Whilst noting that there was and is always resistance when those who have not paid tax have to start paying tax, and in this instance it was wholesalers and retailers who are grumbling about the proposed increase in Value Added Tax (VAT) of up to 15%, tax consultants remarked that deemed input tax or deemed input VAT if introduced would present the simplest solution for the problem at hand.

Member of the Tax Faculty of the Chartered Accountants of Sri Lanka and a Partner of the Gajma & Company, N.R. Gajendran observed that right now there is an unequal playing field in that those with a turnover of over Rs 100 million a quarter were already paying tax while those who are engaged in small time buying from the local market and selling, and whose turnover is between Rs 3 million to Rs 100 million a quarter are not paying VAT, the latter category being the grumblers.

N.R. Gajendran
N.R. Gajendran

Pay VAT only on profit  margin
There are essential items on which VAT is exempt.

“They say that they are not at present paying VAT and they say that if they buy from unregistered persons they have no input tax. They say that if they buy from an unregistered person, they will now with the proposed 15% have to pay 15% of the full price. Only if they are buying from unregistered persons is the 15% not for the entire sale price,” he pointed out.

He added that if they buy from a registered person, they could legally claim input tax. “They say that those who marginally earn over Rs 3 million a quarter, will now with the increase to 15% have to pay just over Rs 450,000.”

“Where are we to find this kind of money, they ask, they who have not paid tax even up to a cent? They fear that they will have to pay 15% on and for the entire sale. This is a very valid point,” he added.

He said that this was the reason why the Government needed to propose the introduction of deemed input tax or deemed input VAT where for those earning marginally over Rs 3 million a quarter will not be taxed 15% on the entire Rs 3 million but only 15% on the profit margin. “For an example if they are buying at Rs 100 and selling at Rs 110, it is only for the Rs 10 that 15% is taxed,” he explained.

Small and medium businesses doomed
Economists in the academia observed that the increase of Value Added Tax (VAT) would especially adversely impact small scale businesses resulting in them losing out on business.

Head of the Department of Economics of the Faculty of Arts of the University of Colombo, Prof. W. Wimalaratana Thera said that there was a burning issue in the country in that Sri Lanka has to respect its international obligations in that the country cannot say that it is not in a position to pay back borrowed money as agreed to by the country as this would amount to sovereign default as in the case of Greece, Cyprus and certain Latin American countries.

Raising VAT would be the easiest strategy to cope with the said crisis situation along with bringing all tax rates to a uniform tax rate of 15%, he added.

Perhaps, depending on factors such as elasticity, large scale businesses, which depending on their scale of business and current profits, could absorb or retain 1% to 4% of the loss without shifting the entire burden on the consumer, may not only not lose much of their profit but may get more income due to businesses shifting from small ones to big ones, as the big ones would have lower prices, he explained.

When the revenue goes down, the resultant natural discontent would result in a political vacuum which would be exploited by especially Opposition political parties who would lead the discontent, he remarked.

“Any Government does not want to lose its reputation. This common principle applies to this Government too. The Government urgently needs revenue to bridge the gap between the income and the expenditure. The Government is forced under the prevailing circumstances to increase tax. This is not popular or favourable as consumers would have to pay a higher price than they did previously,” he said.

He added that small businesses had higher prices and therefore would be adversely affected as when prices go up and the income does not increase parallelly. When the demand goes down as the people will not have extra, excess cash to purchase perhaps unessential items or luxurious items, he said.

“They will infrequently purchase food and clothing items and may postpone or entirely cancel the purchase of electrical and electronic items or the construction of a house or the expansion of an existing house, or a motor vehicle,” he explained.