Tax refund as a business investment climate issue
Business environment and investment climate are among the major factors for attracting and retaining business and investments in a country. There are several components of business environment and investment climate.
Broadly speaking, they include legal, policy and regulatory frameworks and infrastructure among others. In the fiscal space they include a number of tax issues including value-added tax (VAT) refunds. This article highlights VAT refund issues that constitute bad business environment and investment climate.
VAT refund is money paid back by the tax authority to entitled tax payers. This is done in a particular prescribed accounting period when tax liabilities are not exhausted by allowable deductions.
It is also done where a tax payer’s returns for prescribed accounting periods regularly result in excess credits. Application for refund is made where a person has overpaid a net amount payable for a tax period.
In Tanzania, the tax authority shall make decision on the application and inform the applicant on the amount to be refunded and the period upon which such a refund shall be made.
This has to be done within ninety days. VAT refund can be offset against other taxes, penalties and interest owing to Tanzania Revenue Authority.
Refund is supposed to be made within 30 days after the due date for its lodging or the date of receipt of the return, whichever is later. Where the refund is not made within this period, interest is supposed to be paid to the taxable person at the commercial bank lending rate determined by the central bank. This is what is supposed to be the case. Reality on the ground however is different in some cases.
Issues of concern
Tax payers entitled for VAT refund have number of issues of concern. Related to VAT refund delay is the issue of the 15 percent additional up-front payment done on industrial sugar.
Among the key issue is delay in payment of the refund. This translates to capital and cash flow being tied up instead of being used to finance businesses. It also translates to extra transaction costs by ways of resources devoted to dealing with tax refund follow up. Related to this is opportunity cost of having capital tied up in the government coffers.
Even if interest rate was to be paid, it may not make up for lost opportunities. Delays have been reported to be for up to two to three years. The length of time taken for tax refund claims differ by sectors.
It ranges from one to three years in sectors as construction, mining, industry, trade in goods and services, and agriculture. In monetary terms the sum can be in billions of shillings.
Impacts of delayed refunds
Studies would show that delayed refunds result into serious cash flow problems arising from huge outstanding tax claims. The challenge is encountered by virtually all sectors including those in the industrial, construction, mining, agriculture and other sectors.
These have major and far reaching negative implications in Tanzania’s economy by way of constraining businesses and investments. Delayed refunds do impact profitability, increase costs in businesses, increase time spent for accounting and follow up for refunds among others. Other impacts include serious cash flow problems; increased business liabilities; high interests expenses on loans from commercial banks as affected tax payers have to borrow funds to pay for due taxes; increased cost in terms of interest expenses due to overdrafts; decline in credit rates due to delays or failure to pay for credit facilities; and increase in business operation costs among others. These affect Tanzania’s competitiveness.
The need to fix what is broken in the tax refund space cannot be overemphasized.
Among ways forward towards this include paying outstanding tax refunds with interests to partly make businesses more liquid and abolishing application of the 15 percent additional import duty for industrial sugar.
Studies have shown declining trend in both tax refunds payments and amount of funds set aside for refunds for some years.
Among the proposed solutions to the challenge is to budget for the huge sum of funds that remain unrefunded. This would reduce or even eliminate the problem in future financial years.
There is also a need to create special reserve account for VAT refunds to reserve and ring-fence funds projected for VAT refunds is a special escrow accounts. These measures would off-load tied-up capital and make the affected businesses more competitive.