How does apply Interest on overdue VAT for VAT adjustment purpose?
In Bangladesh, when it comes to VAT adjustments and overdue payments, interest can indeed be a significant factor. Here's how interest on overdue VAT is generally applicable, particularly in the context of VAT adjustments:
Core Principle: Interest on Unpaid or Underpaid VAT
The fundamental rule in Bangladesh is that if a taxpayer fails to pay the correct amount of VAT by the due date, interest will be charged on the overdue amount. This applies irrespective of whether the underpayment arose from an initial error, a subsequent adjustment, or simply late payment.
How Interest Applies to VAT Adjustments (Mushak-9.1):
VAT adjustments are made in the monthly VAT return, Mushak-9.1. These adjustments can either be "increasing adjustments" (which increase your VAT liability) or "decreasing adjustments" (which reduce your VAT liability).
Increasing Adjustments:
- Scenario: If an "increasing adjustment" is made in a subsequent tax period (e.g., due to a debit note, reversal of a previously claimed input tax credit that was not eligible, or an error discovered that led to under-declaration of output VAT), this increases the net VAT payable for that period.
- Interest Implication: If this increasing adjustment causes the total VAT payable for the original tax period to be higher than what was actually paid by the due date, then interest will be charged on the difference from the original due date until the date of actual payment. The interest is applied to the amount that was effectively underpaid.
- Example: A business under-declared its sales in January. When preparing the February Mushak-9.1, they discover this error and make an increasing adjustment for the understated VAT from January. If the original January VAT payment was insufficient due to this error, interest will be calculated on the amount of VAT that should have been paid in January but wasn't, from January's due date until the date the adjusted amount is paid.
Decreasing Adjustments:
- Scenario: If a "decreasing adjustment" is made (e.g., due to a credit note for sales returns, advance tax paid at import stage, or correction of an error that led to over-declaration of output VAT), this reduces the net VAT payable for the current tax period.
- Interest Implication: Decreasing adjustments do not directly trigger interest on overdue VAT, as they reduce a liability. However, if a decreasing adjustment leads to a refund claim, the NBR might scrutinize the original period's compliance. Furthermore, if a business incorrectly applied a decreasing adjustment in a prior period, leading to an underpayment, and this error is later rectified (resulting in an increasing adjustment), then interest rules (as described above) would apply to the corrected underpayment.
Rate of Interest:
As per the Value Added Tax and Supplementary Duty Act, 2012 (Section 127), if a person fails to pay the required VAT on or before the due date, they shall be liable to pay simple interest at a rate of 1% per month on the amount of VAT payable, from the day following the due date until the date of actual payment. Some sources also mention a rate of 2% per day in specific contexts, so it's always critical to consult the latest NBR SROs and legal interpretations for the most current and precise rate. It's also important to note that the maximum time limit for charging interest on arrears of VAT has been proposed to be set at 24 months.
Key Points on Overdue VAT Interest:
- Due Date: The deadline for VAT return submission and payment is typically the 15th of the following month for the preceding tax period (e.g., January's VAT is due by February 15th). Interest starts accruing from the day after this due date.
- Automatic Calculation: While the Mushak-9.1 form has a field for "Interest on Overdue VAT," it's the taxpayer's responsibility to correctly calculate and declare this interest if they have an overdue amount.
- Penalties vs. Interest: It's important to distinguish between interest and penalties. Interest is charged on the unpaid amount of tax for the period it was outstanding. Penalties are typically fixed fines for non-compliance, such as late filing of returns (e.g., BDT 5,000 per month for late submission). While interest compensates the government for the delayed use of funds, penalties are for non-adherence to tax laws.
- Unintentional Mistakes: Recent amendments (as of 2022) indicate a move by the NBR to not impose penalties for unintentional mistakes in tax payment or input tax credit claims, provided the taxpayer pays the correct tax with interest later. However, interest still applies.
In summary, if a VAT adjustment (especially an increasing one) reveals that a lesser amount of VAT was paid than due by the original deadline, interest will be levied on that underpaid amount from the original due date until it is fully settled. Accurate and timely filing of Mushak-9.1, including all necessary adjustments, is crucial to avoid incurring interest charges.