Although it hasn’t brought too much impact on markets, Government’s declaration for paying the outstanding VAT possibly in 2020 became the top item on Turkish economic agenda. Following this statement, I have, obviously, received too many phone calls.
While some sounded resented by this refund move, some tried to take a different approach to the situation. “This is an odd system to begin with. It’s time to settle these VAT affairs!” they said. For our international friends, I will sum it up without going into too much detail: Government returns the VAT paid by exporters or businesses operating through the incentives they have given by the Government. Businesses or organizations in Turkey are legally entitled to receive these VAT refunds.
When Treasury increased the non-programme borrowing last year, I thought to myself that the Government must have been collecting money for VAT returns. However, as months pass, there has been no indication that the Government would pay these refunds. In the meantime, Treasury’s high amounts of borrowing have led to an interest rate rise, upsetting the balances.
Last month, I went to Bursa to attend a meeting, during which I called a highly experienced colleague of mine to learn about his opinions on this VAT refund issue. I knew I could one hundred percent trust him as he had held a key position at the Treasury. But to my surprise, he said, “Why did the Government collect such massive amounts of money? Where does all this money go? If it doesn’t go anywhere, is there an upcoming threat that we don’t know anything about?”
“Government should practice what it preaches…”
As I have never witnessed before Treasury collect so much money as a caution on the refunds, the situation has got me curious too. As I mentioned in yesterday’s report, if Government has a big plan in hand, no one knows anything about it. People are not sure if it even exists at all. But I hope it exists.
According to some, Government is expected to refund nearly 142 billion Turkish lira ($30 billion). The more it piles up, the less ability the Government will have to make such big payment. To replace these receivables they cannot recover, companies, unfortunately, borrow loans from financial institutions.
Government charges interest on money owed to itself, but you cannot charge interest on money the Government owes you. This is an interesting situation.
Given the fact that the Ministry of Finance does collect VAT, where is all that money now? Let’s not forget about the Treasury’s debts which, in total, make a significant amount of money.
The issue here is not that simple obviously. Money collected to pay public expenditures is spent all over again, resulting in more taxation and more debt.
Here’s what I’d like to ask: Ministry of Finance constantly says to businesses, “You cannot get all the money you receive from the customer. You should pay VAT on goods and services you provide”. But, what does it do with all that VAT it collected, which must be legally returned to businesses?
The truth is, by taking advantage of the long-tiresome-procedure for paying VAT refund; Government borrows the VAT paid by businesses, uses to settle its own affairs and pays it back whenever it wishes. I think the Government should first practice what it preaches. This would be the just thing to do.