Govt amends VAT law to regain power to grant exemptions

The government has amended the Value Added Tax (VAT) Law 2012, restoring its authority to grant exemptions from the indirect tax through special orders, according to an ordinance issued by the law ministry on Monday.

The development comes months after the government in the Tax Expenditure Policy and Management Framework (TEPMF) removed the National Board of Revenue's (NBR) power to grant exemptions from VAT, supplementary duty (SD), and advance tax.

The policy came into effect in July this year.

Officials said the NBR often receives applications from welfare organisations and donations seeking exemption from taxes. As the new policy has come into effect, the revenue board can no longer extend such benefits.

To resolve this, the NBR added a clause specifying that the tax expenditure policy would not apply to VAT exemptions on donations and grants.

"So, the provision of special orders has been included, empowering the government to give the exemption," said a senior NBR official on condition of anonymity.

In the ordinance on a Few Finance-Related Laws (Second Amendment) 2025, the government has also raised the advance tax on income from investments in treasury bills and bonds held by companies.

Previously, companies paid a 10 percent tax on interest income from these securities. This has now been raised to 15 percent, according to the amendment.

Snehasish Barua, managing director of SMAC Advisory Services, said the overall tax on companies from income on financial assets had not increased despite the higher advance tax on securities.

Until now, firms paid these taxes while filing income tax returns. "It appears that the government needs quicker revenue to finance the budget. So, it is collecting tax on income from these types of financial assets upfront," he said.

Barua added that under Article 4 of the Tax Expenditure Policy, effective from July this year, only parliament will have the authority to approve tax exemptions except in specific cases.

However, under the second amendment to the Finance Ordinance 2025, the government may issue VAT exemptions through special orders in line with Section 126 of the VAT and Supplementary Duty Act 2012, in line with the policy, he said.

According to the proviso of Article 4 of the policy, the government may need to exempt certain goods and services from taxation. Processing such amendments through the official gazette can take longer than issuing a special order.

Therefore, Barua said extreme caution must be exercised when granting such exemptions, as tax expenditure is a factor behind the country's low tax-to-GDP ratio.