Incidence of Value Added Tax (Vat) in the Developing Countries: A Case in Bangladesh

Abstract

VAT is a broad-based tax levied at multiple stages of production (and distribution) with – crucially taxes on inputs credited against taxes on output. Bangladesh introduced VAT in 1991 replacing the previous taxes like sales tax, excise duty and business turnover taxes. In last two decades VAT has become an all encompassing domestic tax covering the domestic manufacturing, wholesale, retail and all the service sectors in the country. This paper is a first attempt to measures the incidence of Value Added Tax (VAT) in Bangladesh. The results show that the VAT incidence varies for people in different income groups. For instance, the VAT incidence for the lowest income group is 6.92 percent whereas for the highest income group it is only 4.56 percent. The higher income groups are also enjoying fewer burdens than the lower income groups. Comparing the results with and without VAT exemptions, the study finds that overall the VAT in Bangladesh is regressive. The study provides some policy recommendations that could help design a better VAT system in the developing countries with a particular case in Bangladesh.