If, on the other hand, a company de

If, on the other hand, a company decides to absorb any VAT increase, it will also experience a profit reduction. A VAT increase would also lead to an increase in exposure to VAT liabilities.

There are several examples from our recent experience that show the Revenue Department focuses more on indirect taxes rather than corporate income tax. The first example is that a 200-per-cent penalty will be imposed on a company whose goods were short in the inventory report, even if the company voluntarily paid the VAT on the stock shortage.

In our recent experience, the department not only challenges companies for the amount of VAT on stock shortages and classes the shortage as sales, but also challenges for the 200-per-cent penalty on the VAT shortfall. The maximum exposure is the VAT and a 200-per-cent penalty on the VAT of stock shortages, or 21 per cent of the stock shortage value given the current 7-per-cent VAT rate. This would be 30 per cent if the VAT rate changed to 10 per cent.

The common second example is issuing invoices and failing to implement VAT, which would result in a penalty. Some companies might think that issuing a VAT invoice - even when unsure if VAT should be applied - is a conservative approach to collecting VAT and submitting it to the Revenue Department. This is a common misunderstanding that could result in a severe penalty.

transaction is subject to VAT, an example being sales promotions, which are subsidy income or are discounts after sales. Issuing a tax invoice without the lawful right to do so under Section 86/13 would result in a 200-per-cent penalty on the tax on the tax invoice and the penalty would be imposed immediately.

The purchaser or the tax invoice recipient who uses the VAT as a tax credit would also be over-claiming the input VAT and would suffer a tax shortfall - 100-per-cent penalty and 1.5-per-cent surcharge per month.

Those are just two common examples of VAT incompliance. Complying with indirect taxes often takes more time than |with direct taxes, because an |indirect tax is related to levels |of transactions and the frequency of filing is monthly rather than yearly.

When the government increases the indirect tax rate, the tax exposure and the risk of VAT incompliance will also be greater, which can result in higher penalties and surcharges.

Companies may want to consider more structural solutions such as assessing tax risk to evaluate company exposure, and forming a plan to standardise tax procedures to reduce incompliance and manage tax risks. It's important to do things right from the beginning, or as soon as possible, to minimise any exposure and impact from future indirect tax rate increases.