The government may review the proposed increase in deposit to be made by businesses for VAT related dispute settlement and introduction of partial VAT rebate based on the actual usage of raw materials — the two provisions incorporated in the budget for the fiscal year 2020-2021.
The revision is under consideration following huge criticism from the business community and the recommendations made by field level value-added tax offices of the National Board of Revenue.
Finance minister AHM Mustafa Kamal proposed to increase the rate of deposit in his budget proposals from 10 per cent to 20 per cent of the disputed VAT for filing appeals before the Appellate Tribunal or Appeal Commissioner of the NBR, saying that it would reduce the tendency of the businesses to lodge illogical cases.
The budget also proposed an amendment in the VAT and Supplementary Duty Act-2012, limiting the scope for businesses to adjust the input tax credit or claim rebate against the VAT paid on inputs.
As per the proposed amendment, the businesses will be able to adjust input tax credit or claim rebate based on actual consumption of raw materials they used to produce finished goods.
Finance ministry officials said that the government might consider the two provisions to facilitate trade and investment in line with the recommendations made by stakeholders.
The government may reinstate the previous provisions or ease the provisions further so that the cash flow of the businesses is not hurt, they said.
The businesses have been opposing the two provisions on grounds that it would increase the cost of business as their operating capital will get tied up with the tax authorities.
Field level VAT officials also opined that introduction of partial VAT rebate on actual usage would also create complexities for them in ensuring compliance while increasing the deposit for dispute settlement would raise the cost of business.
Currently, a firm needs to pay 10 per cent of the disputed VAT amount to file appeals at each stage of the Appellate Tribunal or Appeal Commissioner.
They need to pay another 10 per cent to file appeals before the High Court.
On the other hand, the businesses can adjust the input tax credit or claim rebate at one go on the total value of inputs purchased and they need not wait for consumption or use of raw materials.
In a letter to the finance minister, the Foreign Investors Chamber of Commerce and Industry said that introduction of partial VAT rebate based on actual usage of raw materials would create a huge impact on cash flow.
It will also create unmanageable complexities in operation and may cause the business entities to incur rebate losses as all materials may not be used in production within the four months allowed for adjustment or rebate, it said.
It also said that the effective deposit for the VAT appeal would rise to 50 per cent up to the High Court level which would create a negative perception among the foreign investors as it would keep a large proportion of their capital tied up.
The businesses said that the provision would create problems for them in maintaining books and records.
The complexities particularly arise for businesses who are engaged in production of fast-moving consumer goods, pharmaceuticals and similar sectors which required hundreds of raw materials.
It will also increase the risks of rebate loss if the firms cannot use the raw materials within four mounts, they said, adding that many firms imported the raw materials to last them for a longer time.
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