FM says VAT only on taxable goods revenue

The Finance Ministry says despite the value-added tax (VAT) increase proposed through the VAT Amendment Bill, the retail and wholesale merchants, who have opposed the VAT hike, will have to pay a lesser VAT quantum.

The VAT Amendment Bill proposes to increase the VAT rate to 15 percent from the current 11 percent and the retail and wholesale merchants, whose daily turnover exceeds Rs.138,000, will be brought under the VAT payment threshold.

However, the Finance Ministry in a statement said the amendments to the bill will ensure VAT being only charged on the revenue accumulated on the sale of goods on which VAT has to be paid, eliminating the hidden payment existing in the present VAT system.

For instance, a merchant, whose daily turnover is Rs.200,000 and revenue from the sale of goods liable for VAT is Rs.50,000, he has to pay only Rs.7500 as VAT (15 percent) under the proposed amendments to the VAT bill.

Whereas under the existing system, though the VAT payable is 11 percent, the same merchant who has the turnover of Rs.200, 000 will have to pay more, according to the Finance Ministry.  
While paying Rs.5,500 being the 11 percent VAT for the revenue of Rs.50,000, he also has to pay an additional 11 percent for the revenue of Rs.200,000, minus the maximum exemption of 25 percent granted on the total revenue.

Accordingly, a merchant whose daily revenue is Rs.200,000 under the existing VAT Act, has to pay altogether Rs.16,500 as VAT, whereas the same merchant under the proposed amendment has to pay altogether Rs.7,500 despite the VAT rate being higher at 15 percent.

According to the Finance Ministry, under the present VAT regulations, despite only a limited number of VAT payable goods are included in the turnover, traders were compelled to pay VAT for the total turnover during a specific period.

The VAT should be paid for certain commodities such as cosmetics, biscuit, soap and processed food items. All other essential commodities have been exempted from VAT.

Several health services provided by the private hospital sector have also been exempted from VAT. Among such services are OPD services, laboratory services and dialysis services.

The VAT is borne by the final or the ultimate consumer and not by the trader. It is an indirect tax and the government will receive at the end, through all the intermediary suppliers and whole sale and retailers, an amount equal to the amount paid by the final consumer.

VAT was introduced to the tax system in Sri Lanka in 2002. At the beginning, VAT was charged under three levels, at the rates of 0 percent, 10 percent and 20 percent. In 2005, it was increased to 5 percent, 15 percent and 18 percent. Later, in 2006, VAT was increased to a single rate of 20 percent. However, it was reduced to 15 percent in 2007 and it was further reduced to 12 percent in 2009.  VAT was the tax on domestic consumption of goods and services since its inception but, for the first time, it was extended to the retail and wholesale sectors by the then government in 2013.

Accordingly, supermarkets and other trade outlets engaged in retail and wholesale with a daily turnover above Rs.2.8 million were brought under the tax net and a 12 percent VAT was imposed on such business institutions.

However, this threshold was reduced to Rs.1.4 million in 2014. A limited number of VAT payable goods were included in the turnover but the traders were compelled to pay VAT for the total turnover during that period.