VAT Act: Facilitating refund of accumulated input tax credit for service providers

Pulak Saha, Prabir Mitra and Asif Reja Akash | Published: May 28, 2018 21:34:19 | Updated: May 29, 2018 20:57:30

Finance Minister AMA Muhith is scheduled to present the Finance Bill, 2018 in the Parliament in the first fortnight of June 2018, and there are lots of expectations from it. The business community is especially looking forward to certain amendments to the VAT Act, 1991. Currently, the Act has certain limitations, which are impacting on the ease of doing business in the country. Though the much-hyped VAT & Supplementary Duty Act, 2012 was not implemented last year, it is expected that the government would provide some relief to the service providers and manufacturers.

The prevailing VAT law is causing some serious impediments to the manufacturers as well as a class of service providers. This segment of business community cannot avail refund of their accumulated input tax credit (ITC); it is being carried forward each month, putting undue pressure on their working capital. In turn, the cost of providing service in the country is increasing and the common people have to pay more. Let us look at the existing act and a few possible solutions the government can look at to make things easier for the business ventures to operate in the country.

PRESENT PROVISION OF VAT ACT, 1991 ON REFUND OF ITC: The present VAT Act, 1991 [Section 11 read with Rule 19(2a)] stipulates that any excess ITC remaining un-adjusted in a month is to be carried forward to the next return period. The present provision of refund (Rule 34A) does not provide any opportunity to the VAT payers to avail refund of any unutilised ITC except at the time of cancellation of VAT registration certificate [Rule 19(3)]. This means that a registered VAT entity is eligible for refund of accumulated/carried forward ITC only upon closure of its business.

SERVICE INDUSTRY IS DENIED REFUND OF INPUT TAX CREDIT (ITC): According to the General Order No. 14/Mushak/2017 dated July 01, 2017 (also known as 'VDS Guideline'), mandatory VAT deduction at source (VDS) is applicable to 39 types of service providers. Amongst them, 10 types of service providers enjoy the facility of charging VAT at a truncated rate, and the rest of the service providers have to charge VAT at a standard rate i.e. 15 per cent. As per Section 9 of the VAT Act, 1991 as well as SRO No. 182-AIN/2012/640-Mushak dated June 07, 2012, the service providers enjoying truncated VAT are not eligible to claim ITC. On the other hand, those who apply standard VAT rate of 15 per cent are eligible to claim ITC but due to VDS-claims made by their customers/clients, their positive balance in the VAT current account (i.e. Mushak 18) only increases resulting in unutilised accumulated balance of ITC. This makes it difficult for service providers paying VAT at the rate of 15 per cent, since such accumulated/unutilised balance of ITC blocks their working capital. Moreover, in some cases, such accumulated ITC are not being allowed by the statutory auditors to be shown as 'current assets' in the balance sheet of the service provider. They usually insist on charging of such accumulated credit to the profit & loss account, which eventually increases their cost of providing service.

WAY FORWARD: There could be two possible solutions to deal with this issue and make it easier for the service providers.  One could be to introduce the provision of granting issuance of NIL withholding certificates in favour of the eligible service providers, so that the withholding VAT is not deducted at source by the customers, and therefore ITC could be adjusted by the service providers. The other one could be to amend the related provisions of VAT Act, 1991 which would allow service providers to claim refund of accumulated ITC subject to conditions the government may prescribe to safeguard the loss of revenue. In such a situation, service providers who currently cannot claim refund from the government due to VDS claims made by the customers would be eligible for refund of unutilised balance of ITC. This could be a leap forward in enhancing the ease of doing business in the country.

Pulak Saha is a Partner of Indirect Tax, PwC India; Prabir Mitra is Manager of Indirect Tax, PwC India; and Asif Reja Akash is an Analyst of PwC Bangladesh.

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