Construction subcontractors exempted from VAT

Subcontractors who supply construction raw materials and services to local or foreign firms have been exempted from value-added tax (VAT), according to the finance bill for the FY2022-23.  

If the main contractor mentions the raw material outsourcing in its VAT documents or treasury submissions, the revenue authorities will not ask the subcontractors for VAT separately.

Some local companies are working as subcontractors or in joint ventures with foreign firms in several ongoing projects, such as metro rail, Rooppur nuclear power plant, Bangabandhu Tunnel and Padma Bridge approach road. The National Board Revenue had been deducting VAT on the bills of both the main contractor and the subcontractor, leading to double taxation.

Revenue board officials said foreign development partners, who financed the infrastructural works, have been seeking a solution to the double taxation issue.     

They say that according to the law, VAT will be applicable to any VAT-eligible company if it provides services that are not VAT-free on the basis of contract, tender or work order. But the law does not clarify whether VAT will be applicable on the bill of a hired firm, agent or a service provider that would work for the VAT-eligible company.

The vagueness led to VAT by both the main contractor and subcontractors on their bills and vouchers.   

Including the latest changes, the VAT law says that the hired firms or agents will not have to pay VAT, but the main contractor will have to submit documents mentioning VAT payments against the outsourcing.     

An official of the revenue board's VAT department told The Business Standard that the VAT law was amended once in 2020 after several rounds of meetings with local subcontractors. But the issue of VAT paying entities was not clear in the law, which prompted the complications. The matter has been clarified through changes in the finance bill now.

According to industry insiders, local companies mainly work as subcontractors with foreign contractors on mega projects. The subcontractors provide food and shelter, supply labour, other goods and services. They also provide construction materials.

The main contractor of the project pays 5%-10% VAT to the revenue board on the bill of these services.

On the other hand, revenue officials demand VAT from the subcontracts when they submit their returns separately. As a result, there has been long-standing dissatisfaction among companies working in the construction sector.

SM Khorshed Alam, president of Bangladesh Association of Construction Industry, said the industry was in a tight spot due to the ambiguity in the VAT law.   

The association has more than 100 members. Khorshed Alam said their profit margins are very low as the subcontractors provide intermediate services.

He claimed there are similar problems with their taxes too.