University of Dhaka

Faculty of Business Studies

Department of Banking and Insurance

Input TAX Credit in Bangladesh: Problems and Remedial Measures.

Submitted To,
Prof. Dr Md. Main Uddin
Department of Banking & Insurance
The University of Dhaka.

Submitted By,
Md. Mydul Islam
Master of TAX Management (MTM)
Department of Banking & Insurance
The University of Dhaka.
ID. 51944026
4th Batch

Date of Submission: 22nd September 2021

Letter of Transmittal
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22nd September 2021

Dr. Md. Main Uddin

Professor.
Department of Banking and Insurance.
University of Dhaka.

Subject: Submission of Thesis on Input TAX Credit in Bangladesh: Problems and

Remedial Measures.

Dear Sir,

It is a great learning opportunity for me to submit the Thesis on Input TAX Credit in
Bangladesh: Problems and Remedial Measures to you. I have prepared the paper according to
my data collection and you’re provided guidelines. To complete the Master of Tax
management program, I have prepared this thesis and tried my level best to make the paper
authentic and meaningful. Working on this paper has provided me with the scope of
implementing my acquired theoretical knowledge of fiscal system in real contexts.
It shall be a profound gratification for me if this paper serves its purpose. Thanking you.

Md. Mydul Islam

ID- 51944026
Master of Tax management, Batch - 4th
Department of Banking and Insurance
University of Dhaka

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 Student’s Declaration
I hereby state that this thesis entitled “Input TAX Credit in Bangladesh: Problems and

Remedial Measures” represents the result of my research work, prepared under the

supervision of Dr. Md. Main Uddin, Professor, Department of Banking and Insurance,

University of Dhaka.

Yours sincerely

Md. Mydul Islam

ID- 51944026
Master of Tax management, Batch - 4th
Department of Banking and Insurance
University of Dhaka

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 Supervisor’s Declaration
This is to certify that this thesis on “Input TAX Credit in Bangladesh: Problems and

Remedial Measures” has been prepared by Md. Mydul Islam, ID- 51944026, Department of

Banking and Insurance, University of Dhaka. This paper has been prepared for fulfilling the

requirement of MTM (Master of Tax management program) degree, Department of Banking

and Insurance, University of Dhaka.

This paper has been prepared under my supervision.

Dr. Md. Main Uddin

Professor,

Department of Banking and Insurance,

University of Dhaka.

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 Letter of Acknowledgement

Research is an excellent tool for learning and exploration. No classroom routine can

substitute which is possible while working in a real situation. Application of theoretical

knowledge to the practical situation is the purpose of the report. I’ve acquired vast knowledge

of economic indicators and various financial data through this program. It’s the basis of the

report that I have prepared.

I would like to thank the honorable Dr. Md. Main Uddin, Chairman and Professor of

Banking and Insurance Department, Sir who was always there to help and guide me

whenever I needed help. His perspective criticism kept me working to make this project more

authentic and realistic. I am thankful to him for his encouragement and valuable support.

Working under him was an extremely knowledgeable and enriching experience for me.

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 Executive Summary
The Value Added Tax is a major source of revenue for Government and was enacted in 1991.
To increase the productivity of VAT, the Government enacted the Value Added Tax and
Supplementary Duty Act of 2012 and the Value Added Tax and Supplementary Duty Rules
2016. This report has focused on the overall input tax structure in Bangladesh and the
problems that businesses and other entities face regarding the issue. Taxation is regarded as
the paramount element of internal resources that the economy of a country holds to meet up
its development activities. Taxes are imposed to fulfil the economic and social requirements
like redistribution of earning, reduction of economic imbalance, price stabilization and
creating social cohesion. The input tax credit allows the government to get the tax earnings as
it provides the opportunity to the taxpayers to deduct the amount of tax payable from the tax
they have paid. Bangladesh has been facing tremendous difficulties inappropriate
implementation of the taxation process due to inefficient management. The problems include
Tax Avoidance, Increased Tax Protestors and Resistance, Tax Evasion, Public Knowledge &
Opinion and Increased Corruption in Bangladesh. For solving this problems, the people
should be made more aware of their tax responsibilities and then they should be informed of
the advantages they might avail from the input tax credit mechanism. Then to reduce
corruption and establish a better taxation process the government officials should be offered
upgraded training sessions in which they will be able to pursue an improved understanding of
building an efficient taxation process. Record keeping of business communities’ transactions
also should be monitored effectively. And lastly, developing new relationships and regular
communication with the taxpayers can improve the ITC system in Bangladesh.

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Table of Contents

Chapter: 1. Introduction.............................................................................................................9

1.1 Background of the Study................................................................................................10

1.2 Objective of the Study....................................................................................................10

1.3 Scope of the Study.........................................................................................................10

1.4 Limitations of the Study.................................................................................................11

Chapter: 2. Literature Review..................................................................................................12

Chapter: 3.Methodology..........................................................................................................15

3.1 Research Design.............................................................................................................15

3.2 Research Approach........................................................................................................15

3.3 Research Question..........................................................................................................15

3.4 Research Method............................................................................................................16

3.5 Data Collection...............................................................................................................16

3.6 Ethical Issues..................................................................................................................16

Chapter: 4. Analysis & Discussion..........................................................................................17

4.1 Definition of Input Tax..................................................................................................17

4.2 Conditions for Availing Input Tax Credit......................................................................18

4.3 Input Tax Credit Mechanism in VAT System in Bangladesh........................................19

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 4.3.1 Condition to be fulfilled to claim the input tax credit.............................................20

4.4 Analysis on Input TAX Credit in Bangladesh...............................................................23

4.4.1 Documents Required to Claim Input Tax Credit -..................................................24

4.4.2 Partial Input Tax Credit (U/S 47, Rule 26).............................................................24

4.5 Problem of Input TAX Credit in Bangladesh................................................................25

4.6 Remedial Measures for Improved ITC Mechanism in Bangladesh...............................26

Chapter: 5. Findings and Recommendations...........................................................................28

5.1 Recommendations..........................................................................................................29

5.2 Conclusion......................................................................................................................30

Chapter: 6. References.............................................................................................................31

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Chapter: 1. Introduction
The input tax credit is a very familiar term in goods and services production and sales
activities. GST or Goods and Services Tax is an accumulated tax mechanism in which each
purchase made by any business corporation can be matched with a sale conducted by another
business. This mechanism helps in the easy flow of credit throughout the entire supply chain
of business by creating a seamless system. ITC or the Income Tax Credit is known as the tax
that a business entity pays on purchases it makes and which can be used to reduce the tax
burden while the company makes a sale. In another sense through this mechanism businesses
can decrease their tax burden by claiming credit to the extent of goods and services tax paid
on the purchases they have made.
Germany and France were the first countries to implement VAT, doing so in the form of a
general consumption tax during World War I. The modern variation of VAT was first
implemented by France in 1954 in Ivory Coast (Côte d'Ivoire) colony. Recognizing the
experiment as successful, the French introduced it in 1958. Maurice Lauré, Joint Director of
the France Tax Authority, the Direction General edges Impost implemented the VAT on 10
April 1954, although German industrialist Wilhelm von Siemens proposed the concept
in1918. Initially directed at large businesses, it was extended over time to include all business
sectors. Currently, the VAT system exists in about 166 countries in the world. A new law was
implemented in July 2019. About 56% of total tax revenue is VAT revenue in Bangladesh.
The standard VAT rate is 15%. Export is zero-rated. Besides standard rate, there are multiple
VAT rates (5%, 7.5% and 10%), specific VAT rate (a fixed rate for some specific product &
services), Trade VAT (5%). Under the VAT and SD Act, 2012the net VAT payable
determines from the below equation:

Net VAT Payable=Total output VAT & SD payable –Total input tax credit + All

increasing adjustment – All decreasing adjustment

This report will be focused on the overall input tax structure in Bangladesh and the problems
that businesses and other entities face regarding the issue. Potential remedial actions for a
better input tax mechanism will also be discussed here.

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1.1 Background of the Study

Value Added Tax (VAT) in Bangladesh was introduced in 1991, replacing sales tax and most
excise duties. The Value Added Tax Act, 1991 was enacted that year and VAT started its passage
on 10 July 1991. To increase the productivity of VAT, the Government enacted the Value Added
Tax and Supplementary Duty Act of 2012 and the Value Added Tax and Supplementary Duty
Rules 2016. Then a new law has been implemented since July 2019. The new VAT Act 2012
contains over 139 laws. However, this report does not discuss all of those laws. Rather it
discusses two laws, the compliance of which I have been able to observe during my observation
period. The report explains the laws contained within in such a way that a general reader will not
require prerequisite knowledge regarding VAT to develop an understanding of the report.

1.2 Objective of the Study

This study aims to demonstrate the Input TAX credit mechanism prevailing in Bangladesh
and its current condition. Another objective of preparing such report includes as follows-

1. Identifying the concurrent taxation system in Bangladesh.

2. Understanding the concept of ITC and its application in the country.
3. Finding out the prospects of Input TAX Credit.
4. Identifying the existing problems in ensuring an effective input tax mechanism in
Bangladesh.
5. Providing possible remedial suggestions to improve the concurring condition and to
establish a better ITC system in the country.

1.3 Scope of the Study

The thesis report will be made over the topic: Input TAX Credit in Bangladesh: Problems and
Remedial Measures, as a partial requirement of successful completion of my Master of TAX
Management (MTM) program under the Department of Banking and Insurance of the Faculty
of Business Studies, University of Dhaka. After completion of all the courses of this program,
students are required to submit the thesis paper over any relevant topic to get a better
understanding of their learnings from practical implementation. While conducting the
research I have been able to implement my academic learning in the practical working
environment and learn from being directly involved with the mechanism, problems and
remedial actions to build an effective input TAX credit culture in Bangladesh.

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1.4 Limitations of the Study
This study is concerned with identifying the Input TAX credit structure in Bangladesh
and the key complexities that different entities face while implementing it along with the
possible remedial actions. The major limitation for my internship report is the inability to
collect wider sources of data due to the current COVID-19 situation. This has limited
many scopes of my studies I have to be more dependent on the secondary sources of
data. Another major limitation that has been faced in preparing this report is the lack of
published statistics, without which it is impossible to evaluate the performance of a VAT
regime. One limitation that will be pronouncedly visible in the report is the lack of
ability to think from the point of view of an expert. Since there was no prior knowledge
from the course curriculum regarding VAT, grasping the concepts has been slightly
difficult.

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Chapter: 2. Literature Review
According to, Bikram Pegu (2017) the GST mechanism is a process to rationalize the varied
indirect tax structure. The scholar stated that it is hopeful that goods and services tax will
leave a positive impact and assist the economy of every country to risen its growth rate and
avail overall development and financial progress. The mechanism of value-added tax (VAT)
is considered as the GST in many countries and it is being recognized as one of the core
factors of development in the overall taxation process worldwide. It has also been stated that
about 135 countries of the world have been successfully following the goods and services tax
framework.
In a study by Chaurasia et al (2016), the role of input tax credit for the overall growth of an
economy has been illustrated. The research result concluded in the way that the mechanism
of input tax is essential for the better and effective development of the economy. It helps in
increasing the gross domestic production level of any country. As the mechanism indirectly
provides tax incentives to the manufacturers and other business entities, it eventually works
positively on their production capacity and accelerates global business transactions. Though
there are situations in which taxes on promotional materials are counted as an input tax credit.
An example has been pointed out as when a garment trader makes offers like buying one
output and getting one free, VAT paid on such inputs used to manufacture two outputs will
eventually be provided as an input tax credit against output payable on for only one. This is
because here the inputs are for two items and such two items have been supplied against the
price of a single item.
The challenges and prospects surrounding the effective implementation of input tax have
been analyzed by Lourdunathan and Xavier (2017). Here the scholar stated that a redefined
and effective input tax mechanism can bring one nation and one tax market. Successful
formulation and implementation of good and services tax accelerate the chances of gaining
revenue for the government of a country by expanding the tax base and improving tax
compliance.
Eltony (2002), had used time-series and cross-sectional information for a specific period for
sixteen Arab countries to assess the factors influencing tax efforts. The research output
showed that the key determinants of tax income lie in GDP in which the per capita earning,
agricultural production and overall GDP growth rate. Other influential factors were imports,
exports and retained foreign liabilities. The scholars indicated some country-specific factors
that also impact the input tax credit mechanism of a country. These are political conditions,
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the structure of government, quality of the tax monitoring administration’s work and other
governmental actions.
Emran and Stiglitz (2005), have argued against the concurring consensus that supports the
decrement and removal of trade tax mechanism which extensively depends on the VAT, the
key tool of indirect taxation for the developing nations, may create fragile output derived
from a segregated model that excludes the existence of many informal organizations. A more
effective and furnished model showed the result that replacing the trade tax with VAT can
degrade the welfare of the economy of any country under unpleasable circumstances. The
argument was that the research output creates serious doubt on the effectiveness of indirect
tax customization made by many developing countries. They made an extension of their
research to analyse the issue by selective reforms of trade tax and VAT in the overall
economy for the countries with an informal sector. Hereby selective reforms indicated the tax
changes that are imposed only to a fraction of the commodities that lies under the tax net.

The study of Basher (2002), was focused on the tax system in Bangladesh and the scholar
stated that one of the major reasons behind lagging industrial growth in the country is the
adverse tas mechanism including the input tax credit as well as VAT. He stated that varied
kinds of taxes and duties increase the cost of manufacturing which eventually make the goods
produced by companies non-competitive. Though modified and special provisions have been
enacted to the acts related to tax. Now, an input tax rebate is provided and also exports are
zero-rated for the manufacturers. So the scholars’ points on the input tax credit and other
mechanisms surrounding tax are not responsible for the impending economic condition of the
country.
Faridy and Sarkar (2011), evidenced on the research output of Bashar (2002) and they
attempted to measure the influence of tax mechanism in Bangladesh. They stated that the tax
mechanism in Bangladesh has been very effective and creating positive outputs by
consistently mobilizing increased domestic resources aligning with the overall growth of the
economy.
Moniruzzaman and Islam (2011), assessed the effectiveness and performance of the overall
tax mechanism in Bangladesh and its impact on the economy. This research was based on
statistical data. The results of the study have prioritized the policy issues rather than the
effectiveness of the input tax mechanism for availing the economic development.

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Reviewing the previous literature on input TAX credit it can be said that most of the studies
have been extensively focused on the overall tax mechanism of Bangladesh and its
contribution to economic development. Also, there has been an analysis of the influential
factors that cause problems in the tax mechanism. Very few studies have been conducted
directly on the input TAX credit. Input TAX credit has a great influence on the overall
industrial and business activities of a country. Accordingly, this paper will demonstrate the
input tax mechanism in Bangladesh. Here extensive discussion will be conducted on the acts,
regulations, effectiveness and contribution of input tax credit in Bangladesh. Also, the
problems faced by different entities while implementing the mechanism and possible
solutions will be included. This will be beneficial for the related stakeholders to understand
the current mechanism of input tax credit and avail the benefit through its effective
implementation for the economic progress and development of the country.

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Chapter: 3.Methodology
This chapter will demonstrate the methodologies that I have used for preparing this report on
Input TAX Credit in Bangladesh: Problems and Remedial Measures. Here the research
design, purpose, question, type of data, data collection and analysis methods will be
discussed.

3.1 Research Design

Research design illustrates the overall structure of the assessment and evaluation that will be
used to explore the factors concerning research objectives and questions. The topic will be
assessed from a theoretical viewpoint mostly, due to the limitation of collecting primary data.
Most of the data used here are observational and secondary data. Hence, the “Descriptive
Research Method” has been applied. The method focuses on demonstrating the characteristics
and factors that are causing, influencing or impacting the issue.

3.2 Research Approach

The research paper will use both primary and secondary sources of data. Data will be
assessed considering relevant factors by observing and evaluating the relevant factors. Valid
and authentic sources of data will be used for the analysis. Due to the pandemic situation, it
was quite difficult to collect sufficient primary sources of data, which has eventually limited
the scope of the study.

3.3 Research Question

Research questions help in specifying the factors that will be discussed to identify the
solution or answers related to the topic. It is necessary to structure the research questions so
that all relevant areas regarding the topic gets addressed and analyzed. The research questions
include-
1. What is Input TAX Credit?
2. What are the prevailing regulations or acts regarding the input TAX mechanism?
3. How is the current condition of the Input TAX mechanism in Bangladesh?
4. What are the key problems that different business entities have been facing in the
process?
5. What can be the remedial measures to improve the current condition of the Input TAX
Credit mechanism in Bangladesh?

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3.4 Research Method
This project will be based on observational data. Hence only “Qualitative Data” will be used
to analyze and demonstrate the topic. All these data have been accumulated through the
internship tenure and the research method used here is an “Observational Research
Method”.

3.5 Data Collection

As the chosen research method is observational accordingly both primary and secondary
sources of data will be used in the project. Such sources of data will include-

Primary Sources of Data: Primary information required for the report has been collected
through observation during the tenure of the internship. Moreover, a concrete understanding
had been developed by interacting with my supervisor.
Secondary Source of Data: Extensive help from a textbook was also required to develop an
understanding of the VAT Act 2012 and Supplementary duty rule 2016. For other general
information regarding organization overview, company operations, illustrations used in the
report, use of the internet and the company’s annual report has been made.

3.6 Ethical Issues

Assuring ethical standards and the authenticity of information is necessary for any kind of
research paper. Therefore the ethical standards that I tried to follow in my paper are
mentioned as follows-
1. All the data sources are authentic and valid.
2. Data that provide biased or controversial information are avoided.
3. The data that has been used is relevant to the aim, objectives and research question.

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Chapter: 4. Analysis & Discussion

4.1 Definition of Input Tax

The National Board of Revenue in Bangladesh has clearly stated the Input Tax under its rules
and regulation guidelines. Under section 2(18) Ka “Input” means all kinds of raw materials,
laboratory reagent, laboratory equipment, laboratory accessories, substances used as fuel,
packaging material, services, machinery and spares; But following goods and services shall
not be treated as input:

 Labor, land, building, office equipment and fixtures, construction of building or

infrastructure or establishment, expansion, renovation and repairing;
 Purchasing or repairing of all kinds of furniture, office supply, stationery goods,
refrigerator and freezer, air conditioner, fan, lighting, generator (Alm, 2016);
 Interior design, architecture planning and layout;
 Hiring and leasing of a vehicle;
 Travel, entertainment, staff welfare, development activities and goods and services
thereof
 Rent of business premises, office, showroom or similar place, what so ever called
provided that in case of the business run by the trader mentioned in para (3), Third
schedule of this Act also states goods imported, purchased or earned or otherwise
received for sale, exchange or in the end for transfer shall not be considered as input.

Under section 2 (19) "Input Tax" means the value-added tax imposed on any taxable
supply of any goods, services or immovable property including the value-added tax
payable by any person on the taxable supply of imported goods or services.

Therefore in simple terms, input tax credit stands for the amount of tax already paid by an
individual at the time of purchasing any goods or services and which can be deducted
from the value of tax payable. For example- Trader “X” has purchases goods worth
Tk.100 and has to pay a tax of 10%. Now he has sold such goods at Tk.150 and collects
Tk.15 as tax from the customer. Not the trader has to pay Tk.15 to the government but he
can only pay the net amount of Tk.5 as tax. Here the deducted Tk.10 is the ITC for the
trader.

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4.2 Conditions for Availing Input Tax Credit
Certain requirements have to be ensured before going through the ITC process. Every
registered person or entity will be eligible to take input tax credit advantage on the tax
charged on goods or services supplied to them for further use on business. This also has to be
based on the specified tax paying documents- Tax invoice, debit note, bill of entry, invoice
made based on tax-paying documents and the documents supplied by the input service
distributor for distribution (Hossain, 2020). Other conditions include as follows-

Figure 1: Conditions for availing Tax Input Credit (Researchpoint, 2021)

 Need to ensure payment along with taxes has been disbursed to the vendors within 120
days.
 Need to identify the list of key vendors and ensure taxes have been paid by them to the
appropriate government.
 Identify the list of probable defaulters (Vendors) in terms of registration, invoice,
payment, etc.

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4.3 Input Tax Credit Mechanism in VAT System in Bangladesh
Taxation is regarded as the paramount element of internal resources that the economy of a
country holds to meet up its development activities. Taxes are imposed to fulfil the economic
and social requirements like redistribution of earning, reduction of economic imbalance, price
stabilization and creating social cohesion. Previously the revenue structure of the government
of Bangladesh was largely burdened by the taxation collected from indirect sources. These
were more concentrated on the import and excise duties. But through the globalization
process, the revenue generation through tax has been declining. Though the custom duties
and import activities are still helping in more tax revenue but other factors like changes in
fiscal policies and mounted up income taxes are causing complexities in the whole process
(Hossain, 2020). Accordingly, it has become necessary for the government to collect more
tax revenue. The input tax credit allows the government to get the tax earnings as it provides
the opportunity to the taxpayers to deduct the amount of tax payable from the tax they have
paid. Hence it increases the tendency of attaining more on the taxation process and eventually
adds up to the government earnings. Bangladesh has been facing tremendous difficulties
inappropriate implementation of the taxation process due to inefficient management. There
have been many reforms in the taxation process and it has become more challenging as the
existence of non-compliance and non-enforcement has been damaging the process.
Under the VAT and SD Act, 2012, an input tax credit is admissible against output tax. This
input credit system makes the VAT system widely acceptable. Without the input tax credit,
there is a' cascading' effect of taxes i.e. double taxation (VAT on VAT) occurs. Bangladesh
follows a negative list approach in granting input tax credit. It means, input VAT credit will
be given for all purchases/imports except items excluded from the definition of 'inputs'.
Among others, an input tax credit cannot be claimed for VAT paid on acquisitions related to
the exempt or non-taxable supplies and on rental payments. In claiming an input tax credit,
the taxpayer (claimant) will have to make sure that he is claiming tax on inputs. If an item is
not 'input', the tax paid on the item shall not be considered for the input tax credit. Usually,
the invoice is needed to take an input tax credit. For VAT paid on import of services, treasury
Callan in support of deposit of VAT has to be there.
The input credit system as enshrined in the Bangladesh VAT regime is quite generous. It
allows input credit on goods used as inputs, services, and fixed assets. Except for the items
specified in the negative list (U/S46), tax paid on other purchases seems eligible for an input
tax credit.

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 4.3.1 Condition to be fulfilled to claim the input tax credit
The conditions to be complied with to get input credit are easy to observe. These conditions
are:

(1) Registration under VAT system;

Output VAT to be paid at the standard rate (15.0 per cent) --those who pay VAT at a
specific/fixed rate will not be eligible to get input tax credit;

(2) Valid documents (e.g. VAT invoice; Bill of Entry).

An input tax credit is not applicable in the below-mentioned cases-

1) Except as provided otherwise in this Act. A registered person shall be entitled to an

input tax credit against the value-added tax imposed on a taxable supply or a taxable
import, if -

a. Value of a taxable supply exceeds Taka 1,00,000 (one lakh) and the consideration is
paid without banking channel;

b. If output taxis not mentioned in the return, in the case of receipt of imported service;

c. If input tax is not taken in the tax period or within [four] succeeding tax periods;

d. Goods or services are under the custody or possession or supervision of another person;

e. If any goods or service has not entered into the purchase register [or purchase-sales
register;

f. If name, address and BIN of both buyer and seller are not mentioned in the tax invoice;

g. When supply is received from the importer, if the invoice does not contain the B/E no of
the importer and when there is no match of description of goods between the invoice and
B/E;

h. Input tax involved with BG and has not finally settled;

i. Input tax paid on inputs used in producing exempted goods or services;

j. Turn overtax paid on inputs;

k. SD paid on inputs;

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VAT paid on the purchase of inputs for supply of such prescribed goods or service on which
the rate of VAT is below 15% or fixed. VAT or Value Added Tax is one of the widely used
indirect tax processes in the entire world. And under this process, the input tax credit has
been made admissible against output tax. This method has increased the acceptability of the
VAT system in the country. Input TAX credit has removed the cascading effect of taxes and
made individuals or businesses more attentive towards fulfilling their tax responsibilities
(Hossain, 2018). Here cascading effect of tax means the double taxation effects.
A negative list approach is followed in Bangladesh in the case of input tax credit grants. It
signifies that input VAT credit will be applicable for all kinds of purchases and imports
except those that remain excluded from the definition of input. Also among others, this tax
credit will not be applicable for VAT paid on acquisitions linking to the non-taxable supplies
or exception and on rental payments (Hossain, 2018). While claiming such credit a taxpayer
has to make sure that the claim is on the inputs. If the item does not fall under the features of
being an input then it will not be counted in for input tax credit. Invoice can be used as
evidence for availing the input tax credit benefit. In the case of imported items, a treasury
challan supporting the VAT deposit must be used.
Bangladesh has been consistently availing economic growth and prosperity. It has made
significant development in industrial, banking and other business activities which have
impacted the gross production by the country very positively. Despite the successful
economic growth and prosperity, the country has been through a very low Rate of Tax to
GDP ratio comparing to the other south Asian regions. Such ratio is only 9.3% for
Bangladesh, the lowest among Nepal, Pakistan and India.

Average Tax to GDP Ratio

25.00% 23.10%

20.00%
16.80%
15.00%
11.00%
10.00% 9.30%

5.00%

0.00%
Nepal India Pakistan Bangladesh

Figure 2: Average Tax to GDP comparison (Author’s Calculation)

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One of the core components of the tax revenue is the Value added tax. And the other is the
income tax. Income taxes are confined to the individuals’ tendency of fulfilling their tax
responsibilities. The key indirect component of the taxation process is the value-added tax
and customs duty. It has been projected the total earnings collected by the government from
the taxation process for the year 2020-21 is assumed to be 3,78,000 crore. Here the
contribution of NBR is 330,000 crore. Of this value, about 103,945 crores will be collected
from income, profit and capital tax and 125,162 crores will be collected from value-added tax
(Kessler, 2020).
Previous records have shown that the collection of tax revenue by the country has always
been higher in VAT than that of the income and other taxes. Besides, due to the greater
advancement in globalization, the import supplementary and custom duties will decrease.
Hence to make the related parties more aware of their taxation duties, the input tax credit
should be facilitated more. This enables the tendency of taxpayers to be more attentive
toward full filing their tax responsibilities (Kessler, 2020). This will help the government
mobilize more revenue which will eventually be used for the growth, prosperity and
economic development of the nation.

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4.4 Analysis on Input TAX Credit in Bangladesh
The provision of the VAT and SD Act (2012), states that if the value of taxable supply is
more than Tk. 1.0 lakh and the full consideration is paid through means other than banking
channel, the input tax credit shall not be granted (46 1 a). This is an area of input tax credit
that needs critical analysis. According to this provision of the law, if the full consideration of
a supply is not paid through banking channel and if the procuring entity takes input tax credit
on such supply receipt, the input tax credit so taken shall have to be cancelled out by giving
an 'increasing adjustment' in the Return of the same tax period. 

This provision of the VAT law creates confusion among practitioners. What is meant by
'banking channel' is not equally understood across the board. According to Rule 2 (1) (DHA)
of the VAT & Rules 2016, 'bank account' means the account(s) maintained with the bank by a
registered or enlisted person which has been communicated to the commissioner (through
Registration Application, Mushak-2.1) and which has been entered into the VAT computer
systems by the Commissioner. According to these rules, the banking channel appears to mean
payment of total consideration for any taxable supplies received exceeding Tk. 1.0 lakh
through the said bank account. However, the meaning of the banking channel is not well
explained by any Rules or NBR explanation. Moreover, if a portion of the total consideration
is paid through the banking channel and the remainder is paid through cash, then what will
the explanation of the transaction concerning input credit? There are varied opinions among
stakeholders/practitioners.

For instance, in January, a VAT registered firm ABC Ltd. bought input of Tk 25.0 lakh
(exclusive of VAT) and paid Tk. 15.0 lakh by bank cheque and the rest Tk. 10.0 lakh in cash.
In this case, the input tax credit will be applicable for the amount paid through the banking
channel i.e. on Tk. 15.0 lakh paid by cheque i.e. VAT of Tk. 225,000.
In the same vein, an input tax credit is not applicable for the part of the consideration paid in
cash. A reading of section Sec 46 and Rule 29 together gives this impression. Rule 29(2)(3)
stipulates that input tax credit will not be applicable for the amount paid in ways other than
the banking channel. If the entity takes credit for the full amount of VAT for this input
purchase, the VAT authority will cancel out the input credit by giving an increasing
adjustment in the Return of January (Shekhor, 2018).  However, there is a lack of clarity
about the meaning 'Payment of consideration through banking channel'. The usual

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understanding of 'banking channel' signifies 'payment of money from the buyer's designated
bank account to the suppliers' bank account'.

4.4.1 Documents Required to Claim Input Tax Credit -

(a) In case of an import, a bill of entry bearing the name of the importer and the Business
identification number.
(b) In case of a supply, a tax invoice is used by the supplier;
(c) In case of a withholding entity, withholding certificate;
(d) In case of sub-section (2) of section 20 treasury challan as a proof of tax payment;
(e) In case of taking input tax credit on Gas, WASA, Electricity & telephone services the bill
issued by the respective organization shall be treated as the invoice.

4.4.2 Partial Input Tax Credit (U/S 47, Rule 26)

Partial input tax credit. —
Where a registered person pays or is liable to pay a part of the consideration for a taxable
supply, any input tax credit to which the person is entitled shall be calculated based on the
amount of the consideration such person pays or is liable to pay.
A registered person shall be entitled to claim an input tax credit against an import or
acquisition in at axe period; but if he is not entitled to the input tax credit in full, his
entitlement to it against his total imports and acquisitions shall be calculated under the
provisions of sub-section (3).
For each tax period, the amount of the Input Tax Credit may allowed for the section which
will be calculated through below mentioned formula.
Import I x T/A
Where—
I is the total amount of input tax originating from imports or acquisitions to which this
subsection relates and for which a credit is sought in such tax period, T is the value paid by
the person mentioned below of all taxable supplies during the tax period and A is the value
paid by the registered person of all the supplies during a tax period. For purpose for his
section‚ the Board may determine—

(a) Which input or inputs shall or shall not be included in the above formula;

(b) When and how t/a fraction shall be rounded up or down to full number;

(c) The annual adjustment made at the end of each calendar year;

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 (d)The special procedure with receiving partial tax credit by the suppliers of financial
services;

(e) The actual use of any property with the claimed input tax credit with additional
adjustments made against capital assets.

4.5 Problem of Input TAX Credit in Bangladesh

There are many problems with the input tax credit mechanism in Bangladesh. All these
initially occur due to the complexities arising from avoidance and ignorance of taxation
responsibilities. Individuals as well as business entities are reluctant toward their
responsibilities and are majorly concerned with increasing their wealth and earning. They do
not even interpret the benefits that they can avail through proper maintenance of tax
responsibilities. Problems related to taxation and input tax credit mechanism in Bangladesh
are pointed out below-
Tax Avoidance: Considering tax burden the tendency among entities to avoid payment of tax
creates disrepute in the entire process (Shekhor, 2018). Though there has been the adoption of
different tax rules and regulations which reduces tax avoidance due to the lacking of proper
understanding and inefficient tax management, still tax avoidance has been interrupting the
mechanism of the input tax credit.
Increased Tax Protestors and Resistance: Some of the individuals tend not to pay up the
tax as they believe that they have got uncovered interpretations of regulation that do not make
them the subject to be taxed. These individuals and businesses are considered tax protestors.
An unsuccessful tax protestor is concerned about paying up his tax responsibilities while the
successful one is reluctant about it. Again, a declared refusal of tax payment is the other term
for avoiding tax. Tax resistors usually do not stand in the position of considering the tax rules
or laws illegal but they are more focused on not paying the amount as they oppose particular
government policy. Both the increased tax resistors and protestors have been causing
complexities in the process of the input tax credit.
Tax Evasion: Another alarming problem in the taxation process in Bangladesh is tax
evasion. This is known as the general tendency among firms, individuals and other entities to
evade tax responsibilities by illegal means (Shekhor, 2018). This generally entails the
taxpayers is deliberately concealing and misrepresenting the true state of affairs related to tax

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paying issues to reduce the amount of tax they need to pay. This includes showing less
income, profit generation and overstatements of deductible values.
Public Knowledge and Opinion: The concept of an input tax credit is still in a blurry
condition for the general people of the country. They are not properly aware of how the
mechanism of input tax credit works and how this can enable a less tax burden on them. Also
due to the dodging of individual’s duties toward society and alternative responsibilities to
structure each other’s manner per the law, the tax mechanism is still not productive and
efficient in the country. Those who are reluctant toward their tax responsibilities have also
been promoting directly or indirectly to avoid the tax responsibilities among others too.
Increased Corruption: Corruption has been a major concern for the smooth functioning of
different activities within the country. Corrupt tax officials as well the tax resistors have been
increasing evading the tax responsibilities. When they get involved in the instance of
detecting tax evasion, they indirectly encourage others for the same. Also, they refrain from
reporting the illegal gratification of a bribe. Hence corruption in the countries government
and other official levels has been causing a serious interruption in the entire taxation process.

4.6 Remedial Measures for Improved ITC Mechanism in Bangladesh

For most of the countries in the world, tax management and reforms surrounding it are very
challenging both administratively and politically. But an efficient taxation process is
mandatory for the effective growth and development of the country. Besides taxation is the
major mechanism through which redistribution of income can be assured. The national board
of revenue has been working on differentiated plans to modernize the taxation process and to
make people more aware of tax responsibilities. Though the government is politically
inclined to the NBR development plan, such a plan would be effective if individuals and
other development patterns come together to acquire a better taxation process. Educating the
public about the mechanism of the input tax system will positively enhance the tendency of
being responsible toward tax payments. Other possible remedial measures to achieve an
improved ITC mechanism in Bangladesh are pointed out below-
1. One of the major reasons for the inefficient input tax mechanisms in Bangladesh is the
lacking of individuals to understand the necessity of tax payment. Firstly the people
should be made more aware of their tax responsibilities and then they should be
informed of the advantages they might avail from the input tax credit mechanism.
2. To reduce corruption and establish a better taxation process the government officials
should be offered upgraded training sessions in which they will be able to pursue an

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 improved understanding of building an efficient taxation process. Good training can
eventually get works done better and build more flexibility in the mechanism of the
input tax credit process. The trained officials can contribute more positively to the
nation by making the public aware of their tax responsibilities and the benefits they
may get from the input tax credit mechanisms.
3. Record keeping of business communities’ transactions should be monitored
effectively. Business entities should regularly check on their transactions and review
values incurred for tax payments. All the taxpayers should be brought under a single
supervisory process and a fair and equitable system should be ensured at each level.
Axe tax payment and the input tax credit is entirely dependent on the turnover and
transactions made by business entities hence efficient bookkeeping and the effective
system should be assured at all level.
4. As the input tax credit mechanism is applicable for VAT, every business entity should
be registered and checked on a followed regular schedule to assure if they have been
maintaining their tax responsibilities. The government uses unique numeric identifiers
through which it can easily be identified the stats of taxpayers. Though the
mechanism should be developed and businesses or individuals should be more
capable of understanding the amount they have paid as tax and the remaining tax
payable to avail the ITC.
5. Developing new relationships and regular communication with the taxpayers can
improve the ITC system in the country. As numerous tax reforms and changes have
been introduced, routine control duties and efficient enforcement can be achieved by
regulation communication with the administration and taxpayers. Through this
process, they will be able to understand the advantages and national benefits of the
ITC mechanism.

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Chapter: 5. Findings and Recommendations
Through the analysis, some important aspects of the input tax mechanism and overall
condition related to taxation in Bangladesh have been observed. Besides few complexities
have also been identified for which the condition is not up to the level it should have been.
Therefore the core findings of the research have been illustrated below-
1. Despite the successful economic growth and prosperity, the country has been through
a very low rate of tax to GDP ratio comparing to the other south Asian regions. This
demonstrates the fact that the revenues generated from the taxation process by the
government are not sufficient enough to have a greater domestic production. This
directly links with the ITC mechanism because it reduces the tax burden on
individuals and businesses. But due to avoidance and resistance toward tax payment,
the entire process is bringing an economic downturn for the country.
2. Public awareness related to tax payment in Bangladesh is in very depressing
condition. People are more concerned with generating more revenue from their
business activities and they count tax payment as an extra burden. Whereas the ITC
mechanism allows them to get a reduction on their net tax payment through balancing
the paid and payable tax amount. This process is not even familiar to most of the
entities in the country.
3. Increased corruption in the government level official works has been also damaging
the taxation system within the country. Businesses tend to fake their income, profit
and deductible financial items to get a rebate from the tax. This eventually increases
the overall government expenditure by depriving them of the scope of availing
sufficient national earnings from tax.
4. Frequent reforms and changes in the ITC framework is causing more reluctance
toward tax payment by the entities. Lack of proper communication and relationship
building of the taxpayers and the tax officials has been increasing the tendency of not
being concerned about input tax responsibilities in the country and hence disrupting
the credit mechanism.
5. In Bangladesh, not all businesses and other entities have been efficiently brought
under the taxation mechanism. This has been damaging to the economy and raising
illegal businesses and corruption. Businesses are frequently seen not obliging the tax
rules and remaining unaware of the ITC mechanism which could have benefitted not
only them but also improved the overall economic condition of the country.
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5.1 Recommendations
There are few areas of input tax credit that require plausible explanations. While we studied
VAT, this scribe has seen a lack of clarity, and difference so funder standing about some
issues of the input tax credit. To improve the current condition and encounter the problems in
the over ITC process within the country, few suggestive statements have been outlined below
from reviewing the study above and experience gained through the internship tenure.

The following critical issues of input tax credit need to be resolved:

1. In absence of buyer name and BIN in EFD receipt, as per law buyer cannot claim an
input tax credit.
2. Lack of Mushak 6.3 from licensing authorities (such as DNCC/DSCC, CCI&E,
Fire, DoE, etc.) barred taxpayers to avail input tax credit.
3. The justification of claiming input tax credit is with 4 succeeding months, It can be
extended to 4 years.
4. It is contradictory with the VAT concept by amending the VAT Law on a later date
by inserting the definition of “input” which bypassed the spirit of original VAT
philosophy e.g., preventing VAT on VAT (cascading effect).
5. Despite all relevant sections to ease of input tax credit mechanism but in reality,
input tax credit remains very stringent which can be seen from the dispute and the
total number of VAT cases belongs to an input tax credit.
6. The taxation process should be developed and all the individuals and business
entities should be registered and regularly checked for tax payment to approve on
the ITC process.
7. ITC facilities should be assured at all levels and for this enhanced public awareness
is necessary. The benefits that regular tax payment may provide to individuals,
businesses and the government should be disclosed and communicated with every
related stakeholder to assure the better taxation and ITC system in the country.

It is hoped that if the National Board of Revenue addresses the above issues and brings
necessary amendments in the VAT and SDA act, 2012 to simplify and enhance input tax
credit, it will bring further growth in the trade and industry of our country.

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5.2 Conclusion
Taxation is the major earning source and financial assistance for the government of a country
to make further development and progress. Value-added tax and income tax are the core
components of taxation. An input tax credit is a positive term in enhancing the tendency of
tax payment and availing financial flexibilities. Though implementation of the input tax
mechanism should be supported by proper system and database and this should also be
communicated with the common people to make them understand the process and enhance
their involvement in the overall taxation and ITC mechanism. There is still some organized
sector that has been efficiently following the taxation process and availing the ITC
mechanism. These sectors have successfully been contributing to the economic growth and
prosperity of the nation. The tax mechanism in the country is frequently monitored and the
issues regarding delayed ITC refund has been enacted. Accordingly, in the long run, the
input tax credit mechanism will bring a win-win condition for the business and government
as it will reduce the negative effects on the process and revenue earning will be affected in
this competitive business world and credit market. Strict implementation of taxation rules and
attentive maintenance of the tax responsibilities by the business, individuals as well as
government officials will contribute positively to the economic development and progress of
the nation.

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Chapter: 6. References
[1.]Lectures and study material from Dr Abdul Mannan Shikder, Member (VAT

Implementation & IT), NBR Bangladesh. Official website of NBR

(http://nbr.gov.bd/).

[2.]Input tax credit under value-added tax system: Few unexplained issues published in

“The Financial Express” on 11Jan 2021 -Dr Mohammad Abu Yusuf.

[3.]VAT and SD Act 2012, Understanding the new VAT Regime – KPMG Rahman

Rahman Haq, Chartered Accountants.

[4.]Alm, J., 2016. The land development tax in Bangladesh. Syracuse, N.Y.: Syracuse

University.

[5.]Hossain, R., 2020. INPUT TAX CREDIT AND ITS IMPACT ON REAL ESTATE

PRICES. VISION: Journal of Indian Taxation, 7(2).

[6.]Hossain, S., 2018. The impact of the value-added tax in Bangladesh. Washington

(D.C.): International monetary fund.

[7.]Hossain, S., 2019. The Equity Impact of the Value-Added Tax in Bangladesh.

[8.]Kessler, C., 2020. Taxpayer Non-Compliance with Input Tax Credit Rules: Data and

Policy Options for BD. Bangladesh Tax Journal, 68(3), pp.751-800.

[9.]Pegu, B., 2020. A Comparative Study on Socio-Economics Status and Expenditure

Pattern of Tribal Farmers. International Journal of Engineering Research and

Technology, 13(7), p.1623.

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 [10.] Shekhor, S., 2018. Tax Invoice and Input Tax Deduction in BD. Tax Law

Review, 24(3), pp.191-267.

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