VAT and NBT, interim relief granted by Supreme Court

By P. Guruge

This is the first time in Sri Lanka that the system of tax collection through paper notices was challenged and relief granted by the Supreme Court.

In the past so many years, not only taxes effective from January 1 such as the VAT and NBT but Income Tax effective from April 1, was imposed and collected with retrospective legislation approved by Parliament, long after the effective date of such taxes.

The Supreme Court has pronounced that the Yahapalana administration should follow the Rule of Law in all its activities.

Although the Finance Minister has said that he will recover suspended VAT after the possible approval of the relevant legislation in Parliament on July 23 (in fact he will have to wait till certification by the Speaker), it is very doubtful whether the interim relief granted by the Supreme Court can be reversed.

Whether there was a petition to the Supreme Court on the proposed VAT amendment Bill or not, it is doubtful whether the Supreme Court would approve retrospective legislation to permit the Government to collect VAT as increased from May 2, 2016, under a legislation to be approved by Parliament on July 23, 2016 and certified after that date.

In such an eventuality, what are the options available to the Minister of Finance to recoup the massive VAT revenue loss due to the lethargic attitude of all concerned.

Right decisions

The Government's advisors and experts should properly guide government policy makers to make the right decisions without allowing the good governance administration to fail.

The Rajapaksa regime introduced an amendment to the VAT Act in 2005 (Amendment Act No. 6 of 2005) which enabled the Minister of Finance to make an Order and have it published in the Gazette to change the VAT rates, without an amendment to the VAT Act. In fact Rajapaksa as the Minister of Finance used this method to change the VAT rates. (Section 2A of the VAT Act).

The Minister of Finance could have utilized this section on the May 2, 2016 to increase the VAT rate from 11% to 15% without waiting for a legislative amendment. But now it may be unethical to use this power, since the Supreme Court has commenced a judicial process in relation to the relevant matter.

There is also another problem. When interim relief has been granted by the Supreme Court, that relief may be applicable not only for the future. Such relief should be applicable to the past as well. In other words any increased VAT collected from May 2, 2016, may have to be refunded where the relevant consumers can be identified.

According to media reports, the position of other changes especially, the removal of VAT exemptions on health services, telecom services, telecom equipment, TRC licence fee, specified projects other than housing projects and co-operative societies and Lak Sathosa, were not clear.

I believe such removal of exemptions w.e.f. May 2, 2016, without Parliamentary approval may also become invalid and VAT charged on such goods and services may have to be refunded if the relevant consumers can be identified. The problem with regard to NBT may not be severe since there was no rate increase in the NBT. The rate of 2% which has been approved by Parliament previously remains without any increase. However, in the NBT the problem may be in relation to the removal of exemptions as in the case of VAT.

Future plan

The Government should take appropriate steps not to face similar situations in the future. The Fiscal Calendar of the Government needs a revision.

When the Budget is approved in late November, unless the relevant officials have prepared the draft legislation along with the Budget proposals, there will be hardly enough time to get the legislation approved by January 1 next year to implement changes in taxes such as VAT and NBT.

The Budget debates should commence by the end of September. Otherwise the same problem may be there in relation to the next Budget and all future Budgets.

The other important issue is constant changes in the Budget proposals even after approval which will affect implementation. The Budget should be the Final Budget of the Government.

Liquor and tobacco

It is strange that in the proposed bill to amend the VAT Act, which was published on 24.06.2016, is without any provision relating to VAT liability on liquor and tobacco, which were exempted by Rajapaksa regime in 2014. These decisions of the Rajapaksa regime have been incorporated into the VAT (Amendment) Act, No. 11 of 2015, which was presented to Parliament by the present government.

Accordingly, w.e.f. 25.10.2014, cigarettes, liquor and ethyl alcohol have been exempted from VAT. (In addition these items have been exempted under Customs Duties, PAL and NBT and other levies as well).

Such exemptions will give undue advantage to such products, since any rate increase in VAT, Customs Duty, PAL or NBT applicable to other goods from time to time cannot be charged on such goods which should not be the policy.

The writer is a Tax and Investment Consultant