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Revenue Audit Manual

Chapter 11 Audit of Value Added Tax (VAT)

Index

Topics Pages

Introduction to Value Added Tax (VAT) 11.1 - 11.3


Main Documents for Audit 11.3
Audit Approach to VAT 11.4
Appendix 1 - Schedule of Main Documents and Records 11.5
Appendix 2 - Key Questions Checklist - VAT 11.6 - 11.8

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Chapter 11 - Audit of Value Added Tax (VAT)

Introduction to Value Added Tax (VAT)


1. The main legislation relating to Value Added Tax (VAT) is:

Value Added Tax Act, 1991;


Value Added Tax Rules, 1991;
Finance Acts - annually.

2. VAT is usually levied on goods and services at the rate of 15% of the value of
goods imported and supplied within Bangladesh and the services provided within
Bangladesh. Certain goods (mentioned in the First Schedule to the Act) are,
however, exempt from payment of VAT. Similarly, there are a number of services
mentioned in the Second Schedule to the Act which are exempt from VAT.

3. For the purpose of levying VAT, the value of goods and services is determined as
follows:

In the case of imported goods, the value for levying VAT is determined on the
basis of the value chargeable to import duty under Section 25 or Section 25A of
the Customs Act, 1969 plus supplementary duty and other duties and taxes
except advance income tax.
In the case of goods supplied, VAT is determined on the basis of the value
receivable by the manufacturer, producers or traders which will include the
value of inputs purchased, all charges, commissions, fees, all duties and taxes
including supplementary duty (except VAT) and profits.

4. With the exception of certain cases, mentioned in Sub-section (1) of Section 9 of


the Act, credits for input tax against the output tax paid by the suppliers, traders or
providers of taxable services are allowed.

5. VAT is computed on the basis of assessable value (also known as custom value or
landing cost) in the case of imported goods and on the basis of value of turn over in
the case of goods and services manufactured/produced or provided within
Bangladesh. The basis for computation of assessable value in the case of imported
goods has recently been changed. Value for the purpose of levying Custom Duty
and VAT is now taken to be the value certified by the pre-shipment inspection
agencies (PSI) with the exception of some items, which are exempted from
certification by the PSI.

6. VAT is collected by the Customs, Excise and VAT authorities. The appraisers of
Custom Houses and the inspectors of land custom and airport customs propose the
assessment of VAT, together with custom duty. The assessments are required to be

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approved by the Principal Appraisers at the custom houses and by the


Superintendents in the land and air custom offices.

7. Registration for importers, exporters, suppliers, traders and service providers whose
annual turn over exceeds Tk 20,00,000.00 each is compulsory. Others may have
optional registration. However, exemption from registration may be granted by the
government on certain terms and conditions.

8. In the case of imported goods, VAT is leviable on all items irrespective of value. In
the case of other goods and services, VAT is leviable at the rate of 15% on
turnovers exceeding Tk 20,00,000.00. Turnovers up to Tk 20,00,000.00 are
chargeable to turnover tax at the rate of 4% of value.

9. Supplementary duty at the prescribed rates is leviable on luxury goods and the
goods and services which are socially undesirable. The latest rates of
Supplementary duty have been prescribed by the Finance Act, 2000.

10. VAT/Supplementary duty/turnover tax paid due to errors, inadvertence or


misinterpretation can be refunded on submission of claims by the aggrieved
persons. The limitation for submission of claims of refunds is four months.

11. Drawbacks of VAT/Supplementary duty paid on imported goods which are


subsequently exported can be allowed. It is understood that to be eligible for
drawbacks such imported goods should ordinarily be used for export production.

12. Goods on which VAT due is not paid are liable to attachments and forfeitures by
the officers authorised by the Commissioner of Customs, Excise and VAT. Goods
forfeited after giving the owner or claimant an opportunity of being heard are
disposed of by public auction. A person guilty of violating the provisions of the
Act or the Rules made thereunder is liable to fines determined under the Rules.

13. Persons aggrieved by the decisions of the concerned departmental officers assessing
turnover tax may, within sixty days of such decisions, appeal to the Turnover Tax
Commission. A decision of the Turnover Tax Commission is final, and no legal
remedies can be sought in the court(s). Appeals against the decisions of the officers
of the rank of Additional Commissioner and below in respect of VAT lie before the
Commissioner (Appeals). Appeals against the decisions of the Commissioner(s) or
the Commissioners (Appeal) can be preferred before the Customs, Excise and VAT
Appellate Tribunal. Decisions of the Tribunal can go before the High Court
Division. Government can also review the decisions of the Tribunal.

14. In case VAT/Supplementary duty/fines/amounts due under the provisions of the


Act, or under rules or bonds or documents are considered irrecoverable due to the
bankruptcy of an assessee or other reasons, such dues can be written off by the
Government.

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15. VAT and Supplementary Duty can be paid into the branches of Bangladesh Bank
and the designated branches of Sonali Bank through treasury challans or through
Account Current.

16. Self-clearance of VAT is permissible, and the system has gained wide popularity
and has yielded substantially increased revenue. Computation of VAT whether
under the self-clearance system or appraisement by Custom, Excise and VAT
officials is simple. In the case of imported goods, it is usually levied at the rate of
15% of the total taxed value (see example below). In the case of goods supplied or
services provided within Bangladesh, VAT is usually levied at the rate of 15% of
total turnover. A large number of items are exempted from VAT to the extent
notified by the National Board of Revenue through SROs. An example of
computation of VAT is shown below:

VAT payable on importation of a brand new 1649 cc car on 5-7-2000:

1. C&F Value as per Bill of Entry US$ 15,000.00


2. Value in Taka (if 1 US$ = Tk 55.00) Tk 8,25,000.00
3. Add Insurance @1% of C&F Value or actual Tk 8,250.00
4. Add landing charge @1% of Tk 8,33,250 (2+3) Tk 8,332.50
5. Assessable value (landing cost) (2+3+4) Tk 8,41,582.50
6. Customs Duty @37.5% of Assessable Value Tk 3,15,593.43
7. Duty paid value (5+6) Tk 11,57,175.93
8. Supplementary Duty @65% of duty paid value Tk 7,52,164.35
9. VAT @15% of total taxed value Tk 2,86,401.04

VAT Payable = Tk 2,86,401.04

Main Documents for Audit


17. There are a substantial number of records and documents available for audit
covering everything, e.g., bills of entry, import ledgers, shipping documents and
invoices, pre-shipment certificates, registers of custom duty and VAT receipts,
treasury challans, accounts current. A fuller list is given in Appendix 1.

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Audit Approach to VAT


18. As with other taxes, the audit approach will be structured and on a top down basis
as follows:

review management arrangement of the tax (per Chapter 8) and consider overall
risks;
review data available on trends in income, compare actuals with targets and
budgets for each custom house or district and identify areas for further
examination;
review the application of the systems, procedures and rules for assessing,
collecting and accounting for VAT;
carry out substantive tests of the systems at VAT offices as needed; and
report findings to the appropriate authorities.

19. The main risks and possible controls on VAT are listed below:

1. The value of goods and services is 1. sound valuation procedures,


incorrectly assessed, resulting in independently scrutinised. Adequate
over or underpayment of tax. reviews and checking of assessments.
2. The wrong tax tariff is applied, 2. Adequate system of testing application
resulting in over or under-payment of tax rates, supervision, post-audit,
of tax. etc.
3. Collusion between VAT staff and 3. VAT staff subject to independent
assessed importers/ producers/ checks by appropriate authorities.
manufacturers/ suppliers/ traders
results in less tax being collected.
4. VAT due is not recorded accurately 4. Up-to-date cash records, reconciled
or banked promptly. with receipts/ accounts
5. Theft or loss of goods may occur in 5. All goods are recorded and stored
customs/ factory warehouses. securely.
6. Goods are smuggled into/out of the 6. Appropriate authorities take adequate
country to avoid taxes. counter smuggling measures.

20. Substantive audit tests should be carried out on a sample basis, based on the
checklist in Appendix 2, which is illustrative and not exhaustive.

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Appendix 1
Value Added Tax (VAT)

Schedule of Main Documents and Records


1. Bills of entry/export
2. Bill of Lading/Airway Bill
3. Pre-shipment inspection agencies certificates
4. Valuation Certificate files
5. Shipping documents, invoices, etc.
6. Bond register and bond documents
7. Register of VAT Receipts
8. Register of Penalties and Fines.
9. Register of Seizures, Attachments and Forfeitures.
10. Register of unclaimed goods.
11. Importer/Exporter Ledger.
12. Account Current.
13. Treasury Challan of VAT paid.
14. Refund documents.
15. Drawback/ Exemption papers.
16. Registration Certificates/ Licenses for importers/exporters/ producers/
manufacturers/ traders.
17. Letters of Credit.
18. Trans-shipment Advice Notes.
19. Files of monthly/ quarterly/ annual returns.
20. Declaration of Value Basis.
21. Annual declaration of turnover.
22. Credit Notes/ Debit Notes.
23. Registers of Purchases/Sales.
24. Register of unused/unusable inputs.
25. Register of damaged/destroyed/unserviceable goods.

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Appendix 2

Key Questions Checklist - VAT (1)

Audit Objective Key Questions/Tests Yes No W/P

Assessment

1. Regulations and 1.1 Are there adequate regulations


procedures adequately in place to ensure that all
provide for the proper persons, transactions, events or
assessment of VAT activities liable for VAT are
and those regulations duly identified?
work in practice.
1.2 Do these procedures work in
practice on VAT?

1.3 Are there adequate regulations


and procedures to ensure that
persons, transactions, events or
activities as liable for VAT are
properly assessed?

1.4 Do they work in practice?

Collection

2. Regulations and 2.1 Are there adequate regulations


procedures adequately and procedures to ensure that
provide for the all sums assessed as due are
collection of sums correctly recorded?
assessed and the
regulations and 2.2 Are those procedures working?
procedures operate in
practice? 2.3 Are the procedures and
regulations adequate to ensure
that VAT recorded as due is
collected without undue delay?

2.4 Is VAT collected without


undue delay?

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Key Questions Checklist - VAT (2)

Audit Objective Key Questions/Tests Yes No W/P

Banking

3. Regulations and 3.1 Are the procedures and


procedures adequately regulations adequate to ensure
cover the prompt that VAT due is banked
banking of sums due. promptly?

3.2 Do these procedures work?

Allocation

4. Regulations and 4.1 Are there adequate procedures


procedures adequately to ensure that:
provide for sums
collected to be Records of tax paid are
allocated to the reconciled with amounts
appropriate code of banked?
account. All receipts are coded
correctly?
All recorded receipts are
properly shown in the
account?

4.2 Are these procedures working?

Arrears

5. Procedures for 5.1 Are there adequate procedures


following up arrears of to ensure that tax unpaid or
VAT are adequate underpaid is pursued
promptly?

5.2 Are these procedures working?

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Key Questions Checklist - VAT (3)

Audit Objective Key Questions/Tests Yes No W/P

Write - offs

6. Procedures for writing 6.1 Are there adequate procedures


off unpaid VAT are to ensure that write-offs or
sound and adequate. remissions of VAT are
appropriate and properly
sanctioned?

6.2 Are they working in practice?

Refunds

7. Procedures for 7.1 Are there adequate regulations


refunding VAT are to ensure that:
adequate.
Repayments are properly
assessed?
Only valid repayments are
made?
Repayments are made to
the proper recipients and
for the correct amounts?
All valid repayments are
properly coded and
recorded?
Repayments are properly
shown in the account?

7.2 Do they work in practice?

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