The cost of borrowing could go up if the government does not rethink the new value added tax (VAT) law, experts have said. According to the law effected about four months ago, loan interest rates, which were previously VAT exempt, are taxed. "This will make borrowing so high and, eventually, hurt the banking sector,” Herbert Gatsinzi, the tax advisory services director at Ernst & Young, noted. Interest on loans and foreign exchange operations was removed from list of exempt services, according to the 2013/14 financial year budget presented to Parliament about a fortnight ago. "You may need to engage the tax administrators to find out if this was done intentionally by the regulator because this could change the whole dynamics of tax regime if VAT is levied on bank loan interest and goods and services procured locally,” Gatsinzi told bankers and stakeholders in Kigali recently.In February, a new VAT law was introduced, replacing law no.06/2001 entirely.Sanjeev Anand, the Banque Commerciale du Rwanda managing director, said if the proposal is not suspended, it will be the borrowers to bear the brunt as banks would pass the tax on to them. "We have raised it with the regulator…we think it was an oversight, it will definitely push loan interest rates through the roof top. If, for example, the interest rate was 15 per cent, it will increase to about 16.5 per cent,” Anand, who is also the vice-president of the Rwanda Bankers Association, said.Richard Tusabe, the Rwanda Revenue Authority deputy commissioner general, said the tax body was studying the law. "We are still looking at it closely and we also think it could have been an oversight,” Tusabe said. According to experts, the new VAT introduced in February has also created confusion on the definition of input VAT as it excludes duty on services and goods procured locally. Experts have also raised concerns over penalties the proposal imposes on defaulters, arguing that one could file their VAT returns timely, but which might not be recorded due to technical problems in the system. They also said directors should take full responsibility of tax liabilities that occur during their tenures, arguing that making shareholders liable is not fair.Anand noted that companies do not default intentionally, saying at times software system failures cause the delays. "All companies pay their taxes through banks, but sometimes it’s the electronic system failures that cause these delays,” he argued.Experts say the taxing loan interest has put business people and banks on edge as they prepare to brave tough times ahead.