Harsha finds many drawbacks in VAT system, ‘including lot of confusion even at highest echelons’

By Rathindra Kuruwita

There is a lot of confusion over the amendments to the Value Added Tax (VAT), and it will take a long time for the authorities to address the teething problems in the relevant software systems, Samagi Jana Balawegaya (SJB) MP, Harsha de Silva says.

Dr. de Silva pointed out that there was still a lot of confusion even at the highest echelons about the amendments to VAT. “Even the Colombo Tea Auction was suspended because they have no idea as to how VAT would affect their operations. We also need to ensure that the software at the IRD is ready. I think we will take some time to address technical issues that will arise,” Dr. De Silva said, noting that the amendment to the VAT regime was not that complicated. Goods and services that were taxed at 15 percent have been increased to 18 percent. Moreover, 97 items that were exempt from VAT previously were now subjected to VAT, he said.

“But people need to be better educated on how they should pay VAT. A company that has a turnover of over Rs 60 million a year must be registered for VAT. So, people might wonder if they have to pay VAT, if they buy a milk packet or an exercise book from a supermarket and whether they do not need to do so when they buy one from a roadside shop,” Dr. de Silva said.

“It is obvious that traders are taking advantage of this confusion,” he said, adding that traders were only acting as an agent for the government when they collected tax from the consumer.

“They can’t pocket the money so collected. They have to hand over that money to the state. There are also many issues in the efficiency in collecting taxes by government agencies. These loopholes will allow corrupt businesspeople to manipulate the VAT system,” he said.

The SJB MP added that Sri Lanka had a history of VAT frauds. Those between 2002 and 2004 had cost the Inland Revenue Department dear, he said.

“The government said that from 01 January 2024, everyone over 18 had to obtain a Tax Identification Number (TIN), which had to be produced when opening a bank current account, securing approval for a building plan, registering a motor vehicle or renewing a revenue licence, and registering land or a title to land by the buyer. The government informed us so in November. But this week the government has given a one-month grace period. So it’s obvious that the government has not done enough to ensure compliance,” Dr. de Silva said.

The coming year would be extremely difficult for the average Sri Lankan given the government’s target to double the revenue from VAT compared to the previous year, he said.

The government was planning to collect about Rs 1,400 billion from taxes in 2024, he said.In 2023, the government had sought to rake in about Rs 700 billion from VAT, Silva said.

“So, the government is planning to collect double that amount in the current year. It is obvious that the average Sri Lankan family would be severely affected by the enhanced VAT,” he said.

“Before 01 January 2024, the VAT was not imposed on diesel and petrol. The government has imposed an 18 percent VAT on them. These products were subjected to the Ports and Airports Development Levy (PAL) of 7.5 percent before, and this levy has been repealed. So, the actual increase in taxes due to the application of VAT to diesel and petrol is 10.5 percent.”

The SJB MPs said that there were Sri Lankan companies that produced software for Sri Lankan companies. Their products were now subjected to VAT. But if the software came from overseas it was not subjected to VAT, he said.

“This is a big problem. We must help the local companies. We, members of the Committee on Public Finance, tried our best to resolve this issue. Our proposal was that the government must not consider where the software originated from. We asked it to consider where the software was used. If the service is used in Sri Lanka, it should be subjected to VAT. The President then asked the Treasury Secretary to implement our proposal,” he said.