Value-added tax collection from large manufacturing companies may face a blow as the companies are claiming higher amounts of refund against some ‘unusual inputs’ in absence of definition of inputs required for production of goods in the law.
The current VAT law allows manufacturers to get refunds or adjust the VAT they have paid while procuring or sourcing raw materials, known as inputs, to produce finished goods.
The officials said that the new VAT and Supplementary Duty Act-2012 and VAT and SD Rules-2016, that came into force on July 1, 2019, did not give any definition of inputs, creating the scope for manufacturers to claim a wide range of raw materials and components as inputs to get refunds.
Producers can claim refund or adjust previously paid VAT on inputs simply by making a declaration on input-output coefficient to the VAT offices which the VAT officials are bound to accept.
Field-level VAT offices have found instances where large manufacturers are now claiming higher amounts of refund as well as showing lower levels of value addition in absence of the inputs definition in the new law.
For example, a multinational cement company claimed refunds on inputs which included tailoring shop and tailors, social media and virtual business, hotel and restaurant, printing stationary and office supply, human resources supply and management, service charge on contractual manufacturing, furniture, event management, credit rating agency, auctioning, automated laundry, indenting firm, building construction or architect, interior, engineering firm and graphic design.
These items were not included in the list of eligible inputs in the previous law.
In the previous VAT Act-1991, there was a clear definition of inputs, including all types of raw materials, machinery, spare parts, fuels, gas, packaging materials, laboratory reagents, laboratory equipment, laboratory accessories and other goods and services required for producing goods and business operations which are eligible for getting refunds.
Labour, land, building, office stationary and transport were not included in the list of inputs in the 1991 law.
The Large Taxpayers’ Unit (VAT) of the revenue board in a recent letter to NBR sought guidelines on the input issue saying that it would otherwise put a negative impact on revenue collection.
On analysing a number of VAT returns of some companies, the LTU found that the companies claimed VAT refund against inputs which were not included in the list of inputs under old VAT law.
In case of the cement company, the LTU said that the inclusion of the items had significantly increased the value of inputs by Tk 30.97 of a bag of 50 kilogram cement and by Tk 617.76 for 1,000-kg bulk cement.
The rate of value-addition became lower by Tk 45.17 for a 50-kg bag and Tk 930.64 for 1,000-kg bulk cement produced by the company that caused the actual payable VAT by the company to decline, it said.
The LTU said that the total refund to the company stood at Tk 59.76 and Tk 1,134.46 for 1,000-kg bulk cement after adjustment of 5 per cent advance tax paid during import of raw materials while their actual payable VAT was Tk 55.60 for 50-kg bag and Tk 1,051.17 for 1,000-kg bulk cement.
This means that revenue collection will be negative by Tk 4.16 and Tk 83.29 for the two cases, LTU said.
The VAT office said that the scenario was almost similar for other cement companies.
LTU was also encountering a similar situation in other sectors, it said.
Overall VAT collection by LTU dropped by 15.60 per cent or Tk 922 crore in the July August period in the current fiscal of 2019-2020 compared to that of the same period in FY 2018-2019.
LTU managed to collect Tk 4,991 crore in July-August of FY20 against that of Tk 5,913 crore obtained in the same period of FY19.
Company taxpayers under the LTU had received an additional Tk 307 crore in refunds and adjustments under the new law during the period, according to the LTU.
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