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| Sunday, 27 July 2003 |
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Book Review ICASL Handbook on VAT Law Reviewed by D.D.M. Waidyasekera Though the introduction of Value Added Tax (VAT) was a major event in the taxation system of Sri Lanka, there is unfortunately still very little literature on this important subject. The Tax Faculty of the Institute of Chartered Accountants of Sri Lanka (ICASL) is therefore to be commended for bringing out this handbook to add to what is hoped, a growing body of literature on VAT in Sri Lanka. The handbook commences by giving a brief historical background to the subject. Hitherto, apart from the Customs and Excise Duties, the major item of indirect taxation in the country was the Business Turnover Tax (BTT) since 1964 under the Finance Act. No. 11 of 1963, which was replaced in 1981 by the Turnover Tax (TT) Act No. 69 of 1981. The cascading nature of this tax was to a considerable extent reduced by the granting of input tax credit to registered manufacturers. The changeover to a VAT system was under discussion for quite sometime and the Taxation Commission of 1990, after examining its pros and cons, recommended a changeover to VAT from the existing cascading turnover tax. Still it took six more years to implement this recommendation in the form of the Goods and Services Tax (GST) under the GST Act. No. 34 of 1996 and another two more years for its actual implementation from April 1, 1998. In 2002, together with the reforms in respect of income taxes like the abolition of capital gains and Advance Company Tax (ACT) and stamp duties and the imposition of a Debit Tax, the indirect tax system was simplified by amalgamating the National Security Levy (NSL) with the GST into what was termed a VAT under the VAT Act No. 14 of 2003. While the basic principles and concepts of both the GST and VAT are the same, there have been some significant changes in the VAT regime. These differences are cogently spelt out in the handbook as pertaining largely to the rate structure which was changed from the single 12.5 per cent to two rates 10 and 20 per cent apart from the zero rate for export and certain specified services. They also include charges to the exemption schedules, charges in the system of refunds, tax invoices, deferment procedure and holdover provisions. These modifications led to a number of complications not easily understood by the average payer or businessman. The VAT Act itself is a complicated document not subject to easy understanding particularly by small traders and businesses. And further, though the threshold is high being Rs. 500,000 per quarter or Rs. 1.8 million per annum, the criteria for registration, voluntary registration, the nature of taxable supplies, various exemptions and their applicability etc. make for confusion as to whether one needs to register under VAT or not. Further, once in the VAT system, it is not easy to get out of it either. There are also a host of obligations which a VAT registered person has to comply with. Stringent penalties All these separate issues are very clearly set out and explained under various sections in the handbook. The book not only gives in detail the legal and procedural aspects which every registered VAT payer must know and understand if he is to avoid the stringent penalties he could be liable to for any breach of the provisions, but also the practical aspects like keeping of records, preparing returns, computing the net output tax after deducting input tax, claiming of refunds and interest due payments and appeals. From the legal and statutory angle, mention must be made of the clarifications provided in the handbook in respect of certain special arrears. These pertain to such areas as the valuation of fringe benefits to employees, the meaning of open marked value, taxable supply, lease rent, hire purchase agreements, mortgages and land and improvement. The book also contains a separate section giving certain definitions not found in the body of the text like for example, the definition of "educational establishment," services connected with "international transportation" "recognized institution" and "Authorized Representative". The VAT system as presently in operation in Sri Lanka has two special features that need comment. One is the area of wholesale and retail trade. Under Section 3 of the VAT Act No. 14 of 2002, the tax is not chargeable on the wholesale and retail supply of goods other than by a manufacturer or importer. Such sales are liable to the one per cent turnover tax levied by Provincial Councils. In the 2003 Budget, it was announced that VAT would be levied on the wholesale and retail sector as well from July 1, 2003, but this has subsequently been postponed indefinitely due to its impact on prices and the cost of living. Therefore, while the handbook deals with the Transitional and Savings Provisions (Section 76 to 80) and also the position of VAT in relation to income tax, it does not deal with the problems and implications of imposing the VAT on the wholesale and retail sector. Some comments on this aspect may have been useful for potential taxpayers, the central government and provincial administrations. Financial services Secondly, there is the treatment of financial services. The handbook in Section 29 provides the basis of computing the value added for the financial sector on the addition formula of the sum of wages (emoluments) and profits, as also the type of financial institutions liable while clarifying the computation by means of a lucid example. The position of input tax deduction which is normally not eligible under the addition method, is also clarified in the section. All in all, the ICASL handbook provides a very valuable and detailed exposition of the laws, procedures and practices that are relevant to the imposition and payment of VAT in Sri Lanka. The annexes provide further information regarding the items that are exempted, those liable to the 10 per cent rate and zero rated services. A novel feature of the handbook is the inclusion of the Book Keeping Regulations gazetted and a format for computing the tax payable. |
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