But for the best to the

September 06 2002

VAT

Guide to Value Added Tax

1. (a) (b)

Issued by the VAT Branch of the Inland Revenue Department

\\\ VAT/DM \ \\\ \ \\\\ 1 08th Oct. 2002

Prelude

VAT Notice No. 1

This notice, which explains very briefly the principles of Value Added Tax, their application in Sri Lanka under the provisions of the Value Added Tax Act No. 14 of 2002 and information about the Departments interpretation of the legal provisions, is issued for the guidance of the general public and the taxpayers. This is Notice No. 1 of its kind. It is intended to issue further notices on further clarifications and any future amendments to the law. I am glad that it was possible to insert the proposed changes to the VAT Act by the budget proposals in November 2002, as an appendix.

Sarath H. Goonewardena Commissioner of Inland Revenue (Value Added Tax)

Preface

The Value Added Tax Act was enacted by the parliament on 26.07.2002. This brochure sets out very briefly the law and procedure involved in VAT. This is not an exhaustive interpretation which covers all the situations. I wish to place on record my appreciation for the work done by Mr. Sarath H. Goonewardane, Commissioner (VAT) in the preparation of this brochure.

B.T. Perera Commissioner General of Inland Revenue September 6th ,2002

Contents
Chapter 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. Introduction Imposition of VAT Definitions of Concepts Registration & Cancellation Deferment of Collection Invoicing Returns and VAT Rates Calculation of Tax Exemptions Refunds Assessments Appeals Penalties Accounting basis & Record Keeping Import and Export of Goods & VAT Hire Purchase Transaction & VATLeasing & VAT Mortgages Diplomatic Missions & VAT Some Obligations under VAT Construction Contracts Rulings Zero-rated Supplies Travel Trade, Hotels and TourismSome Useful Hints Annexure 1 BOI Enterprise and VAT Annexure 2 First Schedule to the VAT Act Annexure 3 - Second Schedule to the VAT Act Appendix 1. Comparison of Values of Imported Goods under GST & VAT Appendix - 2. Income Tax Treatment of VAT Appendix 3. Proposed Changes to VAT Law Pages 01

Collection, Payment and Recovery-

Transitional Arrangements and other Matters -

Chapter - 1

Introduction
1.1 Purpose of this brochure This brochure provides a basic knowledge and guidance to the public and taxpayers on Value Added Tax. This is not an exhaustive document and does not cover special situations and exceptions to the general principles stated in the law. This will also serve as an introductory manual to the officers. 1.2 What is V.A.T? The Value Added Tax replaces the existing Goods and Services Tax but the concepts and principles of VAT are the same as those of GST with which you are already familiar. VAT is a tax on domestic consumption of goods and services. Thus goods imported into Sri Lanka and goods and services supplied within the territorial limits of Sri Lanka are the subject matter of this tax. It is a multi-stage tax levied on the incremental Value Added at every stage in the production and distribution chain of Goods and Services. The tax is borne by the final or the ultimate consumer of goods or service (Vide Para 9.5) He does not pay it direct to the government but to the ultimate supplier who supplied the goods or service to him. However the government will receive in the end, through all the intermediary suppliers in the chain of production and distribution, an amount equal to the amount paid by the final consumer, because each intermediary supplier in that chain is responsible to pay to the government, only the VAT he collects on the supplies made by him (output tax) less the VAT he paid on the supplies obtained by him (input tax). Thus the seller or the supplier of good/service does not pay tax himself as he is entitled to re-claim from the government the VAT he pays, on his factors of production, from the monies that he collects for the government. He is a mere collector of tax, from the consumers, on behalf of the government. The VAT collected by him from his customers is not a part of his profit or turnover because he is responsible to account for VAT collected by him on every invoice. The collector (i.e the seller or suppler of good/service) becomes a trustee for that money on behalf of the government.

1.3

The scope of the tax VAT is charged on import of goods into Sri Lanka and supply of goods and services into Sri Lanka in the course of carrying on a carrying out a taxable activity in Sri Lanka Sec. 2. Taxable Activity means any trade, business etc., Please see Definition in Para 3.7. By implication therefore a supply which is not made in the course of a taxable activity and a supply which is not a taxable supply are outside the scope of VAT. In addition Independent trading activities concerning retail and wholesale supply of goods and commodities (Section 3), and Certain imports Sec. 2(3). These excluded imports are Vide Para 2.4.1. Notwithstanding exclusion there is have been specifically excluded from its scope. enumerated in Section 2(3).

provision for voluntary inclusion, in the case of persons engaged in retail and wholesale trading activities if a person wishes to get himself included into the VAT net. Supply of goods and services within the scope of VAT are confined to i. ii. iii. supplies where the supplier is carrying on or carrying out a taxable activity in Sri Lanka, and goods are in Sri Lanka at the time of supply in the case of supply of goods or services are performed in Sri Lanka by the supplier or his agent in the case of supply of services - Section 9. A person or a company resident outside Sri Lanka too can be engaged in carrying on or carrying out a taxable activity in Sri Lanka without having its business presence in Sri Lanka. A foreign company can conduct business in Sri Lanka by establishing a branch office in Sri Lanka, through an agency in Sri Lanka, through internet or through an independent agent who may canvass for clients, canvass for orders and also attend to other activities concerning that business (such as indenting agents who canvass for orders, insurance and survey agents who canvass for clients and prepare survey reports in order to assess the insurance claims made to a foreign insurance company). However it appears that the VAT Act has not brought within its scope all such situations although all are situations of carrying on or carrying out taxable activities in Sri Lanka. When a foreign company has a branch office or a permanent agency in Sri Lanka it can be brought within the scope of the normal provisions of the Act. When a person in Sri Lanka carries on a taxable activity on behalf of a foreign company it can be brought within the scope of VAT under Section 55. Please see para 3.7 (ii) Eg. 2. But it is doubtful whether conducting business in Sri Lanka through an indenting agent, through any independent agent or through internet are within the scope of the VAT Act.

However from the point of view of the agent in Sri Lanka the business in Sri Lanka of the foreign principle is carried on or carried out as a result of the services provided by him in Sri Lanka (for a fee or a commission) and supply of such services satisfy all the requirements as envisaged in Section 9 and such services are therefore within the scope of VAT. That means (i) the taxable activity consisting of supplying services to a foreign principle is in Sri Lanka and (iii) the particular services are performed in Sri Lanka by the supplier himself. Such services are treated as consumed in Sri Lanka by the foreign principle in the course of carrying on a business in Sri Lanka although decisions to accept or reject the services may be taken outside Sri Lanka. 1.4 The liable persons All individuals and organizations except those privileged individuals and organisations referred to in the Diplomatic Privileges Act are liable to VAT. The word liable is used here to mean that they are liable to pay VAT when they import goods or obtain goods & services from registered persons while they are liable to charge VAT when they supply goods and services to others if they satisfy other conditions such as threshold etc.. Thus Proprietary concerns Partnerships Companies Sports clubs, Associations, Trade Unions, Societies and similar organizations Non-profit making organizations Statutory Boards/Corporations Ministries, Departments, Provincial Councils and Local Authorities Religious, Social Service and charitable Organizations. are all liable to VAT. (Please see the definition of Body of Persons in the Act). They only exception is the Diplomatic Missions and privileged individuals working in those missions. They are not liable to pay VAT when they import goods or obtain supplies of goods and services in Sri Lanka if such goods and services are recognized for that purpose by the C.G.I.R (Please see Chapter 20) registable

1.5

What is supply ? VAT is not charged on goods per-se but on the supply of goods/services . Before charging VAT it is therefore necessary to identify the Supply. The word supply is not synonymous with sale. Even when a trader appropriates business goods for his private consumption it amounts to supply of goods under the principles of VAT. As in many other countries the VAT Act does not provide an exhaustive definition for the word supply. The meaning of supply can be gleaned from the context of the Act, specially from the definitions given to the expressions Supply of Goods, Supply of Service, Taxable Activity, Value of Supply, Time of supply of etc. It can be said that supply connotes all types of transactions such as sales, gifts, hires leases or rentals, loans and loan of goods, exchange of goods & services, processes [i.e making goods from someone elses materials Section 5(12)], sales on commission, insurance claims, liquidated damages,(see para 3.3) fringe benefits to employees etc. Even assignment or surrender of a lease, sale of goodwill are also supplies because, according to the definition any supply which is not a supply of goods is to be treated as a supply of service. In accordance with the principles of VAT it can be seen that the legislative intent is to subject virtually all types of transactions to VAT. Thus the Act provides for deemed supplies as well. Any goods or services held at the time a person ceases to be a registered person is a deemed supply Sec.16(5), Vide Para 4.8(c). The other situations of deemed supply can be gleaned from Section 5(5)(iv) which implies that appropriation of goods or services for private use or for any other purpose other than making a taxable supply tantamounts to a supply. The term embraces all things capable of being supplied for a consideration but the consideration need not be in monetary terms as even a gift is a supply liable to VAT if it is made in the course of carrying on or carrying out a Taxable Activity. Thus identifying the supply is the first thing to do before charging VAT. If there is no supply (of goods or services) then there is no VAT. For instance when a lessee defaults payment, the re-possession of the goods by the lessor is not a supply because the goods belong to the lessor. But in the case of a hire-purchase credit sale the goods belong the buyer and, if the goods are re-possessed by the hire-purchase company for default of payments by the buyer then such re-possession amounts to a supply of goods from the defaulting buyer to the hire-purchase company. Similarly a donation made to a school may tantamount to a payment in consideration for a supply (of service) if it is made in consideration of some service such as admission of a child. The Exchange gain due to exchange rate fluctuations is not a supply.

The following test which has been applied to identify a supply (other than a deemed supply) in many situations in foreign tax jurisdictions may be a useful guide in identifying a supply . i. ii. There must be a consideration for the supply whether in money or otherwise than in money. (Thus a court fine does not attract VAT because it is not a consideration for a supply.) There must be a direct link between the supply or the benefit from the supply and the consideration. (Thus charges levied by regulatory bodies may or may not tantamount to considerations for supplies made depending on the facts and circumstance Eg. Penalties are not considerations for supplies made)

It is to be noted that the concept of supply for VAT purposes is independent of and not coterminous with any duties and obligations to be performed under any other law and that the construction of a contractual document or the provisions in any other law will not answer the question What is the nature of supply for VAT purposes? It has to be decided in context and on an overall view of the facts in accordance with VAT principles and not on the basis of provisions in any other law. Even the terms of a contract are not conclusive with regard to the nature of supply in that contract. (Please see the case referred to in para 25.6)

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Chapter - 2

Imposition of VAT
2.1 Value Added Tax is charged on * * 2.2 Supply of goods and services in Sri Lanka, and Import of goods with effect from 01.08.2002

On Supply of Goods and Services VAT is charged at the time of supply on every taxable supply made in a taxable period by a registered person in the course of carrying on or carrying out a taxable activity in Sri Lanka.

2.3

On Imports VAT is charged On the importation of goods into Sri Lanka Made by any person At the time of import (Vide Para 5.11)

2.4

Exclusion from Charging VAT VAT is not charged on certain imports and on retail & wholesale supply of goods. Exclusion is different from exemption. 2.4.1 Exclusion of Imports Section 2(3) VAT shall not be charged by the Customs or the BOI on the importation of following goods i. ii. Any article which is entered in to Custom bonded area. Any fabric imported for the manufacture of garments for export by a person who has entered in to an agreement with BOI Law under section 17 of the BOI and transfer of such fabric with the approval of DGC or the BOI to any other person for the purpose of such manufacture of garments for export. iii Any fabric imported by an approved Trading House who has registered with the BOI for the purpose of manufacture of garments for export through other garment manufacturers as approved by the BOI and transfer of such fabric with the approval of the DGC/BOI to such garment manufacturers for the purpose of manufacture of garments for export.

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iv.

Import of any fabric, yarn, grey cloth, finished cloths, chemicals and dyes used for the manufacture of fabric by a BOI company, entered into an agreement under Section 17 of the BOI Law for the purpose of manufacture of fabric.

v. 2.4.2

Import of any ship (Vide Appendix 3 Item 4) Exclusion of local supplies Sec. 3 VAT shall not be charged on the wholesale and retail supply of goods other than wholesale and retail supply by

a manufacturer of such goods an importer of such goods a supplier who is unable to satisfy the C.G.I.R. as to the source from which such goods were acquired. However a person engaged in retail and wholesale sales can register voluntarily to charge VAT on such sales. The evidence required with regard to acquisition of goods to satisfy the C.G.I.R has been published in a press notice on 07.07.2000. Please see para 15.3. (Excluded supplies are not within the purview of the VAT Act)

2.5

Charging, Collection and payment of VAT As stated in para 2.2 above it is a Registered Person who can charge VAT on the supply of goods and services within Sri Lanka. He should charge and collect VAT from the recipients of taxable supplies of goods and services made by him. This should be done only in the course of a taxable activity carried on by him. VAT should be charged by him at the time of supply. The VAT chargeable is calculated on the value of supply. Thus VAT is in fact paid by the recipient of goods and services (i.e consumer). It is paid to the supplier who should be a registered person. He collects VAT from the recipient (i.e his customer) and remit the same to the C.G.I.R as provided in Section 22(i). Therefore VAT is paid in the first instance by the consumer to the registered person and then, by Person to the C.G.I.R. A registered person is therefore responsible for charging and collecting VAT on behalf of the C.G.I.R and account for such collections to the C.G.I.R in respect of supplies of goods and services made by him in Sri Lanka. On imports VAT is paid by the importer and it is collected by the Director General of Customs who in turn remit it to C.G.I.R. Section 2(3). However the DGC has delegated some of his powers to B.O.I. Vide para 5.11 the Registered

12

2.6

Supply of goods and services in Sri Lanka As stated in para 2.1 VAT is charged on supply of goods and services in Sri Lanka. What is meant by supply of goods & services in Sri Lanka in further clarified in Section 9. It states that goods or services shall be deemed to be supplied in Sri Lanka, (i) (ii) (iii) where the supplier carries on or carries out a taxable activity in Sri Lanka and the goods are in Sri Lanka at the time of supply or services are performed in Sri Lanka by the supplier or his agent.

Eg.(1) A jewellary manufacturer in Sri Lanka (who is a registered person) has a jewellary shop in Singapore. He sells to a tourist from Japan who came to Sri Lanka some jewellary from his shop in Singapore. A. Goods are not in Sri Lanka at the time of supply. No liability to VAT.

Eg (2) X, an architect (who is a registered person)) goes to Australia in order to draw a building plan to an Australian firm and to attend to other matters connected with that service. Services are not performed in Sri Lanka. No liability to VAT. In both these situations the contracts may have been concluded in Sri Lanka but they both are outside the scope of VAT because the goods were supplied or services were performed outside Sri Lanka. The concept of supply for the purpose of VAT is not the same as the performance of an obligation for the purpose of the law of contract (Please see discussion in para 25.6)

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Chapter - 3

The definitions of concepts

3.1 In order to implement VAT it is necessary to understand the meanings of the terms and concepts employed in VAT Law. The terms and concepts as already indicated in paras 2.1 and 2.2 are defined in Sections 4,.5 and 83 of the Act as given below. 3.2 Supply of goods Means passing of exclusive ownership of goods to another person, By the owner of such goods or By another person under the authority of any written law This includes among others sale of goods by public auction sale of goods in satisfaction of a debt transfer of goods from a taxable activity to a non-taxable activity. Transfer of goods under a hire- purchase agreement property but does not includes

Goods means all kinds or movable or immovable money) i

Currency Notes & Coins :- According to Monetary Law currency Notes & Coins become legal tender only when they are recorded and issued for circulation. Thus import of notes and coins is not import of money but import of goods. Their value is not their face value but the cost.

ii.

Supply of goods on Tender Agreements definition of supply of goods. A tenderer may (a) (b) (c) supply goods manufactured by him

is also covered by the above

supply goods which he purchases solely for the purpose of supply under tender agreements supply goods in the course of a retail or wholesale business carried on by him.

In all three situations he is supplying specific goods to a specific person at a specific time at a specified price and passing of exclusive ownership to another person by the owner of the goods is present (in all situations). Thus it is liable to VAT in all situations and the supply on tender does not, by itself, amounts to a retail or wholesale business which is excluded from VAT as envisaged Section 3 of the Act (Vide Para 2.4.2). In situation (c ) above the tenderer is also liable to provincial turnover tax in addition to VAT. (Pleas see discussion in para 4.6)

14

iii.

Passing of Exclusive ownership of goods : What is meant by passing of exclusive ownership of goods is not defined in the Act. It can be construed to mean absolute transfer of goods involving both title and possession. If both the title and possession are passed then it amounts to a supply of goods. If only the possession is passed, as in the case of a lease of movable property or hire of goods, that does not amount to supply of goods. (By definition in Sec. 83 any supply which is not a supply of goods is a supply of service. Thus, lease & hire belong to that category (as explained below) but a hire-purchase credit sale or a conditional sale amounts to a supply of goods sale or credit sale. because both the title and possession is transferred to the purchaser under a hire- purchase conditional

iv.

Sale of goods by an importer of such goods:- is also not treated as an excluded supply by definition in section 3. Thus the sale of goods by an importer of such goods is liable to VAT and in addition, it is liable to provincial turnover tax as well, if the importer is supplying such goods in the course of a retail or wholesale business.

v.

Public Auction:- Supply of goods also include, by definition, sale of goods by public auction. Sale by public auction is governed by different laws and is different from a retail or a wholesale sale.

vi.

Deemed Supply of goods - The Act also provide for deemed supply of goods. This occurs when the registration of a registered person is cancelled. Sec. 16(5). Vide Para 4.8 (c ). Appropriation of business goods for private purposes and gift of business goods to other persons tantamounts to deemed supply of goods in view of Section 5(5)(iv) (by virtue of the definition of taxable supply in section 83 any supply of goods or services made or deemed to have been made is treated as a taxable supply).

vii.

Sale of lands and buildings, sale of houses & buildings on rent purchase terms, Transfer of goods or assets of a business permanently for private use, repossession of goods sold under hire-purchase conditional sale agreement due to default of installments and exchange of goods are some other examples of supply of goods.

3.3

Supply of Services Means any supply which is not a supply of goods but includes any loss incurred in a taxable activity for which an indemnity is due.

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Eg. 1 : If A wants to terminate prematurely an agreement which he has entered into with B then A has to pay liquidated damages to B. Assuming both A and B are engaged in taxable activities, and the agreement relates to these activities, this termination amounts to a loss incurred in a taxable activity for which an indemnity is due. It is therefore a supply of service as per above definition. If B is a registered person B must invoice A with VAT. The VAT paid by A is his input tax and the VAT received by B is his Out put tax. If A is also a registered person he can claim VAT paid to B from his Output tax. Eg 2 : The bank B leases a lorry to the tea factory A which is registered for VAT. Bank remains the absolute owner of the vehicle but the tea factory as the exclusive user and registered owner insures the lorry with the Insurance Company C. The Bank B has got A to assign the Insurance Policy to the Bank as a security against lease rentals in case of a total loss. After sometime, during the period of lease, the lorry meets with an accident and totally destroyed. Factory A makes a total loss claim and the Bank B recovers its dues and lease installments out of the insurance compensation.

The insurance claim is a supply of service. The lessee A must issue a VAT invoice to Insurance Company C Bank may forward the claim/ VAT Invoice to C on behalf of A but the claim is by A. Bank is not liable to VAT on the claim but the Insurance Company is liable to pay VAT. Bank can recover amounts due to it from the insurance proceeds other than the VAT component. VAT received from Insurance Company. C is the output tax of A The recovery of lease installments by the Bank from A out of insurance proceeds is a separate supply and the Bank should issue a VAT invoice to A in respect of that supply but only to the extent of rentals recovered from insurance proceeds. The VAT on insurance premia that was paid before the accident is input tax for A not for the Bank.

Eg:3 : Import of Software - Import of normalized or mass produced software is treated as import of goods and import of specific customized software is treated as import of services. Eg: 4 : Fuel adjustment charge in a electricity bill is part of the consideration for the supply of electricity. Eg: 5 : In the case of Bank loans and credit facilities etc. loan inspection charges, legal fees, documentation charges, loan interest etc. are treated as a mixed supply (i.e a mixture of separate and distinct supplies although they may be ancillary to the main supply) and not as a single supply. The interest component is treated as a financial supply. Hire purchase transactions too contain such mixed supplies. Eg.6 : Some examples of supply of services are Hire of goods Hire of Vehicles, Produce goods from someone elses materials for a fee, Agree for a consideration, to refrain from doing something, Agree to grant, assign or surrender a right for a consideration, Lend business goods to someone for use outside the business, leasing vehicles, renting nonresidential (i.e commercial) premises, supply of management consultancy services, and professional services, construction contracts, services provided by garages, schools etc.

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3.4

Time of Supply This is an important concept because VAT is charged at the time of supply. For the purpose of the VAT Act it does not mean the time of physically delivering the goods or performing the service. Time of supply by definition, varies according to the type of supply. The supply of goods shall be deemed to have taken place at the time of supply as defined below. a Supply of goods- the time of supply If the invoice is issued within 10 days of the delivery of goods the time of supply is the date of issue of invoice If the invoice is issued after 10 days of the delivery of goods the time of supply is the earliest happening of b. the date of invoice the due date of payment the date of receipt of payment/advance the date of delivery

Supply of Services the time of supply If the invoice is issued within 10 days of performing the service, the time of supply is the date of issue of invoice If the invoice is issued after 10 days of performing the service the time of supply is the earliest happening of when the invoice is issued when the payment is due when the payment is received when the service is performed

Exception to the rule If the transaction or part of the transaction falls within a taxable period prior to 31.07.2002 and GST has been paid on that transaction or part thereof then the time of supply will not be considered on the above basis. Example Rent agreement entered into prior to 31.07.2002 and an advance paid on the date of agreement. If GST has been paid on that advance and the balance is being paid monthly during VAT period then the VAT is chargeable only on that balance as and when it is paid. No adjustments will be made in respect of the periods under VAT which has been paid in advance during GST regime.

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c.

Time of supply in relation to supply under Agreements for the provision of periodic payments (entered into after 01.04.1998 ) other than Hire Purchase Agreements is * * when the payment is due or when the payment is received which ever is earlier

Supply under Hire purchase agreements the time of supply is The time the agreement is entered into

e.

Cash basis tax payers the time of supply Sec. 4(6) For Registered Persons who have obtained approval to account for tax on cash basis under Section 23, time of supply is, for the purpose of reporting output tax in his returns is * the time at which the payment is received.

3.5

Taxable supply Means any supply of goods or services made in Sri Lanka or deemed to be made in Sri Lanka which is chargeable with VAT under the Act, and includes a zero-rated supply but not an exempt supply.

Exempt supplies are enumerated in schedule 1 to the Act. Zero-rated supplies are given in section 7 of the Act (Vide Chapter 25). All other supplies (whether they are made or deemed to be made) are taxable supplies, if it is in the course of carrying on or carrying out a taxable activity. Section 16(5) of the Act sets out one situation where a deemed supply can occur. That is, when the registration of a registered person is cancelled, the goods or services remaining at the time of cancellation, which are part of the assets of the taxable activity are deemed to have been supplied by that person. It is a case of a deemed taxable supply. consideration One characteristic of a deemed supply is that there is no Sometimes there may be no in money (Please see para 1.5)

consideration either in money or otherwise than in money. The Act does not enumerates other instances of deemed supply. But from the context of the Act specially from Section 5(5)(iv) it can be said that, appropriation of business goods and assets for private use, gift of business goods (other than samples), transfer of goods and assets from a taxable activity to an exempt activity etc. are either supplies made or supplies deemed to be made.

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It can be seen that in all these situations input credit have been claimed in respect of the goods and services used in the making of the deemed (taxable) supply. 3.6 Taxable period -

There are two taxable periods. Month and Quarter Taxable period is one month in the case of following persons and undertakings persons with the total taxable supplies exceeding Rs.30 million for 12 months period. persons making more than 50% zero-rated supplies (Vide Chapter 25) and persons having less than 50% zero-rated supplies if they are in the VAT deferment scheme.(Thus it can be seen that all the person in the VAT deferment scheme are required to furnish monthly returns) persons who have entered into agreements prior to 01.04.2001 with BOI under Sec. 17 of the B.O.I Law During project implementation period. New ventures registered under section 22 (7) during the project implementation period. (However, a person can opt to file returns quarterly if approved by the C.G.I.R Sec.83)

Note : film exhibitors being registered on behalf of the film corporation, and tea manufactures are also required to be registered for monthly returns 3.7 i. Means a. any activity carried on as a business, trade, profession or vocation or every adventure or concern in the nature of trade (other than employment). b. the provision of facilities to its members or others for a consideration and the payment of subscription in the case of a club, association or organization. c. anything done in connection with the commencement or cessation of any activity or provision of facilities referred to in (a) or (b) d. the hiring or leasing of any movable property or the renting or leasing of immovable property or the administration of any property. e. the exploitation of any intangible property such as patents, copyrights, or other similar asset. (Where such assets is registered in Sri Lanka or the owner of such asset is domiciled in Sri Lanka). All the other registered persons should submit quarterly returns. Taxable Activity

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Thus, any trade, business, etc. are considered as taxable activities. It is important to note that the profit motive is not an essential ingredient of a taxable activity. The essential characteristic of a taxable activity is that the activity must be concerned Thus the supply of goods and with making (taxable) supplies for a consideration.

services for a consideration by a social service or charitable organization is considered as a business and in turn as a taxable activity although the presence of a profit motive may not be there and the consideration charged may be barely sufficient to recover the costs. The consideration may be in money or otherwise than in money. However any activity for pleasure and social enjoyment is not regarded as a taxable activity although such an activity may have all the attributes of a business. Eg. A group of friends contributing towards the expenses of a picnic; the contributions are not regarded as considerations for supplies made in the course of carrying on or carrying out a taxable activity. Examples Q A I sold a block of land which I received sometime back as dowry. Am I required to charge VAT on the sale price? In order to charge VAT you must be a Registered Person and the sale must be in the course of carrying on or carrying out a taxable activity. As per facts given above it is not in the course of carrying on a taxable activity. Therefore VAT is not chargeable. However, if the circumstances surrounding the sale are such that the sale can be treated as an adventure in the nature of a trade then it becomes a taxable activity and you are liable to charge VAT on the sale value, if you are a Registered Person. You may not be a registered person prior to the sale but you may become liable to be registered with the sale if the intended sale price exceeds Rs. 500,000/-. Q A Q A In such cases you are required to obtain a Registration prior to the sale. I am a registered person and I sold my car used in the business activity. Is the sale liable to VAT. Yes. It is in the course of carrying out a taxable activity and liable to VAT. I am a registered person and I sold the scrap in my business. Is it liable to VAT Yes, for the same reasons as above. A contract of employment is not a taxable activity, i.e a job where a person receives salary or wages. But a contract for service is a taxable activity. Eg. An accountant who

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is appointed as a director of a company because of his taxable activity as an accountant and receives directors fees. The fee is treated as a consideration for supply of service in the course of carrying on or carrying out his taxable activity as an accountant. Such a directors fee is not excluded from VAT. If the fees or the value of taxable supplies made by the director exceeds the threshold he should register for VAT and charge VAT to the company. Q. A. Q. The company should pay VAT to the director in addition to the fees.

A person grows anthuriam as a hobby. Occasionally he sells flowers and the total sales per annum is the range of Rs.10,000/- . This is a recreational pursuit and not a taxable activity. A person is collecting stamps and coins and belongs to a club for this. Occasionally he sells some of these items and enters into barter transactions with other members of the club.

It is more than likely that the activity is carried on as a hobby. It is therefore not a taxable activity. However if he embarks upon an adventure in the nature of a trade with such collections then it becomes a taxable activity. The meaning of adventure in the nature of trade is the same as the meaning under the Inland Revenue Act as decided by Courts.

ii.

The place of Taxable Activity/Place of business The place of business or the taxable activity is as important as the taxable activity itself because VAT is charged. i. ii. on the supply of goods and services In the course of carrying or carrying out a taxable activity in Sri Lanka. Section 2(1) of the Act. By virtue of Section 9, Goods or Services shall be deemed to be supplied in Sri Lanka;. (a) (b) (c) if the supplier carries on or carries out the taxable activity in Sri Lanka, and Goods are in Sri Lanka at the time of supply or Services are performed in Sri Lanka by the supplier or his agent.

Thus if a person in Sri Lanka is supplying services to another business in Sri Lanka such services are liable to VAT irrespective of the fact that the business which receives the supply of service may be carried on by a person outside Sri Lanka. The supplier is in Sri Lanka, he is carrying on or carrying out a taxable activity in Sri Lanka and the supply is made or service is rendered to

21

a business in Sri Lanka and not to a business outside Sri Lanka although the owner of such business may be living outside Sri Lanka (Please see para 10.5.14 and 25.6) Eg. I. I introduced clients to a foreign insurance company which has no branch in Sri Lanka. I received a payment in foreign currency which represents the fees for introducing the clients and commission and other charges for subsequent work done in respect of the insurance business carried on by the foreign company with the Sri Lankan clients introduced by me. This work includes making survey reports relating to claims made by the insured clients. Am I liable to VAT on the payment received from the foreign company which was received in foreign currency?. A: Yes. You are liable to VAT. Firstly you are carrying on a taxable activity in Sri Lanka. Secondly you are rendering services to a business in Sri Lanka although it is carried on by a foreign principle. (Please see para 10.5.14) The fact that the payment is received in foreign currency is not material. The criteria to be considered are (i) the place where the taxable activity is carried on by you (ii) The place where the services are performed by you and (iii) The place of business where such services are utilized. The services supplied by you are utilized by a business in Sri Lanka although it is carried on by a person outside Sri Lanka. The services were utilized by the business of insurance carried on in Sri Lanka by the foreign company. Eg:.2. I am acting as the representative of a foreign company which is supplying goods in Sri Lanka. I take orders on behalf of that company and fax them to that company. In a few cases the Sri Lankan traders who give the orders import the goods themselves, In other cases I import the goods and supply them to the local traders, at the pre agreed price on behalf of the foreign company. The sale proceeds are credited to a bank account in the name of the foreign company. I am paid a fee for introducing customers and a commission in respect of the orders canvassed by me. What is my position with regard to VAT ?. A In this case two persons and two taxable activities are involved. One is importing and selling goods in Sri Lanka, which is a taxable activity carried on by you on behalf of the foreign company. You should obtain a separate registration for that. By virtue of section 55 you are liable in the like manner and to the like amount as the foreign principle would be chargeable under the Act. The other

22

is the taxable activity carried on by you on your own as an independent agent for a fee and commission. You should register separately in your name for this purpose. In respect of the former taxable activity you are required to charge VAT on sales and you are entitled deduct VAT paid to the Customs. In respect of the latter taxable activity the commission received by you is liable to VAT as services performed in Sri Lanka (which is consumed by a business in Sri Lanka carried on by a foreign principle through you) You are not entitled to deduct VAT paid to the Customs from the VAT payable on commission. Eg.3 A person resident outside Sri Lanka providing services to a person in Sri Lanka through internet may not attract VAT as the taxable activity of that person is carried on or carried out, out side Sri Lanka unless he makes his presence in Sri Lanka by intermeddling with recipients books of accounts or other material. On the other hand if such overseas person makes his presence physically in Sri Lanka in order to provide the service (Eg. Perform a musical or cultural show, medical consultation, astrological consultation etc) then the place of supply or the place of the taxable activity and the place where the services are performed is in Sri Lanka, by virtue of Section 9. Such services therefore will attract VAT. 3.8 Value of Supply * VAT should be calculated on the value of supply. Definition of Value of Supply vary according to the type of supply. How to ascertain the value of each type of supply is given below. Type of Supply 1. Supply of goods and services * Value When the recepient is a registered person If the consideration is in money Total consideration less VAT or Open market value which ever is higher * If not in money or partly in money Open market value If the value is expressed in foreign currency it must be converted into Rupees at the selling price of currency at the time of supply. Value means the tax exclusive value

23

When the recipient is not a registered Person tax inclusive consideration or open market value which ever is higher 2. Import of goods CIF + Customs Duty + any surcharge + Cess + any Excise Duty payable to Customs under excise duty (Spl. Provisions) Act. (If Customs Duty is waived the same formula stands with Custom Duty=0) 3. Benefits from employment * * Open Market Value Cost of a similar benefit to any other employee as determined by the Assessor if the open market value cannot be ascertained. 4. Lottery or Wagering contract or any business Of like nature 5. Supply of goods under Hire purchase agreement Cash price determined under Consumer Credit Act or Market value which ever is higher subject to adjustments for non claimable input by the seller of goods when the seller is a person different from the Hirer.(Please see Eg.17) If the hired goods are second hand and more than one year old. Value specified in the agreement less hire purchase charges 6. Supply of land and improvement Consideration (Value of Land at the time of supply + improvements upto 31.03.1998) (Consideration shall not be less than the open market value) Thus, it is = Open Market Value of improvements after 31.03.1998 Total amount received less value of the prize or winnings awarded.

7.

Supply under nonreviewable Agreement, other than Hire Purchase Agreement,

Total amount paid/payable under the agreement (It is considered as a tax inclusive consideration)

24

Entered prior to 01.04.1998. 8. Transfer of goods on Termination of Lease * If the consideration is less than 10% of the value of the agreement * If the consideration is more than 10% of the value of lease Agreement 9. Supply is a combination of taxable and non taxable supplies 10. Goods which are manufactured using other goods or services/supply of services using other goods or services 11. Issue of ticket or deposit of money for the supply of goods or services 3.9 Registered Person (R.P) Registered Person means any person who is registered for VAT under Sections 10, 12 or 14(I)(c ) of the VAT Act and includes a person who is liable to be registered under the Act. (Vide Chapter 4) and a person deemed to be registered under Sec. 80(2) Registered Person can be referred to as the tax-payer for the purpose of VAT Act because it is he who is registered with Inland Revenue to collect VAT from consumers and remit it to the department. He only collects VAT from his customers and does not bear the burden of tax because he does not pay anything on his own. Vide para 9.5. The duty to charge, collect an account for VAT to the Revenue falls on the Registered Person. Value of the ticket or deposit less the VAT, not being any refundable amount Consideration received Open Market Value Open Market Value of the taxable portion Treated as a separate supply of goods and the value is the amount paid to acquire the asset. Treated as an installment under lease agreement.

which ever is higher

25

There are two types of registrations called compulsory registration (Sec.10) and voluntary registration.(Sec. 12) In addition there is provision for forced registration by the C.G.I.R Sec.14(I)( c) and deemed registration (Section 80(2)

In addition any importer who is not (permanently) registered for VAT is required to obtain a registration for clearing goods which is called Importers Identification Number (Vide para 4.7)

26

Chapter - 4

Registration and Cancellation

4.1 As stated earlier there are two types of registrations namely, compulsory registration and voluntary registration. In addition the C.G.I.R can compel a person to register while the importers are required to register VAT. 4.2 Compulsory Registration Section 10 (a) Every person who carries on a taxable activity should register for VAT if the Value of his taxable supplies exceeds or likely to exceed. (b) (c) Rs.500,000 per any quarter or Rs.1,800,000 per annum for the purpose of clearing goods if they are not already registered for VAT. A taxable activity must exist before a person is registered for

Such person must notify the C.G.I.R within 15 days of his liability to be registered. In computing the value of supplies to determine the above threshold, the following should be excluded. any exempted supplies any excluded supply of a buying and selling activity (other than buying & selling in connection with any activity of import or manufacture) VAT chargeable on the supply.

(d)

Once a person is registered for VAT he should charge VAT on all the taxable supplies made by him even if his turnover falls below the above limits until he is officially deregistered. (Please see example in para 5.1.1.)

4.3

Voluntary Registration Section 12 Irrespective of the value of the taxable supplies, any person who wishes to register for VAT can apply for voluntary registration. However, such registration may be refused by the CGIR based on the facts of the case. Voluntary Registration has been extended to wholesale and retail trade activity as well. (Sec. 3 proviso) Accordingly (i.) Persons already registered for VAT should obtain specific approval to charge VAT in respect of retail and wholesale sales. Such specific approval should be displayed at the place of the business (if already paying GST on retail and wholesale sales the registration can be

27

continued without making an application) (ii)

Application should be made

to Deputy Commissioner (VAT) under reference VAT/Gen/08) Others are required to make applications for voluntary registration. If they desire to register voluntarily for retail and whole sale trading Important Once a person opts to register voluntarily to charge VAT on retail & wholesale sales he cannot use that option partially (The total sales whether the purchases are with VAT or not, should be sold with VAT).

4.4

Forced Registration Section 14(i)(c ) If the C.G.I.R. having regard to the nature of the activity is of the opinion that a person is required to be registered but has not made an application to that effect, he shall register such person.

4.5

Importers who re-sell the imported goods Sale of imported goods by the person who imported them without subjecting them to any processing is also treated as Supply of Goods under the VAT Act and not as an excluded supply consisting retail & wholesale sales. If the goods are not exempted under the Act the importer is liable to register for VAT when his sales reaches the registrable threshold of Rs.500,000/- per quarter or Rs.1,800,000 per annum (Such persons must declare their activity code number as 6700 when applying for registration)

4.6

Supply of goods on tender Supply of goods under a tender agreement is treated as a taxable supply and not as an excluded supply consisting of retail and wholesale sales as envisaged in Section 3 of the Act. Retail and wholesale supply of goods and supply of goods on a tender agreement are two different types of supplies. The former is basically governed by the provisions of the Sale of Goods Ordinance whereas the latter is mainly governed by the law of contract in addition to Sale of Goods Ordinance as the supplier is contractually bound to supply specific goods to a specific person at a specific time at a pre-agreed price. That is something very different from a retail and wholesale business. Such a supplier is, therefore, liable to register for VAT if his total taxable supplies exceeds the taxable threshold provided the goods are not exempt goods. Sometimes the tenderer may be supplying goods in the course of a retail or wholesale business which is carried on by him. In such a case he is liable to provincial turnover tax as well, in addition to VAT, but that is not always the case. Some tenderers are buying goods solely for the purpose of supplying under the tender agreement. The mere fact

28

that the supplier may buy and sell/ or supply goods under a tender agreement does not mean that he is engaged in a retail or wholesale business. The jurisdiction of provincial councils is limited to turnover tax on retail and wholesale sales only. (Item 36.1 of list 1 of Schedule 9 to the 13th Amendment to the Constitution). Buying and selling does not always tantamount to retail and wholesale sales. Buying and selling may be possible even in respect of intangible assets but it is not possible to do any retail or wholesale business with such assets. 4.7 Importers Identification Number (IIN) Section 11 The importers who are not registered under VAT permanently should notify the CGIR not later than 14 days prior to the clearing of goods from the Customs. An identification number is issued for the purpose of clearing of the goods only. It shall not be treated as a Registration for VAT purposes although sometimes people referred to it as temporary registration. A person who imports under Passenger Baggages (Exemption) Regulations is not required to obtain I.I.N. Note: Such identification number is valid only for twelve months for the clearance of goods by persons who are not liable to VAT. Customs department will monitor the import of goods by such persons on the basis of instructions issued by CGIR from time to time. At present, if the cumulative value of imports exceeds Rs. 2 million under a particular IIN Customs will not clear goods until you obtain a Permanent Registration or a clearance from Inland Revenue. The limit of Rs.2 Million is not applicable to Government Departments, Ministries, Government Universities and for persons who import exempt goods.
N.B. The I.I.N. Certificate must be returned to the department in order to obtain a permanent registration number.

4.8

Cancellation and Changes (a) Application for a cancellation of a registration can be made at any time after the laps of 12 months (Section 16) Thus once registered you are required to charge VAT at least for 12 months even if your sales fall below the registrable limit (vide para 5.1.1) (b) (c) Notwithstanding the de-registration every person is liable for any act done or omitted to be done while he was a registered person (Section 18) Any goods/assets at the time of cancellation of registration shall be deemed to be supplied in the course of carrying on the taxable activity. Thus, before deregistration a person will be asked to pay VAT on existing stocks and assets unless the taxable activity is transferred as a whole (including all assets on which

29

input credit has been claimed and motor vehicles etc.) to another registered person who undertakes to continue the taxable activity. The idea is to ensure that the other registered person shall account for output tax in respect of all such goods and assets. . (d) Cancellation of registration will be done only if the CGIR is satisfied that the applicant has ceased to carry on the taxable activity or that the value of his taxable supplies does not exceed the threshold. D.G.C has suspended the Customs facilities (e) (f) The C.G.I.R will also cancel to such person or that the the registration at his own instance if he is satisfied in addition to above that the continuation of such registration will impede the protection of revenue. The certificate of registration must be returned to the C.G.I.R within 14 days from the last day of the taxable period during which the registration was valid. * Any change in the name, address and place of the business, in the nature of the business (i.e taxable activity), in the person authorized to sign returns, in ownership of the business etc., should be notified within 14 days. (Section 19). Customs will not clear goods if the name and address as appearing in the certificate of registration or INN certificate defers from that in the Customs Declaration or import documents, without verifying from Inland Revenue. * Death, insolvency or incapacity when an individual, proprietor or a partner of a business dies, becomes bankrupt or incapacitated, the person carrying on the business must notify the C.G.I.R within 14 days. Similarly when an administrator, receiver or liquidator etc. takes over the affairs of an incorporated company; C.G.I.R must be informed of the date from which they became responsible and the circumstances in which they took over. 4.9 Deemed Registration Sec.80(2) Any person who is registered for G.S.T. under the G.S.T Act No. 34 of 1996 and whose registration is in force on 31.07.2002 will be deemed to be registered under the VAT Act. 4.10 How to Register Any person who seeks registration for VAT should complete and return the following applications which can be obtained from the VAT Branch of the Inland Revenue Department Head Office in Colombo. Application for Tax payer Identification Number (TIN) Application for VAT Registration (Form VAT 11)

30

When the duly completed applications are handed a TIN number will be issued by the Computer Branch (on the 7th Floor). TIN Number is a unique number for each tax payer consisting of 9 digits. Thereafter a VAT registration certificate depicting the
th

VAT

registration number will be issued by the VAT Branch (6 Floor). The number consist of two parts, the first part being the TIN number and the second part being the code for VAT consisting of four digits. Eg: 123456789
TIN Number

- 7000
VAT Code

123456789 9999 123456789 5050

These are not VAT Registration Numbers

This is a VAT Registration Number

If the code is 5050 or 9999 it is not a VAT Registration Number. It is an Importers Identification Number which is not valid for any other purpose. 4.11 Back dating Registration Request for the back dating of the effective date of registration will be accepted only if their had been an error on the part of the Department. For example if a BOI company which is entitle to Sec. 22(7) approval or which is engaged in manufacture and export has been given an I.I. Number (i.e temporary number ) instead of a permanent VAT registration number the permanent registration can be given retrospectively. However the registered person, should pay VAT, on the taxable supplies made with effect from the effective date of registration. 4.12 Registration of Partnerships Although a partnership is not a legal entity, a partnership is recognized as a person for VAT purposes (Sec.83) and therefore a partnership can be a registered person. It may be possible to obtain several business registrations at different locations with identical partners. But for VAT purposes all those businesses will be given only one registration number because the Act deals with Registered Persons and not with registered taxable activities for the purpose of charging, collecting and accounting for VAT on behalf of the C.G.I.R. In computing the taxable threshold cumulative value of all businesses carried on by identical partners are considered together. This is applicable even to an individual carrying on different taxable activities at different places. Such an individual will be given only one registration number.

31

4.13

Activity Code Number Supplies are categorized into several groups and each group is given a separate code number called the Activity Code. For example supply for goods by an importer without subjecting them to any processing is given the activity Code Number 6700. Supply of textiles is given the Activity Code Number 3210. When applying for registration for VAT the applicant must declare in cage No. 10 of the application (VAT 11) the relevant activity code number which is applicable to his taxable activity. The activity codes are enumerated in the guide given with the application. The classification of supplies into various activity codes is purely an exercise to facilitate computerization and extraction of statistics under predetermined headings . It does not entitle a registered person to apply the same rate of VAT to different supplies having the same activity code number. For example the supply of textiles and supply of yarn have the same activity code number. But they may be taxed at two different rates.

32

Chapter 5

Collection, Payment and Recovery

5.1

Collection of VAT
5.1.1 VAT on local supplies VAT on goods and services supplied in Sri Lanka is charged and collected, by the Registered Persons who make the supplies from the recipient of goods and services at the appropriate rates. Every registered person should collect VAT on supplies made by him in Sri Lanka in the course of a taxable activity from the recipient of such supplies irrespective of the status of the recipient. Only exception is that they are not required to collect VAT when supplies are made to Diplomatic Missions and Diplomatic Personnel (Chapter 20) If the VAT is not collected from any taxable sales they are treated as tax inclusive sales and 1/6 of the total sales is treated as the VAT element in such sales. Once a person is registered he should charge VAT on each taxable supply of goods and services made by him even if the total value of his taxable supplies fall below the taxable threshold.
Eg. Mr. X who imports and sells motor spare parts is Registered for VAT. During the quarter ended 31.12.2002 he has sold only one item for Rs.2000/-. He has also taken spares worth Rs.6000/- for his personal use. (That means during this quarter his turnover is only 2000/- and value of taxable supplies is 8000/-). But he should charge VAT on each taxable supply Vat chargeable is 2000 @ 20% = 400 6000 @ 20% = 1200 He should declare 2000 + 6000 = 8000 as the total value of supplies in cage A of the return and 400 + 1200 = 1600 as the output tax in Box 1 of the return.

5.1.2 *

VAT on imports VAT on importation of goods whether the importer is a registered person or not, and irrespective of the value of import, is subject to VAT and the goods are exempt) is collected by the Director General of Customs at the appropriate rates. (Unless

In determining the rate of VAT applicable to imported goods Customs will follow the H.S. Code. It is a classification of goods under various headings according to some nomenclature. The VAT rates applicable to those goods have been issued by the Policy Planning and identified in consultation with the Inland Revenue. Please refer to VAT Guide & P.R.O 03/2002 dated 01.08.2002 inadequacy in Research Division of Sri Lanka Customs. If there is any inaccuracy and or

33

the H.S. classification it may be brought to the notice of the DGC and CGIR for necessary amendments. laboratory reagents, Sometimes there may be difficulties in identifying For example the VAT Act speaks of But the individual names of these goods as declared in import documents. instruments, semi-precious Code or may stones etc.

raw materials used for pharmaceutical products, medical

reagents, products, instruments and stones may not be appearing in the H.S. be appearing under inappropriate H.S. headings so that is it difficult to decide on the VAT rate applicable to a particular item that is imported. In such situations CGIR will give directions to the Customs, with regard to the rate of VAT applicable after identifying the items on the basis of expert opinion and/or recommendations and other material placed before him. Such recommendations are obtained solely for the purpose of identifying the goods only (Please see para 10.3) Once the goods are properly identified the rate of VAT will be decided in accordance with the VAT Act eventhough an incorrect rate may appear in the H.S. Code due to inadvertence or inadequacy in classification. However the valuation for the purpose of calculating VAT is the responsibility of the D.G.C as the valuation depends on the C.I.F Value. Even if the goods are imported on N.F.E basis and even if the goods are exempted from Customs duty, the C.I.F will be ascertained by the Customs in accordance with the Customs Ordinance for the purpose of calculating VAT and other levies. Importers are advised to verify the VAT rates (and exemptions) applicable to their intended imports beforehand from the H.S. Code Guide in order to avoid any repercussions that may arise after import. VAT on approved local sales of garments by BOI exporters is also collected from the buyers by the Customs at Rs. 25/- per piece in the same manner as in the case of imports 5.1.3 Exempt supplies VAT is not collected on exempt supplies of goods & services. List of exempt supplies are given in Schedule 1 to the VAT Act. Please see Chapter 10.. 5.2 Payment of VAT to C.G.I.R As stated in para 2.5 VAT is paid in the first instance by the consumers to the Registered Persons from whom they purchase goods & services. Thereafter the Registered persons are required to remit the VAT collected by them to the Commissioner General of Inland Revenue as provided in Section 22 of the Act. That Section allows the Registered Persons to deduct the VAT paid by them on the goods and services used by them

34

in making the taxable supplies from the amount charged and collected by them Section 22(1) Thus it is the responsibility of the Registered Person to charge and collect VAT on behalf of the C.G.I.R and to pay and account for such collections to the CGIR. 5.3 Payments dates Registered Persons are required to pay the VAT collected/Collectible in respect of a taxable period within one month form the end of the taxable period. 5.4 Penalty for default Sec. 27(1) Late payment will attract following penalties. (a) (b) 10% of the amount not paid, plus 2% of that amount for each month or part thereof

subject to a maximum of 100% of the amount in default. 5.5 Where to pay ? Payment must be made to one of the assigned branches of the bank of Ceylon. -Vide Para 8.7 5.6 Recovery of tax Non payment of VAT collected from consumers is an offence against which criminal proceedings can be initiated. Commissioner General can take one or more of the following actions against any person who has collected VAT from the consumers but not remitted it to the C.G.I.R. i. ii. iii. iv. Seizure and sale of movable property Sec. 42(1) Distraint Action - Seize and sell any immovable property of the defaulter after obtaining writ of execution from the District Court- Sec. 42(6). Institute proceedings for recovery before a Magistrate. Sec. 43(1) Garnishee Action - Recover the tax from the debtors of the defaulter or by seizure of his bank accounts Sec. 44(1)

5.7

Directors liability when the company defaults When a body corporate has not paid any tax (VAT) on or before the due date, the manager, director, secretary or any other principle officer of such body is personally liable to pay the tax, as if he is the defaulter unless he proves to the satisfaction of the CGIR that he is not responsible for such default (Sec. 48). This is applicable to partners of a partnership as well- Sec. 48(2) . Vide para 12.5. Directors of a company are also liable to pay unpaid VAT of a company under liquation unless it is proved that the default cannot be attributed to gross neglect, breach of duty etc. on the pat of the director in relation to the affairs of the company. Sec. 57(1).

35

5.8

Payment of tax on Assessments Tax payable on assessments made by an assessor (Vide Chapter 11 ) too is payable immediately and the tax in default on such assessments too attract penalties as mentioned above (para 5.4) and liable to recovery action by the C.G.I.R as stated in (para 5.6) The VAT payable on assessments made shall be deemed to be in default from the dates as explained below. Para 5.9(ii)

5.9

Recovery Action and VAT in default In order to commence recovery proceedings as mentioned above in para 5.6, the VAT payable should be deemed to be in default and the (Registered) Person concerned must be deemed to be the defaulter. The circumstances in which VAT in default can arise and a person can be a defaulter are as follows. i. Situations where an issue of an assessment is not necessary Sec. 26(1) When the VAT payable in respect of a taxable period is not paid on due date-i.e within one month from the end of the taxable period: This refers to all situations covered by Section 28(I)(a),(b) and (c) namely (a) (b) (c) return not furnished, tax not paid return furnished but tax not paid or under paid, return is altered at the request of the registered person but tax not paid

then the tax payable shall be deemed to be in default irrespective of whether an assessment is issued or not because issue of an assessment is not a condition under Sec. 26(I). Thus a notice of default under Section44(I) can be issued straightaway. (Question of quantifying the amount in default may arise in (a) above). ii. Situations where an issue of an assessment, additional assessment or an amended assessment is necessary. (a) * * * Return not furnished-but tax paid less than the amount payable in the opinion of the assessor. Assessment should be issued on the difference Section 28(3) The difference shall be deemed to be in default with effect from the date on which such tax ought to have taxable period Section. 28(4) * Therefore penalty will be calculated from the due date i.e form the last day of the month succeeding the last day of the taxable period and not from the date of issue of assessment. been paid for that

36

(b)

Return furnished tax paid it appears to the assessor that the amount paid is less than the amount payable or chargeable for that taxable period

Additional assessment should be made on the additional amount that ought to have been paid for that taxable period according to the judgement of the assessor sec. 31(I).

The amount assessed shall be deemed to be in default from the date on which such tax ought to have been paid by the person chargeable with such tax Sec. 31(2).

* (c) * * * (d) * * *

Penalty calculation will be same as (a) above. When the due date of payment of VAT is deferred by the CGIR Such deferred amount or part thereof which will become payable on settlement of appeal shall be deemed to be in default, From the original due date of such tax Sec. 26(2). A refund (assessment) made in excess of the amount due or A refund on account of any excess input tax claimed. Shall be deemed to be tax in default from the first day of the taxable period in which the excess arose if an assessment is made on that excess amount refunded Sec.22(8)

(e)

* *

The amount of reduced tax with penalty thereon on final settlement of appeal. Shall be deemed to be in default from the date on which such tax ought to have been paid Sec. 27(2).

5.10

Collection of tax (in default) of a deceased person For the purpose of recovery of tax in default from debtors of the defaulter [Para 5.6(iv)] the defaulter shall include the agent of a person who is in default and in the case of a deceased person, if the tax payable by him if he were alive is in default, then the executor, administrator, any person intermeddles with property of the deceased person or a person entitle to apply for letters of administration is deemed to be a defaulter Sec. 44(5). However the executors liability is limited to the deceased persons estate in his possession plus any part of the estate passed to a beneficiary. (For the circumstances in which the tax payable by a deceased person, if he were alive, is in default? - Please see para 12.6).

37

5.11.

Collection of VAT on Imports and BOI As indicated above in para 5.1.2, in terms of Section 2(3) of the VAT Act, VAT on importation of goods shall be charged, levied and collected by the Director General of Customs as if it is a Customs duty. However the DGC has delegated his powers to the BOI in respect of importation of goods by enterprises registered under Section 17 of the BOI Act. Such enterprises are required to submit their Cus-Decs and other import documents to the relevant documentation unit of the BOI. The BOI has documentation units at their Investor Services Section in Colombo 01, and at Katunayake, Biyagama Koggala and Pallekele. Thus, in the case of importation of goods by such enterprises VAT is collected by the BOI and remit it to the DGCs VAT collection account. For the purpose of examination of goods BOI has verification yards at Central Verification Terminal of the Customs Department at Orgodawatta and at Katunayake Air Cargo Village at the Air Port, with regard to goods imported by enterprises outside the investment promotion zones. In relation to goods imported by enterprises within the zones the goods are examined within the factories by the verification officers of the BOI, stationed in the zones.

* *

In these cases VAT deferment scheme is also monitored by the BOI but is implemented by the Customs The VAT collected by the BOI on the goods imported by BOI enterprises are remitted to the D.G.Cs VAT collection account. In addition BOI also pays VAT on its own as a VAT Registered Person on the documentation charges and examination charges levied by them on the importers. Such VAT is their output tax, and is paid direct to the CGIR.

The other important thing to note is that on importation of goods VAT is payable irrespective of the value of imports (that means there is no threshold) and irrespective of whether the importer is a VAT registered person or not provided the goods are not exempted or excluded from VAT.

38

Chapter 6

Deferment of Collection of VAT

6.1 Although VAT on imported goods is normally collected at the time of import, collection of VAT is deferred by the D.G.C in respect of certain imports. Similarly collection of VAT is suspended by the CGIR in respect tea sold at the auctions. 6.2 Deferment on Imports VAT will be deferred by the Customs or the BOI as the case may be in respect of following imports. Deferment is done on the production of a bank guarantee. 6.2.1 i. Deferment for 60 to 90 days any goods imported, including any goods received from the customs bonded area, by a registered person who imports or receives such goods to be used by such person for the purpose of manufacture and re-export of the goods so manufactured; ii. any goods imported by any registered person referred to in subsection (7) of section 22, which are project related goods during such project implementation period; iii. any goods being any plant, or machinery imported for any infrastructure project funded mainly by a foreign government or any regional or multilateral agency including the United Nations Organization and its affiliates, during the period of implementation of such project. iv. any purchase of fabric, manufactured by a person who has entered into an agreement with the BOI under Section 17 of that Law for the manufacture of fabric, by another person who has entered into an agreement with the BOI under Section 17 for the manufacture of garments for export under such agreement and utilized such fabric, for the manufacture of garments for export. 6.2.2 Deferment of 12 months Any goods being plant, machinery or other equipment of high value temporarily imported in to Sri Lanka and re export within twelve months, for the period up to the date of such re export.

39

6.3

Approval For Deferment Facility i. Customs Department has established the VAT Deferred Payment Unit (VAT DPU, formally GST DPU) to register the enterprises, those who seek the deferment facility. This Unit is located at the InFac Centre, 4th Floor, Hemas Building, Bristol Street, Colombo 01. ii. Enterprises which are eligible for this facility can apply for registration in the prescribed form (CDP 10) iii. Non-BOI Sector - importers who wish to avail of this facility should forward their applications directly to the Director General of Customs (to VAT DPU). iv. BOI Sector - Applications should be forwarded through the BOI with their recommendation. v. Every such application should be submitted with a bank gurantee (CDP 2) or a corporate guarantee (CDP 3) together with an irrevocable power of attorney authorizing the Commissioner General of Inland Revenue (CGIR) to remit direct to the Director General of Customs (DGC), the deferred VAT out of the refund due as per details contained in the monthly returns submitted by them. The guarantee furnished should be valid for a period of one year. vi Approval granted for deferment facility will be conveyed to the respective enterprises in the prescribed form (CDP 7) vii. The date of submission of Cus-Dec at the relevant Cus-Dec processing Unit (Bonds Division, In Fac Centre or BOI) is treated as the date of importation to compute the period of deferment

6.4

Processing of Cus-Decs i. Importers entitled to avail of the deferred payment facility should file an additional copy of Cus-Dec titled VAT copy . ii. NON BOI Sector - All Cus-Decs relating to imports under the deferment facility is processed at In Fac Centre and Bonds Division only. iii. BOI Sector - Investor Services Division of the BOI will coordinate with the Units serviced by BOI where Cus-Decs are processed for deferment of VAT.

40

iv. v.

Cus-Decs will be considered finalized at the point of payment of duty & other levies if any with the deferment of VAT. The VAT copy will be returned to the importer with the Delivery copy of the Cus-Dec.

6.5

Issue of credit vouchers to Customs/BOI to set off against deferred VAT i. Exporters being zero-rated, are entitled to a refund of their input taxes attributable to exports. Similarly new ventures approved under Sec. 22(7) are entitled to a refund of their input taxes during the project implementation period. Both these categories of persons are also entitle to VAT deferment facility at the Customs in respect of goods imported. The refunds due to them will be issued directly to the DGC/BOI in the form of credit voucher to be set off against deferred tax. Credit vouchers to the DGC/BOI will be issued only if a registered person is entitled to a refund for the relevant taxable period. If no refund is due the deferred VAT should be settled immediately.

ii.

To enable the credit vouchers be issued such persons should comply with the following requirements. (a) In the first instant the registered person concerned should ensure that he is entitled to a refund by forwarding his VAT return form duly completed (on Form 20), together with form 20A amounts and amounts paid up front. (b) (c) They should ensure that the input tax declared in form 20A is the same, as input tax declared in Cage 4 of Form 20. They should also ensure that the above amounts tally with the figures furnished by the Customs Department to the C.G.I.R. Customs Dept. furnish these particulars on a monthly basis within 3 weeks in the following month. giving the details of deferred

iii.

The credit vouchers to the D.G.C will not be generated by the computer until and unless the figures declared by the importers and the figures furnished by the Customs tally. In the circumstances the importers are advised to declare their actual amount of imports made during a particular taxable period in Forms 20 and 20A furnished for that period.

41

iv.

If an importer declares only part of his imports his figures will not tally with the Customs figures for that month. In such cases the VAT return need to be Taxpayers under amended which involves a long procedure to be fed into the computer system and an undue delay of the refund will be inevitable. deferment scheme are therefore strongly advised not to mixup imports made during different months. They are required to maintain a Register of Imports in chronological order and input tax and output tax VAT accounts. The input tax VAT account relating to local purchases which should be in chronological order may contain sufficient columns to indicate the date of receipt of tax invoice, tax invoice number, VAT registration number of the supplier, type of supply, value of supply, VAT paid and any other particulars that may be useful to ascertain quickly para 15.8 the input tax payable for that period. Vide

(v)

In situations where an exporter is not entitle to a refund for a particular taxable period no credit voucher can be issued to the DGC/BOI for that taxable period. If the refund due is less than the amount of VAT deferred the credit voucher will be limited to the amount of refund due and the balance of deferred tax should be settled immediately. Eg. For the taxable period 30.09.2002, the return furnished export contains the following particulars. deferment scheme. Value of Supply Local supplies Exports On local purchases On imports Refund due 20,000,000 10,000,000 Output Tax 4,000,000 NIL Input Tax 2,800,000 1,500,000 4,000,000 by a registered person who is an importer of goods for the purpose of manufacture of goods for He is registered under the VAT

4 300,000 300,000

In this situation although the collection of Rs.1,500,000/- has been deferred by the Customs/BOI the importer is not entitled to a credit voucher for the entire amount. A credit voucher for Rs.300,000/- can be issued so that the importer can pay the balance 1,200,000/- to the Customs if it is acceptable to the Customs Department. However the Customs Dept. is clearing the deferred amounts not on the basis of a running total but on an entry wise basis. Therefore the importer has two options. He can either obtain a refund cheque for 300,000/- from the

42

Inland Revenue and settle the entire Rs.1,500,000/- to Customs within 60 days of the deferment or pay Rs.1,200,000/- to Inland Revenue and obtain a credit voucher for Rs.1,500,000/- in favour of DGC. If the importer is not entitle to any refund he should pay the amount payable to Inland Revenue forthwith and settle the deferred tax to Customs/BOI immediately. The import register should contain columns to indicate the amount deferred, date of import (i.e the date the deferment was given) and the date of settlement of the deferred tax. The assessors are required check carefully to see whether the A properly maintained import settlement of deferred tax is treated inadequantly as another import and the input tax is claimed twice on the same import. register is therefore importers in the deferred scheme. In order that the VAT deferment scheme is implemented smoothly and that the government (VAT) revenue, which would otherwise have been collected before the goods are released from the Customs is protected, the Custom Department (and BOI) will ensure that the deferred VAT is recovered from the bank guarantees if not settled within 60 days. The only exception can be in situations where the Inland Revenue is unable to decide whether a credit voucher is due or not for the reason that the customs have not been able to forward the detailed figures of import and export made for that month by the persons registered under the deferment scheme or due to some unforeseen circumstances. In such situations the department will inform the Customs/BOI. Otherwise the Customs/BOI will follow the legal requirement to proceed with the recovery of the deferred VAT from the bank guarantees. The importers therefore must make a note of the fact that the Inland Revenue will not interfere with the Customs/BOI in their legal duty to recover deferred VAT within the time stipulated by law. an essential record that should be kept by the

43

6.6

Deferment on Local Supplies (Tea) CGIR will suspend the collection of VAT due on any tea, supplied by any tea manufacturer registered under Tea Board Act to any auction, conducted by a registered tea broker if such tea broker has supplied such tea to any tea exporter. The tea brokers and tea manufacturers are required to follow the instructions already given for this purpose and submit necessary documents along with the return.

44

Chapter 7

Invoicing
7.1 Invoicing Invoice is the most important and crucial document in the implementation of VAT. It is the key record of the supply of goods and services and the most crucial evidence for the transaction and the tax liability. It forms the basis on which all registered persons will account for the input tax and the out put tax. Cus.Dec, is treated as the invoice in the case of imported goods.

It is therefore very essential to comply with the invoicing rules. Failure to comply will be liable to penalties and prosecution. 7.2. Types of Invoices Any Registered Person who makes a supply of goods & services to another person should issue a Tax invoice within 28 days from the time of supply if the recipient of supply is another registered person and a written request is received from such recipient within 14 days of supply Section 20 (1) 7.3 Normal Invoice to others Section 20 (6)

Request for a Tax Invoice The request for a tax invoice must be in writing within 14 days of the time of transaction stating that he is a registered person under the VAT Act or that he is deemed to be a registered person under the VAT Act the full name and address as appearing in the Certificate of Registration. Where a request has been made by a registered person for the purchase of first supply such person shall not be required to make any further requests for subsequent purchases of supplies from the same supplier.

45

7.4

Tax Invoice Tax invoice should contain the following particulars. a. b. c. d. e. f. g. the name, address and the registration number of the supplier the name and address of the recipient the date of the invoice and the serial number the date of supply and description of goods or services the quantity or volume the value of supply, the tax charged and the consideration for the supply, and the word 'Tax invoice' at a conspicuous place in such invoice.

Invoices issued prior to 01.08.2002. Any valid tax invoice issued under GST Act prior to 01.08.202 and Any Cus-Dec or other document authenticated by the D.G.C and issued under the GST Act prior to 01.08.2002 Are also treated as tax invoices under the VAT Act. With regard to GST invoices that may have to be issued after 01.08.2002 please see paras 7.8 and 22.1 7.5 Invoicing to Government Agencies However any VAT registered person supplying taxable goods/services to any Ministry, Department, Provincial Council, Local Govt. Institution, Government Corporation or Statutory Body shall indicate the amount of VAT charged by him in the relevant invoice, voucher or other document. (i.e. a tax-invoice should be issued) 7.6 Grace period under Section 79 Non compliance of invoicing requirements is an offence punishable under the Act. Any person who is unable to comply with those requirements due to specific problems of converting existing invoicing systems or computer systems etc. will be given time till 30th September 2002 to make suitable alterations to the systems if such person appraises the C.G.IR of his difficulties and undertakes to issue such invoices complying with such requirements to the maximum possible extent with effect from 01.08.2002.

46

7.7

Normal Invoice
Normal invoice issued to non-registered persons should indicate the Registration Number of the supplier should not indicate the tax separately.

7.8

It should be a tax inclusive invoice where only the total consideration is shown.

This is also referred to as a tax-inclusive invoice or a simplified invoice.

GST invoices issued prior to 01.08.2002 (Sec.20(2) Tax invoices under the VAT Act can be issued only in respect of taxable periods commencing after 01.08.2002. GST has to be charged and valid GST invoices have to be issued in respect of taxable periods prior to 01.08.2002. But valid tax invoices under the GST Act in respect of supplies made prior to 01.08.2002 can be issued even after 01.08.2002. Valid GST invoice can be issued within 14 days from the time of supply. Eg. Security Services provided in July 2002 is subject to GST at 12.5% (and the NSL at 6.5%). Invoice for this can be issued within 14 days of the time of supply. Time of supply means the time as defined in Sec. 4 of the GST Act which is the same as Sec. 4 of VAT Act. (It is not the actual time of a transaction) Therefore GST invoice for such service may be issued sometime in August 2002. VAT cannot be charged and therefore VAT invoices cannot be issued in respect of supplies made in taxable periods prior to 01.08.2002. Therefore the words valid tax invoice issued under the GST Act prior to 01.08.2002 are construed to mean valid tax invoice issued under the GST Act in respect of supplies made prior to 01.08.2002

7.9

Proforma invoice is not an invoice for VAT purposes even though it may contain the necessary details.

7.10

Adjusting errors in tax-invoices If the amount of VAT charged by a tax-invoice issued by a Registered Person is higher than the amount properly due then he should account for the higher amount in his records unless he corrects the error with his customer by issuing a credit note. If the amount of tax is lower than the amount properly due he should account for the correct amount of tax due whether he corrects the error with his customer or not. He can issue a supplementary tax-invoice for the amount under-charged.

47

7.11

Use of tax fraction to compute output tax in a normal invoice A registered person cannot issue a tax invoice to a non- registered person. He should issue a normal invoice depicting only the total consideration inclusive of VAT. VAT charged is not separately indicated (para 7.7). In such cases for the purpose of declaring output tax by the supplier and also if the recipient wishes to find out the VAT content in the total consideration, the tax fraction can be used. Eg. When Municipal Council (which is registered for VAT) issues an invoice to a resident of the area (who is not a registered person) in respect of the supply of water the invoice will contain the VAT registration number of the Municipal Council, the account number, number of units used and the amount payable. If the amount payable is 165/- then the output tax pertaining to that invoice is 165x 1/11 = Rs.15/-. Because water is liable to VAT at 10%. If it is a supply liable to VAT at 20% then the total consideration in the invoice multiply by 1/6 will give the amount of VAT in that invoice.

48

Chapter 8

Returns and VAT Rates

8.1 VAT Returns As stated in para 3.6 returns are to be furnished either monthly or quarterly. If a person is not making 100% zero rated supplies, he will be treated as a person required to submit monthly returns, if his zero rated supplies exceeds 50% of the total taxable supplies (including zero rated supplies) or if he is in the deferment scheme. Position will be reviewed once in 6 months to check whether he continues to be in that category. Returns must be furnished within one month of the last day of the taxable period. The quarterly tax payers should submit a return for GST for the month of July 2002 and a VAT return for the two months August and September, 2002. The registered persons who should furnish monthly returns are enumerated in para 3.6. Zero Rated Supplies are given in Chapter 25. The return is in triplicate. Original is for the Department. First copy is for the Bank. Second copy is for the tax payer. 8.2 Where to submit the return ? If tax is payable return must be submitted to an assigned branch of Bank of Ceylon with the remittance. The bank will retain the original and the bank copy. You will be given the 2rd copy. 8.3 If tax is not payable return must be submitted to the VAT Branch of the Dept.

Tax Rates There are 3 rates and a special rate namely Zero Rate (0%) Lower Rate (10%) Standard Rate (20%) Zero rate : Export of goods and supply of services in Sri Lanka to be consumed outside Sri Lanka including repair of ships, international transportation etc. as enumerated in Section 7(I)(b) are zero rated (Section 7) The list of zero rated supplies of goods and services is given in Chapter 25

49

Lower Rate 10% Goods and services referred to in 2nd schedule to the Act are taxed at the Lower rate of 10%. When the rate is 10% the tax fraction is 1/11. That means the tax content in a Normal Invoice (i.e tax inclusive invoice) is 1/11 of the total consideration including tax. Standard Rate 20% Goods and Services other than Exempt goods and Services (Schedule 1) Lower (10%) rated goods and services (Schedule 2) Zero (0%) rated goods and services (Chapter 25)

Are taxed at 20% (when the rate is 20% tax fraction is 1/6) Special Rate Each piece of garment supplied to the local market by a B.O.I. garment manufacture cum exporter with the approval of DGC/BOI is taxed at 25/- per piece. collected by the Customs/BOI from the buyer through a Cus-Dec. N.B: If there are other local sales where Rs.25/- per piece is not charged by the This is

Customs/BOI such sales are liable at the normal rate of 20% on the value of supply on a tax invoice issued by the supplier (BOI Company) . Such amount should be declared by the supplier as his output tax. 8.4 Amendment to return If a person wishes to amend a return which he has furnished earlier he should apply to Deputy Commissioner (VAT Refunds) stating the reasons as to why the return should be amended. If the reasons are acceptable necessary adjustment will be made in the computer and a revised assessment will be issued. 8.5 Monthly Returns and Quarterly Returns Please see para 3.6 8.6 Returns to be furnished by importers entitled to VAT deferment facility; Exporters who import goods for the purpose of manufacturer and re-export Persons approved under Sec. 22(7) who import project related goods

Who are entitled to VAT deferment facility (Para 6.2.1) and are required to furnish Form 20A together with VAT return (Form 20) Para 6.5

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8.7

Approved Branches of the Bank of Ceylon Following branches of the Bank of Ceylon have been assigned to pay Value Added Tax. If VAT is payable on the basis of the return, the VAT return form too should be handed along with the payment to any one of the following branches of the Bank of Ceylon. Prince Street (Pettah), Central Market Branch (Pettah), Metro Office (Inland Revenue Building), Corporate Branch, City Branch, Torington, Union Place, Wellawatte, Borella, Kollupitiya, Bambalapitiya, Ratmalana, Nugegoda, Kalutara, Puttalam, Biyagama, Ja-ela, Dehiwala, Maharagama, Homagama, Battaramulla, Kaduwela, Kurunegala, Negambo, Kandy, Galle, Matara, Anuradhapura, Badulla, Nuwara-Eliya, Kegalle, Tissamaharamaya, and Deniyaya.

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Chapter 9

Calculation of Tax
9.1 Calculation Registered persons are required to furnish returns and pay VAT for each taxable period. VAT payable to the C.G.I.R is therefore calculated in respect of a taxable period. Registered persons who are required to submit monthly returns have to calculate VAT payable/refundable every month. Others, must calculate quarterly. The VAT payable in respect of a taxable period is calculated by deducting input tax applicable to that period from the out put tax applicable to that period. VAT payable = Output tax Input tax The applicable taxable period depends on the basis of accounting. If a person is approved to declare tax on cash basis he must declare output tax for the taxable period in which in cash is received and input tax for the taxable period in which the payment is made. If the input tax exceeds the output tax a refund will arise. 9.2 The Theory Roughly the theory behind the above calculation is as follows. In a production/distribution process, Input + Wages + Profit = Output Wages + Profit Value Added = Output Input = Output Input But Wages+ Profit means the added value to the factors of production. The tax on value addition can be calculated by calculating the tax on (output input). This can be done either by applying the tax rate to the (output value input value) or by computing (output tax input tax). Sri Lanka follows the latter method which is the method adopted by OECD countries. (Some countries may follow the wages + profits model but it is not considered desirable because it is accounts based and profits need to be identified) 9.3 Output Tax Output tax is the VAT charged by a registered person on supply of goods & services made by him. Rs. 25/- per piece of garment, charged by Customs or BOI, on approved sale of garments in the local market by BOI manufacturers constitute part of their output tax. However the present return form is not designed to include that amount as

52

the tax is collected by the Customs/BOI. But the number of pieces must be declared in box E of the return in order to verify the amount paid.

Persons who are approved to adopt cash basis under Section 23 should declare output tax only when the cash is received.

Normally out put tax consist of tax charged at Rs. 20%- (Box 1 of the return), tax
charged at 10% (Box 2 of the return) and special output tax of Rs. 25/- per piece of garment. But sometimes it is possible that payments may be received after 01.08.2002. relating to GST invoices issued before that date. Those who are submitting returns on cash basis must declare these amounts as output tax in their VAT returns. (For details Sec. Para 22.1.2) Similarly there may be GST invoices issued in the month of August. Although the GST charged/collected in respect of these invoices is at 12.5% such amounts must be declared in the 20% box (i.e Box 1) of the relevant VAT return.

Sale of assets (including motor vehicles used for travelling)

and scrap of a

taxable activity also constitute a taxable supply and output tax must be declared on such sales. In the valuation of assets for this purpose a reasonable economic depreciation should be allowed. basis. Output tax must also be declared on self supply of taxable goods and assets including motor vehicles used for travelling. An asset or goods from stock in trade may be taken out for private use or for an exempt activity of the same person. If it is permanently transferred for private use it must be treated as a disposal and market value of the asset should be considered to compute out put tax. If it is temporarily transferred it should be considered as a service and output tax should be computed on an appropriate value - Sec. 5.(5)(iv) Bad debts recovered, Insurance receipts, fringe benefits to employees and bartar transactions if any, are other supplies where output tax should be charged and declared. The open market value of the assets and goods remaining at the time of cancellation of registration (including motor vehicles) also constitute a taxable supply. Vide para 4.8(c ). The output tax on such supply at the appropriate rate should also be declared in the return. If all the goods and assets are sold to a non-registered person the output tax must be paid on sale price or open market value which ever is higher. If another registered person continues to carry on the taxable activity with such goods and assets then no output tax is due on such remaining goods and assets. It must be ensured that output tax will be If an asset was used for both taxable and exempt activities the disposal value should be considered on a proportionate

53

accounted for in respect of all the goods and assets on which input tax has been claimed. [Section 16(5)] A separate record should be maintained in respect of GST tax declared as 0output tax in VAT returns. (Para 22.1.2) A separate record should also be maintained in respect of supplies made without output tax to Diplomatic personnel (Vide Chapter 20) When fringe benefits are made to employees, output tax should be paid by the employer on the value of supply. should pay VAT on that amount. (The supplier is the employer). If an employees private bill (say a hotel bill) is settled by the employer, the employer The bill cannot be a tax invoice as the employee is obtaining the service (or buying goods) as a private individual and not as a registered person. But that bill may be a VAT inclusive bill or a bill without VAT depending on whether the supplier is registered or not. In either case the employer is required to pay VAT on that payment (i.e the value of supply) at 10% or 20% depending on the type of supply. If it is a hotel bill it is a service liable at 10%. If it is a bill pertaining to the purchase of a television it is liable as a supply of goods at 20%. included in such invoicesa. The employer cannot claim input tax

9.4

Input tax
Input tax is the VAT payable by a registered person; (a) To another registered person - in respect of goods and services obtained from such person to be used in a taxable activity and (b) To the Customs - in respect of goods imported to be used in a taxable activity. (Garments purchased from a BOI manufacturer cum exporter with the special approval of DGC/BOI
at a special duty of Rs.25/- per piece paid to Customs is also treated as an import)

9.4.1

Special rules regarding input tax Mixed activities - Where a supply of goods or services received by a registered person, or goods imported are used or are to be used partly for the purpose of taxable activity the input tax shall be claimed proportionately except in the case (iv) below.

ii.

Finance Leasing - In the case of a person providing leasing facilities under the Finance Leasing Act No. 56 of 2000, the input tax on Goods supplied under a leasing agreement for a period less than 3 years shall be counted at the rate of 10% even if the tax paid on such goods is more than 10%(Vide Para 18.13.3).

iii.

Tenants - Where an unregistered person leases out his land and buildings in terms of a tenancy agreement, to a registered person, input tax is allowed to be

54

claimed on expenses in connection with the services provided on such land and building, during the tenancy agreement if such registered person provides sufficient evidence to the satisfaction of the CGIR, to the effect that Telephone bills, electricity bills etc. paid by the tenant) iv. Electricity - any registered person who has obtained a license under the Electricity Act No 19 of 1950 and engages in the distribution of electricity may be allowed input tax on the purchase of electricity for such distribution without apportioning for disallowable input. iv. Cash basis reporting - persons who are approved under Sec. 23 for cash basis reporting of tax should declare input tax only when the payment is made in respect of an invoice. 9.4.2 Disallowable input tax Section 22 (5) Input tax is relation to following supplies and invoices are not deductible i. ii. iii. Motor vehicles used for traveling (business or private) including, repairs, lease, hire, insurance etc. Purchase of goods or services which are not connected with the taxable activity. if the supply is not supported by a 'tax invoice' duly issued, and received within 12 months or a customs declaration issued in the name of the registered person. (This does not mean that a tax invoice can be issued within 12 months. It should be issued within 28 days. It is not valid if it is not issued within 28 days. In cases where the tax invoice has to be sent by post ( Ex. Telephone bills) or due to some extra-ordinary circumstances if it is received late anything received after 12 months will be disregarded). Further this 12 months rule have been slipped out of the final draft/print of the Act. It is expected that it will be restored. Taxpayers are advised to place the date stamp on the invoices received by post and to prepare the VAT Account on the basis of that date. (Vide Para 15.6) iv. v. if the input tax contained in a invoice relating to a local purchase is not claimed within 6 months from the date of receipt of the invoice Input tax in a tax-invoice which is not in the name of the Registered Person in except cases referred to in para 9.4.1(iii) and in a Cus-Dec where change in name is apparent. vi. change in the use of assets and change in the status of the activity will give rise to input tax adjustments. Eg: Machine purchase for exempt activity is the payments are made by him and the existence of the tenancy agreement.(Eg.

55

transferred to a taxable activity and exempt activity becoming liable after sometime. Eg 1. Change in status of the activity - Machine was purchased on 01.08.2002 during VAT period for Rs.312,500/- and used in an exempt activity. With an amendment of VAT the status of the activity changed . Activity became a liable (taxable) activity w.e. from 01.08.2004. If the life time of the machine is 5 years. VAT paid when purchased = 312,500 @ 20% = 62,500/Input credit entitlement for VAT is calculated as follows. = Total input tax paid x period of taxable use Life time of asset = 62,500 x 3 5 = 37,500/= Eg.2 Change in use - This happens when an asset is used in an exempt activity and the asset is transferred to taxable activity later. Calculation is the same as above. Input tax adjustment is due in respect of bad debts written off. Input tax incurred in providing re-imbursement of personal expenses of an employee is not allowable since it is not connected to the taxable supplies made by the employer. Record keeping for input tax A separate record should be maintained in respect of relation to GST invoices in VAT returns. 9.4.4 * Special Input tax (i.e NSL in stocks) NSL embedded in the unsold stocks as at 31.07.2002 can be claimed as input tax by importers who are engaged in importing and selling of goods imported by them if the goods are not subject to any processing before sale. input tax claimed in

vii. viii.

9.4.3

IF
* * * * the goods were liable to GST if sold prior to 01.08.2002. goods imported will be available for sale by the same importer no deduction has been claimed under any other provision the details of the stocks and NSL paid on those goods are submitted to the C.G.I.R. before 31.12.2002 on from VAT 24 after a physical stock - taking or from computerized records of stocks The claim can be made only when the CGIR approves the claim. Any excess input tax is not refunded but can be carried forward indefinitely to be It is clear from above that any NSL embedded in stocks which were exempt from set off against future VAT. GST but liable to VAT will not be considered.

56

9.4.5

Transitional Provision Sec. 76 Where the C.G.I.R is satisfied that; * * * * Then * IF The goods are being used only partly for a taxable supply then C.G.I.R shall determine the allowable portion of such input tax. VAT paid on the acquisition of such goods shall be deemed to be input tax. a registered person or other person has paid VAT on goods acquired on or after, 01.08.2002 for the purpose of making an exempt supply and such supply has subsequently become a taxable supply and such goods are being used in making such taxable supply.

9.4.6

Input tax on GST invoices Sec. 22(2) Input tax not claimed on invoices issued prior to 01.08.2002 and on any valid GST invoices issued after 01.08.2002 may be claimed under VAT. (Vide para 7.8). In respect of invoices issued prior to 01.08.2002 the six months rule in para 9.4.2(iv) is applicable with effect from 01.08.2002 irrespective of whether the registered person is on cash basis but cash not paid by that time.

9.4.7

Input tax on Sri Lanka Telecom Master Invoices Sri Lanka Telecom issues master invoices to subscribers who have several telephone connections. If such a subscriber is a registered person and claims input tax on telephone bills an adjustment should be made in respect of telephones which were not used for the taxable activity. The disallowable VAT may be computed by multiplying the VAT on the master bill by the fraction VAT on Disallowable Bill/VAT on Gross Bill

9.5

Burden of VAT From the above mentioned method of calculation of VAT (paras 9.1 and 9.2) it can be seen that the burden of VAT falls on the final consumer only. Final consumer means the last person in the chain of production and distribution who receives (buys) the goods or service but does not use it in any taxable activity. He pays the VAT to his supplier and not directly to the government but the amount paid by him is received by the government through various stages of production and distribution of that goods or service. This can be illustrated by a trivial example.

57

Eg. If A is an ice-cream vendor who buys ice-cream in Cans, put them in Cones and sells them to final consumers; He buys the ice-cream in containers (cans) from X and cones from Y. Assume all are Registered Persons, and VAT on all gods and services is 20%. X sells Cans at 100/- and charges VAT at 20% Y sells Cones at 1/- per Cone and charges VAT at 20% Then A spends as follows X sells a Can of ice cream to A Y sells 10 Cones to A Value of supply 100 10 110 VAT 20 2 22 Total 120 12 132

Thus A pays 110/- on goods and 20/- as VAT to X and 2/- as VAT to Y. If he sells cones at 12/- each then A sells 10 cones @ 12/- per cone As out put tax = 24 As input tax = 20 + 2 = 22 = 2 * Thus As Customers pay government. 24/- as VAT to A but A pays only 2/- to the But the other 22/- has already been received by the government, Tax payable by A = 24 22 120 10 24 2 144 12

20/- through X and 2/- through Y. We can look back further in this chain of production and distribution with the following details. If X is a manufacturer of ice cream who buys raw materials from P and Containers from Q then he should pay VAT on his raw materials and on the purchase of Containers as follows. Value of Supply X buys raw material to make ice-cream, from P X buys containers form Q X sells ice-cream with container to A Then Xs output tax is 20 but input tax is 17 X pays to the department only (20-17) * The value addition by A = 120-110 = 10 = 3 75 10 85 100 15 15 2 17 20 3 90 12 102 120 12 VAT Total

The balance 17/- is coming form P (15/-) and Q (2/-)

58

Tax on value addition @ 20% *

= 10 @ 20% = 2

Which is the same as his (output tax - Input tax) = 24 22 = 2 The value addition by X = 100-85 = 15 Tax on value addition @ 20% * = 15 @ 20% = 3 Which is the same as his (output tax Input tax) = 20-17 = 3 Thus the tax on value addition at each point in the chain of production and distribution is equal to the ( Output tax Input tax) at each point. This is the amount payable by the Reg. Person at that point. He does not pay anything out of his own profits or turnover. The set off of input tax at each stage ensures that tax on tax is not charged and the ultimate consumer bears the full burden of tax. 9.6 Some examples illustrating principles (1) A partnership, which is a registered person, runs a grocery store. One partner took home some goods on 20.09.2002 for his private use. The market value of the goods and the usual selling price of the goods is Rs.3500/- (excluding VAT). In the business books the stock account has been credited by Rs.3,000/- which is the cost of the goods, and his drawings account has been debited by the same amount but no VAT has been paid. What is the VAT implication? This is a deemed supply made in the course of carrying on or carrying out a taxable activity. This is a supply made to an associated person( see the definition in Sec. 83). The value of supply is the market value = Rs.3,500/-; VAT payable by the partnership Sec. 5(5) (iv) = 3,500 x 20% = 700 They should declared this amount as output tax in the VAT return for the period ending 30.09.2002. (2) A registered person owns a furniture shop. He decides to give his sister a table for looking after his child when he is away from home. It was removed to sisters house on 20.09.2002. Market value of the table is Rs.7,500/=. What is the VAT implication. The supply is made to an associate person and the value of supply is the maket value which is = 7,500/Time of supply is 20.09.2002. The Registered person should pay VAT for the taxable period ending 30.09.2002 at 7500 @ 20% = 1500/-.

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(3) (4)

In the above case if the registered person himself takes the table home for his private use? Here again a deemed supply occurs and the calculation is same as above. Mr. Baas (a registered person) is running a garage. After a burglary he lost some of his valuable tools. He received Rs.20,000/- excluding VAT from the insurance company. Insurance claim was made on 10.08.2002 and it was received on 25.09.2002.

Baas should charge VAT to the insurance company. With his insurance claim he should issue a VAT invoice. Time of supply is 10.08.2002. VAT invoice should indicate his VAT registration number, serial number of the invoice, value of supply which is 20,000/- and VAT = 20% of 20,000 = 4,000/= . Baas should declare this 4,000/- as output tax for the taxable period ending 30.09.2002. For the same period company. Insurance company should pay 4,000/- in addition to value of loss that 20,000/- to Baas. If the claim has been made during GST period then Bass must have charged GST in his invoice Value of claim GST 12.5% = = 20,000 2,500 22,500 is 4,000/- is the input tax in the hands of the insurance

Although the claim was paid on 20.09.2002 i.e during VAT period, the insurance company must pay only 2,500/- as the payment is made on a valid GST invoice. Baas should declare 2,500/- as output tax in the; VAT return for period ended 30.09.2002 and the corresponding value of supply that should be declared in cage A of the return is 2500 x 5 = 12,000/- and not 20,000/- (Please see para 22.1) (5) A registered person purchases a computer for his home use. But it is going to be used in his taxable activity 25% of the time. claim? He cannot claim any input tax because the computer (the asset) is not a business asset. The cost of the computer is Rs.125,000/- and VAT paid is 125,00/- What is the amount of input tax he can

60

If the asset if purchased for the business and it will be brought into the balance sheet of the business (i.e the taxable activity) then full input tax on the purchase will be allowed and an adjustment will be made with regard to private use.

(6)

A registered person purchased a Van on 20.09.2002 for a mobile (transport) business carried on by him. He is going to use it 70% of the time for the taxable activity and 30% of the time for private use. Cost of the van is 600,000/- and VAT paid is 120,000/-. What is the input credit available to him. During the taxable period ended 30.09.2002 he spent Rs.60,000/- on insurance and repairs etc. which includes VAT. What are the VAT implications.

There are two adjustments that will arise in this situation. (i) (ii) (i) Input tax on purchase Input tax on running expenditure

Purchase Input tax on purchase Amount attributable to business use Input tax allowable Input tax not allowable = = = = 120,000 120,000 X 70 100 84,000 36,000 ======

(ii)

Running expenses Amount spent on private use (including VAT) VAT content in private use Input tax not allowable = = = 60,000x 30 = 18,000 100 1/6 x 18,000 3,000 =====

This Rs. 3,000/- will be disallowed for that taxable activity. The registered person should Either deduct full input tax on the purchase (120,000/-) plus input tax on total (ie business + private) running expenditure, in cage 5 of the return and add back the disallowable input tax 36,000 + 3,000 = 39,000 in cage 7 of the return or

61

claim (deduct) only the allowable portion in cage 5 ie (84,000 + input tax attributable to business running expenditure = 84,000 + 1 X 70 x 60,000 = 91,000) 6 100

(Some countries make an adjustment of output tax as well with regard to private use i.e total value of private use spent by the Company = 18,000. Treating this is a benefit or a supply made to the person who made use of the company vehicle the Company is called upon to pay 18,000 @ 20% = 3,600 as output tax. We do not make such an adjustment) (7) In the above example if the van is going to be used by an executive of the organization 30% of the time what is the VAT implication. (70% transport work) VAT implication is the same as above. Input tax on purchase : Amount allowable = 84,000 Input tax on private running expenses : Amount not allowable = 3,000

(8)

In the same example (No.6) if the registered person will be terminating the mobile business one year later on 30.09.2003 and if the market value of the Van on that day will be 300,000/- what will be the VAT implication?.

At the time of termination the value of the remaining assets of the taxable activity This is a deemed supply - Sec.16(5) Value of the deemed supply Output tax payable @ 20%

= 300,000/= 300,000/= 60,000/-

(Although 30% was used for private purposes full value of disposal is liable to VAT) (9) In the example No. 6 if the van is taken completely for private purposes (i.e 30% is converted to 100%) What is the adjustment?. Adjustment is the same as above. An asset in the business balance sheet is transferred for private use of the owner. Value of supply for private use VAT payable = = = = Market Value Section 5(5)(iv) 300,000/300,000 60,000/@ 20%

(In this type of cases the extent of private use can be estimated on the basis of the distance travelled for private use and business use. If the private use is commenced a few years after the purchase a reasonable proportion of the input tax on purchase will be disallowed depending on the life time of the asset. If the

62

life time is six years and the private use was commenced two years after the date of purchase the amount disallowable (i.e to be added back) in the 3rd year will be 120,000 x 4 x 30 = 56,000/-) 6 100 (10) In the above example the situation will be different if the asset is used 70% in a taxable activity and 30% in an exempt activity carried on by the same registered person and the van is transferred completely to the exempt activity, the output tax adjustment will be as follows. (i) (ii) (iii) Adjustment on input tax relating to purchase = same Adjustment on input tax relating to usage = same Adjustment on output tax relating to disposal :- as follows. The value of supply of asset from taxable activity to exempt activity Output tax payable = = = = (11) 300,000 x 70 100 210,000/210,000 x 20 100 42,000/-

If the van is transferred totally for the exempt supply (market value = 300,000/-)

A Company (registered person) provides fringe benefits to an executive officer during tax period ended on 30.09.2002 as follows: Overseas travel Medical benefits Free transport Other benefits 75,000 5,000 6,000 4,000 90,000

What is the output tax payable by the company? A. Overseas travel is a zero-rated supply (Vide Chapter 25) . Medical benefits and official transport are exempt supplies (Vide Chapter 10). Therefore only the other supplies amounting to Rs.4,000/- is liable at 20%. The company should pay 800/- as output tax. The company is also not entitled any input credit that can be attributed to exempt supplies (Medical & transport) (12) A Registered person has a jackpot machine at his hotel. in the machine was Rs.16,800/- What is the VAT implication? This is a taxable supply. Time of supply is 30.09.2002. Therefore VAT should be paid for the taxable period ended 30.09.2002. He cleared the

machine on 30.09.2002 and he banked and the money on 01.10.2002. Amount

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Value of Supply has to be ascertained by using the tax fraction because the gross collection is treated as including VAT. Thus VAT inclusive consideration VAT Value of supply = = = = 16,800 1/6 x 16,800 2,800 14,000

(13)

The registered person should declare this amount as output tax in his VAT return for the taxable period ended 30.09.2002. The same treatment is applicable to other coin operated machines. A sports club which is a registered person runs a raffle. The tickets were sold during GST period. The raffle was drawn on 30.09.2002. The results were published on 07.10.2002. The total collection amounted to Rs.750,000/- and the cost of the prizes amounted to Rs.350,000/- What is the VAT implication?

This is a taxable supply. Time of supply is 30.09.2002. Therefore VAT should be paid for the period ended 30.09.2002. Value of supply = 750,000 350,000 = 300,000/VAT payable inclusive. = 1/6 x 300,000 = 50,000/The reason for using the tax fraction is that the collections are treated as VAT

(14)

registered person dealing in computers and accessories offered a part

exchange ( a trade off) of a computer to a customer. Value of the new computer is Rs.125,000/- excluding VAT. The market value of the old Computer (excluding VAT) is Rs.30,000/* Customer pays the balance = = 95,000/- to the dealer 125,000 12,500/(Computers are liable to VAT at 10%.) Value of supply by the dealer VAT at 10%

Customer should pay 12,500/- as VAT to the dealer in addition to 95,000/Dealer should declare this 12,500/- as output tax. In this case if the Customer is also a registered person then he should charge 30,000/- @ 10% = 3,000/- as VAT to the dealer. Customer should declare this amount as his output tax and 12,500/- will be his input tax. Rs.3,000/- will be the input tax in the hands of the dealer.

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(15)

A contractor who is a registered person also has given out some houses on rent. He uses some timber which he has purchased for his contract works, for the purpose of some urgent repairs needed for the houses given on rent. The market value of the timber used is 20,000/- What is the VAT implication?

Renting of residential houses being an exempt activity, the using of timber in that activity becomes a deemed supply from the taxable activity to the exempt activity. Value of supply VAT payable = = = 20,000 20,000 x 20% 4,000/-

(16)

The contractor should declare this amount as his output tax. Mr. B, a registered person is an insurance and transport agent. He purchases a Van to be used, for both transport business and private purposes. use and insurance travelling to be 30%. He has ascertained that the business (transport)use of the vehicle to be 70% and private Van was purchased from another During registered person, an importer on 01.09.2002, for a total consideration of Rs.720,000/- including VAT (i.e value = 600,000 and VAT = 120,000). transport income and van running expenses are as follows.:Income Life insurance commission Motor & other insurance commission Transport income (All excluding VAT) Expenses Value Motor insurance Fuel (Petrol) Spare Parts Repairs What is the VAT implication ? 18,000 15,000 10,000 5,000 48,000 VAT 3,600 2,000 5,600 = = = 300,000 600,000 900,000 500,000 1,400,000 the taxable period ended on 30.09.2002 his insurance income (commission)

B should charge VAT to the insurance company on the commission (Life insurance commission is also liable to VAT although life insurance premium is exempted).

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= = B should also charge VAT on transport charges = = taxable period ended 30.09.2002. Bs VAT return, value of supply Output tax (VAT) 180,000 + 100,000 = =

VAT chargeable

900,000 x 20% 180,000/500,000 X 20% 100,000/-

B should declare these amounts as his output tax in his VAT return for the 1,400,000 280,000

Insurance company should pay 180,000/- in addition to 900,000/- to B and claim that amount as input tax in its VAT return for the same taxable period. Persons who hired his van should pay Rs. 100,000/- as VAT in addition to transport charges of 500,000

Input tax on purchase Input tax paid on the purchase of van Amount attributable to business(transport)use Input tax allowable = = = 120,000/120,000 @ 70% 84,000/-

Input tax on expenses Total VAT paid on running expenses Amount attributable to business use Total input tax that can be claimed by B for the taxable period ended on30.09.2002 Input tax allowable = = = = 87,920/Output tax-Input tax 280,000 87,920 192,080/= = = = 5,600/5,600 x 70 100 3,920/84,000 + 3,920

If there are no other transactions the amount payable to government.

N.B

If the vehicle was used only for insurance business then it becomes a travelling vehicle and no input tax is due.

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Chapter 10

Exemptions
10.1 Exemption from payment of VAT Section 8 of the Act exempts certain supplies of goods and services (including certain imports) from VAT. The exempt supplies are enumerated in the First Schedule to the Act. What is exempted is the supply (including imports) and not the persons (ie. individuals and organizations) Thus irrespective of the person importing goods or the person receiving the supply, if the supply is exempted then the receiver of the supply, (or the importer) is not required to pay VAT on such supply/import. The only instance where individuals and organizations are exempted from VAT is the exemption of Diplomatic Missions and privileged individuals and organizations qualified under the Diplomatic Privillages Act NO. 9 of 1996. There too the exemption is limited to certain supplies and certain imports as identified by the C.G.I.R (vide Chapter 20). Thus all individuals and organizations whether they are Ministries, Departments Non profit making organizations, Religious Institution etc., other than those privileged individuals and organizations, are required to pay VAT when they import goods and when they receive supplies of goods and services from Registered Persons, if the import or the supply is not exempted. 10.2 Exemption from charging VAT The Act does not provide any exemption in this regard. If the value of the taxable supplies made by any person exceeds the registrable threshold then such person (whether an individual or an organization) should register for VAT and charge VAT on the taxable supplies made by such person. The status of the individual or the nature of the organization is irrelevant. 10.3

Imports (Exemption)
Out of the goods enumerated in the H.S. Code classification the Customs has identified the VAT exempt goods in consultation with Inland Revenue. They are clearly indicated in that VAT Guide & PRO 03/2002 dated 01.08.2002.

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The Director General of Customs and the CGIR have no authority to exempt other goods, categorised under other H.S. Codes, on the basis of recommendations made by other Ministries/Authorities. There is provision under the Customs Ordinance to exempt certain goods from Customs Duty on the basis of such recommendations, but the VAT Act No. 14 of 2002 does not permit such an action. However as stated in para 5.1.2 there may be certain inaccuracies/inadequacies in the H.S. classification and if it becomes necessary to identify a certain imported item, recommendations may be obtained form appropriate authorities for the purpose of identification. For example raw materials used in pharmaceutical, Ayurvedic and other preparations are exempt from VAT but in order to identify these raw materials recommendations from Health Authorities are obtained. Similarly medical and surgical instruments, their accessories and laboratory reagents are exempt. But the individual names of some of these items may not appear at all in the H.S. Guide and some may appear under inappropriate headings. In such situations if the CGIR is satisfied, on the basis of such recommendations or on the basis of materials produced before him, that the item imported is a medical or surgical instrument or an accessory or a laboratory reagent as the case may be then exemption will be granted. But, as stated earlier in para 5.1.2 such recommendations will be solely for the purpose of identifying the goods only. For example laboratory equipments are not specifically exempted in the VAT Act. Thus unless such an equipment can also be described as a medical or surgical instrument, no recommendations will be entertained to exempt it simply because it is used in Hospitals. Further simply because laboratory reagents are exempted laboratory equipments cannot be exempted, as it is not provided in the VAT Act.

Minister of Finance can exempt from VAT on the import of certain goods, by approved organizations if the goods are received as gifts or the supply is directly funded by foreign organizations for the relief of distress caused by natural disasters etc. (Item xvi of Schedule 1)

Import of personal items and samples worth Rs. 10,000/- or less in relation to business by parcel post or courier is also exempt from VAT. This is in addition to the VAT Exemption on personal goods which are qualified under Passenger Baggage (exemption) Regulations for Customs Duty purposes.(Items xxxii and xv)

10.4

Imports Exemption of BOI Undertakings Item xx i. Undertaking approved after 01.04.1998 Exemption is available on

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 ii.

prescribed project related articles Only if they make exempt supplies after the completion of the project. Until the completion of the project or till 31.07.2004 whichever is earlier. All undertakings approved prior to 16.05.1996 and undertakings with project cost exceeding Rs. 500 Million and approved prior to 01.04.1998 are also still entitled to the exemption from VAT on the import of project related articles during the project implementation dates. period or until the completion of the project whichever is earlier if such undertakings have not yet reached these

10.5

Following clarifications may be noted with regard to exemptions provided in the first schedule. 10.5.1 Unprocessed Agricultural Produce item (i)(a) Live trees, and other plants, roots, branches, leaves, flowers, tubes, seeds, fruits and nuts of trees and other plants in natural form not otherwise processed. Coconut shells and pairings can be considered as unprocessed for the purpose of exemption but charcoal is not. Vegetables, lac, gums, resins and other vegetable saps and extracts. Straws, husks, shells, skins of trees and other plants in raw form not chemically treated or otherwise processed; other than plants in natural form. Any kind of semi processed rubber.

10.5.2 Unprocessed Horticultural Produce Item (i)(b) Live trees and plants of a garden, branches, foliage, roots, flowers, nuts of trees and plants of a garden. 10.5.3 Unprocessed fishing products item (i)(d) Fish & Prawns Live, chilled or frozen Skin, shells, bones and other parts (Prawns include shrimps, crabs and lobsters)

10.5.4 Unprocessed Timber products item (i)(e) Fuel wood, wood in logs, poles, sticks, particles, billets, piles, stakes or similar form in rough but not chemically treated /or not suitable for manufacture of an article. 10.5.5 Bread item (iii) Any bread product is exempted but stuffed or filled bread and buns are not. Serving bread in a hotel/restaurant is also not exempted.

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10.5.6 Milk item (iv) Liquid milk not made out of powdered milk or any grain is exempted. This includes fresh milk, skimmed milk including sweetened or flavored but not vitamin enriched, Condensed milk but excluding any other products made out of milk such as butter, margarine, yogurt, cheese, ice-cream etc. Infant powdered milk is exempted. enriched infants milk formulae. 10.5.7 Supply of Educational Services item (vi) For the definition of educational establishment. Chapter 24 Para 5 & Para 18 10.5.8. Books item (vii) Books include, loose leaf, fully printed books, Telephone Directories, Annual Reports & Maps. Writing pads and other media of data storage such as cassettes, diskettes, microfilms are not. Magazines & Journals are excluded. 10.5.9 Financial Services Item (xi) (a) * Exchange of Currency Any fee or commission charged in consideration of exchange of currency will be exempted. Similarly any gains arising from exchange of currency will be exempted if the exchange is done in the course of a financial service. * Currency means any bank note or other currency of any country, other than when used as a collectors peice, investment article, item of numismatic interest, or otherwise than as a medium of exchange. (b) The issue, allotment or transfer of ownership, of any Note, order for payment, cheque or letter of credit is exempt Any fee or commission charged for these services will be exempted. Issue means the creation of the relevant document. Payment and collection means the receipt of and presentation by a banker in the process of collection of proceeds covered by the document. Payment for travelers cheques and postal money orders are also covered by this Please see the Rulings This includes infants milk foods, vitamin

70

provision. Automatic payments from accounts, automatic teller machine transactions, electronic fund transfers etc. too are covered. Transfer of ownership will cover any transfer. (c) The issue, allotment, transfer of ownership, drawing, acceptance or endorsement of any debt security, being any interest in or right to be paid money is exempt. Debt securities include deposits with banks and finance companies and other financial institutions, transferable certificates of unsecured notes, promissionary notes, convertible notes, bills of exchange, mortgages and contributory mortgages, debts, government stocks, treasury bills etc.

(d)

The issue, allotment and transfer of ownership of any equity security, participatory security is exempt. Equity security includes company shares, share options and rights Participatory Security means that of an investment jointly undertaken by more than 5 people or managed by a professional manager Eg. Unit Trusts, Common Funds. The activities of the stock exchange are covered under this in relation to transfer of ownership of quoted shares. The activities of unit trusts and fund managers of unit trusts are also covered

(e)

Stock Brokers. Although the issue allotment, transfer of an equity security or a participatory security is exempt form VAT the services rendered by the agents of such broking firms are not.

(f)

Underwriting Fees charged by the underwriter is exempt.

(g)

Provision of loans, advances and credit is exempted Any type of a guarantee is not considered under this. Interest on loans are exempted but penal interest etc. charged on lease rentals is not exempted.

(h)

Hire Purchase The finance charges in a hire purchases agreement were exempted under GST but in the VAT Act it is restricted to finance charges in respect of second hand goods. Please see comments in para 17.2(ii)

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(i)

Insurance xi(i) Only the supply of Life Insurance, Agrahara Insurance and Crop Insurance are exempt. The premiums collected on other insurances are liable to VAT. When life insurance is combined with other insurances like medical/health the exemption should be given proportionately.

Re-insurance made locally is also liable to VAT. Re-insurance outside Sri Lanka is not liable. Insurance Commissions including life insurance are all liable Insurance premiums on international travel insurance policies and marine insurance polices in relation to destinations outside Sri Lanka from other destinations outside Sri Lanka are liable to VAT at 0% if the payment is received in foreign currency.

Insurance compensation is liable to VAT as an indemnity as per definition of supply of service and as explained in para 3.3.

N.B. Although the financial services enumerated above are exempted any fee charged by a broker or an adviser in arranging such financial service and fee charged for giving of advice in relation to such services are not exempted. Eg. Fee charged by an accountant in advising the best form of investment in relation to exempt financial services 10.5.10 Diplomatic Missions (item xii) Please see Chapter 20 10.5.11 Duty Free shops Item (xiii) The exemption is applicable only to the import and sale of goods for foreign currency. exempt. 10.5.12 Postage Stamps Only the stamps are exempted. Envelopes are not exempted. Thus in the case of supply or import of stamped envelopes the cost of envelope is not covered. 10.5.13. Public Passenger Transport item (xvii) Supply of public passenger transport (land) services other than tourist transport, excursion tours, taxi services, air transport and motor transport, AND Sale of locally purchased goods even for foreign currency is not

72

Payment of lease rental on motor coaches used for public passenger transport services with seating capacity 28 or more passenger seats are exempt.

Please note, that supply

or import of a bus for public passenger transport

service is not exempted even if the seating capacity exceeds 28 seats. Only the transport service is exempted, Supply of leasing facility is exempted depending on the seating capacity. 10.5.14 Provision of Services in Sri Lanka to be consumed outside Sri Lanka(Item xxii) i. The consumption of services outside Sri Lanka while the services are performed in Sri Lanka can be observed in many different situations. ii. Computer software may be developed in Sri Lanka to be used outside Sri Lanka. iii. Consultancy services, client support services etc may be provided in Sri Lanka through internet to be consumed outside Sri Lanka. iv. Service may be performed in Sri Lanka relating to use of intellectual property (such as patents, copy rights) outside Sri Lanka v. Services provided in Sri Lanka relating to property outside Sri Lanka is treated as consumed outside Sri Lanka. vi. In the above mentioned situations the contracts to supply the service may be concluded in Sri Lanka but under the VAT principles the services are treated as performed in Sri Lanka but utilized outside Sri Lanka. In the same vein when services are performed in Sri Lanka in connection with property in Sri Lanka or business in Sri Lanka owned by or carried on by a person outside Sri Lanka such services are treated as consumed in Sri Lanka although the decisions may be taken to accept or reject the services at a place outside Sri Lanka. vi. Thus if any fees is paid for the introduction of a prospective customer etc to a foreign principle or for preparing a market research report and if the matter ends there then such payments can be treated as payments for services performed in Sri Lanka and consumed outside Sri Lanka because that is paid before the commencement of any business in Sri Lanka by that foreign principle. But if the foreign principle commences business in Sri Lanka with such customer and services are continued to be supplied in respect of that business as well, such as canvassing for orders etc. then the total payment received will be treated as a payment for a service performed

73

in Sri Lanka and consumed in Sri Lanka although there may be an element of discretion involved to accept or reject the service at the principle place of business which is outside Sri Lanka. Thus exemption or zero rating is not applicable to such services. vii. If the payment is made in rupees for services consumed outside Sri Lanka as explained above then such payments will be exempted from VAT. (if the payment is made in foreign currency through a bank then it is zero-ratedVide para 25.6) viii. In the case of services performed in Sri Lanka, in relation to a business in Sri Lanka carried on by a person outside Sri Lanka, the method of calculation of the payment due may be a useful guideline to decide where the services were consumed or utilized. If the payment due is calculated on the basis of the volume of business transacted in Sri Lanka then the services performed by the agent in Sri Lanka is treated as having consumed in Sri Lanka. Any Commission paid as the term implies relates to volume of business or the business activity that is carried on in Sri Lanka and is liable to VAT at 20%. ix. Difficulty may arise in a situation where a person in Sri Lanka is performing services in Sri Lanka to a foreign principle in relation to recruitment of personnel for jobs abroad. If a person is supplying, say, nurses or students to a foreign hospital or a foreign university via-e-mail or internet such services can be treated as consumed abroad. However if a representative is available in Sri Lanka for the purpose of recruitment then such services are liable to VAT at 20% because (a) the services are performed in Sri Lanka and (b) the services are utilized in Sri Lanka as both the service provider and the recipient are in Sri Lanka at the time of supply. 10.5.15.Residential Accommodation (Item xxiii) For the purpose of exemption residential accommodation includes houses, flats, apartments, or quarters designed solely for residential purposes. Hotels, Guest Houses, and other places meant for short term stay are not included. Commercial premises are not exempted even if they are used sometimes for residential purposes. 10.5.16 Health Care Services Item xxiv) Exemption is available only when such services are i. ii. provided by medical institutions or provided by professionally qualified persons providing such care.

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Thus, tourist hotels providing such care to guests are not medical institutions and therefore do not fall under this exemption unless their Health Care Centres are entities separate form the hotels and registered separately as medical institutions.

Please see Rulings in Chapter 24 Services,

to see what is meant by Health Care

what is meant by Medial Institution and, what is meant by

professionally qualified persons providing health care. In the case of professionally qualified persons providing health care services the exemption can be enjoyed by the qualified person and not by the institution which employs such a person. 10.5.17 Supply of pharmaceuticals item(xxxiii) Any product falls within Chapter 30, H.S Heading 29.36 of Customs H.S. Code classification. Cosmetic products are not exempted. 10.5.18 Ayurveda, Siddha, Unani and Homeapathy, Products item (xxxiv) This means medicaments, products and other preparations produced or made under the systems of Siddha, Unani, Deshiya Chikitsa and other systems of medicine and surgery indigenous to Asian countries as prescribed in Gazette Extra Ordinary No.347/12 of 04.05.1985 published by the Principle Collector of Customs and any other mixture, powder, compound or capsules as approved by the Ayurveda Sangetha Committee and Homeopathy products which are produced or made under the system of medicine established by Dr. Henneman. The exemption is available only if the medical preparation has an end use confined to therapeutic or physicians prescription. exempted. lables) 10.5.19 Agricultural Tractors item (xxxv) Tractors(four wheel or two wheel) used exclusively for agricultural/ horticultural/farming activities. The accessories such as ploughs, Disc Harrows, seeders, planters and transplanters, manure spreades and fertilizer distributors and related machinery for tractor including harrows, scarifier, cultivator weeders and Hoes but not the trailers prophylactic effect and has to be purchased on The Common areated medicated drinks are not

(The relevant certification or approval should be indicated in the

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Chapter 11

Refunds
11.1 Unlike in refunds in the case of income tax and other taxes refund of input tax in Value Added Tax constitute a very predominant feature of the tax, in any country. Refunds may arise in two ways namely Refunds arising from input tax being in excess of output tax during a particular taxable period. Refunds arising from overpayment due to inadvertancy, ignorance settlement of appeal etc. 11.2 Refunds arising from excess input tax Excess input tax arises, at the end of a particular taxable period will be refunded at the end of that taxable period except in the case of importers with activity code number 6700 (Vide para 4.13). This is a deviation from the former GST procedure where the excess input tax was not immediately refunded . In the case of importers with activity code 6700, i.e who re-sell the goods imported without subjecting them to any processing can carry forward the excess input tax to the next taxable period and any excess from that taxable period to the next succeeding period and so on. 11.3. When is refund made ? Within 2 months from the last day of the taxable period. Thus 11.4 Monthly return cases monthly refunds Quarterly; return cases quarterly refunds

Refund of Excess input tax Special Cases Section 22(7) Input tax incurred before commencement of commercial production i. If a person who has commenced a new enterprise proves to the satisfaction of the CGIR that he will undertake to commence commercial operations and to make taxable supplies within 30 months of the date of commencement.

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Credit for input tax will be given during the project implementation period in spite of the fact that there is no output tax during that period. The output tax = 0 and therefore the input tax will be refunded.

Such persons are required to furnish monthly returns and monthly refunds will be made to them.

ii.

Even BOI enterprises are required to get this approval from C.G.I.R in order to get this facility.

iii

If such new enterprise is importing project related goods (i.e goods required before the commencement of commercial production) then they are also entitled to deferment facility at the Customs as explained in para 6.2.1. In these cases the refund due to them is issued to the Customs after verifying from the CusDecs, the VAT payable to Customs. They are therefore not required to pay VAT up front at the Customs. But they should maintain VAT accounts and registers of import as explained in para 15.7

iv

CGIR can extend the period of 30 months if he is satisfied that commercial production cannot commence within that period.

11.5

Refund of Excess input tax Zero rated supplies In the case of zero rated supplies output tax = 0. Input tax will therefore have to be refunded. If a person has more than 50% zerorated supplies or if he has less than 50% zero-rated supplies but he is in the VAT deferment scheme then such person is required to file monthly returns and monthly refunds will be granted if entitled to. If his zero-rated supplies is less than 50% of the total supplies then the monthly refund will be restricted to the VAT deferred, if any, at the Customs or he will be treated as a quarterly taxpayer. Once you are registered as a more than 50% case, i.e as an entity entitled to monthly refund of input tax, the position will be reviewed once in six months to check whether you continue to be in that category.

11.6

Refunds of Excess input tax under G.S.T Excess input tax in GST returns will not be carried forward to VAT returns. They will be separately refunded except in the case of importers mentioned above.

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11.7

Set off of refunds against future tax The computer will generate as above, a separate refund for each taxable period, and therefore if a refund has to be set off against a future tax it can only be done after the return form is processed and the overpayment statement (Form VAT 26) is generated by the computer as the existing computer programmes are not geared to retain refunds for future set off. Tax payers are therefore advised not to set off past refunds in their returns. Any such claim maybe made separately on Form VAT 26 when it is received. It is generally issued after 14 days of furnishing the returns.

11.8

Assessment of undue input tax claim If a refund is issued in excess of the amount due such excess refund can be re-assessed at any time irrespective of time bar.

11.9

Refunds arising from over payments etc. In the case of a refund arising on settlement or determination of an appeal the due date for the refund will be 90 days from the date of settlement with the Assessor or the date of determination by the C.G.I.R.. In other cases the due date will be 90 days from the date of claim. Interest will be due on refunds made after the due date and any interest paid will be an income in the hands of the recipient for the purpose of income tax.

11.10

Claims for refund of VAT charged, collected and remitted ot CGIR at the higher rate when the correct rate should have been the lower rate. In such situations refunds will be made only if the CGIR is satisfied that the claimant not be unduly enriched by such a refund. The evidence required to satisfy the CGIR is that there should be a demand from another registered person who has obtained the supplies from the claimant at the higher rate together with a request to CGIR to adjust his input tax claim made in respect of such excess payment. If the claimant has charged and collected VAT at the higher rate inadvertently from ordinary consumers who are not registered persons such excess should be remitted to CGIR in the same way as VAT charged and collected illegally by a non-registered supplier. will

78

Chapter 12

Assessments
12.1 Power to make assessments An assessor has the power to make assessment on a registered person, The who fails to furnish a return Sec. 28(1)(a) who fails to pay tax, after furnishing the return Sec.28(1)(b) who requests for alternations to the return submitted Sec. 28(1)(c ) who fails to furnish a return but tax is paid which in the opinion of the assessor is less than the amount payable Sec. 28(3) who has obtained a refund or claimed input tax, in excess of the amount due - Sec. 22(8) who has furnished a return but the assessor does not accept the return - Sec. 29 Assessor shall assess the amount of tax, which such person, in the judgement of the Assessor, ought to have paid. The notice of assessment may relate to one or more taxable periods. Where an assessor does not accept a return furnished by the registered person, he shall communicate in writing why the return is not accepted. (Sec. 29) 12.2 Power to make additional assessments The assessor also has the power to make additional assessment when a registered person has for any taxable period furnishes a return but has paid tax an mount less than the proper amount. (Sec. 31). The amount assessed is deemed to be tax in default and is liable to penalty from the date such tax ought to have been paid. Vide Para 5.9 12.3 Time Bar Sec. 33 Three year time bar is applicable in respect of assessment and additional assessments unless fraud is alleged. To make an assessment three years is counted from the last day of the taxable period if a return has been duly furnished as per Section 21(I)

79

 12.4

To make an additional assessment 3 years is counted from the date of the original assessment made as per Section 31 or made in the absence of a return. Only a return furnished on or before the date specified in Section 21(I) may be treated as a return furnished under Section 21(I).

Issuing Assessments on rejecting returns As stated above, where an assessor does not accept a return furnished by a Registered Person he is required to communicate to such person by letter sent through registered post why he is not accepting the return. This is a deviation from the corresponding provision in the Inland Revenue Act. (Section 115(3) of the Act No.28 of 1979 and Section 138(3) of the Act No.38 of 2000). The deviation is intentional. The Inland Revenue Act provides that the Assessor shall communicate his reasons for not accepting the return where as GST Act No.36 of 1998 and VAT Act No.14 of 2002 provide that the Assessor shall communicate..why he is not accepting the return. The word reasons has been omitted in both GST and VAT Acts. The cause for this is the recent trend in attempting to attribute a harsh or restrictive meaning to the word reasons in the Inland Revenue Act. At present a practice has been developed, at least as a matter of routine, to challenge the validity or the legality of every assessment. (on income tax) on the grounds that the reasons are inadequate in the sense that they are not in the nature of judicial reasoning. However, unlike under the Inland Revenue Act where the tax is paid out of taxpayers private profits, Value Added Tax, (as explained in Chapter 9), is a tax collected on behalf of the government by the Registered Person from the consumers. Therefore by the time a return is furnished the tax (VAT) is already collected. The registered persons are not required to give reasons to the consumers when VAT is added to the prices of Goods and Services which they supply to the consumers. That is a legal obligation imposed upon them. They cannot refrain from charging VAT to the consumers by applying their own interpretations to the law. In cases of doubt they should consult the department and charge VAT accordingly. Thus VAT should be collected on all taxable goods and services supplied by a registered person and the VAT so collected should be in the hands of the registered person by the time a return for that period is furnished by such person. Under the circumstances it was considered an impediment to the protection of revenue, if the assessments which are otherwise correct, are quashed (by courts), on a purely technical ground of formulating reasons in the letters of communication issued by the assessors when there is sufficient and adequate appellate procedure laid down in the Act, in order to contest an assessment, if dis-satisfied. As held by the Court of Appeal in 1984 in Gunaratne Vs. Jayawardena, the department is of the view that when rejecting a return giving an indication or a clue to the taxpayer as to where he has gone wrong in his return is

80

sufficient communication of reasons. This is the most recent judgement on this issue. In these circumstances it was considered necessary to deviate from the more strict wording as appearing in the corresponding section of the Inland Revenue Act. This does not mean that the assessors should not exercise care in communicating why a return is rejected. The fact that most assessors, not being legal officers, may not be able to or may not find the time to, formulate reasons in a manner applicable to legal submissions, especially in a context where each one of them is required to handle an extremely large allocation (a few thousand files) is a sailent point to ponder. At times the reasons adduced in their letters of communications may be interpreted as conclusions rather than reasons. But the protection of government revenue as covered by these assessments, which are factually correct, is also of paramount importance. After all the purpose of the reasons is to enable an aggrieved party to formulate his grounds of appeal. In this scenario it was thought that if the assessments are correct on facts and law, leaving room in the legislation to annual assessments on a purely technical ground such as deficiency in the formulation of reasons by the assessor is not the proper thing because a genuine taxpayer who does not want to evade an issue can always get any doubts cleared if the (reasons) communication appear to be not clear or not adequate. However if a Registered Person is aggrieved by the assessment such person is not denied a fair hearing, under the rules of natural justice, which is a matter that succeeds the issue of an assessment (if aggrieved) and not a matter that preceeds the issue of an assessment. The Act provides a very clearly laid down procedure for the purpose of providing a fair hearing for an aggrieved party. While the procedural rules of natural justice have to be observed when the statuary provisions are silent on the procedure to be adopted (and only when a taxpayers rights are affected by administrative action?) it must be emphasized that the VAT Act provides clearly the procedure to be adopted when an assessment is issued and when the assessee is aggrieved by the assessment. The view that the procedural rules of natural justice should be adhered to only when the taxpayers rights are affected by administrative action has also been considered . A taxpayers rights will be affected not when a charge sheet (i.e a notice of assessment) is issued but when and if the recovery proceedings are initiated without recourse to a hearing. Further, on the basis of a consensus reached at the GST review committee the assessors too have been advised administratively to wait for one month as far as practicable, after the issue of the letter communicating why the return is rejected, so that

81

a genuine taxpayer who does not wish to adopt delaying tactics can immediately come forward and properly present his case or obtain the necessary clarifications from the Assessor. 12.5. Assessment on Partnerships Normally assessments are made on registered persons Sec. 28. Although a

partnership is recognized as a person for VAT purposes (Sec. 83) it is not a legal person to institute any legal proceedings for recovery of any tax in default. However Sec. 48(2) provides that it shall be lawful to take action against any partner as if he is responsible for such default unless he proves to the contrary. Thus an assessment on a partnership may be issued in the name of the precedent partner or any other partner.

12.6

Assessments on Executors Assessments/additional assessments in respect of periods prior to death of a deceased person can be made within 3 years from the last day of the taxable period in which death occurred Sec. 54(1)(6).

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Chapter 13

Appeals
Any appeal against an assessment, additional assessment or penalty must be made within 30 days to the CGIR. Hold over of tax in a special situation : * On appeal, CGIR may defer the due date of payment of tax: if a request to that effect is made in writing, and if it is proved that the VAT has not been charged by the appellant on the alleged supplies. * Pre requisites to entertain an appeal :

In order to entertain an appeal against an assessment/additional assessment tax payable on the basis of the return furnished by him and any penalty accrued upto the date of notice of assessment must be paid. if the assessment/additional assessment is in the absence of a return the petition of appeal should accompany a return and proof of payment of tax and penalty thereon. C.G.I.R. may consider an extension of time to pay in cases where appellant has suffered serious financial hardship.

Appeals against the assessments are settled in one of the following stages. The first step The second step The third step The final step Agreement with Assessor, failing Determination by CGIR, if not satisfied Appeal to the Board of Review, if not satisfied State a case to the Court of Appeal and then to Supreme Court

The procedure is the same as that under the Inland Revenue Act.

Chapter 14

83

Penalties
Tax payers should comply with the requirements imposed under the VAT Law. Failure to do so will result in the imposition of penalties by the CGIR or fines and terms of imprisonment by a Magistrate. Fines and penalties in respect of some of the offences are given below. Late Registration fine not exceeding 25000 and/or term of imprisonment Failure to file the return not exceeding 6 months by Magistrate

Penalty not exceeding 50000/- by CGIR or Rs.25,000/- fine and or 6 months imprisonment by Magistrate. Sec. 21(10)

Failure to pay tax on due Dates 10% of unpaid tax plus 2% for each subsequent months up to 100% of the tax Incorrect return Twice the amount of tax under paid plus Rs. 25000.

Non compliance of the requirements to issue a tax invoice

* *

Fine between Rs.25,000/and 250,000/-Sec.20(8) Should the offence continues after conviction Rs,500/- per each day. Sec.20(8)

Issue a tax invoice when not entitled to * Fine Rs.25,000/and /or six months imprisonment Sec. 67 For non-displaying of registration Certificate and non-displaying of exempt supplies Sec. 67 of the Act deals with other penal provisions. * Penalty of Rs.50,000/- - Sec. 15(5)

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Chapter - 15

Accounting Basis & Record Keeping

15.1 Accounting Invoice Basis Every registered person shall account for VAT on an invoice basis ie output tax must be declared in the taxable period in which an invoice is issued and input tax must be declared in the taxable period in which an invoice is received. Cash Basis However any person engaged in a taxable activity where it is not possible to collect payments quickly for the supplies made by him (eg. Contractors) can obtain approval from the C.G.I.R under Section 23 to account for tax (VAT) on a cash basis Once the approval is obtained for cash basis reporting such person is required to declare his out put tax when the cash is received and input tax only when the payment is made. All directions issued by the CGIR under Sec. 23 of the GST Act giving approval for cash basis accounting are valid for VAT. 15.2 Keeping of Records Registered persons are required to keep and maintain records in respect of the taxable activity carried on by them to enable the officers of the C.G.I.R to ascertain the liability. The form of the records to be maintained and the particulars to be set forth therein are as prescribed by gazette extra-ordinary 1024/8 of 21.04.1998 for GST purposes. Records include books of accounts (whether in manual, mechanical or electrical format) recording receipts for payments or income or expenditure and include, all documents that are necessary to verify the entries in such books of accounts, details of any warehouses and stock of goods etc. as are enumerated in Section 64(3) of the Act.

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15.3

Keeping of records regarding excluded supplies of buying and selling Retail and wholesale sales are not liable to VAT unless the registered person is specifically registered to collect VAT on such sales. But if a supplier is unable to satisfy the C.G.I.R as to the source from where the goods were acquired then such goods are liable to VAT. The evidence required with regard to the acquisition of goods to satisfy the C.G.I.R was published by a press notice on 07.07 2000. It is valid for VAT purposes as well. According to this press notice, if any person claims that his supplies are excluded from VAT for the reason that the supplies constitute local buying and selling only, then he should maintain following minimum registers & documents as evidence with regard to acquisition of such goods in order to satisfy the C.G.I.R 1. Register of goods acquired locally (cash or credit) This register should contain the following details (a) (b) (c) (d) (e) (f) 2. Date of the transaction Name and Address of the supplier (including the business Name) Category of goods and quantity/volume Whether imported goods or locally manufactured goods Consideration and the mode of payment Amount of GST paid, if any

The relevant bills and tax invoices (chronologically arranged) When these details cannot be produced or incorrect details have been kept the relevant supplies will not be considered as excluded supplies be treated as VAT payable as output tax) However, the above requirements will not be applicable to goods exempted from the tax. (when the relevant supplies cannot treated as excluded supplies 1/6 of the total sales will

15.4

Keeping of records regarding supplies made to Diplomatic Personnel Please see para 20.5

15.5

Other Records As stated in Chapter 21 a record must be maintained with regard to any GST tax declared in a VAT return as output tax or input tax as the case may be.

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15.6

VAT Account Every Registered person should keep a record of the summary of the output tax charged and input tax payable in respect of each taxable period. This is called a VAT Account. This should be prepared on the basis of the invoices issued and invoices received and not on the basis of actual payments. In case of cash basis tax payers they can provide a separate column to indicate the date of payment in the input tax VAT Account Register and date of receipt of cash in the output tax VAT Account register. Similarly they can have additional columns to enable the other required details to be extracted such as input tax directly attributable to exempt supplies etc. These registers should be available for inspection by the officers of the Department

15.7

Register of Imports and Register of Exports Importers, especially those who are under deferred facility should maintain a Register of Imports and Register of Exports on a monthly basis in chronological order. A Register of Exports should be maintained where applicable.

In the absence of an Output Tax - VAT ACCOUNT and Input Tax VAT ACCOUNT in relation to local supplies, Register of Imports in relation to imports made and a Register of Exports in relation to Exports made during each month, the claims for input credit maybe subject to rejection.

The Register of Imports can have the Cus-Dec No., CIF value, VAT paid at the Customs and the Date of payment, amount and date of VAT deferred and date of payment of deferred VAT..

The Register of Exports can have the Export Cus-Dec No., Value of Export, Invoice No. , Boat Note Reference etc. All the entries should be in chronological order.

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15.8

Example of a VAT Account VAT Account Output Tax(Supplies made) Taxable Period From .. to
Item No. 1. 2. 3. . . Date of Issue of invoice or tax invoice Serial No. of Invoice or Tax invoice in respect of supplies made Value of Supply (made) Output Tax charged Date of Receipt cash/ Cheque

@ 10%

@ 20%

of

Total for the Taxable Period

VAT Account Input Tax (Supplies received) Taxable Period From .. to

Item No. Date of Receipt of Tax invoice Serial No. of tax invoice Suppliers VAT Reg. No Description of the purchase Name of the supplier Value of Supply received) Input tax Payable Date of Payment of cash

@ 10%

@ 20 %

1. 2. 3. . . Total for the Taxable Period

Cash basis Registered Persons and those who make exempt supplies can have the following additional columns.
Taxable Period During which Payment is made

Input Tax directly attributable to taxable Supplies

Input Tax Directly attributable to Exempt supplies

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Chapter 16

Import & Export of Goods & VAT

16.1 Export of goods zero-rating What is meant by an export or an exporter is not defined in the Act. Exports are within the scope of VAT and are subject to VAT at zero-percent. Zero-rating is available only if the supplier of goods export such goods Sec. 7(1)(a). what is meant by this is that the zero rating is available to the direct exporter only. Subject to this All exports of goods * * * irrespective of the nature of goods and including exempt goods irrespective of the person exporting The

are zero rated. (Please see Chapter 25) As stated above zero-rating is available to the direct exporter only. registered person must have the relevant export documents in his name in order to be zero-rated. Submission of an export order and the export Cus-dec is not sufficient. Documents such as Boat Note to verify that the goods have been loaded to the ship or air-craft are essential. The other necessary documents may be the (export) invoice, bill of lading or air-way bill, certificate of shipment etc. In the case of exports by parcel post or courier service too documentary evidence should be available to prove that the export has in fact taken place. If a third party is handling the export on behalf of the exporter (eg. a fright forwarder) sufficient documentary evidence to that effect should also be available. Any person who is exporting the export quota belongs to another person will not be eligible for zero-rating (i.e ship through transactions) 16.2 Deemed Exporter Deemed exports are not zero rated because zero rating is available only to the actual export The supply by the deemed exporter to the actual exporter must be considered as a local sale/local supply. When a trading house or some other person which receives an export order get the required goods manufactured and exported through a manufacturer engaged in manufacture and export of such goods then the actual exporter is the manufacture. It is the manufacture cum exporter who is entitled to zero-rating. If

89

the trading house or the other person who obtained the export order supplies the raw-materials to the manufacturer it becomes a local supply of goods (such a local supply is excluded from VAT in the case of an approved trading house which imports and supply fabric to a BOI manufacture for manufacture & export garments vide para 2.4.1) The export proceeds becomes part of the turnover of the manufacturer. In any event zero-rating cannot be granted to two registered persons in respect of the same export. In order to claim input credit the exporter must have been registered for VAT. The importers identification number which is sometimes called the temporary registration number is not sufficient. Local sales for foreign currency will not be considered as exports eg. Sale of jewellery for foreigners who will pay in foreign currency and take them out of the country. 16.3 Buying & Selling and Import & Export 16.3.1 Mixed Activities A person may (a) (b) (c) (d) exports part of goods he buys locally sell the other part locally exports part of the good he imports sell the balance imports locally. Imports Local purchase

16.3.2 Compulsory Registration If the value of (a) +C) +(d) other than the value of local sale of exempt imported goods, exceeds the taxable threshold such person is liable to be registered compulsorily for activities (a),(c) and (d) only. (i.e excluding local buying and selling) Such person also can come under voluntary registration in respect of (a), (c) and (d) only. If such person is registered for (a),(c) and (d) only (i.e local buying and selling excluded) then he cannot claim input credit in respect of local buying and selling. Records must be kept to enable to identify easily, the items which were bought and sold locally. Please see para 15.3 Department will be careful to check whether input tax has been claimed incorrectly in such cases.

90

16.3.3 Voluntary registration for buying and selling in addition to import and export A person engaged in activities as described in 16.3.1 can register for local buying and selling part of his activity i.e (b) in addition to others i.e (a),(c) and(d) . In such event he should declare out put tax on local buying and selling also and claim input tax on the same. Please see last para in 4.3.(ii) 16.4 Records must be maintained to identify such activities. Vide Para 15.3

Concessions available to Exporters i. ii. Concessions are available in respect of import of goods made by Exporter who import goods for manufacture and export of goods so manufactured. Exporters in BOI sector who import fabric for the purpose of manufacture and export of garments and Certain indirect exporters who import fabric for manufacturer & export of garments through other s in BOI Sector. Concessions are also available to BOI garment Manufacturers cum Exporters (a) (b) when they purchase fabric from BOI manufacturers of fabric and when they transfer fabric imported by them to any other person

for manufacture and export of garments Please see table.

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16.4

Concessions available to Exporters

Type of Exporter BOI manufacturer garments for export of

Type of Concession VAT exclusion (VAT is not Customs/BOI)

Available for

charged

by

i. Import of fabric (for such manufacture & export o ii. Transfer of such fabric With or without value additio to any person (not necessa for manufacture & export o

VAT Deferment (By Customs/BOI)

i. Purchase of fabric from a BOI manufacturer o for the purpose of manufact export

(a) Any manufacturer and exporter of goods so manufactured. (b) If it is a new enterprise approved under Sec. 22(7) Indirect Exporter i.e Trading House

(a) * Import of goods(including ma VAT deferment VAT Non collection of deferred Amount (C.G.I.R will pay to DGC) i. VAT exclusion Import of fabric

* for the purpose of manufactu implementation period.

(b) * Import of project related items

* for manufacturer and export o garments

* through a BOI manufacturer c Any other Exporter approved under Sec.22(7) which is a new Enterprise VAT Refund project implementation period

On VAT paid on the import of proj

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16.5

Refund of Input tax attributable to exports As the exports are zero-rated an exporter will be entitled to recover the input tax attributable to exports. That is the input tax included in the supplies used by him which enabled him to make the export are set off against any output tax payable by him. If there is no output tax the entire amount of input tax is refunded. He is thus able to make the export without the incidence of VAT. Export of VAT exempt goods are also entitled to zero-rating. Section 76 of the Act provides that input tax paid on the acquisition of goods for the purpose of making an exempt supply shall be deemed to be an input tax if such supply subsequently becomes a taxable supply. Thus the input tax attributable to supply of goods used in making an export under any circumstances can be recovered by the exporter.

16.6.

Taxable Period of an Exporter Taxable period of an exporter is one month provided 50% or more of his total taxable supplies (including exports) are zero-rated supplies. Vide para 3.6. Such person should furnish monthly returns unless he opts to file returns quarterly Sec. 83.

16.7

IMPORTS i. Although what is meant by an exporter is not defined in the Act what is meant by importation is defined to include (a) (i). (ii) (i) (iii) iii. bringing of goods into Sri Lanka by any person or goods received form Customs bonded area the D.G.C the C.G.I.R and

(b) purchase of goods on a sale by (ii) Sri Lanka Ports Authority or for the levy of tax and other dues Bringing of a ship or an aircraft into Sri Lanka to be registered under the necessary regulations in Sri Lanka amount to an importation of a ship or an aircraft. The importation of a ship is excluded form VAT Sec. 2(3)(e) iv. VAT on importation of goods are charged and collected by the D.G.C as if it were a Customs Duty and as if all the goods imported into Sri Lanka are dutiable and liable to Customs Duty. Sec. 2.3. Thus VAT is chargeable even if the goods are exempt from Customs Duty. Please see comments made in paras 5.1.2, 5.11 and 10.3

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v.

Importation of services are not recognized in the Customs Ordinance. However a supply of a service which constitute a taxable activity, carried on or carried out in Sri Lanka by a person outside Sri Lanka is liable to VAT under VAT Act. Vide Eg. 2 in para 3.7 (ii)

vi.

In the case of importation

computer soft ware the question will arise as to Normalized mass produced common

whether they are goods or services.

software which can be used by any person and which may be received in diskettes, magnetic tapes, discs and games packages etc is treated as goods whereas specific customized software is treated as services. (vide para 3.3) vii. VAT on importation of goods is calculated on the value of supply which is = (CIF + Cus. Duty + Any surcharge + Cess + Ex. Spl. Duty) at 10% or 20% as the case may be. - Vide para 3.8(2) 16.8 Imports by non-registered persons : VAT is chargeable on the importation of goods by any person whether he is a registered person or not if the goods are liable to VAT. If the importer is not a registered person he is required to obtain an Importers Identification Number from the VAT Branch in order to clear the goods from the Customs. 16.9. Deferment of VAT on Imports : The D.G.C is required to defer the collection of VAT for a period of 60 days in respect of certain goods as enumerated in Section 2(3) Vide Chapter 6 and 16.10, 16.11. 16.10 16.11 Exemption of Imports by BOI companies Please see para 10.4 Exemption of imports made in personal baggages, and import of personal goods and business samples through courier and parcel post - Please see para 10.3 16.12 Exemption of Imports - Other items are enumerated in the First Scheduled to the Act. Please see Annexure 2 16.13 16.14 Exclusion of Imports by approved trading houses Please see para 2.4.1 (iii) Input tax on goods imported by a registered person which are not used in a taxable activity or partly used in a taxable activity - shall be allowed on a proportionate basis section 22 (3)

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16.15

Custom Bonded Area What is meant by a Customs Bonded Area is defined in Section 83 of the Act. Bonded areas means ware houses approved under various provisions of the Customs Ordinance. Free Trade Zones declared by the Board of Investment of Sri Lanka which are subject to monitoring by the Department of Customs are also treated as bonded areas. No VAT is charged on the imported goods if they are transferred to a Customs Bonded Area. But VAT is charged when they are removed from the bonded area as the removal tantamount to an import according to the definition of import. There are seven Free Trade Zones approved as bonded areas at Katunayake, Biyagama, Koggala, Pallekele, Migirigama, Malwatta and Watupitiwala. If any goods are transferred out of these bonded areas even for processing purposes VAT is payable as an import. Vide para 16.7 (I) (a) (ii).

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Chapter 17

Hire Purchase Transactions & VAT

17.1 Hire purchase agreement means an agreement under which goods are sold and i. viii. the possession of goods is delivered by the owner to a person on condition that such person pays an agreed amount in periodical installments : and either the property in goods will be passed to the hire -purchaser on the payment of the last installment or an option to purchase the goods can be exercised in accordance with the terms of the agreement. 17.2 The VAT treatment of a hire-purchase conditional sale or a credit sale transaction is based on the premise that unlike in the case of a lease transaction where only the possession of goods passes to the lessee while the ownership remains with the lessor, in the case of a hire-purchase conditional sale or a credit sale both the possession and the ownership in goods passes to the hire-purchaser. (i) (ii) Supply of goods and Supply of a financial service Thus for VAT purposes an hirepurchase conditional sale or a credit sale is treated as having two components namely

Thus the total consideration in the invoice pertaining to a hire-purchase transaction may have a cash price component and a hire-purchase charges component. The hirepurchase charges component is in effect a finance charge. If the hire-purchase charge is not separately disclosed to the customer the total consideration is treated as the cash price of goods. i. The value of supply in the supply of goods component, as explained in para 3.8(5), is the cash price of goods determined in accordance with the provisions of the Consumer Credit Act No. 29 of 1982 or the market value of goods, whichever is higher, in the case of new goods. If they are second hand goods (i.e if they have been used in Sri Lanka for more than 12 months) then the value of supply is the value as per agreement less hire-purchase charges. The hirepurchase company should charge VAT on this value at the rate applicable to the particular goods. If the goods belong to 20% category (Eg. Television, motor cycle) then 20% of the value of supply as computed above should be charged as VAT. If the goods belong to 10% category (Eg. Computers, refrigerators, airconditioners) then 10% of the value of supply should be charged as VAT. If the goods are exempt as per First Schedule to the VAT Act supply of goods component in a hire-purchase sale will be exempted from VAT.

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ii.

(a)

The financial services component was exempt from GST under item (xvi)(h) of the exemption list provided the finance charge or the hire-purchase charge is separately disclosed to the purchaser.

(b)

However, it appears that the VAT Act has brought about a change by restricting the exemption to the financial charges of second hand goods only. Vide item (xi)(h) of the First Schedule to the VAT Act. Please see the preambles to the two items i.e item (xvi) of the GST Act and item (xi) of the VAT Act. They both speak of exemption of financial services only and not of exemption of supply of goods

(c)

It is noted that the intention was to exempt both components (i.e both finance charge and supply of goods) in the case of second hand goods while exempt only the finance charges component in the case of new goods. It is expected that this will be clarified by an amendment to the law.

(d)

The exemption of finance or hire-purchase charges depends on the fact whether it is separately disclosed to the purchaser or not. If it is not separately disclosed and only the total consideration is disclosed then the total consideration is treated as the price charged for supply of goods. Question of exempting finance charges does not arise.

17.3

The following example will illustrate the VAT treatment of a hire-purchase transaction under the existing provisions and under the intended clarification. Eg 1 -. The Buyer B purchased a new computer from the hire-purchase company H on hire purchase terms. The cash price is Rs.125,000/- and the finance charges amount to Rs.33,000/- so that the total hire-purchase price is Rs. 158,000/- The hire-purchase charge is disclosed separately to the buyer B. The other terms are that an initial payment of Rs.50,000/- should be made while the balance Rs.108,000/- should be paid in 36 installments of Rs.3000/- per month. accordance with Assume that the cash price determined in the Consumer Credit Act and the market value do not exceed

Rs.125,000/- Computers are categorized as industrial machinery and the rate of VAT is 10%. Then the invoice from H to B must contain the following minimum details:

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(a)

Under the existing provisions Value of Supply Cash price/market value Hire-purchase charges (Rate is 20% because it is not specified) Initial payment 125,000 33,000 158,000 50,000 + VAT 12,500 6,600 19,100 19,100 Total = 137,500 = 39,600 = 177,100 = 69,100

(b)

Under the expected clarification Value of Supply Cash price/market value Finance/hire-purchase charges Initial payment B 125,000 33,000 158,000 50,000 + VAT 12,500 Exempt 12,500 12,500 Total = 137,500 = 33,000 = 170,000 = 62,500

should pay VAT (Rs.12,500/-) at the time of signing the agreement. H should

declare that amount as output tax for the particular taxable period during which the agreement was signed because the time of supply in the case of a hirepurchase sale is the time at which the agreement is singed. However the Seller H is not entitle to full input credit on the purchase value of the hire-purchase stock (i.e the computer) because his supply value is partly exempted. allowable portion will be = 125 X actual input tax paid. The balance will have to be added back if it has 158 been already claimed. If the finance charges are not separately disclosed to the buyer then VAT is chargeable on the full value of supply i.e 158,000/- @ 10% which is equal to 15,800/(c) (d) If the market value is more than 125,000/- (say 130,000/-) then VAT payable on the supply of goods component will be 130,000/- @ 10% = 13,000/The exemption on finance charges is available only if the seller H himself provides the hire-purchase credit facility. If the seller (say a retailer) sells only the goods while the finance facility is provided through a third party (a finance company) then the seller should charge VAT on the full consideration which will invariably be an enhanced price than the normal price because it will include finance charges. But in this type of a situation the buyer pays this price to the finance company in installments while the finance company pays the retailer only the price of the goods after retaining the finance charges. The customer should pay VAT to the retailer on the full value (i.e total consideration, which includes finance charge even if it is separately disclosed) for which the retailer should issue an invoice to the buyer (Vide Chapter 27). (e) If the computer is a second hand one (i.e a one that has been used in Sri Lanka for more than 12 moths). The

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Under the existing provisions the finance charges component will be exempted while the cash price component is liable to VAT. Under the expected clarification both the cash price and finance charges will be exempted from VAT and the company H is no entitled to any input credit on such hire-purchase stocks.

The tax payers are expected to follow the latter method.

Eg.2 - B is not a registered person for VAT. He imports a vehicle for Rs.1,000,000/(C.I.F) VAT paid to custom is Rs.200,000/-. Thus his total cost is 1,200,000/-. He goes in for a hire-purchase with a hire-purchase company H. Transfer of vehicle form B to H is a separate supply. But it is not a liable to VAT because B is not a registered person. transferred is Rs.1,200,000/ Supply of the vehicle by H to B under a hire-purchase credit sale is another supply. This is liable to VAT, Usually the value of supply is 1,200,000/-. But in this type of situations where the supply is, made to the same original owner who is not entitled to input credit an adjustment will be made in respect of uncliamable input. Sec. 6(5). Vide para 3.8(5) Thus adjusted value of supply VAT payable @ 20% = = = 1,200,000 200,000 1,000,000 200,000/Price at which the vehicle will be

The original owner, who bought the vehicle on hire-purchase terms, must pay 200,000/- as VAT to the hire-purchase company in addition to VAT paid (Rs.200,000) to Customs. Hire-purchase company H should declare this amount as output tax. 17.4 Re-possession of goods by the Hire purchase Co. If the hire- purchaser defaults payment the hire purchase company has the right to re-posses the goods. The company usually re-sell the goods to a 3rd party and proceeds are taken in satisfaction of the whole or part of the debt outstanding. Following supplies can be identified in such a situation. Re-possession by the hire-purchase company constitute a separate supply. The supplier is the defaulting hire-purchaser and the consideration for the supply is the settlement of the debit. If the hire-- purchaser is a registered person and if the goods are not exempt he must issue a tax invoice to the hire-purchase company and charge VAT. The value of supply on which VAT is calculated is the amount of the debt that is settled which is usually the sale price of the asset

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by the hire-purchase company to the 3rd party. Accordingly the hire-purchaser should declare output tax on that amount. The hire-purchase company can claim input tax credit on the VAT paid to the defaulting hire-purchaser. The sale by the hire-purchase company to a 3rd party is another supply. The company must charge and collect VAT from the 3rd party buyer and declare output tax. The value of supply on which VAT should be calculated is the sale price or the market value whichever is higher. It can be observed that there is no additional liability on the hire-purchase company if the sale price to the 3rd party is not less than the market value provided the amount of the, debt settled is the same as the sale price. In a very rare case where the hire-purchase company is generous enough to give a refund from the sale proceeds, to the defaulting hire-purchaser an adjustment must be made to the value of supply by the hirer. 17.5 When the retailer sells goods to a finance company who then sells to the

consumer on a Hire-purchase Agreement Some times it is possible that the consumer selects the goods from a retailer and then the Finance Company/Hire Purchase Company buys them and sell them on hire to the consumer on hire-purchase terms In such situations there are two taxable supplies namely i. ii. Retailer to Finance Co. (Sale of Goods) Finance Co. to Consumer (Hire Purchase transaction)

The hire-purchase transaction between the Finance Company & the consumer can be dealt with as per 17.3. above. 17.6 When the retailer sells goods to the consumer under a Hire-Purchase Agreement to which the retailer and consumer are parties and then retailer assigns the rights/interest in the agreement to a Finance Co. for a consideration equal to the amount unpaid by the consumer. This is a situation where tax retailer directly provides a hire-purchase sale to the consumer while at the same time the hire purchase agreement is assigned to the finance company. In this case too two supplies can be identified i. ii. Retailers sale to consumer is under a Hire Purchase Agreement which can be dealt with as per para 17.3 The assignment of the Hire-Purchase Agreement. (This may be exempted as a Financial Service)

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17.7

Hire- Purchase inputs input tax credit is available on the goods sold on hire-purchase terms, if the purchase invoice is in the name of the hire-purchase company. However if the finance charges included in the hire- purchase agreement is exempt from VAT, the input tax attributable to finance charges will not be allowed. As far as possible input tax directly attributable to finance charges should be ascertained. 17.3(b). When the hire-purchase of second hand goods are exempted no input tax credit will be allowed on such goods. If it has already been claimed when the goods were purchased it should be added back when the goods are sold on hirepurchase terms. Otherwise it can be claimed on a proportionate basis. Vide

17.8.

Rent purchase transactions are not treated in the same manner as hire-purchase transactions for VAT purposes. The deed value of the property sold on rent purchase terms is treated as the value of supply. Generally residential houses, whether they are sold on rent purchase terms or not, are exempt from VAT unless they fall within the liable category under item (xxiii) of First Schedule to the VAT Act (That is when the residential houses are supplied by a BOI company engaged in a housing project of which the project cost exceeds US $ 10 Million). The VAT liability on the supply on rent purchase terms of commercial buildings and liable residential houses will be calculated on the full value of the transaction.

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Chapter - 18

Leasing & VAT

18.1 Lease means a transfer of the right of possession of an asset for use by another person for a term in return for a consideration. There are two types of leases namely finance leases and operating leases. However there is no difference in treatments in VAT between the two types of leases other than the application of rates as per para 18.3 below. 18.2 In a leasing transaction only the possession of goods passes to the lessee while the title remains in the lessor. It is therefore not a supply of goods. Under the definition (Section 83), any supply which is not a supply of goods is a supply of a service. As no supply of goods is involved the value of supply is not the value of goods (as in hire-purchase) but the amount of the lease rental. 18.3 The rate of VAT is 20% except when the leasing facility is supplied under Finance Leasing Act No.56 of 2000 where the rate is 10%. 18.4 VAT is exempted on the supply of leasing facilities to motor coaches which are used for public passenger transport services if the seating capacity is 28 or more passenger seats. (Note that the supply/import of such buses is not exempted only the lease is exempted) 18.5 The time of supply, i.e the time at which the liability arises, is the earliest of the due date or the date of receipt of rentals. However any advance received will be liable to VAT in the taxable period in which such advance was received. Eg. A lease agreement (for a van) under Finance Leasing Act No.56 of 2000 consist of 26 lease rentals of Rs.20,000/- per month and an advance of an amount equivalent to 10 rentals. i.e Rs.200,000/- to be paid on 01.09.2002. The 26 rentals are to be paid monthly with effect from September 2002. By 30.09.2002 lessee has paid as agreed but by 31.12.2002 he is in arrears of two installments. a sum of Rs.75,000/- on termination on of the least. Generally advance is also treated as a lease installment. Therefore in the VAT period ending on 30.09.2002 we have the advance of 200,000/- and one installment of 20,000/-. The VAT treatment will be as follows:The leasing company is submitting quarterly returns and an option is available under the agreement to purchase the van for

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VAT period ending on 30.09.2002 Type of supply/ Payment Leasing Advance Lease installment(September)
(Please also refer to para 18.15)

Value of supply Rs. 200,000 20,000

Rate 10% 10%

Tax 20,000 2,000 22,000

VAT period ending on 31.12.2002 Type of supply/ Payment Lease installments Value of supply Rs. 20,000x3 60,000 Rate 10% Tax 6,000

Although only one installment is paid during this period the lessor (leasing Co.) must declare output tax on accrual basis except in the case of non-performing leases as explained below. No adjustment is due when the arrears are received and if the advances are set off. 18.6 Non-performing leases Cash basis accounting has been allowed for GST for non-performing leases. This approval can be continued to apply for VAT. Non-performing lease means any lease agreement under which six(6) or more consecutive lease rentals are in arrears. In such situations accrual basis as above (para 18.5) can be applied upto the 5th rental in arrear and from 6th rental in arrear onwards cash basis can be adopted. The output tax can be declared only when the cash is received. Bad debt relief can be claimed in respect of output tax already paid on accrual basis. 18.7 Interest and other Charges The extra amounts charged under a lease agreement such as penalty charges, penal interest or interest etc. will be considered as part of the rentals and liable to VAT irrespective of the description given to such charges. 18.8 Re-scheduling of lease payments There is no additional VAT if there is no additional payment. VAT should be calculated and paid on the new rentals. If an additional payment is to be made by the lessee VAT should be charged on such additional payment. Re-scheduled installments (i.e new rentals) are treated as rentals under a new supply (new lease) and VAT should be paid on the full value of the new rentals although part of the arrears under the former lease may be included in the new

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installments. Any VAT not recovered under the former lease amounts to bad debt. 18.9 Termination of a lease As explained in para 3.8(8) if the payment made by the lessee at the end of the lease period, to acquire asset is less than 10% of the total amount payable under the lease agreement then the final payment made for the purpose of acquiring the asset is considered as another lease installment. Value of supply = last payment, Rate = rate applicable to the particular lease. If the final payment charged is more than 10%, then it will be considered as a separate supply of goods. VAT will be charged on the value of supply acquired. Value of supply = the amount paid to acquire the asset. The rate of VAT is the rate applicable to supply of goods. If it is a car or van or motor cycle it is liable at 20%. If it is a passenger bus with 28 or more passenger seats or a refrigerator it is liable at 10%. Eg: 1 - In the above example (para 18.5) the total amount payable under the lease is 200,000 + 26 x 20,000 = 720,000. At the end of the lease the amount payable to acquire the asset is 75,000/-. It is more than 10% of the total and it is considered as a supply of a van for 75,000/-. Thus the VAT payable is 75,000 @ 20% = 15,000/-. If the final amount payable is 50,000/- then it is subject to VAT as another leasing installment ie. 50,000/- @ 10% = 5,000/-. (if the lease is not under Finance Leasing Act No.56 of 2000 then the lease installments are also taxed at 20% - operating leases may fall into this category) Premature Termination Eg.2 If the lessee wants to terminate the lease at the end of the 18th installment and acquire the van an if the lessor agrees to transfer the van for a payment equivalent to balance eight (8) installments plus an additional sum of 25,000/then the amount payable to acquire the lorry is 20,000x8+ 25,000 = 185,000/This is not treated as payment of leasing installments in advance because the lease comes to an end after 18 months and a separate transaction begins. The total amount paid under the lease is 200,000 + 18 x 20,000 = 560,000/-. As 185,000 is greater than 10% of 560,000 this is treated as a supply of van for 185,000/- and VAT payable by the lessee is 185,000/- @ 20% = 37,500/-. This is output tax in the hands of the lessor and input tax in the hands of the lessee. If the final payment was less than 10% of 560,000/- then it is treated as another leasing installment and taxed at the rate applicable to the lease. This case being a lease under Finance leasing Act the rate is 10%.

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18.10. Re-possession of the leased asset. If the asset is re-possessed by the lessor there will be no VAT liability because the leasing company is the owner of the asset. Any sale of re-possessed goods amounts to a separate supply of supply of goods and any re-lease amounts to a new lease. Sale proceeds of the repossessed asset should be first set off against the VAT payable on the arrears of installments. The balance should be set-off against VAT payable on the sale. 18.11 Termination due to damage etc. If the asset given on lease becomes unusable due to damage or some other reason and the lease agreement is terminated on that grounds there is no VAT due on such termination because it does not amount to a separate supply. This is a termination by returning the unusable goods. If there are any arrears of lease installments at the time of termination the lessee has to pay VAT on such arrears. If the returned asset is unusable to the extent that it cannot any more be considered as part of the (leasing) stock then the lessor should consider it as a disposal of goods and VAT must be paid on the value of disposal i.e the market value if any. If any insurance or indemnity is received then out put tax must be declared on such receipt. If the indemnity is on a total loss then the out put tax payable is not on the market value but on the insurance claim . The VAT on the insurance claim is paid to the lessor by the insurance company. (please see examples given in para 3.3). 18.12 Removals from leasing stock If the goods to be given on lease (leasing stock) is used for other purposes such as renting, given on loan, use of the asset in other projects and private use etc. such transfers can be treated as disposals depending on the circumstances. Then there is no lease but a different kind of a supply takes place. The amount received for that supply or the market value of the goods as the case may be should be treated as the value of supply.

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18.13

Leasing inputs Leasing inputs can be claimed only when the leasing company (lessor)acquires the leasing stock in their name. 18.13.1 Leasing Inputs lessee transfers his own goods to lessor If lessee acquire goods/asset in the first instance and then go in for a lease with a leasing company then the leasing company cannot claim input tax on the acquisition of the asset as it was incurred by the lessee himself. The lessee has paid VAT on its acquisition or import and later he has to pay VAT again on lease rentals. All this is input tax in the hands of the lessee if he is a registered person. In such cases the intended lessee being the owner has to transfer the asset to the leasing company and then request for a lease. Thus if the intended lessee is a registered person he has to charge VAT on such transfer to the leasing company. That becomes input tax in the hands of the leasing company. 18.13.2 Leasing inputs - lessee pays part of the sale price to vender Sometimes it is also possible that the intended lessee pays part of the sale price to vender of the asset and other part by the intended lessor. Thereafter the lease agreement may be signed for the balance amount. In such cases there are 3 transactions. sale of goods by vendor to (intended) lessee sale of goods by vendor to (intended) lessor Lease transaction between lessor and lessee.

Output tax and input tax should be calculated in respect of each transaction if they all are registered persons. Vendor charges output tax on the lessee (as a supply of goods) which is input tax in his hands. Vendor charges output tax on the lessor (as a supply of goods) on the balance amount which is input tax in his hands. Lessor charges output tax on lease rentals (as a lease) which is input tax in the hands of the lessee.

18.13.3 Leasing inputs Early settlement before 3 years * In the case of a leasing facility under a leasing agreement under the Finance Leasing Act No. 26 of 2000 if the leasing facility is for a period of less than 3 years then the input tax in the hands of the lessor is restricted to 10% even if the VAT paid on the purchase of the leased asset is 20%. This is applicable even when there is an early settlement of a lease within 3 years. * Eg. If it is assumed that the leasing company has purchased the van in the earlier example for a sum of Rs.600,000/- from an importer, then the Company

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would have paid Rs.120,000/- as 20% VAT on 600,000/-. This is input tax in the hands of the leasing company which they would have claimed in the VAT return when the van was purchased. But subsequently if it is given on lease for a period less than 3 years or if the lease has been settled within 3 years (as in example 2 of para 18.9) then the leasing company is not entitled to 120,000/input tax credit. They are entitled to only 10% of 600,000/- = 60,000/- as input tax on the purchase of the van. Therefore Rs.60,000/- should be added back as disallowable input tax in the VAT Return when the short term lease was given or when the early settlement was made. 18.13.4 Leasing inputs Lessee makes a down payment to lessor It is also possible that lessee make a down payment to the leasing company (either directly or through the vender of the asset) on account of a leasing transaction. Then such amount should be treated as an advance by the leasing company and they should charge VAT (collect output tax) on that amount. Otherwise the amount received will be treated as VAT inclusive. In such situations the leasing company can claim input tax on the total value of asset on the invoice issued by the vendor but they have to account for output tax on the advance and then on leasing installments as in example given in para 18.5. Please also see para 18.15.

18.14

Exemption under VAT Act. Leasing of public passenger motor coaches with 28 or more passenger seating capacity is exempt from VAT. (whether the leasing is under Finance leasing Act or not) It should be emphasized that only the leasing facility is exempted. Supply (i.e sale or import) of a motor coach used for public passenger transport services is not exempted although it was exempted under GST. In the circumstances, in the case of such motor coaches, although the leasing installments are exempted the settlement of leasing facility or early settlement of leasing facility (that means purchase of the Coach for a certain sum of money at the termination of the lease) is subject to VAT if the amount payable exceeds 10% of the total amount paid under lease agreement as explained in para 18.9. The rate of VAT is the rate applicable to particular asset (coach) at the market value of the asset. Thus, the Finance Company should declare output tax on the final payment received but they are not entitled to any input tax on that coach as it was used in an exempt activity.

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18.15

Leasing Advance Sometimes it is possible that the leasing advance be treated as a supply different from leasing and as a supply not specified in the VAT Act. In that case the advance should be taxed at 20% irrespective of the type of asset leased. Then in the example in para 18.5 Rs. 200,000/- advance will be taxed at 20% while the lease installment is taxed at 10%). A ruling to this effect will be issued shortly This is applicable to advance payments which will not be set off against subsequent rentals..

18.16

Leasing of immovable properties The time of supply is the same as in the case of finance leasing described under para 18.5. Any advance is taxed at the time of payment of advance at the rate applicable to (lease) rent.

18.17

Some Examples Eg.1 Bank B on 20.09.2002 purchases a bus with seating capacity more than 28 seats from the importer A in order to give it on lease to C who is in public passenger transport business. The leasing is under the Finance Leasing Act. A,B, and C are all registered persons. B files returns monthly while the others are quarterly taxpayers. Price paid is Rs.1,600,000 + VAT. It was leased to C on 05.10.2002 on terms that C should pay 300,000/- advance at the time if signing the agreement plus 72 monthly installments of 25,000/each (i.e six years). In addition C was required to insure the bus as the exclusive user and to assign the insurance policy to the bank. After July 2003 the installments went into arrears and in August 2004 the bus met with an accident. The insurance company D paid in November 2004 accident damages for a claim of 350,000/made in October 2004 and the bank recovered arrears from the insurance claim. C decides to settle the lease prematurely and paying 30 installments. VAT implications? purchase the bus on 28.02.2005. i.e after Amount payable to purchase as decided by the bank is

equivalent to 15% less than the balance 42 installments i.e Rs.892,500/- What are the

Taxable Period ending 30.09.2002 A Importer As Output tax on the sale of the bus = = B Banks input tax on the purchase of the bus = 16,000,000 @ 10% 160,000/NIL

because the VAT rate applicable to passenger bus with more than 28 seats is 10%. because input tax credit on leasing stock is not allowed as the leasing installments are exempt from VAT in respect passenger bus with more than 28 passenger seats.

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Taxable Period (month) October 2002 B Bank Bs output tax on the leasing advance = = provided the leasing advance is treated as a separate supply which installments and as a supply liable to VAT as indicated in para 18.15. B Banks output tax on leasing installment = NIL (because leasing installments are exempt from VAT in the case of a passenger bus with more than 28 seats). Taxable Period ending 31.12.2002 C The transporter Cs input tax on the leasing advance 60,000/- is not allowed because he uses the bus in an exempt activity. Taxable period (month) ending October 2004 B C D No implications Quarterly taxpayer no implications till December Quarterly tax payer same 300,000 @ 20% 60,000/-. is different from leasing

Taxable Period ending 31 December 2004 C Tax invoice from C to insurance company D on the Insurance claim: Value of supply VAT Total output tax of C on the insurance claim (because insurance claim is liable to VAT at 20%.) D BInput tax of D on the insurance claim = 70,000/= = = = 350,000 70,000 420,000 70,000/-

Bank B the absolute owner of the bus and the assignee of the insurance policy who forwards the insurance claim on behalf of C can recover the lease arrears from August 2003 to November 2004 which is = 16 x 25,000/- = 400,000/-. But the amount of the claim is not sufficient to recover this amount because insurance claim is only 350,000/-. The VAT Rs.70,000/- belongs to C. Thus C has to pocket out the balance 50,000/- in order to settle the arrears.

Taxable Period (month) ending 28.02.2005 B Bank B must charge VAT on the disposal of bus because the amount payable to buy the bus which is Rs.892,500/- is more than 10% of the total amount payable under the lease which is 10% of 2,100,000/- = 210,000/ Rs.892,500/- is not treated as another leasing installment.

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Thus output tax of B on the termination of lease and disposal of bus (because the VAT rate applicable to this bus is 10%) This transaction being treated as something outside the lease, input tax credit may be allowed for the Bank B on the following basis. Input tax of B (allowable portion) = (Input tax paid) x Unexpired Lease period Total lease Period = 160,000 x 42 72 = 93,333/= = 892,500/- @ 10% 89,250/-

Taxable period ending 31.03.2005 C paid Rs.89,250/- as VAT to bank in February on the termination of the lease and purchase of the bus. But Input tax of C on termination of lease 89,250/- is not allowed in the hands of C because he uses the bus in an exempt activity. Input tax on insurance premiums Lessee C who has insured the bus as the exclusive user is not entitled to input credit on insurance premiums because passenger transport services is exempt from VAT. what is stated above. Eg: 2 If in the above case there was a total loss after the accident and the insurance claim was Rs.1,100,000/- what is the VAT implication ? If it is a total loss the insurance claim can be treated as payment for the disposal of the bus and be taxed at the rate applicable to supply of a bus (i.e 10%) and not at 20%. Output tax of C Input tax of D = 1,100,000 @ 10% = = 110,000/110,000/-

But the entire 1,100,000/- will be appropriated by the bank which forwards the insurance claim on be behalf of C leaving only Rs.110,000/- VAT to C because the bus belongs to B. Eg 3 - In the above example, if it was a lorry (lessee is in lorry transport business)then leasing installments are liable to VAT. The rate of VAT is 10% because the lease is under Finance Leasing Act. Sale of Bus by A and purchase by B Output tax of seller A Input tax on Bank B Leasing Advance Output tax of bank B Input tax on lessee C = = = 300,000 @ 20% 60,000/60,000/= = = 1,600,000 @ 20% 320,000/320,000/-

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Leasing Installments Liable to VAT on accrual basis till 5th installment in arrear is till December 2003. From January 2003 to November 2004 bank can declare output tax on cash basis. Rate is 10% Insurance claim Same as before Termination of lease & disposal * Output tax of bank B (Taxable period February 2005) = = 892,500 @ 20% 178,500/-

Input tax on the bank will have to be restricted to 10%. But input tax has already been claimed by the bank @ 20% when the lease was given in October 2002. Amount claimed is 320,000/-. Therefore 160,000/should be added back in the VAT return of the bank for the month February 2005. Input tax of bank B to be added back (Taxable Period February 2005) input tax on lessee- Taxable period 31.03.2005 Input tax on insurance premiums The lessee who insures the vehicle as the exclusive user is entitled to input tax credit on insurance premiums in addition to input tax credit on leasing installments, leasing advances etc. = 178,500/= 160,000/-

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Chapter 19

Mortgages
19.1 Mortgage loan is not liable to VAT because it is a financial service that is exempted. Item (xi(g) of the First Schedule. Any fees paid to a bank for the supply of a mortgage facility is a supply of a financial service and is exempt from VAT. installments are also exempt from VAT 19.2 If the mortgagor (the debtor) has defaulted and the mortgagee i.e the lender (Bank or the Financial Institution as the case may be) has auctioned the property mortgaged in satisfaction of the debt following supplies can be identified. 19.3 If the lender sells the property after the property gets vested in the lender in terms of some written law then: 19.4 vesting of the property in the lender is a supply form the defaulting mortgagor to lender. The consideration for the supply is the settlement of debt. Sale by auction is another supply. Mortgage loan

Vesting * If the mortgagor (ie. the debtor) is a registered person he must charge VAT on the Bank or the financial institution as the case may be and declare that amount as output tax It is input tax in the hands of the bank/financial institution. The value of supply on which VAT is calculated will be the amount of the loan settled by vesting. The time of supply i.e the time at which the liability arises will be the time the loan is settled. This may perhaps be a date after the auction.

19.4

Sale by Auction The Bank must charge VAT on the buyer calculated on the sale price and declare it as output tax.

19.6

The property cannot be treated as a sale of an asset used in an exempt activity by the bank/financial institution because the lender Bank became the owner of the asset only at the time of vesting. It is in fact not used by the lender in any activity whether exempt or not. The possibility is that the original owner (mortgagor) would have been using it in his taxable activity until it was vested in the bank

19.7 19.8

The auctioneer is liable on the commission if he is registered. He should charge VAT on the bank declare it as output. It is input tax in the hands of the bank. Sale of pawned articles too will be treated in the same manner.

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Chapter- 20

Diplomatic Missions & VAT

20.1 (a) (b) Diplomatic Missions and Organizations to which Diplomatic Privileges Act No. 9 of 1996 applies, and Diplomatic Personnel of such missions or organizations are exempt from VAT on the following supplies :On the import of goods (including import under a temporary admission carnet for re-export) and On the supply of goods and services obtained by them in Sri Lanka.

The exemption in the case of Diplomatic Personnel is subject to the following conditions:i. ii. Reciprocal benefits should be available to their counter parts from Sri Lanka and Goods and Services to which such reciprocal benefits are available must be identified as such by the C.G.I.R Thus if any goods or services used by the Diplomatic personnel of the Sri Lankan Mission in any other country is exempt from VAT (or corresponding sales tax) in that country then the Diplomatic Personnel of the Mission of that country in Sri Lanka too will be exempted from VAT in Sri Lanka in respect of such goods and services. The exemption is based on the basis of reciprocity only. This is the only instance where persons (individuals and organizations) are exempted from payment of VAT. The exemption is applicable to payment of VAT and not for charging and collecting VAT if they undertake to carry on taxable activities/businesses. 20.2 Following goods and services have been identified by the C.G.I.R for the purpose of exemption as being commonly exempted in all the countries. Goods Any goods purchased locally or imported or supply of goods from Customs Bonded warehouses and duty free shops with the approval of the Ministry of Foreign Affairs. Services Telecom Services including internet Electricity Services Services provided by star class hotels Buildings on rent/lease

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Services provided by international schools Security and janitorial services Supply of land and buildings to such organizations Repairs & maintenance of buildings of such organisations Maintenance Services on vehicles or other equipments owned by such organizations. Supply of office equipment(computers, photo copiers, fax machines etc) to such organisations Customs clearing services, transport services Courier services, and insurance services provided to such organisations The services provided by an Auctioneer to such organisations

This list is now being reviewed to check whether reciprocal benefits are available in other countries with the information obtained from Sri Lankan Missions abroad with the assistance of the Ministry of Foreign Affairs. 20.3 i. All the individuals working in or working for a Diplomatic Mission are not privileged persons. They are being separately identified by the Ministry of Foreign Affairs and an identity card (white colour) is issued to them. If they produce that Identify Card when they purchase above mentioned goods and services the supplier must not charge and collect VAT from them. ii. Diplomats with white identity cards are not entitle to VAT exemption on all the goods and services. At present the above mentioned goods and services have been identified as commonly exempted in all the countries. However on review if it is observed that some countries do not offer reciprocal benefits to Diplomats from Sri Lanka the names of these countries and the particular goods and services for which reciprocal benefits are not available will be separately published. Then the suppliers are not permitted to supply free of VAT, such goods and services, to Diplomats from those countries. 20.4 It is the responsibility of the supplier to identify correctly the person or the organisation before making supplies free of VAT. 20.5 The registered persons who makes such supplies to Diplomatic Missions and Privileged persons are not entitled to claim any input tax on such supplies and also they are required to keep adequate records of such supplies to Diplomats. The record should be available for inspection by the officers. 20.6 If any person is not a privileged person he is not entitled to the VAT exemption irrespective of the fact that funds are provided by his/her Diplomatic Mission/organisation to purchase or obtain above mentioned goods/services. (eg. The International Schools

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must charge VAT on the fees paid for children of Non-Diplomatic staff even though the funds may have been provided by the Diplomatic Mission. White identity card is the criteria for identification of a privileged individual. 20.7 20.8 The other services which are not identified will be dealt with on a case by case basis. Telecom & Electricity Board will be informed, on a case by case basis, not to charge VAT in respect of buildings rented or leased by Diplomatic Missions during the period of tenancy. 20.9. Diplomatic Missions include Embassies, High Commissions, U.N.O. and its agencies and other recognized organizations.

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Chapter - 21

Some Obligations Under VAT

21.1 Registered Person Every Registered person shall display the certificate of registration prominently in his place/places of taxable activity. Shall display the list of exempt goods and services in his place/places of taxable activity. Shall issue Tax Invoice to another registered person and Normal Invoice to others. Shall print clearly the VAT registration number on all invoices whether they are tax-invoices or Normal invoices. Shall issue tax invoice only once for each supply. If it becomes necessary to issue a duplicate subsequently the words COPY ONLY must be marked clearly across the invoice 21.2 Shall maintain prescribed records of accounts, invoices etc. for a period of 5 years. Shall notify the CGIR of any changes.[para 4.8] Any importer, if he is not registered for VAT, must register in advance clearing goods, irrespective of the value of imports. Every person must apply for registration within 15 days of becoming liable to charge VAT Maintain proper and sufficient records for VAT purposes as prescribed under Section 64(2) (The Gazette notice issued under Section 65of GST Act a prescribing the records for GST purposes is valid for VAT until such time as new gazette is issued when required). Vide Chapter 15 Maintain VAT Accounts (Input Tax and Output tax) and Registers of Import and Export (Vide Para 15.7) Furnish a return within prescribed date. Make payments by the due dates. for General

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Chapter 22

Transitional arrangements and other matters

22.1 Transitional arrangements 22.1.1 Input Tax i. If a valid GST invoice is received during VAT period the input tax (although at 12.5%) should be declared in the relevant VAT return depending on whether the recipient is on cash basis or invoice basis
ii. If the recipient is on invoice basis, input tax on a valid GST invoice received in VAT period must be claimed when the invoice is received even if it is received during VAT period.

iii.

If he is on cash basis input tax on a GST invoice must be claimed when the cash is paid subject to the condition that it must be claimed within six months of the receipt of invoice eventhough the cash may be paid in VAT period.

x.

If a person on cash basis, makes a payment during VAT period, in respect of a GST invoice received prior to 01.08.2002 the claim for deduction of input tax is allowed in the VAT return although it is at 12.5%. But the payment must be made within six months from 01.08.2002. It is also possible that input tax may be claimed in the VAT return on GST invoice raised and received after 01.08.2002. (eg. GST invoice raised on 12.08.2002
in respect of security services provided in July 2002) and received on 20.08.2002). This is because a GST invoice can be issued within 14 days of the time of supply. (Vide para 7.8).

22.1.2 Output Tax i. If a valid GST invoice is being issued during VAT period (as explained in
para 7.8 the time of supply is not the time of transaction but the time as defined in Sec. 4 of the GST/VAT Acts) then the supplier has to declare as output tax (the GST tax of 12.5%) in the VAT return for the relevant taxable period

depending on whether the supplier is on invoice basis or cash basis. ii. If the supplier is on invoice basis the output tax (of 12.5%) must be declared in the VAT return for the period during which the invoice was issued. iii. iv. If the supplier is on cash basis the output tax (of 12.5%) must be declared in the VAT return when the payment is received. In both cases (12.5% GST tax) has to be declared as output tax in the VAT return. There is no special cage provided in the VAT return for this purpose. This tax should be declared in 20% tax cage i.e. Cage No.1.

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However an adjusted figure must be declared as the Value of Supply in Cage A of the return so that 20% of that value is equal to the output tax declared. Thus, it is not the actual value of supply but an adjusted figure which is equal to tax multiplied, by 5 has to be declared as value of supply in cage A. Eg: GST invoice issued on 12.08.2002 in respect of security services provided in July 2002 is as follows. Rs. Value of supply GST @ 12.5% Supply + GST NSL @ 6.5% Total consideration 20,000 2,500 22,500 1,462 13,962

This Rs.2500/- must be declared as output tax in cage 1 of the VAT return for the relevant taxable period depending on the accounting basis of the supplier. However the value of supply should be declared as 2500x 5 = 12,5000/- and not as 20,000/- because 20% of 12,500 = 2,500/-. N.B. In respect of taxable periods on or after 01.08.2002 the VAT will be at 20% but there will be no NSL. 22.2. Bad debts If a bad debt written off during GST period is received during VAT period it will be taxed at the GST rate at which it was written off. That means 1/9 of the amount recovered should be declared in Cage 1 of the VAT return as output tax and 5/9 should be declared in Cage A as the value of supply. Ex. A registered person supplied services to a non-registered person (say construct a house) for 100,000/- in 1999. Following invoice was issued. Value of supply GST @ 12.5% Total consideration on 30.09.2002. Amount recovered Rs.90,000/- is treated as a part payment inclusive of VAT. The tax content (fraction) in the total consideration = 12,500 112,500 = 1/9 The tax (GST) content in the (part payment ) of 90,000/= = 1/9 x 90,000 10,000/100,000 12,500 112,500

This 125,000/- was written off as a bad debt in April 2002. But 90,000/- was recovered

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 Value of supply in 90,000

= =

8/9 x90,000 80,000/-

This 10,000/- should be declared as the output tax in the VAT return. However, as it is paid during VAT period the value of supply that should be declared (in Cage A) of VAT return is not 80,000/- but an adjusted figure. The adjusted value of supply = = 22.3 Tax Debit Notes and Credit Notes If the supplier of goods or services has undercharged or overcharged the recipient (in respect of VAT) the supplier is entitle to issue a tax-debit Note or a tax credit note as the case may be for the purpose of adjusting the amount undercharged or overcharged. 22.4 The supplier shall pay the amount of out put tax if he has paid less or deduct as input tax the amount which he has over paid as output tax. The recipient too should make similar appropriate adjustments on receipt of a tax debit note or tax credit note. Debit Notes & Credit Notes should be in specified forms. 10,000x5 50,000/-

Gazette Notices The following gazette notices issued under the GST Act are valid for VAT purposes. i. ii. Gazette Extra Ordinary No. 1024/8 of 21.04.1998 regarding keeping of records for GST purposes Gazette Extra Ordinary No. 1201/9 of 11.09.2001 regarding international transportation. zero-rating of

22.5

Other Approvals i. ii. The approvals given under Section22(6) of the GST Act are valid to be applied under Sec. 22(7) of the VAT Act. The approvals given under Section 23 of the GST Act to declare output tax and input tax on cash basis is valid under Sec. 23 of the VAT. Act.

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Chapter 23

Construction Contracts
23.1 VAT Treatment VAT treatment of construction contracts differs from others for the reason that on one hand they consist of progress payments which cannot be predicted in advance with regard to the amount payable as well as the time at which the payment will fall due and on the other hand they may be based on non-reviewable agreements where the total consideration cannot be changed. This might create problems, if the tax rate changes while the contract is in progress, if it is not provided for in the agreement. 23.2 Time of Supply and Invoicing The contractor should charge VAT at the time of supply. The time of supply is the time at which a claim for a progress payment is made. The claim for a progress payment generally takes the form of a work measurement statement of the work done upto the time of the claim. The contractor should issue a TAX Invoice depicting the value of supply as agreed upon in respect of a claim for progress payment and the VAT payable thereon together with other necessary particulars required under Sec. 20(1). Sometimes the claim or the work measurement statement itself can be treated as the tax invoice if the words Tax Invoice are printed prominently together with other necessary particulars. However the time of supply is the time at which the claim is made which is the time at which payment arises. Thus if a claim for a progress payment is made during VAT period in respect of work done during GST period a VAT invoice should be issued under VAT. (because the work was handed over and the payment arised during this period.) 23.3 Retention If, in case of a progress payment, a retention is made, the retention should be taxed only at the time the retention will be paid (in future). At the time of supply, only the net progress payment should be charged to VAT. Retention should be charged at the rate prevailing at the time of payment. 23.4 Advance Payment If an advance is payable, the time of supply is the time that the advance is due and the advance should be charged to VAT at the rate applicable at that time. If the advance was payable during GST period then GST is chargeable on the advance. It was a final tax on the advance. No adjustment is due when the advance is setoff subsequently.

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23.5.

Invoicing in VAT period for work done in GST period i. As stated above (23.2) the time of supply is the time at which a claim for a progress payment is made. Thus if a progress payment claim is made during VAT period in respect of work done in GST period a VAT invoice should be issued. However if the entire construction was completed before 31.07.2002 and the claim is made within 14 days as provided in the GST Act a GST invoice should be issued. ii. In the case of progress payments where the claim is made in VAT period for the work done in GST period question will arise if the VAT rate is higher than the GST rate while the contract agreement is non-reviewable. If the total consideration (including tax) cannot be changed in terms of the contract agreement and other laws governing contracts then the amount payable can be treated as VAT inclusive. VAT component can be computed by applying the tax fraction.

23.6

Cash Basis Contractors can obtain approval from the CGIR under Sec. 23 of the VAT Act to declare output tax and Input tax in their VAT returns on cash basis. In such cases where GST charged is received during VAT period and in the first category of cases referred to in para 23.5(i) where GST charged have to be declared as output tax in VAT returns the (12.5% GST) tax should be declared in 20% tax cage, i.e Box 1 of the VAT Return. Then the value of supply which should be declared in Box A should be adjusted in such a way that 20% of the value in Box A = Output tax declared. Thus in such cases the adjusted value of supply that should be declared in Box A is equal to tax multiply by five.

23.7

Tenders In case of the tenders (both construction contracts and supply contracts) the tenderer should indicate the VAT due on the contract as a separate item. In evaluating the contract the VAT component may be ignored but keeping in mind that if the contract is awarded to a VAT registered person VAT has to be paid in addition to the agreed value. Even though the contractor may not be a registered person at the time of awarding the contract, he may subsequently be compelled to obtain registration. Thus all Ministries, Government Departments, Corporations and statutory bodies, Provincial Councils and Local Government Institutions, should make a note of the fact that their suppliers should be considered as registered for VAT if the amount payable under a contract within one year exceeds Rs.1.8 million or amount payable within 3 months exceeds Rs.500,000/-

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Government agencies mentioned above are expected to call for a VAT clearance certificate issued by the VAT Branch before releasing the retention payment or before commencement of the payment of VAT component in invoices submitted by the tenderers and contractors to whom VAT is payable in excess of 25,000/= Please also refer to Public Finance Circular NO.364 of 20.10.1998 which was issued under GST. It is expected that a new circular will be issued under VAT. (New Circular No.364(3) dated 30.09.2002 has now been issued) 23.8 VAT Rates i. Under VAT there is a special definition for a construction contractor or a subcontractor. The construction contractors and sub-contractors enumerated in that definition are subject to VAT at 10%. Other construction contractors and sub contractors are subject to VAT at 20%. If any person enters into a contract - with another person - to provide for that person; Services in constructing of a building a road a bridge water supply system drainage system sewerage system electricity generation and transmission system any other infra-structure then he is a construction contractor. It should be a new building, a new road a new bridge and so on. Contracts for renovation, repairs and maintenance, supply contracts such as supply of pre-mix concrete and other goods, contracts for interior work and engineering surveying and architectural contracts (unless they fall under professional services) are all liable to VAT at 20%. (All these services were earlier liable to GST at 12.5% and NSL at 6.5% but with the introduction of VAT in order to grant some incentive to construction industry only the construction alone and not other ancillary services, has been granted the lower rate. as to existing ones and are taxed at 20%). The other ancillary services such as supply of material etc. are common to new constructions as well

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ii.

Construction contractor means the person who enters into an agreement directly with the owner of the property to construct any one of the items enumerated above. Sub-contractor is the person who enters into an agreement to construct any one of such items with the direct contractor and not with the owner.

iii.

Computer hardware is classified under industrial machinery and therefore supply of computer hardware is taxed at 10%. However repairs and other services including software is liable at 20%.

23.9

Infra-structure For the purpose of this section infra-structure include the following: supply and installation of lifts supply and installation of concrete poles to C.E.B is not construction of infrastructure but if it includes supply and installation of poles and then do the construction of the distribution line for which the wires and other material are provided by C.E.B, then it can be treated as a construction contract (or a subcontract as the case may be ) in constructing an infra-structure . supply and installation of air-conditioning system together with a building to house the main air-conditioner plant. (This does not include supply and installation of small air-conditioners, it should be an air-conditioning system) Infra-structure should relate to the items described in the definition i.e a building, a road, a bridge etc. (Eg. Construction of infra-structure relating to a clock tower is not covered)

23.10

If the contractee under takes to pay the VAT on behalf of the contractor Sometime with certain contractors (specially foreign contractors) the contractual agreement, provides the contractee to undertake VAT payment on behalf of the contractor. In such situations the contractee should obtain a separate VAT registration number on behalf of the contractor. VAT returns should also be furnished by the contractee along with the payment. Any input credit available to the contractor may be claimed in the VAT return which is furnished on behalf of the contractor. clients. This arrangement is no possible when the contractor is providing services to a number of

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Chapter 24

Rulings
24.1 Following rulings which have been given to various institutions under GST are valid for VAT purposes. 24.2 Telecom Services Sri Lanka Telecom i. International Traffic Revenue For all International incoming telephone calls, Telex etc. revenue is collected by the relevant foreign telecom authorities. These collections are shared with SLTL for using Sri Lanka net work. The same basis is adopted to calls originated from Sri Lanka. The share from foreign telecom authorities will be exempt from GST/VAT. ii. International Leased Circuits These circuits have been provided by SLTI to local agents in Sri Lanka for which the payments are made by the principal outside Sri Lanka. These circuits are physically connected from Sri Lanka to the respective foreign country through under sea cables or via satellite. These are used as dedicated lines by the local agent and the foreign principal to communicate and transfer data. Under the Malburn Agreement many Telecom Authorities in the world have exempted this revenue from VAT/GST. We also exempt such revenue form GST/VAT. 24.3 Telecom Services - Other Telecom Providers i. International Roaming Under this system cellular phones can be used outside Sri Lanka free of GST/VAT, if the connection is between two places out of Sri Lanka and on incoming calls to Sri Lanka. The calls originated from Sri Lanka and other charges paid from Sri Lanka will be liable to GST/VAT. ii. Agencies providing telecom facilities - All such persons should register if the gross collection exceeds the registration limit. They should calculate output tax also on total collection and claim input tax on the payment made to SLTI and GST/VAT paid on other inputs. iii. Import and sale of all telecom equipments including payphone cards are liable to GST/VAT. Payphone cards are considered as a supply of a future services.

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24.4.

Invoicing - Special Arrangements i. Master Invoice - Sri Lanka Telecom - With the introduction of a discount system by S.L. Telecom a requirement of a Master invoice has arisen. This will be applicable to any subscriber having a number of telephone connections. In such cases the SLT will issue a Master invoice showing the discount and the VAT. They will not show the VAT in the individual bills covered by the master Invoice. A Master invoice will be issued only where all the telephones were subscribed by the same person. A problem may arise in ascertaining disallowable VAT input tax if one or more telephones covered by the Master invoice have not been used in making taxable supplies. In such cases the disallowable VAT may be calculated using the following formula. Disallowable Telephone Total Bill x VAT charged in the Master Invoice Master Invoice Gross Bill When the GST/VAT input tax has been claimed using the Master invoice the individual bills covered by the Master invoice should be checked and make the necessary adjustments using the above formula. ii. Central Invoicing - Several Companies in one Group This is a ruling given to one group of companies and this can be approved to be extended to similar groups under exactly similar circumstances if a request is made. In order to streamline the procurement of goods/services for the companies under the group and to enjoy the economic benefits they wanted to have the invoices from the suppliers to be received by one central company and debit the expenditure only to the other companies on some valid basis. Entire GST/VAT will be claimed by the central company who receive the invoice. In this case all institutions covered will be registered persons making only taxable supplies. This has been agreed subject to the following conditions: This method should be applicable only to the services and not for goods.

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None of the companies covered by this scheme should exempt/excluded supplies.

engaged in

Adjustments on fringe benefits, self supplies etc. in relation to such services should be made by the individual Companies not withstanding that they do not claim input tax.

Any GST/VAT payment due from participating companies should be made without considering the input tax situation of the central company. The company should consider the full amount of input. Companies should not make any adjustments for income tax purposes.

24.5

Exemption of Educational Services Supply of educational services are exempted if they are provided by government. An educational establishment means a higher educational institution established under the Universities Act or the Buddhist and Pali Universities Act recognized institution providing incorporated examination body. For this purpose i. Recognized Institutions means any government department, any Provincial Council, any Local Government Authority and any board or body which has been established by or under any law other than Companies Act No.17 of 1982 with capital wholly or partly provided by way of a grant or loan from the Government. ii. A school funded by the Government means any school in receipt of funds from the government to meet the salary bill. iii. Educational Services do not include sale of goods from school shops, sale of school uniforms, and sports clothing etc., receipt of commission for allowing sales by outside organizations, conducting carnivals, exhibitions or fairs etc., renting premises and other fund raising activities. or any vocational training or re-training or an (i) an educational establishment (ii) government schools or (iii) schools funded by the

24.6

Exclusion of local buying and selling By virtue of Section 3 if a supplier of goods is unable to satisfy the C.G.I.R as to the source from where the goods supplied by him were acquired then such supplies will not be treated as local buying and selling of goods and will be subject to VAT. In order to satisfy the C.G.I.R. evidence in the form of following records are required.

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i.

A record of local purchases of goods (whether for cash or on credit) which should contain the following details. (a) (b) (c) (d) (e) (f) Date of transaction Name and address (including business name) of the person from whom the goods were acquired. Type of goods and quantity/capacity Whether imported goods or local goods? Consideration paid and nature of payment(Cash cheque etc.). If GST/VAT has been paid on purchases, the amount paid.

ii. 24.7

Chronologically arranged receipts and tax invoices in respect of such purchases.

Issues relating to insurance Primary Insurance - Collection of premia (other than pure life insurance) is liable to GST/VAT. When the life insurance is combined with other insurance like medical/health it has to be apportioned. Re-insurance Local This is a part of an insurance business and therefore The insurance companies who pay re-insurance GST/VAT has to be charged on the premia other than on life insurance. Re-insurance Foreign premia to companies outside Sri Lanka need not pay GST/VAT on such

insurance premia because the supply and consumption of service take place outside Sri Lanka. Insurance Claims - If the repair should take place in an assigned garage, and if the garage is a registered person, the garage should charge GST/VAT and issue a tax-invoice to the insurance company. The garage should declare that amount as output tax. Insurance company can claim it as input credit (Owner is not involved) If the owner has to repair the vehicle on his own and submit bills to the Insurance Company: In such cases the insurance company has no contract with the garage. The garage owner, if registered, should charge VAT and issue a taxinvoice in respect of repair charges. The insurance company should pay VAT only on such invoice and not on any other invoices that may be produced by the owner of the vehicle in respect of spare parts which he may have purchased for the purpose of such repair. There should be only one invoice form the garage and the value of supply may include the value of spare parts supplied by the owner. The insurance company is not obliged to reimburse VAT to the owner in respect of spare parts

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which he has supplied to the garage for the purpose of the repair although he may have obtained tax-invoices in the name of the insurance company from the suppliers of spare parts. In either case the insurance company is not liable to pay VAT to any person who not being a registered person is not entitle to issue a tax invoice to the insurance company. 24.8 Exemption of Health Care Services Health Care Services provided by Medical Institutions or by professionally qualified persons providing such care are exempted from VAT. Health Care Services means - Medical services, Public Health Services and related laboratory services relating to patient care including medical consultation and diagnosis and/or prophylactic, therapeutic or surgical treatment for persons. Medical Institutions means Institutions which look after patient care and include both private and State run hospitals and dispensaries registered under Medical Ordinance No.26 of 1927, Ayurveda Act No. 31 of 1961 or Homeopathy Act No.7 of 1970. Professionally qualified person providing health care services means Persons who are authorized under the Medical Ordinance, (Medical Officers, Medical Specialist and Registered Medical Practitioners) Ayurveda Act or Homeopathy Act to practice as Medical Practitioners, Consultants, or in any other capacity in Medical Care and/or to provide medical treatments to persons suffering form any decease. The supply of service followed by invoicing should be done either by a medical institution or by a professionally qualified person providing health care. If the professionally qualified person is employed by an institution that institution will not get the benefit of exemption unless it is a registered medical institution. 24.9 Exemption of Financial Services (i) Colombo Stock Exchange Fees received from the following functions are liable to VAT i. ii. iii. Listing Fees (i.e the fees charged form each of the listed companies for enjoying the status of a listed company in the stock exchange). Quotation Fees (i.e the admission fee charged from companies seeking to obtain membership of the stock exchange) Custodian Bank fees (i.e the fixed fee charged from each of the Custodian Banks registered with the stock exchange for participating in

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exchange operation and the fee based on the number of trades through each Custodian Bank) iv. Commercial Services Services such as charges for computer information, providing data signal, and remote data link. Fees or Commission on the following are treated as receipts form exempt supplies. i. ii. iii. Bankers fees i.e fees payable by brokering firms (member) in order to operate as members of the stock exchange fixed charge Commission on Brokerage Share of brokerage commission for transactions through the stock exchange. Fees from clients (Listed companies) charges received form listed companies based on the number of transactions as a fee for monitoring of depository operations. v. (ii). Brokers entrance fees Entrance fees payable by new firms to obtain a broker license. Stock Brokering Firms (i.e Members of the Colombo Stock Exchange) The services rendered by stock brokering firms in relation to the issue, allotment or transfer of ownership of any equity security or participatory security can be considered as exempt financial services. However the services rendered by the agents of such brokering firms cannot be considered in the same way and therefore such services are liable to VAT. (iii) Unit Trusts A unit of a Unit Trust can be considered as participatory security and the issue, allotment or transfer of such participatory security can be exempted under financial services. The exemption may be applicable for the following receipts of the Unit Trusts as well. i. ii. Interest income received from bank deposits, commercial paper, debentures, repurchase agreements and other debt instruments. Capital gains received by way of sale of equity securities and debt securities. (iv) Custodian Services This includes holding of customer funds and settlement of brokers on receiving instructions from clients for which settlement function a quarterly fee is levied from the customer. These services are liable to VAT. However, settlement fees collected by banks for services in connection with carrying out of customers

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instructions can be exempted if such services are in relation to the payment of any Note or Order for payment. (v) Credit Card Operations Fees paid in connection with the take over of the merchant debtor can be exempt on the basis that it is a transfer of ownership of a debt security. (vi) Other Services provided by Banks and Financial issued under VAT All the services provided by banks whether they are ancillary services or not are not essentially financial services for the purpose of VAT, For the purpose of VAT many of the supplies by the banks are treated as mixed supplies and the strictly financial services component for VAT purposes can be separated. Thus. Leasing, Management Services, Consultancy Services and Commission earned form Investment Management Services Courier Services, Provision of safety lockers, sale of unwanted articles, sale of properties mortgaged. Legal fees on granting of loans and other legal fees recovered form customers. Photocopy charges, telex/fax charges Commission earned from providing custodian services, insurance services. Credit card joining fees Non refundable tender deposits Other income such as income from entrepreneur development activities. Are treated as separate supplies which are taxable and not treated as supply of financial services 24.10 International Permits Charges for issuing international permits are liable to VAT since the service is provided to a person in Sri Lanka. However, any amount included as a government charge may be considered as a re-imbursement of expenditure and may be excluded from the Value of supply 24.11 Film Exhibitors Film exhibitors are liable to be registered for VAT as agents of the Film Corporation and other irrespective of whether the value of supply is below or above the taxable threshold. They are required to file monthly VAT returns. However they may not charge VAT on other activities if the value of supply of other activities is below the threshold. If the Institutions (Ruling

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value of supply of other activities are above the threshold output tax from exhibition of films and output tax on other activities can be declared in the same return. 24.12 VAT Invoicing on advertising i. Advertising in media (in news papers, Radio, T.V. etc) is often done through agents. The media gets 85% of the charge and the agent gets 15%. If it is done through an agent, the agent should issue a tax-invoice for the whole amount and account for output tax if the agent is a Registered Person. ii. Then the media (Newspaper, Radio, TV) should issue a tax-invoice on their share of 85%, to the agent and charge output tax to the agent. By using this invoice the agent can claim that amount as input tax. iii. iv. In addition both the media and the agent can claim input tax credit on other relevant items of expenditure. The payment for Arts work, Models, or any other inputs in relation to the production of advertisement . (Radio/TV commercials) cannot be deducted from the gross amount when arriving at the Value of supply for VAT purposes. However, if these service providers are registered persons they will issue tax invoices and the media or the agent can claim input tax. v. If the agent is not registered for VAT then the media should charge VAT on the full value of the service provided. The agent cannot charge VAT on the commission of 15%. vi. If the above method is not adopted then the media should directly invoice the client on the full value + VAT and the agent can claim his 15% commission + VAT if applicable from the media. vii If the business is directly done by media without an agent the media should directly invoice the client, value of supply + VAT. 24.13 The following rulings have also been issued under VAT. Renting of Co-owned properties The renting or leasing of a property by its co-owners (or undivided share holders) of such property amounts to a taxable activity carried on by the co-owners (or the undivided share holders as the case may be) which is different from any other taxable activity that may be carried on by an individual co-owner or some of the co-owners. i. If the rent received by the co-ownership exceeds the threshold it should obtain registration for VAT as a Registered Person which is separate and distinct from

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any other registration that may have been obtained by an individual co-owner or some of the co-owners because a co-ownership is defined as a person for VAT purposes under Sec. 83 of the Act. ii. If the identical co-owners are renting several properties all such rents should be considered under one-registration (and they should be amalgamated for the purpose of calculating the threshold) even if the share of rent may be different from different properties in terms of the title to the properties. It is like several partnerships carried on by identical partners while the profit sharing ratio is different in different partnerships iii. The reason is VAT is chargeable by a Registered Person" and not by a "Taxable Activity". (Vide Para 4.12). An individual co-owners rental income which he receives on his own form a different property will not be amalgamated with his share of rent from the coownership if the co-ownership is liable to be registered separately; However if the co-ownerships rental income is below the threshold and is not registered for VAT then for the purpose of calculating the threshold, the individual co-owners share of rent will be amalgamated with his value of supplies from other taxable supplies which he may be supplying. 24.14. Entrance fees of a club The definition of taxable activity in the case of a club includes only (i) receipts of subscriptions and (ii) provision of facilities to its members and others for a consideration. Thus entrance fees appear to be outside the scope of taxable activity. However in terms of item (xx) of Schedule 2 to the VAT Act subscription can be constructed to mean membership fees and similar charges. Thus. if the entrance fees is similar to membership fees in the sense that it entitles a members to continue as a member or to other benefits enjoyed by a member such as voting rights etc., or if it is charged in consideration of other facilities offered by the club or the payment of entrance fees makes the person entitles to other facilities then entrance fees is treated as subscription or a charge similar to membership fees and is subject to VAT at 10%. The rules and regulations and or the constitution of the club will enable this to be determined. In case the entrance fees is not a charge similar to membership fees which can be subject to VAT, the input credit attributable to that part of the receipts will be disallowed (Any claim should be forwarded to file VAT/Gen/18)

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24.15 Management Companies Sometimes it is possible that a hotel or an estate is managed by a management company and the management [company is the registered person which is registered for VAT with the C.G..R while the hotel or the estate has no registration on its own. But invoices in respect of certain services obtained by the hotel or the estate (such as telephone, water and electricity) may be received in its own name and not in the name of the management company. They are not entitle to ask for tax invoices because the hotel or the estate is not a registered person. In such situations the management company can obtain prior approval from the CGIR to apply the tax fraction in order claim input tax in respect of such invoices. (claim should be forwarded to File VAT/Gen/18) 24.16 Input tax on assets purchased in the name of partners Partnership being a non legal entity, sometimes it may not be possible to purchase certain assets in the name of a partnership. The asset and the invoice in such situations maybe in the name of an individual partner and the partnership, although a Registered Person, will be without a tax invoice while input tax has been paid in respect of that asset. In such cases the partnership should obtain prior approval from the C.G.I.R in order claim input tax in respect of such assets by applying the tax fraction by forwarding i. ii. evidence to the effect that the asset was purchased out of partnership funds and a letter of confirmation singed by the precedent partner to the effect that the asset will be brought into the partnership balance sheet. (claim should be forwarded to File VAT/Gen/18) 24.17 Project cost of BOI Companies engaged in housing projects The project cost of BOI companies engaged in housing projects for the purpose of liability to VAT as envisaged in item (xxiii) of the First Schedule to the VAT Act should be the actual cost of the project under taken and not the capital or the investment in the company. 24.18 Educational Services(professional bodies) Although some professional bodies which conduct professional examinations or provide vocational training may qualify as recognized institutions (within the meaning of educational establishment) in view of the fact that their capital have been contributed wholly or partly by the government (vide 24.5) the following will not be treated as exempt educational services.

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i. ii.

Membership fees and or subscriptions Sale of books, journals and magazines; any royalties and other miscellaneous income.

The exempt educational services will be restricted to (a) (b) student membership fees, examination fees and tuition fees

24.19. Premature termination of lease in the case of coaches used in public passenger transport services If the coach has more than 28 seats the leasing company is not entitled to input credit in relation to purchase of the coach because lease installments are exempt from VAT. When the lease is terminated within 3 years the leasing company is required to charge VAT on the amount payable (by the lessee) to acquire the coach if such amount exceeds 10% of the total amount payable under the lease. In such situations therefore both the purchase and sale (of the coach) are liable to VAT while no input credit is allowed in respect of VAT paid on the purchase value. In order to overcome the cascading effect that may arise due to this treatment the leasing company will be allowed input credit on the basis of the following formula. Input credit allowable = ( Actual input tax paid) x Unexpired lease period Total lease period (Please see Ex. 2 in para 18.17) 24.20 Structured leasing Certain leasing companies allow the lessees to pay leasing installments on a seasonal basis in cases where the lessees income is seasonal and not regular. For example farmers engaged in paddy cultivation do not have regular income. seasonal. Their income is Some leasing companies allow leasing installments in respect of leased

tractors to be paid during the seasons only. In order to do this they either fix large lease installments for the seasons by allowing grace periods in between the seasons or allow the lease installments during the off seasons to go into arrears without any penalty so that such arrears can be paid during the seasons. This type of leasing, which is known as structured leasing, too should be subject to VAT in the same manner as other leases. Any advance should not be treated as a leasing installment. Large installments or amounts paid during the seasons can be treated as normal installments. Any amount payable in order to purchase the asset at the termination of the lease should be treated as a separate transaction if such amount exceeds 10% of the total amount payable under the lease. If the asset is transferred on the payment of the last installment, that

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installment is treated as the amount payable to purchase the asset and not as a leasing installment. ,If the initial payment exceeds 10% of the total payable under the lease it is treated as an advance and not as a leasing installments. 24.21. Condominium property management committees The contributions or amounts paid by the occupiers of houses in a condominium property to the management committee formed in terms of Apartment Ownership Law of 1973 for the provision of common facilities to the property will not be treated as subscriptions or membership fees paid by members of a club. Such payments, which is usually based on the floor area occupied by each person are treated as payments for supply of services.

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Chapter 25

Zero Rated Supplies

25.1 Section 7 of the Act provides that certain supplies be zero- rated. supplies can be categorized into two groups viz. i. Goods Export of goods by the supplier himself and
(Please see para 16.1)

Broadly these

ii.

Services Services connected to exports, international transportation, property outside Sri Lanka and certain services consumed outside Sri Lanka.

25.2

When a supply is zero-rated no tax shall be charged on such supply but it is treated as a taxable supply in all other respects. That means input tax in relation to such supplies made by a registered person can be deducted from his output tax. If all his supplies are zero-rated then such persons out put tax is zero and input tax will be refunded.

25.3

Section 7(i)(b)(iv) provides that the international transportation (including transshipment) of goods or passengers as are specified by the C.G.I.R by a Notification published in the Gazette will be zero-rated. In this connection the Services specified by the C.G.I.R are specified in gazette extra ordinary NO.1201/9 of 11.09.2001. This is an important area in zero-rating.

25.4

International Transportation (a) (b)

is defined in Sec. 80, to mean any service directly

related to the transportation of goods or passengers from a place in Sri Lanka to a place out side Sri Lanka; from a place outside Sri Lanka to a place in Sri Lanka upto the point of landing unless such services are carried out under a specified carriage contract according to the Documents of Carriage issued by a freight forwarder who is registered with the Central Bank of Sri Lanka. (c) From a place outside Sri Lanka to another place outside Sri Lanka. This excludes landing, delivery and other services in relation to imports. That means they are not zero-rated. Exports:- Freight forwarding from a factory in Sri Lanka to a destination abroad will be zero-rated. Services obtained from others are not zero-rated. Zero rating is available only to the international transporter who in fact undertakes to transport goods/passengers. Thus the charterer of a ship or aircraft for international transportation of goods or passengers will qualify for zerorating but not the owner of the ship or aircraft who hired it or supplied it to the charterer.

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Any other services including coastal and inland transportation services for a local customers will be liable to VAT. Outbound travel being international transportation of passengers is zero-rated. But it is not applicble for commission received by the local agent.

25.5

Following general guide lines may be used in deciding to zero rate export of goods and supply of services under VAT Act. Sec.7(1)(a) Export of Goods Submission of export cusdec is not sufficient. Goods should have been in fact loaded into the ship/air craft. Basic document is Boat Note(Please see para 16.1) Persons exporting only exempt goods too can register for VAT and come under zero-rating. Sec.7(1)(b)(i) Services directly connected with any movable/immovable property outside Sri Lanka - If the services are performed in Sri Lanka in relation to any property out of Sri Lanka such services are zero rated. (Eg. A lawyers report on land outside Sri Lanka, a valuation report on a property outside Sri Lanka, advertising and insurance services in of relation to property outside Sri Lanka. maintenance via internet property situated outside Sri Lanka are zero-rated.

software used overseas etc. being services directly connected with However a business organization out side Sri Lanka will not fall under this and hence the management of such a business cannot be zero rated). Other examples are Eg. 1 A Sri Lankan insurance company issuing insurance cover to clients motor vehicle which is in India. The service of insuring is zero-rated because it is a service directly connected with immovable property outside Sri Lanka. Eg.2 A Sri Lankan film (registered person) sells apartments in Australia on behalf of a client in Sri Lanka. The commission received is zero rated for the same reason as above i.e a service provided in Sri Lanka but directly connected with immovable property outside Sri Lanka. It must be noted that in this type of situations the contract to supply the services may have been concluded in Sri Lanka but yet the services are zero rated because the services are directly connected with property outside Sri Lanka. (Please se discussion in para 25.6)

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(ii)

Services directly connected with any repair of any foreign ship or aircraft is zero rated Foreign ship/Aircraft means a ship or aircraft registered in a foreign country or owned by a person not in Sri Lanka (It may as will be a chartered/leased vessel or aircraft) Repair does not include maintenance. Services directly connected with the repair/refurbishment of marine cargo containers.- (These should be containers currently in use and not the containers transferred along with the goods). Services directly connected with any goods imported for re-export This is applicable to goods imported for re-export without any processing (Entre-pot trade)

(iii)

Services directly connected with the use outside Sri Lanka of any intellectual property such as patents, copyrights etc. Eg. Preparation of agreements, consultations or any other advise etc., on such use of property.

(iv)

Services directly connected with the International transportation of goods/passengers - This will include trans-shipment. For the definition of international transportation see para 25.4. Zero rating is available to the carrier who may be the charterer of the ship or air craft but not the owner unless the owner himself undertakes the transport.

Following will be considered as services directly connected with international transportation for the purpose of zero-rating: (Vide Gazette No.1201/9 of 11.09.2001 and 1246/21 of 26.07.2002.) (a) Services provided by airlines, and shipping lines engaged in International transportation - Any other mode of transport included in a package will not qualify. (Only upto a harbour or airport in Sri Lanka in the case of imports landing/delivery are excluded). (b) Following services provided by the Airport and Aviation Services (Sri Lanka) Ltd., i. ii. iii. Aircraft landing/parking, over flying Aircraft over flying, or Provision of day rooms & showers to transit passengers

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(c)

Following services provided by Sri Lanka Ports Authority (SLPA) in relation to the international shipping only i. SLPA Tariff Section I -Navigation and related services ii. SLPA TariffSection II -Stevedoring and Harbour Tonnage Dues iv. SLPA Tariff Section III Landing & delivery and shipping (Excluding landing/delivery of imports unless such services are carried out under a specified carriage contract according to the documents of carriage issued by a freight forwarder who is registered with the Central Bank of Sri Lanka); and iv. SLPA Tariff Section IV General Services rendered to International Shipping lines. v. SLPA Tariff Section V Hiring Services rendered to International Shipping lines

(d)

Services provided by statutory bodies (S.L. Customs, Sri Lanka Freight Bureau) to international shipping lines and their agents Customs charges, Sri Lanka Freight Bureau Registration fees and other fees and charges to international shipping lines and their representatives

(e)

Services provided by the General Sales Agents and licensed Agents of International airlines international transportation. i.e Commission earned on

(f)

Services provided by freight forwarders etc. Services provided by freight forwarders (agents) or their local representatives who are registered with the Central Bank of Sri Lanka under the provisions of the Exchange Control Act, facilitating international transportation, and where such services are evidenced by a document of carriage covered by a Freight Forwarders All Risk Legal Liability Insurance Policy issued in favour of the local freight forwarder (Gazette Extra Ordinary 1246/21 of 26.07.2002)

(g)

Inland Depot Services to shipping lines engaged in international transportation these services are in connection with container Pre-repair inspection of cargo depots (storing, repairing etc.);

containers in order to report the serviceable condition to the shipping line will not be zero rated. However monitoring the refrigeration after the repair (if it is a requirement under the contract) is zero-rated. (h) Ancillary Services - These will include the following Ship chandelling Supply of various goods to international shipping lines Supply of stationery to international shipping lines Supply of laundry services to international shipping lines Supply of garbage removal services to international shipping lines

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Supply of facilities for crew change/recruitment of international shipping lines (other than meals provided in hotels) Launch hire received form international shipping lines Advertising services provided to international vessels in the shipping list Container handling charges levied on shipping lines engaged in international transportation. (i) Services provided for repositioning of empty cargo containers - ie Container transport and other services.(Eg. Repairing, storing, handling where such services are provided to shipping lines engaged in international transportation) (j) (k) Ship/Aircraft Surveying These are for registration purposes such as Loyds Register Maintenance, broking or management of any ship or aircraft ship/aircraft engaged in international transportation. (l) (m) (n) (o) (p) Insurance Services Covering ships/aircrafts engaged in international transportation and cargo both outward/inward upto landing. Courier Services - Directly connected to international transportation of goods other than imports from the point of landing. Services provided by Air Lanka Catering Services Ltd To any international air line engaged in transportation of goods/passengers Ground handling services In relation to any aircraft engaged in international transportation. General Sales Agents Zero-rating applicable to Air Lines can be extended to services rendered by General Sales Agents directly in relation to international transportation. Sub-Agents are not zero-rated. (q) Container Related Services and Trucking Services Following container services and Trucking services are zero rated.
Activity 1. Storage Description (a) Rental on storage of containers belonging to International shipping lines (b) Rental on storage of containers to third parties who have hired the containers form shipping lines 2. Lift on/off (a) Charges for loading/unloading containers belonging to shipping lines Exporerts Shipping line/ Agent Zero rated Standard Rate Billed to Shipping Line/ Agent VAT Status Zero rated

shipping lines listing

If

such services are provided to the owner, operator or agent of such

Container related services

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(b) Charges for loading/unloading containers to third parties 3. Repairs Repair of containers belonging to the Shipping Lines Exporters Shipping Line/ Agent 4. Washing 5. Yard OT 6. Trailer Repair Washing of containers belonging to the Shipping lines Charge levied on clients of Shipping lines Repair of trailer belonging to the shipping lines - do The client Shipping line/ Agent 7. Sub Yard Bills Same treatment as for main yard 8. Stuffing Loading of export cargo into a container and transporting to port (If transport is subcontracted if will be standard rated) When billed to an importer/exporter 9. De-stuffing Unloading of Cargo from a container Any person Standard Rate Standard Rate Shipping line/ Agent/ Freight Forwarder Zero rated Zero Rated Standard Rate Zero rated Standard Rate Zero Rated

10. Cargo rent

Rent on storage of import/export cargo

Shipping line/ Agent Freight Forwarder Zero rated Shipping line/ Agent Fright Forwarder Entrepot Traders Zero rated Standard Rated

When billed to an exporter 11. Multi-Country Loading unloading of bonded cargo & Consolidation transhipment activities

12. Warehouse Rent Trucking Services 1. Import

Renting/leasing of warehouse space

Any person

Standard Rated

(a) Charges levied for transporting loaded container to the importers go-down (b) Re-positioning of empty container

Any person Freight forwarder Importer/ Freight Forwarder Shipping line/ Agent

Standard Rated Standard Rated

2. Export

Charges levied for transporting a loaded container from the exporters go down to port

Zero rated Zero rated

3. Inter Terminal

Transporting containers belonging to the Shipping lines between terminals

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4. Yard to Port and Vice-Versa 5. Yard to Yard

Transporting containers belonging to the Shipping lines between port and yard Transporting containers from yard to yard If billed to a third party

Shipping line/ Agent Shipping line/ Agent Standard rated Zero rated Zero rated

Note: If a third party has provided the trucking service to the relevant person (importer/exporter/freight forwarder etc.) such supply will be standard rated. N.B. i. ii. Entry permit fees, vehicle parking fees, landing and parking fees(domestic), rentals & concessions and other miscellaneous charges imposed by the Airport and Aviation Department are liable to VAT. The services provided by off line carriers (i.e Air lines and ships) which do not call at any part in Sri Lanka but provided services via an agent in Sri Lanka being services provided outside Sri Lanka are exempted. The agents commission too is exempted. iii. In the above mentioned situations discussed under Section 7(1)(b) it can be observed that in many cases the contract of service (whether in relation to property outside Sri Lanka or in relation to other matters outside Sri Lanka) may be concluded in Sri Lanka while the service is utilized outside Sri Lanka. The zero-rating or other matters connected to a supply is not determined on the basis of the place where the contract is concluded to provide the supply.

25.6

i.

Provision of Services in Sri Lanka to be consumed outside Sri Lanka Section 7(1)(b)(v), (vi) and (vii) all deal with provision of services in Sri Lanka to be consumed outside Sri Lanka for which payment is received in foreign currency through a bank. Comments made under para 10.5.14 are also applicable here. The difference is that, under zero rating the payment should be in foreign currency through a bank whereas under exemption the payment should be in local currency or foreign currency but not through a bank.

ii.

Special mention should be made about sub- section 7(1)(b)(vii) because it is stated in general terms while the other sub-sections enumerate specific situations where the services provided in Sri Lanka are utilized outside Sri Lanka. The scope of Section; 7(1)(b) is clear from all the other sub-sections and SubSection 7(1)(b)(vii) cannot be extended to cover different situations. For instance if the supply of a service originates in Sri Lanka and finally such service is utilized in the course of carrying on or carrying out a business in Sri Lanka by a foreign principle then such service is not treated as consumed outside Sri Lanka even though the decisions to accept or reject the service may be taken at the head office in a foreign country. Under Section 7(1)(b)(vii) what is material is the actual place of business in the course of carrying on carrying

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out of which, the services are in fact utilized.

That means the (place of the

business) where such services are in fact utilized is as important as the place of the taxable activity from where the services are originated but not the place where the decisions are taken on behalf of that business which utilizes the services. In other words the place where the contract is concluded to accept the services is not material. It may also be useful to quote from a foreign judgement with regard to the concept of supply in Value Added Tax. The concept of making a supply for purposes of VAT is not identical with the performance of an obligation for the purpose of law of contracts even where the obligation consist in the provision of goods and services Thus the commission paid in foreign currency to a Sri Lankan agent by a foreign principle for canvassing orders and other connected activities in Sri Lanka in the course of carrying on or carrying out a business in Sri Lanka by that foreign principle, does not tantamount to a payment for services supplied in Sri Lanka to be consumed outside Sri Lanka for the purpose of zero-rating as envisaged in sub-section 7 (1) (b)(vii) of the Act. The services consumed outside Sri Lanka as envisaged in that sub-section should be consumed in a manner similar to the consumption section(v) of services mentioned in other sub-sections, and sub-section ( vi) . specially subWhat matters is the actual place of

consumption of services and not the place where the decisions are taken. Please see para 10.5.14 The commission is paid on the basis of volume of business transacted in Sri Lanka with the help of a an agent in Sri Lanka and the business is transacted in Sri Lanka as a result of the services performed in Sri Lanka ; then the services are treated as being consumed in Sri Lanka . The presence of an agent or representative in Sri Lanka, to supply services makes things completely different from a situation where business is transacted by other means such as internet. The services of the agent in Sri Lanka falls within either Section 9 or Section 55 of the Act depending on the facts of the case.

Laws J. in Customs & Excise Commissioners V. Reed Personnel Services (1995) STC. 588

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Chapter - 26

Travel Trade, Tourism and Hotel Industry.

26.1 Travel Products i. All travel products provided in Sri Lanka are liable to VAT if the provider is a registered person. (Eg. Air fares for local and international travel, bus fares and car hires for tourists excursion tours etc., services provided by Hotels Guest houses, Rest Houses and Restaurants and included in a travel package are also liable to VAT). ii. Tour Operators and Agents Tour operators performs the role of the wholesalers in the industry in that they package various travel accommodation components into a marketable tour. That tour will either be sold directly by the tour operator or through an agent either in Sri Lanka or overseas. Sales marketed in Sri Lanka constitute domestic travel which is liable to VAT as explained below (para 26.2) Sales marketed outside Sri Lanka by out-bound tour operators are also liable to VAT (para 26.3). iii. General Sales Agents (G.S.AA) General sales agents normally represent overseas principles as their Master agents in Sri Lanka and sells overseas facilities on behalf of the principle. For the performance of that service they receive a marketing fee and an over-rider commission. The overseas service component of the tour is not liable to VAT but the commission received by the GSA is liable to Sri Lanka VAT. 26.2 Domestic Travel i. ii. This means excursion tours and tours arranged for tourists etc., with or without hotel facilities but not public passenger transport services. If an agent arranges the tour the agent receives a commission from the tour operator (ie the supplier). Supplier should charge VAT on his price and the agent should charge VAT to the supplier on the commission if both are registered persons. The payment can be in one of the following ways. (a) (b) Customer pays the agent Customer pays the supplier direct after confirmation of booking through agent. iii. (a) If the sale price is Rs.1000/- and the customer pays agent

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Value of Supply Paid to Agent

Commission Retained by Agent (say 10%) 100 20 120

Net Proceeds paid to the supplier by the agent 900 180 1080

Sale price VAT @ 20%

1000 200 1200

Customer pays 1200/- to the agent and he keeps 120/- of which 20/- he should pay as output tax. The supplier should pay 200/- as output tax and deduct 20/- as input tax paid to agent. If the agent is not registered then the agent will not retain 20/- and the suppliers output tax will be 200/- without any deduction of input tax in relation to agents commission. Net proceeds to the supplier will then be 900+200 = 1100 (b) Customer pays the supplier: Value of Supply paid to Supplier by the customer Sale price VAT @ 20% 1000 200 1200 Commission paid to Agent (say 10%) 100 20 120 Amount Retained by Supplier

900 180 1080

Here again the final position is the same but the money is first received by the supplier who in turn pays commission to the agent for which the agent charges 20% VAT.

The output tax to be declared by the agent is 20/-. In the case of the supplier output tax is 200/- and input tax is 20/-. Both the supplier and the agent can claim other input taxes in relation to other expenses incurred during the course of this taxable activity.

26.3

Out Bound Travel i. Transportation of passengers outside Sri Lanka is zero-rated because it is a service consumed outside Sri Lanka. Thus no VAT is payable by the consumer on any out-bound travel products such as Air-fares and ship-fares. But the commission received by a local travel agent is liable to VAT.

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ii.

But travel insurance and goods purchased in Sri Lanka and taken out of Sri Lanka are not zero-rated. They are subject to VAT at rates applicable to supply of service (insurance) and supply of goods respectively.

iii.

Services provided by General Sales Agents (GSAA) and other licensed agents in relation to (international) travel are also zero-rated. However any other agent, if he is a registered person should charge VAT to his client and declare output tax.

iv.

The commission received by local agent on out-bound travel is liable to VAT at 20%.

v.

The out-bound tour operator should charge VAT on the rupee value of the gross selling price of that portion of the tour which is related to any service to be performed within Sri Lanka. (i.e local portion) The exchange rate should be the rate at the time of sale and no adjustment will be made for the difference, if any, in the net revenue received.

vi.

If the product is sold to a customer through an overseas agent VAT is payable by the Sri Lankan supplier on the local portion of the final selling price to that customer. basis. The local portion may be ascertained on a suitable proportionate

vii.

Marketing costs overseas and funds sent overseas to support marketing activities to be performed outside Sri Lanka will not attract VAT.

viii. ix.

Overseas agents commission is liable to VAT if he is registered. If the product is sold to an overseas agent who then independently markets and

on-sells that product to a customer overseas, then VAT is payable by the Sri Lankan supplier on the local portion of the selling price of the product to that agent. 26.4 In-bound Travel i. VAT will be charged to the overseas customer on in-bound travel products since all the services are consumed in Sri Lanka. ii. If the in-bound tour operator is billing the overseas customer for the entire tour including hotel charges the rate of VAT is 10%.

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iii.

In such situations the hotel is billing the agent/tour operator for the customers stay in Hotel. Such bills too should to subject to VAT at 10%. This is the output tax for the hotel and input tax for the tour operator.

iv.

If the tour-operator/agent is billing only for the travel portion and the hotel is separately billing the customer the hotel bill is subject to VAT at 10%. The local tour portion which is separately billed by the agent/tour operator is subject to Vat at 20%.

v.

If the product is sold to a customer through an overseas agent then VAT is payable by the Sri Lankan supplier on the final selling price to that customer. The total consideration may be treated as VAT inclusive and the output tax should be declared by the supplier.

vi.

Marketing costs incurred overseas and funds sent overseas to support marketing activities to be performed outside Sri Lanka will not attract VAT.

vii. viii.

Overseas agents commission is liable to VAT if he is registered. If the local tour operator (supplier) sells the in-bound travel product to an overseas agent, who then independently markets and on-sells that product VAT is payable by the Sri Lankan supplier on the selling price to that agent.

26.5

Hotel Industry Following are the rates of VAT that should be applied by Hotels. Rooms sales, Food sales, Ala carte sales, Buffet and catering for weddings can be considered under the lower rate of 10%. Laundry if it is billed to the guest by the hotel and if the laundry service is part and parcel of the taxable activity carried on by the hotel then it can be considered under the lower rate. If the laundry is a separate entity and if its turnover is not a part of the hotels turnover then it should be taxed at higher rate of 20% for VAT. Letting convention halls is subject to VAT at 20% except in cases coming under 26.5. All other services such as locker sales, Telephone, Swimming pool tickets, photo copy charges, beverages (whether package or outlet), wedding hall hires, miscellaneous sales(exhibitions, animation, cockage etc), commissions, service charges, herbal fitness etc, should be taxed at 20%.

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26.6

VAT ON MICE Tourism VAT rate applicable to the services in relation to MICE tourism rendered by Professional Conference and Exhibition Organizers (PECO) is 10%. This is applicable to Professional Conference Organizers and Professional Exhibition Organizers only if they are members of the Sri Lanka Conventions Bureau. Lower rate is confined to MICE tourism only ie Meetings, Incentive Travel, Conventions and exhibitions conducted by PEC00.

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Chapter 27

Some useful hints

1. Supply of goods i. Sale of goods by a partnership is treated as a sale by the body of persons although partnership is not a legal entity to own the goods and passing of exclusive ownership as the owner may not be present. The same is applied to the sale of fixed assets of the partnership. ii. Similarly sale of liquor etc. by a club to its members is treated as supply of goods. The management owns the goods and the ownership change hands when they are sold for a consideration to its members. The members cannot claim that they consume their own liquor/food. The same applies when a supply is made to a partner by a partnership. iii. iv. v. vi. In the same vein sale of stolen goods is liable to VAT not withstanding that sale is voidable and passing of exclusive ownership as the owner is absent. Input tax incurred before registration for VAT is not allowable. Input tax paid after registration but in respect of supplies received before registration is also not allowed. Input tax paid after registration but before the commencement of commercial operations (That is before the commencement of making taxable supplies) will be allowed because the definition of taxable activity includes any activity in connection with the commencement or cessation of a trade, business, profession, voccasion etc. Vide Para 3.7(i)(c ) This is provided in Section 22(7) of the Act subject to the conditions laid down therein. Vide Para 11.4 vii. Goods stolen if covered by an insurance compensation is considered as a taxable supply. Insurance company must pay VAT. This may be considered under the second limb of the definition of supply of service para 3.3. viii. Samples supplied to actual or potential customers without any charge and not from items ordinarily available for sale and supplies for testing and market research without any charge are not taxable supplies. ix. Bartar transaction (i.e exchange of goods/services without cash payment or with part payment) should be considered as two separate supplies (because the consideration for a supply may be in money or otherwise than in money). If both parties are registered both should account for VAT. registered he should account for VAT. goods/services exchanged. If only one party is Tax base is the market value of

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x. xi.

Supply of goods & vehicles free of charge to share holders or employees for nonbusiness use is a taxable supply taxed at open market value. No output tax can be charged in respect of supplies made prior to registration even if the payment is received after registration. If the output tax is charged incorrectly it should be remitted to the CGIR.

2.

Supply of Services i. Directors fees under normal circumstances is not a taxable supply. service, then that directors fee will be subject to VAT ii. iii. iv. v. Court fines are not subject to VAT because they are not paid as a consideration for a supply. Deposits, if refundable, is not a taxable supply unless it is set off against some amount receivable. Deposits if not refundable is considered as a supply. Forfeiture of a deposit becomes a taxable supply if it is in the course of the taxable activity. Booking fees is a supply of service. (Please note that although outbound travel products are exempt from VAT (Para 26.3) any overseas hotel booking fees charged by a Sri Lankan tour operator is liable to VAT). vi. Reimbursement of and expense is liable to VAT it cannot be split in to parts unless it consists of statutory charges such as amount paid to government, customs etc incurred by the client where the invoice is in the name of the client and no margin has been kept by him in his claims and no input tax is claimed by him. vii. Fringe benefits to employees Following fringe benefits will not be subject to VAT. - Free use of motor car on which no input credit has been allowed - Travelling in a motor coach provided by the employer - Residential accommodation provided by the employer - Health care services provided by the employer viii. ix. Activities carried on for pleasure (eg. hobbies, private recreation pursuits) represent final consumption and no VAT is payable. Vide para 3.7 In the case of supplies involving finance companies - If the finance company becomes the owner of the goods then * supply from trader to finance company is a separate supply. * supply from finance company to customer is a separate supply * supply from finance company to customer may involve supply of goods and supply of credit which is an exempt supply If the Director is appointed as part of a wider taxable activity. eg. under a contract for

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If the finance company does not become the owner of goods i.e when the purchase is financed by a loan agreement goods are supplied directly by the trader to the customer. Finance company enters into a separate transaction with the customer to make a supply of a credit facility. * supply from trader to customer is a supply of goods where the value of supply is the value of goods and not the amount received from the finance company. * supply from finance company to customer is a supply of credit

x.

Donations to schools If the donation is in fact for a supply of a service(eg. admission of a child or for some other consideration) VAT should be charged on that supply. The school should declare output tax if it is Registered for VAT. If no VAT is charged 1/11 of the donation will be treated as output tax.

xi.

Indenting agents, who introduce importers from Sri Lanka, for their principle resident abroad, is rendering a service in Sri Lanka and VAT is payable on the commission even though it is received in foreign currency.(Vide Para 25.6)

xii.

Management consultancy services etc. provided by persons outside Sri Lanka, for persons in Sri Lanka by using documents, records other information or technical devices in Sri Lanka via internet, e-mail or by other means with the assistance or permission form a person in Sri Lanka may have to be treated as services performed in Sri Lanka and the fees charged by the service provider may be liable to VAT if the service provider can be deemed to be a person registered for VAT. The recipient company in Sri Lanka can be treated as an agent of the foreign supplier.

xiii.

Printing - In the case of printing if the printer is only providing the service of printing while the Customer provides the paper then it amounts to supply of a service which is liable to VAT at 20%. However if the printer undertakes the entire work, whether it is on his own or for a customer, the supply by the printer tantamounts to a supply by a manufacturer. The items so manufactured should be subject to VAT at the rates applicable to such items as a supply of goods by a manufacture. Eg. Excise Books, Cheque Books, Ledger Books, Diaries, Newspapers and Writing Pads etc. 20%. Magazines and Journals 10%. Text Books and other items of similar nature such as Annual Reports, Audit Reports, Administration Reports, Gazettes and Maps etc. are exempted.

xiv.

Supply of Mixed Services & Composite Services - Sometimes provision of a service may consist of supplies of several distinct services. submission and typing work. For example a lawyer or some other consultant may charge separately for his written This is sometimes referred to as a mixed supply

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and for VAT purposes the two components are treated as separate supplies if they are subject to two different VAT rates. Eg. A bank may charge legal fees, documentary charges, fax charges etc. in granting a loan. Although they may be incidental to the main supply they are billed separately and are treated as separate and distinct supplies for VAT purposes. However when supply of goods forms part and parcel of a supply of a service then it becomes one composite service which cannot be separated. Eg. The amount charged for photocopying includes the cost of the paper but that cannot be separated into supply of goods and supply of a service. A contractor supplying the service of constructing a building is supplying one composite service which includes provision of materials. It cannot be separated into supply of goods and supply of a service. Similarly when a vehicle service station is providing air filters, engine oil etc. for the purpose of the service it cannot be separated into sale of goods and sale of a service. It is a supply of one composite and single service of servicing the vehicle.

However, in such a situation, if the existence of a separate business of retail and wholesale supply of motor spares, can be established then the sale of motor spares can be treated as an excluded supply as provided in Sec3. The evidence required to establish the existence of a separate business are (i) Separate Trade license for the retail and wholesale business from the relevant local authority and a separate business registration from the relevant provincial council (ii) Evidence to support that the supply of spare parts is open to general public and not confined to those who come for vehicle servicing (iii) Maintenance of separate invoices, books of accounts and other records as required under Section 3 (and as mentioned in para 2.4.2 and para 15.3) and preparation of separate Profit & Loss Account and balance sheet for the business of buying and selling motor spares, oil cans etc. If the existence of a separate business cannot be established the total amount charged for the service including the value of spare parts provided shall be treated as the value of supply for VAT purposes. Even prior to the transfer of turnover tax on retail & wholesale sales to Provincial Councils it was treated in the same manner and the entire value of supply was treated as the value of the supply of a service for turnover tax purposes and the total value was not separated into two components called supply of goods and supply of services (Although the agency which implements the turnover tax law has undergone change turnover tax law applicable to the facts of this case and the tax treatment which is a

152

consequence of that law did not change. In the circumstances the question of Provincial Council turnover tax will not arise unless the existence of a separate business of retail and wholesale sales is established) But in the case of air travel, the in flight catering service is considered as an integral part of the supply of passenger transport service by air. The reason is unlike in the case of bank loans where the customer (i.e. the recipient of the supply) is billed after the occurrence of each event (ie each supply) the air passenger pays in advance for one composite service. The price paid in advance for the air ticket includes in flight catering services that are provided in that particular air line. If the supply of liquor etc. are separately charged then it amounts to a separate supply. xv Sweep Ticket Agents - Sweep tickets are not sold as goods or commodities and the sale of sweep tickets are not governed by the Sale of Goods Ordinance. The ticket is only a token for the buyer to participate in a (lottery) draw conducted by the lottery organizer. The agent may sell on a commission basis, the tickets belonging to the lottery organizer or sometimes for business convenience he (the agent) may be asked to purchase the tickets outright at a discounted price with no right to return the unsold tickets. In the latter case the agent is doing buying and selling sweep tickets but it is debatable whether he does retail and wholesale business with sweep tickets because on one hand they are not sold as goods or commodities and on the other hand the stocks will have no value and are not salable after the draw. The purpose of the sale is not to sell sweep tickets as a commodity (such as printed material or toilet paper) but to sell them as permits to enter into the draw. After the draw people throw away the tickets if there is no prize. Therefore the sale of sweep tickets is not an excluded supply, consisting of retail or wholesale supply of goods, as envisaged in Section 3 of the Act. The agent is supplying a service to the lottery organizer whether he buy and sell tickets or whether he sells them on commission basis (The service is the enrollment of clients for the draw). In the former case he is allowed to keep a predetermined margin and re-sell the tickets and in the latter case he is allowed to retain an agreed commission on the final sale value. The margin kept by the agent or the commission retained by him as the case may be, is the value of supply by the agent to the principle. The departments view is that VAT is chargeable on the margin kept by the agent or the commission retained by him, which is the consideration for the supply of service by the agent to the principle

153

(i.e

the lottery organizer)

on which turnover tax was charged prior to the

introduction of GST, but no turnover tax is payable on the sale value of the sweep ticket because there is neither a retail or wholesale business nor a sale of goods or commodities which are pre-requisites for charging turnover tax on the total sale proceeds. Even when Department was implementing the turnover tax on retail and wholesale sales prior to 1991 the sale of sweep tickets was not treated as a sale liable to turnover tax but only the commission or discount was treated as liable. As stated earlier the legal provisions leading to the tax treatment applicable to the facts of this case did not change although the taxing authority has changed. Therefore the question of Provincial turnover tax does not arise and the agent should register for VAT if the total commission or the margin exceeds the taxable threshold. The agent should issue a tax invoice to the lottery organizer and charge VAT which he should declare as output tax. Otherwise 1/6 of the commission/margin is treated as output tax. Xvi Layby Sales - In the case of layby sales the customer deposits some money (sometimes the deposits may be made from time to time) with a view to purchase some goods but no transaction occurs until the customer finally purchase the goods and takes possession of the goods. This is different from an advance because an advance is paid when a transaction is concluded. Layby deposits are refundable and the transaction is not concluded at the time of the deposit. The time of supply of goods is the time at which the transaction is concluded usually by taking possession of the goods. The layby deposit is not treated as a consideration for any supply. But if the customer changes his mind and request for a refund of the deposit the layby seller may sometimes forfeits a part of the deposit. If he forfeits part of the deposit that part is treated as a consideration for supply of a service. 3. Local Government authorities Local government authorities and provincial councils are frequently engaged in taxable activities and are liable to be registered and required to charge and collect VAT on the (taxable) supplies made by them. i. Exemptions The following supplies made by them are exempt from VAT and they are not required to charge and collect VAT on such levies.

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1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Assessment rates Taxes on vehicles and animals Sales taxes on businesses and professions Entertainment tax on cinemas Tax on sale of lands and tax on undeveloped lands All kinds of penalties (Eg. Penalty for unauthorized constructions) Rents on residential dwellings Charges for public library services Charges for health cares services (The health care centres of local authorities are treated as medical institutions) Charges for educational services if they are normal educational services as provided in government schools (Eg. Special computer training classes are not exempt. But any pre-school nurseries conducted by local authorities can be exempted.)

11. 12.

Crematoria and burial charges Interest on loans given to employees

Therefore any input tax paid on goods and services obtained for the purpose of supplying the above services will not be eligible for deduction. They are also not required to pay VAT on the following. 13. 14. 15. 16. 17. 18. L.L.D.F. loans received by local authorities Court fines received by local authorities Stamp duties received by local authorities Interest on Fixed deposits All grants allocated to the council/Sabha if not related to a supply All sums appropriated by the parliament if not related to a supply and input is not claimed on spending of such grants. ii. Goods and Services liable at 10% Local authorities (and provincial councils) are required to charge & collect VAT at 10% on the following services provided by them 1. 2. 3. 4. Water supply charges Electricity supply charges in excess of 30 kwh per month. Charges made by restaurants and guest houses carried on by them. Sale of any goods enumerated in the Second Schedule to the Act

155

The VAT charged on above should be declared as output tax. They are required to pay 10% VAT on the following services obtained by them 5. 6. iii. Construction contracts (only the construction contracts enumerated in para 23.8 ) Land transport of goods

Goods and Services liable at 20% They are required to charge and collect VAT at 20% on all other goods and services provided by them including the following. 1. 2. 3. 4. 5. Trade Licences of all kinds (Eg. Slaughter house licences, licencing of offensive and dangerous trades and places) Charges for name boards and banners Vehicle parking fees Scavenging charges Sale of building applications charges and charges for issue of certificate of conformity, charges for any other certificates and any registration charges, charge for extracts of deeds etc, charges for the approval of survey plans for blocking out of lands, charges for marking street lines, entertainment taxes not being on cinemas. 6. 7. 8. 9. 10. 11. Rents, tolls and fees charged for public markets, rent or lease of other commercial buildings, any other tolls Sale or lease of markets Public Auction of property seized, sale of materials of buildings pulled down Seize and sale of stray cattle and other animals Sale of tender forms, sale of fixed assets and scrap Supply of any other goods and services

156

Annexure 1 ENTERPRISES UNDER BOARD OF INVESTMENT B.O.I. Enterprises too are governed by the provisions of the VAT Act. The B.O.I has set out in a circular the manner in which the VAT Act applies to their enterprises. The contents of the circular are reproduced below. The Department was not able to check whether the circular is strictly in accordance with the provisions of the Act before this guide was given for printing. However it is inserted into this guide for the benefit of the tax payers. 1. 1.1 PROJECTS LOCATED IN EXPORT PROCESSING ZONES (EPZZ) IMPORTS VAT is not payable on import of project related items by the projects located in the following zones. Katunayake Export Processing Zone Biyagama Export Processing Zone Koggala Export Processing Zone Kandy Industrial Park, Pallekelle Malwatte Export Processing Park Mirigama Export Processing Zone Wathupitiwala Export Processing Zone

If goods are removed from the Zones, the enterprises should submit a Cusdec for the payment of VAT. However, these enterprises have the option to pay VAT either on upfront or deferred basis at the time of imports, so that, the enterprises could remove their goods from the EPZZ for various purposes, such as washing, embroidery, etc,. without submission of a Cusdec. 1.2 1.2.1 TRANSFERS Imported Fabric from a Garment manufacturer to inter or intra Zone project or BOI garment manufacturer outside EPZ :On a transfer application Cusdec is not necessary. 1.2.2 Other imported materials except fabric to inter or intra zone project :Permitted without VAT on a Transfer application.

157

1.2.3

Other imported materials except fabric to an outside EPZ BOI Project :_ Submission of a Cusdec for payment of VAT on market value.

1.2.4

Goods from a Customs Sales Bond to an EPZ project :With BOI approval on submission of a Cusdec/GRN to Sri Lanka Customs but VAT is payable, only if there is a value addition including profit mark-up.

. 1.2.5

Goods imported or manufactured out of imported materials by a TIEP manufacturing bond or infac project to an EPZ project :On a Tax invoice to the market value, subject to submission of a Cusdec/GRN to SLC with the prior approval of BOI.

1.2.6

Goods from a EPZ project to a Customs Bond :Permitted on submission of a Cusdec to the SLC by the recipient. VAT is payable on the basis of sales invoice to Customs.

1.3 1.3.1

REMOVAL OF GOODS FROM AN EPZ FOR PROCESSING AND RETURN Removal of goods for Processing and Return, Sub-Contracts, etc.:Permitted on submission of a Cusdec by the transferor for payment of VAT to the value of the product including any value addition upfront or deferred basis. If same goods are required to remove again, VAT is payable only at first instance. Enterprise should submit documentary evidence to this regard. Tax invoice to be issued by the processor for processing charges.

1.3.2

Locally purchased goods for processing and return :Permitted on submission of a Processing and Return Application. A Tax invoice to be issued for the processing charges by the processor.

1.4 1.4.1

SALES Imported goods to inter or intra zone project :VAT is not payable existing procedure to continue.

1.4.2

Manufactured goods including fabric to inter or intra zone project :On a Tax invoice for the value addition only.

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1.4.3

Imported goods (except fabric for garment manufactures) or manufactured goods to export oriented or non-export oriented outside EPZ BOI project :Permitted on submission of a Cusdec by the recipient for the payment of VAT i.e. for imported items on the material value and for manufactured items for the mark-up value. In case of imported fabric for garment manufacturers VAT is not payable, however BOI approval to be obtained.

1.4.4

Imported or manufactured goods to TIEP manufacturing bond or infac project :Permitted on submission of a Cusdec for payment of VAT on market value to Sri Lanka Customs by the recipient with BOI approval.

1.4.5

Imported or manufactured goods to a non-BOI project, home consumption or to an individual :Permitted if the BOI enterprise is entitled to sell such goods on submission of a Cusdec for the payment of duty. VAT and other levies to Sri Lanka Customs. In the case of sale of finished garments Rs.25/= per piece will have to be paid.

1.4.6

Imported goods except fabric or manufactured goods by an outside EPZ BOI project to an EPZ project:Permitted on declaration of goods to BOI Security at Main gate of relevant EPZ along with a tax invoice on the market value (original + copy) and production of goods to BOI Verification Unit. BOI prior approval is necessary. In case of fabric VAT is not payable, but prior BOI approval should be obtained.

1.4.7

Imported or manufactured goods by TIEP, manufacturing bonds or Infac project to an EPZ project:Permitted on submission of a Cusdec/GRN to be processed at SLC by the seller. Goods should be declared to the BOI Security at the Main gate of EPZ with a copy of invoice and production of goods to BOI verification. Prior BOI approval is necessary.

1.5 1.5.1

SUB-CONTRACTS To inter or intra zone project :Tax invoice to be issued by the processor for the processing charges.

1.5.2

To a BOI project located outside EPZ:-

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The sub-contract awarder should pay VAT upfront of deferred basis prior to removal on a Cusdec. Processor to issue a Tax invoice for the processing charges. 1.5.3 EPZ project undertakes for a BOI or non-BOI export oriented outside EPZ project :Permitted on the request of the EPZ enterprise subject to production of goods at the time of bringing in and out of EPZ. Tax invoice to be issued for the processing charges by the processor. 1.6 1.6.1 REMOVAL OF MACHINERY AND EXQUIPMENT FOR REPAIRS AND LOANS:Maximum of 05 Nos. machines or parts of a particular category :Permitted to remove without payment of VAT. 1.6.2 Machines given or taken on loan basis for temporary use and return :No VAT is chargeable. Present format and procedure will continue. 1.7 1.7.1 REMOVAL OF SAMPLES Removal to a buying office or buyer's representative is not subject to payment of VAT. The present BOI controlling system will continue. 2. PROJECTS LOCATED OUTSIDE EPZZ ENGAGED IN DIRECT EXPORT OF GOODS AND SERVICES (ENTERPRISES REGISTERED FOR DEFERRED FACILITY) 2.1 2.1.1 IMPORTS Project related items needed for the establishment of project can be imported exempted from payment of VAT for the following categories, during the project implementation period as specified in the agreement or up to the date of completion of project whichever is earlier. BOI enterprises signed agreements prior to 16/05/1996 And, BOI enterprises signed agreements prior to 01/04/1998 where the total cost of investment is not less than Rs.500 million. 2.1.2 The following projects which are permitted to import project related items on the exemption of payment of VAT for a period of two years from the appointed date of VAT or until the completion of the project specified in the agreement which ever is earlier. (a) Housing and Health care project.

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(b) (c) (d) (e)

Projects engaged in unprocessed agricultural products including fishing (not including liable agricultural produced). Wheat flour milling projects. Project producing liquid fresh milk (flavoured or not). Any other projects engaged solely in producing any other goods exempted under the first schedule to the VAT Act.

2.1.3

Except fabric by the BOI approved garment manufacturers, all project related goods are permitted on deferment of VAT by the export oriented project including garment manufacturers if they export more than 50% of the value of the output directly.

2.2 2.2.1

TRANSFERS Imported goods except fabric for garment manufacturers to another outside EPZ enterprise :Permitted on submission of a request along with a Tax invoice for the market value (original + copy) issued by the transferor to the IS Dept.

2.2.2

To a TIEP manufacturing bond or infac project :Permitted on submission of a Tax invoice for the market value _ Cusdec/GRN processed at SLC by the transferee subject to BOI formalities.

2.2.3

From TIEP, manufacturing bond or Infac project under SLC to outside BOI project:Permitted on submission of a tax invoices for the market value + Cusdec/GRN processed at SLC by the transferor subject to BOI formalities.

2.2.4

To a project in an EPZ:Permitted on declaration of goods to BOI security at the Main Gate at EPZ on producing goods along with VAT invoice for the market value (Original + copy). Prior approval to be obtained.

2.2.5

From a Customs sales bond to outside EPZ project:With BOI approval on submission of a Cusdec with payment of VAT on market value. However, in respect of fabric if the recipient is a garment manufacturer, VAT ins not payable.

2.3

SALES

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2.3.1

Imported goods (except fabric) or manufactured goods to another outside EPZ project:Permitted on submission of a Tax invoice on the market value (Original + copy) the IS Dept. by the recipient.

2.3.2

To another export-oriented project under SLC (TIEP manufacturing bond or infac project):Permitted subject to BOI formalities on processing of a Cusdec/GRN at SLC on a tax invoice on the market value by the recipient.

2.3.3

From non-BOI (TIEP manufacturing bond or Infac project) to outside EPZZ project:A Cusdec/GRN to be processed at the SLC by the seller and submission to the IS Dept. of the BOI with a Tax invoice by the BOI project.

2.3.4

To the local market within permissible limit of the agreement:On payment of Customs duty and VAT as determined by SLC on submission of a Cusdec by the buyer to the SLC.

2.4 2.4.1

SUB-CONTRACTS Between outside BOI projects and BOI or non-BOI projects located in or outside EPZ:Permitted on a request made by the sub-contractor on the prescribed format. Processor to issue a Tax invoice for the processing charges.

3. 3.1 3.1.1 3.2 3.2.1 3.2.2

TRADING HOUSES LOCATED INSIDE EPZZ IMPORTS The procedure relating to imports effected by enterprises located inside EPZZ will apply. TRANSFERS Imported goods to another inter or intra EPZ project for manufacture and return:Not liable for tax. However, the processor should issue a Tax invoice for the processing charges. Imported goods except fabric to another BOI or non-BOI project located outside EPZ for manufacture and return:Payment of VAT on submission of a Cusdec to the market value of the goods on upfront or deferred basis. A Tax invoice to be issued by the processor for the processing charges.

3.3

SALES/PURCHASES

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3.3.1

Purchasing manufactured goods from inter or intra zone project for export purposes :The seller to issue a Tax invoice for value addition.

3.3.2

Purchase of manufactured goods from a BOI or non-BOI project located outside EPZZ for export :Submit an export Cusdec indicating the name and location of the manufactured enterprise in cage 51 of the export Cusdec for consideration of deferred facility for the manufacturing enterprise. The seller should issue a Tax invoice on the market value. In case of purchase of goods from a non-BOI project prior approval to be obtained from SLC and also goods to be exported should be verified by SLC.

4. 4.1 4.1.1

TRADING HOUSES LOCATED OUTSIDE EPZZ IMPORTS The same procedure relating to imports effected by export-oriented enterprises located outside EPZZ will apply. Additional details to be obtained from the IS Dept.

4.2 4.2.1

SALES/PURCHASES Purchase of goods from BOI or non-BOI export-oriented projects located outside EPZ:Seller to issue a Tax invoice for the market value. In case of purchased of goods from a non-BOI project prior approval to be obtained from SLC and export of goods should be verified by SLC.

4.2.2

Manufactured goods from an EPZ enterprise :The trading house submit a Cusdec prior to removal of goods for payment of VAT upfront or deferred basis., But if the goods are directly exported from the manufacturer's premises, a Tax invoice for the market value should be issued and non Cusdec is issued for the payment of VAT.

5. 5.1 5.1.1 5.2 5.2.1

FABRIC MANUFACTGURING ENTERPRISES LOCATED INSIDE EPZZ IMPORTS The procedure relating to imports effected by enterprises in EPZZ will apply. SALES To inter or intra EPZ garment manufacturing project :Permitted on a Tax invoice for the value addition.

163

5.2.2

To BOI garment manufacturing projects located outside EPZ :On submission of a Cusdec for the payment of VAT for value addition value on deferred or upfront basis.

5.2.3

To export-oriented project under TIEP, manufacturing bond or Infac:Submission of a Cusdec by the recipient to SLC for the payment of VAT on market value either on upfront or deferred basis.

6. 6.1 6.1.1

FABRIC MANUFACTURERS LOCATED OUTSIDE EPZZ IMPORTS Import of following raw materials by the BOI fabric manufacturers are allowed VAT free. Yarn Grey cloth Dyes used for manufacture of fabric Chemicals used for manufacture of fabric Finished cloth for processing Fibre

However, in order to avail this facility fabric manufacturers should export more than 51% of the value of the output either directly or indirectly or combination of both. Facility will be withdrawn if they fall short of this minimum export level. A guarantee should be given to this effect to the IS Dept. 6.2 6.2.1 SALES To a garment manufacturing project in EPZ :Permitted on submission of a Cusdec by the recipient for the payment of VAT on market value on deferred or upfront basis. 6.2.2 To another garment manufacturing BOI project located outside EPZ:Permitted on submission of a Cusdec by the recipient for the market value for payment of VAT. 6.2.3 To an export-oriented garment manufacturer under SLC (TIEP manufacturing bond of Infac):-

164

Permitted on submission of a Cusdec to SLC by the recipient for the payment of VAT on market value. 7. 7.1 7.1.1 OTHER PROJECTS NOT MENTIONED ABOVE IMPORTS All other projects should pay VAT on upfront at the point of imports at the rates applicable for all projects related items. 7.2 7.2.1 SALES To other BOI projects in or outside zones:Permitted on issue of a Tax invoice for market value subject to submission of a Cusdec/GRN to be processed at SLC by the buyer. 7.2.2 To TIEP Manufacture-in-Bonds or Infac projects:Permitted on issue of a Tax invoice for market value subject to submission of a Cusdec/GRN to be processed at SLC by the buyer.

7.2.3

Construction materials like steel to BOI enterprises :The purchasing BOI enterprise should obtain prior approval of BOI and payment of VAT on market value on a tax invoice.

7.2.4

All other local sales need prior approval as per the agreement and is subject to payment of duty, VAT and other levies.

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Annexure - 2
First Schedule to the VAT Act

The Following supplies or imports are exempt from VAT. This is a summarized version of the list. For the exact version please refer to the Act. Goods i. The supply or import of (a) (b) (c) (d) (e) (f) ii. iii. iv. v. vi. vi. vii. viii. ix. x. xi. Unprocessed Agricultural products other than potatoes, onions, chillies, all other grains excluding rice and paddy, planting material Unprocessed horticultural products Unprocessed animal husbandry products other than any variety of meat and live birds including day old chicks Unprocessed fishing products Unprocessed forestry products other than timber. Cardamom, cinnamon, cloves, nutmeg, pepper, desiccated coconut, rubber, paddy and seed paddy.

The supply or import of Rice, rice flour, wheat, wheat flour and eggs The supply or import of bread of any description . The supply or import of liquid milk(not made out of powdered milk or any grain) and infants powdered milk. The supply of Air crafts helicopters and temporary import of any plant machinery, equipments which are re-exported within 12 months from the date of import. The supply of import Books other than cheque books, magazines, periodicals, news papers diaries, ledger books and exercise books. The supply of import kerosene, bunker fuel and aviation fuel. The supply of import of crude Petroleum oil Pharmaceutical products (other than cosmetics) and raw materials Ayurvedic, Siddha, Unani or Homeopathic preparations (other than cosmetics) and raw materials Medical machinery, surgical instruments, medical and dental equipment and ambulances Artificial limbs, crutches, hearing aids and accessories wheel chairs, prepared culture media, diagnostic or laboratory reagents, surgical glows, contact lenses X-ray tubes, white canes for Blind and Braille typewriters and parts

166

xii. xiii. xiv. xv. xvi.

Pearls, diamonds, diamond power, precious stones, precious metals, and gold coins Unused postage or revenue stamps Import and supply of goods at any; duty free shop for foreign currency. Temporary import of high value plant, machinery, equipment etc. to be exported within 12 months. Any goods imported by or supplied to any diplomatic mission or other privileged person under the Vienna convention and identified as such by the Commissioner General of Inland Revenue. Passengers Baggage(Exemption) entitlements, duty free re-importation and ships stores Import of goods by; approved organizations for relief of distress, charitable or religious purposes (a) Import of approved project related articles by any BOI company approved before 16th May 1996 or before 1st April 1998 with a total cost of the project not less than Rs.500 Million. import of approved project related articles by any BOI project which will make exempt supplies on the completion of the project for a period of 02 years form 1st August 2002.

xvii. xviii.

(b)

xix xx xxi xxii

Import of non-business articles and samples worth rs.10,000/- or less Supply of goods used in Sri Lanka for a period not less than 12 months under any hire purchase agreement Fire or subsidized meals to employees at their places of work Supply of residential houses other than by a BOI company which has entered into an agreement on or after 01st April 2001 with a project cost not less than US dollars 10 million or its equivalent. Agricultural tractors and a agricultural machinery.

Xxiii

Services 1. 2. 3. Educational services provided by a recognized educational establishment Government school or higher educational establishment funded by the government. Public library services Specified financial services including life insurance, Agrahara Insurance and Crop & Livestock Insurance

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4.

Supply of any services to any Diplomatic mission or other privileged person under the Vienna Convention and identified as such by the Commissioner general of Inland Revenue. Approved public Passenger Transport Services (excluding air or water transport tourist transport, excursion tours and taxi services.) Leasing facilities on motor coaches with 28 or more seats used in public passenger transport Electricity not exceeding 30 kwh per month consumer Supply of services consumed outside Sri Lanka for which the payment was made in rupees Lease or rent of residential accommodation other than by a BOI company which has entered into an agreement on or after 1st April 2001 with a project cost not less than US dollars 10 million or its equivalent. Supply of health care services by a medical institution other than by a BOI company which has entered into an agreement on or after 1st April 2001 with a project cost not less than US dollars 10 million or its equivalent. Supply of Health Cares Services by a professionally qualified person. Supply of services by a restaurant situated beyond the Immigration point at any airport. Free or subsidized transportation of employees between their homes and place of work. Services in relation to burials and cremations

5. 6. 7. 8. 9.

10.

11. 12. 13. 14.

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Annexure - 3 Second Schedule to the VAT Act The supply or import of the following goods and services are taxed at 10%. This is a summarized version. For the exact version please refer to the VAT Act. Goods 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Coconut-Poonac-Prawn-feed and Poultry feed Tea, Copra and coconut oil Potatoes, onions and chillies Planting materials and vegetable seeds Live birds, day old chicks, dressed chicken and parts and all other unprocessed meat Magazines and journals Powered milk (other than infants milk) and condensed milk Lentils, sugar, jaggery and sakkara Dried fish and Maldive fish Fertilizer including rock phosphate Water, LP Gas, petrol and Diesel Bicycles and Motor bicycles Motor coaches, chassis or bodies with 28 or more seating capacity, used for public passenger transport. Photo voltaic, solar batteries, CFL lamps and spare parts and Solar Home systems Industrial machinery classified under H.S. Code (Chapter 84) excluding fans and parts, air conditioners, refrigerators, cabinets for refrigerators, dish washing machines (household type) personal weighing machines, lawn or sports ground rollers and parts, lawn movers and parts, house old washing machines and house hold type sewing machines. Electric motors, generators and spare parts, electric generating sets, and spare parts classified under H.S. Codes 85.01.,85.02 and 85.03 Cinematic firms (other than vedio films) and Theatrical productions

16. 17.

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Services 1. 2. 3. 4. 5. 6. 7. 8. 9. Electricity more than 30 kwh, per month per consumer and bulk supply of electricity to the national grid. Construction contractors or sub contractors services Hotels, Guest Houses, Restaurants etc. and inbound tours Exhibition of films or dramas Liable educational services Services provided by the Foreign Employment Bureau of Sri Lanka Leasing facilities Land transportation of goods Services provided by qualified professionals and those who carry on specified vocations.

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Appendix I Comparison of the value of imported goods under GST and VAT Assume that the C.I.F value of goods imported is Rs.100/-, Customs Duty is levied at 25% ( & surcharge at 10%) and that the goods are not liable to Excise (special provisions) Levy and Cess. i. Under GST regime (prior to 01.08.2002) GST = = = NSL = = = (C.I.F + Cus Duty + Surcharge + Ex.Spl.Duty+ Cess) x 12.5 100 (100 + 25 + 10 + 0 + 0) x 12.5 100 16.87 (C.I.F + Cus Duty ) x (100 + 25 ) x 125 x 6.5 100 100 10.15 125 x 100 NSL 6.5 100 In the Calculation of the the surcharge on Customs Duty is not taken into account

Total landed cost after taxes = CIF + Cus Duty + Surcharge + GST + NSL + (Excluding Stamp Duty) Ex.Spl.Duty+Cess = 100 + 25 + 10 + 16.87 + 10.15 + 0 + 0 = 162.02 ii. Under VAT Regime (After 01.08.2002) VAT = = = (C.I.F + Cus Duty + Ex.Spl.Duty+ Cess) x 20 100 (100 + 25 + 0 + 0) x 20 100 25

Total landed cost after taxes = CIF + Cus Duty + VAT+ Ex.Spl.Duty + Cess (Excluding Port Development Levy) = 100 + 25 + 25 + 0 + 0 = 150 iii. Sale price to the Consumers If the importer is a registered person be should charge and collect VAT from the consumers to whom the imported goods are sold. But in deciding the sale price he need not take into account the GST or VAT paid to the Customs as it does not form part of his cost.

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Sale before 01.08.2002 GST Regime Landed cost GST paid to Customs Actual cost Assume the profit margin Sale price (Marked price) GST payable @ 2.5% Final price to the consumer VAT payable to the government = = = = = = = = = = 162.02 16.87 145.15 15.00 160.15 20.01 180.16 Output tax Input tax 20.01 16.87 3.14

(*Note: The importer can afford to sell it at a price (160.15) below the landed price (162.02) because the GST paid to Customs (16.87) which is included in the landed price is not a part of his cost since it can be recovered by way of a deduction from the amount payable to the government. Sale after 01.08.2002 VAT Regime Case 1 If the goods imported before 01.08.2002 are sold after 01.08.2002 In this situation an importer is entitled to a special input credit Sec.78(i) That is even the NSL embeded in the stocks remaining unsold as at 31.07.2002 is treated as input tax. Vide para 9.4.4 Input tax allowable Landed price Actual cost to the importer Assume the same profit margin Marked price for sale VAT at 20% Final price to the consumer VAT payable to the government = = = = = = = = = = = 16.87 + 10.15 162.02 162.02 (16.87 + 10.15) 135.00 15.00 150.00 20.00 180.00 Output tax Input tax 30 16.87 10.15 2.98

Thus it can be seen that the importer can keep the same profit margin as during GST period but sell the goods at a lower final price to the consumer than during GST regime if the other (non-tax) factors remain unchanged.

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Case 2 - When the goods imported after 01.08.2002 are sold Landed price = 150.00 VAT paid to Customs = 25.00 Actual cost to the importer = 125.00 Assume the same profit margin = 15.00 Marked sale price = 140.00 VAT @20% = 28.00 Final sale price to the consumer = 168.00 Therefore under VAT an importer can keep the same profit margin as under GST but sell the goods to the consumer at final price very much lower (168/-) than under GST, (180.16) assuming other non-tax factors remain unchanged. It was observed that the VAT paid to customs does not form part of the cost to the importer. Similarly VAT charged by him on the sale price does not form part of his turnover because that is a statutory collection made on behalf of the government (The importer is required to pay 1% of 140/- i.e Rs.1.40 as turnover tax to the Provincial Council. In the previous case where the sale price was 150/- he is required to pay Rs.1.50 as T.T.) N.B. Unlike in turnover tax, VAT on sales is not an amount received or receivable in respect of the transaction but an amount charged separately and statutorily on behalf of the government which the supplier has to account for in respect of each invoice. (whereas under T.T. the liability of the supplier is based not on the amount of T.T indicated in the invoice but on the basis of a pooled turnover.) Price difference between VAT Registered Person and Un-registered Person The other important thing to note is that if the person importing and selling the above goods is not a VAT registered person then the VAT paid at the Customs becomes part of the cost of his goods. Then in the last case referred to above his cost is Rs.150/- and he cannot afford to price mark the goods at Rs.140/-. In order to keep the same profit margin of Rs.15/- the unregistered person should sell them at 150 + 15 = 165. Thus there cannot be a significant (final) price difference between the registered person and the unregistered person because the registered person is also entitled to input credit on other expenses such as electricity, telephone, transport vehicles etc. in addition to input credit (of 25/-) on VAT paid to Customs. The VAT registered persons price may then, perhaps be less than the price of the un-registered person. difference can never be as high as the VAT rate . (i.e 20%) iv. The effective rate of VAT on imports (a) The above example represents a case where the rate of Customs Duty = 25%. When CIF = 100 and CD = 25% then GST = 16.87 and NSL = 10.15. The the effective rate when GST and NSL taken together as a percentage of CIF = 16.87 + 10.15 = 27.02%. (b) Similarly when the Customs Duty = 10%. In any event the price

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(c) (d)

(CIF + CD + Surcharge + Ex.Spl.Duty +Cess) x 12.5% (100 + 10 + 10 + 0 + )) x 12.5 100 = 15 and NSL = (CIF + CD) x 1.25 x 6.5% = (100 + 10) 125 x 6.5 100 100 = 8.93 and the effective rate = 15 + 8.93 = 23.93% When the Customs Duty is = 35%, it can be seen that, GST = 18.12, NSL = 10.96 and therefore the effective rate is 29.08% Under the VAT regime too VAT payable on imports can be calculated when CD = 10%, 25% or 35% by using the formula VAT = (CIF + CD+ Ex.Spl.Duty + Cess) 10% or 20% as the case may be the relevant values are given in the following table in respect of goods for which excise (Special Provisions) Duty and Cess Duty are not applicable.

GST

= =

Effective rate as a % of CIF Customs Duty % 10 25 35 v. VAT Rates Subject to few exceptions 20% rate has been fixed for the goods which were earlier liable to both GST (12.5%) and NSL (6.5%) such as telecommunication services, electrical goods, motor vehicles, 10% rate has been fixed for goods which were earlier liable either only to GST (eg. Supply of electricity, leasing and transport) or only to NSL (Eg. Bread, Milk, Sugar) Introduction of only one indirect tax (VAT) instead of two taxes (GST & NSL) in respect of the same transaction has simplified to some extent the tax base and the tax structure relating to indirect taxes administered by the CGIR. (12.5%) GST % CIF 15 16.87 18.12 (6.5%) NSL % CIF 8.93 10.15 10.96 GST + NSL % CIF 23.93 27.02 29.08 ( 10%) VAT % CIF 11 12.50 13.50 (20%) VAT % CIF 22 25 27

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Appendix 2 Income Treatment of VAT Income Tax is charged on profits and income. In computing profits of any trade, business, profession or vocation, the expenditure as well as the income, consist of payments and receipts which include VAT. If the person whose profits are computed is a Registered Person for VAT then such person is entitled to deduct VAT included in the supplies used by him (i.e input tax) from the VAT charged and collected by him (i.e output tax) on behalf of the government and the therefore VAT does not form part of his cost as explained in the example in Appendix 1. Inland Revenue Act recognizes this principle and in the circumstances a VAT registered person is not entitle to i. deduct VAT (i.e input tax) included in the expenses incurred in the production of income in computing the profits Sec. 24(I)(v) of the Inland Rev. Act, and ii. deduct VAT (input tax) included in the capital assets in computing depreciation etc. Sec. 23(7)(f)(iv) Similarly, iii. The output tax included in the supplies (i.e sales) made by such person is not part of his turnover, and iv. The output tax included in the disposal of capital assets will not be treated as part of the sale proceeds -Sec. 23(7)(c ) However adjustments are due in respect of disallowable VAT such as VAT paid on expenses relating to motor vehicles etc. As the registered person is not entitle recover such VAT, such amounts will be treated as part of his cost. Adjustments are also due in relation to bad debts written off and bad debts recovered. The VAT element in such amounts should be excluded. There may also be situations where only a part of the supplies are taxable. In such cases the input tax is either apportioned or will be allowed only to the extent that input tax is directly attributable to the taxable supplies. The amount of input tax that is not allowed for VAT purposes will be treated as part of the cost for income tax purposes. The VAT Account which is required to be maintained under Sec. 64(I) of the VAT Act by a registered person (as stated in para 15.6) is a useful record which can be used to make these adjustments. In the Input Tax VAT Account, they can provide a separate columns

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to indicate the date of payment of cash, in the case of cash basis taxpayers, and a column to indicate whether the input is directly attributable to an exempt supply.

Appendix 3 Proposed Changes to VAT Law 1. Following changes and amendments have been proposed to the VAT Act which includes mainly the changes proposed by the Budget speech presented to the Parliament on 06.11.2002 2. VAT on Retail and Wholesale Trading VAT will be introduced to retail and wholesale supply of goods with effect from 01.07.2003. Section3 of the Act will be suitably modified. 3. VAT on Financial Services The financial services which are presently exempted under items (xi)(a) to (xi)(h) of the First Schedule read with Section 8 of the VAT Act will be liable to VAT with effect from 01.01.2003 provided such services are supplied by specified institutions namely (a) (b) (c) A Licensed Commercial Bank within the meaning of the Banking Act NO. 30 of 1988 A Finance Company registered under the Finance Companies Act No. 78 of 1988. A Licensed Specialized Bank within the meaning of Banking Act NO. 30 of 1988.

However it has been proposed to use the additive model (i.e wages + profits) and not the substrative model i.e (Output Input) as discussed in para 9.2 as the base for calculating the tax. Thus the banks and financial institutions will have to compute their profits monthly in order to adopt this method as they will be required to furnish monthly returns. A separate Chapter will be introduced to the VAT Act to deal with taxation of financial services for VAT purposes. However the Life Insurance, Agrahara insurance and crop insurance as specified in item (xi(i) will continue to be exempted. Any financial services supplied by other institutions too will continue to be exempted. hotels. Eg.

Commission charged for exchange of foreign currency by approved money changes and tourist

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4.

Import of Ships Exclusion from VAT as per Section 2(3) (e) will be applicable (Vide Para 2.4.1)only till 31.12.2002. Any ship imported thereafter will be eligible for deferment of VAT by the Customs for a period of 36 months which should be settled in quarterly installments. Other requirements, such as furnishing of a bank guarantee etc., as are required in other cases of deferment, are applicable. The second proviso to Section 2(3) will be suitably amended.

5.

Local Sale of Garments by Manufacturers Cum Exporters of garments Sec. 22(1) This facility will be extended to non-BOI Sector exporters as well. They will therefore be required to make such sales, through a Cus-Dec with the approval of the Customs/BOI and charge 25/per piece as VAT which will be collected by the Customs from the buyers. This 25/- is the output tax of the manufacturer and the same procedure as in explained in para 9.3 is applicable.

6.

Input tax on Motor Vehicles Section 22(6) will be amended to allow 50% of the input tax in respect of Motor vehicles used in a taxable activity effective from 01.01.2002.

7.

Issue of Assessments Section 28 & 33 will be amended by deleting last para of Sec. 28 and introducing at the end of Section33 the following paragraph For the purpose of this Chapter any notice of assessment may refer to one or more taxable periods. This will enable an assessment or an additional assessment to be issued covering several taxable periods

8.

Assessments for Fraud and willful evation - Time Bar No assessment can be made on fraud or willful evasion if detected after 5 years.

9.

Appeal settlement period Sec. 34 The period within which appeal to be settled will be reduced to two years.

10.

Board of Review Sec. 35

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The period within which the Board of Review should give a determination on an appeal will also be restricted to two years. 11. Recovery Proceedings Sec. 48 Recovery proceedings to be initiated within 5 years.

12.

Refunds Sec.58 Application to be made within 3 years.

13.

Definition of Goods Sec. 83 Will be amended to fall in line with the administrative ruling given in example 3 of para 3.3 of this brochure.

14.

Exemptions Schedule 1 Item xxvi exemption of medical and dental equipments and ambulances etc. is withdrawn and will be taxed at 10%.

15.

Hire-purchase of second land goods Item (xi)(h) of the exemption list will be amended to clarify the position that hier-purchase of second hand goods will be exempted from VAT as mentioned in para 17.2.

16.

Lower rate 10% - Schedule 2 Item xviii - will be amended so that any leasing advance and any payment made for early settlement of a lease to acquire the asset if the amount exceeds 10% of the total payable under the agreement will not be considered as leasing payments (Please see para 18.15) Any initial payment which cannot be set off against subsequent installments is an advance for this purpose. Item xx MICE tourism will be taxed at 10%. (This will give effect to para 26.6). Items xxii to xxvii - supply and import of, textile and hand loom products, ships, jewellery, maize and medical equipments etc will be brought under 10% category.

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Telephone Numbers Any person wishing to seek clarifications with regard to any matter contained in this brochure may kindly contact the following or any Senior Assessor or Assessor of the VAT Branch. Name Mr. A.A. Wijepala Mr. R.K.H. Kaluarachchi Designation Deputy Commissioner Deputy Commissioner (Regarding VAT Refunds) Deputy Commissioner Contact Tele Nos. 343176 421241 - 2663 342097 421241 - 2613 342095 421241- 2555 328697 421241 2511

Dr. P.P.A Hameed

Mr. H.M. Premaratne Banda - Deputy Commissioner (Regarding GST Refunds) VAT Refunds Mr. A.G de Z Jayathilake Mrs. P. Rohini VAT Registration Mrs. Priya Fernando - Senior assessor - Senior Assessor - Senior Assessor

328427 421241 2664 451741 421241 - 2654

451740 421241 2675 451740 421241 2677 421241 2522

Mrs. W.A.S. Chandrasekara - Senior Assessor Mrs. Wasana Siriwardana General Information Audit 1 Miss. Dhammika Gunathilake - Senior Assessor Mr. A.W. Abeypitiya Mrs. W. Anulawathie Audit 2 Senior Assessor Senior Assessor - Assessor

451736 421241 - 2670 451738 421241 2660 541741 421241 2668

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Mrs. S.N.P. Abrew Mr. D.B. Dissanayake Audit 3 Mrs. K. Dahanayake Mr. I.B.M Senaviratne Mr. P.G.K. Samaratunga GST Refunds Mr. A.N. Guruge -

Senior Assessor Senior Assessor

328427 421241 2653 421241 2614

Senior Assessor Senior Assessor Senior Assessor

331849 421241 2553 331849 421241 2559 421241 2558

Senior Assessor

430809 421241 2521 331859 421241 - 2518

Mr. W.M.P.N.B. Wanigasekera Senior Assessor

Financial Services Miss. Dhammika Gunathilake - Senior Assessor Mr. K.N.C.N. Perera Collection Mr. W.S.K. De Costa Senior Assessor 451739 421241 - 2679 Senior Assessor 451736 421241 - 2670 421241 2561

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