Wholesale and retail traders in dark over VAT threshold for May-July

By Chandeepa Wettasinghe
Wholesale and retail traders, who had not followed the ping-pong changes to the Value Added Tax (VAT) laws this year, will have to remain in limbo over their fates for a while longer, after the country’s Finance Minister said that there are legal problems over the matter.
“There are some legal problems that we have to sort out,” Finance Minister Ravi Karunanayake said last week in response to the issue raised by Mirror Business. The murky area on the latest revised VAT Bill published last month is that for the period between May 2, 2016 and July 12, 2016, there is no specified threshold above which wholesale and retail traders are liable to be charged VAT.
The two-month period had seen the implementation of the controversial revised VAT Bill, which had been gazetted on June 24. The May revisions, which were enforced before being legislated, were later found to be unconstitutional by the Supreme Court following a case filed by the Joint Opposition.

Prior to the implementation of the VAT changes on May 2, wholesale and retail traders were exempted from VAT under Section 3 of the VAT Bill, except in certain situations explained in the Section 3 subsections, such as if they had turnover in excess of Rs. 100 million per quarter. 

The revisions which were enforced in May had under Section 3 said that wholesalers and retailers were only exempted from VAT until May 2, 2016, but did not have any mention of the subsections.
Interestingly, the 2016 budget had called for wholesalers and retailers to be exempted from VAT. KPMG Sri Lanka Tax and Regulatory Principal Suresh Perera, speaking at a Chartered Institute of Management Accountants event last week, noted that in the absence of a specific threshold in the May revisions, the wholesale and retail traders should have fallen under the general threshold of Rs. 3 million per quarter turnover.
“But during that period, no one between Rs. 3 million and Rs 100 million turnover registered,” he said.

The revised VAT Bill which was gazetted last month showed that when it is passed in Parliament, the laws that will be in effect in the future will be retrospectively applied to the two-month period between May and July this year, since the country’s businesses should have followed the May revisions as if they were legal until they were cancelled, and charged higher VAT rates from consumers.
The laws will be retrospectively applied, since the increased prices should have come into the government coffers instead of being pocketed by the businesses as profit. An exception to the latest revision is the wholesale and retail trade, where, after the passing of the law, the prospective tax threshold will be Rs. 12.5 million per quarter compared to Rs. 100 million in the past, while no mention is made of the threshold for the two months. “The law is silent,” Perera said, and added that “according to common sense, it should be Rs. 100 million”.

On June 23, over a month after the implementation of the illegal revisions, Karunanayake had said that entities with less than Rs. 30 million of quarterly turnover do not have to pay VAT.

A further complication of the matter may be that under the September revisions, only goods liable for VAT should be charged, while previously, any business liable for VAT had paid VAT for at least 75 percent of its turnover, since only 25 percent of VAT-exempt products could have been claimed by businesses.
Since the wholesalers and retailers who had turnover between Rs. 3 million and Rs. 100 million had not registered for VAT for the two-month period, the government would either have to introduce a Rs. 100 million threshold for them or subject them to penalties under the VAT Bill.

It should be noted that many customers had complained that even merchants who had not registered for VAT had increased their prices and pocketed the profits, when merchants registered for VAT had increased their prices to account for the tax increase.
Legislating the VAT Bill before December is a requirement for Sri Lanka to receive the second tranche of the US$ 1.5 billion 3-year Extended Fund Facility from the International Monetary Fund, which is essential to correcting the country’s balance of payments.
Karunanayake is hoping that the VAT revisions will be legislated this month, enabling him to add an additional Rs.100 billion to the Treasury, through the vastly-reduced VAT thresholds.
 He said that the government is well on target to reach the 5.9 percent fiscal deficit target set for 2016.