The Sri Lankan government on October 4 presented the revised Value Added Tax (VAT) Amendment Bill before Parliament. Minister of Higher Education and Highways and the Leader of the House of Parliament, Lakshman Kiriella moved the Bill entitled “Value Added Tax (Amendment)” to amend the Value Added Tax Act, No.14 of 2002. However, the bill is presently facing a setback as two petitions have been filed against the bill by lawmakers Bandula Gunawardena and Sisira Jayakody before the country’s apex judicial body, the Supreme Court. Therefore, the enactment of the bill is now likely to be delayed in light of the fresh legal impediment.

However, in order to enlighten our readers of the upcoming bill, Nation below presents a highlight of the amended VAT bill approved by the Cabinet on September 13,  envisaged by the government

♦ The new amendment to the VAT Act, envisages imposition of 15% VAT, instead of the current 11 %.

♦ The threshold of registration for VAT has been reduced from Rs. 3.75 million a quarter or Rs. 15 million a year to Rs. 3 million a quarter or Rs. 12 million a year with effect from April 1, 2016.

♦ 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.

♦ The imposition of VAT applies to wholesale and retail trade where the threshold is more than Rs. 50 million a year or Rs. 12.5 million a quarter and takes effect from the date of passing the VAT Bill.

♦ The traders will be charged 15% VAT only on the goods for which VAT is payable and hence 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 new rate will, however, be imposed on private health services other than diagnostic tests, dialysis, and OPD services.

♦ The VAT increase will, among others, affect telecommunication services, tobacco products and powdered milk which contains added sugar or other sweetening matter.

♦ It will also affect air ticketing fees, with the 15% tax imposed on air passengers moving from an airport in Sri Lanka to an airport outside the country.

♦ Private medical services will also be hit by the VAT.

♦ 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.

♦ The VAT rate will be increased to 15 per cent from the date of passing the amendment in the parliament.  Further the rate would prevail at 15 per cent for the period from 2nd May 2016 to 11th July 2016. For any period after 11th July 2016 up to the date on which the Bill is passed in the parliament, the rate will remain at 11 per cent.

♦ The threshold currently prevailing for wholesale and retail would be Rs.100 million per quarter.  The exemption which prevails for healthcare services has been narrowed down only to diagnostic tests, dialysis and OPD services excluding medical consultation services.  The VAT exemption provided to healthcare services will be removed with effect from the date on which the Bill will be passed in the parliament and for the period May 2, 2016 to July 11, 2016.

♦ The VAT Bill has revoked the exemptions granted to the Telecommunication services Telecommunication services including services of issuing licenses for telecommunication which is now liable for VAT for the interim period May 2, 2016 to July 11, 2016 to the date on which the Bill is legislated.

♦ 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 VAT should be paid for certain commodities such as cosmetics, biscuit, soap and processed food item.

♦ The Value Added Tax (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%.However, in 2005, the three-band rates was increased to 5%, 15% and 18% respectively.  Later, in 2006, VAT was increased to a single rate of 20%.

♦ In 2007, the then ruling government reduced the VAT to 15% and in 2009 it was consequently revised to 12%.

♦ For the first time in 2013, VAT which remained as a tax levied on domestic consumption of goods and services since its inception, was expanded to include retail and wholesale sectors by the then ruling government.

♦ 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.

♦ The government on the May 2, 2016, decided to increase the Value Added Tax rate from 11% to 15%. However, the Supreme Court on July 11 issued an interim order to suspend the VAT increase until the relevant legislation is passed by the parliament.

♦ A fresh Bill drafted based on the proposals agreed during the round of talks between the Finance Ministry and various groups including political parties was approved by the cabinet of Ministers on September 14.