Why the new VAT law taxes bank loan interest

The new value added tax (VAT) law could have far reaching implications on the banking sector if it is not amended, industry stakeholders have said. The law that came into force on February 5 replaced law No. 06/2001 of 20/01/2001 on the code of value added tax. Under the new law, banks are required to account for VAT on loan interest, which experts say will cripple the banking industry if implemented. This (levy on loan interest) was, however, not introduced by the 2013/14 fiscal year budget proposals. Article 6 of the new law outlines goods and services that are exempt from paying VAT, which include financial and insurance services. However, it does not exempt loan interest from VAT, which the old law did under a Ministerial Order. Richard Tusabe, the Rwanda Revenue Authority deputy commissioner general, last week acknowledged that there could have been an oversight in the law, adding that the tax body was studying it to find a way out. “We are still looking at it closely… we think it could have been an oversight,” Tusabe said. However, Alex Nzitonda, the Ministry of Finance tax policy legal officer, insisted ‘nothing’ was changed in the old VAT law, adding that bank loan interest would not be subjected to any tax. Under the old law sub-section 2 on exemptions and zero rating, Article 15, “The minister may, by order, provide for list of other VAT exempt items other than those in Articles 86 and 87.” Therefore, according to Article 79, the financial services exempted under Article 86 (7) (b) of the old law included exchange operations carried out by recognised financial institutions and interest chargeable on and deposits, which were VAT exempt following a Ministerial Order. Other items were operations of the National Bank of Rwanda and fees charged on vouchers and bank instruments. However, tax experts say the new law does not give the minister powers to come up with such a list that is not in the new law. “In the absence of a new clause in the law, the minister cannot come up with another list of VAT exempt items. The law needs to be amended to give the minister the mandate to draw such a list…,” they advised. The new law exempts only fees charged on the operation of current accounts under Article 6 (7) (b) and makes no specific mention of interest chargeable on credit and deposits as VAT exempt. Bankers said this would make borrowing expensive and hurt the financial services sector. Last week, Sanjeev Anand, the Banque Commerciale du Rwanda boss, noted that if the law is not amended, borrowers will bear the brunt as banks would pass the tax on to them. “We have raised the issue with the regulator…we think it was an oversight. It will definitely push loan interest rates through the roof top,” Anand, who is also the vice-president of the Rwanda Bankers Association, said.

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Why the new VAT law taxes bank loan interest