Sri Lanka’s Finance Ministry last week assured that although the retail and wholesale merchants whose daily turnover exceed   Rs.138, 000 will be brought under the threshold for the payment of VAT, in accordance with the proposed VAT amendment Bill, the  VAT will really be charged only on the revenue accumulated on the sale of VATable goods.
“The new amendment to the VAT Act, envisages  imposition of 15% VAT, instead of the current 11 %. Though it appears that there is an increase in the rate but in real term the quantum of payment to be made under the new amendment will come down due to the elimination of the hidden payment that was in the existing system,” the Ministry states.
Excerpts from the statement issued by the Finance Ministry on the proposed VAT bill published in the gazette on 13th September 2016 are reproduced below;
For instance if a merchant whose daily turnover is Rs.200,000 and the revenue from the sale of goods liable for VAT is Rs 50,000 he has to pay only Rs 7500.00 being the 15 % VAT for that Rs 50,000 under the new amendment. Whereas under the existing system though the VAT payable is 11 %, the same merchant who has the turnover of Rs 200,000 will have to pay more. While paying Rs 5,500 being the 11% VAT for the revenue of Rs 50,000 he also had to pay an additional 11 % 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  had to pay altogether Rs 16,500 being the 11 percent VAT whereas the same merchant under the proposed amendment has to pay altogether Rs 7,500 only though the rate of VAT will be increased to 15 percent.

The  VAT should be paid for certain commodities such as cosmetics, biscuit, soap and processed food item. All other essential commodities have been exempted from VAT, therefore, VAT will not be charged for such VAT exempted goods.

Value Added Tax known as 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%, 10% and 20%. In 2005, it was increased as 5%, 15% and 18%.  Later, in 2006, VAT was increased to a single rate of 20%.

The then ruling government reduced the VAT to 15% in 2007 and it was further reduced to 12% 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 retail and wholesale sectors by the then ruling 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 tax net and, a 12% 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 included in the turnover but the traders were compelled to pay VAT for the total turnover during that period.

Under the new Act, only the wholesale and retail shops which exceed their daily turnover of Rs.138, 000 will be categorized as VAT payable merchants.  But the uniqueness is that the traders will be charged 15% VAT only on the goods for which VAT is payable.

Under the new Act, VAT will not be charged on any essential item. Several health services provided by private hospital sector has also been exempted from VAT. Among such services are: OPD service, Laboratory service 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 wholesale and retailers, an amount equal to the amount paid by the final consumer.

Under such circumstances, certain factions who had kept tight lipped when the heavy VAT ranging even up to 20% were charged during the previous government, have now started to react maliciously.  It was observed in the recent past that such groups used local business community as its cat’s paw by propagating malicious and mischievous remarks on the proposed VAT.