JAAF lauds initiative to introduce simplified Suspended VAT scheme

The Secretary General of the Joint Apparel Association Forum (JAAF) Tuli Cooray said the Government initiative of introducing a simplified Suspended VAT scheme is a step in the right direction to sustain the growth of value added exports including apparels.

He was addressing a seminar in Colombo attended by a large number of apparel sector representatives.

"VAT is based on a destination principle; it is chargeable where the supply is affected or the value addition takes place. However, it is a neutral tax as far as exports are concerned, hence exports were zero rated and input VAT is to be refunded.

Domestic distortions arising from the VAT system is removed as far as exports are concerned.

Consequently, imported inputs for export processing, including that of VAT applicable on capital equipment were either differed or excluded."

"The import substitution of inputs for export processing could have been hampered if this principle is continued to apply.

In this scenario the tendency to import would be higher than procuring from the domestic market because of the incidences of VAT liability of such local input purchases.

Importance of the concept of suspended VAT emerges at this point," he said.

The rationale for introducing a suspended-VAT scheme for local suppliers thus becomes an essential prerequisite for the achievement of the objectives of creating value added exports within the economic growth agenda of the country, he said.

"Therefore, we the industry lobbied and argued for introducing the basic rationale of a level playing field for domestically manufactured inputs with that of imported inputs and we continue to lobby to remove the cascading efforts of domestic indirect taxation which is harmful for local value addition."

Firstly, the system shifted from cash payments to a paper-based system.

Secondly, the identification of eligible company became the pivotal point in place of a specific activity -identification of an eligible company to procure goods and services on a Suspended-VAT basis".

The eligible companies include exporters, indirect exporters and value-added service providers. Any of these companies, if proved to the satisfaction of the Commissioner General of Inland Revenue that they are exporting directly or indirectly with more than 51 percent of its turnover, then they can procure any local input on a Suspended-VAT basis without spending a cent.

Any supplier supplying to any such eligible entity is required to register with the Department of Inland Revenue as an eligible supplier. Depending on the volume of exports, either direct or indirect, a purchaser can be a supplier or vice-versa.

"The significance of the scheme is that the total export procurement and supplies are brought under the formalised VAT system while removing the cash flow burden to the export industry, cash flow burden to the Government and more or less minimising the propensity of fraudulent activity as far as supplies to export sector are concerned.

The success of this scheme will depend on a number of factors - the ability of the industry to be compliant with the system and the ability of the Department of Inland Revenue (DIR) to monitor.

"Electronic documentation is an important element which we believe will be implemented by the DIR in a progressive manner.

We, the industry believe that this is one of the most outstanding trade facilitation measures introduced by the Government to ensure the realisation of the export objectives of a value-added economy," he said.