goods and services taxed on a presumptive basis are not allowed to claim input credit. The highly differential application of VAT legislation in the country results in a major disconnect between the VAT paid by producers and the value added by them.

**Table 6. VAT Exemptions, Reduced Rates and Presumptive Taxation in Bangladesh**

|Exemptions for Goods|Most unprocessed agricultural products and select raw materials (cork,<br>wood,cotton)|
|---|---|
|Exemptions for Services|Six main categories of services:<br> basic services for living (agriculture‐related services: e.g., packing or<br>sorting of food grains and vegetables; storage and preservation of<br>agricultural goods, seeds, meat and fish);<br> social and welfare services (e.g. medical and educational services);<br> culture‐ related services (e.g. TV and radio broadcasting, artwork, social<br>and sports clubs);<br> financial services;<br> transport services; and<br> personal services (e.g. dancers, actors, translators, plumbers, wood,<br>mason and electrical workers)|
|Presumptive Taxation of ManufacturingItems|101products are taxed based on notional tariff values atproduction stage|
|Reduced Rates for Services(“truncated VAT”)|21 services are taxed at reduced rates of 1.5%,2.25%,4.5% and 9%.|
|Special Treatment of Wholesalers and<br>Retailers(“trade VAT”)|Wholesalers and retailers are taxed at 1.5% of total sales, provided that<br>theydo not avail of input credit.|

‐ Source: Bangladesh National Board of Revenue <u>http://www.nbr bd.org/valueaddedtax.html ; Bangladesh Value Added Tax Act, 1991; and</u> Ahmed. N. 2013.

India has two types of VAT – a Central Value Added Tax (CENVAT) charged by the federal government on goods manufactured in India and a state level VAT charged on the sale of domestic and imported goods. CENVAT functions like a production tax and is paid by a manufacturer, who passes its incidence on to customers. The standard CENVAT rate is 12%; there are also lower rates of 0% and 6%. Indian states have a constitutional right to levy VAT (former sales tax) only on goods through retail and wholesale. A lot of products are subject to exemptions or reduced rates, so state level VAT is a highly differentiated tax. The standard VAT rate varies from 12.5 ‐15% and the reduced rate from 4‐5% depending on the state. Gold, silver, precious stones and articles made of these materials are subject to a rate of 1%. The list of products eligible for exemptions and reduced rates is determined at the state level, which increases compliance costs for firms buying and selling goods across states. For example, in the state of Nagaland, 73 types of products are exempt, 350 are subject to a rate of 4% and 172 are subject to a rate of 12.5%. The rates often differ at the sub‐product category (Table 7) and similar types of goods are subject to different rates.<sup>27</sup> Most industrial inputs are taxed at a reduced VAT rate of 4‐5%,<sup>28</sup> which violates VAT design principles, as this tax provides credit for inputs used in the production of final goods.<sup>29</sup>

> 27 Government of Nagaland, Department of Finance. Nagaland VAT Act, 2005: VAT Schedule of Rates

> 28 Rao, M. and R. Rao. 2005. Trends and Issues in Tax Policy and Reform in India

> 29 See, for example, Keen, Michael and Ben Lockwood. 2007. The Value Added Tax, Its Causes and Consequences. IMF Working Paper WP 07/183

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