012). In-house costs are the costs related to keeping tax records, calculating and completing return and paying taxes; the external costs are the costs for external advisers, learning about taxation laws, and dealing with the tax offices.
The operation of a tax system may bring some benefit to taxpayers. For example, compliance costs may be divided between gross or social compliance costs (the costs to the economy) and net or taxpayer compliance costs (the costs directly borne by taxpayers). Social compliance costs tend to be less than taxpayer compliance costs as these include cash flow benefits43 and managerial benefits44 (Evans, 2008). Net tax compliance costs are defined as the gross tax compliance costs minus the tax compliance benefits (Lignier, 2009).
Sanford et al. (1989) argued that the operational definition of compliance costs study needs to be geared to the data available. In this regard, Evans (2003) noted that what to include or exclude for the estimation of compliance costs depends mainly on the availability of the data. According to Evans (2003), compliance costs study may include the costs of labour/time consumed in completion of tax activities; for example, the time taken by a businessman to acquire appropriate knowledge to deal with tax obligations or the time taken in compiling receipts and recording data in order to be able to complete a tax return. The costs of expertise purchased to assist with completion of tax activities
(typically, the fees paid to professional tax advisers) as well as the incidental expenses incurred in the completion of tax activities, including computer software, postage and travel, should be included to estimate compliance costs. Evans also suggested that the
43. Cash flow benefits arise for the timing difference between receipt of funds and payment of tax relating to those funds. 44. For business taxpayers, managerial benefits occur as a result of better accounts and record keeping systems. These benefits reduce the costs of audit and accounting fees for small businesses. 67
costs of anxiety and stress that taxpayers experience in dealing with taxation matters should be added into the taxation compliance costs.
3.4.2 VAT Compliance Costs in Bangladesh
In the context of the Bangladeshi VAT, a business complying with the VAT law encompasses both direct and indirect costs. Direct costs cover the costs of collecting documentation (compiling receipts, recording data, checking accounts); accounting for
VAT; the fees paid to professional tax advisers; costs to learning VAT law, costs of price declaration; preparation for VAT refunds; and remitting VAT on products. For many SMEs in Bangladesh in remote locations, this compliance costs may involve considerable time and cost travelling to the nearest bank or Treasury Office in the nearest city (CPD, 2014). Indirect costs include the time associated with the completion of VAT returns; the time associated with acquiring the intellectual capital necessary to enable this work to be done; the need to be aware of taxpayers’ rights and obligations; and of staying up to date (that is, obtaining information about new regulations and procedures). Another cost could be psychological costs such as the costs of anxiety and stress that many taxpayers experience when trying to comply with tax legislation and regulation. However, the likelihood of some (indirect) benefits for taxpayers in having to comply with VAT legislation should be acknowledged. For example, some SMEs in
Bangladesh may find that the need to submit monthly VAT returns imposes some financial discipline on their businesses that might not otherwise be there. There is some empirical evidence, albeit in an Australian context, of a perception by small business taxpayers that the need to comply with GST and other tax legislation has brought managerial benefits that might not otherwise have occurred (Lignier & Evans, 2012).
Lignier (2009) has highlighted that compliance costs studies in developing countries rarely consider these managerial benefits.
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In this research, VAT compliance costs are defined as all costs(besides the actual VAT liability) born by businesses and third parties, in the process of ensuring that they comply with the provisions of the existing VAT law and the requirements imposed on them by the NBR, including the inconveniences encountered in the process of becoming and remaining tax compliant. These costs are multiple and would include genuine compliance costs, costs of non-compliance (associated with audits, objections and appeals), psychological costs and bribery costs. This thesis also investigates whether
SMEs perceive the existence of managerial benefits as a result of the imposition of the
VAT in Bangladesh.
3.4.3 Leading Compliance Costs Studies
The empirical evidence of compliance costs studies and their various findings are now described. The first modern study of compliance cost, conducted by Robert Haig in
1935 in the USA, used a mail survey to large corporations about federal taxes and all local government taxes. In the UK, Sandford (1973) undertook the first compliance cost study of personal income taxes through complementary surveys. Sandford (1973) first identified the regressive nature of compliance costs and the importance of psychological costs. Over the past four decades, tax compliance cost studies have now occurred in many countries including Canada, Germany, Ireland, Netherlands, Spain, Portugal,
Sweden and Switzerland), Australasia (Australia and New Zealand), Asia (Singapore,
Malaysia, Hong Kong, India, South Korea), Eastern Europe (Croatia and Slovenia),
Africa (Nigeria, Tanzania, Ethiopia and South Africa) and South America (Brazil)
(Lignier, Evans,& Tran-Nam, 2014). These studies utilise various methodologies including surveys, case studies, time studies and document analysis. However, they have a number of methodological shortcomings for the present purposes: they are
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mostly confined to personal income taxpayers; they generally suffer from small sample sizes and low response rates; and most importantly they do not consider Bangladesh.
A few compliance costs surveys have specifically considered VAT (Walpole, 2014).
Some of these surveys (in UK, Australia, New Zealand, Canada, and Indonesia) target all taxes or target sectors of the economy affected by compliance costs. Some of these surveys suffer in providing an absolutely clear distinction between compliance costs associated with VAT and those associated with other taxes. However, identifying the expenses exclusively for VAT can be problematic. In developed economies or for large taxpayer units, it may be possible to get such comparisons easily. But in a developing economy where SME businesses generally use one accountant’s services for all tax
(VAT, Income tax and Customs duty) advisory, some imprecision is inevitable.
The first comprehensive study on the compliance costs of VAT, conducted by Sandford,
Godwin, Hardwick and Butterworth (1981) for the year 1977-78 in the UK, was followed up by another study about the operating costs of VAT in the UK for the year
1986-87 (Sandford et al., 1989). These two studies demonstrated that VAT compliance costs for UK were about 3.7% of the total VAT revenue collected. A Canadian study found that compliance costs of VAT were between 3.3% and 6.6% of the total VAT revenue (Plamondon & Zussman, 1998). Allers (1994) found a similar ratio of 6.0% of the total revenue in the Netherlands.
The international evidence in empirical studies on VAT suggests that, in most developed countries, the introduction of a VAT results in significantly higher compliance costs for taxpayers than for other forms of taxation (Vaillancourt, 1987;
Pope, 2001); and that VAT compliance costs are disproportionately higher for small businesses than for large businesses (Cnossen, 1994; Rametse &Pope, 2002; Coolridge,
2012). These VAT compliance costs include record keeping for VAT purposes,
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preparation and filling of VAT returns, checking accounts, obtaining information about new procedures for filling VAT returns and changes in the law (Cléroux, 1992; Klun,
2004; O’Keefe & O’Hare, 2008). A report published by United States Government
Accountability Office in 2008 recognised that in VAT, as with other taxes, the compliance burden is mostly driven by record-keeping requirements, filing frequency requirements, and time and resources to deal with audits (cited in Walpole, 2014, p.
394). In terms of size, compliance costs as a percentage of the turnover were found to be
30 to 40 times higher for companies in the UK with a turnover of less than £20,000 compared to those with a turnover of £1 million and more (Godwin& Sandford, 1983).
A New Zealand study found that the mean VAT compliance costs for the smallest companies represented 2% to 7% of their turnover, compared to only 0.005% for that of the largest companies (Massey, 2003). These studies highlight the regressive nature of compliance costs. This is reconfirmed for developing and transition economies, by
Coolidge (2012) who noted that, while larger taxpayers can spend 1% of their turnover on tax compliance costs, SMEs can spend from 5% to 15% or more on it.
Compliance costs studies based on VAT with other taxes have been conducted in developing and underdeveloped countries: Mauritius (Pillai, 2000); South Africa
(Stigling & Smulders, 2012); Czech Republic (Vitek & Pavel, 2008) and Ethiopia
(Yesegat, 2009). Pillai’s (2000) study involved a mail survey and face-to-face interviews of Mauritius’s hotel industry, and highlighted some of the start-up costs associated with the transition of VAT. The overlapping of VAT compliance costs with the hotel and restaurant tax was one of the major shortcomings of this study. The reasons for higher compliance costs included the high volume of invoices and multiple rates of VAT applying to food.
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Vitek and Pavel (cited in Walpole, 2014) employed a structured interview methodology for their compliance costs study in the Czech Republic45 with a sample size of 100
‘entrepreneurs’ and 100 ‘companies’. Their research identified VAT compliance costs for the businesses as 4.5% of VAT revenue, but VAT ranked only fifth highest out of the eight taxes surveyed below that of real estate tax, the personal income tax, the corporate income tax and the road tax. This study also noted that for small entrepreneurs the ‘accounting costs and tax costs’ were regularly merged as it was difficult for the small entrepreneurs to segregate the two.
Yesegat (2009) examined the operating costs of VAT and the possible link between
VAT compliance costs and compliance decisions in Ethiopia. The taxpayer data was collected from the tax authority and she used structured interviews with VAT payers
(193 out of 269) and VAT advisors (29 out of 33 interviews), seeking both quantitative and qualitative data. Yesegat (2009) found that VAT compliance costs were higher for small businesses than for large businesses. The results revealed that VAT operating costs in Ethiopia in the fiscal year 2005-06 appeared to be relatively low and that the
VAT compliance costs and intentional VAT reporting compliance decisions were inversely correlated, although this was statistically weak. Given that in Ethiopia VAT was introduced in 2003, Yesegat’s research (based on FY 2005-06) may have picked up the start-up and transitional costs of VAT, which can be higher than routine compliance costs (Tran-Nam & Glover, 2002). Yesegat (2009) argued that her results suggest that strengthening the tax administration, allowing small businesses to adopt the cash basis of accounting and to report less frequently, and reducing the VAT registration threshold could increase compliance among taxpayers.
45. Vitek and Pavel (2008) estimated the compliance costs of corporation income tax, personal income tax from wages, personal income tax from business, Value added tax, health insurance contributions, social security contributions, road tax and real estate tax. 72
Smulders et al. (2012) conducted a compliance costs survey for small taxpayers in
South Africa. This emailed survey had a large sample size of 5,865 usable responses from 88,057 small business taxpayers, amounting to a 6.6% response rate. While the survey was not confined to VAT, this research revealed that recording information and calculating tax, filing returns and paying tax are the most time consuming activities for businesses. Time was spent on four other activities in descending order: dealing with
South African Revenue Service; learning about tax; dealing with tax advisors; and tax planning. This research also recognised there were some managerial benefits from being VAT registered, such as proper record keeping for the annual audit, which mitigated the overall compliance costs.
The World Bank Group (WBG) conducted several large-scale semi-structured questionnaire-based studies of tax compliance costs in transitional and developing countries from 2006 to 2012 (Armenia, Burundi, Georgia, India, Kenya, Lao PDR,
Nepal, Peru, South Africa, Ukraine, Uzbekistan, Vietnam and Yemen) (Coolridge,
2012). These studies considered the time and costs spent on compliance, not only with
VAT but also with personal income tax, corporate income tax and payroll tax. Through structured interviews, taxpayers were asked about their bookkeeping practices, their computer and internet access; their experience with tax inspections and audits; taxpayer morale; their reasons for any non-compliance (including failure to register for VAT and income tax); and their perceptions about the tax authorities and tax officers. The WBG studies documented extremely regressive patterns in the developing world, with small businesses incurring tax compliance costs of up to 15% or more of turnover. Complex tax accounting requirements were associated with high tax compliance costs, while well-designed tax accounting software and e-filing in middle-income countries appear to yield significant reductions in such costs. The WBG studies also documented very high rates of tax inspections and audits (including any kinds of visits, official and 73
unofficial, by tax authorities), which increased compliance costs. The WBG studies emphasise a need to, obtain data from the relevant tax authorities themselves, if practicable, even though this is often difficult (IFC, 2011). Indeed, a lack of access to official tax authority data is one of the reasons why most of the WBG studies are conducted with taxpayers’ data from other sources.
Compliance costs studies specifically focusing on SME firms have been carried out in
Australia (Lignier et al., 2014), Malaysia (Abdul-Jabbar & Pope, 2008), New Zealand
(Ritchie, 2001), the USA (Slemrod, 2004) and the UK (Hansford & Hasseldine, 2012), as well as a multi-country study based in South Asia (GINI, 2014). However, very few of these studies focus specifically on compliance costs related to VAT; this is therefore considered to be a gap in prior literature. Overall, it appears that compliance costs are regressive and the GST/VAT is cause of the highest compliance costs. Internal tax compliance costs can make up the biggest element of total tax compliance costs, usually in excess of 50% of all costs. Within these internal costs of tax compliance, most business time was spent in recording the information needed for the various taxes. This may be of particular concern for SMEs, as it may be the owner doing this activity rather than focusing on the core business (Coolridge, 2012)
3.4.4 Tax Compliance Costs Studies in Bangladesh
Despite the growing problems of tax non-compliance in Bangladesh, to date only two studies have been carried out. The Bangladesh Investment Climate Fund (BICF), managed by IFC, conducted a survey in 2012 about the tax perception and compliance costs for both the formal sector and the informal sector for the year 2011 (IFC, 2013).46
46. Formal firms in this BICF survey were those that are registered with the National Board of Revenue. Thus these firms had a Tax Identification Number (TIN). These firms may or may not be registered as a limited liability company or may operate as a proprietorship business with a trade license. In contrast, informal firms were those that are primarily not registered with the 74
The survey collected data from membership bodies such as the Federation of
Bangladesh Chambers of Commerce and Industries (FBCCI), the Dhaka Chamber of
Commerce and Industry (DCCI), and the Metropolitan Chamber of Commerce and
Industries (MCCI), as it was not possible to obtain registered taxpayer lists from the
NBR, due to privacy reasons. This resulted in 1000 formal sector respondents and 800 informal sector respondents. According to the report, businesses can pay up to 7 types of taxes (VAT, corporate income tax, personal income tax, customs duty, supplementary duty, wealth tax, tax deducted at source and payroll tax) overall. The survey focused on income tax, but did report some findings in respect of VAT. For example, the average monthly monetary cost relating to VAT compliance was 33,801
BDT (450 USD), with large firms spending 96,277 BDT (1,283 USD) and medium sized and small sized firms spending 33,350 BDT (444 USD) and 12,856 BDT (171
USD), respectively. The findings from this survey also demonstrated that it takes a total of 304 hours per month for all types of tax compliance. For a mid-sized firm it takes, between 103 hours and 161 hours per months for paying VAT and CIT, respectively. In comparison, the Doing Business Report (2012) for Bangladesh found that a mid-sized enterprise in Bangladesh takes on average 302 hours monthly to comply with several types of taxes: for example, VAT takes 162 hours and CIT 140 hours. These studies would suggest that in Bangladesh VAT compliance is as great as or similar to that for income tax (World Bank, 2012).
In another tax-related survey in Bangladesh, conducted by CPD in 2012 (CPD, 2014), a total of 262 enterprises were surveyed on a purposive basis from four district areas.
Among those surveyed, four enterprises had not been formally registered for VAT or income tax registration, and so were considered to be non-compliant. The sample
National Board of Revenue. They didn’t have a TIN and a trade license. For those who were registered with the NBR, no income tax returns had been filed in the last 3 years. 75
mainly analysed the general tax behaviour of SMEs, firms from special economic zones and a few large firms. The survey considered the impact of VAT on SME development in Bangladesh and the compliance costs of different taxes (income tax, property tax and
VAT). Unfortunately, only 19% (51 out of 262) enterprises revealed their VAT compliance costs; and of these, approximately 50% (27 out of 51) of SMEs used an annual package VAT system.47Nevertheless, the survey found that mean monthly VAT compliance costs for SMEs were 24,903 BDT (332 USD). However, some capital- intensive SMEs disclosed BDT 20,000 (266 USD) to be their monthly VAT compliance costs. The report itself noted ‘the data could have been affected by small sample bias’
(p. 36).
This survey also found that 75% of the SME respondents and 83% of the large firms’ respondents found the VAT related costs burdensome. According to a few respondents, registration with VAT and spending some money for VAT compliance costs are beneficial for their businesses. The study reported that the legality of business, the access of firms to formal commercial loans and the mental relief of being a taxpayer are the benefits of having a VAT registration. A summary of the major findings of these two compliance costs studies is shown in Table 3.1.
47. Small business ‘consumers’ (i.e., purchasers) at the wholesale and retail level pay a fixed annual amount of VAT, the quantum of which depends on the geographic location of their business, this is known as package VAT. For example, if a small retail shop is based in the capital city, Dhaka, or one of the two major port cities, it would pay 12,000 BDT ( USD 160) per year in deemed VAT. 76
Table 3.1: Earlier Tax Compliance Costs Studies in Bangladesh
Author/Year of Research Results/Main Outcomes consideration/Type methods/Sample/ of Taxes Survey area
Bangladesh Investment Face-to-face Highest compliance costs are for personal income tax Climate Fund (BICF); interviews with (PIT) and corporate income tax (CIT). VAT is second structured highest compliance costs; 2013; questionnaire; The average monthly tax compliance costs are 104,649 CIT, PIT, VAT, SD, 1000 formal BDT (1,395 USD); Overall it takes 304 hours per CD, Wealth tax, Tax businesses with month for total tax compliance. For a mid-sized firm it deducted at Source, TIN and 800 takes 103 hours and 161 hours for paying VAT and Payroll tax informal CIT respectively; businesses; Compliance costs are not very regressive; Dhaka and Chittagong City Tax inspection results in ‘increased tax’, ‘wastage of Corporation Area time’ and ‘higher compliance costs’;
Average 339 days required to resolve any tax disputes with unofficial payments;
Taxpayers’ perception about NBR is below average. Appeals and hearing of a tax assessment were considered to be the two most complicated and costly procedures.
Centre for Policy Mail Survey; Tax related registration cost is 13,500 BDT (180 USD) Dialogue (CPD); including bribe to tax offices; 219 SMEs,39 large 2014; taxpayers Average compliance costs ranges between 20,000 BDT registered with (266 USD) and 240,000 BDT (3200 USD) per month; Income Tax, Property VAT and 4 non- Tax and VAT of SMEs registered SMEs Large firms are more compliant than SMEs. Tax with VAT; related costs are much higher for large firms. 74% of respondents think VAT compliance is burdensome for business development; 4 districts (Dhaka, Chittagong, Bogra 95% of respondents found difficulties in obtaining and Narsindi) VAT refunds; 75% of the respondents think procedural complexity is the main reason for non-compliance and compliance costs.
Source: Authors’ own compilation
Prior international research suggests that tax compliance costs for SME businesses are proportionately high and regressive in nature. However, the Bangladeshi studies reflect different findings (Table 3.1) suggesting that compliance costs are not overly regressive.
Prior literature from developing countries can also fail to establish a significant
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relationship between compliance costs and compliance decisions (Yesegat, 2009;
Abdul- Jabbar & Pope, 2008).
3.4.5 Psychological Costs
Another aspect of the tax compliance costs are the psychological effects. According to
Sandford (1995), three of Adam Smith’s (1776) four maxims of taxation are concerned wholly or partly with compliance costs and include the ‘psychological’ costs of compliance. For example, Smith's second maxim argues that the tax which each taxpayer is bound to pay ought to be certain and not arbitrary (Smith, 1776). The time and the manner of tax payment, and the amount to be paid, ought to be clear and plain to the taxpayer, and to every other person. Any uncertainty about the tax payments can create feelings of helplessness in the taxpayers, which could be argued to be
‘psychological costs’. Smith’s third maxim states that the feelings of ‘inconvenience’ associated with tax compliance may generate some kind of resistance and resentment among the taxpayers. These could be stated as the negative emotional feelings of the
‘psychological’ costs. Smith's fourth maxim contains a clear statement of certain
‘psychological’ elements of compliance costs (1952, Eds.):
By subjecting the people to frequent visits; and the odious examination of the tax gatherers, it may expose them to such unnecessary trouble, vexation and oppression, and though vexation is not; strictly speaking, expense, it is certainly equivalent to the expense of which every man would be willing to redeem himself from it. (p. 362)
Smith also regards the ‘insolence’ and ‘oppression’ of the tax gatherer as potentially more burdensome than the tax itself. Overall, it can be appreciated that the
'psychological' cost of compliance is a multi-faceted notion reflecting many different characteristics. The feelings of uncertainty, powerlessness, inconvenience, trouble, vexation and oppression are ones that many taxpayers certainly might wish to be 78
without. Such feelings can be classified into two sub-sets of ‘psychological’ cost: anxiety and resentment. The first factor, ‘anxiety’, relates to stress, fear and uncertainty.
The second factor, ‘resentment’, concerns invasion of privacy, inconvenience, trouble, vexation and oppression.
Both of these factors are negative emotional responses to the particular fiscal environment that the taxpayer inhabits, although measuring them is problematic. The
Meade Committee’s (1978) report states that the worry and anxiety related to the tax affairs, borne by the taxpayers, are almost impossible to value. It is this valuation issue that is largely the reason behind the paucity of research in this area, even though the cost may be very real for those affected.
Stress is not an easy concept to define or to measure and most attempts to do so have originated from the field of health psychology and behavioural medicine. The literature suggests that some practical and theoretical limitations of measurement of specific stressors exist. For example, there is evidence that people often misattribute their feelings of stress to a particular source when the stress is actually due to another source
(Gochman, 1979; Keating, 1979; Worchel & Teddlie, 1976).
The current World Health Organisation (WHO) defines ‘occupational or work-related stress’ as the response people may have when presented with work demands and pressures that are not matched to their knowledge and abilities and which challenge their ability to cope. Dealing with new legislation and the daily efforts to cope with new rules are also considered to be a type of workplace stress (Woellner, Coleman,
McKerchar, Walpole, & Zelter, 2001). Life events and difficulties both contribute to an individual’s stress (Brown & Harris, 1989). Cox (1978) argues that an individual’s ability to deal with the mismatch between perceived demands and resources is an important factor when assessing stress levels. It is recognised by researchers that
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positive events help neutralise the distress caused by negative events, and that life’s daily hassles are better predictors of stress than major life events (Woellner, Coleman,
McKerchar, Walpole, & Zelter, 2007). Kanner, Coyne, Schaefer, and Lazarus (1980) described concerns about owing money, financial responsibility, fear of rejection, and unexpected company as the daily hassles of life. Epstein (1976) and Kanner et al. (1980) have noted that pleasant experiences and ‘daily uplifts’ can help to reduce and prevent anxiety and stress. Cousins (1976) observed that positively toned experiences (such as uplifts) might serve as emotional buffers against stress disorders.
In the context of compliance costs research, there is limited research into the psychological costs of tax compliance (Woellner et al., 2007). However, some attempts have been made towards a qualitative assessment of such costs. For instance, Diaz and
Delgado (1995) qualitatively measured the psychological costs of taxation in Spain and found that older and retired taxpayers are the category of taxpayers with the higher psychological costs, since they find it more difficult to understand tax law.
Smith (1776) indicted that subjecting people to frequent visits and odious examinations of tax-gatherers may create unnecessary trouble, vexation, and oppression for taxpayers.
According to Smith, vexation is a kind of expense; it is an expense that many taxpayers would be willing to relieve themselves from. Based on this idea, an Australian survey undertaken by McKerchar (2003) found that the experiences of stress and anxiety were real for the taxpayers. The survey asked the respondents to indicate how much they would be willing to pay to have someone else complete their tax return and 29% of respondents replied ‘zero’, whereas 55% replied ‘less than $100’. McKerchar (2003) argued that a percentage of taxpayers choosing not to incur monetary costs in completing their tax returns did not necessarily mean that they had no costs associated with anxiety and stress. Lopes, Basto, and Martins (2012) assessed the psychological
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costs of individual income taxpayers along with compliance costs in Portugal. The study used the ‘classical’ question derived from Smith’s idea about how much Portuguese taxpayers would be willing to pay to get rid of all the care and compliance costs of completing their income tax returns. One-third of the respondents did not answer the question at all and another third stated ‘zero’. These results tend to indicate low psychological costs in Portugal (Lopes et al., 2012). A recent study by Lopes and
Martins (2013) qualitatively measured the stress and anxiety incurred by Portuguese income tax taxpayers when complying with their tax affairs. They concluded that elderly and less educated taxpayers have higher psychological costs. However, due to valuation issues, the study did not consider the monetary value of psychological costs.
In the context of VAT in Ethiopia, Yesegat (2009), in a semi-structured interview-based study, found that psychological costs are a significant component of the total costs of
VAT compliance in that country, although no monetary value was given.
Woellner et al. (2001, 2007) conducted studies in Australia that evaluated psychological costs in a qualitative manner, relating to the behaviour and attitudes of taxpayers. They concluded that using external help decreases the psychological costs for individual taxpayers, but increases the monetary costs of tax compliance. The study also indicated that the absolute valuation of psychological costs is extremely difficult, but not impossible, although they added that, in most cases, it is sufficient to identify taxpayers who incur this type of costs. One measure of psychological costs therefore could be the price people are prepared to pay in order to get rid of the trouble of interpreting and applying the law (Woellner et al., 2001).
The complexity of the tax system and the changes being made to the tax law may increase compliance costs for taxpayers, as well as create anxiety. Therefore, as a result of tax complexity, psychological costs may increase. It is therefore argued that it is
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important to include psychological costs in the estimation of compliance costs.
However, psychological costs are influenced not only by whether a tax system is enforced, but also by how it is enforced. Tax regulators commonly adopt one of two main approaches to enforcing the law: a stricter ‘rule-based’ approach, and a somewhat softer ‘principle-based’ approach (Kirchler, 2007). The first approach is the traditional
‘enforcement’ paradigm, in which regulators view taxpayers as prospective criminals whose potentially illegal behaviour must be detected through regular audits, and punished with strict penalties. The second approach is based on a less strict ‘service’ paradigm, which recognises that enforcement necessarily has a role, but which also seeks to take account of social or community norms that can be utilised to help encourage greater tax compliance through administrative services provided by the tax authority (Alm & Martinez-Vazquez, 2007).
3.4.6 Corruption in Taxation
Perceptions of fairness and corruption have also been identified in the tax compliance literature as a crucial factor (Torgler, 2004; Wenzel, 2003). Feld and Frey (2002) noted that taxpayers show more willingness to comply with the tax law when governments are seen to be fair, not corrupt, and to treat taxpayers respectfully. This willingness to comply with the tax authorities also refers to the degree of satisfaction with public services (Alm, Cherry, Jones, & Mckee, 2010). Kirchler (2007) conveyed the idea that mutual respect and trust between tax authorities and taxpayers have an important role in voluntary compliance. Trust also appears to be related to perceptions of corruption. In
2012 a survey of the European Commission revealed that 57% of Europeans believed that corruption is a major problem in Europe and that bribery and the abuse of power for personal gains were widespread among politicians. Corruption and tax evasion
(intentional non-compliance) are two major problems globally, as these two obstruct
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socio-economic progress in developing countries and erode the welfare programmes of developed countries (Julius, 2006). These two economic delinquencies sometimes occur together and sometimes substitute for one another, depending on the situation and the economic condition of a country. Corruption and taxpayer non-compliance are significantly interrelated and reinforce each other in causing negative effects on government finances, growth and wealth distribution (Litina & Palivos, 2011). The prior literature of developing countries shows that half or more of the taxes that could be or should be collected remain untraced by government treasuries due to corruption and tax evasion (Krugman, Alm, Collins, & Remolina, 1992; Bird 1992; Alm, Bahl,&
Murray, 1991).
Flatters and Macleod (1995) have identified three agents in developing countries which can be involved in corruption: the Minister of Finance (or government or president) who sets the revenue target; the collector who collects the revenue for the Ministry of
Finance; and the taxpayer who pays the tax to the collector. The first agent might take part in corruption by the formulation of complex tax law and policies and the last two agents might be directly involved in corruption and tax evasion. In the case of most developing countries, tax officials can be lowly paid, the monitoring system inefficient, and the taxation system complex. The tax system can be manually operated and the tax collectors might overlook various types of intentional non-compliance activities through bribes from taxpayers. Obid (2004), who has examined the effect of corrupt tax administration on tax compliance, points out that the poorly paid and low morality tax official might tend to maximise personal benefit by colluding with the taxpayers in utilising the complexities of the tax system and the inadequate resources of the tax administration. She further argues that corruption negatively affects the equity and fairness of the tax system, as well as the efficiency of the tax administration. Despite the importance of this topic, very little empirical research has been conducted to date on 83
corruption and taxpayers’ non-compliance in Bangladesh. Monir (2012) identified influential driving forces for income tax non-compliance, being the absence of a tax culture among income earners, the inadequate taxpayer service, the complexities and unfairness with the income tax estimation, the weak enforcement and the negative image of the income tax department. The empirical findings of that study also revealed that corruption is facilitated by inappropriate relationships between self-interested policy makers and rent-seeking income tax officials, and between self-utility maximiser taxpayers and their intermediaries and income tax agents (Monir, 2012). As her study was limited to income tax evasion in the socio-economic and administrative context of
Bangladesh, generalising the findings regarding VAT non-compliance by SMEs is problematic.
This study will explore the two hidden costs (psychological and corruption) of VAT compliance for SMEs in Bangladesh, a developing nation. This thesis will also investigate whether, in Bangladesh, deterrent effects from NBR prosecutions of non- compliant taxpayers increase the psychological costs of other taxpayers or not. Also the extent to which psychological costs are a component of VAT compliance costs for
SMEs in Bangladesh will be evaluated, in order to consider their contribution to SME non-compliance with VAT.
3.4.7 Government Price-Setting Powers
This section will consider how the price setting power of NBR could increase the complexity and therefore the compliance costs for SME taxpayers in Bangladesh. As noted in Chapter 2, the NBR in Bangladesh has the power to determine and set prices through value declaration (in respect of all products) and tariff value (in respect of some specified products). Stigler (1996) emphasises that although monopoly prices may exist in some private sector markets, the government can have the ultimate monopoly control 84
over prices since it can, through legislative power, effectively prohibit substitute price- setters.
The NBR’s price-setting power has implications in policy areas. Assuming taxpayer honesty, government-declared values for products and tariff values, which may be very similar to market prices, could be unlikely to cause economic inefficiencies in
Bangladeshi product markets. However, economic inefficiencies could arise where market prices and declared values and tariffs are very different. In any market which is not purely or perfectly competitive,48 market price is not a single point estimate, but is a
‘representative’ price in a Marshallian (1890) sense. This ‘representative’ market price can be seen as an ‘average’ of price points which are at a given time normally distributed about the ‘representative mean’ price, with some prices at the higher and lower ends of the distribution. This would see the ‘representative’ market price situated between the asymptotes of that distribution. Under normal circumstances, the NBR, as an administrative arm of the Bangladeshi government, may have the incentive to determine a value at the upper end of the range, thereby increasing the VAT paid.49 In contrast, Bangladeshi SME taxpayers may have an incentive to submit to VAT Officers only that receipt or invoice evidence that supports a price at the lower end of the range, thereby reducing the VAT paid.
The greater the information asymmetry between taxpayers and government, the greater will be the variability of ‘representative’ market prices; and the greater the likelihood that any government price or value will differ significantly from a ‘representative’ market-determined price. This will also be the case if there is significant uncertainty
48. Marshall, A. (1921), Principles of Economics, 8thed, London: Macmillan (originally published in 1890). 49. The VAT Rule 5 empowers the VAT Authority to re-determine the value of any relevant goods if the declared value is inconsistent of Sec 5 of the VAT Act’1991. If the extent of value addition is shown in Mushak-1 form is significantly low and if the declared base value is less than the base value of similar goods. 85
about the ‘true’ market price of the commodities traded (that is, because the taxpayer is unable to provide written receipts). For the purpose of value declaration, the supplier
(taxpayer) has to make a detailed declaration in a prescribed form, giving all the information about raw materials with packaging material, the percentage of wastage and the components of value addition. The entitled VAT Officer is legally bound to give the value approval within 15 working days, with an interview with the supplier (producer) if necessary. Despite repeated demand from VAT payers for the time-consuming and complex procedures of value declaration of goods and services, most VAT Officials strongly defend the continuation of this system on the grounds of revenue protection
(Saleheen &Siddiquee, 2013). The value declaration system infringes a taxpayer’s right to self-assessment and also appears to increase the cost of compliance. This may be because taxpayers have to spend extra time collecting the documents for a hearing with the VAT authority, or they may have to take external assistance for preparing the
Mushak-1 form correctly.
Best VAT practices across the world are more focused on under-invoicing to control
VAT evasion. However, in Bangladesh, value declaration has pre-occupied VAT officials more than anything else, at both policy and administration levels (Hossain,
2010; Saleheen, 2013a; GOB, 2014). Without effective internal controls and audits within the NBR (including the VAT Office), the current value declaration, tariff value and price-setting systems in Bangladesh may provide incentives for some SMEs to make side-payments (bribes) or to provide other benefits to local VAT Officers or to the
NBR to obtain favourable treatment. Hossain (2010) argues that the laws and rules related to value declaration have been supplemented by a host of interpretative standing orders from the NBR. The valuable declaration procedure is a unique feature of
Bangladeshi VAT; there is no previous literature about how the value declaration can
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influence non-compliance among the SME taxpayers in Bangladesh. This research aims to address this gap.
3.4.8 Deterrent Effects
As noted in Chapter 1, deterrence effects occur if VAT taxpayers generally comply more with the VAT Law because they see other taxpayers being successfully prosecuted or penalised for non-compliance, and if they are aware of the potential penalties for non-compliance. Deterrence effects, where they exist, are a form of positive externality.
In the present context, externalities may result if the acts or omissions of either government authorities or taxpayers affect other agencies, firms or consumers in such a way that the costs or benefits of that behaviour to the community are not reflected in the relevant market price. Positive externalities exist when the marginal benefits to society or to the community exceed the marginal costs to society (Pindyck & Rubinfeld, 2009).
Thus deterrence effects of successfully prosecuting or penalising non-compliant taxpayers are a form of positive externality, provided the benefits to the community as a whole, exceed the costs to the community of doing so. For example, other taxpayers
(who may be more numerous and, together, of more value, in terms of potential revenue collected) perceive that they too will be prosecuted or penalised if they do not comply with the VAT Law.
According to deterrence theory, the level of legislative compliance is positively related to the level of enforcement and punishment, including penalties (McKerchar, 2003).
The theory specifies that the level of compliance is determined by the level of enforcement and punishment (Loo, 2006). Penalty and punishment by a legal system will communicate to the individual that the legal system takes intentional tax non- compliance as a crime. For some taxpayers, the penalties must be demonstrated in
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concrete sentences that are relevant to their own life situation. The imposition of fines and punishments is a demonstration to the society that the legal system is serious in its attempt to prohibit illegal behaviour such as tax evasion. Therefore, even increasing the penalty or fine may improve the deterrent effect. Similarly, the threat of punishment
(higher penalty rate) is considered a positive strategy for influencing behaviour, as the
Australian Taxation Office (ATO) has a deterrent effect upon taxpayers through the issuing of tax rulings and media releases about the enforcement of tax laws (Devos,
2007).
Conversely, the enforcement and punishment for non-compliance with tax legislation can add to the cost of non-compliance, not only to taxpayers who are caught, but to others who are non-compliant but not yet caught. Not only do punishment and the imposition of fines demonstrate to society that the legal system takes illegal or non- compliant behaviour seriously; but public disclosure of a non-compliant taxpayer's identity and their punishment can affect their reputation (Levi, 2010). The media also has the incentive to report non-compliance with taxation legislation, since such stories can generate public attention (Devos, 2007).
Some taxpayers can be more sensitive than others to such threats and punishments.
According to deterrence theory, those (generally more numerous) taxpayers who are deterred from non-compliance with tax legislation will be in this category. However, at least some of those non-compliant (often high-profile) taxpayers who are successfully prosecuted and penalised will be less sensitive to the threat and level of punishment
(Polinsky & Shavell, 1988, 1989). In a developing country like Bangladesh, where there is rampant corruption among the tax authorities and the policy makers (Monir, 2012), this deterrent effect is likely to influence such practices of high-profile taxpayers.
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Deterrence by punishment has been described as a method of retrospective interference, by holding out threats that whenever a wrong is committed the wrongdoer will incur punishment (Kenny, 1929). Deterrence aims to discourage potential offenders by demonstrating the punishment of convicted offenders (Walker, 1965). The threat of punishment (fines, penalties and imprisonment) may improve taxpayer behaviour, habits of obeying the tax law and excluding the criminal alternative. The New Zealand case of R v Radich (cited in Devos, 2007) is useful to illustrate the purpose of punishment:
One of the main purposes of punishment… is to protect the public from the commission of such crimes by making it clear to the offender and to other persons with similar impulses that, if they yield to them, they will meet with severe punishment. In all civilised countries, in all ages, that has been the main purpose of punishment and still continues so. (p. 201)
However, the empirical evidence relating to the effectiveness of a deterrence effect is mixed, from at least the developed economies, with the observed effects being at best weaker than expected, and at worst inconclusive or non-existent (Devos 2009; Frey,
2003; Ali et al., 2001; Andreoni et al., 1998; Fischer et al., 1992). Some of these weak results may be because the penalties for non-compliance with the law are too low
(Polinsky & Shavell, 1988, 1989). Corruption undermines penalties: with some taxpayers in South Africa believing that their tax officials can be managed relatively easily with the use of side-payments or bribes (IFC, 2008).
The differences could also relate to some methodological shortcomings in these studies.
For example, in his recent study, Devos (2009) acknowledged that his sample of taxpayers was small, as he had interviewed by phone the six taxpayers who had evaded personal income tax. Moreover, his study did not have a control group (that is, of non- evaders) to compare the evaders with. This thesis considers the deterrent effect, if any,
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on Bangladeshi SME VAT payers particularly, noting if there are any differences between compliant taxpayers and those identified as non-compliant.
3.4.9 A model: Complexity, Compliance Costs and Non-compliance
As discussed earlier, the complexity of the existing VAT law and the VAT compliance costs may take a variety of forms. Complexity can have different aspects in Bangladesh, with VAT compliance costs including internal and external costs, and psychological costs. Tax noncompliance, particularly unintentional non-compliance, may be partly caused by the complexity of the VAT law. Therefore, reduced complexity could enhance the ability to comply with the law, and can reduce errors and the risk of innocently incurred penalties. Another potential outcome of reduced complexity could be a reduction of VAT compliance costs. As intentional noncompliance may be partly caused by the high tax compliance costs burden, then less complex VAT legislation might reduce the SME compliance costs burden and the intentional non-compliance. In this context, it is possible to assume that reduction in complexity and compliance costs could decrease the level of noncompliance, both intentionally and unintentionally.
The literature also revealed that a government’s price setting power or value declaration procedure undermines the general self-assessment nature of VAT. This provision may enable corruption between the SME taxpayers and VAT Officials, thereby decreasing the deterrent effect of audits and penalties. The potential relationship of complexity, compliance costs and non-compliance is illustrated in Figure 3.1.
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Figure 3.1: Towards a Model of Complexity, Compliance Costs and Non-Compliance
Intentional ↑Complexity of ↑Non- ↑VAT VAT law Compliance by Compliance costs SMEs Unintentional
Costs to Costs to Government Taxpayer(Monetar NBR(Monitoring Deterrent Monopoly y costs, time costs and Enforcement effect of VAT Price-Setting and psychological costs) Powers costs)
The proposed model can be used to demonstrate the expected relationship between complexity, compliance costs and non-compliance. If all other determinants of compliance behaviour remain unchanged, it can be argued that an increase in complexity and compliance costs would contribute to an increase in the level of non- compliance, intentionally or un-intentionally, by SMEs in Bangladesh. Such an increase in the level of non-compliance may decrease the deterrent effect of VAT and may increase the intentional non-compliance among the SME taxpayers.
3.5 Conclusion
This chapter has explored and analysed the current literature in relation to the complexity of tax law, the compliance costs and the non-compliance of SMEs. The conceptual framework of the thesis uses the non-compliance theory of taxation based on the economic deterrence approach and the social and fiscal psychological approach. The economic deterrence models assume that taxpayers are amoral rational economic
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evaders who would assess the costs and benefits of paying taxes first. However, findings on the effect of each of these factors generally lack consistency, leading to the choice of the social and psychological models. The purpose of the social psychology model is to develop an understanding of human behaviour and attitudes. Social and psychological insights suggest that the taxpayers’ stance is influenced by many factors, including their disposition towards public institutions, the perceived fairness of the taxes and the prevailing social norms. The chapter emphasised that taxpayer compliance behaviour is complex and is influenced by a large number of factors, including economic, socioeconomic and demographic variables.
This chapter also reviewed the simplicity and complexity of the taxation law, tax compliance costs theory and the empirical evidence. Simplicity, or conversely the reduction of complexity in a taxation system, may reduce compliance costs, administrative costs, and thereby improved the levels of voluntary compliance. It was also revealed that only very few VAT compliance costs studies of SMEs were done in developing countries. In terms of empirical studies about VAT compliance costs, the international evidence suggests that in most countries the introduction of a VAT results in significantly higher compliance costs for taxpayers than for other forms of taxation, and that VAT compliance costs are disproportionately higher for small businesses than for large businesses. The literature revealed that the complexity of the tax system and the uncertainty in tax law might create some anxiety in the process of paying taxes.
Therefore, as a result of tax complexity, psychological costs might increase. In the context of compliance costs research, very limited research into the psychological costs of tax compliance was identified.
In addition to providing a framework for the analysis which follows, this chapter has identified a number of key gaps in the scholarly literature concerning the potential
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causes of taxpayers’ non-compliance with VAT legislation, not only in relation to
Bangladesh, but also in respect of other jurisdictions. Whether complexity, perceived or actual, plays a role in explaining taxpayer non-compliance with the VAT Law in
Bangladesh has yet to be investigated. There is as yet no empirical evidence on the extent to which compliance with Bangladesh's VAT Law is influenced by any information asymmetry on the part of Bangladesh’s SMEs. Furthermore, there is also little research into the psychological costs for Bangladeshi taxpayers in complying.
Almost all the empirical evidence regarding the existence of the deterrent effect relates to developed economies, and those results are mixed and are characterised by methodological shortcomings. There is almost no empirical evidence on whether there is any deterrent effect in developing countries such as Bangladesh, let alone in the context of a VAT.
This thesis seeks to address these gaps in the literature with the theoretical basis and understandings presented in this chapter. The following chapter will outline the methodological framework to be adopted for this research.
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Chapter 4
Methodology
4.1 Introduction
Chapters One to Three provided an institutional and theoretical framework for the analysis. The gaps identified in the relevant literature inform the key research questions with which the study is concerned. The purpose of this chapter is to identify the empirical indicators to estimate VAT compliance costs including psychological cost.
This chapter then outlines the data, methodological approaches and research methods to be used in this thesis.
The chapter is arranged as follows. The next section presents the research questions followed by the empirical indicators used in the research. The research methods and the appropriate choice of method for the current research are discussed in Section 4. The data collection methods and the sampling procedure for this research are presented in
Section 5. The ethical issues are discussed in Section 6 and Section 7concludes the chapter.
4.2 Research Questions
The overarching research problem underpinning this thesis is to ascertain why some
SMEs comply with the VAT Law in Bangladesh, and others do not. To do so, this research explores the extent of any associations between the complexity of the VAT
Law, VAT compliance costs and SME non-compliance with the VAT Law in
Bangladesh. The theoretical and empirical literature reviewed in Chapter 3 suggests that:
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VAT payer’s non-compliance is a function of legislative and regulatory
complexity, and legislative compliance costs; and
Legislative compliance costs are a function of taxpayers’ private compliance
costs and psychological costs.
The literature further suggests a positive association between taxpayer non-compliance, legislative and regulatory complexity and the private taxpayer compliance costs
(including psychological effects).On the other hand, there is likely to be a negative association between the taxpayer non-compliance and the deterrent effect. A foundation for this research is to try to estimate the VAT compliance costs of Bangladeshi SMEs, expressed as the following research question:
What are the costs of complying with the VAT Law in Bangladesh for compliant and non-compliant SME taxpayers? (RQ 1)
Compliance costs include three major components, namely monetary costs, time costs and psychological costs to the taxpayers. The discussion in Chapter 3 demonstrated that most of the previous tax compliance cost studies have not tried to measure the psychological costs of VAT. This study aims to estimate the psychological costs in a
Bangladeshi context. Therefore, one sub-research question flows from RQ 1:
What is the value of psychological costs in taxpayers' total compliance costs? (SRQ 1)
The literature review in Chapter 3 identified that there is a lack of research in
Bangladesh concerning the low representation of SMEs in terms of VAT. This research will try to ascertain why some SMEs do not comply with the VAT law in Bangladesh.
The second research question is expressed as follows:
What are the reasons for non-complying with the VAT Law by Bangladeshi SMEs? (RQ 2)
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The literature review also identified that there may be relationships between the complexity of the taxation law and the compliance costs. One of the research objectives was to identify any such relationship between the complexity of the VAT Law and the
VAT compliance costs for SMEs in Bangladesh. Relating to this third research objective is its research question:
Is non-compliance with the VAT Law by some SME taxpayers in Bangladesh a result of the legislation and regulation being overly complex? (RQ 3)
An objective of this research is to examine the potential inter-relationships between the complexity of VAT Law, the VAT compliance costs and the VAT non-compliance; another is to find whether there are other factors contributing to VAT non-compliance by SMEs in Bangladesh. Consequently, the following four sub-research questions will be addressed:
Is SME non-compliance with the VAT Law in Bangladesh due to the costs of VAT compliance being excessively high for these taxpayers? (SRQ 2)
To what extent are the deterrent measures of VAT Law effective to ensure compliance with the Law? (SRQ 3)
Are there other factors which contribute to VAT non-compliance by SMEs in Bangladesh? (SRQ 4)
4.3 Empirical indicators
A number of empirical indicators will be used to addressing the above research questions. The key terms used in the research propositions are taxpayer ‘compliance’ and ‘non-compliance’ (intentional or unintentional); legislative and regulatory complexity; taxpayers’ legislative compliance costs; psychological costs; and deterrent effects.
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In respect of each of these key terms, the empirical indicators used in the analysis are as follows:
1) Taxpayer Compliance: Taxpayers who have paid VAT to the National Board of
Revenue (NBR) and who had no dispute in respect of their VAT payment; or
taxpayers who had had a dispute with the NBR but have subsequently been
vindicated by the NBR, the Tribunals, or the Courts as complying with the VAT
Law.
2) Taxpayer Non-compliance: Taxpayers who have either not paid the correct
amount of VAT to the NBR (as assessed by NBR’s VAT Inspectors) or who
have had a dispute in respect of their VAT payment but who ultimately lost their
appeals through the NBR, the Tribunals, or the Courts. For ethical reasons50,
taxpayers who were still engaged in an ongoing dispute with the NBR in respect
of their VAT payment were excluded from the sample. Non-compliance was
classified as ‘intentional’ if the taxpayer confessed either to the NBR, a Tribunal
or Court that their non-compliance was intentional. In all other cases, taxpayer
non-compliance with the VAT legislation was classified as ‘unintentional’.
3) Legislative and regulatory complexity: Complexity is a relative concept, in the
sense that what one person finds complex, another may find relatively simple.
Financially illiterate and innumerate taxpayers may be likely to find legislation
and regulatory affairs more complex than financially literate taxpayers. The
length of each taxpayer’s experience in working with VAT and filing VAT
returns with the NBR was recorded in the focus group discussions and the semi-
structured interviews (in terms of the number of years).
4) Taxpayers’ legislative compliance costs: Costs measured by the following: the
average annual value (in taka) of accountants’, bookkeepers' and VAT advisors'
50 See, National Human and Medical Research Council (NHMRC) Guidelines at: http://www.nhmrc.gov.au/guidelines-publications (last accessed 8 September 2015). 97
fees paid to ensure compliance with the legislation. Also, the average annual
taka cost (excluding sunk costs), of technology51 (such as, of accounting
software and personal computers) used to produce VAT returns; the value of
time taken to complete VAT returns each quarter; and the average taka value of
the hours spent travelling to the local VAT Office to file returns (given that
many taxpayers in rural areas in Bangladesh are located at significant distances
from their local VAT Office).
5) Psychological costs: An empirical indicator of psychological costs associated
with VAT compliance is the average annual cost per taxpayer of sleeping pills52
or a similar medication used to relieve the symptoms of anxiety or stress
connected with such compliance. The costs of uplifting activities to get relief
from stress are also included as empirical indicators of psychological cost of
VAT.
6) Deterrent effects: One empirical indicator of a perceived deterrent effect is
taxpayers' perceptions (measured on a six-point Likert scale) that previous NBR
prosecutions have been successful in preventing non-compliance with VAT that
would otherwise have occurred. A second empirical indicator is how more VAT
taxpayers have been encouraged to comply more with the VAT Law because
they had seen other (typically high profile) taxpayers being successfully
51 This should be reflected in the taxpayer’s tax accounts, and already adjusted so that relevant costs reflect purely business use, including preparation of quarterly VAT returns. 52 In developed Western economies, people who suffer from the psychological effects of stress or anxiety may self-medicate through alcohol, smoking (eg. tobacco); consult a psychologist or psychiatrist; possibly take prescribed medication; or, in some cases, take drugs that are not prescribed. Because Bangladesh is a traditional Muslim country, Bangladeshis experiencing stress or anxiety tend not to drink. Nor do Bangladeshis typically consult psychologists or psychiatrists, or take prescribed anti-depressants for their stress or anxiety. While some do smoke, the most common, cost-effective way of relieving stress or anxiety for taxpaying Bangladeshis is to take small quantities of sleeping pills, which can be readily obtained on a doctor’s prescription from local pharmacists. There is no equivalent of public medical insurance (such as Medicare) in Bangladesh. If sleeping pills are used in this fashion by a significant proportion of the VAT taxpayer population, there could be external (social) costs which must ultimately be borne by the Bangladeshi government and any external financiers of economic development such as the World Bank. Any estimation of such external social costs is, however, beyond the scope of this thesis. 98
prosecuted or penalised for non-compliance. Another empirical indicator of
deterrent effect is NBR Officers’ perceptions (measured on a six-point Likert
scale) that previous NBR prosecutions have been successful in preventing non-
compliance with VAT that would otherwise have occurred. These NBR Officers
also provided their opinions of the likely net benefit of any deterrence effects;
and
7) Other factors: Empirical indicators of other relevant factors that might
contribute to taxpayer non-compliance were the asset size of the SME (in taka);
the number of years for which the business had operated; the Industry Code for
the industry of which the SME operates; the distance (in kilometres) the
taxpayers must travel each quarter to and from the local VAT Office (as a round
trip) in order to lodge their monthly returns53. Taxpayers' perceptions of fairness
(measured by a six-point Likert scale), which includes the fairness of the VAT
(the tax itself) in Bangladesh, the extent to which the NBR deals fairly with
taxpayers in its administration of the VAT system, and the extent to which VAT
Officers act ethically in the administration of their duties; taxpayers’ perceptions
of the extent to which the administrative system, and the judicial and quasi-
judicial system, abide by the principles of procedural justice in the discharge of
their obligations; taxpayers’ and NBR Officers’ (of varying levels) perceptions
of the extent to which the NBR operates efficiently; and the demographic
characteristics of the person in the SME who was mainly responsible for
finalising the SME’s VAT return (in terms of age in years, gender, and highest
educational level attained).54
53 In part, this was a cross-check against the data provided in relation to the cost of such travel, as noted earlier. 54 Categorised into primary education, secondary education, tertiary (diploma), tertiary (Bachelor’s degree) and tertiary (Master’s degree or higher). 99
4.4 Research Methods
4.4.1 Disciplinary Approach of the Taxation Research
The study of tax policy has been largely influenced by economists (Peters, 1979 cited in
Radaelli 2005, p. 86). However, Everest-Philips (2008) asserts that the role of taxation in state-building requires understanding law, politics, policy, administration, history, and economics along with the technical detail of law, public administration, and business accountancy. Arguing that a common interest in taxation requires a multidisciplinary research interest, Lamb (2005) states that each academic discipline – law, economics, accounting, political science, and social policy – has its own particular set of concerns about taxation, as well as an understanding of what taxation is and how it should be researched.
The disciplinary approach of this research combines primarily those of economics, law and accounting, due to the ‘relationship between the complexity of VAT Law, the compliance costs and the taxpayers’ non-compliance. One of the objectives of this study is to examine the extent to which VAT policy reform introduced by the VAT administration relate to public administration. The research questions involving the complexity of VAT legislation affecting taxpayer behaviour fit into a behavioural research project. This research has a legal aspect as well as pointing out the internal inconsistencies of the VAT Law. All in all, this research attempts to address the research questions from an interdisciplinary approach as suggested by Lamb (2005).
4.4.2 Nature and Approach of the Research
The nature of this study is largely empirical and is based on the data collected from both primary and secondary sources. The main objective is to estimate the VAT compliance costs and to investigate the causes and issues of VAT non-compliance by SME
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taxpayers in Bangladesh. In this way the potential relationship between complexity, compliance costs and non-compliance of VAT Law will be explored. The literature about taxpayer non-compliance has shown that non-compliance exists in different forms and can be observed all over the world. However, the mode, forms, causes and issues of non-compliance differ in accordance with the socio-economic and administrative pattern of each country. Nevertheless, there might be similarities among countries with comparable economic and regional backgrounds. These issues are again subjective and relative. Therefore, analysing the causes of taxpayer non-compliance and the relationship between legislative complexity, compliance costs and non-compliance of
VAT Law is difficult, particularly as there is a paucity of this research area in
Bangladesh.
An in-depth single-country-based case study research approach appeared to be most suitable for the current research. Yin (2003) states that a case study is the most appropriate tool to study any complex phenomenon since it contributes to knowledge about individual, organisational, social, political, economic and other related phenomena. According to Hancock and Algozzine (2006), case study research identifies a topic that deals with an in-depth analysis within a natural context, using multiple sources of information. In this regard, Woodside (2010, p.1) noted that the case study
‘is an inquiry that focuses on describing, understanding, predicting, and/or controlling the individual (i.e., process, animal, person, household, organization, group, industry, culture, or nationality)’. The main purposes that this method serves are description, explanation, prediction and control. Miles and Huberman (1994, p. 25) raise two specific questions, which are important to consider for a case study research: ‘what is my case?’ and ‘where does my case leave off?’ In order to find answers to these questions, Miles and Huberman (1994) suggest identifying a case as a phenomenon that occurs in a bounded context, where the case is the unit of analysis. The researcher has 101
thus identified the ‘VAT non-compliance by SME sector of Bangladesh’ as the unit of investigation, while the causes, issues and actors of VAT non-compliance are considered to be the major areas of inquiry. Consequently, the boundary of the study is the VAT system in Bangladesh.
4.4.3 Mixed Methods
Depending on the nature of research objectives and research questions, either quantitative or qualitative research methods or a combination of these two approaches, can be applied. Whereas quantitative research approaches may lack flexibility because of the standardisation procedures used, qualitative approaches may reveal insightful information about outliers in the distribution that are not highlighted by standardising statistical procedures. Certainly the nature of the investigation in this thesis lends itself more to a research methodology that incorporates both quantitative and qualitative methods.55The purpose of using such a mixed methods approach is to gather data that could not be obtained by adopting a single method.
In light of the research problem, the quantitative method will be used to estimate the compliance costs of VAT. To gain a better insight and a detailed understanding about the potential relationship between complexity, compliance costs and VAT non- compliance, this quantitative method will be supplemented by the qualitative method of inquiry.
It is not so common to use mixed methods within a case study framework because case studies are often considered synonymous with qualitative undertakings. However, The
Commonwealth of Learning (2004) provides that it is possible to employ a mixed
54. While much of the earlier empirical literature on tax compliance costs and tax non-compliance utilised quantitative research methods, more recent studies have used a combination of quantitative and qualitative methods (see, Ritchie, 2001; Tran-Nam & Glover, 2002; McKerchar, 2003; Glover & Tran-Nam, 2005; Loo, 2006; Yesegat, 2008). 102
approach in a case study through the use of qualitative methods to identify ‘hard’ data that offers explanations and identifies causes (deductively), while using quantitative material in an exploratory manner (inductively).Within this research, a number of concepts are identified and explained to build a conceptual framework and determine appropriate theories. Accordingly, a mixed methods approach of data collection and analysis is adopted in the research project to logically answer the research questions.
Creswell and Clark (2007) explain:
Mixed methods research is a research design with philosophical assumptions as well as methods of inquiry. As a methodology, it involves philosophical assumptions that guide the direction of the collection and analysis of data and the mixture of qualitative and quantitative approaches in many phases in the research process. As a method, it focuses on collecting, analysing, and mixing both quantitative and qualitative data in a single study or series of studies. Its central premise is that the use of quantitative and qualitative approaches in combination provides a better understanding of research problems than either approach alone. (p. 5)
The present study has applied mixed methods not merely as a process of gathering data; rather, the entire thesis follows a mixed method approach in terms of data collection and analysis, discussion and conclusion. There are six major strategies of mixed methods: sequential explanatory, sequential exploratory, sequential transformative, concurrent triangulation, concurrent embedded and concurrent transformative strategies (Creswell,
2009). Of the six strategies, this study has adopted the ‘sequential exploratory strategy’, characterised by an initial phase of qualitative data collection and analysis, which is followed by a phase of quantitative data collection and analysis (Creswell, 2009, p.215).
Creswell (2009) explains that the sequential phenomenon strategy is often discussed as the model used when a researcher develops and tests an instrument.
The research was conducted in three key stages. Stage 1 involved focus group discussions with VAT taxpayers (both compliant and non-compliant) and VAT
Officials. Stage 2 involved the mailing of a questionnaire, seeking qualitative and 103
quantitative data from both complying and non-complying SME taxpayers. Stage 3 involved in-depth, semi-structured interviews with NBR Officers and taxpayers in relation to a variety of qualitative and quantitative data. The taxpayers who filled out a questionnaire in stage 2 and who expressed their willingness to take part in an in-depth interview were participants in the face-to-face interview in stage 3. This methodology fits with the criteria of mixed methods as set out by Creswell and Clark (2007):
In a mixed method study, a researcher collects data using a quantitative survey instrument and follows up with interviews with a few individuals who participated in the survey to learn more detail about their survey responses. (p. 11)
In order to address the research questions this thesis utilised a survey of SME taxpayers and semi-structured interviews with SME taxpayers and NBR management. One of the shortcomings of such techniques is that, when people are asked detailed and personal questions (particularly in a taxation context), what they say in reply may well be different from what they actually do. In economic nomenclature, they reveal their true preferences more in what they do, than in what they say (Koutsoyiannis, 1983; Dwyer,
Forsyth,& Dwyer, 2010). As a crosscheck against such responses to interview and survey questions, a documentary analysis was conducted in the thesis. Where possible, documents were examined including taxpayer records, as well as government administrative records and reports. The major steps of the data collection process are illustrated in Figure 4.1.
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Figure 4.1 : Procedures of the Mixed Methods Employed in the Study
Stage 1
Qualitative Method (Focus Group Discussions)
Stage 2
Quantitative Method (Mail survey of SME taxpayers)
Stage 3
Qualitative Method (In-depth semi-structured Documentary interviews with taxpayers and analysis VAT Officials) (NBR records)
4.4.4 The Role of the Researcher
The relationship between the researcher and the participants is very important in conducting successful qualitative research (Holliday, 2007) .Taxpayer non-compliance is a sensitive area concerning private motivations that participants may not feel comfortable to disclose to the researcher. This can cause participants to behave in uncharacteristic ways or withhold or misrepresents their position. It is therefore very important for a researcher to use the experience of his/her relations with people in the research setting as data. This is not just within the ongoing process of improving his/her own relations, but to increase understanding of the culture generally, thus contributing to the whole investigation. In addition, to examine such a sensitive case involving a developing economy a researcher requires strong connection, confidence, courage and
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patience, which have been built through real world experience. Before conducting the present study, the researcher had worked in the National Board of Revenue (NBR) within the Ministry of Finance in Bangladesh as a VAT Official for more than nine years. This prior experience has been invaluable to the researcher, and has an effect somewhat of an insider researcher.
According to Kanuha (2000), insider research refers to a process when a researcher conducts research with populations of which he or she is also a member. Asselin (2003) states that an insider researcher is in a unique position to study a particular issue in- depth and with special knowledge about that issue; he/she has easy access to people and information that can further enhance that knowledge; he/she has in-depth knowledge of many of the complex issues; and he/she can challenge an issue from an informed perspective. As an insider researcher of this research, familiarity with the organizational
(NBR) culture and customs and the professional relationship with many of the organization’s stakeholders (taxpayers) gave the researcher a unique opportunity to gain access to insider information which may have been more difficult for a stranger. The working experience within the VAT department and the NBR made it possible for the researcher to grasp the importance, nature and scope of the inquiry, and this is an added advantage for an investigator. In this respect, Yin (1989) says:
A person must have a firm grasp of the issues being studied, whether this is a theoretical or policy orientation, even if in an exploratory mode. Such a grasp reduces the relevant events and information to be sought to manageable propositions. (p. 63)
It is, however, important to note that, while pursuing the present study, the researcher did not hold any active government position and endeavoured to ensure the research remained free from any kind of conflict of interest and potential bias. As a strategy to avoid bias, the researcher utilised visiting cards from Griffith University, introducing
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herself as a doctoral researcher. This enabled the researcher to have appointments with and access to the respondents without creating any confusion about her role or purpose.
The role as a researcher rather than VAT Official enabled this researcher to have the distance from the subject in order to obtain a better view of the VAT system. The researcher’s work experience and professional expertise with VAT helped her to work as a mediator of language in analysing the relevant documents and interpret the information provided by the participants.
4.5 Data and Methods
4.5.1 Data Source and Methods of Data Collection
The thesis has utilised data from both primary and secondary sources, in order to address the research questions and pursue the objectives of the study. While one of the focuses of the study is to understand the practice of VAT and the legislative complexity of the VAT Law, the use of secondary data in the form of documents was found appropriate. At the same time, the stakeholders’ perception about the complexities of
VAT Law demands the use of primary data. The qualitative aspect of the research thus involves documentary analysis, focus group discussions and in-depth interviews with different stakeholders.
One of the main objectives of this research is the estimation of VAT compliance costs for the Bangladeshi SMEs. Stanford et al. (1989) identified seven major methods of estimating the compliance costs of taxation: highly structured questionnaires and/or interview schedules; semi-structured or unstructured interviews; time and motion studies; participant observation/action research; other types of case study; archival research (using records held by government departments, tax advisors); and simulation or modelling exercises. Among all these methods, contact with taxpayer through face-
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to-face interviews is generally considered to produce most reliable data, as any ambiguities or queries between researcher and respondent can be settled immediately
‘on the spot’ (Pope, 2003). But such interviews may be time consuming and expensive to administer. The data used for most of the earlier studies on tax compliance costs were collected through postal or mail surveys and sometimes the survey data was supplemented by follow up interviews. Such a method has the advantage of covering a large geographical territory with low cost. A web-based survey could be another alternative to collect data: less expensive; and easier data analysis (McKerchar, 2010).
However, in a developing country like Bangladesh, where a majority of SME taxpayers do not the access to internet and literacy level may not be sufficient to manage a web- based data.
On the other hand, a survey of intentional tax non-compliance with non-compliant taxpayers is complicated by the sensitive nature of the topic (Devos, 2009). The threat of penalties, prosecution and stigmatization can induce individuals either to lie about their tax non-compliant behaviour, or to refuse to take part in the study because they wish to avoid answering sensitive questions (Houston & Tran, 2001). A better response rate may be obtained if the respondents are provided with clear and concise instructions during face-to-face interviews, so they feel that their contribution is valued and appreciated and that the survey will be done only for academic purposes (McKerchar,
2010). These considerations led to a self-administered questionnaire distributed via mail to collect data for the estimation of VAT compliance costs and the perception of taxpayer non-compliance. In addition, some questionnaires were personally delivered and collected after three weeks, with two reminder phone calls.
As one of the main objectives of this research is to find the potential relationship between the complexity of VAT Law, the VAT compliance costs and the non-
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compliance with VAT by SMEs in Bangladesh, it was necessary to know the perceptions about VAT non-compliance from the SME taxpayers as well as from the
NBR Officials. Consequently, focus group discussions and in-depth interviews with semi-structured questions were utilised.
The power of focus group discussions as a research tool lies in group dynamics.
Advantages such as synergy, snowballing, stimulation, spontaneity and serendipity can occur as part of a focus group (Stewart & Shamdasani, 1990). As a fast and cost- effective technique for eliciting views and opinions, the focus group discussions have been found to be appropriate for obtaining insights into target audience perceptions.
This method has been used in this research to gather primary data from SME taxpayers and VAT Officials in order to develop the survey instruments.
Similarly, in-depth interviews were chosen for this research as they provide the greatest opportunity for finding out what someone thinks or feels, and how they react to various issues and opportunities (Bouma, 2000). Patton (2002) describes the fundamental principle of qualitative interviewing as being to provide a framework within which respondents can express their own understandings in their own terms. Of the different types of interviews (structured, semi-structured and unstructured), the semi-structured interview was considered appropriate for the research purpose as it allowed the use of open-ended questions to extract interviewees’ ideas while placing some boundaries around the issues being discussed.
4.5.2 Primary Data
VAT as a broad based consumption tax involves an array of stakeholders whose degrees of interaction with the taxing system differ widely. For example, a VAT registered business that collects VAT for the government has to be familiar with all the particulars
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associated with the collection of the tax. A VAT policy maker’s concern lies with the system’s effectiveness and efficiency; a business operator has to grapple with the multiple concerns of lowering the compliance cost while trying to increase competitiveness and minimise the tax payments (Saleheen, 2013). Selection of the respondents for this study has been made with a conscious effort to try to gain insights from key stakeholders:
VAT payers: With VAT, a registered business is a taxpayer, as it collects VAT from its buyers and passes it on to the government. It also claims input tax credits on its purchases. The VAT administration deals directly with businesses in order to implement their VAT policies. VAT payers’ compliance costs, as well as their competitiveness, may depend on the VAT system’s degree of complexity or fairness. The survey used in this study aimed to produce data to increase the understanding about their perceptions about the existing VAT system in Bangladesh. Given that this research dealt with non- compliance data was gathered from non-compliant taxpayers about their VAT compliance costs and their reasons for non-compliance. Collecting data from non- compliant taxpayers through focus group discussion, the mail survey and the in-depth interviews forms a dynamic part and strength of the thesis. It should be acknowledged that obtaining data about non-compliant taxpayer is very sensitive for privacy reason
(Devos, 2009).56 Due to this, VAT payers’ were divided into two groups:
I. The SME taxpayers who had no non-compliance history and were registered
with VAT for at least three years (Referred to as Compliant VAT payers);
56. Devos (2009) conducted a study about personal income tax evaders in Australia to investigate the deterrent effect of penalties and the probability of detection. The personal income tax ‘evader group’ was selected from the ATO’s record of tax returns of three years and from the audit cases. Due to privacy reason ATO was not willing to give the contact details of the tax evaders and Devos finally ran the survey through ATO. 110
II. SME taxpayers who had completed and decided VAT non-compliance cases
against them and had already paid the fines and penalties imposed on them
(Referred to as Non-Compliant VAT payers).
Business Leaders: With VAT, the role of businesses is more crucial than any other stakeholders in the economy as they are a tax collecting agent for the government. As such business leaders (who have VAT registered firms or businesses) represent the trading people to the policy makers and work in collaboration with the government to facilitate business and trade. In Bangladesh, proposals for tax policy changes are sought from business leaders on behalf of their organisations on the eve of formulating the national annual budget.
VAT consultants: VAT consultants from the professional arena were included in the survey with the belief that they would bring a practical perspective of VAT. In
Bangladesh, some of the retired VAT Officials, who had in-depth knowledge and understanding of VAT, now work as VAT consultants for the VAT registered firms or work independently. These retired officers had played a key role during the early stage of VAT in Bangladesh and they have the knowledge to compare the current VAT with the excise system which it replaced. Two retired VAT Officials and two other VAT consultants took part in the focus group discussions.
VAT Officers of both policy and administration: ‘No tax is better than its administration, so tax administration matters a lot’ (Bahl & Bird, 2008, p. 296).
However, in many developing countries, tax administration can be seen as weak
(Brautigam, 2008, p. 3). Also scholars acknowledged that in developing countries, tax administration is the tax policy (Casanegra de Jantscher, 1990). In Bangladesh, VAT
Officers from mid-levels to senior level have the unique opportunity of playing the dual role of policy formulator and implementer of tax policy. Hence, they can be familiar
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with the factors that prompt the existing VAT policy as well as the problems of VAT administration. Thus in-depth interviews were conducted with some senior officials and some other officials participated in focus group discussion.
4.5.3 Stage 1: Focus Group Discussions
In Stage 1, focus group discussions were conducted with SME taxpayers and VAT
Officials about their perceptions of why some SME taxpayers comply with the VAT
Law in Bangladesh, and others do not. The focus groups were conducted in Dhaka, the capital city of Bangladesh because of the respondents’ location. For many of them, the topic being researched was a matter of great interest for its potential to contribute to the improvement of the Bangladesh tax culture and they also considered it an opportunity to share their opinions about the different aspects of VAT with a researcher. However, a couple of VAT Officers declined to participate in the discussions as they thought that they should not talk ‘on the record’ to a researcher.
Because very few participants were fluent in the English language, the discussions were conducted mainly in Bangla, the common language especially among SMEs. The discussions were recorded for transcription and any identifying names or references were removed from the transcription. The confidentiality and anonymity of the recorded data was confirmed by coding participants and not using participant’s names.
4.5.3.1 Discussion Guide and the Participants
To provide structure for the focus groups, a ‘Focus Group Discussion Guide’ was developed (see Appendix C). The Discussion Guide was formulated after careful consideration of the literature presented in Chapter 3 and the overall research questions being addressed. The Discussion Guide was intentionally split into two parts. The first part of the discussion was important because it provided participants with a background.
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The data gathered from these initial questions are also important in order to understand the participants’ knowledge about VAT in Bangladesh. The second part of the
Discussion Guide asked questions relating to the role of audit, penalties and sanctions.
In addition, as identified in Chapter 3, there are some gaps in the literature in terms of the deterrent effect of VAT, and any qualitative data gathered in relation to this particular issue would go some way in considering whether the deterrent effect is an important aspect of VAT compliance.
The questions in the Discussion Guide were important for deriving data needed to design a valid survey instrument for the SME taxpayers in Bangladesh as part of Stage
2. The process of designing a questioning route which moves from the general to the specific is consistent with the approach suggested by Krueger and Casey (2000). In terms of the actual conduct of the focus groups, all participants were asked the same questions as per the Discussion Guide (except for the pilot first group). It was decided to provide participants with a copy of the discussion guide at the beginning of the focus group for the purpose of keeping the discussion on track. This technique is highlighted in the literature as being a ‘seen’ approach (Stewart, Shamdasani, & Rook, 2007, p. 60).
To increase the validity of the data, focus group participants should be representative of the range of people present in the taxpayers’ population being researched. However, complete randomisation is not the goal of focus groups. According to Krueger and
Casey (2000), the intent of focus groups is not to infer but to understand, not to generalise but to determine the range, and not to make statements about the population but to provide insights about how people in the groups perceive a situation.
Focus group participants (taxpayers’ group) were therefore recruited with the help of the
VAT Divisional Officers after receiving verbal consent from the VAT Commissioners of Dhaka city. Other participants (VAT Officials) were recruited by inviting them from
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the field level and policy level. Consequently, participants were divided into three groups: Compliant VAT payers (CT), Non-Compliant VAT payers (NCT) and VAT
Officials (VO).57 By seeking voluntary participation it was envisaged that participants were more likely to be willing to contribute information. This approach is described by
Krueger and Casey (2000, p. 65) as allowing the purpose of the study to drive the participant selection. Chapter 5 provides a detailed breakdown of the participants by age, gender, level of education and VAT related experience.
4.5.3.2 Testing the Discussion Guide
The literature recommends that focus group discussion guides should be tested for validity (Clark & d'Ambrosio, 2003). This is sometimes referred to as ‘pretesting’. The first focus group discussion was treated as a pre-test as the participants were also representative of the types of participants expected in later focus groups. Given feedback from the first focus group, slight amendments were made in later discussions.
Testing for time and flow of questions was also carried out. Given there were only six focus group discussions, the data was analysed manually by the researcher.
4.5.4. Stage 2: Survey
After completing the focus group discussions, a survey instrument (a structured questionnaire)58 was designed with a process that went through three broad stages: first drafting of the questionnaire; pilot testing and revision of the initial draft; and finally the
57. The SMEs taxpayers who had no non-compliance history and registered were with VAT for at least three years (Referred to as Compliant VAT payers, and abbreviated to CT); SME taxpayers who had completed and decided VAT non-compliance cases against them and had already paid the fines and penalties imposed on them (Referred to as Non-Compliant VAT payers, and abbreviated to NCT) and, NBR’s VAT officials from field and policy level and who have been working with the NBR at least for eight years (Referred to as VAT Officials, and abbreviated to VO). 58. Oppenheim (1996) stated that: “A questionnaire is not just a list of questions or a form to be filled out. It is essentially a scientific instrument for measurement and for collection of particular kinds of data. Like all such instruments, it has to be specifically designed according to particular specifications and with specific aims in mind” (p. 2). In order to acknowledge these requirements, a study specific questionnaire was designed for the purpose of this research. 114
content of the survey was submitted to independent readers for checking before commencing the actual survey. The questionnaire was designed to gather both quantitative and qualitative information on factors about VAT non-compliance, and to gather data necessary for the estimation of VAT compliance costs. The survey instrument was designed using mainly closed-ended questions in order to gather numerical data, in the form of information which could be verified against documentation (such as the value of fees paid to professional advisers); in categorical form (such as tax rates applicable to different product categories); or in integer format
(such as taxpayers' ratings of their perceptions on a 1-6 Likert Scale). Other open-ended questions were also included in the questionnaire, to enable the gathering of information which was not readily reducible to numerical form. These types of questions included those relating to taxpayer's perceptions about the integrity of the VAT Officials; suggestions for improving the ways in which VAT in Bangladesh is designed or administered; and suggestions for the other reforms. A summary of the English version of survey questionnaire is presented in Appendix D. Another version was also distributed that was written in Bangla, the official language of Bangladesh. Before the final survey was undertaken 20 questionnaires were sent to SME taxpayers as a pilot survey to determine if the drafted questions were easily understandable to the respondents or not. After a two week period, twelve completed responses were received, being a response rate of 60%. After the pilot test, a few amendments of the survey instrument were made. One important amendment was related the valuation of time spent in complying with the requirements of VAT legislation.59 After receiving the pilot questionnaire, it was found that none of the respondents could answer about the
59. A key issue related to compliance costs is how to value the internal time. Pope (1995) identified at least six methods of valuing taxpayers’ time. These methods include: each individual’s own valuation of time (reported value); each individual’s own valuation, subject to a maximum hourly rate; what taxpayers would pay to be rid of all compliance costs; before tax hourly wage rate; after tax hourly wage rate; and the median value of time as reported by individual taxpayers. 115
valuation of time. Therefore, total hours spent on VAT compliance activities were taken into consideration to measure the time costs. After refinement, the questionnaire was then distributed to SMEs VAT payers from June 2013 to September 2013.
4.5.5 Stage 3: In-depth Interviews
An interview is considered more likely than a survey questionnaire to provide better cooperation and understanding between the researcher and the interviewee.
Consequently, some of the respondents from the mail survey showed their interest in taking part in an in-depth interview with the researcher as part of Stage 3. Among them, participants from the taxpayers were selected to share their experience and expertise about VAT, to better understand the issues of complexity, compliance costs and non- compliance. Also interviews of the VAT Officials who had a minimum of 10 years’ working experience were undertaken. The experience component was to ensure they had sufficient experience to share their critical opinions about the VAT system in
Bangladesh. The interviews were conducted on an individual basis, voice-recorded, and transcribed. The in-depth interviews were completed generally within an hour. Most of the in-depth interviews were conducted in Dhaka due to location.
4.5.6 Sampling
Patton (2002) asserts that the sampling strategy needs to be suitable for the purpose of the study, considering the availability of resources and the constraints being faced. In the words of Silverman (2005): “sampling in qualitative research is neither statistical nor purely personal” (p. 130). Therefore in selecting the appropriate sampling method the researcher had to consider the costs related to data collection, the availability of time and the types of respondents. Given that taxation is a specialist subject (Lamb, 2005), respondents in focus group discussions and in-depth interviews had to have some in-
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depth understanding about the VAT Law and VAT non-compliance. From this point of view, purposive sampling was considered the most suitable for the qualitative part of this research.
A stratified sampling method was used for the mail survey: this method is superior to random sampling because it reduces sampling error. Stratified sampling divides the population into strata groups. A sample is taken from each of these strata using either random, systematic, or convenience sampling. On the merits of stratified sampling,
Sarantakos (2005) stated that such samples are utilised when there is a need to represent all groups of the target population in the sample, and when the researcher has a special interest in certain strata. In this sense, the method is very economical, and offers a high degree of representativeness. Fowler (1984) noted that some degree of stratification is relatively simple to accomplish and it is usually a desirable feature of a sample design.
As mentioned earlier, two groups of SME taxpayers (compliant and non-compliant) took part in the mail survey. For the VAT payers’ survey the sample was chosen from the current list of VAT registered persons held by the NBR. A complete list of VAT registered businesses (as of the beginning of April 2013) was obtained from the central database of NBR. The data obtained from the NBR included total turnovers for the
2010-11 and 2011-1012 financial years, dates of registration, and industry. From this list of potential VAT-payers respondents for this study were selected randomly with the help of the relevant VAT Commissioner of different territorial jurisdictions such as
Dhaka, Chittagong, Rajshahi, and Khulna.
4.5.7 Sample Size
Sample size is important for the reliability of a study. However, this does not mean that large sample size always guarantees a high degree of precision, validity or success in general (Sarantakos, 2005). Bannock (2003) states that for tax compliance costs studies, 117
large scale surveys are obviously preferable where funding allows, though small scale surveys produced results which were broadly consistent with larger scale work.60 For the choice of the desired sample size, Fowler (1984) noted that it is preferable to consider the sample size used by other competent researchers. However, the sample size ought to be decided on a case-by-case basis, considering the different goals to be achieved by a particular study. Sarantakos (2005) also specifies that a desired sample size depends on the availability of time and resources, the homogeneity of the target population, the accuracy required and the aim of the research. Given prior studies and constraints the following were undertaken for Stage 1, 2 and 3.
For Stage 1, the literature suggests the ideal (though not crucial) number of participants for a focus group should be six (Stewart, Shamdasani, & Book, 2007). For this study, a total of 45 participants participated in six focus group discussions: 15 from compliant taxpayers (11 business owners; 4VAT Director of the enterprises), 15 from the non- compliant taxpayers (12 business owners; 3 VAT consultants from the selected enterprises) and 15 from VAT Officials (9 Joint Commissioners of VAT; 6 Second
Secretaries of VAT from the NBR).
For Stage 2, a total of 500 potential (300 compliant and 200 non-compliant SME taxpayers) survey participants were randomly selected from the eligible list (selected through stratified sampling) of VAT registered businesses in Bangladesh.
For Stage 3, Guest et al. (2006) suggest that for data collection using interviews, the minimum sample should be 12 participants and if the sample is highly homogenous, a sample of 6 interviews would be sufficient to enable a meaningful theme to appear. For
60. Bannock (2003), in his paper, “Can small scale surveys of compliance costs work”, noted “that small scale surveys have produced results which are broadly consistent with larger scale work and therefore have particular value in those countries where little compliance cost assessment has been made”. (p. 87) 118
the in-depth interviews in Stage 3, a total of 26 respondents (14 taxpayers and 12 VAT
Officials) were selected from among the taxpayers and VAT Officials.
4.5.8 Data Analysis
Tharenou, Donohue, and Cooper (2007, p. 191) argue that data needs to be analysed using techniques suited to testing the research questions/hypotheses. For the study, the researcher followed a systematic data analysis process of both quantitative and qualitative data, depending upon the stage of data collection.
For Stage 2,the Statistical Package for the Social Sciences (SPSS) software was used for quantitative data entry and analysis. A series of analysis of variance (ANOVA) were used to check for differences between groups (compliant and non-compliant taxpayers) about their perceptions of complexity, compliance costs and non-compliance with VAT.
For Stage 1 and 3, primary qualitative data gathered through focus groups and in-depth interviews was analysed in terms of the research questions. For analysing the qualitative data, the researcher primarily focused on the coding process. The researcher manually coded the qualitative data component for the mixed methods of the study through
‘reading, re-reading, and checking transcribed text to arrive at a series of themes and subthemes, with the description of these themes being presented as the analysis of the data’ (Bazeley 2010, p. 435). Once the coding was completed, the coded information was printed, the content of the data was reviewed, and important quotations from interviews were used during thesis writing.
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4.6 Ethical Considerations
To conduct the study, the researcher considered all the ethical issues guided by Griffith
University.61 Informed consent, either written or verbal, was obtained prior to the interviews and before collection of any documents from the competent authority.
Respondents were informed about what was expected from them. During the interview, the participants were informed about the digital recording by the researcher. All the audio recordings were destroyed once the data had been transcribed. Participants were informed of their rights to withdraw themselves from the interview and from any information collected at that time. To minimise potential risk of harm to the respondents and the researcher, several number of strategies were adopted. The researcher informed the participants that their participation was entirely optional and would not influence or affect their relationship with the VAT Authority. The participants were informed that the person conducting the survey had no influence on relevant VAT cases that were already judicially settled. In particular, the confidentiality and the anonymity of data at all stages were achieved by coding the participant, and not using their names.
4.7 Conclusion
Yin (2009) lists that the five essential components of a research deign: research questions, propositions, units of analysis, the logic of linking the data to the propositions, and the criteria for analysing the findings. This chapter has presented the research questions. An outline of the entire process of carrying out the research is systematically and sequentially discussed. The purpose and nature of the study is stated with justifying reasons for selecting a mixed methods approach. The sample and sample area and the types of respondents of the study are introduced. Data collection
61. Ethical clearance (Protocol No. AFE/03/13/HREC) was granted from Griffith University Human Research Ethics Committee before conducting the research.
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techniques, data presentation and analysis methods are also discussed. This chapter also describe the nature and importance of confidentiality for the study. The following three chapters (5, 6, and 7) will provide detailed analysis of the results of the focus groups, the survey, and the in-depth interviews.
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Chapter 5
Focus Groups Discussions
5.1 Introduction
The preceding chapter gives the research questions and the rationale for undertaking the research using a mixed methods approach. This and the subsequent chapters discuss the results and analysis of the findings of the different research stages of the thesis. This chapter will discuss the results of Stage 1, focus groups, which inform the design and development of the survey questions for Stage 2. These are centred on the participants’ perceptions of complexity, compliance cost and non-compliance with the VAT Law in
Bangladesh.
The remaining part of this chapter is organised as follows. The demographics of participants are presented in Section 2, with the outcomes of focus groups discussions in
Section 3. The summary of the findings are presented in Section 4. Finally, conclusions are in Section 5.
5.2 Demographic Characteristic
As outlined in Chapter 4, the focus group participants for the taxpayers’ groups were recruited with the help of the Divisional VAT Officials of Dhaka city. Other participants (VAT Officials) were recruited from the field level and policy level by invitation. Overall, there were forty-five participants in six focus groups discussions.
Table 5.1 gives the details of the participants by age, gender, level of education and working experience in VAT area.
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Table5.1: Focus Groups Demographics
Age Gender Education Experience(Years) Code No
42 Male HSC 14 CT 1 48 Male MA 11 CT 2 67 Male MA 18 CT 3 40 Male BCom 11 CT 4 46 Male MA 13 CT 5 33 Female MBA 7 CT 6 65 Male MSC 26 CT 7 39 Male BCom 9 CT 8 36 Male MBA 5 CT 9 54 Male Postgraduate 17 CT 10 42 Male MSC 12 CT 11 53 Male BSC 15 CT 12 39 Male BA 10 CT 13 62 Male MSC 28 CT 14 41 Male HSC 11 CT 15 42 Male MSC 11 NCT 1 36 Male BBA 9 NCT 2 39 Male BSC 13 NCT 3 63 Male MA 27 NCT 4 41 Male BBA 10 NCT 5 29 Male BCom 6 NCT 6 37 Male MA 9 NCT 7 31 Female MBA 5 NCT 8 32 Male BCom 7 NCT 9 69 Male MBA 29 NCT 10 52 Male MSC 15 NCT 11 66 Male MSC 27 NCT 12 39 Male MA 10 NCT 13 49 Male MBA 11 NCT 14 44 Male MBBS 11 NCT 15 39 Male MBA 9 VO 1 38 Female MSC 9 VO 2 39 Male BSC (Engineer) 13 VO 3 45 Male MBBS 17 VO 4 43 Female MA 16 VO 5 38 Male MSS 11 VO 6 37 Male MSC 13 VO 7 40 Male BSC (Engineer) 12 VO 8 45 Male Postgraduate 16 VO 9 41 Male MBA 12 VO 10 38 Female MSS 11 VO 11 39 Female MSC 9 VO 12 36 Female MBBS 9 VO 13 44 Male BDS 14 VO 14 43 Male M Com 16 VO 15 Notes: CT: Compliant Taxpayer; NCT: Non-Compliant Taxpayers; and VO: VAT Officials.
In the focus groups, 90% of the participants were aged between 15-64 years of age whereas Bangladesh Bureau of Statistics data states that, this percentage is much lower
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(57.6%)for the total Bangladeshi population (BBS, 2012). However, for the focus groups the youngest participant was over 28 years old. In terms of education, the percentage of focus group participants with a Bachelor degree or above was 90% whereas the national percentage was 9% in May 2010 (BBS, 2010). It appears that participants in focus groups have higher education levels than general Bangladeshi people in general. Consequently, these differences need to be kept in mind through the following analysis.
5.3. Results
The following section details the results of the focus groups. Each question in the discussion guide is addressed in detail, outlining the most common themes that emerged. In addition, the researcher’s observations on how the different groups responded are also included.
5.3.1. Reasons for Complying
The discussion guide’s first question for the participants asked why they thought some
SME taxpayers would comply with the VAT Law in Bangladesh. This question was seen as important as paying taxes or being compliant, each business can exhibit remarkable diversity in compliance behaviour and there was no conclusive answer from the literature of why Bangladeshi SMEs would comply with the VAT Law.
The most common response about VAT compliance was that participants saw civic duty as motivating people to comply with the VAT law, especially from the compliant taxpayers:
It’s our duty as citizens and also our responsibility to The State to comply with the VAT Law as The State is providing us with necessary services. I see paying VAT and comply with the VAT Law as a duty of a business man. (CT 8)
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If you are a citizen of this country, paying tax is an obligation. Similarly, if you are a business owner, paying VAT is your civic duty. (CT 12)
As a businessman, paying VAT is our civic duty. Of course, if we are living in this country and we have some responsibilities towards The State. So, it’s our duty to pay VAT and to comply with the VAT law. (CT 3)
One reason for compliance, can be the provision of public goods (Myles, 2000; Link &
Scott, 2011), which emerged as the second most common theme for compliant taxpayers. In addition, the participants acknowledged that VAT was one the main factors to strengthen The State:
It is essential to consider paying VAT as the price of public goods and services and as our liability for development of our Country. We need to pay the price of state’s services that is provided. If we comply with the law properly, it’s a return to the state. (CT 11)
The State has provided us with some opportunities which enable us to do our business such as infrastructure. Even if you think the State as a company, it has provided some services and facilities for us. We need to pay the price for the State’s services. If we pay the right amount of VAT, it’s a contribution to The State to build its future. (CT 15)
SMEs taxpayers comply with the VAT law and pay VAT to fulfil their duty towards the society and especially for The State which is providing everything for us. This is a give and take relationship. Without paying taxes how we claim facilities from The State? (CT 12)
Some of the participants claimed that they paid taxes to receive better services from The
State, but in Bangladesh some taxpayers do not receive enough public services and do not get sufficient information on how the tax money is spent:
We have frustration over inadequate health, education and other public services, despite paying income tax and VAT. Most of us are aware of the taxes that we are obliged to pay, but after considering that unwise use of taxpayers’ money and in-sufficient return from government as social services discourage us to deposit right amount of taxes. (CT 5)
Alm et al. (1992, p. 37) noted, ‘An increase in the amount that individuals receive from a given tax payment increases their compliance rate, and individuals pay something in taxes to receive government services even when there is no chance of detection and 125
punishment’. A taxpayer’s motivation to pay taxes may include an evaluation of the extent to which the exchange between taxes and services is equitable (Cowell, 1992).
This is consistent with the findings from compliant taxpayers.
In contrast, the most common influence for complying with the VAT by the non- compliant taxpayers was that VAT was seen as a mandatory obligation for businesses and to avoid conflict with VAT Officials. Kirchler (2007) stated that a positive relationship between the tax authority and the taxpayer may influence the level of voluntary compliance. However, in developing countries an antagonistic relationship may exist between these two groups, similar to a ‘cops and robbers’ game (Kirchler,
2007). Tax authorities perceive the taxpayers as ‘robbers’ who try to evade whenever they can and need to be monitored all the time. Similarly taxpayers perceive tax authorities as ‘cops’ and feel it their right to hide. Three enterprise owners asserted that most business persons want to run their business according to the law and to avoid any interference and obstruction from VAT Officials. This was especially the case if a large percentage of their wealth was invested in the business, so it may be very costly if they are subjected to any penalties:
I don’t want any conflict with my local VAT offices and also I want to avoid any sort of legal trouble with the NBR which may be very costly for me. So I try to pay my VAT timely. (NCT 13)
I firstly understand my duty when any kind of tax is mentioned. Paying VAT and abiding by the VAT Law cannot be enjoyable for people but if I can calculate my VAT correctly, paying the rightful amount of the taxes is a good job actually. I feel secure if I maintain a good relationship with the VAT offices. I think some SMEs taxpayers comply with the VAT law to maintain a good relationship with VAT offices and to get co-operation from them. (NCT 9)
Aaron and Slemrod (2004) assert that people pay taxes mainly for two reasons. Firstly, paying taxes is a duty of citizenship rather than the outcome of a cost-benefit calculation; secondly, the law requires payment of taxes, as wilful failure to pay taxes
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warrants fines and penalties. A taxpayer may take into account only the cost of the paying VAT and the expected legal sanction from VAT noncompliance. If the expected sanction exceeds the VAT payment, the person will pay; otherwise, the taxpayer will not. The views from the VAT Officials were consistent with this literature, as they asserted better enforcement and monitoring by the revenue authority to be the most influencing factor to improve VAT compliance:
Civic duty or contributions to The State are not the main factors. The most important things are strong monitoring and enforcement. They are tax fearing people; they are not tax loving people. (VO 3)
In my 15 years of service life with the VAT department, I have never seen a taxpayer want to deposit the right share of VAT. Most of the times they want to avoid our requests to pay VAT. Finally when they are given threat by the VAT Officials about audit, surprise visit or 26 dhara (Section 26)62 of the VAT Law, they got careful and pay VAT. But in most cases, they pay a little more than before, not the right amount. (VO 5)
I don’t understand exactly why the taxpayers’ behaviours are so disappointing when I am very gentle and cool to make them understand to pay right amount of VAT. They are ringing the same bell year after year that their businesses are running very hard. But when I am annoyed and adamant to collect the right share of VAT and visit their business premises frequently, they became compliant. (VO 12)
Audit, penalties and sanctions play a vital role in changing their attitude towards paying tax. It also serves as a deterrent for them. Thus better enforcement and monitoring through more auditing, penalties and sanctions from our part can encourage taxpayers’ more compliant. (VO1)
62. Section 26 of the VAT Law’1991 provides: Any value added tax officer not below the rank of an Assistant Commissioner or any value added tax officer authorized by him in this behalf - (a) shall have the right to enter a place of production, supply, rendering of service or trading or other related houses or premises belonging to a registered or registrable person (b) may inspect production process; and goods in stock, service and inputs and examine related accounts of a registered or registrable person; and (c) may at any time, examine all trading documents including books, files and commercial documents related to value added tax of any registered or registrable person, direct to submit or detain them or to do any other thing necessary for this purpose. 127
Allingham and Sandmo (1972) stated that an increase in the probability of detection will lead to larger incomes being declared. Consistent with this literature, the likelihood of audits, penalties and sanctions appears to affect compliance rates for some taxpayers, especially CTs:
I think, NBR’s effective steps regarding better enforcement of VAT law, strong monitoring and vigilance of local VAT offices and finally the likelihood of audits, penalties and sanctions are very important to make us more compliant. (CT 10)
When I saw the possibility of visits of VAT Officials to my business premises and got information that my business can be audited, I become more careful to any dealings with VAT. (CT 14)
However, the focus groups suggest this may not be the case for NCTs:
I don’t think the enforcement and monitoring of NBR is sufficient to prevent the taxpayers from non-compliance. The frequency of audit is very low in Bangladesh, then why the taxpayers’ will be afraid of audit? (NCT 2)
This implies that the frequency and adequacy of the audits in Bangladesh may be deficient. According to NBR statistics (NBR, 2014) less than 1% (0.07%) of VAT registered businesses were audited in FY 2011-2012.63 It appears the detection of violation of VAT law is infrequent with the low audit rates, so non-compliant taxpayers may not take audits, fines and penalties seriously.
The fourth theme which emerged relating to VAT compliance is religion. When a participant introduced the role of religion, a number of participants added statements which suggested religion could be an important factor in VAT compliance:
As a Muslim, I have to face Allah at The Judgement Day. To me, “Zakat” is for my poor relatives and income tax or VAT is for my country. I should not ignore them. (CT 12)
63. Only 410 audits (0.07%) were done in FY 2011-12 against a total of 534,991 VAT registered units. Of these 410 businesses which were audited, 257 were manufacturing industries, and 167 were others including service rendering units. 128
You can divide your duty into two, duty in terms of you as an individual as a citizen of a particular country, also your duty as a Muslim to be able to help others. Therefore, I am obliged to serve my country. I take paying VAT as my obligation as a Muslim. (CT 6)
In Islam, our obligation is mentioned not only to the religion but also to the country. From the religious aspect, if you don’t give, your life won’t be happy. Whatever you have earned, you should give right share of your income to the country as Income tax or VAT. When you have contributed and not do any tax evasion Allah sees, you are now a clean man. So I always deposit the right amount of VAT. (CT 15)
In my opinion, religious values make people fair and just. It is not only for tax but it is for all forms of life. All of these are part and parcel of religious concepts, as I believe. I think when I pay the right amount of tax I feel happy and get peace in my mind that I didn’t do any dishonesty. (NCT 9)
Some previous studies reveal that one of the possible reasons of taxpayers’ willingness to comply voluntarily with tax laws is their religious values (Mohdali& Pope, 2012;
Torgler, 2003; Welch, Xu, Bjarnason, Petee, O'Donnell, & Magro, 2005; Stack &
Kposowa, 2006). The views from participants may be explained by the strong religious values held by many Bangladeshi (Hasan, 2012) as well as the concept of giving which has been emphasised in almost all religious faiths. For example, Muslims are obliged to pay ‘zakat’ and Christians are encouraged to pay ‘tithing’ to help the needy and the poor. It is possible that the sense of giving that stems from religion drives the same sense to fulfil obligations to the government by paying tax. The findings from the focus group discussions revealed that religious beliefs appeared to have the least influence on taxpayers to be compliant compared to other factors. However, some participants strongly rejected the perceived influence of religious beliefs on taxpayers’ attitudes.
Instead they viewed that paying tax isthe duty as a citizen to the country:
I think, some people may pay VAT because of their duty as a citizen, but paying VAT due to their religious awareness is quite unusual. (VO 3)
Actually, if you ask me from the religious point of view, it is not much! People comply only because of the pressure from government, sometimes from social cause but not religious influence. (NCT 10) 129
Actually, I don’t think religion influences. The government might be the main influence that I pay taxes as a good citizen. I think it is the government that makes us, whether we want to pay or not. It depends on our status of employment, not really on religion. (CT 1)
The final theme which emerged related to the difference between the present VAT system and the excise duty that it replaced. Some of the participants noted that the documents kept for VAT and prepared for monthly VAT returns are useful for other business purposes. VAT was also seen as more transparent compared to other indirect taxes in Bangladesh. However, given that 20 years had passed since the introduction of
VAT, only five out of thirty participants from the taxpayers group, who are mainly aged and experienced with the previous system, spoke about this:
I had the experience of working in the excise system of taxation. VAT is much easier and its mode of operation is more transparent than excise system. (CT 7)
In excise period the Inspectors and Superintendents were the Boss. They were so powerful they could do anything. Many things depended on their sweet will as they had unbridled discretionary power. Business people knew it and wanted to stay outside the excise net. It was better for us to manage everything bypassing the Law. I think, VAT is more trade friendly than excise system. So we try to comply with the VAT law. (NCT 4)
I think VAT improves my business recording keeping, accounting system and my financial system. Compared to excise duty, customs duty and income tax I find VAT more trade friendly. I think VAT accommodates more of business people demand than excise duty. This could be the one reason why we following the VAT law properly. (NCT 10)
The identification of this difference between excise tax and VAT by participants supports the earlier study conducted by Saleheen (2012). His study demonstrated that
55% of VAT paying businesses believed that VAT is more trade friendly than the previous business taxation system. However, the basic knowledge about the potential benefits (cash-flow benefits and managerial benefits) derived from VAT was found to be very low among the participants. Most of the respondents of this research had no clear idea about these benefits and a very few of them, who had the basic knowledge
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about cash-flow benefits, found no-cash flow benefits to their businesses. Some of them informed the researcher that the benefit may be very negligible as they can only hold the cash maximum for 30 days:
Whatever we collect from the consumer, we deposit that within 30 days of our collection. So I don’t think we can enjoy cash-flow benefits from VAT. (CT 5)
This is the first time, I heard about the term. I never thought about these benefits. Do you think our VAT is based on our sales? We have to deposit extra money to The Treasury for achieving revenue target of our VAT commissionerates. (NCT 9)
The discussion suggests that the target-based VAT collection system in Bangladesh imposes an extra burden and brings dis-benefits to the SMEs. Fixing a hypothetical yearly revenue target, rather than actual could negate the reality and put immense pressure on the VAT Officials to achieve the yearly revenue target (Saleheen &
Siddiquee, 2013). Consequently, undermining the actual VAT system, VAT Officials pressurise businesses under their geographical jurisdiction to deposit as much VAT as they can. The consequences of this can lead to excess credits in the current account register of SME taxpayers64:
How can we get the cash-flow benefits from VAT? Even our surplus input tax over output tax is not refunded timely but instead brought forwarded to the next tax period and treated as an input tax credit in the latter tax period. I have so much credit in my account current register that I can manage from my account current register without depositing VAT for next 6 months. (NCT 5)
In line with the credit mechanism of VAT, prior-stage tax is immediately deductible or refundable if it is directly invoiced to a taxable person and uses the input in his/ her business. Tait (1988) notes, “ As VAT is intended to be a tax on consumption and not a tax on business; in principle, all excess of input tax over output tax should be refunded at once” (p. 285). In Bangladesh the desire of governments to increase the collection of
64. It should be recalled from Chapter 2 that excess VAT input tax credits are not refunded directly to businesses; instead they are carried forward to reduce future VAT liability. 131
VAT stands as an obstacle to the realisation of a cash-flow benefit by businesses. The analysis also suggests that there was some confusion among respondents about the concept and the estimation of managerial benefits, although more than half of the respondents acknowledged that VAT improves the record keeping system of their business.
5.3.2 Reasons for Non-compliance
Following the introductory discussion about the reasons for compliance, participants were then asked to discuss the reasons for non-compliance with the VAT Law by
Bangladeshi SMEs. This question generated a high level of discussion and the major themes that arose from this question were perceptions of an extra burden on the business, the unfairness of the taxation system, the complexity of the present VAT Law, the information gaps between the VAT payers and VAT Officials and the corruption of the revenue administration.
For the most common theme, ‘VAT as a burden on the business’, participants tended to identify some aspect of avoiding VAT in the first instance. Some non-compliant taxpayers considered VAT as a burden and extra costs for SMEs. Compliant taxpayers stated that the higher VAT rate (15%), with the supplementary duty and tariff value, made VAT costly to the SMEs taxpayer in Bangladesh. Seven non-compliant participants stated that the VAT rate is very high in Bangladesh and the business owners outside the VAT net are in a better position than the taxpayers within the VAT net. Cash flow appeared to be a big issue for SMEs, and remitting the VAT can be adverse to their cash flow. These various perceptions were used to justify non-compliance:
VAT is an extra cost for my business. I always want to minimise my cost. The VAT becomes a burden for me. (NCT 1)
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I am not paying the VAT from my own pocket. I am collecting VAT from the customers. If I collect it and do not deposit the right amount to the Treasury I can make 15 percent more profit than my business competitors. So why do I have to pay VAT and comply with the Law? (NCT 11)
Do you not think, 15 percent VAT rate and sometimes supplementary duty on my product make VAT so costly and a burden for my business? (CT 8)
Higher VAT rate encouraged the taxpayers’ for aggressive non-compliance. If a taxpayer can successfully evade 15% VAT from his business, what else does he want? (VO 5)
The majority of the participants from the taxpayers group considered the higher VAT rates to be one of the main reasons for VAT non-compliance, which can further exaggerate the cash flow problems that SME can face. There are mixed findings in the literature about the effects of tax rates on compliance. For example, Weck-Hannenmann and Pommerehne (1989) and Pommerehne and Weck-Hannenmann (1996) demonstrate that tax evasion increases with an increase of tax rate. Also, Clotfelter (1983) and
Slemrod (1985) found that the higher tax rate has a significant effect on under-reporting, whereas Porcano’s (1988) study showed tax rates had no effect on tax-noncompliance or underreporting.65
The second most common theme related to non-compliance was procedural justice and the unfairness of the VAT system. In this study, a few of the non-compliant taxpayers stated that the unfairness of the tax system encourages them to engage with tax evasion and tax avoidance schemes. Furthermore, they complained about the attitude of VAT staff affecting fairness in the tax system, including the relationship with ‘big’ business:
VAT Officials are unfriendly, unfair and corrupt. They maintain unlawful relationship with the powerful businesses and give more cooperation to large enterprises - big businesses can pay less VAT than SMEs. Some of the VAT Officials behave so badly with us, that we feel afraid to go to the VAT offices. If I saw less corruption by the VAT Officials, I would actually comply more with the VAT Law and pay more VAT. (NCT 5)
65. Alm et al. (1995), Baldry (1987) did not find any significant effect of tax rates on tax- noncompliance. 133
Businesses that do not file or pay taxes are in a much better situation than businesses that pay regular taxes. Businesses registered for VAT are often subjected to NBR’s audits and inspections but the NBR do not give extra effort for the businessmen who are not registered for VAT. (NCT 4)
I am collecting VAT from my sales. But the NBR never encourage me and give extra effort for me and I can never reach to them. Local VAT office only gives me pressure to pay more VAT unlawfully. (NCT 6)
The literature supports this: when taxpayers find the burden of taxes unfair, they are more likely to evade (Kirchler, 2007). As such, willingness to comply with any law is determined predominantly by the perceived fairness of procedures. According to Tyler and Blader (2000), both trustworthiness between two parties (taxpayers and tax officials), and polite, dignified and respectful behaviour are essential to perceive procedures as fair.66
Corruption also emerged as an influential reason for non-compliance by SMEs in
Bangladesh:
If I saw less corruption of the VAT officials, I would comply more with the VAT Law and pay more VAT. (NCT 12)
Some of the tax officials are so rich and corrupted that is beyond our imagination. You will never believe, a revenue officer gave me the proposal to give him money personally each month and I need not to take the VAT registration as he will manage the VAT office. (NCT 3)
We actually don’t have any options except to give them bribe. I think, if I not give him some money this time, next time he will not do my work and will not co-operate with me. So we compromise with them, pay less VAT than the actual amount. (CT 5)
Taxation and corruption have been widely discussed in the public finance literature. It has been empirically established in a number of studies that the countries with a high level of corruption tend to have a lower collection of tax revenue as a percentage of
GDP (Tanzi & Davoodi, 2000). Le (2007) points out, that corruption and tax evasion
66. The quality of treatment in interactions between taxpayers and tax authorities, such as, respectful and fair treatment with individual taxpayers, act as a positive incentive to encourage voluntary compliance (Tyler, 1990; Job et al., 2007). 134
reduce voluntary compliance with tax laws and regulations, demoralise honest taxpayers, and create an atmosphere of distrust. The same findings were revealed during the focus group discussions. Corruption by tax officials has been advanced as a vital reason of non-compliance in most developing countries (Thuronyi, 2003). The
Transparency International of Bangladesh (TIB) report of 2011 stated that the NBR lost
USD 3 billion in a year and failed to generate optimum revenue due to the tax officials’ involvement in corrupt practices, a high rate of indirect tax and people’s unwillingness to pay taxes due to apparently complex procedures (Saleheen, 2013a). The VAT
Officials acknowledged that corruption does exist, although some of the taxpayers informed that young VAT Officials are less corrupted:
Our taxpayers always love to talk about corruption by the revenue department. They will never agree that they gave 1 BDT to the officials and take the opportunity of more than 100 BDT. Actually they inspired the revenue officials to be corrupted so that they can evade taxes. (VO 13)
I don’t think all the VAT Officials are corrupted. Some of them may be, but not all of them. Comparatively the young officers are helpful and cordial to me. I received remarkable support every time I needed. I can’t say I am not listened to and I am not heard. (CT 3)
The communication gap between VAT payers’ and VAT Officials was found as another important theme contributing non-compliance in Bangladesh. Focus group discussions explored that there is a lack of ‘psychological contract’ between VAT payers and VAT authorities in Bangladesh. The majority of the non-compliant VAT participants stated that they are aware of their duties and they have sufficient knowledge about the VAT
Law but the ‘information gap’ between VAT Officials and VAT payers is sometimes the reason for unintentional non-compliance. Balch (1980) identified that an information strategy (apart from regulations, facilitation and incentives strategy) can be a method that a government can use to change people’s behaviour. White, Curatola, and
Samson (1990) also emphasised that successful communication can increase voluntary
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compliance. However, participants from the VAT Officials opposed this assertion of a communication gap:
I don’t think there is a communication gap between us. We should bear in mind that any tax policy is a technical matter. If the key players in VAT (business people) do not want to communicate with us by themselves, how we will know where is there problem? NBR is organising “VAT Week” since 2011 in its attempt to boost tax collections by creating awareness and by reducing any kind of information gap from taxpayers’ corner. (VO 1)
The discussion and comments made by the respondents demonstrate that there could be multiple reasons for noncompliance by SME VAT payers in Bangladesh. The VAT
Officials stressed that generally SMEs taxpayers do not comply with the tax law and do not pay the right amount of VAT to obtain their extra business profit. In comparison,
SME taxpayers stressed that higher VAT rate, an unfriendly attitude by VAT offices, corruption, and red tape are the main reasons for non-compliance. Moreover, some of the non-compliant participants said that they are aware of the VAT that they are obliged to pay, but justified non-compliance as they considered that the government was not using taxpayers’ money wisely. Also they thought that taxpayers are not getting sufficient return from the government in terms of infrastructure or social security schemes:
I don’t think, taxpayers’ are getting sufficient return from the governments. Look at our daily hassles like poor infrastructure, traffic, and law and order situation. What government is doing with our taxpayers’ money? (NCT 11)
I believe in give and take policy. We are paying taxes and government is giving us nothing special. We, the taxpayers, don’t know what we are getting in return of paying taxes. (NCT 13)
The literature also showed that taxpayers will evade less if they believe that the government is spending what government should spend on the public goods and they are receiving from the government what they should receive (Kirchler, 1997).
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Accordingly, it appears that non-economic factors may be contributing to taxpayers’ non-compliance with VAT law in Bangladesh.
5.3.3. Costs of VAT Compliance
To explore the role of compliance costs with VAT non-compliance, the participants were asked to discuss their thoughts about VAT compliance costs issues in Bangladesh.
Some non-compliant taxpayers considered VAT as a burden and extra costs for SMEs.
They also added that the higher VAT rate (15%) with supplementary duty and tariff value make VAT costly for SME taxpayers. Consistent with the literature, many of them believed that the complexity of the VAT Law affects the SME taxpayers more than it affects the larger taxpayers and this complexity increases the cost of complying with the VAT laws. These factors together were seen as increasing non-compliance.
However, during the focus groups, awareness or consideration of VAT compliance costs seemed to be low among the participants. A majority of participants admitted they had not considered compliance costs relating to VAT before, and they usually considered the costs relating to tax as just part of running a business. They also generally bundled together the costs associated with customs duty, income tax and
VAT. Nevertheless, some CTs argued that while they could not calculate an exact figure about their VAT compliance costs, they nevertheless felt that VAT compliance costs were higher than compared to other taxes:
I never thought about these costs in this way before; I basically calculate all the costs related to customs duty, income tax and VAT together. (CT 10)
My accountant always shows all taxation costs together at year ending balance sheet. I never calculate VAT compliance costs separately from other taxes. (CT 5)
These observations re-enforce the problems associated with trying to estimate compliance costs. A majority of the participants agreed that they could not give exact 137
calculation of their VAT compliance costs, but thought their VAT advisor or VAT consultant would calculate such costs. Most of the participants stated that they employed a VAT adviser and/or accountant to assist with VAT, which necessarily increased their VAT compliance costs. However, some of the participants commented that their costs are greater than 2% of their annual turnover; others claimed that it might be more than 1% of their annual turnover but not more than 5%. Obviously these are not exact figures and are at best rough estimates. However, most of the participants from both groups claimed that payments to external advisors make up a large component of their VAT compliance costs:
I think the largest contribution in relation to VAT related costs are the salary of the staff or VAT consultants. When a business owner does his VAT related works by himself the VAT compliance costs become very lower. VAT compliance costs of my business are insufficient as I don’t mind to do VAT related works by myself. (NCT 1)
Some of the taxpayers stated that SMEs in terms of compliance are mainly relying on themselves, their tax advisors, professional bookkeepers and accountants or the common practices of the market. Engaging VAT advisors is considered as an effective measure in SME’s tax compliance, as studies suggest that tax advisors can act as advocates to their clients and also as intermediaries to the government (Tan, 1999).
Some taxpayers stressed that the NBR should take the initiative to educate taxpayers to make them (taxpayers) confident to do their VAT related works by themselves and to reduce their VAT compliance costs:
Though I never thought about VAT compliance costs, but I understand professional VAT experts, bookkeepers and accountants are too expensive. If NBR gave us training about VAT law, we would not need to hire professionals. This would decrease our compliance costs and would make us more compliant. (NCT 3)
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Jenkins and Forlemu (1993) argue that reducing compliance costs through simplification of the tax system and enhancing taxpayer services would reduce the level of taxpayer non-compliance and increase voluntary compliance. Although 73% (11 out of 15) of the compliant VAT payers agreed that SMEs would pay the correct amount of
VAT if the costs of complying with VAT were less, some of them argued that some
SME taxpayers would never pay the correct amount of VAT even if VAT compliance costs were less:
If VAT record keeping was less complicated and less time consuming with a simpler payment system, the monetary compliance costs and time related costs would be lower than before and business people would be willing to collect and deposit the right amount of VAT. (CT 6)
Taxpayers who want to pay less tax will never pay more tax if compliance cost is less than before. They will search for new ways for tax evasion. Paying more or less never depends on tax compliance costs. It depends on tax morals. It should come from within. (CT 7)
As discussed earlier in Chapter 3, the psychological costs of taxation may be an important component of tax compliance costs. During the focus groups, there were some statements which suggested that participants from the taxpayers’ group had not previously considered the potential psychological costs of VAT:
I think there are a lot of taxpayers out there who don’t even know the exact definition of VAT compliance costs let alone psychological costs of VAT. (VO 5)
I think even 5% of our taxpayers never heard about the psychological costs of taxation. (NCT 3)
I believe I have tension about tax and VAT return. But the term ‘psychological costs of VAT’, I have heard it first time in my life. (CT 11)
In Bangladesh, VAT related research is mainly limited to the key features of
Bangladeshi VAT and to the revenue aspects of VAT only (Faridy, 2011; Saleheen,
2013). Thus, the very first responses made by the participants were not surprising.
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However, further questioning revealed that complexity of the VAT law was considered one of the main reasons for psychological costs of VAT by most of the participants (CT and NCT). Indeed, all the price declarations, complicated rebates and refund procedures requiring many books to be maintained to increase both VAT complexity and stress for the SMEs. To reduce these complexities, SMEs have employed a VAT advisor and
VAT accountant to assist with VAT obligations. Taking assistance from the advisors or accountants appeared to give them some relief from tension or anxiety but increased their VAT compliance costs in monetary terms:
As VAT Law is complicated in Bangladesh, I usually take help from the VAT consultants. An experienced consultant can help us in respect of price declaration and refund mechanism properly. So their fees are very high. I don’t mind to pay higher salary to VAT consultants’ as they are helping me to get a hassle free business life. I can concentrate more on my business now. (CT 8)
My VAT advisor looks after everything about my VAT affairs and all the costs related to VAT. But I think, the extra cost related to VAT is higher than other tax related payments. Although my advisor is helping me to keep away from tensions and anxiety, I think I would have invested more money into my business If I didn’t have to pay my VAT advisor.(CT 4)
However, it was interesting that a few respondents (4 out of 30 taxpayers) specified that taking assistance from the external advisor did not help them to reduce their stress and anxiety about VAT matters:
VAT Officials and VAT Consultants both are the same; they only try to empty our pocket. I feel unsafe as long as my consultant cannot give me a clearance letter from the NBR. (CT 11)
The discussion then extended to explore the role of VAT compliance costs with compliance decisions. Some non-compliant participants considered that higher VAT compliance costs have an impact on tax compliance attitudes; although most of them
(12 out of 15) agreed that there are other factors that influenced the compliance decision. It appeared that the positive attitude of VAT Officials’ towards SMEs was 140
considered an important factor for compliance. The majority of the VAT Officials (12 out of 15) argued that the threat of punishment, fines and penalties, cancellation of VAT registration, the likelihood of audits and surprise check-up by VAT Officials are more influential factors for compliance decisions compared to compliance costs:
It’s not complexity of VAT Law and compliance costs. Significant promotion of the NBR’s prosecutions of non-compliant taxpayers increases psychological pressure among other SME taxpayers and therefore increases voluntary compliance and enforced compliance among other SME taxpayers. (VO 13)
Compliance cost is not a leading factor about paying taxes. There are other factors with compliance costs. Audit, penalties and sanctions play a vital role in changing their [taxpayers] attitude towards VAT non-compliance. They also serve as a deterrent to them. So after auditing, penalties and sanctions taxpayers have been exposed and they will give a second thought to being intentionally non-compliant. (VO 11)
Audit can make the taxpayers realise if there is any weakness in their understanding and record keeping for VAT. Again, penalties and sanctions have deterrent effect for the taxpayers concerned and other taxpayers. The result is a better understanding and better compliance of VAT Law. (VO 10)
Although the literature suggests that the lower the VAT compliance costs the higher the expected degree of voluntary compliance (Yesegat, 2009), almost all the VAT Officials disagreed with this. Strong beliefs in paying VAT and positive attitudes towards tax were emphasised as the dominant factors to increase voluntary compliance rather than reducing compliance costs:
I think, some SME taxpayers in Bangladesh naturally deposit the correct amount of VAT. They are compliant regardless of higher or lower compliance costs. But they are in minor group. Majority of the taxpayers in Bangladesh are associated with creative non-compliance. They don’t believe in tax paying culture. (VO 5)
On the other hand, compliant participants claimed that compliance costs would have a positive relationship with VAT non-compliance. Most of them believed that larger firms do not bother about compliance costs as they have different strategies to evade VAT.
However, evidence demonstrates that larger firms appear more compliant with tax laws 141
due to better internal controls, proper accounting systems and higher tax knowledge as compared to SMEs (Juahir, Norsiah,& Norman, 2010).
A few of the non-compliant taxpayers admitted that unfairness in the tax system increases compliance costs for the taxpayers and that reducing corruption is more important than compliance costs. Indeed monthly bribes to the VAT Officials increase
VAT related costs. This corruption encourages taxpayers to undertake VAT evasion and
VAT avoidance. Taxpayers also identified that VAT authorities’ attitude, the fairness in the tax system, and corruption are all more important than compliance costs:
VAT Officials are unfriendly, unfair and corrupt. They maintain unlawful relationship with us and when give them bribe they give us more cooperation. Then we can pay less VAT than before. It’s a give and take relationship. But, if I saw less corruption by the VAT Officials and if I need not to pay them extra money, I would actually comply more with the VAT Law and pay more VAT. I think, corruption increases the compliance costs of my business. (NCT 5)
If I notice less greed by the higher VAT Officials and Local VAT administration, I would be willing to pay the correct amount of VAT. To me, corruption is more important than higher compliance costs. (NCT 4)
Supportive treatment of taxpayers by tax authorities and trust of taxpayers towards tax the authority are important for voluntary compliance and to reduce unintentional non- compliance (Kirchler et al., 2008). Using Swedish individual survey data to understand
Swedish people’s perceptions about tax evasion, Hammer, Jagers, and Nordblom (2009) demonstrated that distrust of the tax authority by citizens and perceptions of corruption can be very important determinants of perceived tax evasion. The findings from the focus groups support the literature in that reducing corruption of the VAT Officials could reduce a considerable amount of VAT compliance costs and improve overall compliance.
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5.3.4 Complexity and Non-compliance
The next question explored the notion of complexity in relation to the non-compliance of SME taxpayers in Bangladesh. Complexity of the VAT Law was considered one of the main reasons of non-compliance by many of the taxpayers’ participants. The compliant taxpayers expressed their opinion that VAT Law in Bangladesh is very complex and difficult to understand. However, few compliant participants stressed that they cannot cope with the changes in the law. It was identified that price declarations, complicated rebates and refund procedures requiring many documents to be maintained make the VAT Law very complex and costly for the SMEs. Compliant participants also pointed out the complex tax system, multiple rates of VAT, highly complicated language and frequent changes in the VAT Law, all around the financial year discourage taxpayers from complying with the VAT law.
The multiple VAT rates, frequent changes in VAT law and its highly complicated language make the law complex. The VAT law has given discretionary power to NBR and VAT Officials to exempt any goods or services for any special purpose to, fix tariff value of any goods for the assessment of VAT, to select goods or services for withholding and advance payment of VAT or to determine turnover threshold and bring any goods or services under VAT irrespective of their turnover. These discretionary powers are misused by the NBR Officials. Continuous changes in the law also make the VAT Law complex. (CT 5)
I am generally so caught up in running my business, often until late each night. I have little time for the seemingly costly bureaucratic processes required to comply with VAT obligations. How will the SME businesses like me deal with the VAT law? I cannot hire a VAT accountants or lawyers to ensure that they get things right. You have to make the system a lot simpler for us if you expect us to be able to comply easily. (CT 9)
Some taxpayers explained that VAT Officials’ conduct added to the complexity due to their lack of in-depth knowledge about the law. Interestingly, VAT Officials claimed that although the taxpayers are sufficiently aware of their liabilities, they can be
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unaware about the VAT incentives such as input tax credit, cash-flow benefits, and improved record-keeping benefits:
SMEs taxpayers believe that they are only paying VAT. Most of them don’t have a clear idea that they are only collecting VAT as an agency from the customers. They are also unaware of the VAT incentives that they are enjoying from the NBR. They should think positively about the incentives or the opportunities that the government provides for SMEs. Also, thinking negatively about paying the VAT makes the law complex and unfriendly for them. (VO 3)
Both compliant and non-compliant VAT payers identified that sometimes the law itself, the rules, office orders and Statutory Regulatory Orders (SROs) are inconsistent and contradictory. However, the majority of non-compliant participants expressed that the
VAT Law in Bangladesh is not very complex and not difficult to understand. Non- compliant taxpayers indicated that if someone gives the extra effort to understand the
VAT Law and tracked the changes, then the law can be understood:
The VAT Law is not as complex as we think. If we have sufficient tax education and we give some extra effort to understand the VAT Law, the VAT Law seems easier to understand for the SMEs. (NCT 8)
A majority of VAT Officials agreed that the VAT Law in Bangladesh is reasonably understandable. This may be because the VAT Law is drafted by the VAT Officials and they work with the law consistently. In contrast with the non-compliant participants and the VAT Officials, the compliant taxpayers stated that VAT law was complex.
Cnossen (2011) noted that for a tax like VAT, which is based on voluntary compliance, unambiguous legislation, simplicity and clarity of language is essential for effective implementation. Saleheen (2012) argues that taxpayers’ perception of the simplicity and clarity of VAT rules can influence the level of voluntary compliance in Bangladesh.
Many taxpayer respondents complained that the legal terminology of the VAT Law is not self-explanatory and cannot be understood by general taxpayers other than VAT
Officials and VAT practitioners:
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I have been looking after my VAT related activities for last 8 years. I found the legal terms of the VAT Law is very complicated and sometimes the higher VAT Officials couldn’t answer my questions properly. I couldn’t make myself satisfied with their explanation. (CT 9)
My VAT advisor is very experienced but sometimes he also claimed that he couldn’t cope up with the changes of the VAT law. It is really frustrating that we have to go through so many words and so many technical languages. If this is the situation of an experienced taxpayer, then what about a general taxpayer who can’t afford to hire a VAT advisor? (NCT 5)
The main causes of compliance complexity were found to be the ‘volume’ of materials required to be read rather than its actual words and technical language. Other causes identified included the volume of regulatory orders to remember and the number of forms to be filled out for monthly filing. This can be supported by the fact that from
July 1991 to June 2013, the NBR issued about 600 statutory regulatory orders (SROs),
150 general orders (GOs) and a host of explanatory orders to administer the VAT.
Furthermore, there were so many amendments, repeals, and replacements that sometimes even the VAT Officials find it difficult to keep track:
I agree with the taxpayers that sometimes the changes of VAT law are so frequent that less experienced VAT Officials may be puzzled by the changes. (VO 11)
A recent study by Saleheen (2013c) found that the written orders or SROs and the superior’s oral orders are sometimes inconsistent. This means inconsistency can complicate matters for SME taxpayers to comply with the VAT law, particularly if they have insufficient means and financial strength to seek assistance from the VAT consultants. In addition, some SME taxpayers may not be sufficiently educated to handle VAT matters. This technical complexity can affect taxpayer ability to comply and take advantage of positive attributes of VAT:
I am committed to comply with the VAT law. But the complexity within the law makes sometimes impossible to follow the law properly. Sometimes I am not
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interested to claim refund as the procedures are so complicated and time consuming. (NCT 3)
Some of the non-compliant participants also stated that they are not interested in filling for VAT refunds and other benefits to avoid the hassles associated with the requirements of excess documentation and complicated procedures. In Bangladesh, a
VAT refund is not possible unless the whole value chain is VAT compliant. Without taking input from a ‘registered’ supplier, one cannot claim the VAT refund benefit against its input VAT. This lack of VAT credit may expose SMEs to double taxation or tax cascading. A study conducted by World Bank Group (2013) also found that in
Bangladesh the average time taken by the VAT office for processing refunds was a minimum of 36 days. Also 36% of respondents to that survey reported that they didn’t claim refunds as the procedure was too complicated and time consuming (WBG, 2013).
In this study, participants from both groups of taxpayers (CTs and NCTs) commented that NBR does not provide sufficient induction or educational programs for SME taxpayers to raise awareness and to inform them of changes in the VAT law. Some of the compliant and non-compliant participants raised the point that VAT Officials should be more knowledgeable and should have clear conceptual understandings about the
VAT Law:
The NBR and local VAT offices are not informing us enough about the VAT Law. We do not know about our responsibilities and the new things about the VAT Law. To be honest it is (the VAT law) changing very frequently, so it is hard for us to track changes. If the VAT authority does not inform us properly about the changes in the VAT Law, how can we comply with the Law properly and accurately? We want to comply with the VAT Law but the communication gap between taxpayers and the VAT offices makes us unintentionally non- compliant. (CT 15)
Lewis (1982) reported that the education necessary to understand tax laws is unreasonably high for a general citizen. For example, assessment of various UK tax laws based on a formula to assess required reading comprehension levels determined
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that thirteen years of schooling was required, whereas the average citizen had nine years of schooling. Lewis (1982) also found that the USA tax law required twelve and a half years education, and the Australian system needed seventeen years.
In summary, the focus groups demonstrated that the compliant SMEs overwhelmingly confirmed that the complexity of the VAT Law is an important factor for non- compliance. However, this perception was not matched by the non-compliant SMEs and
VAT Officials.
5.3.5. Deterrent Effects
The final question in the discussion guide was designed to gain specific responses about possible deterrent effects of government enforcement on tax compliance or non- compliance.
During the focus group discussions, whenever respondents were asked to share their basic ideas about possible deterrent effects, most taxpayers expressed little understanding about the concept:
I think the majority of the general taxpayers have no idea. There’d be a small portion who understand it but I think it might be as high as 90% have no idea. (CT 9)
You have to assume that most of us know nothing about deterrent effect of taxation. (NCT 5)
I think there are a lot of taxpayers out there who don’t even know the exact definition of non-compliance let alone deterrent effect. (VO 5)
In comparison, participants from the VAT Officials group could contribute comprehensively about the topic. From the discussion, the most common themes emerging from this question, in order, were connection with NBR and political parties, lengthy judiciary processes, and ineffective audits.
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The first theme which participants recognised in relation to the deterrent effect was the association of business owners with the NBR and political parties. In Bangladesh, politics is dominated by ‘big money’ (mostly unaccounted for), ‘goons’ and people with little background and training in formal politics (Khan, 2003). It has been reported that the party that has the greatest business support can influence the general elections by the distribution of illegal money among the poor voters (Meisburger, 2015). Buying political influence and buying votes are common manifestations of political corruption in many countries including Bangladesh (Ahmed, 2003). Given that money is a requirement for being active in politics and participating in elections, businesses are invited to join the mainstream of politics, which gives rise to the notion of 'Businessman
Politicians' (Me'ny, 1996), which is also the case in Bangladesh. Tasnim (2007) demonstrates that the percentage of business professions among the members of parliament has increased from 24% in 1971 to 61% in 1991 and remains constant at
60% in 2001. This concentrated representation can lead to benefits being provided to the rich. Similarly, civil service employees view public service as an opportunity for self- enrichment, particularly with side payments to public sector officials whoare poorly paid (Khan, 2003). Moreover, a civil servant may engage in corrupt activities in an effort to meet personal obligations to members of his immediate and extended family
(Alm, 1989; Gould & Mukendi, 1989). In Bangladesh, the extended family places significant pressure on the civil servants, which may lead them to engage in corrupt and nepotic practices. Bureaucrats are believed to exploit their public positions to generate benefits for themselves, their families, and their ethnic or social cleavage (cf. UDAMA,
2013).
There can also be interaction with corrupt officials and entrepreneurs, which promotes the strengthening of organized crime (Levin & Satarov, 2000). For instance, a business person who evades VAT is at the mercy of a VAT inspector and becomes an easy target 148
for demands for bribes in exchange for promises of protection. Official corruption, particularly through bribery, reduces the likelihood of punishment and consequently the effectiveness of punishment as a deterrent (Moscos, 1998). Comments from participants highlight the interaction:
How can you say a deterrent effect exists in Bangladesh? Political connection and corruption by civil servants allow inefficient producers remain in business. This business group motivates government to pursue perverse tax policies and provide opportunities to civil servants and politicians to enrich themselves through extorting bribes. (NCT 12)
Some businessmen maintain political affiliation to keep a monopoly in the business sector. They take extra benefit during the annual budget. The payment of bribes to the right Ministers and Officials can help them to mitigate their unsolved issues very quickly. (NCT 9)
Civil service employees view public service as an opportunity for self- enrichment. Civil service positions should not be used as a reward for businesses’ illegal support, political support or negotiated for bribes. Incompetent, unqualified and unprofessional politicians and civil servants are significantly responsible for insubstantial deterrent effect. (CT 10)
The Global Competitiveness Report (GCR) 2014-2015,which surveyed 77 Bangladeshi business executives, found that the key factors hampering the country’s business competitiveness was a politically ineffective parliament, political corruption, burdensome government procedures, and improper government and business relationships. The report argued that for this to change, accountability and ethical standards for politicians are needed.
During the focus group discussions, some taxpayer participants indicated that in the early stages of business registration, expenses are considerably higher in Bangladesh.
They described how creating a business requires permission from about 50 officials of several departments. Such expenses included bribes to the government officials. When government regulation imposes significant costs and time on a business, the entrepreneur may try to minimize these costs and time by paying bribes to the right 149
politicians and members of the enforcement community. The bribe is expected either to exempt the business from the laws and regulations or to have the individual's enterprise taxed at a lower rate by special orders from NBR. Political and bureaucratic corruption can be seen as primarily rent-seeking behaviour, which is directly related to the level and extent of government activity in the economy (Mbaku, 2008):
I think, to extract extra income a corrupt bureaucrat always helps private entrepreneurs. With the help of corrupted bureaucracy and affiliation with political parties, some businesses are able to capture and maintain monopoly position in the economy. (CT 1)
The habitual bias of the NBR Officials towards some businessmen makes us unsecured. Not having found enough co-operation and legal protection from NBR, we are obliged to seek special arrangement by buying unlawful services from NBR officials. (NCT 9)
However, not all the government officials were blamed by participants during the focus group discussions. Some participants stated that pressure exerted by politicians of the ruling parties is sometimes unavoidable for civil servants:
I think we should not only blame the government officials. Use of a public officer for one’s (businessmen politicians) private interest is a common practice in Bangladesh now. This conflict of interest exists when a member of the Parliament or a member of his family or a friend or a partner or a contributor to his/her election expenses does have a business. (CT 5)
Why do we talk only about the civil servants? Political inference everywhere in civil service creates a lack of confidence in public officials at different levels. In the absence of guarantees for posting and promotions, the officials become more susceptible to the temptations of bribe taking. They take the motto that as long as they have opportunities to earn extra money, they will earn. Who can say, what will happen tomorrow? (NCT 2)
From these comments and discussions it is evident that the deterrent effect appears to be adversely affected by corrupt politicians and civil servants. For example, if a civil servant accepts money from a business person to give some favour, it is unlikely they will be aggressive or take lawful action against that business. However, some of the
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VAT Officials stated that the deterrent effect was apparent during the military backed caretaker government in Financial Year 2007-2008:
During the caretaker government there was tremendous pressure from the higher authority to the tax officials to collect as much revenue as they can and to taxpayers’ to deposit more income tax and VAT without looking at the actual rules and regulations. At that time media also played a vital role. In Chittagong Customs House and some other land customs station, army people set up their office to look after the revenue matters. Some of the big shot businessmen were caught and was send to jail for tax evasion. The general taxpayers were very afraid at that period. I think there was strong deterrent effect during that military-backed army government. (VO 9)
A number of focus group participants (taxpayers) also confessed that they paid more income tax and VAT during the 2007-2008 period due to tremendous pressure from the
NBR. This was re-enforced by watching media of high wealthy business owners being victimised by the army-backed government:
We have seen in TV and newspapers that some of the civil officials are openly assaulted by the army officers. As they (army person) can be so rude with the civil servant, then they can go to any extent with the general taxpayers. Naturally, I was afraid and deposited more VAT than before though I had loss in my business at that time. (NCT 8)
There is a set of law everywhere and in every sector in Bangladesh. But what is absent is its enforcement. During the caretaker government, enforcement was strong and monitoring was very intensive and close. Even, the government officials were closely monitored at that time. So we all tried to comply with the VAT law. But things went to back to square one with the end of that regime. (CT 5)
One NBR Official (VO 3) acknowledged that it was not only the taxpayers, as they were also under extreme pressure at that time. The revenue collection scenario under the caretaker government and some of their initiatives, such as the Citizen Charter of the
NBR, has been acknowledged by Saleheen (2013b), in terms of improving good governance and VAT collection in Bangladesh. The discussions and comments made by the respondents during the focus groups indicated that the deterrent effect could be more
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visible and effective if there was better and more honest enforcement by the revenue administration.
The second theme that emerged relating to the deterrent effect was the corruption and lengthy judiciary system. In Bangladesh successful implementation of the taxation policy depends primarily on NBR, the judiciary and the press (Ahmed, 2003).It would be hoped that those agencies are appropriately constrained by the law, proactive and free of corruption. However, in Bangladesh, the political system, the judiciary and the revenue department appear to be embroiled in high levels of corruption. The TIB report
(2014) found that 76% of the respondents thought corruption in the public sector was the major problem, while 40% thought personal relationships were more important in getting public service. The report also revealed that 93% of Bangladeshi interviewees thought that the police were the most prone to bribery, followed by the judiciary (63%) and land services (44%). On the other hand, the TIB report (2011) noted that citizens perceive political parties (62%) and the Parliament (40%) as some of the most corrupt institutions in Bangladesh. Given this, it is difficult for the taxation system, which is backed by these agencies, to be effective in Bangladesh. The comments about the judiciary shed some light on the situation:
I think, the most judiciary systems, revenue officers and police forces in our country are not properly controlled by the Law and that most civil servants (including some Judges and revenue officers) are themselves corrupt. So we can’t expect deterrent effect in Bangladesh. (NCT 9)
Our company lawyer sometimes gives luxury gifts to the persons related to legal service. I am not unhappy for that as this helps us to save a lot of money by delaying the court decision. (CT 6)
These findings are consistent with the literature (Mbaku, 2000), which illustrates for example that most of the citizens in Africa are not afraid of the enforcing agencies, as the politicians, civil servants and the legal system are mostly corrupted. Brennan and
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Buchanan (1985) argue that any existing rules and regulations of a country will be ineffective if citizens perceive that politician and bureaucrats are corrupt. Therefore the entrepreneurs or the taxpayers who bribe politicians and civil servants are never afraid of the enforcement agencies and there will be minimal deterrent effect among the taxpayers. One of the respondents commented:
Corruption infiltrates courts also. Our lawyers can use bribes as an effective tool for the defence of their clients. (NCT 13)
Moreover, court decisions are often not implemented in a timely manner. For tax matters, the low effectiveness of courts relating to tax matters results in long case processing delays, which can have a paralysing effect on economic activity. This is made worse by the shortage of skilled and knowledgeable personnel at the NBR to meet the requirements of the court cases (Monir, 2012). Therefore, the judiciary has become largely unapproachable for VAT Officials, resulting in a loss of tax revenue and reduced confidence in the tax system as a whole.
A lack of effective audits was also considered by the participants as an important theme relating to the deterrent effect. As in other developing countries that have adopted VAT, audits are yet to evolve as an effective instrument in the organizational culture of
Bangladeshi VAT. Bangladesh has not been able to achieve a satisfactory level of audit performance, compared to the number of businesses registered for VAT, turnover taxes and cottage industries. The number of audits currently is below 1%when compared to the number of larger taxpayers, such as manufacturers (NBR, 2014). Therefore, whereas audits have become the major tool of tackling non-compliance in most developed countries, in Bangladesh this has largely not occurred. In the words of a compliant respondent:
Before starting business, the word audit strikes a fear in my mind. But my business has not been audited by VAT department for last 4 years. I am 153
continuing a very good relation with the local VAT office. I hope they will inform me before starting any audit, so that I can get enough time to arrange everything. (CT 3)
According to the respondents from the taxpayers’ group, auditing has yet to take professional shape in Bangladesh. Everyone agreed audit should be one of the most important issues of the NBR. However, ironically, a posting in the audit division of the
NBR or the Audit Directorate is considered as a ‘punishment posting’ in Bangladesh
(Saleheen& Siddiquee, 2013). In addition, comparatively inefficient inspectors and superintendents are posted to this division, due to the lack of status of the job.
Taxpayers are informed that the audit division has a low social image and that the officers are not as efficient and knowledgeable as they should be. As a result, taxpayers do not take VAT auditing as an effective deterrent tool:
My enterprise was audited last year. The problem was from the beginning of the audit: the team started their attitude that they came to catch a thief. At the beginning I was very worried. Even I needed to visit a psychiatric. But sorry to say, when I understood that two of the members of that team had minimum knowledge about VAT law, I became relaxed. My VAT consultant helped them to write the report. I realised from then, we should not be afraid of a VAT audit.(NCT 6)
VAT Officials confirm this:
It is fact that there have always been some meritorious detection of irregularities, but many of the objections were ill-conceived, without adequate understanding of rules and regulations of VAT. So for most of the cases we can’t establish our claims. So taxpayers are not very much concerned about VAT audits. (VO 9)
Saleheen (2013c) in his thesis about ‘VAT and Good Governance in Bangladesh’ quoted one taxpayer: ‘unless you are in hands of a few officers who are very skilled, honest, many of whom are arrogant and discourteous as well, audit is a matter of involving some additional cost’ (p.233). Therefore, an audit would appear to be effective when the auditor is skilled and honest.
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The VAT Officials stated that the taxpayers who have political connections or who are both politicians and businessmen are very reluctant to discuss VAT auditing. Their political influence may have made them confident about the consequences of VAT auditing, although the Officials did not deny the strength of meritorious findings from auditing:
Auditing is an effective tool of deterrent, when the findings from audit are really genuine. Even the influential and politically connected business owners became fully in our control when we identified their VAT evasion through audit. (VO 5)
The relationship between the auditor and the auditee, especially the level of trust between the two parties, is very important to make the auditing process effective
(Saleheen, 2012). In response to the question of how effective the audit was, some of the participants from SME taxpayers perceived that audit as not being effective at all:
Most of the time, the auditors raised very silly objections. Sometimes maybe the objections are genuine but when we can understand our fault, we generally try our best to manage them by offering bribes. I think, we are successful about in 75% cases. Otherwise we go to court to vacate the objections. I think audit is not an effective tool to make me compliant. (CT 2)
An aggrieved taxpayer has the forum to file an appeal. Then why will I be afraid of VAT Audit? I have very good relation with our local VAT offices and NBR. So I believe, I will get sufficient help and lawful suggestions from them. I know, if I have any fault, they will give me enough time to rectify myself. (NCT 3)
Overall, it appears that any potential deterrent effect of VAT audits and penalties is undermined in Bangladesh due to corruption and inadequacies at many levels.
5.3.6 The Relationship between Complexity, Compliance Costs and Non- compliance
An objective of this research is to examine whether there are any potential inter- relationships between complexity of VAT Law, VAT compliance costs and VAT non- compliance for SMEs in Bangladesh. Almost all the VAT Officials participants agreed 155
there is no strong relationship between complexity of law, compliance costs and VAT non-compliance. The strong beliefs to pay VAT and to have a positive tax paying attitude are emphasised as the dominant factor to increase voluntary compliance. In contrast, some of the non-compliant VAT payers considered that a high positive mentality does not necessarily guarantee that they would voluntarily comply with the
VAT Law. The non-compliant VAT payers strongly argued that most of the VAT payers are intentionally or un-intentionally non-compliant, and it is the failure of NBR and local VAT administration that they cannot find the non-compliant taxpayers efficiently. On the other hand, compliant participants claimed that the complexity of the
VAT and the compliance costs have a positive relationship with VAT non-compliance.
Table 5.2 illustrates the possible relationships between complexity, compliance costs and VAT non-compliance as raised in the focus group discussions.
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Table 5.2: Possible Relationship between complexity of VAT law, compliance costs and non-compliance
Relationship Sub-Theme Example of Quotation Civic Duty and Not all VAT payers who are highly compliant have lower compliance positive tax costs. They also face complexity with the law. But their strong civic duty mentality influenced more than compliance costs and complexity of law. To me, the biggest reason of paying VAT and being compliant is to contribute the state. (CT 2) Paying VAT is a duty of citizenship rather than the outcome of a cost benefit calculation of my business. (CT 11) Apparent Weak Deterrent Effect It’s not complexity and compliance costs. Significant promotion of NBR or No prosecutions of non-compliant taxpayers increase psychological pressure Relationship among other SME taxpayers and therefore increases voluntary compliance and enforced compliance among other SME taxpayers. (VO 13) Fair tax system and If I believe the VAT system is fair and neutral, I would be willing to pay corruption more VAT though the Law is complex. I want to add, business friendly relationships between taxpayers and VAT Officials are the most important factor than others. (NCT 14) If I saw less corruption by NBR Officials and Local VAT administration, I would be willing to pay correct amount of VAT. To me, corruption is more important than complexity or compliance costs. (NCT 4) Record keeping If the VAT record keeping is less complicated with simpler payment system, compliance costs will be lower and business people would be willing to deposit the right amount of VAT.(CT 6) Apparent Strong External Advice Professional VAT experts, bookkeepers and accountants are too Relationship expensive. If the VAT law was less complex and we need not to keep so many books and records for VAT purpose, we don’t need to hire professionals. This would decrease our compliance costs and would make us more compliant. (NCT 11) Statutory or The Bangladeshi VAT Law is full of complicated and cumbersome regulatory language and there have some sort of inconsistency between language Law/Rules/SROs/Office orders. All these made the law complex and results higher compliance cost. I think if we can draft a law with simplified language, this will increase voluntary compliance and decrease unintentional non-compliance. (VO 9)
The findings revealed that SME taxpayers’ dissatisfaction with the fairness of the VAT system and the corruption of the VAT Officials appear to be important driving factors for the weak relationship between complexity, compliance costs and VAT non- compliance. The perceptions and opinions shared by taxpayers indicated that the manner in which VAT Officials treated SME taxpayers caused resentment and dissatisfaction, which contributed to them not complying with VAT requirements.
Hence, the absence of a strong deterrent effect and of a taxpayer-friendly environment appears to contribute to a weak relationship between complexity, compliance costs and
VAT non-compliance in Bangladesh. In contrast, the complicated statutory and regulatory language of the VAT law, external advice and mandatory record-keeping
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liabilities act as important factors for complexity, higher compliance costs and non- compliance.
5.4 Summary of Findings
It is argued that the overall findings from the focus groups provide important insights about the compliance behaviour of the SME taxpayers in Bangladesh. The comments made by the participants demonstrate that there could be multiple reasons for compliance with the VAT law by SME VAT payers in Bangladesh. The compliant taxpayers’ motivation for paying VAT comes not only from their rational behaviour of outcome maximization, but also from their feelings of civic duty as a citizen and the perceived value of receiving benefits in exchange for paying taxes. On the other hand, non-compliant taxpayers put more emphasis on the trust and confidence in government.
In contrast, VAT Officials focused more on better enforcement and strong monitoring by NBR than on other factors such as civic duty or the service-client relationship between taxpayers and tax officials.
It appears from the focus groups that some taxpayers will not pay their VAT if they are unsatisfied about the ways their taxes are spent and if they feel the government is unresponsive to taxpayers’ wishes or demands. How fairly the SME taxpayers are judged by the NBR was also found to be an important factor for the non-compliance decision. Compliance costs could be an important factor for VAT non-compliance by compliant taxpayers, but not so for non-compliant taxpayers. The other possible reasons for non-compliance were perceptions about VAT as an extra burden for the businesses, the complexity of the present VAT Law, information gaps between the VAT payers and
VAT Officials, and corruption by the revenue administration.
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The impact of complexity on compliance decisions was also acknowledged by most of the compliant taxpayers. The focus group findings demonstrate that differentiated VAT rates, value declarations, the complicated rebates and refund system, and the frequent changes in VAT Law could be the main reasons behind VAT complexity in
Bangladesh. The findings from non-compliant VAT payers indicate that there is an apparent lack of trust between the VAT authority and the taxpayers in the SME sector.
This antagonistic relationship between the two groups may affect compliance more than complexity or compliance costs. The corruption of the VAT Officials, the lengthy delays and corrupted Judiciary, the unethical connection with the political parties, and the ineffective audits were found to be the reasons for a weaker deterrent effect of VAT enforcement activities.
5.5 Conclusion
This chapter has detailed the research findings in respect of the focus groups. The findings touched on the complexity of VAT law, the compliance costs, the deterrent effects and VAT non-compliance. The findings from the focus groups have provided important insights that enabled a more robust and comprehensive survey for Stage 2.
Chapter Six will present the findings of the second stage of this research and will provide empirical evidence about VAT compliance costs and the potential relationship between complexity, compliance costs and non-compliance by Bangladeshi SMEs.
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Chapter 6
Survey Results
6.1 Introduction
To provide an empirical basis to exam the relationship between VAT and Bangladeshi
SMEs, a survey was developed from the focus groups discussions (Chapter 5). The survey addressed the broad objectives of the thesis; being firstly, to measure the VAT compliance costs for Bangladeshi SMEs. The survey also provided a basis to examine any potential inter-relationships between VAT compliance costs and VAT non- compliance, as well as the complexity of the VAT.
The purpose of this chapter is to present the survey results. Section 2 provides descriptive statistics of survey participants, with Section 3 detailing the survey outcomes relating to VAT compliance costs. In Section 4 are the findings in terms of non-compliance by SMEs. The survey results relating to the deterrent effect and other factors which influence non-compliance are also discussed in Section 4. The summary of Stage 2 findings and conclusions are presented in Section 5 and Section 6 respectively.
6.2 Descriptive Statistics
A total of 300 survey questionnaires were distributed to the compliant taxpayers (CTs) group and 200 questionnaires were distributed to non-compliant taxpayers (NCTs). This was followed by two reminders to improve the response rate. Finally the usable responses were a total of 240 completed surveys with 152 from CTs and 88 from NCTs.
This gave an overall response rate of 48%, representing 51% response rate from CTs and 44% response rate from NCTs. A summary of the survey participants' characteristics is illustrated in Table 6.1. 160
Table 6.1: Summary of Participants’ Characteristics
Characteristics Compliant Non-Compliant Total (N=152) (N=88) (N=240) n (%) n (%) n (%) Location of business / enterprise City corporation area (Dhaka) 33 (21.7) 35 (39.8) 68(28.3) City corporation area (Other)* 60 (39.5) 26 (29.6) 86(35.8) District town 33 (21.7) 15 (17.1) 48(20.0 Upazilla area 26 (17.1) 12 (13.6) 38(15.8) Primary business / enterprise Manufacturing 75 (49.3) 44 (50.0) 119(49.6) Construction Units 16 (10.6) 12 (13.6) 28(11.6) Service Rendering Units 36 (23.7) 16 (18.2) 52(21.6) Traders ( local, importers, exporters, 25(16.4) 16(18.2) 41(17.1) commercial importers) Business Structure A sole proprietorship 63 (41.4) 40 (45.5) 103(42.9) A partnership 10 (6.6) 8 (9.1) 18(7.5) A private limited company 65 (42.7) 35 (39.8) 100(41.6) Others 10 (6.6) 5(2.3) 15(6.3) VAT related record keeping practice A manual / paper system 65 (43.1) 30 (34.1) 95(39.6) A partially computerized system 58 (38.4) 39 (44.3) 97(40.4) A fully computerized system 18 (11.9) 18 (20.5) 36(15.0) Tax adviser / external accountant 10 (6.6) 1 (1.1) 11(4.6) Average monthly VAT paid in FY 2011-12 (in BDT) Under 400,000 45(29.6) 28(31.8) 73(30.4) 400,001 to 600,000 27(17.8) 11(12.5) 38(15.8) 600,001 to 800,000 12(7.9) 10(11.4) 22(9.2) 800,001 to 10,00,000 19(12.5) 10(11.4) 29(12.1) More than 10,00,001 49(32.2) 29 (33.0) 78(32.5) Education level Below SSC 0 1 (1.1) 1(0.42) HSC 19 (12.5) 14 (15.9) 33(13.7) Certificate 2 (1.3) 3 (3.4) 5(2.1) Diploma 11 (7.2) 7 (7.9) 18(7.5) Bachelor degree 58 (38.1) 33 (37.5) 91(37.9) Master’s degree or above 60 (39.5) 24 (27.3) 84(35.0) Others (CA, LLB, MBA, PhD) 2 (1.3) 5 (5.7) 7(2.9) Notes: * means other city corporation area including Gazipur, Chittagong, Rajshahi, Khulna and Sylhet
About 64% of survey respondents were residing in the capital city of Dhaka and in other city corporation areas of Gazipur, Chittagong, Rajshahi, Khulna, and Sylhet. The other respondents were situated in regional areas such as District town and Upazilla. The geographical distribution of all VAT registered businesses in Bangladesh (during the year under consideration) showed approximately about 61% residing in the city
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corporation area of Bangladesh (BBS, 2012). Accordingly, the relatively higher responses from the city corporation area were to be expected.
Half of the participants (50%) were from manufacturing business unit and 22% were from service rendering units. The distribution of types of industries indicates a slight under-representation of the construction and trading sector and an over representation of the manufacturing sector, compared to the overall VAT registered businesses (NBR,
2014).
In terms of forms of business ownership,43% of participants operated as a sole proprietorship business and 42% as a private limited company. The remainder were partnership or others. This characteristic of the sample is similar to the general characteristics of SME businesses in Bangladesh, as 50% of the SMEs businesses are sole proprietorship and 35% SMEs are private limited companies (SME Foundation,
2014).
Regarding the manner of keeping accounting records, 43% from the compliant group and 34% from non-compliant group indicated that their systems were fully manual. The rest noted that either their accounting systems were fully or partially computerised or their external accountants or tax advisors kept their accounting records. This is consistent with the general population, as the SME’s record keeping system has been found to be mainly manually operated in Bangladesh (CPD, 2014; Saleheen, 2003c;
NBR, 2014).
In terms of monthly VAT paid, 46% of total respondents were from small sized SMEs,
21% from medium sized and 32% were from large sized. The education level of participants was also gathered. As can be seen, most of the respondents (73%) of the survey were well qualified in terms of academic qualifications, with 35% holding a
Masters and 38% holding a Bachelor Degree. BBS data reports that as of July 2012, the proportion of the adult population (15-64) below the graduate level was 59% (BBS,
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2012). Consequently the sample is more educated than the general population in
Bangladesh. This may have the advantage of the survey being completed more accurately, but it may not be representative for those businesses operated by less educated people.
6.3 VAT Compliance Costs
This section provides a discussion of the survey results relating to the following research questions:
What are the costs of complying with the VAT Law in Bangladesh for compliant
and non-compliant SME taxpayers? (RQ1)
What is the value of psychological costs in taxpayers' total compliance costs?
(SRQ 1)
It was noted in Chapter 3 that compliance costs include three major components, namely monetary costs, time costs and psychological costs to the taxpayers (Evans,
2003; Lignier et al., 2014). Monetary costs include money spent on tax professionals and expenses relating to taxation guides, books, communication and other incidental costs. Time costs are incurred by the taxpayer mainly on record keeping for tax purposes, completing tax returns and the preparation of tax details for the tax authorities or for tax professionals. The psychological costs of taxation are the net economic costs of the pressure, anxiety and stress encountered when taxpayers seek to submit their tax returns in a timely and correct manner (Pope, 1994; Stanford et al., 1989; Evans et al.,
2001; Hasseldine & Hansford, 2002).
The questionnaire required respondents to report their monthly spending and the working hours required to submit VAT returns, including the total money spent each week or month on record keeping, calculating and paying VAT; keeping all physical receipts, books and registers in an organised manner; preparing documents for refunds
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or rebates; and working time spent with Courts and Tribunals. It should be noted that some of the activities are not performed monthly. For example, meetings with
Divisional Officers and Commissioners, visits by VAT Officials, price declarations and preparation for VAT audits, which can occur on an ad hoc basis. To allow for this, respondents were asked to estimate the monthly average time and money spent for these activities. A small percentage of respondents reported costs which were surprisingly high for their size and sector of the businesses. Where possible such atypical responses were followed up and queried in detail. In some cases they proved to be exaggerated, or estimated on a poor basis. The exaggerated information was excluded from the final results but other cases revealed particular problems with their reporting systems.
This research also aimed to estimate the potential psychological costs associated with
VAT compliance. Woellner et al. (2001, 2007) described psychological costs of tax compliance as the negative experiences (such as anxiety and frustration), or stress, caused by tax compliance. In western economies, people who suffer from the psychological effects of stress or anxiety may self-medicate through alcohol, smoking; may consult a psychologist or psychiatrist and possibly take prescribed medication; or, in some cases, may take illicit drugs. Due to Bangladesh being predominately a traditional Muslim country, Bangladeshis experiencing stress or anxiety tend not to drink (Hurcombe, Bayley, & Goodman, 2010). The empirical indicators used to try to estimate psychological costs associated with the VAT compliance were the average annual cost per taxpayer of sleeping pills, tobacco, consulting psychologists or psychiatrists or similar medication used to relieve the symptoms of anxiety or stress connected with such compliance. While this is not a perfect indicator of the psychological costs, it does provide some important initial evidence in this regard.
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6.3.1Compliance Costs Based on Value-Added Tax Payment
In terms of compliance costs by the size of the firm, reported VAT paid was used to segment to the firms into five categories: small firms who paid monthly VAT less than
BDT 400,000 (Group 1); intermediate SMEs who paid VAT between BDT 400,001 to
600,000 (Group 2) and BDT 600,001 to 800,000 (Group 3); large SMEs who paid VAT between BDT 800,001 to 1,000,000 (Group 4); very large SMEs who paid VAT exceeding BDT 10,00,001 (Group 5). The monthly average compliance costs based on monthly VAT paid by compliant and non-compliant SME VAT payers are presented in
Table 6.2 and Table 6.3 respectively.
Table 6.2: Average Compliance Costs of Compliant Taxpayers
Group VAT Payment VAT Compliance Costs for CTs Group (expressed in BDT) Total Monetary Monetary Time Psychological Costs Costs (Total Hours) costs (BDT/USD) (BDT/USD) (BDT/USD) 1 Under 400,000 27,822/371 97 4,648/62 32,470/500 2 400,001 to 600,000 61,628/822 160 13,521/181 75,149/1,001 3 600,001 to 800,000 74,315/990 211 11,495/153 86,110/1,148 4 800,001 to 10,00,001 94,578/1,261 208 22,861/304 117,439/1,565 5 More than 10,00,001 1,79,265/2,390 336 31,176/415 210,441/2,805
Table 6.3: Average Compliance Costs of Non-compliant Taxpayers
Group VAT Payment VAT Compliance Costs for NCTs Group (expressed in BDT) Monetary Time Psychological Total Monetary Costs (Total Hours) costs (BDT/USD) Costs (BDT/USD) (BDT/USD) 1 Under 400,000 35,091/468 113 6,622/88 41,173/549
2 53,851/718 252 7,985/106 61,836/824 400,001 to 600,000 3 75,000/1,000 273 16,273/217 91,273/1,216 600,001 to 800,000 4 102,900/1,372 298 19,444/259 122,344/1,631 800,001 to 10,00,001 5 227,655/3,035 448 33,045/441 260,700/3,476 More than 10,00,001
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The above results indicate that reported VAT compliance costs in Bangladesh in the year under consideration are found to be higher for non-compliant than for compliant
VAT payers. This trend is generally consistent for both monetary and psychological costs. Part of the explanation for these extra costs for non-compliant taxpayers may be due to their non-compliant behaviour. That is, they are spending extra money to mitigate the objections against them, and paying extra money for external advisors or lawyers. These non-compliant SMEs could also be involved in appeal process with the
High Court, Commissioner (Appeal), or Appellate Tribunal. The results demonstrate that NCTs are spending more hours for the VAT related activities than are spent by
CTs. The results also suggest that psychological costs are an important component of
VAT compliance costs for Bangladeshi SMEs and are higher for the NCTs.
Psychological costs are discussed in more detail in Section 6.3.6.
6.3.2 Compliance Costs by Annual Turnover
Average compliance costs based on the amount of annual turnover are presented in
Table 6.4. Compliance costs per group are calculated by dividing the average compliance costs by the mid-point unit of the size in each group.
Table 6.4: Average VAT Compliance Costs of CT and NCT
Average VAT Compliance Costs Compliance Costs as a % of Annual turnover annual turnover (expressed in BDT) Average Compliance Average Compliance CT NCT Costs (BDT/USD) of Costs (BDT/USD) of CT NCT 8,000,000 to 10,000,000 243,000/3,240 277,992/3,706 2.70% 3.08% 307,500/4,100 374,112/4,988 2.46% 2.99% 10,000,001 to 15,000,000 403,700/5,382 498,000/6,640 2.30% 2.84% 15,000,001 to 20,000,000 498,500/6,646 573,000/7,640 2.21% 2.54% 20,000,001 to 25,000,000 More than 25,000,001 762,888/10,171 893,796/11,917 2.03% 2.38% (1 BDT= 0.013 USD as of 31/12/2003)
The data in Table 6.4 illustrates that compliance costs are higher for NCTs and are regressive in nature. In other words, costs per unit decrease as the size increases, 166
showing the economics of scale effect which is common to many tax compliance costs studies (Walpole, 2014; Barbone et al., 2012). These results are similar to those of focus groups observations, where respondents gave an approximate figure that compliance costs would be 1% to 2% of the annual turnover and not more than 5% of the annual turnover of their business. The survey results demonstrate that VAT compliance cost for
Bangladeshi SMEs ranges from 2% to 3% of annual turnover.
6.3.3 Industry wide VAT Compliance Costs
The businesses registered under the VAT system are divided into four different sectors by the NBR being, manufacturing; construction; service rendering units and traders
(NBR, 2010). This research also wanted to estimate the industry wide VAT compliance costs to see if there are any apparent differences between industries. Industry wide average compliance costs based on monthly VAT paid by the compliant and non- compliant SME taxpayers are presented in Table 6.5.
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Table 6.5: Industry wide Average VAT Compliance Costs
VAT Compliance Costs for Manufacturing Units VAT Payment Group Monetary cost Time Cost Psychological Cost (BDT) (BDT) (Total Hours) (BDT) CT NCT CT NCT CT NCT Under 400,000 33,899 43,916 134 159 6,995 5138 400,001 to 600,000 66,272 53,181 180 291 13,409 6439 600,001 to 800,000 90,000 83,000 250 351 16,666 18,750 800,001 to 10,00,000 95,444 1,05,000 196 400 24,259 16,666 More than 10,00,001 1,87,390 2,35,280 282 449 41,585 33,333
VAT Compliance Costs for Construction Units CT NCT CT NCT CT NCT Under 400,000 24,149 26,000 52 112 3,732 4166 400,001 to 600,000 48,750 61,000 157 187 13,125 14,666 600,001 to 800,000 64,000 75,000 120 155 No cost 15,000 800,001 to 10,00,000 73,666 90,000 179 275 13,125 16,666 More than 10,00,001 1,05,000 1,80,000 182 435 36,250 33,208
VAT Compliance Costs for Service Rendering Units CT NCT CT NCT CT NCT Under 400,000 29,568 31,750 98 82 2,362 12,583 400,001 to 600,000 64,250 30,000 126 150 12,500 8333 600,001 to 800,000 67,333 62,000 236 283 14,305 15,277 800,001 to 10,00,000 1,16,250 75,000 188 200 31,666 12,500 More than 10,00,001 1,41,830 1,12,500 287 356 44,881 27,600
VAT Compliance Costs for Traders CT NCT CT NCT CT NCT Under 400,000 20,560 35,181 69 118 5643 7,234 400,001 to 600,000 64,791 58,800 165 192 16,222 8250 600,001 to 800,000 60,000 72,000 152 227 20,833 13,289 800,001 to 10,00,000 84,000 97,000 300 314 16,666 19,723 More than 10,00,001 1,89,000 2,39,000 316 392 32,023 41,666
Table 6.5 illustrates that the monetary compliance costs of VAT in Bangladesh in the financial year 2011-12 are generally higher for manufacturers than for other industries; the second highest VAT compliance costs were incurred by traders. This trend is generally consistent for both total hours for VAT and psychological costs of VAT. Part of the explanation for the additional costs for the manufacturing industry may be the extra money and time spent on value declarations,67 audits, refunds and rebate
67. The suppliers of VAT-able goods in Bangladesh, before making a supply, have to make a declaration, on a prescribed form, of the selling price of their goods. The declared price is supposed to be the price for the assessment of VAT. The prescribed value declaration Form (Mushak-1) requires the supplier to provide information to the VAT office with a description of the goods, the unit of supply, the name and quantity of raw materials and packaging materials 168
procedures, which are more likely in this sector. Also they may have to deploy additional staff for calculating VAT, completing VAT returns and paying VAT. This would include paying extra money for external advisors or lawyers.
6.3.4 Breakdown of money spent on VAT compliance activities
It should be noted that businesses will spend money on a variety of services such as bookkeepers, accountants, lawyers and tax advisors for various tax and non-tax related activities (Sandford et al., 1989). In Bangladesh, businesses appear generally to use one accountant’s service for a variety of taxes (VAT, Income tax and Customs duty) as well as for general advisory and accounting work. Due to this, the bill from the accountant may not separate the different services identified in their bills. This means it may be difficult to assign values to different taxes, as well as to non-tax activities. To try to reduce this mixing and thus improve reliability, before the survey was sent out, respondents were phoned and given clear instruction that they should state only the costs relevant to VAT. In addition to this, after obtaining completed surveys, the VAT focus was again checked with respondents over the phone and cross checked with other answers.
Two questions in the survey instrument related to distinct activities that constitute VAT compliance. These questions explored in-house compliance activities, learning about
VAT, dealing with advisors, preparation of price declarations and working time and money spent on audit, objection or appeal. The average money and time spent on these different activities relating to VAT are illustrated in Table 6.6 to Table 6.8.
used for each unit of the good along with the percentage of wastage, cost of inputs including Customs duty, Supplementary duty, LC fee and other charges, as applicable, etc.
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Table 6.6: Average money spent on VAT Compliance Activities by CTs
Components of Average Average Money Spent by Compliant Taxpayers Compliance Costs Group 1 Group 2 Group 3 Group 4 Group 5 (BDT) (BDT) (BDT) (BDT) (BDT) Recording information needed for 3,500 6,000 9,700 11,500 28,000 VAT Keeping all physical receipts in an 2,000 4,000 2,800 4,500 10,000 organized manner Calculating VAT and paying VAT 1,000 4,000 4,500 6,000 10,000 Keeping the forms and registers 1,500 5,000 3,500 5,000 10,000 related to VAT Preparing and making VAT monthly 3,422 5,000 5,000 5,000 10,000 returns Total costs for in-house compliance 11,422 24,000 25,500 32,000 68,000 activities (35.17%) (31.93%) (29.61%) (27.24%) (32.31%) Dealing with the NBR (phone calls, 1,000 1,000 1,000 400 2,000 emails, visits) Dealing with external VAT adviser, 3,000 12,000 20,000 23,000 45,000 including providing information to them Learning about VAT law, including 1,000 1,000 1,000 2,400 2,000 reading newsletters, NBR website, bulletins 5,000 14,000 22,000 25,800 49,000 Total external activities (15.39%) (18.62%) (25.54%) (21.96%) (23.28%) Time spent for price declaration 2,000 4,628 5,615 7,600 12,000 Working time spent on VAT refund 2,000 4,000 4,000 5,678 10,000 Working time spent on VAT related 1,500 4,000 4,500 6,000 10,265 objections, appeal and VAT related court appeal VAT Audit 3,400 7,000 7,500 8,500 15,000 Total costs with price declarations, 8,900 19,628 21,615 27,778 47,265 refunds, audit, objection and (27.40%) (26.11%) (25.10%) (23.65%) (22.45%) appeal Total non-routine expenses (speed 2500 5,000 6,000 10,000 15,000 money/bribes) (7.69%) (6.65%) (6.96%) (8.51%) (7.12%) 4,648 13,521 11,495 22,861 31,176 Psychological costs for VAT (14.31%) (17.99%) (13.34%) (19.46%) (14.81%) Total VAT Compliance Costs (BDT) 32,470 75,149 86,110 117,439 210,441 Total VAT Compliance Costs (USD) 415 961 1102 1502 2693 Compliance Costs per BDT VAT 0.162 0.150 0.123 0.130 0.105 Payment Notes: (1 BDT= 0.013 USD) (Group 1: monthly VAT less than BDT 400,000; Group 2:monthlyVAT between BDT 400,001 to 600,000; Group 3: monthly VAT from BDT 600,001 to 800,000; Group 4: monthly VAT between BDT 800,001 to 1,000,000; and Group 5: monthly VAT BDT exceeding 10,00,001).
The results in Table 6.6 suggest that the main monetary compliance activities for CTs relate to in-house compliance activities and costs relating to audit, objections and appeal
(approximately 22% to 27%). As size of business increases there is a greater reliance on
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external advisers, as these costs increase to approximately 22% to 25% for Group 3 to
Group 5.
Table 6.7: Average money spent on VAT Compliance activities by NCTs
Components of Average Average money spent by Non-compliant Taxpayers Compliance costs Group 1 Group 2 Group 3 Group 4 Group 5 (BDT) (BDT) (BDT) (BDT) (BDT) Recording information needed for 2,500 5,000 7,200 11,000 15,000 VAT Keeping all physical receipts in an No 2,000 1,800 2,500 6,000 organized manner Calculating VAT and paying VAT 1,500 2,486 1,500 3,000 10,000 Keeping the forms and registers 500 2,000 1,500 3,000 10,155 related to VAT Preparing and making VAT monthly 2,721 3,000 5,000 4,000 5,500 returns Total in-house costs of compliance 7,221 14,486 17,000 23,500 46,655 activities (17.31%) (23.43%) (18.62%) (19.20%) (17.89%) Dealing with the NBR (phone calls, No 1,000 1,000 1,000 2,000 emails, visits) Dealing with external VAT adviser, 3,500 5,000 15,000 20,000 49,000 including providing information to them Learning about VAT law, including 500 2,000 1,000 2,000 5,000 reading newsletters, NBR website, bulletins 4,000 8,000 17,000 23,000 56,000 Total external activities (9.58%) (12.93%) (18.62%) (18.79%) (21.48%) Time spent for price declaration 3,500 6,000 6,500 9,400 25,000 Working time spent on VAT refund 2,000 5,000 6,000 6,000 15,000 Working time spent on VAT related 8,370 10,000 14,500 18,500 39,000 objections, appeal and VAT-related court appeal VAT Audit 5,500 6,365 8,000 15,000 26,000 Total costs with price declarations, 19,370 27,365 35,000 48,900 105,000 refunds, audit, objection and appeal (46.43%) (44.25%) (38.34%) (39.96%) (40.27%) Total non-routine expenses (speed 4,500 4,000 6,000 8,000 20,000 money/bribes) (10.78%) (6.46%) (6.57%) (6.54%) (7.67%) 6,622 7,985 16,273 19,444 33,045 Psychological costs for VAT (15.87%) (12.91%) (17.82%) (15.89%) (12.68%) Total VAT Compliance Costs (BDT) 41,713 61,836 91,273 122,344 260,700 Total VAT Compliance Costs (USD) 533 791 1168 1565 3336 Compliance Costs per BDT VAT 0.209 0.125 0.130 0.135 0.130 Payment Notes: (1 BDT= 0.013USD) (Group 1: monthly VAT less than BDT 400,000; Group 2:monthlyVAT between BDT 400,001 to 600,000; Group 3: monthly VAT from BDT 600,001 to 800,000; Group 4: monthly VAT between BDT 800,001 to 1,000,000; and Group 5: monthly VAT BDT exceeding 10,00,001).
In comparison to the CTs, the NCTs spent only 17% to 23% of their total compliance costs for in-house compliance activities. Similarly, NCTs spent less time on external
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activities compared to CTs (10% to 21% compared to 22% to 27%). The activity of greatest cost for NCTs included the costs of audit, objection and appeal, representing
41.85% of total compliance costs compared to 24.90% for CTs. The higher cost could relate to NCTs having to organize additional experienced staff to work in the court system and having to pay lawyers. The corrupted and lengthy judiciary process also may cost extra money for the non-compliant taxpayers.
Indeed, non-routine expenses accounted for more than 7% of the total compliance costs for the SME taxpayers. Most of the taxpayers (compliant and non-compliant) in this study mentioned speed money68 or bribes as their non-routine expenses. In particular, some of the respondents noted that speed money was related to VAT. While the overall percentage for non-routine expenses between CTs and NCTs is similar, the actual dollar figure is higher for NCTs. It has been reported that, in the name of the processing VAT registration, VAT Officials collect money from businesses in the form of unauthorised payments for getting the formal VAT registration (CPD, 2014). Prior western studies into VAT compliance costs are largely silent in terms of speed money (bribes) to government officials as part of compliance expenses. These results are consistent with the IFC (2014) Bangladesh study, where taxpayers claimed that the average monthly unofficial fee in relation to VAT and personal income tax is BDT 10,770 (143 USD) and the maximum unofficial fee is BDT 50,000 (667 USD).
Another question required the respondents to give details of other costs regarding price declarations, VAT refunds, VAT audit, VAT objections, and VAT appeal. Table 6.6 demonstrates that for CTs, the largest costs among these activities are incurred when the firms are audited, while the lowest are when the firms are proposing a VAT objection
68. In Bangladesh, officials of different government sector expect some extra fees for quick service. It is one form of bribe and is technically illegal in Bangladesh. As a contrast in Vietnam, it is customary and culturally acceptable to give government officials gifts or cash for holidays and other important events; thus gifts are not considered unlawful in Vietnam (IFC, 2011).
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and appeal. However, for NCTs the largest costs are incurred when the firms are facing objection, appeal and VAT related court process, followed by the costs of VAT audit
(Table 6.7). This may be because for NCTs there could be much more preparation when facing an object and appeal given the potential for mistakes and their disputed non- compliance.
Previous tax compliance cost research demonstrates that tax compliance costs are regressive (Evans, 2003; Lignier et al., 2014). Consistent with this, the current survey indicates that in relative terms (cost of compliance relative to monthly VAT payment) smaller businesses incurred higher compliance costs than larger businesses. However,
VAT compliance costs in Bangladesh appear less regressive in nature compared to other compliance cost studies in different countries (cf. Yesegat, 2008 for Ethiopia; Hansford
& Hasseldine, 2012 for the UK; Eragbhe & Modugu, 2014 for Nigeria; IFC, 2011 for some developing countries). In Bangladesh, the costs relating to external expenses appear to be the main reason for this less regressiveness nature. For example, only 17% of the SMEs in Group 1 used assistance from external VAT consultants, whereas 72% of the SMEs in Group 5 used external advice for compliance. This could relate to smaller firms not being able to afford to pay for external advisors. It may also be the case that operators of smaller firms undertake extra work in VAT compliance themselves, and thereby have less time to focus on their core business. It is difficult to measure the opportunity cost that this may involve for these smaller firms.
6.3.5 Breakdown of time spent on VAT compliance activities
The survey required respondents to report the time spent on different VAT activities.
For the estimation of monthly time spent, an average of 22 working days consisting of 8
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hours per day was assumed.69 Measurement of compliance time was based on time spent on various VAT related activities reported by the respondents for the 2012 financial year (1 July 2011 to 30 June 2012). Table 6.8 illustrates the difference between compliant and non-compliant taxpayers in time spent on different compliance activities.
Table 6.8: Average time spent on VAT Compliance activities by CTs and NCTs
Components of spending time Average Time Spent on VAT compliance (CT= 152 and NCT= 88)
Group 1 Group 2 Group 3 Group 4 Group 5 Hours/ Hours/ (%) Hours/ (%) Hours/ (%) Hours/ (%) (%) Total in-house compliance activities CT 44(45.36) 71(44.37) 108(51.18) 92(55.76) 161(47.91) NCT 45(39.82) 96(38.09) 101(36.99) 95(31.87) 145(32.36) External activities CT 10(10.30) 17(10.62) 26(12.32) 32(15.38) 47(13.98) NCT 10(8.84) 25(9.92) 32(11.72) 35(11.74) 55(12.27) Other time* with audit, objection and appeal CT 43(44.32) 71(44.37) 77(36.49) 74(35.57) 128(38.09) NCT 58(51.32) 131(51.98) 140(51.28) 168(56.37) 248(55.35) Total Hours CT 97 160 211 208 336 NCT 113 252 273 298 448 Notes: *Other time include the time needed for price declarations, refunds, and rebate.
The findings indicate that the main time consuming activities for CTs are related to in- house compliance activities, such as properly keeping information for VAT, completing monthly returns, calculating and paying VAT in a timely manner and keeping up to date with the VAT law. Approximately 61% of total time spent by CTs was ensuring VAT compliance (in-house and external activities), whereas NCTs spent only 46% of their total time on in-house and external compliance activities. This may reflect that CTs are lower risk-takers who spend extra time to ensure compliance and minimise the chance of mistakes. In particular, CTs spend more time on in-house compliance activities to
69. In Bangladesh, there are five working days in a Week. Then the total general working days are 22 days in a month. 174
assist with their compliance, although as size increases they are more likely to engage external advisors to assist with this.
The results appear to be somewhat inconsistent with the previous literature on tax compliance costs. For example, Hansford and Hasseldine (2012) found that in terms of the hours spent on different activities, the UK’s SME taxpayers spent over three- quarters (79%) of their time on recording information needed for VAT, calculating tax, completing returns, paying VAT and tax planning and tax advice. Similarly, Gupta and
Sawyer’s (2014) study for New Zealand and Lignier et al.’s (2014) study for Australia demonstrated similar results to Hansford and Hasseldine (2012). Hansford and
Hasseldine (2012) stated that taxpayers should spend more time on in-house compliance activities and learning about taxes to keep themselves from committing any unintentional non-compliance and not falling foul of the tax agency. Accordingly, it may be a matter of concern for the NBR that Bangladeshi taxpayers appear to spend proportionately less time on in-house compliance activities compared to other jurisdictions, as these strategies could be very important to improve tax compliance.
Overall, NCTs spent more hours complying with VAT compared to CTs, particularly for external activities and for the appeal and audit activities. Indeed, the largest differential was with the time spent on price declarations, refund, audit, objection, and appeals, which made up over half of all the time (54%), spent on VAT compliance activities NCTs. For CTs, these activities constituted fewer than 40% of the overall time. This demonstrates that due to the non-compliant behaviour of NCTs, they have to spend more time trying to justify their activities.
6.3.6 Psychological Costs of VAT
This study sought to estimate the potential psychological costs associated with VAT compliance. This measurement was done in two ways. Firstly, by taxpayers estimating
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the cost of things they did to relieve stress and anxiety. Secondly, taxpayers were also asked to consider a question: “if you could claim from the VAT Authority for your stress or anxiety in the 2011/12 financial year about complying with VAT for your business, how much would you have claimed?’70
The hypothetical figure claimed was found to be 8 to 10 times higher than the estimates of costs of things to do to reduce stress and anxiety (Table 6.19). For example, Group
1’s estimates of psychological costs to reduce stress for VAT were 4,648 BDT (62
USD) but the amount they would like to claim was 35,000 BDT (467 USD), which is indeed greater than their total compliance cost for VAT.
Table 6.9: Difference between Psychological Costs and Taxpayers’ Claims to NBR
Components of Average Compliance Average Money Spent by CTs costs Group 1 Group 2 Group 3 Group 4 Group 5 (BDT) (BDT) (BDT) (BDT) (BDT) Total VAT Compliance Costs (monetary 32,470 75,149 86,110 117,439 210,441 costs plus psychological costs) 4,648 13,521 11,495 22,861 31,176 Psychological costs for VAT
The amount taxpayers would claim to 35,000 50,000 65,000 250,000 400,000 VAT authority for stress and anxiety Average Money Spent by NCTs
Group 1 Group 2 Group 3 Group 4 Group 5
(BDT) (BDT) (BDT) (BDT) (BDT) Total VAT Compliance Costs (monetary 41,713 61,836 91,273 122,344 260,700 costs plus psychological costs) 6,622 7,985 16,273 19,444 33,045 Psychological costs for VAT
The amount taxpayers’ would claim to 50,000 63,000 85,000 275,000 520,000 VAT authority for stress and anxiety Notes: (1 BDT= 0.013 USD) (Group 1: monthly VAT less than BDT 400,000; Group 2:monthlyVAT between BDT 400,001 to 600,000; Group 3: monthly VAT from BDT 600,001 to 800,000; Group 4: monthly VAT between BDT 800,001 to 1,000,000; and Group 5: monthly VAT BDT exceeding 10,00,001).
The reason for this large difference may demonstrate the problem of getting taxpayers to estimate total amounts holistically, compared to individual components.
Alternatively, it may be that VAT taxpayers appear to include in their claim the total compliance costs of VAT, particularly the use of VAT advisors. That is, the whole
70. This is based on the work of Lopes, Basto and Martins (2012) about Portuguese taxes. This figure represents the cost of paying someone due to relief from stress of VAT compliance. 176
compliance with VAT is a stress, and taxpayers would prefer to pay someone to deal with it. Further, the estimate initially used to measure an individual’s psychological costs to release stress may be inadequate. Also, it appears the amount claimed includes
‘speed money’ [bribes] paid to VAT Officials to progress matters.
This result is supported by findings from the focus groups, where participants were asked to indicate how much they would be willing to claim from the VAT authority for their stress or anxiety. Many of their responses are covered with the following statement: ‘the amount I paid my VAT Consultant, VAT advisor or the speed money I paid the VAT Officials’. However, about 20% of the respondents from CTs and 21% from NCTs noted that they did not want to claim anything from the VAT authority. This could represent the notion that VAT is just something taxpayers have to deal with when running a business. Overall, it was found that psychological costs appear to account for approximately 15% of total VAT compliance costs in Bangladesh (Table 6.10). This would suggest that psychological costs may be a substantial component of VAT compliance costs for SMEs in Bangladesh, with little difference between CTs and
NCTs.
Woellner et al. (2007) reported that simplified legal drafting may reduce the psychological costs of tax compliance. Regarding the stress and anxiety (psychological costs) that VAT causes, Yesegat (2009) points out those Ethiopian taxpayers perceived the burden of psychological costs to be high and very high. To explore the relationship of psychological costs and different factors, four attitude statements were asked in the survey (Table 6.10).
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Table 6.10: Psychological Costs of VAT
Psychological Costs of VAT Agree/ Disagree/ Not Sure/ (CT= 152, NCT= 88) strongly agree strongly Neutral disagree CTs NCTs CTs NCTs CTs NCTs There are no psychological costs (stress/anxiety/sleepless nights) in complying with 18% 13% 63% 73% 19% 14% VAT. Psychological costs have significantly affected the amount of time and effort that I can put into my 64% 82% 28% 4% 18% 16% business. The psychological costs relating to VAT are excessive 40% 62% 37% 11% 23% 27% when compared to other taxes in Bangladesh. The VAT authority’s timely information and friendly attitude towards taxpayers can reduce psychological 82% 85% 3% 10% 15% 5% costs.
The results demonstrate that about 63% of compliant and 73% of non-compliant VAT payers strongly disagreed or disagreed with the notion that “there are no psychological costs (stress/anxiety/sleepless nights) in complying with VAT”. In relation to these four attitudinal statements, the large differences between CTs and NCTs lay in the area of psychological costs appearing to affect the amount of time available to put into their business by NCTs (82%) more than CTs (64%). This could be due to NCTs having to go through an audit and/or appeal process, and may be because they know they are at fault. The results suggest that one way to possibly reduce psychological costs is for the
VAT authority to provide timely information and have a friendly attitude towards taxpayers, as 82% of CTs and 85% of NCTs strongly agreed or agreed with this. This may demonstrate that establishing a better relationship between the taxpayers and NBR can encourage voluntary compliance and can help businesses manage their level of stress. This is consistent with Kirchler (2007), who found that strengthening relationships between the designated tax inspectors and taxpayers allowed taxpayers to fulfil their obligations willingly.
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About half of the respondents agreed or strongly agreed that the psychological costs relating to VAT are excessive when compared to other taxes in Bangladesh. This may be due to the fact that income tax returns have to be submitted once a year and the taxpayers get sufficient time for income tax calculation and return preparation. On the other hand, registered Clearing and Forwarding Agents (C&F Agents) look after the customs-related activities on behalf of the importers for import taxation. In the case of
VAT, to submit a monthly VAT return all transactions of sales need to be included.
Input tax credit, record keeping, collecting VAT at different stages of production also need more paper work and formalities. Sandford et al. (1981) noted that taxes such as
VAT or GST are transaction-based taxes that require comprehensive record keeping and periodical reporting and remitting. Due to many Bangladeshi SMEs not utilising computerised accounting system in their businesses, the record keeping required for
VAT can be burdensome. It should be recalled that only 15% of respondents had a fully computerised record keeping practice (Table 6.1). Also, the variability in the measure of
Bangladesh’s VAT calculation and the uncertainty surrounding it could create higher stress than other taxes. Stress could also be increased by the VAT Officials’ surprise visits to business premises and examinations, which could generate greater stress and anxiety for SME taxpayers compared to other taxes.
Respondents were asked to indicate the types of remedies that they took to reduce stress and anxiety in relation to VAT. The most common ways that taxpayers coped with the psychological costs of VAT compliance was taking medicine like sleeping pills (27%), taking tobacco (22%), consulting with a psychologist or psychiatrist (19%) or self- meditating (7%). Out of the remaining 25% respondents, 13% took part in activities such as vacations, being with family, socializing, eating out, shopping, travelling, entertainment and using alcohol. 12% identified that the use of their VAT adviser meant that never felt any stress or anxiety, as they thought their VAT consultants were very 179
efficient in relation to VAT. This would support that for some using VAT advisers is a way of mitigating the psychological costs of VAT compliance.
6.3.7 External Assistance
An important component of compliance costs is the professional fees paid to the external advisers for VAT related activities. Indeed, as just discussed the use of external advisor can assist in reducing the stress of VAT compliance. From the sample, 55% of
CTs and 42% of NCTs paid an external VAT adviser to assist with their VAT compliance. The results are similar to the more recent Australian study of Lignier et al.
(2014), with 52% of Australian SME businesses seeking external advice for GST in
Australia. Respondents in this study offered several reasons why they used VAT consultants, which are presented in Table 6.11 according to the ranking of their choices.
Table 6.11: Reasons for Using VAT Consultants
Rank Compliant Taxpayers (N= 152) Non-compliant Taxpayers (N=88) (agree or strongly agree) (agree or strongly agree) 1 To reduce the chance of error in value To avoid penalties for non-compliance with declaration and monthly VAT returns (73% ) VAT obligations (87%) 2 The VAT Law is too Complex (72%) To reduce the chance of error in value declaration and monthly VAT returns (82%) 3 To avoid penalties for non-compliance with The VAT Law is too Complex (69%) VAT obligations (70%) To ensure compliance with VAT obligations (70%) 4 My VAT adviser(s) charges less than the To get (carry forward) of our VAT rebate and time and money it would cost to do myself refund quickly (68%) (63%) 5 To get (carry forward) of our VAT rebate To ensure compliance with VAT obligations and refund quickly (62%) (64%) 6 My VAT adviser(s) charges less than the time and money it would cost to do myself (52%)
The compliant and non-compliant VAT payers appeared to have largely similar reasons for using VAT consultants, with the top three reasons being similar, although ranked in a different order. For example, 72% of CTs and 69% of NCTs strongly agreed or agreed that complexity of VAT Law is one of the main reasons to use external advice.
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However, the main reason that NCTs sought the assistance of external advisers was to avoid penalties for non-compliance with VAT obligations. In comparison, the main reason for compliant taxpayers was to reduce the possibility of errors with price declarations and monthly VAT returns. In this study, 64% of NCTs and 70% of CTs agreed or strongly agreed that they use external assistance to ensure compliance with
VAT obligations. However, the need for external assistance diminished when
Bangladeshi SMEs have qualified staff to handle VAT related issues, as 87% of CTs and 93% of NCTs stated external consultants were not needed when they had their own qualified staff (Table 6.12).
Table 6.12: Reasons for not using assistance from VAT Consultants
Rank Statements Compliant Non-compliant (agree or strongly agree) Taxpayers Taxpayers (N= 152) (N=88) 1 When the owners have qualified staff who 87% 93% can handle the VAT affairs 2 When the owner cannot afford to pay tax 72% 88% advisers 3 Tax is a sensitive issue, so the owner can’t 57% 77% rely on anyone else 4 They have sufficient time to do the VAT 52% 69% work 5 It is not difficult for the owner to complete all 49% 48% forms and submit returns 6 When our VAT affairs are very simple 42% 35% 7 When the owner receives help from the NBR 2% 8% and local VAT authority
It may not be surprising that affordability appears to be a dominant reason for not using assistance from VAT consultants: 71% of CTs and 88% of NCTs agreed or strongly agreed that not being able to afford an advisor provided a reason for not seeking assistance. While approximately 50% of taxpayers did not use an external adviser as it was not difficult for the owner to complete the forms, only a small percentage (2% of
CTs and 8% of NCTs) sought assistance from the NBR or the local VAT authority.
During the focus groups the majority of respondents agreed that external advice gives them confidence that their VAT matters are under control and their taxpaying behaviour 181
is within the bounds of the VAT law. Similar to that finding, when respondents were asked whether they would still pay for an external advisor for VAT services if
Bangladesh did not have a VAT, 57% of CTs and 47% of NCTs would still do so. Prior literature (Hite & McGill, 1992; Hansford & Hasseldine, 2012), suggests that when
VAT is considered, these advisers play an ‘enforcing’ role with VAT compliance of
SME taxpayers.
Overall, the findings of the survey indicate that NCTs have greater VAT compliance costs than CTs. The study also confirms that VAT compliance costs are regressive. It appears that internal costs are higher for CTs and external costs are higher for NCTs.
The findings indicate that both compliant and non-compliant VAT taxpayers experience psychological costs representing over 10% of their total VAT compliance costs.
6.4 VAT Non-compliance
This section provides a discussion of the survey results relating to the following research questions:
What are the reasons for non-complying with the VAT Law by Bangladeshi
SMEs? (RQ 2)
Is SME non-compliance with the VAT Law in Bangladesh due to the VAT
compliance costs being excessively high for these taxpayers? (SRQ 2)
Is non-compliance with the VAT Law by some SME taxpayers in Bangladesh a
result of the legislation and regulation being overly complex? (RQ 3)
To what extent are the deterrent measures of VAT Law effective to ensure
compliance with the Law? (SRQ 3) 182
6.4.1 Reasons for non-compliance with the VAT Law
The focus group discussions demonstrated the potential for the following multiple reasons of non-compliance by the SME taxpayers: the VAT rate; complexity; better position for tax non-filers; concerns with government spending; unfairness; the negative attitude of the VAT authority towards SME taxpayers and corruption. The VAT
Officials in the focus group stressed that SME taxpayers do not comply with the VAT
Law to increase their overall business profits. In the survey, reasons for non-compliance were explored through a question asking six attitude statements (Table 6.13).
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Table 6.13: Reasons for non-compliance with VAT Law
Not Strongly Strongly SMEs do not comply with the VAT Law Disagree Neutral Agree Sure Disagree Agree because (%) (%) (%) (%) (%) (%) The VAT rate is high
CT 0 1.32 25.66 7.89 25.66 39.47
NCT 1.14 0 4.56 3.42 37.50 53.38
The fine and penalty rates are very high
CT 0 3.30 20.40 5.90 52.60 17.80
NCT 1.10 3.40 10.20 9.10 58.00 18.20 Overly complex VAT law and regulation CT 0 2.64 22.37 7.89 44.73 22.37
NCT 1.14 0 4.56 3.42 37.50 53.38 Complicated and time consuming record keeping system CT 1.32 2.63 30.92 5.26 46.71 13.16
NCT 0 9.09 6.82 11.36 54.54 18.17
Higher compliance costs
CT 10.53 3.95 23.68 11.18 28.95 21.71
NCT 2.28 2.27 5.68 2.27 38.64 42.87
The VAT system is unfair
CT 2.6 9.2 59.2 13.2 9.9 5.9
NCT 3.4 9.1 27.3 14.8 26.1 19.3
VAT Officials are corrupt
CT 1.32 8.55 28.29 21.05 30.26 10.52
NCT 6.84 1.15 15.91 9.09 28.41 38.69 Discretionary and judicial power of
NBR CT 11.84 1.32 10.55 7.24 44.07 25.00
NCT 11.36 7.95 9.09 12.50 28.41 30.68
Unwise use of taxpayers’ money
CT 5.9 1.3 9.9 11.2 46.1 25.7
NCT 6.8 2.3 3.4 9.1 28.4 50.0
Better financial position of VAT non-filers
CT 9.86 3.96 36.84 11.18 17.11 21.05
NCT 14.77 1.14 10.23 3.41 22.73 47.23 Audit and inspections of NBR for VAT registered businesses CT 7.24 2.63 31.58 3.29 38.81 16.45
NCT 4.55 1.13 4.55 4.55 37.50 47.72
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The findings provide some evidence to support Allingham and Sandmo’s (1972) contention that the higher VAT rate and higher fines and penalties are important reasons for compliance.71In the survey, 90% of the NCTs and 65% of the CTs reported that the high VAT rate in Bangladesh contributed to non-compliance (Table 6.13).However, evidence suggests that the Bangladeshi VAT rate is not high compared to these of other countries. Of the 146 countries with VAT, only 37 countries have VAT rate of 15% or less; the majority (109 countries) have a VAT rate higher than 15% (Ebrill et al., 2001;
Schenk & Oldman, 2007). Nevertheless, the perception that Bangladeshi VAT rate is high may be contributing to non-compliance. Similarly, more than 70% of the respondents considered that the non-compliance increases due to higher fines and penalty rates. The penalty rate for intentional non-compliance is up to 250% in
Bangladesh. By having higher penalties and fines, SMEs may be encouraged to stay within the cash economy and not register for VAT. Moreover, when the NCTs had to pay higher penalties for their evasion, they may have considered the imposition of such penalties to be nearly harassment. Literature suggests that when the fines and penalties are too high the tax system can be perceived as unjust and unfair, leading taxpayers to avoid their tax payment (Devos, 2009). The findings also indicate that NCTs tended to consider the VAT system to be unfair, as approximately 46% of NCTs agreed or strongly agreed, whereas, 69% of CTs disagreed or strongly disagreed. The findings provide some evidence to support the importance of less complexity, as a large percentage of both CTs (67%) and NCTs (90%) considered that the VAT Law in
Bangladesh is overly complex (Table 6.13). However, the findings did not match with the focus groups, where NCTs considered that the VAT law was not very complex nor difficult to understand.
71. Allingham and Sandmo (1972) assumes that taxpayer’s behavior is influenced by factors such as the tax rate which determines the benefits of tax evasion, and the probability of detection and penalties for fraud which determines the cost. If audit detection is likely and penalties are severe, the possibility of intentional non-compliant will decrease. 185
Perceptions about unregistered VAT businesses and the advantages they have for being outside the VAT system seem to be an important factor for non-compliance. Of the non- compliant VAT payers, 70% believed that businesses that are not registered with VAT and that do not pay VAT are in a better situation than registered businesses. This may be due to non-registered firms not having the costs relating to VAT and price competition. Similarly, 75% of NCTs and 55% of CTs agreed that businesses registered for VAT are often subject to NBR audits and objections (Table 6.13). It appears that
NCTs have the perception that by becoming VAT registered, businesses are more likely to come to the attention of the NBR, compared to if they stay outside of the VAT system altogether and operated in the ‘cash economy’. Kirchler (2007) states that if a taxpayer finds the burden of taxes as unfair and that a non-compliant taxpayer is in a better position than a compliant taxpayer, then taxpayers may be discouraged to comply.
The discretionary and judicial powers of the VAT Authority appear to be important factors for non-compliance as 69% of CTs and 59% of NCTs agreed or strongly agreed that the discretionary and judicial power of VAT Authority discourages them from paying VAT. Saleheen (2013a) demonstrates that the presence of excessive discretionary powers in Bangladesh’s VAT law creates lack of trust between taxpayers and tax officials. Excessive discretionary power may encourage corruption, especially in the case of price declarations and the determination of tariff values or truncated base.
This had previously led to business organisations and donor agencies arguing for a reduction of the discretionary power of VAT officials to reduce burdens on their business and to improve voluntary compliance (GOB, 2013; IMF, 2013; “FBCCI for reducing”, 2012).
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Table 6.14: Reasons for non-compliance ANOVA Table (One tailed and Between Groups)
Reasons of Non-compliance Sum of Mean df F Sig.* Squares Square The VAT rate is high 5.731 1 5.731 4.274 0.04* The fines and penalty rates are 0.226 1 0.226 0.192 0.661 very high Overly complex VAT law and 3.318 1 3.318 2.569 0.11 regulations Complicated and time consuming 0.952 1 0.952 0.698 0.404 record keeping system. Higher compliance costs 5.701 1 5.701 2.493 0.116 VAT system is unfair 12.846 1 12.846 8.465 0.004** VAT officials are corrupt 25.618 1 25.618 10.162 0.002** The discretionary and judicial power of VAT Authority 0.015 1 0.015 0.008 0.927 discourages me to pay VAT Unwise use of taxpayers money 14.426 1 14.426 7.963 0.005** Better financial position of VAT 0.306 1 0.306 0.107 0.744 non-filers Audit and inspections of NBR for 22.22 1 22.22 11.069 0.001** VAT registered businesses R= 0.649, R Square= 0.421, Adjusted R Squared= 0.268. Std. Error of the estimate= 0.429 *p < 0.05; **p < 0.005
The ANOVA72 results demonstrate (Table 6.14) that among the selected reasons for non-compliance, only five statements yielded significant differences between compliant and non-compliant taxpayers. The areas of significant differences included the higher
VAT rate, the unfair VAT system, the corruption of VAT Officials, the unwise use of taxpayers’ money, and the possibility of audits and inspections for VAT registered businesses. Among these five reasons, NCTs emphasised the higher VAT rate (91%), the possibility of audits and inspections for VAT registered businesses (85%), the unwise use of taxpayers’ money (79%) and the corruption of the VAT Officials (67%).
The significant difference about the unfairness of the VAT system may arise as 69% of the CTs did not consider the Bangladeshi VAT system unfair, whereas only 36% of
72. The ANOVA is an important test because it enables us to see the comparison of two different types of treatment. The F-ratio tells the researcher how big a difference there is between the conditions. ANOVA tests assume: the population sample must be normal; and the observations must be independent in each sample. 187
NCTs had this opinion. Therefore, for NCTs, the big issues for non-compliance are the higher VAT rate; audits and inspections; and corruption appeared.
The ANOVA results also revealed the higher fines and penalty rates; the overly complex VAT laws; complicated and time consuming record keeping system; the higher compliance costs; the discretionary and judicial power of the VAT Officials and the better financial position of the non-compliant taxpayers to be the main reasons for non- compliance for both CTs and NCTs.
To contrast the findings for non-compliance, the survey sought to elicit reasons why taxpayers do comply. Aim, McClelland and Schulze (1991) observed that taxpayers exhibit a remarkable diversity in their compliance behaviour as they sometimes appear to overemphasise the low probabilities of detection and then sometimes appear to be risk-seeking. Braithwaite (2003) suggests that taxpayers follow quite diverse motivational postures in paying their taxes. While some may pay their taxes due to their commitment to the community, others are disengaged, or enjoy tax evasion a kind of game playing with the state.
The potential differences between CTs and NCTs regarding compliance are demonstrated in Table 6.15, with ANOVA results in Table 6.16. For example, 97% of
CTs strongly agreed or agreed that paying the correct amount of VAT is their civic duty, while only 24% of non-compliant VAT payers thought similarly. The findings of the CTs are largely consistent with the prior literature. Alm et al. (1992) stated that people comply with the obligation to pay taxes as they understand that the public goods they receive need to be financed by their taxes. Aaron and Slemrod (2004) argue that people pay taxes and comply with the tax law as a duty of citizenship.
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Table 6.15: Reasons for Compliance with VAT Law in Bangladesh
Not Strongly Strongly Disagree Neutral Agree Reasons for Compliance Sure Disagree Agree (%) (%) (%) (%) (%) (%) Paying the correct amount of
VAT is our civic duty CT 0.65 0 0 1.97 59.21 38.15 NCT 3.41 0 60.23 12.50 23.86 0 Paying the correct amount of VAT is an important contribution to the development of Bangladesh CT 0.66 0 0 2.63 59.21 37.50 NCT 10.22 6.82 11.36 15.91 34.10 21.59 VAT is a simple method of collecting tax CT 0.66 10.53 42.76 22.37 20.39 3.29 NCT 0 37.50 36.36 9.09 14.74 2.28 VAT improves business’s record keeping systems CT 1.32 1.32 7.24 12.50 57.23 20.39 NCT 4.56 3.41 6.81 13.64 64.77 6.81 VAT improves the decision making in our business CT 6.58 1.32 3.95 15.79 52.63 19.24 NCT 2.27 5.68 6.81 14.77 59.09 11.36 The likelihood of audits encourage me to comply with the VAT law CT 5.92 1.32 5.27 17.10 46.71 23.68 NCT 6.82 25.00 30.65 9.09 22.73 5.68 The likelihood of penalties and sanctions encourage me to comply with the VAT law CT 1.97 1.32 7.24 15.79 51.32 22.36 NCT 6.82 21.59 26.14 13.64 27.27 4.54
The aspect of reciprocity or exchange, that is, the public goods that taxpayers receive financed by their VAT, was found to be an important reason for compliance by the respondents. In the survey, 98% of the CTs and 56% of NCTs agreed or strongly agreed that paying VAT is an important contribution to the development of Bangladesh.
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The easier and more transparent mode of the VAT system was another reason for compliance. More than 75% CTs agreed or strongly agreed that VAT improves their business’s record keeping system and the decision making of their business. Similarly, more than 70% of NCTs agreed or strongly agreed with the benefits of VAT. It appears that SME taxpayers see the documents prepared for monthly VAT returns or other VAT related services can be useful for their business operations. For example, where businesses keep their business records properly for tax compliance purposes, this information may assist them to better understand their cash flow. This benefit of the
VAT record keeping might encourage them to comply with the VAT law (Lignier,
2009).
One of the key findings of this study relates to the relationship between perceptions of fines and penalties with compliance behaviour. Allingham and Sandmo (1972) predict that if detection is likely and penalties are severe people will be more compliant.
However, this positive relationship between penalties and sanctions with compliance appears not to hold with the non-compliant VAT payers in Bangladesh. Only 32% of non-compliant VAT payers strongly agreed or agreed that the likelihood of penalties and sanctions would encourage them to comply with the VAT law. In comparison, 73% of compliant VAT payers considered the likelihood of penalties and sanctions influencing their compliance behaviour positively. This may be due to the fact that
NCTs tend to be risk-takers in making compliance decisions. Alternatively, it may be because non-compliant VAT payers do not think there is a great risk of detection by the
NBR, as less than 28% thought the likelihood of audits would encourage compliance.
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Table 6.16: Reasons for compliance ANOVA Table (one tailed and between groups)
Reasons of compliance Sum of Mean df F Sig. Squares Square Paying the correct amount of 13.812 1 13.812 9.046 0.003** VAT is your civic duty Paying the correct amount of VAT is an important contribution 0.527 1 0.527 0.379 0.539 to the development of Bangladesh VAT is a simple method of 1.797 1 1.797 1.001 0.318 collecting tax VAT improves business’s record 0.153 1 0.153 0.149 0.700 keeping systems VAT improves the decision 3.89 1 3.89 2.652 0.105 making in our business The likelihood of audits encourage me to comply with the 12.463 1 12.463 10.746 0.001** VAT law The likelihood of penalties and sanctions encourage me to 13.14 1 13.14 4.964 0.027* comply with the VAT law R= 0.568, R Square= 0.322, Adjusted R Squared= 0.198. Std. Error of the estimate= 0.429 *p < 0.05; **p < 0.005
The ANOVA results (Table 6.16) demonstrate that only three statements yielded significant results between the two groups in terms of reasons for compliance: civic duty, likelihood of audit and the likelihood of fines and penalties. It appears for CTs that the major reasons for their compliant behaviour relate to their sense of civic duty and fear of audits and penalties. These three reasons affect CTs more than NCTs. The non- compliant taxpayers do not think that the likelihood of audits, fines and penalties will encourage them to be compliant. This may be because penalties and fines imposed by the VAT authority are not considered by NCTs as serious due to corruption of the VAT
Officials. That is, NCTs may think they can manage corrupted VAT Officials with bribes or speed money.
It was confirmed that a large majority (70%) of the respondents perceived there to be benefits to VAT compliance. In particular, they believed that keeping tax records was an incentive to their businesses. Keeping better and more accurate records, in turn, led to a better knowledge about the financial position and decision of their businesses. 191
Dosser (1981) considers VAT as a good device for modern accounting procedures even for small businesses. Therefore, these benefits of VAT could induce both CTs and
NCTs to be more compliant.
6.4.2 VAT Compliance Costs and Non-compliance
The sub research question 2 of this research related to the potential relationship between
VAT compliance costs with VAT non-compliance. In this study, it was found that complying SMEs have lower compliance costs than non-complying SMEs. The results seem to suggest that SMEs with higher compliance costs possibly tend to not comply with the VAT Law and regulations, although it may be that their non-compliant behaviour that increases their compliance costs. Table 6.4 demonstrates that although non-complying SMEs have relatively higher compliance costs than complying SMEs, the margin is less than 10%. The extra costs incurred by the non-complaint taxpayers may be related to the costs of their audit, objections and appeal processes.
Several attitude statements were used in answering this sub research question 2. In general, examining the overall attitude of respondents towards VAT compliance costs, it was found that NCTs tended to have negative attitudes towards compliance costs. More than half of the non-compliant respondents (64%) disagreed or strongly disagreed with the statement that ‘the VAT compliance costs of our businesses are insignificant’. In contrast, less than half of the respondents (37%) from CTs agreed or strongly agreed that the VAT compliance costs of their businesses are insignificant. The compliance costs may be insignificant for some of the CTs, as most of the respondents of Group 1
(37 out of 42) did not use external services for VAT.
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Table 6.17: Compliance Costs and Non-compliance
Compliance Costs and Non-compliance Agree/ Disagree/ Not Sure/ (CT= 152, NCT= 88) strongly agree strongly disagree neutral CTs NCTs CTs NCTs CTs NCTs The VAT compliance costs of our business are insignificant 37% 20% 46% 64% 17% 14% Our core business suffers due to VAT compliance costs 37% 52% 38% 27% 25% 21%
Compliance with the VAT law is excessively burdensome and costly for 50% 87% 27% 8% 22% 5% taxpayers The burden of compliance costs discourages the owners to fulfil VAT 46% 68% 35% 17% 18% 14% obligations
Table 6.18: Compliance Costs and Non-compliance ANOVA Table (one tailed and between groups)
Compliance Costs Sum of Mean df F Sig. Squares Square The VAT compliance costs of our 11.568 1 11.568 6.799 0.01* business are insignificant Our core business suffers due to 6.050 1 6.050 2.792 .096 VAT compliance costs Compliance with the VAT law is excessively burdensome and 5.701 1 5.701 2.493 0.116 costly for taxpayers The burden of compliance costs discourages the owners to fulfil 16.385 1 16.385 9.323 0.003** VAT obligations R= 0.649, R Square= 0.421, Adjusted R Squared= 0.268. Std. Error of the estimate= 0.429 *p < 0.05; **p < 0.005
From the focus groups, it appeared that compliance costs could be an important factor for VAT non-compliance by compliant SME VAT payers, but not for non-compliant
VAT payers. However, the survey findings demonstrate the opposite, as more than three-quarters (87%) of NCTs felt that compliance with the VAT law is excessively burdensome and costly for taxpayers. In contrast, only 50% of CTs thought this. The
ANOVA results also demonstrate significant differences between CTs and NCTs with regard to two statements: ‘The VAT compliance costs of our business are insignificant’
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and ‘The burden of compliance costs discourages the owners to fulfil VAT obligations’.
Consequently, it appears that for NCTs a major reason of non-compliance is the perception that high VAT compliance costs discourages them for fulfilling their VAT obligations.
There could be a number of reasons why half of the CTs did not consider VAT compliance burdensome and costly, including some methodological aspects of the current research. Firstly, as the current research involves a sensitive area of taxation, it is not known to what extent the respondents were honest in demonstrating their non- compliance behaviour. The compliant taxpayers may be reluctant to respond to negative statements. Secondly, the owners were requested to complete the survey by themselves or with a person who is expected to have sound financial and accounting knowledge of the business. However, the extent to which the survey was completed by them directly is not known. Thirdly, compliance costs are derived based on estimates gathered through self-reporting surveys. It is possible that respondents were not able to accurately recall their time and money spent. A total of 23% respondents (CTs and
NCTs) were in ‘not sure’ or ‘neutral’ position about commenting on compliance costs.
The ANOVA results did not find a significant difference between the two groups about the statement ‘compliance with the VAT law is excessively burdensome and costly for taxpayers’. Also, a total of 45% respondents (CTs and NCTs) agreed or strongly agreed that their core business suffers due to VAT compliance costs. Higher compliance costs can significantly take away time and money from the taxpayers which could be spent on other business activities. The insignificant ANOVA results for the second and third statements of Table 6.18 demonstrate that in general both CTs and NCTs found higher compliance costs to be burdensome for their businesses.
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6.4.3 Complexity and Non-compliance
To address the research question RQ 3 about the relationship between non-compliance and complex legislation, it was necessary to identify the complexity of the VAT Law in
Bangladesh. Complexity within the tax law arises where a respondent, such as a business taxpayer, experiences or perceives any difficulty fulfilling their tax obligation
(McKerchar, 2003). In this respect, the focus group discussions identified several complexities, such as price declarations; complicated rebate and refund procedures; highly complicated language; judicial interpretations of the law; frequent changes of the law; and inconsistency between rules/ office orders/statutory regulatory orders (SROs).
Using this as a basis, a question of the survey asked respondents to judge the complexity of the existing VAT Law in Bangladesh. The findings are presented in
Table 6.19 and Table 6.20 including the ANOVA results comparing CTs and NCTs.
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Table 6.19: Reasons for Complexity of the VAT Law
Strongly Strongly Complexity of the VAT law Not Sure Disagree Neutral Agree Disagree Agree (%) (%) (%) (%) (%) (%) Multiple rates of VAT CT 1.97 4.61 21.71 6.58 40.13 25.00 NCT 1.14 4.56 3.42 7.95 38.63 44.31 The number of VAT related forms CT 0.66 1.97 30.93 5.92 49.34 11.18 NCT 6.82 2.28 13.64 6.82 34.09 36.37 Judicial interpretation of VAT legislation CT 13.16 2.64 15.13 11.80 41.44 16.44 NCT 10.22 2.27 15.91 3.42 42.05 26.14 The price declaration procedure CT 26.66 6.58 5.42 3.29 22.37 36.18 NCT 7.95 3.42 2.28 10.22 32.95 43.18 Rebate and refund procedure CT 23.7 3.3 19.7 3.3 17.8 32.2 NCT 9.1 3.4 4.5 12.5 25.0 45.5 The length of time for judicial system for VAT cases CT 17.76 1.97 6.58 6.58 32.24 34.87 NCT 2.28 4.56 5.68 5.68 26.14 55.68 Understandability of VAT instructions CT 31.58 2.64 18.42 3.29 38.82 5.25 NCT 13.64 0.66 6.82 5.68 33.55 14.74 Frequent changes to VAT legislation CT 9.21 2.64 9.87 4.61 26.97 46.71 NCT 4.56 15.91 10.22 12.50 1.14 55.68 Inconsistency between law/rules/office orders/SROs CT 12.50 3.29 11.84 3.29 19.24 49.34 NCT 12.50 17.06 10.21 6.82 2.27 51.15 The VAT registration process CT 6.58 8.55 17.11 16.44 31.58 19.74 NCT 1.14 6.82 19.35 4.56 42.04 26.14
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Table 6.20: Reasons of Complexity ANOVA Table (between groups)
Complexity of VAT Law Sum of df Mean Square F Sig. Squares Multiple rates of VAT 5.407 1 5.407 3.385 0.067 The number of forms 11.759 1 11.759 7.403 0.007* Judicial interpretation of 19.843 1 19.843 8.154 0.005** legislation Price declaration 0.355 1 0.355 0.095 0.758 Rebate and refund procedure 3.326 1 3.326 0.926 0.337 The length of time for judicial 6.808 1 6.808 2.376 0.125 cases Understandability of VAT 0.248 1 0.248 0.077 0.782 instructions Frequent changes to VAT 18.505 1 18.505 8.149 0.005** legislation Inconsistency between 26.364 1 26.364 8.452 0.004** law/rules/office orders/SROs The VAT registration process 2.344 1 2.344 1.143 0.286 R= 0.451, R Square= 0.203, Adjusted R Squared= 0.135. Std. Error of the estimate= 0.466 *p < 0.05; **p < 0.005
It is apparent from Table 6.19 that respondents perceived that complexity existed: 63% of the CTs and 82% of the NCTs found multiple rates of VAT to be one of the main reasons for complexity. Supporting the focus groups, complicated refund and rebate procedures were found complex by both the CTs and NCTs. For example, 50% of CTs and 70% of NCTs found refund and rebate procedures complicated. The survey also found 70% of the NCTs and 50% of CTs considered this complexity to be due to the requirements of excess documentation, lengthy timing and complicated procedures.
Similarly 58% of the CTs and 76% of the NCTs considered price declaration as a reason for the complexity of the VAT law.
The ANOVA result yielded significant differences between groups in terms of inconsistency between law/rules/office orders/SROs, frequent changes to VAT legislation, judicial interpretation of legislation and the number of VAT related forms to be filled out. More than 25% NCTs did not agree or strongly disagree frequent changes of VAT legislation and inconsistency between the laws/rules/ office orders/SROs as the
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causes of complexity. This may be because NCTs who had external advice did not find frequent changes of VAT Law and inconsistency between Law, rules and SROs to be complicated or this inconsistency aided their tax planning opportunities. Another reason may be they are not concerned about following the changes of the law. The results identified that both CTs and NCTs thought the following factors added complexity to the VAT law: multiple rates of VAT; price declarations; complicated refund and refund procedure; lengthy judiciary; understandability of VAT law; and the VAT registration process.
The findings from the survey provide some evidence that complexity leads to non- compliance. A large percentage of CTs (67.1%) and NCTs (78.42%) considered that the
VAT Law in Bangladesh is overly complex (Table 6.13) and stated that complexity is one of the major reasons of non-compliance. The ANOVA results (Table 6.14) also found no significant differences between CTs and NCTs about overly complex VAT law and regulations as a reason for non-compliance (F= 2.569; p =0.11).Abdul-Jabbar and Pope (2008) stated that the level of voluntary compliance by SMEs depends upon several factors: the complexity of the tax laws, the frequency of the law changes, and the higher compliance costs. Evans (2003) considered ‘frequency of change’ and
‘complexity’ as the major drivers of the compliance costs and non-compliance for personal taxpayers in Australia and the UK. The KPMG Report (2006, p. 6) also noted
‘change creates both cost and uncertainty’. Given there have been frequent changes of
VAT Law in Bangladesh, the complexity and compliance burdens are relatively higher for SME businesses than for large businesses.
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6.4.4 Deterrent Effect and VAT Compliance
The economics-of-crime model (Allingham & Sandmo, 1972; Srinivasan, 1973) specifies that compliance depends upon enforcement by the tax administration. This approach concludes that an individual pays taxes because of fear of detection and punishment.
Research question SRQ-3 of this study is related to the potential relationship of the deterrent effect with VAT compliance. Table 6.21 reports the findings of taxpayers’ perception about the deterrent effect on taxpayer compliance.
Table 6.21: Deterrent Effect
Statement about Deterrent Not Strongly Strongly Disagree Neutral Agree Effect Sure Disagree Agree (%) (%) (%) (CT=152, NCT=88) (%) (%) (%) Taxpayers would pay the correct amount of VAT if there was greater enforcement by VAT Authority CT 6.58 5.92 9.87 9.21 46.71 21.71 NCT 6.82 22.73 22.73 9.09 26.13 12.50 Significant promotion of NBR prosecutions of non-compliant taxpayers would increase psychological costs among other SME taxpayers CT 9.2 7.0 3.9 18.4 34.2 33.6 NCT 6.8 17.0 4.5 10.2 45.5 15.9 Significant promotion of NBR prosecutions of non-compliant taxpayers would increase compliance among other SME taxpayers CT 4.61 0.66 4.61 17.76 42.76 29.61 NCT 6.82 25.00 18.18 13.64 27.27 9.09
A similarity between compliant and non-compliant taxpayers was that significant promotion of NBR prosecutions of NCTs would increase psychological costs among other SME taxpayers (68% for CTs and 61% for NCTs). It appears that prosecutions can increase psychological costs. Otherwise there was differing opinions about the
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deterrent effects of significant promotion of the NBR prosecutions regarding compliance decisions. For example, 72% of the CTs strongly agreed or agreed that significant promotion of NBR prosecutions of non-compliant taxpayers would increase compliance among other SME taxpayers, while only 36% of NCTs thought so.
Similarly, 43% of NCTs did not agree that greater enforcement by the NBR would increase compliance, whereas only 5% of CTs disagreed with this. This would indicate that there is a greater deterrent effect for CTs than for NCTs. This is re-enforced by the findings in Table 6.16, which indicate the likelihood of audits and penalties having greater impact on CTs compared to NCTs. The findings demonstrate the importance of changing the attitude of NCTs compared to CTs to gain improved compliance. The present enforcement by NBR may be another reason for the lower deterrent effect by
NCTs. For example, in 2012 a mere 15,873 (out of 460,092) businesses received a show-cause letter from the VAT Commissionerates for not submitting the monthly VAT returns; of them, only 1,659 businesses were penalised for these non-compliance activities (NBR, 2014).It may be that taxpayers are well acquainted with the NBR’s administrative inefficiency and they feel it is extremely unlikely that their non- compliance will be detected and penalised. Indeed, it may be the ineffectiveness of the audits and the potential corruption that reduce the deterrent effects of audits. The overall results demonstrate that the deterrent effect appeared to be important for CTs to ensure compliance but not so for NCTs.
6.4.5 The Perceptions of Corruption and Taxpayers’ Voluntary Compliance
The discussions and comments made by the respondents during focus group discussions demonstrated that there could be multiple reasons for non-compliance beyond complexity and VAT compliance costs, including corrupt politicians and civil servants.
Some of the VAT Officials also identified corruption as a potentially influential factor
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for non-compliance. To tease out perceptions of corruption and VAT compliance, a number of questions were asked in the survey (Table 6.22 and Table 6.23).
Table 6.22: Corruption and Voluntary Compliance
Not Strongly Strongly Statement about Corruption Disagree Neutral Agree Sure Disagree Agree (CT=152, NCT=88) (%) (%) (%) (%) (%) (%) If I saw less corruption by Bangladesh big business I would be willing to pay the correct amount of VAT CT 0 2.6 7.9 11.8 58.6 19.1 NCT 3.4 4.5 22.7 17.0 37.5 14.8 If I saw less corruption by government officials I would be willing to pay the correct amount of VAT CT 0 7.00 2.6 11.2 69.1 16.4 NCT 13.6 3.4 12.5 14.8 34.1 21.8 If I saw less corruption by VAT Officials I would be willing to pay the correct amount of VAT CT 7.00 7.00 5.3 8.6 65.8 19.1 NCT 6.8 3.4 5.7 14.8 47.7 21.6 If I saw less corruption by Bangladeshi politicians I would be willing to pay the correct amount of VAT CT 0 7.00 6.6 7.2 66.4 17.1 NCT 11.4 3.4 23.9 12.5 33.0 15.9
Table 6.23: Role of Corruption in Voluntary Compliance ANOVA Table (Between Groups)
Sum of Mean Voluntary Compliance df F Sig. Squares Square Less corruption by Govt Officials 16.116 1 16.116 16.261 .000** Less corruption by VAT Officials 6.253 1 6.253 5.731 .017* Less corruption by big businesses 3.881 1 3.881 3.246 .073 Less corruption by Bangladeshi 3.652 1 3.652 2.557 .111 politicians R= 0.710, R Square= 0.504, Adjusted R Squared= 0.277. Std. Error of the estimate= 0.426 *p < 0.05; **p < 0.005
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It appears that the reduction of corruption would have the biggest positive influence for
CTs, although it would still have some positive impact for NCTs. Particularly, less corruption by VAT Officials could have the largest influence for both CT (85%) and
NCT (69%), followed by government officials. It is interesting that more than 20% of the NCTs are in the position of ‘not sure’ or ‘neutral’ about the statements relating to corruption, whereas only 10% of the CTs are in this position. This may be because a larger portion of NCTs did not want to comment about the corruption of the VAT
Officials or the politicians, as they have taken part in the corruption process to gain favour. Only 11% of CTs and 20% of NCTs disagreed or strongly disagreed that less corruption by politicians, civil servants (government officials and VAT officials) and big businesses would increase voluntary compliance among the taxpayers. The ANOVA results (Table 6.23) do not show significant difference between groups in terms of less corruption by politicians (F = 2.557, p =.111) and big businesses (F = 3.246, p = .073).
The findings that the corrupt practice of politicians, government officials, VAT
Officials, and big businesses encourage VAT non-compliance are consistent with prior literature based on income tax corruption in Bangladesh (Monir, 2012).
Overall the findings suggest that perceived corruption by VAT Officers, politicians and other government officials reduces the effectiveness of audits and fines and penalties and decrease the level of voluntary compliance.
6.5 Summary of Findings from Survey
The first research question addressed through the survey was “What are the costs of complying with the VAT Law in Bangladesh for compliant and non-compliant SME taxpayers?” Overall, the survey results indicate that the VAT compliance costs in
Bangladesh for the financial year 2011-12 were higher for non-compliant than for compliant VAT payers. This trend is generally consistent for both monetary and
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psychological costs. The manufacturing sector has the highest compliance costs among the sectors in Bangladesh. Part of the explanation for these extra costs for the manufacturing sector’s VAT payers may be due to their extra VAT related activities, such as additional record keeping, value declarations, audit, refund, and rebate procedures. Also, the manufacturing sector is subject to more audits than other sectors.
The results also demonstrated that the monetary compliance costs of VAT were higher when VAT consultants were engaged to prepare monthly VAT returns and other activities. However, the time costs were higher when the owners, sole proprietors or internal managers performed most activities, compared to those using external advisers.
VAT compliance costs were regressive and found to be varying by size of business, by location of the business and by who prepares the VAT returns. Non-routine expenses
(mainly speed money/bribes) accounted for more than 7% of the total compliance costs for SME taxpayers.
Addressing the second research question, “What is the value of psychological costs in taxpayers' total compliance costs?”, found that psychological costs are a substantial component of VAT compliance costs for SMEs in Bangladesh, with little difference between CTs and NCTs, and accounting for 15.50% of total the VAT compliance costs in Bangladesh. The survey results indicated that psychological costs of VAT in
Bangladesh are found to be higher for the manufacturing sector than other sectors. Part of the reason for this could be attributed to the high level of discretion in this sector, in terms of the value that VAT applies to. Also this may be attributed to the larger audit activity and frequent visits by the VAT Officials with this sector.
The third research question considered was “What are the reasons for non-complying with the VAT Law by Bangladeshi SMEs?” Broadly, the survey results suggest that a majority of the compliant SME taxpayers considered complexity with the VAT law and compliance costs as the two important factors influencing VAT non-compliance by
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SMEs. On the other hand, while non-compliant VAT payers agreed that the VAT law is overly complex, they also place emphasis on higher fines and penalties. However, the likelihood of audits, penalties and sanctions were found to have less effect on VAT non- compliance for NCTs. Also it was found that negative perceptions about government policy and spending of tax revenue may contribute to non-compliance. Other negative influences on compliance included perceptions of tax officers being unfair and corrupt, and the discretionary power provided to them.
Another two research questions were addressed: “Is SME non-compliance with the
VAT Law in Bangladesh due to the costs of VAT compliance being excessively high for these taxpayers?” and “Is non-compliance with the VAT Law by some SME taxpayers in Bangladesh a result of the legislation and regulation being overly complex?” Broadly, the findings were consistent with The GINI research (2014) in relation to VAT and entrepreneur development in South Asia. It was revealed that excess compliance cost of taxation was one of the reasons for SME taxpayers to be non- compliant. The same study showed that VAT related costs were found to be burdensome to 75% of SME respondents. This research found that 81% of NCTs and
51% of CTs agreed or strongly agreed that compliance with the VAT law is excessively burdensome and costly for taxpayers. While the focus groups thought VAT compliance costs could be an important factor for VAT non-compliance, the survey found this was not the case for non-compliant VAT payers. The most common reason for the higher compliance costs was ‘complexity of regulations’. The survey results suggest that the majority of SME taxpayers (both compliant and non-compliant) used external help to deal with the complexity of VAT Law. Previous literature also suggests that the primary reason taxpayers use tax practitioners is to file accurate tax returns (Collins et al., 1990;
Tan, 1999).The other reasons stated by respondents for the higher VAT compliance costs were frequency of changes to VAT law; the number of forms and books to keep;
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failure of the NBR to enforce the law, thus placing registered SME taxpayers at a disadvantages and non-routine expenses like speed money and bribes.
Complexity of the VAT Law was considered as one of the main reasons for non- compliance by most of the CTs. While the majority of non-compliant participants expressed the views during the focus groups that the VAT Law in Bangladesh was not very complex and difficult to understand, 87% percent of NCTs in the survey considered the overly complex nature of the VAT law to be one of the main reasons for non-compliance.
The final research question asked “To what extent are the deterrent measures of VAT
Law effective to ensure compliance with the Law?” Indications from the comments and discussions in the focus groups were that VAT Officials viewed significant deterrent effects from NBR prosecutions of non-compliant taxpayers would increase voluntary compliance among taxpayers. However, the survey found that for non-compliant taxpayers such prosecutions appear to have little impact on them. For example, 36% of the NCTs disagreed or strongly disagreed that significant promotion of NBR prosecutions of non-compliant taxpayers would increase compliance among other SME taxpayers. However, the deterrent effect appears to influence CTs as 72% of compliant
VAT payers thought significant promotion of NBR prosecutions would be effective to increase compliance. Legislators often try to increase the deterrent effect by successful prosecution against non-compliance taxpayers. However, Bangladeshi non-compliant taxpayers do not think heavier fines and penalties or prosecution actually improve compliance. This may be because of the fact that NCTs tend to be risk-takers in making compliance decisions, and so penalties and fines imposed by the VAT authority are seen as risks worth taking. Alternatively, it may be because NCTs do not take the deterrent effect seriously as the tax administration is seen as weak, inefficient, and corrupt in
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6.6 Conclusion
This chapter has reported the results of the survey component of the research, which measured the VAT compliance costs and also explored the VAT non-compliance by
SMEs in Bangladesh. The chapter began by describing the descriptive statistics of the survey. The results of the survey were then presented in the context of each of the particular research questions. This was followed by a discussion of the findings for each of the research questions. The next chapter will present the data obtained through in- depth interviews with VAT Officials and SME taxpayers (both compliant and non- compliant), which explored some of the survey findings in more detail.
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Chapter 7
In-depth Interviews
7.1 Introduction
This chapter presents the key steps and results of the in-depth interviews conducted as in Stage 3. This included face-to-face interviews with VAT Officials from both field and policy levels, as well as selected SME taxpayers who indicated their interest to be interviewed through their survey instrument. This methodology fits with the criteria of mixed methods as stated by Creswell and Clark (2007), which posits that with a mixed method study a researcher can collect data using a quantitative survey instrument and can follow up with interviews with a few individuals who participated in the survey to learn more detail about their survey responses.
The remaining part of this chapter is organised as follows. Section 2 presents the demographics of the participants; Section 3 gives the perceptions of the participants about the complexity of the VAT Law. VAT compliance costs and non-compliance related discussions presented in Section 4, which are followed by perceptions about the deterrent effects in Section 5. Section 6 considers the relationship between complexity, compliance costs and non-compliance. Section 7 discusses the results of the documentary analysis. The summary of findings and conclusions are presented in
Section 8 and Section 9 respectively.
7.2 Demographic Characteristic
The 26 participants participated in the in-depth interviews, were recruited through the survey instrument. Table 7.1 provides a detailed breakdown of the participants by age, gender, level of education and their working experience in VAT area.
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Table 7.1: Demographic Statistics
Age Gender Education Experience(Years) Code No
42 Male BSC 14 CTI 1 48 Male MA 11 CTI 2 63 Male MA 22 CTI 3 40 Male BCom 11 CTI 4 46 Male MA 13 CTI 5 41 Female MBA 15 CTI 6 64 Male MSC 23 CTI 7 42 Male MSC 11 NCTI 1 46 Male BBA 13 NCTI 2 49 Male BSC 20 NCTI 3 64 Male MA 28 NCTI 4 41 Male BBA 12 NCTI 5 44 Male BCom 16 NCTI 6 40 Male MA 12 NCTI 7 39 Male MBA 11 VOB 1 48 Female MSC 19 VOB 2 39 Male BSC (Engineer) 13 VOB 3 45 Male MBBS 17 VOB 4 43 Female MA 16 VOB 5 39 Male MSS 13 VOB 6 49 Male MSC 20 VOB 7 40 Male MSC 12 VOB 8 (Engineer) 45 Male Postgraduate 16 VOB 9 51 Male MBA 22 VOB 10 43 Female MSS 15 VOB 11 49 Female MSC 18 VOB 12 Notes: CTI means Compliant Taxpayers for In-depth interviews; NCTI is Non-Compliant Taxpayers for In-depth interviews and VOB stands for VAT Officials for In-depth interviews. In the in-depth interviews, all of the participants were aged between 39 and 64 years of age. With working experience averaging 16 years, the participants were well experienced to contribute their knowledge about VAT for this research. In terms of education, 100% of the participants were graduates and above. It appears that participants in Stage 3 are more educated than those in focus groups and Bangladeshi people in general, as the national percentage of graduates and above was 9% in May
2010 (BBS, 2010). Consequently, the results of the in-depth interviews need to be kept in mind.
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7.3 The Role of VAT Law Complexity in VAT Compliance
The complexity of the VAT Law appeared to be one of the main reasons of non- compliance by most of the taxpayer participants during the focus groups discussions. In
Stage 2, a large percentage of both compliant (67%) and non-compliant taxpayers
(90%) considered that the VAT Law in Bangladesh was overly complex (Table 6.13).
In Stage 3 most of the VAT Officials strongly supported the complexity within the VAT
Law. Some of the interviewees including SME taxpayers expressed a generalised view that VAT Law complexity and its counterpart, VAT Law simplification, means different things to different people. To a tax lawyer or tax consultant, complexity may mean that a reasonably certain conclusion, in some instances, cannot be determined despite diligent and expert research. To a general taxpayer, complexity would refer to the navigability of the tax instructions and forms:
Complexity means to take more than 100 hours each month for VAT related work. There are more than 15 Mushak (VAT) forms to fill out by my staff. These are really burdensome to me. (CTI 4)
Complexity means burdensome record-keeping requirements. For example, to submit the monthly VAT return, refund, keeping and updating buying and selling registers or keeping a bunch of bill-of-entries. (CTI 5)
A statute that is vaguely worded means complexity to me. I need to consult with consultants, VAT Officials, or other additional sources of information for clarification of that vague statute. And, I get different explanations always. (NCTI 1)
Complexity means monetary burden to me. Bangladeshi VAT Law has a higher level of legal complexity which increases legal fees. When complexity is low legal fees are low. So VAT consultants and sometimes VAT Officials do not want a minimum level of legal complexity. (NCTI 5)
Notions around the complexity of the tax law refer to the specialised nature of tax law configurations, which cause calculations of tax payable to be difficult (Mudler,
Verboon, & De Cremer, 2009). The interviews with the NBR Officials revealed some
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interesting findings about complexity of the VAT law. Some of the respondents
(especially VAT Officials) saw complexity within the VAT law as inevitable. Three of the interviewees recognised that the VAT Law must account for the ways in which every individual and every business operates. In this way they thought complexity was unavoidable, given that 700,000 businesses are affected by the VAT Law and over 377
Billion BDT (5 billion USD) was collected in 2012 (NBR, 2012). For example, with a real estate and construction company’s transactions, it needs to be determined whether or not a property is used in a trade or business, for residential or for investment or rental purposes. Also there needs to be consideration of whether the owner is a foreign investor or joint tenant with right of survivorship or whether the products to be sold are subject to 15% as VAT or in tariff value. In order for the VAT system to take everything into account, complexity is an evitable part of the VAT systems:
The VAT Law and regulations are complicated because of the significant revenue it produces. As long as society changes, the economy becomes more sophisticated, so too should the VAT Law. (VOB 2)
The variations of business and the forms of transactions are increasing day by day. To adequately address all transactions the VAT system has to take into account everything. Therefore complexity has to be added to the tax systems to address them. (VOB 5)
The VAT law and VAT administration have to be complex enough to differentiate between simple and complex transactions. It must be extensive enough to cover vast area of transactions that in place in a complex economy (VOB 11)
The above comments demonstrate that complexity can be inevitable given the vast variety of transactions that take place in a modern society. Originally in 1991, VAT was imposed on only the importations and the manufacturing sector, whereas in 2015 VAT has been expanded to cover also trade, service sectors, and distributions (GOB, 2014).
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NBR Officials also claimed that the elimination of taxpayer abuse and loopholes adds complexity to the tax system. They added that lawyers, taxpayers, accountants, and even some of the VAT Officials meticulously search the Code for ways to take advantage of gaps and ambiguities in the system. A VAT officer with 20 years’ experience in VAT administration explained:
Many taxpayers try to take the chance of the loopholes of VAT law. To eliminate loopholes and abuses within the VAT law, NBR must either repeal or amend provisions containing loopholes. NBR makes changes to the VAT law to avoid or close loopholes and the result is a frequently changing code with a predisposition toward detailed, complex provisions. (VOB 7)
The NBR continuously monitors the Code for potential abuse and takes steps to eliminate areas of abuse, especially during the national annual budget period. An NBR
Official claimed that the NBR always tries to involve stakeholders in the budgetary process to try to improve compliance. However, some of the Officials agreed that the consultation process could increase complexity:
Whenever we invite business people during the annual national budget cycle to provide suggestions about how to overcome the complexities they are claiming with the existing VAT Law, most of the time their proposals are so impractical and create much confusion. It seems that at that time they only care about their own business and not about the government’s need for revenue. (VOB 7)
A large body of literature suggests that revenue authorities prefer complex tax laws in order to win tax disputes and increase tax revenue (e.g.,Scotchmer & Slemrod, 1989;
White et al., 1990). However, the complexity of the VAT system was seen to be a benefit to tax evaders through the ad hoc culture of VAT audits. Some of the compliant taxpayers claimed that the audit lottery of the VAT system permits aggressive taxpayers to test the system and take advantage of the ambiguity of the VAT Law:
The VAT audit system is completely biased and complex in Bangladesh. This is one type of lottery. This system leads to dishonesty because complexity leads honest tax payers to non-comply; it drives out good practitioners in favour of the bad and lowers the risk of a dishonest taxpayer being caught (CTI 5).
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One of the Officials argued that the cycle of abuse and measures to close loopholes increase the complexity of the VAT system. Due to the devices used to take advantage of loopholes being intricate, the amendments addressing them must also be intricate. As taxpayers develop new loopholes, the NBR makes changes to the VAT laws to avoid and close these loopholes, and the result is a frequently changing Code with a predisposition toward detailed, complex provisions:
In my last 20 years of working experience with the taxpayers, I have noticed that you can’t control the evaders with a simplified law. Tax law should be tricky and indistinct sometimes to check the evaders. (VOB 3)
However, this cycle of amendments could be particularly hard on compliant taxpayers, who can also be affected by the complex procedures. These complexities add technical complexity to the VAT Law, which in turn adds structural complexity for taxpayers who have to determine if their activities fall within the law. Compliance complexity is also added in the form of more guidelines, VAT forms, and filing requirements. Despite the added complexity and the overall concerns for simplicity in the VAT Code, it appears that some compliant taxpayers generally prefer complexity as they want the system to be fair:
I think, fairness means that the rules apply to everybody and everybody plays by the rules. If the NBR needs to make the VAT Law complex to combat VAT evasion and to give punishment to the evader, I support complex legislation. (CTI 2)
If I would have an option between added complexity and unfairness, I always choose complexity. (CTI 3)
Additionally, some of the interviewees strongly expressed that if complexity could ensure VAT benefits (input tax credit, timely refunds, managerial benefits from better record keeping), then complexity within the VAT Law is preferable to simplicity:
I think, SME taxpayers generally are unwilling to sacrifice VAT benefits to achieve simplicity. (CTI 5)
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In terms of complexity some of the interviewees indicated that exclusions from VAT can increase the complexity known as ‘tax expenditure’.73 Although the primary purpose of the tax system is to collect revenue, the NBR can use the system to promote and to discourage certain behaviours, to attain social and economic goals, and to try to assist micro and small taxpayers (NBR, 2012). In recent years the NBR has extensively used VAT expenditures and there are no signs of the trend slowing (Bangladesh Bank,
2012).It appears that the VAT system grows and becomes more complex every time the
NBR uses it to achieve social or economic goals. Given the extensive use of tax expenditures, complexity is inevitable in the tax system:
Tax expenditure is a requirement to make the tax system justifiable and less regressive to the small businesses. To illustrate the tax expenditure, complexity is inevitable in the system. (VOB 11)
The literature argues that when tax law serves revenue, equity, efficiency and social purposes, this can be at the expense of simple tax laws (Forest & Sheffrin, 2002). To try to improve fairness, some taxpayers with certain levels of business income may be exempted from paying VAT or charged lower tax rates as in less regressive VAT systems (Forest & Sheffrin, 2002, Partlow, 2013). However, having many tax exemptions, causes confusions and renders the tax laws difficult to comply with (Oliver
& Bartley, 2005). In Bangladesh, there is a long list of exemptions (NBR, 2012) which appears to create complexity within the VAT law:
I think a long list of exemptions increase complexity in the VAT system. Every year during the annual budget we have to suffer a lot to update the list, to inclusion and exclusion of the goods and services to the list. Similarly, taxpayers have to take pains, especially the businesses, which produce both goods from the exempted list and taxable products. But we can’t ignore the exemption also. To ensure equity and regressivity, exempted products are a must. (VOB 9)
73. Tax expenditure is a label attached to certain exclusions, deductions, and credits that have the effect of reducing the tax collected while presumably furthering some other goal. 213
Some of the interviewees argued that a complex tax code brings uncertainty to the tax system. Two of the interviewees suggested that the use of broad statutes and imprecise language leads to increased uncertainty and thereby complexity and time-consuming judicial interpretation by the courts. This can put a disproportionate burden on SME taxpayers who are legitimately trying to comply with the law but have to bear the cost of legal research by tax professionals or litigation due to uncertainty in the law’s application. Survey results show that small businesses will do this research themselves, whereas large SMEs will engage external professionals. It was evident from the interviews that both the SME taxpayers and the VAT Officials are conscious of the certainty of the VAT system as a fundamental requirement of a fair tax system:
The more certainty SME taxpayers have about the VAT law and the more predictable the VAT law is from year to year, the easier it is for SME taxpayers to comply with the VAT Law and the less likely it is for taxpayers to make unintentional errors. While certainty is necessary, it cannot be achieved through broad laws. (VOB 9)
Partlow (2013) argues that broad statutory language can lead to more ambiguity and noncompliance. Such broad statutes can lead to taxpayer abuse, increased judicial interpretation and the seeking of help from tax professionals, and thus cause higher compliance costs for SME taxpayers (Abdul-Jabbar &Pope, 2009).
Some of the compliant taxpayers were very vocal against the complexity, arguing that complexity of the VAT law sometimes leads to ambiguity, creating opportunity for manipulation and lessening the likelihood that the NBR will be effective in detecting non-compliance. Complex provisions may facilitate intentional non-compliance
(evasion) in part because they make it difficult for the NBR to determine whether a taxpayer is complying with the law without a substantial and sophisticated audit.
Complexity also makes it difficult for the VAT Officers to know the law properly and
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for Courts to interpret ambiguities. The consequences of VAT Law complexity is best summed up in the following comments:
Complexity begets more complexity burden and non-compliance, as it creates opportunities for abuse, which in turn spur more complex legislation that may alienate taxpayers. (CTI 3)
Complexity creates ambiguity, unintentional non-compliance, and opportunities for manipulation and can encourage pessimism which can lead to intentional non-compliance. (CTI 5)
Complexity causes frustration and doubt about the fairness of the tax system, which in turn leads to noncompliance. (NCTI 6)
Complexity encourages tax shelters and aggressive positions that reduce compliance, produce controversy, and waste both NBR and taxpayer resources, reducing respect for the tax system. (CTI 4)
These comments demonstrate that taxpayers believe complexity of the VAT law is an important cause of non-compliance in Bangladesh. This was also supported by the findings from Stage 1 and Stage 2. Even though some of the VAT Officials strongly supported complexity, they asserted that there was a growing awareness about the importance of simplicity. They stated that even the length of the sentences within the
VAT Law should be significantly reduced and more precise language should be used to make the law simpler. Following this broader discussion about the complexity of the
VAT legislation in general, the focus turns to VAT compliance costs and its role in
VAT non-compliance.
7.4 VAT Compliance Costs and Non-compliance
A majority of SME taxpayers could not give any concrete idea about the monetary value of VAT compliance costs during focus groups. Some of the participants related to manufacturing commented that their costs are not lower than 2% of their annual turnover. In terms of actual compliance cost, the survey results of Stage 2 found that the 215
reported compliance cost for non-complying VAT payers was higher than that reported by complying VAT payers. This trend was generally consistent for both monetary and psychological costs. The survey also found that the manufacturing sector had the highest compliance costs among other sectors in Bangladesh. In this regard, during the in-depth interview one respondent claimed that the owners of manufacturing units have to tolerate extra costs to run the manufacturing units:
As I am the owner of a manufacturing unit, I have to look after so many things related to VAT. We not only have to satisfy the VAT Officials. We have to think about income tax issues. I have also to talk with my income tax consultant before submitting my monthly VAT return. We have to satisfy the local political leaders and in some cases local police also to run my business smoothly. I can’t show them in black and white. So, I think VAT compliance costs and psychological costs related to VAT is relatively higher in Bangladesh for manufactures. (CTI 01)
Another manufacturing respondent claimed that they have to go the VAT offices five times on average to manage the VAT Officials to get the approval of value declarations, input tax credits or for refunds. All of this appears to contribute to higher VAT compliance costs for the manufacturers in Bangladesh. In addition to that, some compliant taxpayers noted that their concerns about VAT are increased when there are
‘estimated assessments’ due to the frequent surprise visiting by local VAT Officials or by the audit team which are far in excess of actual liability.
It was also expressed by some respondents that the treatment of taxpayers differed by sector, firms and even by products, which could raise the compliance costs for the firms.
For example, dishonest VAT Officials can have more incentive to visit the manufacturing industries or trading sector as they might get informal payments at their visits (CPD, 2014). It appears that sometimes manufacturers and traders were threatened with audits and instant documentation check-ups during surprise visits. In this regard, some of the SME taxpayers admitted that this ‘fake enforcement’ resulted in higher
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compliance costs for the manufacturers and traders. This led some taxpayers to reduce the burden of compliance, thereby increasing the compliance costs:
We, the taxpayers do not often go to the VAT experts for tax savings; we come mostly to lift the burden of worrying about VAT. (NCTI 5)
This notion of employing others is consistent with the notion of paying others to remove the stress of complying (McKerchar, 2003).
Another reason for higher compliance costs for the manufacturers was the extra expense incurred by the businesses for registering the firms for VAT. VAT Officials in the name of the processing VAT registration collected additional money from manufacturers.
Some respondents from the manufacturing units claimed that on an average they had to spend about 20,000 Taka (267 USD) for completing the process of registration. This is despite the fact that there is no formal registration fee for VAT. Therefore, the money is an ‘unauthorised’ payment as a bribe (speed money). This expense varied widely between businesses, due to the size of operation, location of firms and informal understanding of ‘unauthorised’ payments. It was interesting that a large share of unauthorised payments to VAT authorities appeared to be for the assurance of better dealing in future with taxpayers. These unauthorised payments increased the compliance costs for the manufacturers:
When I went to the local VAT office for my VAT registration, I paid a handsome amount to the local office for site visit, documents and machinery check-up. (CTI 5)
A few respondents from manufacturing units mentioned that some of their SME competitors are not registered with VAT, which can lead to unfair price competition with the non-registered businesses. Additionally, these non-registered firms do not face the compliance costs relating to VAT. Similarly, a large number of SMEs in Bangladesh use the package VAT system or turnover taxes even though their yearly turnover is
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sufficient to be registered for monthly VAT (Saleheen, 2013a), and their compliance costs are very negligible (CPD, 2014) compared to the SMEs who pay regular VAT.
Therefore, firms who had higher VAT compliance costs faced multiple challenges in marketing their products, as compliance costs related to VAT decreased their profitability and made them more uncompetitive compared to unregistered firms:
When I sell 1kg of cooking oil at 125BDT to the market, (another firm) is selling the same product at 105BDT. (Another firm) has no BIN and making more profit. Then how can I survive in this unfair competition? (NCT 3)
I know some of my competitors have no VAT registration. They have a monthly arrangement with the local VAT office and are running business with turnover tax registration. Some of them have more selling volume than my business. An unequal competition is prevailing between registered and non-registered firms. (CTI 5)
Some of the entrepreneurs also claimed that some non-registered SME producers manufacture a vast variety of intermediate goods and final products and maintain informal relations with the VAT and income tax officials. CPD’s (2014) study about
SME’s ‘tax policy and enterprise development’ revealed that SMEs took, on average five and half years to become registered with any tax authority after the inception of their business. As the fines and penalties are nominal for non-registrants to register for
VAT, they continue their business year after year without registration.74
Snavely (1990) argued that tax compliance behaviour and attitude towards the tax system may be affected by the individual’s reference group, such as competitors, neighbours and friends. If other businesses do not comply with the VAT law, then the compliant businesses may start to respond by non-complying as well. These findings appear to be consistent with the findings of Stage 2, where 70% of the non-compliant taxpayers and 40% of compliant taxpayers believed that businesses that are not
74. Section (37) of the VAT Law states that If any person fails to submit an application for VAT registration under this Act, though required to submit such an application; he shall be liable to pay a fine of taka not less than ten thousand and not more than fifty thousand. 218
registered with VAT and they do not pay VAT are in a better situation than registered businesses.
7.4.1 Psychological Costs of VAT
The survey results revealed that the psychological costs of VAT appeared to be higher for NCTs compared to CTs; in exploring this further the in-depth interviews appeared to suggest that the cause of these higher costs relates to ‘hassles’ and ‘financial dealing’ of the taxpayers. The survey results also revealed that manufacturers had the highest psychological costs. The cause of these higher costs was explored in the in-depth interviews.
Some of the respondents stated that VAT compliance costs included the characteristics of ‘resentment’ as part of psychological costs. They considered that ‘hassles’ from VAT
Officials, ‘financial dealing’ with VAT consultants and revenue officials, and ‘worries’ about the decisions from the NBR added to the stress of their life. Some NCTs admitted that dealing with senior VAT Officials for non-compliance objections was the most unpleasant thing for them. Fear of confrontation and rejection, or the possibility of losing money through fines or penalties, triggered mental pressure for taxpayers. To remove this resentment some taxpayers appeared to bribe officials to make the problem go away:
VAT Officials are unfriendly and unfair. If you don’t maintain an unlawful relationship with them, you feel rejected. I had a bitter experience to handle a VAT audit case with them. The irregularities were raised on the basis of whim rather than on substantial grounds. Whenever I raised the issue they became arrogant with me. I felt so disgraceful that I need to consult with the psychiatrist twice to forget that incidence. Finally, I thought, it might be better to give them some money and settle the case unofficially. (NCTI 4)
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Also taxpayers resented how they were treated at a basic level:
Last year I had a hearing with the Commissioner of VAT in his office. I had to wait an extra five hours to meet with him. The Commissioner was so rude that I am not a taxpayer, but rather that I am a thief. I was shocked. I realised that I did a mistake in my tax planning. I should employ a VAT consultant to mitigate the case. It would cost me more but I might have been saved from this disgraceful behaviour. I think, VAT compliance costs include this type of adverse psychological effects which actually costs a lot. (NCTI 1)
The discretionary power of VAT Officials was acknowledged to be one of the main reasons of higher psychological cost for manufacturers in Bangladesh:
The discretionary power of VAT Officers is really terrifying to me. They can set out prices, seize our products any time at any place, they can visit your business premises even at midnight. How powerful they are? I think, most of the taxpayers feel very worried when they visit us. My psychological cost of VAT becomes higher when I submit my price declaration documents to them. (CTI 7)
The findings about the discretionary power of VAT Officials are consistent with the previous literature, as there is a general belief that VAT Officials wield very strong powers and sometimes would use all powers at their disposal to obtain VAT owed.
Business organisations like Federation of Bangladesh Chambers of Commerce and
Industries (FBCCI) and Dhaka Chamber of Commerce and Industries (DCCI) proposed a reduction of the VAT Official’s discretionary power to the new VAT Law to reduce the compliance burden for business (GOB, 2013). The majority of NBR Officials believe that these powers are necessary to maximise compliance and to act as strong deterrents (Saleheen, 2012). However, a few (2 out of 12) NBR Officials believed that excessive power was not effective in preventing intentional non-compliance as long as the taxpayers have a lower ethical concern about paying VAT:
I believe we should have some discretionary power to handle the non-compliant taxpayers. But ethics is very important for voluntary compliance. As long as the taxpayers are not willing to pay VAT ethically, the situation will not improve. I think complexity, compliance costs, ethics and some discretionary powers of
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VAT Officials all are equally important to make taxpayers interested in paying the right amount of taxes. (VOB 8)
Half of the taxpayers in Stage 3 (7 out of 14) indicated that they had encountered problems in dealing with VAT Law and they had employed a VAT consultant. It was apparent that from the perspective of the respondents, complexity existed and increased the VAT compliance costs along with the psychological costs. Many reduced the anxiety of VAT compliance by employing others. Gaining assistance from advisors or accountants was seen as providing some relief from tension or anxiety but clearly increased their VAT compliance costs in monetary terms. For that reason, most of the participants claimed that the psychological costs of a business owner should include the costs of the tax professionals and also psychiatrists:
I am not losing my sleep due to tax purposes. I am paying sufficient money to my VAT consultants to keep myself away from all stress and anxiety. I think the fees of VAT consultants should be included into the psychological costs of VAT. (NCTI 5)
I use a consultant to achieve the feeling of confidence that my VAT return has been completed and submitted correctly. I also feel that taking assistance from a consultant is time effective and less worrying for me. (CTI 5)
I have always lodged my VAT return on time every month since I started my business. Last month I was busy due to my business’s location change. Consequently, my VAT return submission was late. I was very surprised the Divisional office did not value my previous records and my unintentional delay. I received a phone call from the VAT office with an angered voice. I found myself feeling threaten. It surprised me because I know of others who haven’t ever submitted VAT return on time and have been rarely chased up by the VAT Officer. One of my close friends then gave me an idea to go for a monthly arrangement with the local VAT office for a hassle free business or to hire a consultant to contact with the VAT office on my behalf. I think, to get rid of all these unwanted hassles we have to accept extra cost. These costs should include psychological costs of VAT. (CTI 4)
The employment or engagement of an advisor was also used to put the taxpayers on a more of an equal footing with tax officials:
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The NBR assumes taxpayers are guilty of tax evasion until the taxpayers prove themselves innocent. I pay an accountant in my business to do my VAT related works and VAT return because it assists me to prove my innocence to the NBR and keep myself mentally peaceful. The VAT system is loaded against the SME taxpayers. (NCTI 3)
One important issue apparent from the above comments is that many taxpayers want to comply with the VAT Law and relief from stress is a significant issue for them. They are ready to pay VAT consultants and sometimes VAT Officials to get relief from anxiety and stress. Therefore, when the respondents were asked to indicate how much they would be willing to claim from the VAT authority for their stress or anxiety, many of their responses was:
The amount I paid my VAT Consultant, VAT advisor or the speed money I paid the VAT Officials.
However, some of the respondents expressed it in the following terms:
I know doing VAT related works by me is disappointing but I find no means to pay others from my business’s profit. I faced problems while doing this, but it’s my duty as a business man. I don’t want to claim anything from The NBR. (CTI 6)
There is no doubt that I have stress and anxiety for my tax related works. I had to spend lots of hours to complete these. But when I finished everything I felt very relaxed. I realised that I can argue with the VAT Officials if they chased me. I have that confidence within me. I don’t believe on that concept of claiming from the VAT authority for my stress and anxiety. I think, a good behaviour or a compliment from the VAT officials is enough for me. (CTI 4)
Nevertheless, the taxpayers who had sufficient knowledge about the VAT law and chose not to take help from the consultants did not necessarily mean that they had no monetary costs as there would be at least time costs and costs associated with anxiety and stress. It was apparent from the discussions that the role of VAT compliance costs was important in terms of non-compliance. In terms of compliance costs two interviewees observed that:
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No VAT registration, no compliance costs for VAT. (NCTI 2)
No TIN (tax identification number) and no BIN (business identification number) means no compliance costs for my business and no hassle from NBR. When a tax official would visit my business, I might give him a packet, he would be happy and me too. (CTI 5)
The findings are consistent with the survey conducted by the Bangladesh Investment
Climate Fund (BICF) in 2013 about the ‘Tax perception and compliance cost of the formal sector and perception of taxation by the informal sector’. The BICF’s survey revealed that 31.8% of income taxpayers strongly indicated that the biggest advantage of not obtaining a TIN certificate was ‘no compliance cost’, followed by ‘no tax’ from
26.8% respondents. The respondents of that survey listed no harassment from tax officials (9.3%) and no hassle of income tax return (6.4%) as the other advantages of not obtaining a TIN certificate. However one interesting finding was that 14.3% of the respondents who had a TIN could not find any advantage of having a TIN certificate.
These findings would indicate that taxpayers found compliance costs to be a burden and therefore were not interested in taking out a TIN certificate.
An interesting finding exposed during in-depth interviews was that taxpayers faced higher psychological costs for VAT during the annual budget period:
The annual budget is a financial statement how revenue will be earned and expenditure made. I think, the budget process should provide an opportunity of our participation. But, I am sorry to say, although the NBR welcomed recommendations from FBCCI and other business organisation, it is a routine activity of the NBR’s policy wing. We submit our recommendations based on our practical experiences and they (officials from policy wing) do what they really want. There is no effective consultation with the SME taxpayers on decisions concerning changes and recommendations. It concerns me that we (SMEs) are ignored by the NBR. I became worried and tensed about the frequent changes of Law during the annual budget period. I think the psychological costs related to VAT are comparatively higher during June and July. (CTI 3)
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Some SME taxpayers perceived that many of the VAT Officials are corrupt in their dealing with the taxpayers, while some of them are exceptionally honest. However, both of them are non-friendly for SMEs. It appears that the corrupt VAT Officials cause the higher non-routine expenses of monetary compliance costs, with the honest officials sometimes responsible for higher psychological costs of VAT due to them not accepting bribes:
Our local VAT Superintendent is a very honest person. But I am always afraid of his visit to my production premise. I really feel stressed if there is any chance of his visit to my factory. (NCT 2)
Some of them are corrupt and some of them are excessively honest. Both of them are tough to manage. I think, honest VAT Officials are not easy to handle. They are sometimes the reasons of stress and anxiety of my business. So I prefer the other group as I can manage them with money. (NCTI 4)
The findings demonstrate that VAT taxpayers mitigate their psychological costs by employing a dedicated VAT staff member or engaging an external VAT accountant.
While this leads to an increase in the monetary value of compliance costs, it is seen as a way of reducing the psychological costs caused by VAT. However, VAT Officials felt that the employment of an accountant could actually lead to increased compliance costs, given that more aggressive tax planning may be adopted.
7.4.2 Cost of VAT Non-compliance
Data collected through the in-depth interviews demonstrate that the higher costs for
VAT-related obligations suggest a relationship between complexity of the VAT Law and the costs of compliance. The most common reason given for higher compliance costs was mentioned the ‘complexity of regulations’. Complexity can significantly reduce the time and money that taxpayers could spend on business activities. Intuitively, the more time and resources spent on tax related activities, the less they remain
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available for core business activities. The literature suggests that compliance costs are lower for simpler taxes – that is, taxes with less rate differentiation and exemptions
(Yesegat, 2009).
The survey results suggest that the majority of the SME taxpayers (both compliant and non-compliant) used external help to assist with the complexity of VAT Law. Prior literature has revealed that the primary reason taxpayers use tax practitioners is to increase the accuracy of the tax return (e.g. Collins et. al., 1990; Tan, 1999), and that taxpayers prefer conservative advice more than aggressive advice from their tax practitioners (Hite & McGill, 1992). For many SME businesses in Bangladesh, hiring an external consultant can be cheaper than having the owner tackle the compliance challenges. VAT consultants may have more experience in dealing with the obligations and tax planning, thus making it easier for the owners to reduce overall their tax burden.
Responses from the VAT Officials indicated that they thought VAT consultants would recommend aggressive tax planning strategies to their clients which would also increase the VAT compliance costs:
They (taxpayers) are always finding a tax consultant or lawyer who can minimise their VAT paid, someone who can take advantage the grey areas of VAT law and finally who can deal with any problems that might arise. Seeking help from a well networked VAT consultant is always an expensive choice which increases the VAT compliance costs for taxpayers. (VOB 4)
Taxpayers are always looking for a consultant who is well networked and knows what the NBR is checking at a particular time. And a well networked VAT consultant always charges more than others. (VOB 11)
VAT Officials appeared to regard compliance costs as costs of non-compliance. It was argued by VAT Officials that the ultimate goal of some taxpayers is to minimise VAT payment at any costs and thus so the payment to consultants relates to more of a cost of non-compliance
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It is mandatory to use an ECR (Electronic Cash Register) machine for all small and medium retail businesses. The NBR and local VAT authority are trying their best to implement this. But our honourable taxpayers are not interested to use it. Rather they are interested to go to the VAT consultants’ or accountants for financial engineering. If they would use an ECR, I could take it as VAT compliance costs. But I will not consider the consultant’s payment or fees as VAT compliance costs. To me, that’s the cost of non-compliance, either intentional or unintentional. (VOB 13)
Hiring a VAT professional is very expensive. It increases the compliance costs. If a business owner hires a VAT professional for aggressive tax planning then it should not be considered as VAT compliance costs. I think, it is the cost for non- compliance. (VOB 2)
VAT Officials thought taxpayers should make more use of advice from the NBR:
The existing VAT law and the forthcoming VAT law are both not so complex. The taxpayers should have an honest desire to pay the correct amount of VAT. They can easily get proper help from the local VAT office. Therefore the VAT compliance costs should not be so high. It would be a lump sum amount only to keep the VAT records properly. I think most of the VAT payers hire VAT experts to reduce their VAT liability. So why should we call it VAT compliance costs? It is the extra costs incurred by the tax payers for non-compliance or for VAT avoidance. (VOB 3)
Some prior literature demonstrates that paid-prepared tax returns tend to be more aggressive than taxpayer-prepared returns (Erard, 1993; Hite & Sawyer, 1998; Klepper
& Nagin, 1989). In spite of some general doubts about the VAT consultants and aggressive tax-planning, the majority of taxpayers agreed that external advice gives them confidence that their VAT matters are under control and their taxpaying behaviour is within the bounds of the VAT law. Taxpayers strongly disagreed with the VAT
Officials who consider paying consultants as a cost of ‘non-compliance’. Some taxpayers believed that VAT Officials are not open-minded and that they have only an agenda designed to penalise the taxpayers and to obtain bribes. This appeared to be consistent between the compliant and non-compliant taxpayers:
I have lack of in-depth technical knowledge about VAT Law and I think VAT law is too complicated for me. So, I usually go to VAT professionals. This is 226
one of the components of my business compliance costs. I would not have to hire a VAT expert if the VAT law was easy to understand for me. I have no intention to cheat on VAT. So I think this is my VAT compliance costs, not the costs for non-compliance. (CTI 4)
If they (VAT Officials) detect some error, they take it as an instance of evasion. Sometimes they refrain from reporting in return for illegal gratification or bribe. Maybe I would not be in trouble if they reported it to a higher authority. However, to avoid tension and unnecessary harassments I usually pay extra money to those sleazy VAT Officials. That may be my cost of un-intentional non-compliance. (NCTI 1)
A recent study conducted by The World Bank (2014) revealed that people’s perception about the NBR is not very positive and that the honesty of NBR staff is questionable. In this study, a proportion of the non-compliant taxpayers are not satisfied with the activities of VAT Officials. Conversely, some NCTs expressed with confidence that they have done no wrong by paying speed money to officials as this has become the
‘norm’ in Bangladesh. At the end of the day, the attitudes and responses from the taxpayers and VAT Officials suggest that there exists an antagonistic climate between the two groups. The low trust between these two groups appears to be influencing VAT compliance. The lack of trust may be compelling the taxpayers to take external help rather than taking assistance from VAT Officials. Even though the SME taxpayers are aware of the VAT consultants’ fees, they utilise their advice in order to feel secure and comfortable about VAT. In contrast, the preconceived beliefs about the taxpayers’ use of VAT consultants influence the VAT Officials to consider this expense as a cost of non-compliance. An increase in trust could increase the power of VAT authorities, as citizens would then support the VAT Officers and ease their work. Conversely, a decrease in trust can reduce power, and discourage parties to act lawfully (cf. Kirchler et al., 2008). Extending trust and participation rights of taxpayers develops the emergence of a psychological contract between the actors that assists with voluntary compliance based on mutual trust (Feld & Frey, 2002).
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During the in-depth interviews some taxpayer interviewees stated that knowledgeable and experienced VAT Officials and VAT consultants are more aggressive than non- experienced officials and consultants in the interpretation of the law:
Some VAT Officials really know very well and have a sound knowledge about VAT law. But at the same time, they know how to use the loophole of the law. They are more aggressive than anyone else. If you can manage them with money, you can continue your business very smoothly. Actually money talks in your favour. (NCTI 3)
Experienced consultants are very efficient is aggressive tax planning. They are even more capable of using their brains for aggressive tax planning. As much money as you spend on experienced tax consultants, the more money you can save from your tax payment. (CTI 5)
VAT consultants are sometimes likely to use loopholes of the VAT law, but seem unlikely to engage in illegal schemes. On the other hand, some of the non-compliant taxpayers claimed that VAT Officials are more interested in ‘VAT avoidance schemes’ or ‘artificial paper schemes’ for minimising VAT. In this regard, taxpayers have actually nothing to do but to bear all costs either for VAT consultants or for VAT officials. Therefore, the compliance or non-compliance cost of VAT may not be the issue, as all expenses are incurred by the taxpayers regardless, in order to keep themselves in the VAT net. However, their responses need to be treated with great caution as when people are asked detailed and personal questions (particularly in a taxation context), what they say in reply may well be different from what they actually do (Koutsoyiannis, 1983; Dwyer et al., 2010).
7.5 Deterrent Effects
It was identified in Chapter 3 that the deterrent effect of enforcement activities of taxation law has been seriously underestimated in developing nations. Stage 1 of this research found that participants from the taxpayers group had not previously considered
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the deterrent effect of enforcement activities of VAT Law in Bangladesh. The findings of Stage 2 indicated that a high probability of audit and detection on the threat of punishment may increase deterrent effect and may have an impact upon the compliance attitudes of taxpayers who had not been penalised before. However, different groups appeared to have different opinions about the effects of significant promotion of the
NBR prosecutions regarding compliance decisions. For example, 72% of the CTs strongly agreed or agreed that significant promotion of NBR prosecutions of non- compliant taxpayers would increase compliance among other SME taxpayers, while only 36% of non-compliant VAT payers thought similarly. During the in-depth interviews some new themes like the role of media and the good reputation of a business came into consideration.
The role of media emerged as influencing the deterrent effect for Bangladeshi SMEs.
The media and press play a unique role as a check on government decisions and abuse
(Gamson & Modigliani, 1989). A major function of the news media is to inform the public, that is, to provide reliable information that shapes beliefs about important people, places and events (Zaller, 1992). But beyond this reporting function, the media also provides cues about how we should integrate our beliefs into attitudes (Lyengar &
Kinder, 1987). The World Development Report titled ‘Building Institutions for
Markets’ (2002) dedicated a chapter to the importance of media and economic development. The role of the media has been studied in terms of its impact on government transparency and accountability (Stiglitz, 2002). Additionally, many case studies have addressed the state of the media industry in specific countries (Gross,
1996; O’Neil, 1997; McAnany, 1980; Lent, 1980). However, none of these writings consider the role of media with taxation. Some of the participants identified the media as an influencing factor on the deterrent effect of VAT:
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I think, media could play a vital role to reshape the deterrent effect of taxation. A free and quality media seems to be very effective for achieving good outcomes. Quality media is beneficial for healthy institutions also. Strong media can inform the citizens what is happening between the politicians, business men and the tax authority. But sorry to say, in Bangladesh, media is fully controlled by the first two groups. We hardly know what is really happening. (CTI 2)
I think about 20 million Bangladeshi watches television news on an average evening. During the caretaker government, there was huge news about the anti- corruption commission and the big-shot tax evaders. These news stories had a great influence to shape the general people’s perception about paying taxes. We, the SME taxpayers feel threatened while watching these media coverage and to be honest about paying the right share of taxes. Then how can we ignore the role of media to influence our mind? (NCTI 5)
I believe media has a great power to influence peoples’ view about taxation. In recent years taxation issues have attracted considerable media attention. But it is true, there is not sufficient evidence in the media about tax evaders. So how will we know about the NBR’s action against tax evaders? (CTI 6)
It is important to note that compliant taxpayers appeared to more worried about media coverage which increases the deterrent effects:
If I once get media coverage as a tax evader, my own position will be degraded to my family and to my peer group. So I am always careful about to comply the tax law. My accountant has the ability to produce the monthly VAT return, but I always double check. I never want to see my name in the media as a tax evader. (CTI 6)
Iyengar and Kinder (1987) state that when the media focuses attention on an issue, that issue should come into a citizen’s awareness relatively more easily and therefore exert a correspondingly greater effect on opinion. Herman (2002) sees research on mass media as one of the most notable embarrassments of modern social sciences. However, some of the participants opposed the role of media in influencing the deterrent effect:
In Bangladesh, media is not out of corruption or yellow journalism. In addition, there is a lack of well-trained staff in media. Most of them have no clear idea about how to interpret and report information to attract general people. There are some journalists who sell news to the businessmen and tax officials. Taxpayers are very well informed about all these journalists. So in most cases people don’t believe that news or keep a close eye on the media. There are other problems. 230
People are not very much interested in taxation matters. Very few Bangla newspapers publish tax related news except some English newspapers. Therefore, I strongly believe, media has no role in the deterrent effect of taxation. (VOB 3)
Most of the newspapers are owned by the businessman-politicians. As they are the owners, they control the news which affects their interest. So general people can know very little about the collusion of interest groups. I think a free and strong media can have power to enhance the deterrent effect of taxation. But in Bangladesh, the media is controlled either by government or by the owner. (VOB 11)
The media is a profitable business now. Like all other firms in a market economy, media firms are also subject to profit and loss. The firms, which are not run by state funding, are constrained by consumer demand. For example, if enough consumers demand coverage of corruption and tax policy, media sources will adjust their coverage accordingly. In Bangladesh, people are more interested in political news rather than taxation or financial news. So there is no role of media in deterrent effect of taxation. (NCTI 2)
Djankov, McLish, Nevona and Shleifer, (2002) argue that a free and strong media decreases corruption and increases people’s awareness about economic and social responsibilities. While media can have role as a change agent in Bangladesh (Rahman &
Marjan, 2013), this is adversely influenced by the general citizens’ lack of interest in taxation matters, and by the political influence and pressure from the government about censorship and self-censorship by journalists due to stress from the upper echelons of society.
However, the education level, financial capability and interest in media of Bangladeshi people should also not be ignored when the role of media is discussed in terms of the deterrent effect. Additionally, the content of media should also be considered:
I think our education level is not high enough to understand the tax matters and generate interest on tax issues in the media. On the other hand, a large number of people across the country also remain excluded from the newspaper, television or internet. Then, the media has not an important role on the deterrent effect of VAT. (NCTI 3)
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Most of the television channels and newspapers along with the civil society groups are more interested in the political talks rather than the economic agenda. If you watch television, you will see so many talk shows regarding politics. But how many talk shows discuss tax or economic policies of government except the price hikes of some products during the national annual budget period? So I think the role of the media is not an important factor to change people’s perception about tax or the NBR. (VOB 5)
From the above discussion it has become evident that the media could play an important role in changing people’s perception about the deterrent effects of VAT. It was also noticed that the interim caretaker government’s anti-corruption campaign had resulted in the arrest of numerous high profile figures associated with tax evasion, which appears to have increased people’s awareness of tax matters and may be increased the deterrent effect. However, citizens’ low level of interest in taxation matters, low trust regarding government action against tax evaders and awareness of the corruption of media appear to decrease the deterrent effect of VAT.
Feedback from several interviewees indicated that maintaining a good business reputation is an important factor of the deterrent effect. Having a good reputation has been shown to be of increasing importance to taxpayers, with reputation formed over time and based on an organisation’s actual behaviour (Balmar, 2003). The valuable commodity of a ‘good reputation’ has to be managed carefully as it is like a ‘fragile resource’ (Hall, 1993). NBR Officials also admitted that this ‘good track’ of taxpayers should be taken into account during NBR audits and for unintentional non-compliance:
We evaluate the taxpayers based on their revenue performance and previous history. I think the firms which have a good reputation should not be afraid about deterrent activities taken by NBR. (VOB 7)
Good reputation is a valuable asset and an important variable in tax compliance decisions. I have a list of the compliant taxpayers of my administrative zone. I know they are very much concerned about their reputation. So these firms will always try to remain compliant in any situation. (VOB 11)
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The firm which can keep their reputation unspoiled needs not to take tax risks as we always value the compliant taxpayers. (VOB 3)
The analysis of findings demonstrates that there is an importance of taxpayers’ good reputation to the VAT Officials. However, one interviewee mentioned that the closeness of some relationships between the NBR and businesses seems to be more accommodating than a good reputation:
I think everything depends on how strong your relation is with the NBR people. Though the closeness of the relationships between NBR and some businesses are critised but who cares about this? The more close you are with tax Officials, the less deterrent effect you have. (NCTI 3)
Some of the taxpayers argued that maintaining a good connection with the NBR is more important than good reputation. However, it was not clear whether this ‘good reputation’ included bribes to VAT Officials. SME taxpayers are not well connected with NBR and therefore could not influence the VAT Officials the way the large taxpayers can. They stated that large business owners’ illegal association with NBR with political parties and Ministers reduced the deterrent effect of taxation. It was also apparent that bureaucrats are also concerned about the influence of large business:
I think there would be a strong deterrent effect in our taxation sector if political institutions worked properly. Connections with the NBR and political parties, especially with influential ministers, allowed the old and more established groups to totally dominate and monopolize markets. These groups can buy anyone. We, the SME taxpayers may fear the NBR, but the large taxpayers are not afraid of violating the Law. They know money can buy anyone in Bangladesh. (CTI 4)
Most of the large taxpayers’ unit (LTU) businessmen are members of a politically dominant group and have significant influence over the policy makers. We actually have no influence at the time as we are civil servants. Under these conditions, we sometimes behave like interest groups whose primary object is to help that influential business group. The political connections of those business groups forced us to help them in tax matters. (VOB 5)
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Although there are many SMEs operating in the economy, they are largely heterogeneous with limited lobbying capacity and not a united force (CPD, 2014).
The influence of VAT consultants on the deterrent effect was also discussed at Stage 3.
Two of the interviewees argued that deterrent effects are not a matter of concern for the
VAT consultants. Sometimes VAT consultants may have different motives and may initiate aggressive tax practices even though the business owners did care about their reputation:
We, the taxpayers, are sometimes incompetent. Our tax consultants may be corrupt. They are not afraid about the deterrent effect. They (VAT Consultants) know that all of our VAT Officials or NBR people are not intelligent enough to identify the intentional evasion. We always want to comply as we know reputation is a long term asset for our business. (CTI 4)
It’s a part of their job to keep the business secured. They think if they manage the VAT Officials, both of the parties will be benefitted and we the owners will lose our money. Some of us become paranoid about being hauled in front of the tax team or the press. But our VAT consultants are silent in most of these cases. (CTI 7)
An insightful comment about the role of trust, ethics and reputation to improve deterrent effect was made by one owner:
I think trust, ethics and reputation are all interrelated with voluntary compliance. If I have strong ethics, I will pay the right amount of tax, no doubt. If I have generalised trust (trust in others) or political trust (trust in government), I will surely comply with the law. If I care about my reputation, significant promotion of NBR prosecutions of non-compliant taxpayers will increase the psychological pressure on me. As I am a compliant taxpayer, significant promotion of NBR prosecutions of non-compliant taxpayers will not increase compliance by me. But I will be happy, if I see the NBR in such a strong position as I believe significant promotion of NBR prosecutions of non-compliant taxpayers will increase compliance of other non-compliant taxpayers. (CTI 3)
One of the interviewees also expressed the view that the concept of the deterrent effect of taxation is new in Bangladesh, and the perceptions expressed may change. Most interviewees agreed that customs, VAT and income tax are definitely not front page
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news in Bangladesh unless it pertaining to the news of foreign currency or gold seized at an airport. As long as the taxpayers and general people are not aware of the importance of domestic resource mobilisation and the role of taxation in the economy, the concept of a deterrent effect will bear little to combat tax non-compliance:
VAT or income tax is not a front page issue. General people only show interest if there are some interesting news about smuggling or gold seized at the airport. Then we think, yes, the NBR is working. As long as the citizens are not aware about the role of taxation in the economy, you can’t expect deterrent effect will work. (CTI 2)
It appears that for the deterrent effect to improve there needs to be reduction in corruption at all levels, and the media to play a greater role in reporting corruption cases.
7.6 Relationship between Complexity, Compliance costs and VAT Non-compliance
The focus group discussions found that a majority of the compliant participants listed
VAT law complexity and compliance costs as contributing to non-compliance. While non-compliant VAT payers agreed that VAT law is overly complex in Bangladesh, they emphasised more about the positive relationship between taxpayers and VAT Officials for compliant behaviour. However, to get non-compliant VAT payers to comply appears to be a multi-faceted issue, as the likelihood of audits, penalties and sanctions was found in stage 2 to have less effect on VAT non-compliance for them. In comparison, such monitoring and penalties would apparently improve compliant behaviour by compliant VAT payers. Reducing compliance cost would also not necessarily increase compliance by non-compliant VAT payers, whereas it might for compliant VAT payers.
When the respondents were asked about the specific relationship between complexity, compliance costs and non-compliance in Stage 2, 72% of the compliant VAT payers strongly agreed or agreed that simplified VAT Law and reasonable compliance costs 235
would increase voluntary compliance among SMEs VAT payers in Bangladesh. In contrast, only 36% of non-compliant VAT payers shared this view.
When the interviewees in Stage 3 were asked about the relationship between complexity, compliance costs and non-compliance with VAT, the most common responses were about the penalty structure of VAT law and the severity of committing intentional VAT non-compliance, as well as about the notion of ethics and mental accounting,
If a business is not found to comply with the VAT law’s requirements (accurate return within a given deadline, submission of false documents, selling products without price approval, excess input tax credit), there is a rigid financial penalty structure in the VAT
Law. With respect to strict fines and penalties, Becker (1968) argues that a government should set the fines and penalties for detected crimes as high as possible, so that even with a low resource cost of enforcement, the overall expected deterrent effect will be large. But this argument ignores the presence of a corrupt tax administration and that such a system can harshly punish someone who is unintentionally non-compliant.
In Bangladesh, the maximum monetary penalty for intentional VAT non-compliance is
200% of the evaded amount with a maximum fine of 50% imposed if the VAT evasion proved un-intentional or ignorance of VAT law.75 Having fines and penalties too high, could induce taxpayers to avoid their VAT. Martinez-Vazquez and Rider (2005) point out that taxpayers’ often find the possibility of evading the authorities’ enforcement
75. Section 37 of the VAT Law’1991 states about a taxpayer for the intentional non-compliance or VAT evasion: “…… he shall be liable to a fine of an amount not less than equal to, and not more than two and a half times of, the amount of value added tax or, where applicable, value added tax and supplementary duty, payable upon the goods or service; and, if convicted for the said activity in a court of Magistrate, he shall be liable to imprisonment for not less than three months and not more than two years, or to a fine not less than equal to, and not more than two and half times of, the amount of value added tax or, where applicable, value added tax and supplementary duty, or to both. For irregularities other than evasion of revenue, he shall be liable to a fine of not less than twenty five thousand taka and not more than three hundred thousands BDT.” 236
efforts (increasing fines and penalty rates) by switching to a different mode of tax non- compliance than the targeted one. Given that the rate of audit in Bangladesh is less than
1% of the total VAT registrants, the taxpayers can be cognitive that higher fines and penalties may have little role without effective audits. However, some of the respondents argued that strict imposition of fines and penalties are more important for compliance than complexity and higher compliance costs. Two of the interviewees commented:
I do not disagree with the role of complexity and compliance costs for VAT non-compliance, but I think the penalty structure related to the severity of committing evasion is more important than the complexity and compliance costs. When taxpayers find the NBR very strict about the offences and the fines, taxpayers will automatically pay tax. Taxpayers will find the NBR very rigid about offences, wanting the offenders to pay fines and penalties, thus they will feel psychological pressure and they will pay the right amount of VAT. (VOB 11)
We don’t have enough money. I am always afraid of being caught and penalised. So I want to be on the ‘safe side’ always. Fines and penalties will cost me a lot and maybe I have to close my business due to cash flow shortage. To me, any type of fines and penalties are more important than compliance costs. (CTI 3)
Another insightful comment made by a respondent:
You know the input tax credit system is so complicated. I made a mistake and local VAT officials warned me initially not to do that. But my VAT consultants explained that we are right. Actually I don’t have enough interest in the VAT law as it all seem very complicated to me. In the end we had to pay a huge amount as penalties and I felt very aggrieved about this. After that I started to learn about the law and VAT matters. I think severity of fines and penalties are very important to make us compliant. (NCTI 7)
It was evident from the discussion that most of the SME business owners are particularly concerned about their cash flow and that higher penalty rates are an additional cost they did not want to be burdened with.
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Mental accounting76emerged as an important matter while discussing the relationship between complexity and compliance costs with non-compliance. One of the main characteristic of VAT is that consumers are paying the VAT and that VAT has been collected at different stages by the businesses, who actually act as a VAT collector
(Webley & Ashby, 2010). However, it is quite possible that taxpayers can perceive that collected money is part of their own business cash (Adams & Webley, 2001). If businesses perceive the taxes they collect as forming part of their business turnover, rather than taxes to be passed on to the VAT authority, they may be more motivated to engage in intentional non-compliance. In this study, only a minority of taxpayers believed that the money they are collecting belonged to the VAT authority; instead they felt the VAT collected was their own business turnover:
VAT takes a lot of money from my business. So I pay just as much VAT as I can. It hurts me very much to pay all collected money together at the last week of the month. (NCTI 4)
I know it is not an income of my business, but I am just looking after the money for the government. I should deposit the entire amount I collected. But all the money together became a huge amount sometimes and I feel so bad to deposit all. (NCTI 7)
However, some of the comments reflected the intention of compliant taxpayers:
I can’t understand why to keep money in my own pocket. I can take input tax credit lawfully. It is their money. There is no point of worrying about depositing the entire amount to NBR’s account. (CTI 2)
I am the collector of VAT. I feel honoured about my job, I am doing. So I always in favour of depositing the entire amount I collected from the consumer as VAT. (CTI 5)
It is not fully unrealistic that SME taxpayers saw the VAT they collect as their own money and they begrudged paying it over. In relation to VAT, Adams and Webley
76. According to behavior finance, mental accounting refers to the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account (Phung, 2001). 238
(2010) found that some taxpayers conceptualised VAT money as “mine” (their own) whereas some others conceptualised as “theirs” (the VAT offices). This is similar to findings in this study. Therefore, a challenge for the VAT authorities is to identify those taxpayers who consider the VAT “is mine”. This could include assisting SMEs to manage their cash flow to assist when VAT has to be remitted:
Taxpayers are well informed that this is “government’s money”, not their money. Ignorance is a trick. We should try to stop that. I think we should arrange more press and media coverage along with training and workshops. Taxpayers should avoid separate mental accounting for VAT. I think, if they can change themselves, huge revenue will be collected. So to me, mental accounting is more important than complexity or compliance costs. (VOB 11)
7.7 Documentary Analysis
A majority of the respondents in the focus groups thought that business size influenced non-compliance, and that big businesses pay less VAT compared to SME businesses.
This statement was further supported by the survey results, as approximately 54% respondents from CT and NCT agreed or strongly agreed that big businesses pay less
VAT, compared to small businesses. Further, the data collected from the NBR and other organisations also suggests that taxpayer non-compliance varies with the size and maturity of the business, or the types of businesses. Table 7.2 to Table 7.4 present the data about the types of non-compliant cases filed by VAT Authorities in FY 2011-12.
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Table 7.2: Non-compliant cases based on monthly average VAT payment
Name of the VAT Number of non-compliant cases based on monthly average VAT Commissionerates payment Group 1 Group 2 Group 3 Group 4 Group 5 Total Dhaka (South) 65 97 111 101 325 699 Dhaka (North) 21 23 16 9 63 132 Dhaka (East) 109 93 187 112 306 807 Dhaka (West) 27 16 31 45 87 206 Chittagong 16 11 23 17 39 106 Comilla 16 3 4 7 24 54 Rajshahi 3 N/A 2 2 8 15 Jessore 2 N/A 1 3 10 16 Sylhet 20 11 13 21 42 107 Total 279 254 388 317 904 2142 Total (in %) 13% 11.69% 18.11% 14.79% 42.20% 100% Source: Author’s own calculation from NBR and Other VAT Commissionerate data (Group 1: monthly VAT less than BDT 400,000; Group 2:monthlyVAT between BDT 400,001 and 600,000; Group 3: monthly VAT from BDT 600,001 to 800,000; Group 4: monthly VAT between BDT 800,001 and 1,000,000; and Group 5: monthly VAT BDT exceeding 10,00,001).
Table 7.2 demonstrates that in financial year 2011-12, more than 42% non-compliant cases were from Group 5, whose monthly VAT payments are the highest among the groups. However, this may be more about the VAT audit focus of the NBR: that is, the
NBR focuses its audit on the larger firms (Audit Manual, 2006). Another reason may be that it is easier to collect a large amount of taxes from a small number of large firms rather than collecting a relatively small portion of VAT from a large number of SMEs.
Consequently, the VAT Administration is more focused on large businesses even though non-compliance by small businesses may be at smaller rates. CPD’s (2014) study also reveals that VAT Officials used to visit many large firms quarterly (44% of the firms) while they visit small firms at annual basis (visits 35% of small firms annually). According to NBR statistics, it was evident that matured businesses are more non-compliant than newer businesses (Table 7.3).
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Table 7.3: Non-compliant cases based on the maturity of the business
Name of the VAT Number of non-compliant cases based on the maturity of the Commissionerates business 0-5 years 5-10 years 10-15 years Total Dhaka (South) 247 140 312 699 Dhaka (North) 32 29 71 132 Dhaka (East) 387 61 359 807 Dhaka (West) 57 10 139 206 Chittagong 23 31 52 106 Comilla 13 8 33 54 Rajshahi 5 3 7 15 Jessore 2 2 12 16 Sylhet 31 33 43 107 Total 797 317 1028 2142 Total (in %) 37.20% 14.79% 47.99% 100% Source: Author’s own calculation from NBR and Other VAT Commissionerate’s data
Table 7.3 illustrates that older businesses had comparatively more non-compliant cases than younger firms. This may be because matured firms have better knowledge about aggressive VAT planning. However, the data may be confounded as more mature businesses may be large, and thereby of greater focus to audit activity by the NBR due to their size compared to age necessarily.
On the other hand, new registrants may not be thoroughly aware of VAT rules and regulations, and may consequently commit un-intentional compliance. Data collected from the VAT Commissionerates and the Appellate Tribunal reveals that most of the non-compliant cases of the less mature firms concerned mostly un-intentional irregularities. These irregularities were mainly to failure to submit a return within the specified date; failure to inform the VAT Officer about changes of information in relation to registration or failure to proper documentation. The non-compliant histories of the mature firms related to submission of incorrect VAT returns in relation to raw- material information, attempts to evade VAT by submitting forged or false documents,a false statement or declaration relating to the value of their goods and services, taking 241
input-tax credits through forged or fake invoices, and destroying or altering documents for intentional VAT evasion.
Literature suggests that the firms that are not very old in the market cannot use the mainstream opportunities due to their lack of knowledge about the VAT law, and frequently engage in unintentional non-compliance (GINI, 2014). Some of the SME businesses situated within the Bangladesh Small and Cottage Industries Corporation
(BSCIC) zones enjoy a tax holiday or VAT exemption benefit for the first three year of their businesses. During that time, these firms do not need to learn about the VAT rules and regulation, and visits of the VAT Officials are very unlikely during that period
(CPD, 2014). After the expiration of these first three years, most of these businesses faced non-compliant cases for irregularities due to their ignorance about the VAT Law.
The frequency of visits of the VAT Officials to the older firms rather than to the new registrants’ may be another reason for more non-compliant cases filed against the mature firms.
Table 7.4: Non-compliant cases based on the business type
Name of the VAT Number of non-compliant cases based on business type Commissionerates Manufacturing Construction Service Traders Total Dhaka (South) 439 7 24 229 699 Dhaka (North) 74 11 20 27 132 Dhaka (East) 674 2 10 121 807 Dhaka (West) 142 4 8 52 206 Chittagong 90 5 3 8 106 Comilla 39 1 4 10 54 Rajshahi 13 N/A N/A 2 15 Jessore 14 N/A N/A 2 16 Sylhet 92 3 5 7 107 Total 1,577 33 74 458 2,142 Total (in %) 73.62% 1.54% 3.45% 21.38% 100% Source: Author’s own calculation from NBR and Other VAT Commissionerate’s data
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Table 7.4 demonstrates that a minimal number of non-compliant cases are filed against construction firms and service providers. As indicated in Chapter 5, the manufacturers and the traders faced higher compliance costs compared to others. The non-compliant cases filed by the VAT Officials also showed that in FY 2011-12, 73.62% cases were filed against manufacturers and 21.38% cases were filed against traders (Table 7.4).
According to NBR statistics, it was found that of the total 2,142 non-compliance cases,
678 cases were filed as intentional non-compliance, 285 were related to seizing VAT- able goods and the other 1,169 were filed as intentional or un-intentional irregularities
(NBR, 2014). Most of these non-compliant cases were against the manufacturing firms.
However, in Bangladesh a large number of service rendering units are operating by violating VAT rules and regulations (GINI, 2014). Only 10% of these businesses submit their monthly VAT returns on time. The construction units also seem to be largely non- compliant as only 8% of the registered construction firms submitted their monthly VAT returns in FY 2011-12 ( NBR, 2014). In this regard, some of the respondents in Stage 3 highlighted that most of the construction businesses are operated by powerful businesspeople with political power. Therefore, this may reduce the ability for VAT
Officials to influence them.
Saleheen (2013c) demonstrated that VAT Officials in Bangladesh are more interested in searching and seizing conveyances carrying VAT-able goods than in auditing.
Therefore, VAT payers may be more scared of the VAT vigilant teams that are empowered to intercept a conveyance carrying VAT-able goods and seize it.That
Bangladeshi VAT Officers prove to be more active in enforcing their seizing authority than their auditing authority is demonstrated by the much higher number of seizure cases than audits. In 2011-2012, the number of seizures was 609 involving an amount of revenue of BDT 2,697 million (36 million USD), while far fewer audits(410) raisedof
BDT 1,719 million (23 million USD) (NBR, 2014). 243
The data presented above also demonstrates that the extent of non-compliance cases depends upon the geographical location of the businesses. The numbers of non- compliant cases were high in Dhaka-based VAT commissionerates compared to other commissionerates located at other cities and districts. In general, firms located in Dhaka are closer to the VAT administration than in other districts.77 VAT offices conveniently located in and near Dhaka city can frequently visit the businesses and can identify the
VAT related irregularities routinely. However, visits of the VAT officials are not frequent to stakeholders outside the city due to the distance between the local VAT offices and the business premises. The VAT Officials from outside Dhaka acknowledged that they sometimes found it difficult to travel to taxpayer’s business premises from district headquarters.
7.8 Summary of Findings
The findings of the in-depth interviews demonstrated that although simplicity is one of the commonly accepted key tenets of a taxation system, the complexity of the VAT law in Bangladesh exists mainly because of the vast number of transactions that take place in such a complex society. The results also supported the view that the potential for unintentional non-compliance could result from the complexity of this VAT system. It was also acknowledged by the respondents that the ambiguity created by complexity could provide a shelter for aggressive taxpayers and could encourage intentional non- compliance.
The survey results indicated that the compliance costs of VAT in Bangladesh were higher for the manufacturing sector than for other sectors. Part of the explanation for these extra costs appeared to be the frequent visits by the VAT Officials to the
77. The NBR, Audit Directorate, Appellate Tribunal and the Head Quarter of 4 other VAT Commissionerates are located in Dhaka city. 244
manufacturing units and the bribe or speed money given to Officials.78 It was also found that VAT compliance costs include characteristics of ‘resentment’ in terms of psychological costs. Taxpayers considered that the ‘hassles’ from VAT Officials by surprise visits to their businesses, the ‘financial dealing’ with VAT consultants and revenue officials, and the ‘worries’ about the decisions from the VAT offices and NBR added stress and anxiety to their life. A common way that VAT taxpayers mitigated their psychological pressure was to employ a dedicated VAT staff member or to engage an external VAT accountant. While this leads to an increase in the monetary value of compliance costs, it was seen as a way of reducing the psychological costs caused by
VAT, especially knowing that the right thing had been done. Appointing an external advisor gave VAT taxpayers a sense of being on an equal footing when dealing with
VAT Officials, and thereby reducing the ‘resentment’ of compliance. However, VAT
Officials felt that the employment of an adviser could actually lead to increased compliance costs, given that more aggressive tax planning may be adopted: they asserted that such costs should be considered costs of non-compliance. However, the
SME taxpayers strongly disagreed with the VAT Officials’ comments.
Corruption appears to be part of VAT compliance in Bangladesh; this can in part relate to the discretionary powers of the VAT Officials. The corruption of the VAT Officials was found to be an important reason for the lower deterrent effect. However, most of the NBR officials refuted the business representatives’ allegation of corruption against them. Some of them contested the allegation and cited a number of incidents about taxpayers’ corruption. The interviews revealed that the threat of punishment, fines and
78. There is a provision in Bangladesh, that if an officer visits the business premises, the business owner pay some extra cash as an honor to the official. This is illegal, but became a custom in the Bangladeshi taxation system.
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penalties, the cancellation of VAT registration, the likelihood of audits and the taxpayer mental accounting are influencing factors for compliance decisions.
The findings of this study demonstrated that, for some compliant taxpayers, the deterrent effect related to their business reputation and to the effect of NBR’s prosecution against non-compliant taxpayers. In contrast, the non-compliant taxpayers appear not to be too concerned about the deterrent effect. The VAT Officials thought the significant demonstration of NBR prosecutions of non-compliant taxpayers may increase the compliance level among all SME taxpayers.
The antagonistic relationship and the low trust between the two groups (SME taxpayers and VAT Officials) were clear from the discussions. The low trust of the VAT Officials and policy makers, due to corruption, played a negative role in nurturing the voluntary compliance level of SME taxpayers.
Finally, to answer the research question ‘Are there other factors which contribute to
VAT non-compliance by SMEs in Bangladesh?’, the researcher used documentary analysis from NBR and from VAT Commissionerates. The findings demonstrated that taxpayers’ non-compliance varies with the location, size and maturity of the business.
The manufacturing sector was found to be the most non-compliant sector in the economy. SMEs taxpayers believed that the big businesses pay less VAT compared to them, which contradicts the findings of international and local studies. However, evidence demonstrates that larger firms are more compliant with tax laws due to better internal control, proper accounting systems and higher tax knowledge, as compared to the smaller firms (CPD, 2014; Juahir et al., 2010; Tedds, 2010).
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7.9 Conclusion
This chapter presented the results of the in-depth interviews with VAT Officials and taxpayers in Stage 3. Data obtained through this method was employed to compare with the findings of Stage 1 and Stage 2 of this research. This chapter also explored some new findings, such as the inherent complexity of VAT law, the mental accounting and the role of media in taxation. The relationship between complexity, compliance costs and non-compliance with VAT was also explored further in this chapter. This chapter also presented the findings of documentary analysis. The overall results of the research, such as the results of research questions, the policy recommendations, the areas for further research, the limitations and the concluding comments, will be presented in the final chapter.
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Chapter 8
Conclusions and Policy Recommendations
8.1 Introduction
The purpose of this chapter is to review the major findings of the thesis with a view to formulating policy recommendations, and to suggest avenues for future research. The findings will be used to analyse the amendments to VAT Law that are scheduled to come into effect from July 2016.79
The chapter is organised as follows. Section 8.2 presents an overview of the thesis and its major findings, including the conclusions in respect of each research question and sub-research question. Section 8.3 briefly outlines forthcoming amendments to the VAT
Law against the background of the research findings, and assesses whether they are likely to improve compliance and lower compliance costs. Section 8.4 suggests a number of policy recommendations which follow from the thesis findings, while section
8.5 notes the contributions of this research to the literature. The limitations of the thesis and future research directions are discussed in Section 8.6 and 8.7 respectively. Section
8.8 concludes the thesis.
8.2 Overview of Major Findings
Chapter 1 provided an overview of the tax structure of Bangladesh and the current revenue collection practice. Possible reasons for a low revenue collection from VAT included a poor tax-to-GDP ratio with the presence of a large cash economy, the intentional or unintentional noncompliance of taxpayers and an inefficient or even corrupt tax administration. Although SMEs were found to constitute some 90% of all
79. As some of the taxpayers may have to adjust considerably during the new regime, the government has provided a four-year period of preparation for the new law. 248
businesses and played an important role in the country’s economic growth and employment, SMEs appeared to be under-represented both in terms of their registration for VAT and the VAT revenue collected from them. The thesis queried whether non- compliance by SMEs was related to the complexity of the VAT system and the compliance costs associated with it. In Bangladesh, the compliance burden of taxes, particularly VAT, is largely unknown, as are the compliance decisions of SME taxpayers. There has been little research about the SME sector and VAT compliance in particular, and the potential inter-relationships between complexity, VAT compliance costs and the VAT compliance decisions.
Chapter 2 provided an overview of VAT and the way it actually operates in Bangladesh.
The main reasons why VAT was introduced in 1991 were to maximize revenue and to make the tax system more transparent, more accountable and more participatory. While the standard rate of VAT in Bangladesh is 15%, with exports and deemed exports zero- rated, there are other rates such as the ‘fixed value addition’ on a ‘truncated base’,a deemed 1.5% VAT (the so-called ‘Trade VAT’) and a small business supplier tax at a rate of 3% of their annual turnover.
Chapter 3 outlined the conceptual framework used in the thesis, which included a non- compliance theory of taxation based on economic deterrence and social and fiscal psychology. This chapter also reviewed the complexity of taxation law, tax compliance costs theory and the relevant empirical evidence to date. The difficulties of measuring some of the constituents of tax compliance costs (such as psychological costs of compliance) and offsetting benefits (including managerial benefits and cash flow benefits) were noted. Much of the prior research related to developed nations and concerned personal income tax, with little research about VAT compliance in developing countries. The review of empirical evidence on tax compliance costs
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revealed that the costs of complying with VAT can be larger than those for other taxes, can fall (disproportionately)more heavily on smaller taxpayers, and may generate resentment that adversely affects taxpayers’ compliance behaviour.
Factors identified from the literature influencing tax evasion and tax compliance included the tax rates, levels of tax enforcement (audits), complexity of the regulation, the simplicity of tax forms and returns, the tax authority’s attitude towards taxpayers, taxpayers’ perceptions of fairness, perceptions about how government spends tax monies, and certain demographic characteristics. It was highlighted that there was little empirical evidence, especially in developing countries such as Bangladesh, which explored the inter-relationships between the complexity of VAT legislation, VAT compliance costs and non-compliance with VAT. Further, there was limited empirical evidence of the estimated psychological costs associated with the VAT.
Chapter 4 presented the research questions, the research design and the methodology. A mixed methods approach was adopted, utilising quantitative and qualitative methods, to maximise, so far as is practically possible, the internal and external validity of the results (Huck et al., 1974). The research project was designed to collect primary data from SME taxpayers (both compliant and non-compliant taxpayers) and from VAT
Officials of the NBR, at the field level and the policy level. Relevant secondary data and information were collected from the NBR and the Ministry of Finance.
The research was conducted in three stages. Stage 1 involved focus group discussions with VAT payers from the SME sector (both CTs and NCTs) and VAT Officials, with a total of 45 participants participating in six focus groups. After the focus group discussions were completed, Stage 2 involved a survey seeking qualitative and quantitative data from both complying and non-complying SMEs taxpayers. Of a total of 500 questionnaires, 200 questionnaires were distributed to the NCT group and the
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remaining 300 questionnaires were distributed to the CTs, resulting in 240 usable responses (152 from CTs and 88 from NCTs). Stage 3 involved in-depth semi- structured interviews with NBR Officers and with those taxpayers who in Stage 2 expressed their willingness to take part in Stage 3.A total of 26 in-depth interviews were conducted with VAT Officials and SME taxpayers. Chapters 4, 5 and 6 provided a detailed analysis of the results of the focus groups, survey, and in-depth interviews respectively.
The first research question addressed: “What are the costs of complying with the VAT
Law in Bangladesh for compliant and non-compliant SME taxpayers?” During the focus groups, awareness or consideration of VAT compliance costs seemed to be low among the participants. A majority of participants could not nominate a precise figure for their estimated VAT compliance costs. However, they felt that the compliance costs associated with VAT were higher than those for other taxes. Most of the CT and NCT participants reported that payments to external advisors made up a large part of the VAT compliance costs. A few of the NCTs admitted that perceived unfairness in the tax system ‘compelled’ them to pay extra money to the VAT Officials as bribes on a monthly basis, which increased their VAT-related costs.
The survey results indicated that the VAT compliance costs in Bangladesh (in terms of both monetary and psychological costs) were higher for non-compliant than for compliant VAT payers for the financial year 2011-12. In-house compliance activities consumed the most time and money for CTs, representing 31.25% of total compliance costs. In comparison, NCTs spent only 19.29% of their total compliance costs for in- house compliance activities. Costs associated with the price declaration and refund procedures, along with the costs of audits, objections and appeal activities, were the highest cost-consuming components for NCTs, representing 41.85% of total compliance
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costs, compared to 24.90% for CTs. Non-routine expenses – in particular, speed money or bribes to VAT officials – accounted for more than 7% of the total VAT compliance costs for SMEs. The results also indicated that the manufacturing sector had higher compliance costs than those of other sectors. VAT compliance costs were regressive and found to vary with the size of the business, the location of the business and the person preparing the VAT returns.
The first sub-research question addressed in this thesis was: “What is the value of psychological costs in taxpayers' total compliance costs?” The statements made by SME taxpayers in focus groups suggested that SMEs employed a VAT advisor and a VAT accountant to assist with their VAT obligations largely to reduce stress and anxiety. The
Stage 2 survey results demonstrated that psychological cost was a substantial component of VAT compliance costs for SMEs in Bangladesh, with little difference between CTs and NCTs, accounting for 15.50% of total VAT compliance costs in
Bangladesh. The results also indicated that psychological costs associated with the VAT in Bangladesh in the year under consideration were higher in the manufacturing sector than in other sectors. The main reasons for higher psychological cost were related to the discretionary power of the VAT officials, surprise visits to the business premises by
VAT officials, and the extra VAT-related activities for manufacturers. Taxpayers reported that these psychological costs could be reduced if the VAT authority were to provide timely information and have a friendly attitude towards taxpayers (82% of compliant and 85% of non-compliant VAT payers strongly agreed or agreed with this).
The second research question considered, “What are the reasons why non-compliant
Bangladeshi SMEs fail to comply with the VAT Law?” Participants in the focus groups identified multiple reasons for non-compliance by SME VAT payers in Bangladesh.
The VAT officials stressed that SME taxpayers do not comply with the tax law and do
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not pay the correct amount of VAT. Compliant taxpayers’ stressed that a complex tax system, multiple rates of VAT, highly complicated language and frequent changes to the VAT Law discourage taxpayers from complying with the VAT Law. In comparison, non-compliant taxpayers reported a high VAT rate, the unfriendly attitude of the VAT officials, wide discretionary powers of VAT officials, corruption and red tape as being the main reasons behind non-compliance with the VAT Law in Bangladesh. The survey results in Stage 2 demonstrated that perceptions about unregistered VAT businesses having an advantage seemed an important factor for non-compliance. Other important factors were that businesses registered for VAT are often subject to NBR audits and objections, and that businesses are wary of the discretionary and ‘quasi-judicial’ powers of the VAT authorities.
Research question 3 and sub-research question 2 related to the role of complexity and compliance costs with non-compliance by SMEs in Bangladesh. A majority of the compliant SME taxpayers in the focus group discussions listed complexity in VAT law and compliance costs as the two most important factors influencing VAT non- compliance by SMEs. Some non-compliant participants considered that the complexity of VAT law and higher VAT compliance costs might have an impact on tax compliance attitudes, but other factors like the antagonistic relationship between taxpayers and tax officials had more influence. The survey finding demonstrated that more than three- quarters (87%) of NCTs felt that compliance with the VAT law was excessively burdensome and costly for taxpayers. In contrast, only 50% of CTs believed this. While the focus groups thought that VAT compliance costs could be an important factor in
VAT non-compliance, the survey found this was not the case for non-compliant VAT payers. The most common reason given for the higher compliance costs was the
‘complexity of regulations’. The survey results suggest that the majority of the SME taxpayers (both compliant and non-compliant) used external help to deal with the 253
complexity of VAT Law. VAT Officials argued in both Stage 1 and Stage 3 that the threat of punishment, fines and penalties, the cancellation of VAT registration, the likelihood of audits and the surprise checks by VAT Officials are more influential factors for compliance decisions than the complexity and compliance costs.
A further research question of this thesis concerned the effectiveness of deterrent measures in ensuring compliance by SMEs in Bangladesh. Different groups appeared to have different opinions about the effectiveness of deterrent measures to encourage compliance. Bangladeshi NCTs did not think heavier fines and penalties or prosecution actually deterred non-compliance. In comparison, CTs and VAT Officials thought heavier prosecution and penalties would probably improve compliance. Some 72% of the CTs strongly agreed or agreed that a significant increase in NBR prosecutions of non-compliant taxpayers would increase compliance among other SME taxpayers, while only 36% of NCTs believed this. Respondents’ comments in Stage 1 and Stage 3 indicated that the deterrent effect could be improved in Bangladesh if the NBR and other enforcing agencies were proactive, free of corruption, and appropriately constrained by the law. Some participants pointed out that illegal relationship between business owners and the NBR and political parties reduced some taxpayers’ willingness to comply with the law, even despite the existence of deterrent measures.
The final research question related to whether there are any other factors that contribute to VAT non-compliance by SMEs in Bangladesh. Documentary analysis of NBR papers and data collected from VAT Commissionerates found that taxpayer non-compliance varies with the location, size and maturity of the business. The manufacturing sector was found to be the most non-compliant sector in the Bangladeshi economy.
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8.3 The New VAT and Supplementary Duty Act’ 2012
As noted in Chapter 2, a new VAT and Supplementary Duty Law, passed by the
National Parliament in November 2012, commences in July 2016. Below is a brief outline of the major changes implemented by the new law, followed by insights about its likely effectiveness given the research findings from this thesis.
A tax development partner group comprising the International Monetary Fund
(IMF),the Bangladesh Investment Climate Facility (BICF),the Department of
International Development (DFID) and the European Commission claim that the new
VAT Law could increase the tax yield and broaden the tax base if properly implemented and administered by the NBR (IMF, 2014).According to the IMF forecasts, an increase in VAT yields from 3.7% of GDP in 2012 to 4.6% are expected if the new law can be implemented successfully (GOB, 2015).
The new law, which does not change the VAT registration threshold (BDT 8 million or
106,666 USD), provides for three taxes: a creditable 15% VAT that is chargeable by businesses with taxable sales above BDT 8 million; a non-creditable 3% turnover tax that applies to businesses with taxable sales between BDT 2.4 million (32,000 USD) and BDT 8 million (106,666 USD); and a supplementary duty of varying rates which are chargeable on sales of specific goods and services. The new VAT Law will apply to all sectors: import, manufacturing, services, and distribution. VAT will be imposed on the actual sales price instead of arbitrary tariff values or truncated bases; and taxpayers are no longer required to have price declarations approved by VAT officers. However, businesses have to keep the input-output coefficients of their manufacturing products to show these to the VAT authority if necessary. There will be no provision for package
VAT in the new law to support small businesses.
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The amount of VAT due in each reporting period is based on the invoice-credit method where the amount of tax to be paid equals the VAT charged on sales (and other positive adjustments) minus the VAT paid on inputs (and other negative adjustments). The new
VAT law allows tax to be remitted to government when the tax return is due and will eliminate step by step the current requirement for manufacturers and some service providers to remit VAT before shipping goods or providing services.
The new law vests some additional powers with the NBR to recover tax arrears, including authority to freeze a tax debtor’s bank accounts, place a lien on the tax debtor’s property, and hold company directors liable for paying unpaid taxes. It also allows tax debtors to pay their arrears in instalments for up to 12 months (only 6 months is permitted under the existing law). Under the new VAT Law, taxpayers will be able to access an alternative dispute resolution (ADR) system, although they will also be required to pay 10% of a disputed tax before being entitled to file any appeal. The number of exempted goods subject to supplementary duty will be substantially reduced under the new VAT Law.
While the development partners and NBR have high expectations for the new VAT
Law, business groups have strongly opposed it. The business sector has argued that the
Bangladeshi Parliament passed the law in order to obtain loans from the IMF, ignoring objections raised by the businessmen (Uddin, 2015; “Businessmen Oppose New”,
2014).The business sector has strong objections to a variety of issues, such as the cancellation of package VAT, the payment of fines and penalties, the exemptions of a small number of products, and the provisions relating to changes to the tax base being made unilaterally by Parliament without a more inclusive, consultative process. The policy recommendations presented in the next section draw from the findings of the
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thesis, and give some indication of how effective or ineffective the new VAT Law is likely to be.
8.4 Recommendations
The results and findings of the thesis suggest a number of policy recommendations, which are discussed below, regarding corruption, discretionary powers, legislative and regulatory complexity, NBR communication and knowledge, and fair enforcement. i. Reducing Corruption
This study has highlighted how corruption is undermining various aspects of the VAT system, including the audit process. Indeed, one of the most interesting results of the thesis is that non-compliant taxpayers appear not to be too concerned about fines and penalties, or audit procedures, apparently because of the possibility of bribing NBR officials. In order to enhance revenue collection and voluntary compliance, policy makers need to take steps to reduce corruption at all levels. One area of concern relates to the discretionary powers of the VAT Officials. Measures could include introducing a hot line for taxpayers to report corrupt VAT Officials, disciplinary proceedings by an independent body, and better employment conditions for NBR officials. It is important that disciplinary proceedings are made transparent to the public, to improve public perception of the integrity of the NBR and its staff. The results demonstrated that the perception of ‘fairness’ is important for improving compliance. However, it needs to be noted that corruption at all levels, such as big business, other government officials, and politicians also needs to be addressed.
To lessen the temptation for corruption, one possible reform could be to improve the wages and conditions for NBR Officers. Increasing the wages of tax officials, however, will not reduce corruption unless and until an extensive and effective monitoring of
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corrupt VAT Officials is implemented (Fjeldstad, 2006).Accordingly, any increase in wages would need to be accompanied by the prosecution of corrupt VAT officials.
Special service rules and regulations for NBR officials also need to be reinforced to ensure the provision of punishment for any corruption by public officials. ii. Decrease Complexity
Simplicity and clarity of both language and processes in any tax system are important determinants for voluntary compliance. Cnossen (2010) argues that for a tax such as
VAT, which is based on voluntary compliance, unambiguous legislation is essential for effective implementation. This is confirmed by the thesis results regarding taxpayers’ perceptions of a need for greater simplicity and clarity of the VAT rules.
In terms of which areas are perhaps in greatest need for improvement in this regard,
SME taxpayers identified that multiple rates of VAT, highly complicated language, frequent changes in the VAT Law, price declarations, complicated rebates and refund procedures make the VAT Law very complex and costly for SMEs. The new VAT Law proposes a flat rate of 15%, the abolition of the ‘package VAT system’, the discontinuation of truncated value base and the simplified refund procedures. In addition, the existing price declaration provision for the manufacturers has been discarded; instead the taxpayer will need to notify the current good or service price and input-output coefficient.
The thesis found that tax expenditure incentives increase the complexity of the VAT law. It is therefore recommended that the number of tax expenditure incentives in the
VAT system be reduced, and the NBR is planning to gradually reduce the number of exempted goods and services. These are seen as positive moves to decrease complexity and increase compliance.
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Some business persons claim that the new Law is not business-friendly and is more complex than the existing Law. The new VAT Law comprises more than twice the number of sections as the existing VAT Law, including more definitions. An increase in the documentation required under the new Law could lead to an increase in compliance costs, at least initially. During the transitionary period, SME taxpayers may have to spend more money and working hours to become familiar with the new VAT Law. This may include having to seek assistance from VAT consultants in interpreting the new
Law.
The new VAT Law will also implement computer-generated VAT invoices(‘challans’), with online submission of monthly VAT returns, so that the current practice of manually sending invoices to VAT Circle Offices will cease. While the use of technology could be beneficial, it ignores the reality of Bangladesh’s infrastructure problems. One of the interviewees commented:
We are living in the 21st century but our new VAT law is trying to operate like in the 22nd century. Operating the law by fully electronic and online process is a day dream to us. (CT 5)
Another interviewee commented that the reforms also ignore the expenditure required by businesses in terms of new computer software and training:
We have to buy electronic cash registers and new computer software and finally we need some skilled staff to manage everything electronically. Again, we have to keep all manual receipts for 5 years. Therefore, we have to spend double for record-keeping. (NCT 6)
Completing VAT online is admirable but highly ambitious when the supply of electricity is not continuous. Miah (2006) identified the irregular and inadequate supply of electricity as one of the main constraints of SME development in Bangladesh, and it is still a current issue (GOB, 2014). Policy makers need to re-think the online VAT system and how a better record-keeping system might be applied to SMEs, at least
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initially. In addition to ensuring a more reliable electricity supply, this could include training, and funding or tax relief to purchase necessary equipment. iii. Decrease Discretionary Power of the VAT Officials
As reflected in the research findings, it is important that the discretionary powers of
VAT officials be reduced. These discretionary powers not only add to the psychological costs, but they appear to lead to opportunities for corruption (whether real or perceived).
This recommendation is supported by the IMF, which suggests that the power for the
NBR to set tariff values for VAT concentrates too much power in the hands of the NBR and its officials (IMF, 2007). Without other legislative checks and balances, this aspect of Bangladesh's VAT system is vulnerable to political and bureaucratic opportunism
(IMF, 2007). This recommendation is also supported by the country’s apex business association, the Federation of Bangladesh Chambers of Commerce and Industry
(FBCCI), which has proposed reduced discretionary powers for VAT Officials in a bid to improve business conditions (Financial Express, 2012).
Under the new VAT Law, some of the existing discretionary power will be eliminated.
For example, the price declaration provision, the truncated base for assessment of VAT, and the power of determination of turnover taxes will be removed. However, discretions around the provision of tariff values, the use of stamp and banderole, the input-output coefficient for manufacturers, and section 26 of the existing VAT Law (i.e. the power of make ‘surprise’ visits to taxpayers’ premises) will continue. Also under the new VAT
Law, the NBR will have vested additional powers to recover VAT, including freezing a tax debtor’s bank accounts, placing a lien on the tax debtor’s property, and holding company directors liable for paying unpaid taxes. While the removal of some discretion is constructive, there continues the possibility of misusing this additional power and perpetuating the alleged corruption of VAT officials. It is therefore recommended that
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there be greater checks and balances around these discretionary powers, including taxpayer rights to appeal NBR decisions. In addition, a corruption hotline and more stringent disciplinary procedures for corrupt VAT officials could be introduced. iv. Improvement of NBR’s Communication
Most taxpayers interviewed believed that the relationship between taxpayers and the
NBR is neither friendly nor professional. The VAT authority’s antagonistic treatment towards taxpayers appears to affect their morale and willingness to comply with the
VAT Law. A resulting sense of frustration between the NBR and the SME taxpayers appears to have exacerbated SME non-compliance with the VAT Law. An improved tax culture between the NBR and taxpayers over the long-term is therefore vital to increase voluntary compliance. This could include the NBR setting up a better exchange of information, so that taxpayers understand that audits, surprise visits and proper record keeping in VAT are not only a legal obligation but also a safeguard of transparency.
When conducting such visits or communicating generally with taxpayers, VAT officials need to be respectful and timely.
The NBR should consider treating compliant and non-compliant taxpayers differently.
Compliant taxpayers should be given more assistance from NBR and local VAT offices.
This could include the NBR being more understanding about inadvertent breaches, improving the audit process and increasing the frequency of constructive communications with taxpayers.
One of the most interesting results from the thesis is that non-compliant taxpayers appear not to be too concerned about fines and penalties, or audit procedures. VAT officials should be stricter with NCTs through regular audits, and the imposition of fines and penalties to increase pressure upon them to be compliant. However, this is only
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likely to be effective if the audit process is free from corruption, since any corruption of
VAT officials undermines the entire audit and penalty system.
The NBR has recently established a ‘help desk’ with all VAT Commissionerates and local VAT offices, with the aim of providing services to assist taxpayers in complying with the VAT law. This is seen as an important step in improving relationships with taxpayers. In addition however, the NBR could consider establishing a SME businesses
‘Support Service Unit’ to provide specific assistance and advice on VAT issues to SME taxpayers who are not represented by VAT consultants. This ‘Support Service Unit” could include assisting SMEs to manage their cash flow while recognising the need to pay VAT. This ability to manage cash-flow is important to enable businesses to meet their VAT obligations. The positive side of VAT compliance, such as the cash-flow benefits and managerial benefits arising from VAT compliance, should be emphasised by the NBR to improve NCT attitudes towards compliance.
The NBR should also arrange an extensive, free training program about the new VAT
Law to make it understandable to SME taxpayers. Lowering penalties for non- compliance in the first 12 months of operation of the new VAT Law, while businesses adjust, should also be considered. Electronic and print media could be utilised to encourage taxpayers to learn about the new VAT Law, and to permit feedback to the
NBR about taxpayers’ opinions about its VAT policies. However, taxpayer trust in such a process could be ensured only with a free and unbiased media. v. Improve VAT Official’s Knowledge
The thesis results indicate that a substantial portion of taxpayers are not comfortable with VAT officials, and that taxpayers consider that the VAT Officials themselves lack relevant knowledge about the VAT Law. Therefore the NBR shouldenhance the quality of its resources by recruiting skilled officers and giving intensive training to its
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Officials. This training should aim to improve their ethics and knowledge of the VAT
Law,as well as their communication skills so that they can better explain the VAT and its benefits (eg. in terms of cash flow management) to SME taxpayers. Ensuring effective and efficient training for VAT Officials is important to enhance their professional performance and to gain taxpayer trust. Policy makers and the NBR could also engage in research programs, seminars and conferences on VAT compliance issues, publishing VAT-related articles, news and reports to update Officials and taxpayers about tax matters and revenue performance. The government might also encourage
VAT officials to pursue higher studies to better understand VAT compliance. vi. Restructuring Fines and Penalties
Allingham and Sandmo (1972) assume that if audit detection is likely and penalties are severe, the possibility of intentional non-compliance will decrease. In contrast, the results of this thesis suggest that higher fines and penalties would have minimal impact on compliance. As the penalty rate for intentional non-compliance is very high
(250%)in Bangladesh and the probability of detection is very low, taxpayers could see evasion as a worthwhile gamble. Furthermore, the penalty for not registering VAT is not very high in the existing VAT law. As a result, businesses who do not register or comply with the VAT Law may not take the possibility of detection seriously. It is recommended that the NBR should focus on restructuring the fines and penalties for failing to register for VAT. On the other hand, the NBR could consider reducing penalties and fines for those taxpayers with a reasonable track record for compliance.
For example, the NBR could take into account the track record of taxpayers in the audit process: for example if unintentional errors or mistakes arise, lower penalties could apply. Of course, this does provide for some discretion, so it is important that there are some checks and balances surrounding this to ensure corruption does not occur.
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vii. Effective Enforcement
Effective enforcement is required by local VAT offices and the NBR to ensure that all businesses required to register for VAT are in fact registered and to establish a level playing field for compliant SMEs. This includes improving the speed of the VAT registration process and stopping the culture of unauthorised payments during registration. The NBR must ensure the proper enforcement of rules and regulations in relation to non-compliant taxpayers, in order to stop them taking advantage of weaknesses in the VAT system. Increased media reporting about the prosecution of non-compliant taxpayers could increase the deterrent effect. The government should also consider introducing a general anti-avoidance rule for VAT, rather than making annual ‘band aid’-style changes to try to address loopholes.
Any taxation reform is difficult and it takes several years to adjust (Bird, 2013).
Successful implementation of any reform agenda by the implementing agency (NBR) needs to keep the relevant stakeholders (SMEs) on board and address their concerns.
Awareness building and possible consequences should always be an integral part of a reform implementation plan.
8.5 Contributions
This thesis has contributed to the body of knowledge on legislative complexity, VAT compliance costs and compliance behaviour in a number of ways, including its research method and results. First, in terms of research methodology, a mixed methods approach, combining qualitative research tools such as focus groups and in-depth interviews with the quantitative tool of a survey, contributed to the efficacy of the results and main findings of the thesis.
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Second, conducting a survey involving compliant and non-compliant VAT payers was unique. No other VAT compliance cost study has done this. Third, a key contribution of this thesis was the researcher’s access to key NBR management to ascertain their views about taxpayer compliance behaviour. Very few VAT-related studies in developing countries have taken into account the views of VAT authorities and their observations about the VAT non-compliance of the SME sector.
A fourth key contribution was the estimation of taxpayers’ psychological costs of seeking to comply with the legislation. Very few empirical studies have sought to estimate psychological costs. Fifth, the consideration of all of these phenomena from three perspectives was unique: (i) those VAT taxpayers who have been found non- compliant previously; (ii) VAT taxpayers with a compliant history; and (iii) VAT
Officials who administer the system.
As explored in Chapter 3, the effect of deterrent measures in taxation legislation has been seriously underestimated in developing nations. The qualitative method of exploring the deterrent effect from the VAT Officials and the non-compliant taxpayers’ point of view appears to be novel, not having been conducted in any previous compliance study.
8.6 Limitations
As with any research, the limitations of the analysis in this thesis must be acknowledged. First, the findings in relation to the focus groups and in-depth interviews are limited by the sample and demographic characteristics of the participants. The two main sample biases were that a larger percentage of SMEs came from city areas as opposed to country areas, and that these SMEs had typically attained higher education levels than the national average. These deficiencies could reduce the generalisation of
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some of the findings. A second weakness of this thesis could be a Type II error in the classification of the taxpayers as ‘compliant’ and ‘non-compliant’. That is, it is possible that some compliant taxpayers were in fact non-compliant but had not yet been identified as such by the NBR.
Third, this thesis was based on a sensitive topic, and participants may have felt uneasy or embarrassed about responding truthfully during the discussion process and the survey. While measures were taken to assure participants of their anonymity, it is possible that their responses were not totally accurate (eg. if they feared leaks to the
NBR). The VAT officers involved in this study may also have felt cautious about their responses. While this group was happy to talk and was lively and confident in their opinions, some had concerns about voice-recording during discussions as they are government employees and thought they could be reprimanded for expressing their opinions. While re-assurances of anonymity were provided, their concerns may have influenced the candidness of their responses.
A fourth limitation is with the estimation of VAT compliance costs. Insofar as compliance cost estimates were self-reported or recollections of historical compliance costs, taxpayers may not have been completely accurate. Fifth, the measures used for psychological costs were rudimentary, but given the paucity of robust measures, they nevertheless provide an interesting reflection. Sixth, the survey used in the current study may not be able to measure non-compliance behaviour perfectly, or it may be interpreted differently by some respondents, adversely affecting the quality of the responses or even possibly response rates.
These limitations suggest several possible future research directions, discussed in the following section.
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8.7 Future Research Directions
A number of opportunities for further research can be identified from the analysis in this thesis. Firstly, the survey did not include those SMEs operating solely in the ‘cash economy’ (i.e. who are not currently within the VAT system, even though registrations may be mandatory for them).It could be that the factors driving the behaviour of these cash economy SMEs are different from those of the non-complying VAT payers surveyed. Nor did this thesis consider the compliance behaviour of those businesses registered under the turnover taxes, which could be a useful area for future research.
The thesis has focused on VAT non-compliance rather than VAT avoidance and VAT evasion. It might be fruitful in the future to investigate the extent of VAT avoidance and evasion in Bangladesh: for SMEs, for turnover taxes, and for large taxpayer units.
Further research could be undertaken into large businesses and their incentives for non- compliance, as well as their VAT compliance costs, psychological costs and the effectiveness of deterrent measures applied to them. Furthermore, future research could measure the overall tax compliance costs, including income tax, VAT, and the customs duties. Future research could also estimate the enforcement and monitoring costs of
VAT and test whether the findings of this thesis are corroborated.
Further research into the role of the media in tax compliance behaviour could provide valuable insights. Since this thesis is the first study to estimate VAT compliance costs
(monetary costs, time costs and psychological costs together) for the SME sector in
Bangladesh, but does not cover multiple years, future research could consider whether the VAT compliance costs of SMEs in Bangladesh are decreasing or increasing over time. Future studies could be conducted after the introduction of the new VAT Law in
July 2016, in order to monitor its impact on VAT compliance costs. Further research
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could investigate whether the new VAT Law has decreased compliance costs compared to the current study, after adjusting for transitional costs given the change in rules.
The findings of this study suggest that the cost relating to external advice is a major cost component of compliance costs. The VAT officials interviewed considered at least some of this cost to be a cost of non-compliance, insofar as it related to tax minimisation schemes. Future research could consider whether the use of VAT consultants increases the likelihood of aggressive tax planning and thereby increases the overall compliance costs.
The thesis results for NCTs indicated that improving VAT compliance would be best served by changing taxpayer perceptions through re-framing, specifically by convincing
NCTs that VAT compliance improved record-keeping and therefore business decisions.
Further studies could explore the effectiveness of such a strategy for improving compliance by NCTs compared with CTs.
8.8 Conclusion
The VAT is generally acknowledged for its significant revenue-raising potential for financing government services and for the efficiency with which it can be imposed
(Williams, 1996). VAT has become one of the most important revenue-mobilising instruments in advanced industrialized countries as well as in developing countries
(Bird, 2013; Eccleston, 2007).
However, for a VAT system to achieve its revenue-raising potential, there needs to be compliance and its cost of its operation must not be overly burdensome. Moreover, to make the VAT system an effective tool for revenue-raising in a self-assessment environment, there needs to be trust and confidence in taxpayers, motivating them to pay the right share of VAT.
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As with other countries, SMEs are an important part of Bangladesh’s economy and future prosperity. The increasing complexity in the tax system, together with the growth of the importance of the SME sector, has raised awareness for the need of simplicity, lower compliance costs and voluntary compliance by SMEs, especially with VAT. This thesis sought to explore the VAT compliance burden for Bangladeshi SMEs, particularly the complexity of the VAT Law and the compliance costs of VAT.
The findings of this study provide valuable insights into the inter-relationships between complexity, compliance costs and VAT non-compliance by SMEs in Bangladesh. The study provided a comprehensive estimate of VAT compliance costs for both complying and non-complying VAT payers, including their psychological costs. Important differences were also found to exist between compliance and non-compliance behaviour, including the effectiveness of audits and penalties as a deterrent. A theme running through was that the very corrupted could have a negative effect on the new
VAT law working effectively.
The findings of this research gave some clear directions to the NBR and other enforcement agencies to improve the efficiency, fairness and integrity of the whole taxation system. It is likely that these directions are relevant to the tax administrations in other developing countries and perhaps to other types of taxpayer (large taxpayers of
VAT, personal income taxpayers and corporate income taxpayers in Bangladesh).
The policy recommendations of this thesis will be important for tax policy researchers, policy makers and VAT administrators in Bangladesh. The findings could also be relevant to other developing countries in designing an effective VAT system. This issue is important for developing countries so that the economic benefits of the VAT can be fully realised.
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Appendix A -Ethics Approval
GRIFFITH UNIVERSITY HUMAN RESEARCH ETHICS COMMITTEE
12-Apr-2013
Dear Ms. Faridy
I write further to the additional information provided in relation to the provisional approval granted to your application for ethical clearance for your project "NR: Complexity, Compliance Costs and Non-Compliance with VAT by Small and Medium Enterprises (SMEs) in Bangladesh: Is there a Relationship?" (GU Ref No: AFE/03/13/HREC).
The additional information was considered by Office for Research.
This is to confirm that this response has addressed the comments and concerns of the HREC.
Consequently, you are authorised to immediately commence this research on this basis.
The standard conditions of approval attached to our previous correspondence about this protocol continue to apply.
Regards
Ms Kristie Westerlaken Policy Officer Office for Research Bray Centre, Nathan Campus Griffith University ph: +61 (0)7 373 58043 fax: +61 (07) 373 57994 email: [email protected] web:
Cc: Researchers are reminded that the Griffith University Code for the Responsible Conduct of Research provides guidance to researchers in areas such as conflict of interest, authorship, storage of data, & the training of research students. You can find further information, resources and a link to the University's Code by visiting http://policies.griffith.edu.au/pdf/Code%20for%20the%20Responsible% 20Conduct%20of%20Research.pdf PRIVILEGED,PRIVATE AND CONFIDENTIAL This email and any files transmitted with it are intended solely for the use of the addressee(s) and may contain information which is confidential or privileged. If you receive this email and you are not the addressee(s) [or responsible for delivery of the email to the addressee(s)], please disregard the contents of the email, delete the email and notify the author immediately.
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Appendix B - Letter from NBR
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Appendix C- Focus Group Discussion Guide
Complexity, Compliance Costs and Non-Compliance with VAT by Small and Medium Enterprises (SMEs) in Bangladesh: Is there a Relationship?
Participants’ Information
Chief Investigators:
Dr Richard Copp A/P Brett Freudenberg Dr. Tapan Sarker +61 737357790 +61 733821196 +61 737353835 [email protected]@griffith.edu.au [email protected]
Student Researcher
Nahida Faridy Griffith Business School Phone: 01731056680 (BD mobile) E-mail: [email protected]
Introduction
Due to the importance of SMEs sector in Bangladesh’s economy it is important to estimate the VAT compliance costs of SMEs and to know Taxpayers’ perceptions about complexity of VAT law. If you think the VAT law of Bangladesh is complex, it is important to know which part of this law is complex. Therefore, the objectives of this thesis are to estimate the VAT compliance costs for SMEs in Bangladesh and consider whether there is any relationship between the complexity of the VAT law (real or perceived) and VAT compliance costs for SMEs in Bangladesh. The others objectives are to examine whether, in respect of SMEs in Bangladesh, there are any potential inter- relationships between VAT compliance costs and VAT non-compliance.
What you will be asked to do
We will discuss about the complexity, compliance costs and VAT non-compliance by SMEs in Bangladesh and it is estimated the discussion will take 1-1.5 hours of you. The discussion has two parts. First part is VAT non-compliance, VAT compliance costs and VAT law complexity. The second part is based on your perception about the deterrent effect of VAT by SMEs in Bangladesh. Our discussion will be limited only on VAT not turnover taxes.
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Consent to Participant
Your participation in this discussion is voluntary and you are not under any obligation to consent or participate in this research. Non-participant will not involve any penalty and you may discontinue participation at any stage without penalty or without providing any explanation. It is hoped that the findings of this research may be useful to design an effective VAT system for SMEs. It is envisaged that the findings of this research will fortify current theory, building a stronger framework for further studies.
Confidentiality
Before starting the discussion, you are requested to respect the privacy of other participants. The opinion is this discussion will be reported in general terms and will not involve any identifying feature. All information will be kept confidential and a unique identification number will be allocated to all you. The correlation between number and participant will be kept securely only within the research team. All data will be stored securely for five years before being destroyed. You will be asked for permission for the researcher to voice record the interviews conducted as part of this research. These voice recordings will be transcribed into document format, recordings will be destroyed upon completion of transcription. These transcriptions will be identified with the unique participant identifier code and any particular identifying information presented in the transcriptions will be removed. The information collected is confidential and will not be disclosed to third parties without your consent, except to meet government, legal or other regulatory authority requirements. A de-identified copy of this data may be used for other research purposes. However, your anonymity will at all times be safeguarded. For further information consult the University’s Privacy Plan at http://www.griffith.edu.au/privacy-plan or telephone (07) 3735 4375. A report of the collective findings from this study will be made available to participants upon request. Requests are to be made by email to the student researcher: Nahida Faridy ([email protected]) Should you have concerns regarding this research please feel free to contact with the Chief investigators or with the student researcher over phone or by email listed above.
Risks to you
This research is conducted for the student researcher. Nahida Faridy’s PhD thesis in Griffith University, Australia and is only for academic purpose. This research poses no risk to you and will not cause any stress to you. This will not affect your relation to National Board of Revenue in future. On the other hand, the person conducting the survey is not involved with the VAT authority now and has no influence to your VAT cases (if any) as it is already judicially settled.
The ethical conduct of this research
Griffith University conducts research in accordance with the National Statement on Ethical Conduct in Human Research. If you have any concerns or complaints about the ethical conduct of this research you should contact the Manager, Research Ethics at Griffith University on +61 7 3735 4375 [email protected].
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Questions about this research
The Chief Investigators for this research projects are Dr. Richard Copp and A/P Brett Freudenberg and Dr. Tapan Sarker. This research forms part of a Doctoral Degree being undertaken by Nahida Faridy (Student Researcher) in her capacity as a Griffith University Student. If you have any questions regarding this research please feel free to contact with the Chief investigators or with the student researcher over phone or by email listed above. If you decide to participate, please take your time and proceed.
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Complexity, Compliance Costs and Non-Compliance with VAT by Small and Medium Enterprises (SMEs) in Bangladesh: Is there a Relationship?
CONSENT FORM
Research Team
Chief Investigators
Dr Richard Copp A/P Brett Freudenberg Dr. Tapan Sarker +61 737357790 +61 733821196 +61 737353835 [email protected]@griffith.edu.au [email protected]
Student Researcher
Nahida Faridy Griffith Business School Phone: 01731056680 (BD mobile) E-mail: [email protected]
I have read the information and understand that:
• This participation is only for the academic requirement of Ms Nahida Faridy, Griffith Business School.
• I understand that my involvement in this research will include participating in a discussion that relates to VAT complexity, compliance costs and non-compliance of SMEs sectors in Bangladesh.
• I understand there is no risk involved in this discussion and my participation will not affect my future relation with NBR.
• I understand that there will be no financial benefit to me from my participation in this research.
• Data will be kept confidential for a period of five years in a locked cupboard before being destroyed.
• I am being asked to allow voice recording of the focus group discussion. The recording will be transcribed and once completed the original recording will be destroyed immediately.
• I understand that my participation in this research is voluntary and I am free to withdraw at any time, without comment or penalty.
275
• I understand that if I have any additional questions I can contact the research team.
• I understand that I can contact the Manager, Research Ethics, at Griffith University Human Research Ethics Committee on +61 (0) 7 3735 4375 (or research- [email protected]) if I have any concerns about the ethical conduct of the project.
• A summary of this research will be provided by the researcher upon mailing Ms Nahida Faridy on [email protected].
• The conduct of this research involves the collection, access and/or use of my identified personal information. The information collected is confidential and will not be disclosed to third parties without my consent, except to meet government, legal or other regulatory authority requirements. A de-identified copy of this data may be used for other research purposes. However, my anonymity will at all times be safeguarded. For further information consult the University’s Privacy Plan at http://www.griffith.edu.au/privacy-plan or telephone (07) 3735 4375.
I have read the information and consent form. I agree to participate in this discussion and give my consent freely. I understand that the study will be carried out as described in the participant information sheet (I have retained a copy for my records). I understand that it remains my decision to participate or not in the project and I have the option to withdrawal from the study at any time without explanation. I have had all questions answered to my satisfaction.
Name:
Age & Gender:
Working Experience (years):
Signature:
Date:
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Part 1
1. Why do you think SME taxpayers comply with VAT law?
2. What are the causes of non-compliance by SMEs in Bangladesh?
3. Have you ever estimated the compliance costs for your business? Can you give some rough estimation about it?
4. Do you think VAT compliance is affected by complexity of VAT law and VAT compliance costs?
Part 2
5. Have you have any idea about the deterrent effect of VAT?
6. Do you think deterrent effect (effect of audit, penalties and sanctions) have any
influence on VAT non-compliance in Bangladesh?
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Appendix D- Survey Questionnaire
Complexity, Compliance Costs and Non-Compliance with VAT by Small and Medium Enterprises (SMEs) in Bangladesh: Is there a Relationship?
Participants’ Information
Chief Investigators:
Dr Richard Copp A/P Brett Freudenberg Dr. Tapan Sarker +61 737357790 +61 733821196 +61 737353835 [email protected]@griffith.edu.au [email protected]
Student Researcher
Nahida Faridy Griffith Business School Phone: 01731056680 (BD mobile) E-mail: [email protected]
Introduction
Due to the importance of the Small and Medium Enterprises (SMEs) in the Bangladesh economy it is important to know about the complexity of the VAT law and the compliance costs of your business. The objectives of this thesis are to estimate the VAT compliance costs for SMEs in Bangladesh and consider whether there is any relationship between the complexity of the VAT law (real or perceived) and VAT compliance costs for SMEs in Bangladesh. The other objectives are to examine whether, in respect of SMEs in Bangladesh, there are any potential inter-relationships between VAT compliance costs and VAT non-compliance, including the extent to which higher compliance costs are likely to lead SME taxpayers failing to comply with VAT law, or whether there are other factors contributing to VAT non-compliance by SMEs in Bangladesh.
What you will be asked to do
You have to fill out a survey questionnaire and it is estimated to take 30-35 minutes for you. The questionnaire has four parts. I may request you for a follow up face-to-face in- depth interview for further clarification. If you are interested for a face to face interview in the next stage, I will contact with you later.
278
Consent to Participant
Your participation in this project is voluntary and you are not under any obligation to consent or participate in this research. Non-participation will not involve any penalty. If you choose to participate, you may discontinue participation at any stage without penalty or without providing any explanation. It is hoped that the findings of this research may be useful to design an effective VAT system for SMEs in Bangladesh. It is also envisaged that the findings of this research will fortify current theory as well as building a stronger framework for further studies on VAT reform in Bangladesh.
Confidentiality
The data collected from this research will be reported in general terms and will not involve any identifying feature. All information will be kept confidential and a unique identification number will be allocated to all participants. The correlation between number and participant will be kept securely only within the research team. All data will be stored securely for five years before being destroyed. The information collected is confidential and will not be disclosed to third parties without your consent, except to meet government, legal or other regulatory authority requirements. A de-identified copy of this data may be used for other research purposes. However, your anonymity will at all times be safeguarded. For further information consult the University’s Privacy Plan at http://www.griffith.edu.au/privacy-plan or telephone +61 (07) 3735 4375. A report of the collective findings from this study will be made available to participants upon request. Requests are to be made by email to the student researcher: Ms Nahida Faridy at [email protected]. Should you have concerns regarding this research please feel free to contact with the Chief investigators or with the student researcher over phone or by email listed above.
Risks to you
This research is conducted for the student researcher. Nahida Faridy’s PhD thesis at Griffith University, Australia and is only for academic purpose. This research poses no risk to you and will not cause any stress to you. This will not affect your relation with the National Board of Revenue (NBR) under any circumstances. On the other hand, the person conducting the survey is not involved with the VAT authority at present and has no influence to your VAT cases (if any) as it is already judicially settled.
The ethical conduct of the research
Griffith University conducts research in accordance with the National Statement on Ethical Conduct in Human Research. If you have any concerns or complaints about the ethical conduct of this research you should contact the Manager, Research Ethics at Griffith University on +61 ( 7) 3735 4375 or [email protected].
279
ID no:
Questionnaire Section 1: Background
1. What is the location of your business/enterprise? (tick ONE appropriate box)
Dhaka city corporation area Other City Corporation Area District Town Upazilla Area
2. What is your main business/enterprise activity? (tick ONE appropriate box)
Manufacturing Construction Units Service Rendering Units Traders (local, importers, exporters, commercial importers)
3. What type of business form do you use to conduct your enterprise? (tick ONE appropriate box)
A sole proprietorship A partnership A private limited company Others
4. When did your business/enterprise first register for VAT?
______(Year)
5. How do you keep your VAT related records? (tick ONE appropriate box)
A manual/paper system A partially computerised system A fully computerised system Tax adviser/external accountant
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6. For the 2011/12 financial year how much average monthly VAT did your business/enterprise pay? (tick ONE appropriate box)
Under BDT 400,000 BDT 400,001 to 600,000 BDT 600,001 to 800,000 BDT 800,001 to 10,00,000 More than 10,00,001
7. For the 2011/12 financial year how much was your business’s/enterprise’s annual turnover? (tick ONE appropriate box)
BDT 8,000,000 to 10,000,000 BDT 10,000,001 to 15,000,000 BDT 15,000,001 to 20,000,000 BDT 20,000,001 to 25,000,000 More than BDT 25,000,001
8. What is your highest level of education attained? (tick ONE appropriate box)
Below SSC and SSC SSC HSC Certificate Diploma Bachelor degree Master’s degree and/or higher Others (CA, LLB, MBA, PhD)
9. In the 2011/12 fiscal year, have your business been visited by a VAT officer?
No
Yes – if yes please complete specify:
How long did the visit last? ______(hours)
When was the visit: During the last month 1 to 3 months ago 3 to 6 months ago
Do you have any comments about the visit:
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Section 2: Complexity of VAT Law
10. Please indicate to what extent you agree or disagree with
the following statements:
The reason for COMPLEXTIY of VAT law in Bangladesh is
because of …:
Not sure Strongly Disagree Disagree Neutral Agree Strongly Agree Multiple rates of VAT (15%, 0%, Supplementary duty, tariff a) value, truncated base) b) The number of VAT related forms to complete c) Judicial interpretation of VAT legislation d) The price declaration procedure e) The rebate and refund procedure f) The length of time for judicial system for VAT cases g) Understandability of VAT instructions h) Frequent changes to VAT legislation i) Inconsistency between law/rules/office orders/SROs j) The VAT registration process
Section 3: VAT Non-compliance
11. Please indicate to what extent you agree or disagree with
the following statements:
In relation to COMPLYING with VAT law in Bangladesh … :
Not sure Strongly Disagree Disagree Neutral Agree Strongly Agree a) Paying the correct amount of VAT is our civic duty Paying the correct amount of VAT is an important b) contribution to the development of Bangladesh c) VAT is a simple method of collecting tax d) VAT improves business’s record keeping systems e) VAT improves the decision making in our business The likelihood of audits encourage me to comply with the f) VAT law The likelihood of penalties and sanctions encourage me to g) comply with the VAT law Imagining if Bangladesh was a tax-free country, you would h) still pay an external accountant/adviser for accounting-related services
282
12. Please indicate to what extent you agree or disagree with
the following statements:
Small and medium businesses do NOT COMPLY with VAT
law in Bangladesh because … :
Not sure Strongly Disagree Disagree Neutral Agree Strongly Agree a) The VAT rate is high b) The fines and penalty rates are very high c) VAT law and regulation is overly complex Keeping so many books and records for VAT purposes is d) complicated time consuming Compliance with the VAT law is excessively burdensome and e) costly for taxpayers f) The VAT system is unfair g) VAT officials are corrupt h) Discretionary and judicial power of the VAT Authority i) Government is not using taxpayers money properly Businesses that do not file or pay VAT are in a much better j) financial position Businesses registered for VAT are often subject to NBR’s k) audits and inspections
13. Please indicate to what extent you agree or disagree with
the following statements:
In relation to COMPLYING with VAT law in Bangladesh …:
Not sure Strongly Disagree Disagree Neutral Agree Strongly Agree If I saw less corruption by Bangladesh big business I would a) be willing to pay the correct amount of VAT If I saw less corruption by government officials I would be b) willing to pay the correct amount of VAT If I saw less corruption by VAT Officials I would be willing c) to pay the correct amount of VAT If I saw less corruption by Bangladesh politicians I would be d) willing to pay the correct amount of VAT Taxpayers would pay the correct amount of VAT if there was e) greater enforcement by VAT Authority Significant promotion of NBR prosecutions of non-compliant f) taxpayers would increase psychological costs among other SME taxpayers. Significant promotion of NBR prosecutions of non-compliant g) taxpayers would increase compliance among other SME taxpayers Imagining if Bangladesh was a tax-free country, you would h) still pay an external accountant/adviser for accounting-related services
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Section 4: VAT Compliance Costs
14. Do your business/enterprise employ an external adviser (eg accountant or a specialist tax adviser) to do the VAT work of your business? (tick ONE appropriate box)
Yes No – if no, do you do it yourself? Yes No
15. Please indicate to what extent you agree or disagree
with the following statements:
The MAIN REASON why the owners do NOT get external
advice to process VAT formalities is … :
Not sure Strongly Disagree Disagree Neutral Agree Strongly Agree a) They have sufficient time to do the VAT work Tax is a sensitive issue, so the owner can’t rely on b) anyone else It is not difficult for the owner to complete all forms and c) submit returns d) Our VAT affairs are very simple When the owner receives help from the NBR and local e) VAT authority f) When the owner cannot afford to pay tax advisers When the owners have qualified staff who can handle our g) VAT affairs
16. The MAIN REASON why you employ someone to assist
with processing VAT formalities:
Not sure Strongly Disagree Disagree Neutral Agree Strongly Agree a) The VAT law is too complex b) To get (carry forward) of our VAT rebate and refund quickly When the VAT adviser(s) charges less than the time and c) money it would cost to do it themselves To reduce the chance of error in value declaration and d) monthly VAT returns e) To reduce the chance of being audited by VAT Authority f) To ensure compliance with VAT obligations g) To avoid penalties for non-compliance with VAT obligations
284
17. Please estimate your business’s/enterprise’s average MONTHLY cost incurred by in-house staff dealing with the following VAT Estimate of average monthly BDT cost activities during the 2011/12 financial year: a) Recording information needed for VAT ______BDT Keeping all physical receipts in an organized manner (such as b) ______BDT sales slips, invoices, receipts) c) Calculating VAT, completing VAT return and paying VAT ______BDT d) Keeping the forms and registers related to VAT ______BDT e) Preparing and making VAT monthly returns ______BDT f) Dealing with the NBR (phone calls, emails, visits) ______BDT Dealing with external VAT adviser, including providing g) ______BDT information to them Learning about VAT law, including reading newsletters, NBR h) ______BDT website, bulletins i) Preparing for price declaration documents for VAT offices ______BDT Working time spent on VAT refund preparation and j) execution, preparing and submitting VAT refund document to ______BDT NBR k) Preparing for the VAT audits by VAT Authority ______BDT Working time spent on objections, appeal and VAT-related l) ______BDT court appeal m) Other expenses – please specify ______BDT
18. Please estimate your business’s/enterprise’s average MONTHLY Estimate of average monthly hours ‘TIME’ spent by in-house staff dealing with the following VAT Use decimals for fraction of hours (i.e activities during the 2011/12 financial year (include time spent by 0.5 hours for half an hour) owners/partners/directors/paid employees): a) Recording information needed for VAT ______hours Keeping all physical receipts in an organized manner (such as b) ______hours sales slips, invoices, receipts) c) Calculating VAT, completing VAT return and paying VAT ______hours d) Keeping the forms and registers related to VAT ______hours e) Preparing and making VAT monthly returns ______hours f) Dealing with the NBR (phone calls, emails, visits) ______hours Dealing with external VAT adviser, including providing g) ______hours information to them Learning about VAT law, including reading newsletters, NBR h) ______hours website, bulletins i) Preparing for price declaration documents for VAT offices ______hours Working time spent on VAT refund preparation and j) execution, preparing and submitting VAT refund document to ______hours NBR k) Preparing for the VAT audits by VAT Authority ______hours Working time spent on objections, appeal and VAT-related l) ______hours court appeal m) Other expenses – please specify ______hours 285
19. Please indicate to what extent you agree or disagree with
the following statements:
In relation to the PSYCHOLOGICAL COSTS of VAT
compliance …:
Not sure Strongly Disagree Disagree Neutral Agree Strongly Agree There are no psychological costs (stress/anxiety/sleepless a) nights) in complying with VAT Psychological costs have significantly affected the amount of b) time and effort that I can put into my business The psychological costs relating to VAT are excessive when c) compared to other taxes in Bangladesh Psychological effects influence my private cost of seeking to d) comply with VAT The VAT authority’s timely information can reduce e) psychological costs The VAT authority’s friendly attitude towards taxpayers can f) reduce psychological costs
20. Please indicate to what extent you agree or disagree with the following statements:
To COPE with the PSYCHOLOGICAL COSTS of VAT compliance ...: a) I consult a psychologists or psychiatrist b) I self-meditate c) I take tobacco d) I take medication, such as sleeping pills e) Other expenses– please specify ______
21. Please estimate your monthly psychological costs related to VAT in the 2011-2012 financial year? ______(BDT)
22. If you could claim from the VAT Authority for your stress or anxiety in the 2011/12 financial year about complying with VAT for your business, how much would you have claimed? ______(BDT)
23. What suggestion(s) would you make to reduce the costs of complying with VAT for your business and to improve the voluntary compliance level? (you can use separate sheet )
286
24. Please indicate to what extent you agree or disagree with
the following statements about the relationship between
complexity of VAT law, compliance costs and non-
compliance:
Strongly Disagree Disagree Neutral Agree Strongly Agree Not sure Compliance with VAT Law is excessively burdensome and a) costly for SME taxpayers b) The VAT compliance costs of our business are insignificant The burden of compliance costs discourages the owners to c) fulfil VAT obligations d) Our core business suffer due to VAT compliance costs
25. Are you interested in being involved in a face-to-face interview in the next stage of the research to clarify some issues? (Please note your percentage)
No: Thank you for taking the time to complete this survey. Please return the survey (details below)
Yes – Please provide your contact details:
End of Survey: Please send the completed survey back to
Nahida Faridy,
Customs, Excise and VAT, Dhaka South, IDEB Bhaban, Kakrail, Dhaka-1000 or
Send it to: [email protected]
If you want to receive a summary copy of this research finding please give me a call or sent me a mail. If you have any other comments, please feel most welcome to provide them.
Thank You Very Much
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Appendix E – In-depth Interviews
Complexity, Compliance Costs and Non-Compliance with VAT by Small and Medium Enterprises (SMEs) in Bangladesh: Is there a Relationship? Participant consent for in-depth interview (Stage 3)
Student Researcher Chief Investigators Ms Nahida Faridy Dr Richard Copp; AP Brett Freudenberg; & Dr. Tapan Sarker Griffith Business School Griffith University, Australia Griffith University, Australia Phone: +61 737353390 Phone: 01731056680 Email: [email protected]; [email protected]; : Email: [email protected] [email protected]
I have read the information and understand that:
•I understand that my involvement in this research will include participating in a interview that relates to complexity of VAT law, VAT compliance costs and non- compliance of SMEs sectors in Bangladesh. The researcher has explained everything to me before starting the interview.
•This participation is only for the academic requirement of Ms Nahida Faridy, Griffith Business School. I am informed that the interview will consist of some open-ended questions and is scheduled to take no longer than 60 minutes. This time will be allocated to 45 minutes of question and answer time and 15 minutes for free discussion.
•I understand there is no risk involved in this research and my participation will not affect my future relation with NBR.
• I understand that there will be no financial benefit to me from my participation in this research.
•I am being asked to allow voice recording of the interview. The recording will be transcribed and once completed the original recording will be destroyed immediately.
•Data will be kept confidential for a period of five years in a locked cupboard before being destroyed.
• I understand that my participation in this research is voluntary and I am free to withdraw at any time, without comment or penalty.
•I understand that if I have any additional questions I can contact the research team.
288
• I understand that I can contact the Manager, Research Ethics, at Griffith University Human Research Ethics Committee on +61 (0) 7 3735 4375 (or research- [email protected]) if I have any concerns about the ethical conduct of the project.
•A summary of this research will be provided by the researcher upon mailing Ms Nahida Faridy on [email protected].
•The conduct of this research involves the collection, access and/or use of my identified personal information. The information collected is confidential and will not be disclosed to third parties without my consent, except to meet government, legal or other regulatory authority requirements. A de-identified copy of this data may be used for other research purposes. However, my anonymity will at all times be safeguarded. For further information consult the University’s Privacy Plan at http://www.griffith.edu.au/privacy-plan or telephone (07) 3735 4375.
I have read the consent form. I agree to participate in this study and give my consent freely. I understand that the study will be carried out as described in the participant information sheet (I have retained a copy for my records). I understand that it remains my decision to participate or not in the project and I have the option to withdrawal from the study at any time without explanation. I have had all questions answered to my satisfaction.
Name:
Age &Gender:
Working Experience (Years):
Signature:
Date:
289
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