VAT rules unclear

The absence of specific method in the VAT rules has made it difficult for the taxmen to freeze bank accounts of non-compliant businesses, deepening fear of the potential legal issues, tax officials say.
The Value Added Tax (VAT) and Supplementary Duty Act-2012, empowers taxmen to freeze bank accounts in case of the violation of legal provisions.
Although the section 83 (3) and section 91 of the law allows VAT officials to freeze the bank accounts following a specific method, the rules prepared under the same act do not clearly specify the method of freezing bank accounts.
The VAT Audit, Intelligence and Investigation Directorate has recently made such an observation.
Due to the opaque rules, any aggrieved person can throw up legal challenge if the taxmen make any attempt to freeze accounts, according to officials.
The VAT intelligence wing urged the National Board of Revenue (NBR) to issue an order immediately as it has detected a number of tax evasion cases where freezing of bank accounts is necessary.
It said a directive with the specified method is needed to ease accounts freezing without facing any hurdles, officials said.
The wing sent a letter to the board with a format and proposals for incorporating those into the VAT rules.
It said the power for freezing bank accounts at the audit or investigation stage should be given to the commissioner and director general considering its sensitivity.
In the letter, director general of the directorate Dr Moinul Khan said the actual liability is not always proven at the investigation stage so the authority of idling bank accounts should be given to the high-ups.
He suggested incorporating a new sub rule (2ka) into the VAT rule 64 with a format of warrant that could be sent to the banks asking for making bank accounts inactive.
In the existing VAT law, the deputy commissioner or deputy director or above are empowered to issue such orders.
The wing attached a format of issuing warrants to be used by the banks for the suspected tax evaders.
The names of bank officials, designations and addresses will have to be mentioned in the warrant.
The draft format requires bank officials to submit a compliance report of the warrant to the VAT 12.10 form.
The warrant will also include names and addresses of the suspected businesses.
Talking to the FE, a senior VAT official said they are still freezing bank accounts on a limited scale, but there is a scope for legal tangles.
The VAT rules have specified the process of making bank accounts inactive for the collection of outstanding revenue.
However, the rules have not mentioned any method specifying as to how the VAT officials will freeze the bank accounts in case of investigations, inspections or audits.
In the letter, the wing said VAT officials found the evidence of a huge amount of tax evasion by freezing bank accounts of some persons.
These types of businesses usually do not maintain proper financial and commercial documents, it added.
Of late, the directorate has found it imperative to freeze bank accounts of some businesses, but fears the measure will trigger disputes due to the absence of a rule, the letter said.
Business leaders have long been opposed to the discretionary power of the VAT officials for freezing bank accounts.
Mahfuzul Haque Shah, chairman of the standing committee for internal trade at the Chittagong Chamber of Commerce and Industry (CCCI), said such measures should be avoided as the provisions of the existing VAT law are controversial.
"We have placed some proposals for amendments, which were yet to be considered," he added.
The government should not take such stern measures as it tarnishes the image of businesses, he added.
Mr Shah recommended imposing fines and penalty for VAT evasion rather than freezing bank accounts.
Businesses need some time to be accustomed to the provisions of the new law, he added.
"It would not be fair to freeze bank accounts of businesses as we are collecting VAT on behalf of the government," he said.
He, however, said the VAT officials can freeze bank accounts in case of detection of money laundering or other serious offences.

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