VAT Guide to Value Added Tax - sri lanka inland revenue ...
VAT Guide to Value Added Tax - sri lanka inland revenue ...
VAT Guide to Value Added Tax - sri lanka inland revenue ...
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But for the best <strong>to</strong> the<br />
September 06 2002<br />
<strong>VAT</strong><br />
<strong>Guide</strong> <strong>to</strong><br />
<strong>Value</strong> <strong>Added</strong> <strong>Tax</strong><br />
1.<br />
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Issued by the <strong>VAT</strong> Branch of the Inland Revenue Department<br />
<strong>VAT</strong>/DM 08 th Oct. 2002<br />
1
Prelude<br />
<strong>VAT</strong> Notice No. 1<br />
This notice, which explains very briefly the principles of <strong>Value</strong> <strong>Added</strong> <strong>Tax</strong>, their application in<br />
Sri Lanka under the provisions of the <strong>Value</strong> <strong>Added</strong> <strong>Tax</strong> Act No. 14 of 2002 and information<br />
about the Department’s interpretation of the legal provisions, is issued for the guidance of the<br />
general public and the taxpayers. This is Notice No. 1 of its kind. It is intended <strong>to</strong> issue further<br />
notices on further clarifications and any future amendments <strong>to</strong> the law. I am glad that it was<br />
possible <strong>to</strong> insert the proposed changes <strong>to</strong> the <strong>VAT</strong> Act by the budget proposals in November<br />
2002, as an appendix.<br />
Sarath H. Goonewardena<br />
Commissioner of Inland Revenue<br />
(<strong>Value</strong> <strong>Added</strong> <strong>Tax</strong>)<br />
2
Preface<br />
The <strong>Value</strong> <strong>Added</strong> <strong>Tax</strong> Act was enacted by the parliament on 26.07.2002. This brochure sets<br />
out very briefly the law and procedure involved in <strong>VAT</strong>. This is not an exhaustive interpretation<br />
which covers all the situations. I wish <strong>to</strong> place on record my appreciation for the work done by<br />
Mr. Sarath H. Goonewardane, Commissioner (<strong>VAT</strong>) in the preparation of this brochure.<br />
B.T. Perera<br />
Commissioner General of Inland Revenue<br />
September 6 th ,2002<br />
3
Contents<br />
Chapter<br />
Pages<br />
1. Introduction - 01<br />
2. Imposition of <strong>VAT</strong> -<br />
3. Definitions of Concepts -<br />
4. Registration & Cancellation -<br />
5. Collection, Payment and Recovery-<br />
6. Deferment of Collection -<br />
7. Invoicing -<br />
8. Returns and <strong>VAT</strong> Rates -<br />
9. Calculation of <strong>Tax</strong> -<br />
10. Exemptions -<br />
11. Refunds -<br />
12. Assessments -<br />
13. Appeals -<br />
14. Penalties -<br />
15. Accounting basis & Record Keeping<br />
16. Import and Export of Goods & <strong>VAT</strong> -<br />
17. Hire Purchase Transaction & <strong>VAT</strong>-<br />
18. Leasing & <strong>VAT</strong> -<br />
19. Mortgages -<br />
20. Diplomatic Missions & <strong>VAT</strong> -<br />
21. Some Obligations under <strong>VAT</strong> -<br />
22. Transitional Arrangements and other Matters -<br />
23. Construction Contracts -<br />
24. Rulings -<br />
25. Zero-rated Supplies -<br />
26. Travel Trade, Hotels and Tourism-<br />
27. Some Useful Hints -<br />
Annexure 1 – BOI Enterprise and <strong>VAT</strong><br />
Annexure 2 – First Schedule <strong>to</strong> the <strong>VAT</strong> Act<br />
Annexure 3 - Second Schedule <strong>to</strong> the <strong>VAT</strong> Act<br />
Appendix – 1. Comparison of <strong>Value</strong>s of Imported Goods under GST & <strong>VAT</strong><br />
Appendix - 2. Income <strong>Tax</strong> Treatment of <strong>VAT</strong><br />
Appendix – 3. Proposed Changes <strong>to</strong> <strong>VAT</strong> Law<br />
5
Chapter - 1<br />
Introduction<br />
1.1 Purpose of this brochure<br />
This brochure provides a basic knowledge and guidance <strong>to</strong> the public and taxpayers on<br />
<strong>Value</strong> <strong>Added</strong> <strong>Tax</strong>. This is not an exhaustive document and does not cover special<br />
situations and exceptions <strong>to</strong> the general principles stated in the law. This will also serve<br />
as an introduc<strong>to</strong>ry manual <strong>to</strong> the officers.<br />
1.2 What is V.A.T?<br />
The <strong>Value</strong> <strong>Added</strong> <strong>Tax</strong> replaces the existing Goods and Services <strong>Tax</strong> but the concepts<br />
and principles of <strong>VAT</strong> are the same as those of GST with which you are already familiar.<br />
<strong>VAT</strong> is a tax on domestic consumption of goods and services. Thus goods imported in<strong>to</strong><br />
Sri Lanka and goods and services supplied within the terri<strong>to</strong>rial limits of Sri Lanka are the<br />
subject matter of this tax. It is a multi-stage tax levied on the incremental <strong>Value</strong> <strong>Added</strong> at<br />
every stage in the production and distribution chain of Goods and Services. The tax is<br />
borne by the final or the ultimate consumer of goods or service (Vide Para 9.5) He does<br />
not pay it direct <strong>to</strong> the government but <strong>to</strong> the ultimate supplier who supplied the goods or<br />
service <strong>to</strong> him. However the government will receive in the end, through all the<br />
intermediary suppliers in the chain of production and distribution, an amount equal <strong>to</strong> the<br />
amount paid by the final consumer, because each intermediary supplier in that chain is<br />
responsible <strong>to</strong> pay <strong>to</strong> the government, only the <strong>VAT</strong> he collects on the supplies made<br />
by him (output tax) less the <strong>VAT</strong> he paid on the supplies obtained by him (input tax).<br />
Thus the seller or the supplier of good/service does not pay tax himself as he is entitled<br />
<strong>to</strong> re-claim from the government the <strong>VAT</strong> he pays, on his fac<strong>to</strong>rs of production, from<br />
the monies that he collects for the government. He is a mere collec<strong>to</strong>r of tax, from the<br />
consumers, on behalf of the government. The <strong>VAT</strong> collected by him from his cus<strong>to</strong>mers<br />
is not a part of his profit or turnover because he is responsible <strong>to</strong> account for <strong>VAT</strong><br />
collected by him on every invoice. The collec<strong>to</strong>r (i.e the seller or suppler of<br />
good/service) becomes a “ trustee” for that money on behalf of the government.<br />
6
1.3 The scope of the tax<br />
<strong>VAT</strong> is charged on import of goods in<strong>to</strong> Sri Lanka and supply of goods and services in<strong>to</strong><br />
Sri Lanka in the course of carrying on a carrying out a “taxable activity” in Sri Lanka –<br />
Sec. 2. <strong>Tax</strong>able Activity means any trade, business etc., Please see Definition in Para<br />
3.7. By implication therefore a supply which is not made in the course of a taxable activity<br />
and a supply which is not a “taxable supply” are outside the scope of <strong>VAT</strong>. In addition<br />
• Independent trading activities concerning retail and wholesale supply of goods<br />
and commodities (Section 3), and<br />
• Certain imports – Sec. 2(3).<br />
have been specifically excluded from its scope. These excluded imports are<br />
enumerated in Section 2(3). Vide Para 2.4.1. Notwithstanding exclusion there is<br />
provision for voluntary inclusion, in the case of persons engaged in retail and wholesale<br />
trading activities if a person wishes <strong>to</strong> get himself included in<strong>to</strong> the <strong>VAT</strong> net.<br />
Supply of goods and services within the scope of <strong>VAT</strong> are confined <strong>to</strong><br />
i. supplies where the supplier is carrying on or carrying out a taxable activity<br />
in Sri Lanka, and<br />
ii. goods are in Sri Lanka at the time of supply in the case of supply of goods or<br />
iii. services are performed in Sri Lanka by the supplier or his agent in the case<br />
of supply of services - Section 9.<br />
A person or a company resident outside Sri Lanka <strong>to</strong>o can be engaged in carrying on or<br />
carrying out a taxable activity in Sri Lanka without having its business presence in Sri<br />
Lanka. A foreign company can conduct business in Sri Lanka by establishing a branch<br />
office in Sri Lanka, through an agency in Sri Lanka, through internet or through an<br />
independent agent who may canvass for clients, canvass for orders and also attend <strong>to</strong><br />
other activities concerning that business (such as indenting agents who canvass for<br />
orders, insurance and survey agents who canvass for clients and prepare survey reports<br />
in order <strong>to</strong> assess the insurance claims made <strong>to</strong> a foreign insurance company). However<br />
it appears that the <strong>VAT</strong> Act has not brought within its scope all such situations although<br />
all are situations of carrying on or carrying out taxable activities in Sri Lanka. When a<br />
foreign company has a branch office or a permanent agency in Sri Lanka it can be<br />
brought within the scope of the normal provisions of the Act. When a person in Sri Lanka<br />
carries on a taxable activity on behalf of a foreign company it can be brought within<br />
the scope of <strong>VAT</strong> under Section 55. Please see para 3.7 (ii) Eg. 2. But it is doubtful<br />
whether conducting business in Sri Lanka through an indenting agent, through any<br />
independent agent or through internet are within the scope of the <strong>VAT</strong> Act.<br />
7
However from the point of view of the agent in Sri Lanka the business in Sri Lanka of the<br />
foreign principle is carried on or carried out as a result of the services provided by him in<br />
Sri Lanka (for a fee or a commission) and supply of such services satisfy all the<br />
requirements as envisaged in Section 9 and such services are therefore within the scope<br />
of <strong>VAT</strong>. That means (i) the taxable activity consisting of supplying services <strong>to</strong> a foreign<br />
principle is in Sri Lanka and (iii) the particular services are performed in Sri Lanka by<br />
the supplier himself. Such services are treated as consumed in Sri Lanka by the foreign<br />
principle in the course of carrying on a business in Sri Lanka although decisions <strong>to</strong> accept<br />
or reject the services may be taken outside Sri Lanka.<br />
1.4 The liable persons<br />
All individuals and organizations except those privileged individuals and organisations<br />
referred <strong>to</strong> in the Diplomatic Privileges Act are liable <strong>to</strong> <strong>VAT</strong>. The word liable is used<br />
here <strong>to</strong> mean that they are liable <strong>to</strong> pay <strong>VAT</strong> when they import goods or obtain goods &<br />
services from registered persons while they are liable <strong>to</strong> charge <strong>VAT</strong> when they supply<br />
goods and services <strong>to</strong> others if they satisfy other conditions such as “registable<br />
threshold” etc.. Thus<br />
• Proprietary concerns<br />
• Partnerships<br />
• Companies<br />
• Sports clubs, Associations, Trade Unions, Societies and similar organizations<br />
• Non-profit making organizations<br />
• Statu<strong>to</strong>ry Boards/Corporations<br />
• Ministries, Departments, Provincial Councils and Local Authorities<br />
• Religious, Social Service and charitable Organizations.<br />
are all liable <strong>to</strong> <strong>VAT</strong>. (Please see the definition of Body of Persons in the Act).<br />
They only exception is the Diplomatic Missions and privileged individuals working<br />
in those missions. They are not liable <strong>to</strong> pay <strong>VAT</strong> when they import goods or<br />
obtain supplies of goods and services in Sri Lanka if such goods and services<br />
are recognized for that purpose by the C.G.I.R (Please see Chapter 20)<br />
8
1.5 What is “supply” ?<br />
<strong>VAT</strong> is not charged on “goods” per-se but on the “supply” of goods/services . Before<br />
charging <strong>VAT</strong> it is therefore necessary <strong>to</strong> identify the “Supply”. The word “supply” is not<br />
synonymous with sale. Even when a trader appropriates business goods for his private<br />
consumption it amounts <strong>to</strong> supply of goods under the principles of <strong>VAT</strong>. As in many<br />
other countries the <strong>VAT</strong> Act does not provide an exhaustive definition for the word<br />
supply. The meaning of supply can be gleaned from the context of the Act, specially from<br />
the definitions given <strong>to</strong> the expressions “Supply of Goods”, “Supply of Service”, “<strong>Tax</strong>able<br />
Activity”, ”<strong>Value</strong> of Supply”, “Time of supply” of etc. It can be said that supply connotes<br />
all types of transactions such as sales, gifts, hires leases or rentals, loans and loan of<br />
goods, exchange of goods & services, processes [i.e making goods from someone else’s<br />
materials Section 5(12)], sales on commission, insurance claims, liquidated<br />
damages,(see para 3.3) fringe benefits <strong>to</strong> employees etc. Even assignment or surrender<br />
of a lease, sale of goodwill are also supplies because, according <strong>to</strong> the definition any<br />
supply which is not a supply of goods is <strong>to</strong> be treated as a supply of service. In<br />
accordance with the principles of <strong>VAT</strong> it can be seen that the legislative intent is <strong>to</strong><br />
subject virtually all types of transactions <strong>to</strong> <strong>VAT</strong>. Thus the Act provides for deemed<br />
supplies as well. Any goods or services held at the time a person ceases <strong>to</strong> be a<br />
registered person is a deemed supply Sec.16(5), Vide Para 4.8(c). The other situations of<br />
deemed supply can be gleaned from Section 5(5)(iv) which implies that appropriation of<br />
goods or services for private use or for any other purpose other than making a taxable<br />
supply tantamounts <strong>to</strong> a supply. The term embraces all things capable of being<br />
supplied for a consideration but the consideration need not be in monetary terms as even<br />
a gift is a supply liable <strong>to</strong> <strong>VAT</strong> if it is made in the course of carrying on or carrying out a<br />
<strong>Tax</strong>able Activity.<br />
Thus identifying the supply is the first thing <strong>to</strong> do before charging <strong>VAT</strong>. If there is no<br />
supply (of goods or services) then there is no <strong>VAT</strong>. For instance when a lessee defaults<br />
payment, the re-possession of the goods by the lessor is not a supply because the goods<br />
belong <strong>to</strong> the lessor. But in the case of a hire-purchase credit sale the goods belong the<br />
buyer and, if the goods are re-possessed by the hire-purchase company for default of<br />
payments by the buyer then such re-possession amounts <strong>to</strong> a “supply of goods” from the<br />
defaulting buyer <strong>to</strong> the hire-purchase company. Similarly a donation made <strong>to</strong> a school<br />
may tantamount <strong>to</strong> a payment in consideration for a “supply” (of service) if it is made in<br />
consideration of some service such as admission of a child. The Exchange gain due <strong>to</strong><br />
exchange rate fluctuations is not a supply.<br />
9
The following test which has been applied <strong>to</strong> identify a supply (other than a deemed<br />
supply) in many situations in foreign tax jurisdictions may be a useful guide in identifying<br />
a supply .<br />
i. There must be a consideration for the supply whether in money or otherwise than<br />
in money. (Thus a court fine does not attract <strong>VAT</strong> because it is not a<br />
consideration for a supply.)<br />
ii. There must be a direct link between the supply or the benefit from the supply and<br />
the consideration. (Thus charges levied by regula<strong>to</strong>ry bodies may or may not<br />
tantamount <strong>to</strong> considerations for supplies made depending on the facts and<br />
circumstance Eg. Penalties are not considerations for supplies made)<br />
It is <strong>to</strong> be noted that the concept of “supply” for <strong>VAT</strong> purposes is independent of and not<br />
coterminous with any duties and obligations <strong>to</strong> be performed under any other law and<br />
that the construction of a contractual document or the provisions in any other law will not<br />
answer the question “What is the nature of supply for <strong>VAT</strong> purposes?” It has <strong>to</strong> be<br />
decided in context and on an overall view of the facts in accordance with <strong>VAT</strong> principles<br />
and not on the basis of provisions in any other law. Even the terms of a contract are not<br />
conclusive with regard <strong>to</strong> the nature of supply in that contract. (Please see the case<br />
referred <strong>to</strong> in para 25.6)<br />
10
2.1 <strong>Value</strong> <strong>Added</strong> <strong>Tax</strong> is charged on<br />
Chapter - 2<br />
Imposition of <strong>VAT</strong><br />
* Supply of goods and services in Sri Lanka, and<br />
* Import of goods<br />
with effect from 01.08.2002<br />
2.2 On Supply of Goods and Services<br />
<strong>VAT</strong> is charged<br />
• at the time of supply<br />
• on every taxable supply<br />
• made in a taxable period<br />
• by a registered person<br />
• in the course of carrying on or carrying out a taxable activity in Sri Lanka.<br />
2.3 On Imports<br />
<strong>VAT</strong> is charged<br />
• On the importation of goods in<strong>to</strong> Sri Lanka<br />
• Made by any person<br />
• At the time of import (Vide Para 5.11)<br />
2.4 Exclusion from Charging <strong>VAT</strong><br />
<strong>VAT</strong> is not charged on certain imports and on retail & wholesale supply of goods.<br />
Exclusion is different from exemption.<br />
2.4.1 Exclusion of Imports – Section 2(3)<br />
<strong>VAT</strong> shall not be charged by the Cus<strong>to</strong>ms or the BOI on the importation of<br />
following goods<br />
i. Any article which is entered in <strong>to</strong> Cus<strong>to</strong>m bonded area.<br />
ii. Any fabric imported for the manufacture of garments for export by a person who<br />
has entered in <strong>to</strong> an agreement with BOI Law under section 17 of the BOI and<br />
transfer of such fabric with the approval of DGC or the BOI <strong>to</strong> any other person<br />
for the purpose of such manufacture of garments for export.<br />
iii Any fabric imported by an approved Trading House who has registered with the<br />
BOI for the purpose of manufacture of garments for export through other garment<br />
manufacturers as approved by the BOI and transfer of such fabric with the<br />
approval of the DGC/BOI <strong>to</strong> such garment manufacturers for the purpose of<br />
manufacture of garments for export.<br />
11
iv. Import of any fabric, yarn, grey cloth, finished cloths, chemicals and dyes used<br />
for the manufacture of fabric by a BOI company, entered in<strong>to</strong> an agreement<br />
under Section 17 of the BOI Law for the purpose of manufacture of fabric.<br />
v. Import of any ship (Vide Appendix 3 – Item 4)<br />
2.4.2 Exclusion of local supplies – Sec. 3<br />
<strong>VAT</strong> shall not be charged on the wholesale and retail supply of goods other<br />
than wholesale and retail supply by<br />
• a manufacturer of such goods<br />
• an importer of such goods<br />
• a supplier who is unable <strong>to</strong> satisfy the C.G.I.R. as <strong>to</strong> the source from which such<br />
goods were acquired.<br />
- However a person engaged in retail and wholesale sales can register voluntarily<br />
<strong>to</strong> charge <strong>VAT</strong> on such sales.<br />
- The evidence required with regard <strong>to</strong> acquisition of goods <strong>to</strong> satisfy the C.G.I.R<br />
has been published in a press notice on 07.07.2000. Please see para 15.3.<br />
(Excluded supplies are not within the purview of the <strong>VAT</strong> Act)<br />
2.5 Charging, Collection and payment of <strong>VAT</strong><br />
• As stated in para 2.2 above it is a Registered Person who can charge <strong>VAT</strong> on<br />
the supply of goods and services within Sri Lanka. He should charge and<br />
collect <strong>VAT</strong> from the recipients of “taxable supplies” of goods and services<br />
made by him. This should be done only in the course of a “taxable activity”<br />
carried on by him. <strong>VAT</strong> should be charged by him at the “time of supply”. The<br />
<strong>VAT</strong> chargeable is calculated on the “value of supply”.<br />
• Thus <strong>VAT</strong> is in fact paid by the “recipient” of goods and services (i.e<br />
consumer). It is paid <strong>to</strong> the “supplier” who should be a registered person. He<br />
collects <strong>VAT</strong> from the recipient (i.e his cus<strong>to</strong>mer) and remit the same <strong>to</strong> the<br />
C.G.I.R as provided in Section 22(i). Therefore <strong>VAT</strong> is paid in the first instance<br />
by the consumer <strong>to</strong> the registered person and then, by the Registered<br />
Person <strong>to</strong> the C.G.I.R.<br />
• A registered person is therefore responsible for charging and collecting <strong>VAT</strong><br />
on behalf of the C.G.I.R and account for such collections <strong>to</strong> the C.G.I.R in<br />
respect of supplies of goods and services made by him in Sri Lanka.<br />
• On imports <strong>VAT</strong> is paid by the importer and it is ’collected’ by the Direc<strong>to</strong>r<br />
General of Cus<strong>to</strong>ms who in turn remit it <strong>to</strong> C.G.I.R. – Section 2(3). However the<br />
DGC has delegated some of his powers <strong>to</strong> B.O.I. Vide para 5.11<br />
12
2.6 Supply of goods and services in Sri Lanka<br />
As stated in para 2.1 <strong>VAT</strong> is charged on supply of goods and services in Sri Lanka. What<br />
is meant by supply of goods & services in Sri Lanka in further clarified in Section 9. It<br />
states that goods or services shall be deemed <strong>to</strong> be supplied in Sri Lanka,<br />
(i) where the supplier carries on or carries out a taxable activity in Sri Lanka<br />
and<br />
(ii) the goods are in Sri Lanka at the time of supply or<br />
(iii) services are performed in Sri Lanka by the supplier or his agent.<br />
Eg.(1) – A jewellary manufacturer in Sri Lanka (who is a registered person) has a<br />
jewellary shop in Singapore. He sells <strong>to</strong> a <strong>to</strong>urist from Japan who came <strong>to</strong> Sri Lanka<br />
some jewellary from his shop in Singapore.<br />
A. Goods are not in Sri Lanka at the time of supply. No liability <strong>to</strong> <strong>VAT</strong>.<br />
Eg (2) – X, an architect (who is a registered person)) goes <strong>to</strong> Australia in order <strong>to</strong> draw a<br />
building plan <strong>to</strong> an Australian firm and <strong>to</strong> attend <strong>to</strong> other matters connected with that<br />
service.<br />
Services are not performed in Sri Lanka. No liability <strong>to</strong> <strong>VAT</strong>.<br />
In both these situations the contracts may have been concluded in Sri Lanka but they<br />
both are outside the scope of <strong>VAT</strong> because the goods were supplied or services were<br />
performed outside Sri Lanka. The concept of supply for the purpose of <strong>VAT</strong> is not the<br />
same as the performance of an obligation for the purpose of the law of contract (Please<br />
see discussion in para 25.6)<br />
13
Chapter - 3<br />
The definitions of concepts<br />
3.1 In order <strong>to</strong> implement <strong>VAT</strong> it is necessary <strong>to</strong> understand the meanings of the terms and<br />
concepts employed in <strong>VAT</strong> Law. The terms and concepts as already indicated in paras<br />
2.1 and 2.2 are defined in Sections 4,.5 and 83 of the Act as given below.<br />
3.2 Supply of goods<br />
Means<br />
• passing of exclusive ownership of goods <strong>to</strong> another person,<br />
• By the owner of such goods or<br />
• By another person under the authority of any written law<br />
This includes among others<br />
- sale of goods by public auction<br />
- sale of goods in satisfaction of a debt<br />
- transfer of goods from a taxable activity <strong>to</strong> a non-taxable activity.<br />
- Transfer of goods under a hire- purchase agreement<br />
“Goods” means all kinds or movable or immovable property but does not includes<br />
money)<br />
i<br />
ii.<br />
Currency Notes & Coins :- According <strong>to</strong> Monetary Law currency Notes & Coins<br />
become legal tender only when they are recorded and issued for circulation.<br />
Thus import of notes and coins is not import of money but import of goods. Their<br />
value is not their face value but the cost.<br />
Supply of goods on Tender Agreements - is also covered by the above<br />
definition of “supply of goods”. A tenderer may<br />
(a) supply goods manufactured by him<br />
(b) supply goods which he purchases solely for the purpose of supply under<br />
tender agreements<br />
(c) supply goods in the course of a retail or wholesale business carried on<br />
by him.<br />
In all three situations he is supplying specific goods <strong>to</strong> a specific person at a<br />
specific time at a specified price and passing of exclusive ownership <strong>to</strong><br />
another person by the owner of the goods is present (in all situations).<br />
Thus it is liable <strong>to</strong> <strong>VAT</strong> in all situations and the supply on tender does not, by<br />
itself, amounts <strong>to</strong> a retail or wholesale business which is excluded from <strong>VAT</strong> as<br />
envisaged Section 3 of the Act (Vide Para 2.4.2). In situation (c ) above the<br />
tenderer is also liable <strong>to</strong> provincial turnover tax in addition <strong>to</strong> <strong>VAT</strong>. (Pleas see<br />
discussion in para 4.6)<br />
14
iii. Passing of Exclusive ownership of goods : What is meant by passing of<br />
exclusive ownership of goods is not defined in the Act. It can be construed <strong>to</strong><br />
mean absolute transfer of goods involving both title and possession. If both the<br />
title and possession are passed then it amounts <strong>to</strong> a “supply of goods”. If only<br />
the possession is passed, as in the case of a lease of movable property or hire of<br />
goods, that does not amount <strong>to</strong> supply of goods. (By definition in Sec. 83 any<br />
supply which is not a supply of goods is a supply of service. Thus, lease & hire<br />
belong <strong>to</strong> that category (as explained below) but a hire-purchase credit sale or a<br />
conditional sale amounts <strong>to</strong> a supply of goods because both the title and<br />
possession is transferred <strong>to</strong> the purchaser under a hire- purchase conditional<br />
sale or credit sale.<br />
iv. Sale of goods by an importer of such goods:- is also not treated as an<br />
excluded supply by definition in section 3. Thus the sale of goods by an importer<br />
of such goods is liable <strong>to</strong> <strong>VAT</strong> and in addition, it is liable <strong>to</strong> provincial turnover tax<br />
as well, if the importer is supplying such goods in the course of a retail or<br />
wholesale business.<br />
v. Public Auction:- Supply of goods also include, by definition, sale of goods by<br />
public auction. Sale by public auction is governed by different laws and is<br />
different from a retail or a wholesale sale.<br />
vi. Deemed Supply of goods - The Act also provide for “deemed supply of goods”.<br />
This occurs when the registration of a registered person is cancelled. Sec. 16(5).<br />
Vide Para 4.8 (c ). Appropriation of business goods for private purposes and gift<br />
of business goods <strong>to</strong> other persons tantamounts <strong>to</strong> deemed supply of goods in<br />
view of Section 5(5)(iv) (by virtue of the definition of “taxable supply” in section<br />
83 any supply of goods or services made or deemed <strong>to</strong> have been made is<br />
treated as a taxable supply).<br />
vii. Sale of lands and buildings, sale of houses & buildings on rent purchase terms,<br />
Transfer of goods or assets of a business permanently for private use, repossession<br />
of goods sold under hire-purchase conditional sale agreement due <strong>to</strong><br />
default of installments and exchange of goods are some other examples of<br />
“supply of goods”.<br />
3.3 Supply of Services<br />
Means<br />
• any supply which is not a supply of goods<br />
• but includes any loss incurred in a taxable activity for which an indemnity is due.<br />
15
Eg. 1 : If “A” wants <strong>to</strong> terminate prematurely an agreement which he has entered in<strong>to</strong> with “B” then<br />
A has <strong>to</strong> pay liquidated damages <strong>to</strong> “B”. Assuming both “A” and “B” are engaged in taxable<br />
activities, and the agreement relates <strong>to</strong> these activities, this termination amounts <strong>to</strong> a loss incurred<br />
in a taxable activity for which an indemnity is due. It is therefore a “supply of service” as per above<br />
definition. If “B” is a registered person “B” must invoice “A” with <strong>VAT</strong>. The <strong>VAT</strong> paid by “A” is his<br />
input tax and the <strong>VAT</strong> received by “B” is his Out put tax. If “A” is also a registered person he can<br />
claim <strong>VAT</strong> paid <strong>to</strong> “B” from his Output tax.<br />
Eg 2 : The bank ‘B’ leases a lorry <strong>to</strong> the tea fac<strong>to</strong>ry ‘A” which is registered for <strong>VAT</strong>. Bank remains<br />
the absolute owner of the vehicle but the tea fac<strong>to</strong>ry as the exclusive user and registered owner<br />
insures the lorry with the Insurance Company ‘C’. The Bank ‘B’ has got ‘A’ <strong>to</strong> assign the<br />
Insurance Policy <strong>to</strong> the Bank as a security against lease rentals in case of a <strong>to</strong>tal loss. After<br />
sometime, during the period of lease, the lorry meets with an accident and <strong>to</strong>tally destroyed.<br />
Fac<strong>to</strong>ry ‘A’ makes a <strong>to</strong>tal loss claim and the Bank ‘B’ recovers its dues and lease installments out of<br />
the insurance compensation.<br />
• The insurance claim is a “supply of service”.<br />
• The lessee ‘A’ must issue a <strong>VAT</strong> invoice <strong>to</strong> Insurance Company ‘C’<br />
• Bank may forward the claim/ <strong>VAT</strong> Invoice <strong>to</strong> ‘C on behalf of ‘A’ but the claim is<br />
by ‘A’.<br />
• Bank is not liable <strong>to</strong> <strong>VAT</strong> on the claim but the Insurance Company is liable <strong>to</strong> pay<br />
<strong>VAT</strong>.<br />
• Bank can recover amounts due <strong>to</strong> it from the insurance proceeds other than the<br />
<strong>VAT</strong> component.<br />
• <strong>VAT</strong> received from Insurance Company. ‘C’ is the output tax of ‘A’<br />
• The recovery of lease installments by the Bank from ‘A’ out of insurance<br />
proceeds is a separate supply and the Bank should issue a <strong>VAT</strong> invoice <strong>to</strong> ‘A’ in<br />
respect of that supply but only <strong>to</strong> the extent of rentals recovered from insurance<br />
proceeds.<br />
• The <strong>VAT</strong> on insurance premia that was paid before the accident is input tax for<br />
‘A’ not for the Bank.<br />
Eg:3 : Import of Software - Import of “normalized or mass produced software” is<br />
treated as import of goods and import of “specific cus<strong>to</strong>mized software” is treated as<br />
import of services.<br />
Eg: 4 : Fuel adjustment charge in a electricity bill is part of the consideration for the<br />
supply of electricity.<br />
Eg: 5 : In the case of Bank loans and credit facilities etc. loan inspection charges, legal<br />
fees, documentation charges, loan interest etc. are treated as a mixed supply (i.e a<br />
mixture of separate and distinct supplies although they may be ancillary <strong>to</strong> the main<br />
supply) and not as a single supply. The interest component is treated as a financial<br />
supply. Hire purchase transactions <strong>to</strong>o contain such mixed supplies.<br />
Eg.6 : Some examples of supply of services are Hire of goods Hire of Vehicles, Produce<br />
goods from someone else’s materials for a fee, Agree for a consideration, <strong>to</strong> refrain from<br />
doing something, Agree <strong>to</strong> grant, assign or surrender a right for a consideration, Lend<br />
business goods <strong>to</strong> someone for use outside the business, leasing vehicles, renting nonresidential<br />
(i.e commercial) premises, supply of management consultancy services, and<br />
professional services, construction contracts, services provided by garages, schools etc.<br />
16
3.4 Time of Supply<br />
This is an important concept because <strong>VAT</strong> is charged at the time of supply. For the<br />
purpose of the <strong>VAT</strong> Act it does not mean the time of physically delivering the goods or<br />
performing the service. Time of supply by definition, varies according <strong>to</strong> the type of<br />
supply. The supply of goods shall be deemed <strong>to</strong> have taken place ‘at the time of supply’<br />
as defined below.<br />
a<br />
Supply of goods- the time of supply<br />
If the invoice is issued within 10 days of the delivery of goods the time of supply<br />
is<br />
• the date of issue of invoice<br />
If the invoice is issued after 10 days of the delivery of goods the time of supply is<br />
the earliest happening of<br />
• the date of invoice<br />
• the due date of payment<br />
• the date of receipt of payment/advance<br />
• the date of delivery<br />
b. Supply of Services – the time of supply<br />
If the invoice is issued within 10 days of performing the service, the time of<br />
supply is<br />
• the date of issue of invoice<br />
If the invoice is issued after 10 days of performing the service the time of supply<br />
is the earliest happening of<br />
• when the invoice is issued<br />
• when the payment is due<br />
• when the payment is received<br />
• when the service is performed<br />
Exception <strong>to</strong> the rule<br />
If the transaction or part of the transaction falls within a taxable period prior <strong>to</strong><br />
31.07.2002 and GST has been paid on that transaction or part thereof then the<br />
time of supply will not be considered on the above basis.<br />
Example<br />
Rent agreement entered in<strong>to</strong> prior <strong>to</strong> 31.07.2002 and an advance paid on the date of<br />
agreement. If GST has been paid on that advance and the balance is being paid monthly<br />
during <strong>VAT</strong> period then the <strong>VAT</strong> is chargeable only on that balance as and when it is<br />
paid. No adjustments will be made in respect of the periods under <strong>VAT</strong> which has been<br />
paid in advance during GST regime.<br />
17
c. Time of supply in relation <strong>to</strong> supply under Agreements for the provision of<br />
periodic payments (entered in<strong>to</strong> after 01.04.1998 ) other than Hire Purchase<br />
Agreements -<br />
is<br />
* when the payment is due or<br />
* when the payment is received<br />
which ever is earlier<br />
d Supply under Hire purchase agreements – the time of supply<br />
is<br />
The time the agreement is entered in<strong>to</strong><br />
e. Cash basis tax payers – the time of supply – Sec. 4(6)<br />
For Registered Persons who have obtained approval <strong>to</strong> account for tax on cash<br />
basis under Section 23, time of supply is, for the purpose of reporting output tax<br />
in his returns is<br />
* the time at which the payment is received.<br />
3.5 <strong>Tax</strong>able supply<br />
Means any supply of goods or services<br />
• made in Sri Lanka or<br />
• deemed <strong>to</strong> be made in Sri Lanka<br />
• which is chargeable with <strong>VAT</strong> under the Act, and<br />
• includes a zero-rated supply<br />
• but not an exempt supply.<br />
Exempt supplies are enumerated in schedule 1 <strong>to</strong> the Act. Zero-rated supplies are given<br />
in section 7 of the Act (Vide Chapter 25). All other supplies (whether they are made or<br />
deemed <strong>to</strong> be made) are taxable supplies, if it is in the course of carrying on or carrying<br />
out a taxable activity. Section 16(5) of the Act sets out one situation where a deemed<br />
supply can occur. That is, when the registration of a registered person is cancelled, the<br />
goods or services remaining at the time of cancellation, which are part of the assets of<br />
the taxable activity are deemed <strong>to</strong> have been supplied by that person. It is a case of a<br />
deemed taxable supply. One characteristic of a deemed supply is that there is no<br />
consideration in money (Please see para 1.5) Sometimes there may be no<br />
consideration either in money or otherwise than in money. The Act does not enumerates<br />
other instances of deemed supply. But from the context of the Act specially from Section<br />
5(5)(iv) it can be said that, appropriation of business goods and assets for private use,<br />
gift of business goods (other than samples), transfer of goods and assets from a taxable<br />
activity <strong>to</strong> an exempt activity etc. are either supplies made or supplies deemed <strong>to</strong> be<br />
made.<br />
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It can be seen that in all these situations input credit have been claimed in respect of the<br />
goods and services used in the making of the deemed (taxable) supply.<br />
3.6 <strong>Tax</strong>able period<br />
• There are two taxable periods.<br />
- Month and<br />
- Quarter<br />
• <strong>Tax</strong>able period is one month in the case of following persons and undertakings<br />
- persons with the <strong>to</strong>tal taxable supplies exceeding Rs.30 million for 12 months<br />
period.<br />
- persons making more than 50% zero-rated supplies (Vide Chapter 25) and<br />
persons having less than 50% zero-rated supplies if they are in the <strong>VAT</strong><br />
deferment scheme.(Thus it can be seen that all the person in the <strong>VAT</strong> deferment<br />
scheme are required <strong>to</strong> furnish monthly returns)<br />
- persons who have entered in<strong>to</strong> agreements prior <strong>to</strong> 01.04.2001 with BOI under<br />
Sec. 17 of the B.O.I Law – During project implementation period.<br />
- New ventures registered under section 22 (7) during the project implementation<br />
period.<br />
(However, a person can opt <strong>to</strong> file returns quarterly if approved by the C.G.I.R –<br />
Sec.83)<br />
Note :<br />
- film exhibi<strong>to</strong>rs being registered on behalf of the film corporation, and<br />
- tea manufactures<br />
are also required <strong>to</strong> be registered for monthly returns<br />
• All the other registered persons should submit quarterly returns.<br />
3.7 i. <strong>Tax</strong>able Activity<br />
Means<br />
a. any activity carried on as a business, trade, profession or vocation or every<br />
adventure or concern in the nature of trade (other than employment).<br />
b. the provision of facilities <strong>to</strong> its members or others for a consideration and the<br />
payment of subscription in the case of a club, association or organization.<br />
c. anything done in connection with the commencement or cessation of any activity<br />
or provision of facilities referred <strong>to</strong> in (a) or (b)<br />
d. the hiring or leasing of any movable property or the renting or leasing of<br />
immovable property or the administration of any property.<br />
e. the exploitation of any intangible property such as patents, copyrights, or other<br />
similar asset. (Where such assets is registered in Sri Lanka or the owner of such<br />
asset is domiciled in Sri Lanka).<br />
19
Thus, any trade, business, etc. are considered as taxable activities. It is important <strong>to</strong><br />
note that the profit motive is not an essential ingredient of a “taxable activity”. The<br />
essential characteristic of a taxable activity is that the activity must be concerned<br />
with making (taxable) supplies for a consideration. Thus the supply of goods and<br />
services for a consideration by a social service or charitable organization is considered<br />
as a business and in turn as a taxable activity although the presence of a profit motive<br />
may not be there and the consideration charged may be barely sufficient <strong>to</strong> recover the<br />
costs. The consideration may be in money or otherwise than in money. However<br />
any activity for pleasure and social enjoyment is not regarded as a taxable activity<br />
although such an activity may have all the attributes of a business. Eg. A group of friends<br />
contributing <strong>to</strong>wards the expenses of a picnic; the contributions are not regarded as<br />
considerations for supplies made in the course of carrying on or carrying out a taxable<br />
activity.<br />
Examples<br />
Q - I sold a block of land which I received sometime back as dowry. Am I<br />
required <strong>to</strong> charge <strong>VAT</strong> on the sale price?<br />
A - In order <strong>to</strong> charge <strong>VAT</strong> you must be a Registered Person and the sale<br />
must be in the course of carrying on or carrying out a taxable activity.<br />
As per facts given above it is not in the course of carrying on a taxable<br />
activity. Therefore <strong>VAT</strong> is not chargeable.<br />
However, if the circumstances surrounding the sale are such that the<br />
sale can be treated as an adventure in the nature of a trade then it<br />
becomes a taxable activity and you are liable <strong>to</strong> charge <strong>VAT</strong> on the sale<br />
value, if you are a Registered Person.<br />
You may not be a registered person prior <strong>to</strong> the sale but you may<br />
become liable <strong>to</strong> be registered with the sale if the intended sale price<br />
exceeds Rs. 500,000/-. In such cases you are required <strong>to</strong> obtain a<br />
Registration prior <strong>to</strong> the sale.<br />
Q - I am a registered person and I sold my car used in the business activity.<br />
Is the sale liable <strong>to</strong> <strong>VAT</strong>.<br />
A - Yes. It is in the course of carrying out a taxable activity and liable <strong>to</strong><br />
<strong>VAT</strong>.<br />
Q - I am a registered person and I sold the scrap in my business. Is it liable<br />
<strong>to</strong> <strong>VAT</strong><br />
A - Yes, for the same reasons as above.<br />
A contract of employment is not a “taxable activity”, i.e a job where a person receives<br />
salary or wages. But a contract for service is a taxable activity. Eg. An accountant who<br />
20
is appointed as a direc<strong>to</strong>r of a company because of his taxable activity as an accountant<br />
and receives direc<strong>to</strong>rs fees. The fee is treated as a consideration for supply of service in<br />
the course of carrying on or carrying out his “taxable activity” as an accountant. Such a<br />
direc<strong>to</strong>rs fee is not excluded from <strong>VAT</strong>. If the fees or the value of taxable supplies made<br />
by the direc<strong>to</strong>r exceeds the threshold he should register for <strong>VAT</strong> and charge <strong>VAT</strong> <strong>to</strong> the<br />
company. The company should pay <strong>VAT</strong> <strong>to</strong> the direc<strong>to</strong>r in addition <strong>to</strong> the fees.<br />
Q. A person grows anthuriam as a hobby. Occasionally he sells flowers and the<br />
<strong>to</strong>tal sales per annum is the range of Rs.10,000/- .<br />
A. This is a recreational pursuit and not a taxable activity.<br />
Q. A person is collecting stamps and coins and belongs <strong>to</strong> a club for this.<br />
Occasionally he sells some of these items and enters in<strong>to</strong> barter transactions<br />
with other members of the club.<br />
A It is more than likely that the activity is carried on as a hobby. It is therefore not<br />
a taxable activity. However if he embarks upon an adventure in the nature of a<br />
trade with such collections then it becomes a taxable activity. The meaning of<br />
‘adventure in the nature of trade’ is the same as the meaning under the Inland<br />
Revenue Act as decided by Courts.<br />
ii.<br />
The place of <strong>Tax</strong>able Activity/Place of business<br />
The place of business or the taxable activity is as important as the taxable<br />
activity itself because <strong>VAT</strong> is charged.<br />
i. on the supply of goods and services<br />
ii. In the course of carrying or carrying out a taxable activity in Sri<br />
Lanka.<br />
Section 2(1) of the Act. By virtue of Section 9, Goods or Services shall be<br />
deemed <strong>to</strong> be supplied in Sri Lanka;.<br />
(a) if the supplier carries on or carries out the taxable activity in Sri Lanka,<br />
and<br />
(b) Goods are in Sri Lanka at the time of supply or<br />
(c) Services are performed in Sri Lanka by the supplier or his agent.<br />
Thus if a person in Sri Lanka is supplying services <strong>to</strong> another business in Sri<br />
Lanka such services are liable <strong>to</strong> <strong>VAT</strong> irrespective of the fact that the business<br />
which receives the supply of service may be carried on by a person outside Sri<br />
Lanka. The supplier is in Sri Lanka, he is carrying on or carrying out a<br />
taxable activity in Sri Lanka and the supply is made or service is rendered <strong>to</strong><br />
21
a business in Sri Lanka and not <strong>to</strong> a business outside Sri Lanka although the<br />
owner of such business may be living outside Sri Lanka (Please see para<br />
10.5.14 and 25.6)<br />
Eg. I.<br />
I introduced clients <strong>to</strong> a foreign insurance company which has no branch in Sri<br />
Lanka. I received a payment in foreign currency which represents the fees for<br />
introducing the clients and commission and other charges for subsequent work<br />
done in respect of the insurance business carried on by the foreign<br />
company with the Sri Lankan clients introduced by me. This work includes<br />
making survey reports relating <strong>to</strong> claims made by the insured clients. Am I liable<br />
<strong>to</strong> <strong>VAT</strong> on the payment received from the foreign company which was received in<br />
foreign currency?.<br />
A: Yes. You are liable <strong>to</strong> <strong>VAT</strong>. Firstly you are carrying on a taxable activity in Sri<br />
Lanka. Secondly you are rendering services <strong>to</strong> a business in Sri Lanka although<br />
it is carried on by a foreign principle. (Please see para 10.5.14) The fact that<br />
the payment is received in foreign currency is not material. The criteria <strong>to</strong> be<br />
considered are (i) the place where the taxable activity is carried on by you (ii) The<br />
place where the services are performed by you and (iii) The place of business<br />
where such services are utilized. The services supplied by you are utilized by a<br />
business in Sri Lanka although it is carried on by a person outside Sri Lanka.<br />
The services were utilized by the business of insurance carried on in Sri Lanka<br />
by the foreign company.<br />
Eg:.2. I am acting as the representative of a foreign company which is supplying goods<br />
in Sri Lanka. I take orders on behalf of that company and fax them <strong>to</strong> that<br />
company. In a few cases the Sri Lankan traders who give the orders import the<br />
goods themselves, In other cases I import the goods and supply them <strong>to</strong> the<br />
local traders, at the pre agreed price on behalf of the foreign company. The sale<br />
proceeds are credited <strong>to</strong> a bank account in the name of the foreign company. I<br />
am paid a fee for introducing cus<strong>to</strong>mers and a commission in respect of the<br />
orders canvassed by me. What is my position with regard <strong>to</strong> <strong>VAT</strong> ?.<br />
A<br />
In this case two persons and two taxable activities are involved. One is importing<br />
and selling goods in Sri Lanka, which is a taxable activity carried on by you on<br />
behalf of the foreign company. You should obtain a separate registration for<br />
that. By virtue of section 55 you are liable in the like manner and <strong>to</strong> the like<br />
amount as the foreign principle would be chargeable under the Act. The other<br />
22
is the taxable activity carried on by you on your own as an independent agent for<br />
a fee and commission. You should register separately in your name for this<br />
purpose.<br />
In respect of the former taxable activity you are required <strong>to</strong> charge <strong>VAT</strong> on sales<br />
and you are entitled deduct <strong>VAT</strong> paid <strong>to</strong> the Cus<strong>to</strong>ms.<br />
In respect of the latter taxable activity the commission received by you is liable <strong>to</strong><br />
<strong>VAT</strong> as services performed in Sri Lanka (which is consumed by a business in Sri<br />
Lanka carried on by a foreign principle through you) You are not entitled <strong>to</strong><br />
deduct <strong>VAT</strong> paid <strong>to</strong> the Cus<strong>to</strong>ms from the <strong>VAT</strong> payable on commission.<br />
Eg.3<br />
A person resident outside Sri Lanka providing services <strong>to</strong> a person in Sri Lanka<br />
through internet may not attract <strong>VAT</strong> as the taxable activity of that person is<br />
carried on or carried out, out side Sri Lanka unless he makes his presence in Sri<br />
Lanka by intermeddling with recipients books of accounts or other material. On<br />
the other hand if such overseas person makes his presence physically in Sri<br />
Lanka in order <strong>to</strong> provide the service (Eg. Perform a musical or cultural show,<br />
medical consultation, astrological consultation etc) then the place of supply or the<br />
place of the taxable activity and the place where the services are performed is in<br />
Sri Lanka, by virtue of Section 9. Such services therefore will attract <strong>VAT</strong>.<br />
3.8 <strong>Value</strong> of Supply<br />
* <strong>VAT</strong> should be calculated on the value of supply. Definition of ‘<strong>Value</strong> of Supply’<br />
vary according <strong>to</strong> the type of supply. How <strong>to</strong> ascertain the value of each type of<br />
supply is given below.<br />
• If the value is expressed in foreign currency it must be converted in<strong>to</strong> Rupees at<br />
the selling price of currency at the time of supply.<br />
• <strong>Value</strong> means the tax exclusive value<br />
•<br />
Type of Supply<br />
<strong>Value</strong><br />
1. Supply of goods When the recepient is a registered person<br />
and services * If the consideration is in money<br />
- Total consideration less <strong>VAT</strong> or<br />
- Open market value<br />
which ever is higher<br />
* If not in money or partly in money<br />
- Open market value<br />
23
When the recipient is not a registered Person<br />
- tax inclusive consideration or<br />
- open market value<br />
which ever is higher<br />
2. Import of goods CIF + Cus<strong>to</strong>ms Duty + any surcharge + Cess +<br />
any Excise Duty payable <strong>to</strong> Cus<strong>to</strong>ms under excise<br />
duty (Spl. Provisions) Act. (If Cus<strong>to</strong>ms Duty is waived<br />
the same formula stands with Cus<strong>to</strong>m Duty=0)<br />
3. Benefits from * Open Market <strong>Value</strong><br />
employment * Cost of a similar benefit <strong>to</strong> any other employee<br />
as determined by the Assessor if the open<br />
market value cannot be ascertained.<br />
4. Lottery or Wagering Total amount received less value of the prize or<br />
contract or any business<br />
winnings awarded.<br />
Of like nature<br />
5. Supply of goods under Cash price determined under Consumer Credit<br />
Hire purchase agreement Act or Market value which ever is higher subject <strong>to</strong><br />
adjustments for non claimable input by the seller of<br />
goods when the seller is a person different from the<br />
Hirer.(Please see Eg.17)<br />
If the hired goods are second hand and more than one<br />
year old.<br />
- <strong>Value</strong> specified in the agreement less hire<br />
purchase charges<br />
6. Supply of land and Consideration – (<strong>Value</strong> of Land at the time of supply +<br />
improvement improvements up<strong>to</strong> 31.03.1998)<br />
(Consideration shall not be less than the open market<br />
value) Thus, it is = Open Market <strong>Value</strong> of<br />
improvements after 31.03.1998<br />
7. Supply under non- Total amount paid/payable under the agreement<br />
reviewable Agreement, other (It is considered as a tax inclusive consideration)<br />
than Hire Purchase Agreement,<br />
24
Entered prior <strong>to</strong> 01.04.1998.<br />
8. Transfer of goods on<br />
Termination of Lease<br />
* If the consideration is less Treated as an installment under lease agreement.<br />
than 10% of the value of<br />
the agreement<br />
* If the consideration is more Treated as a separate supply of goods and the<br />
than 10% of the value of value is the amount paid <strong>to</strong> acquire the asset.<br />
lease Agreement<br />
9. Supply is a combination of Open Market <strong>Value</strong> of the taxable portion<br />
taxable and non taxable<br />
supplies<br />
10. Goods which are - Consideration received<br />
manufactured using other - Open Market <strong>Value</strong><br />
goods or services/supply of<br />
which ever is higher<br />
services using other goods or<br />
services<br />
11. Issue of ticket or deposit of <strong>Value</strong> of the ticket or deposit less the <strong>VAT</strong>,<br />
money for the supply of goods<br />
not being any refundable amount<br />
or services<br />
3.9 Registered Person (R.P)<br />
• Registered Person means any person who is registered for <strong>VAT</strong> under Sections<br />
10, 12 or 14(I)(c ) of the <strong>VAT</strong> Act and includes a person who is liable <strong>to</strong> be<br />
registered under the Act. (Vide Chapter 4) and a person deemed <strong>to</strong> be registered<br />
under Sec. 80(2)<br />
• Registered Person can be referred <strong>to</strong> as the tax-payer for the purpose of <strong>VAT</strong> Act<br />
because it is he who is registered with Inland Revenue <strong>to</strong> collect <strong>VAT</strong> from<br />
consumers and remit it <strong>to</strong> the department. He only collects <strong>VAT</strong> from his<br />
cus<strong>to</strong>mers and does not bear the burden of tax because he does not pay<br />
anything on his own. Vide para 9.5. The duty <strong>to</strong> charge, collect an account<br />
for <strong>VAT</strong> <strong>to</strong> the Revenue falls on the Registered Person.<br />
25
• There are two types of registrations called compulsory registration (Sec.10) and<br />
voluntary registration.(Sec. 12) In addition there is provision for forced<br />
registration by the C.G.I.R Sec.14(I)( c) and deemed registration (Section 80(2)<br />
• In addition any importer who is not (permanently) registered for <strong>VAT</strong> is required<br />
<strong>to</strong> obtain a registration for clearing goods which is called Importers Identification<br />
Number (Vide para 4.7)<br />
26
Chapter - 4<br />
Registration and Cancellation<br />
4.1 As stated earlier there are two types of registrations namely, compulsory registration and<br />
voluntary registration. In addition the C.G.I.R can compel a person <strong>to</strong> register while the<br />
importers are required <strong>to</strong> register for the purpose of clearing goods if they are not<br />
already registered for <strong>VAT</strong>. A taxable activity must exist before a person is registered for<br />
<strong>VAT</strong>.<br />
4.2 Compulsory Registration – Section 10<br />
(a)<br />
(b)<br />
(c)<br />
(d)<br />
Every person who carries on a taxable activity should register for <strong>VAT</strong> if the<br />
<strong>Value</strong> of his taxable supplies exceeds or likely <strong>to</strong> exceed.<br />
- Rs.500,000 per any quarter or<br />
- Rs.1,800,000 per annum<br />
Such person must notify the C.G.I.R within 15 days of his liability <strong>to</strong> be<br />
registered.<br />
In computing the value of supplies <strong>to</strong> determine the above threshold, the<br />
following should be excluded.<br />
- any exempted supplies<br />
- any excluded supply of a buying and selling activity (other than<br />
buying & selling in connection with any activity of import or<br />
manufacture)<br />
- <strong>VAT</strong> chargeable on the supply.<br />
Once a person is registered for <strong>VAT</strong> he should charge <strong>VAT</strong> on all the taxable supplies<br />
made by him even if his turnover falls below the above limits until he is officially deregistered.<br />
(Please see example in para 5.1.1.)<br />
4.3 Voluntary Registration – Section 12<br />
• Irrespective of the value of the taxable supplies, any person who wishes<br />
<strong>to</strong> register for <strong>VAT</strong> can apply for voluntary registration. However, such<br />
registration may be refused by the CGIR based on the facts of the case.<br />
• Voluntary Registration has been extended <strong>to</strong> wholesale and retail trade<br />
activity as well. (Sec. 3 proviso)<br />
Accordingly –<br />
(i.) Persons already registered for <strong>VAT</strong> should obtain specific approval <strong>to</strong><br />
charge <strong>VAT</strong> in respect of retail and wholesale sales. Such specific<br />
approval should be displayed at the place of the business (if already<br />
paying GST on retail and wholesale sales the registration can be<br />
27
(ii)<br />
continued without making an application) Application should be made<br />
<strong>to</strong> Deputy Commissioner (<strong>VAT</strong>) under reference <strong>VAT</strong>/Gen/08)<br />
Others are required <strong>to</strong> make applications for voluntary registration.<br />
If they desire <strong>to</strong> register voluntarily for retail and whole sale trading<br />
Important<br />
Once a person opts <strong>to</strong> register voluntarily <strong>to</strong> charge <strong>VAT</strong> on<br />
retail & wholesale sales he cannot use that option partially (The<br />
<strong>to</strong>tal sales whether the purchases are with <strong>VAT</strong> or not, should<br />
be sold with <strong>VAT</strong>).<br />
4.4 Forced Registration Section 14(i)(c )<br />
If the C.G.I.R. having regard <strong>to</strong> the nature of the activity is of the opinion that a person is<br />
required <strong>to</strong> be registered but has not made an application <strong>to</strong> that effect, he shall register<br />
such person.<br />
4.5 Importers who re-sell the imported goods<br />
Sale of imported goods by the person who imported them without subjecting them <strong>to</strong><br />
any processing is also treated as “Supply of Goods” under the <strong>VAT</strong> Act and not as an<br />
excluded supply consisting retail & wholesale sales. If the goods are not exempted under<br />
the Act the importer is liable <strong>to</strong> register for <strong>VAT</strong> when his sales reaches the registrable<br />
threshold of Rs.500,000/- per quarter or Rs.1,800,000 per annum (Such persons must<br />
declare their activity code number as 6700 when applying for registration)<br />
4.6 Supply of goods on tender<br />
Supply of goods under a tender agreement is treated as a “taxable supply” and not as an<br />
“excluded supply” consisting of retail and wholesale sales as envisaged in Section 3 of<br />
the Act. “Retail and wholesale supply of goods” and “supply of goods on a tender<br />
agreement” are two different types of supplies. The former is basically governed by the<br />
provisions of the Sale of Goods Ordinance whereas the latter is mainly governed by<br />
the law of contract in addition <strong>to</strong> Sale of Goods Ordinance as the supplier is<br />
contractually bound <strong>to</strong> supply ‘specific goods’ <strong>to</strong> a ‘specific person’ at a ‘specific<br />
time’ at a pre-agreed price. That is something very different from a retail and wholesale<br />
business. Such a supplier is, therefore, liable <strong>to</strong> register for <strong>VAT</strong> if his <strong>to</strong>tal taxable<br />
supplies exceeds the taxable threshold provided the goods are not exempt goods.<br />
Sometimes the tenderer may be supplying goods in the course of a retail or wholesale<br />
business which is carried on by him. In such a case he is liable <strong>to</strong> provincial turnover tax<br />
as well, in addition <strong>to</strong> <strong>VAT</strong>, but that is not always the case. Some tenderers are buying<br />
goods solely for the purpose of supplying under the tender agreement. The mere fact<br />
28
that the supplier may buy and sell/ or supply goods under a tender agreement does not<br />
mean that he is engaged in a retail or wholesale business. The jurisdiction of provincial<br />
councils is limited <strong>to</strong> “turnover tax on retail and wholesale sales” only. (Item 36.1 of list 1<br />
of Schedule 9 <strong>to</strong> the 13 th Amendment <strong>to</strong> the Constitution). Buying and selling does not<br />
always tantamount <strong>to</strong> retail and wholesale sales. Buying and selling may be possible<br />
even in respect of intangible assets but it is not possible <strong>to</strong> do any retail or wholesale<br />
business with such assets.<br />
4.7 Importers Identification Number (IIN) – Section 11<br />
• The importers who are not registered under <strong>VAT</strong> permanently should notify the<br />
CGIR not later than 14 days prior <strong>to</strong> the clearing of goods from the Cus<strong>to</strong>ms. An<br />
identification number is issued for the purpose of clearing of the goods only. It<br />
shall not be treated as a Registration for <strong>VAT</strong> purposes although sometimes<br />
people referred <strong>to</strong> it as temporary registration.<br />
• A person who imports under Passenger Baggages (Exemption) Regulations is<br />
not required <strong>to</strong> obtain I.I.N.<br />
• Note: Such identification number is valid only for twelve months for the clearance<br />
of goods by persons who are not liable <strong>to</strong> <strong>VAT</strong>. Cus<strong>to</strong>ms department will moni<strong>to</strong>r<br />
the import of goods by such persons on the basis of instructions issued by CGIR<br />
from time <strong>to</strong> time. At present, if the cumulative value of imports exceeds Rs. 2<br />
million under a particular IIN Cus<strong>to</strong>ms will not clear goods until you obtain a<br />
Permanent Registration or a clearance from Inland Revenue. The limit of Rs.2<br />
Million is not applicable <strong>to</strong> Government Departments, Ministries, Government<br />
Universities and for persons who import exempt goods.<br />
N.B. The I.I.N. Certificate must be returned <strong>to</strong> the department in order <strong>to</strong> obtain a<br />
permanent registration number.<br />
4.8 Cancellation and Changes<br />
(a) Application for a cancellation of a registration can be made at any time after the<br />
laps of 12 months (Section 16) Thus once registered you are required <strong>to</strong> charge<br />
<strong>VAT</strong> at least for 12 months even if your sales fall below the registrable limit (vide<br />
para 5.1.1)<br />
(b) Notwithstanding the de-registration every person is liable for any act done or<br />
omitted <strong>to</strong> be done while he was a registered person (Section 18)<br />
(c) Any goods/assets at the time of cancellation of registration shall be deemed <strong>to</strong><br />
be supplied in the course of carrying on the taxable activity. Thus, before deregistration<br />
a person will be asked <strong>to</strong> pay <strong>VAT</strong> on existing s<strong>to</strong>cks and assets<br />
unless the taxable activity is transferred as a whole (including all assets on which<br />
29
(d)<br />
(e)<br />
(f)<br />
input credit has been claimed and mo<strong>to</strong>r vehicles etc.) <strong>to</strong> another registered<br />
person who undertakes <strong>to</strong> continue the taxable activity. The idea is <strong>to</strong> ensure<br />
that the other registered person shall account for output tax in respect of all such<br />
goods and assets. .<br />
Cancellation of registration will be done only if the CGIR is satisfied that the<br />
applicant has ceased <strong>to</strong> carry on the taxable activity or that the value of his<br />
taxable supplies does not exceed the threshold. The C.G.I.R will also cancel<br />
the registration at his own instance if he is satisfied in addition <strong>to</strong> above that the<br />
D.G.C has suspended the Cus<strong>to</strong>ms facilities <strong>to</strong> such person or that the<br />
continuation of such registration will impede the protection of <strong>revenue</strong>.<br />
The certificate of registration must be returned <strong>to</strong> the C.G.I.R within 14 days from<br />
the last day of the taxable period during which the registration was valid.<br />
* Any change – in the name, address and place of the business, in the<br />
nature of the business (i.e taxable activity), in the person authorized <strong>to</strong> sign<br />
returns, in ownership of the business etc., should be notified within 14 days.<br />
(Section 19). Cus<strong>to</strong>ms will not clear goods if the name and address as<br />
appearing in the certificate of registration or INN certificate defers from that in<br />
the Cus<strong>to</strong>ms Declaration or import documents, without verifying from Inland<br />
Revenue.<br />
* Death, insolvency or incapacity -<br />
when an individual, proprie<strong>to</strong>r or a partner of a business dies, becomes<br />
bankrupt or incapacitated, the person carrying on the business must notify the<br />
C.G.I.R within 14 days. Similarly when an administra<strong>to</strong>r, receiver or liquida<strong>to</strong>r<br />
etc. takes over the affairs of an incorporated company; C.G.I.R must be<br />
informed of the date from which they became responsible and the<br />
circumstances in which they <strong>to</strong>ok over.<br />
4.9 Deemed Registration Sec.80(2)<br />
Any person who is registered for G.S.T. under the G.S.T Act No. 34 of 1996 and whose<br />
registration is in force on 31.07.2002 will be deemed <strong>to</strong> be registered under the <strong>VAT</strong> Act.<br />
4.10 How <strong>to</strong> Register<br />
Any person who seeks registration for <strong>VAT</strong> should complete and return the following<br />
applications which can be obtained from the <strong>VAT</strong> Branch of the Inland Revenue<br />
Department Head Office in Colombo.<br />
• Application for <strong>Tax</strong> payer Identification Number (TIN)<br />
• Application for <strong>VAT</strong> Registration (Form <strong>VAT</strong> 11)<br />
30
When the duly completed applications are handed a TIN number will be issued by the<br />
Computer Branch (on the 7 th Floor). TIN Number is a unique number for each tax payer<br />
consisting of 9 digits. Thereafter a <strong>VAT</strong> registration certificate depicting the <strong>VAT</strong><br />
registration number will be issued by the <strong>VAT</strong> Branch (6 th Floor). The number consist of<br />
two parts, the first part being the TIN number and the second part being the code for <strong>VAT</strong><br />
consisting of four digits. Eg:<br />
123456789 - 7000 123456789 – 9999<br />
TIN Number <strong>VAT</strong> Code 123456789 – 5050<br />
This is a <strong>VAT</strong> Registration Number These are not <strong>VAT</strong> Registration Numbers<br />
If the code is 5050 or 9999 it is not a <strong>VAT</strong> Registration Number. It is an Importers<br />
Identification Number which is not valid for any other purpose.<br />
4.11 Back dating Registration<br />
Request for the back dating of the effective date of registration will be accepted only if<br />
their had been an error on the part of the Department. For example if a BOI company<br />
which is entitle <strong>to</strong> Sec. 22(7) approval or which is engaged in manufacture and export has<br />
been given an I.I. Number (i.e temporary number ) instead of a permanent <strong>VAT</strong><br />
registration number the permanent registration can be given retrospectively. However<br />
the registered person, should pay <strong>VAT</strong>, on the taxable supplies made with effect from the<br />
effective date of registration.<br />
4.12 Registration of Partnerships<br />
Although a partnership is not a legal entity, a partnership is recognized as a person for<br />
<strong>VAT</strong> purposes (Sec.83) and therefore a partnership can be a registered person. It may be<br />
possible <strong>to</strong> obtain several business registrations at different locations with identical<br />
partners. But for <strong>VAT</strong> purposes all those businesses will be given only one registration<br />
number because the Act deals with Registered Persons and not with “registered taxable<br />
activities” for the purpose of charging, collecting and accounting for <strong>VAT</strong> on behalf of the<br />
C.G.I.R. In computing the taxable threshold cumulative value of all businesses carried<br />
on by identical partners are considered <strong>to</strong>gether.<br />
This is applicable even <strong>to</strong> an individual carrying on different taxable activities at different<br />
places. Such an individual will be given only one registration number.<br />
31
4.13 Activity Code Number<br />
“Supplies” are categorized in<strong>to</strong> several groups and each group is given a separate code<br />
number called the Activity Code. For example supply for goods by an importer without<br />
subjecting them <strong>to</strong> any processing is given the activity Code Number 6700. Supply of<br />
textiles is given the Activity Code Number 3210. When applying for registration for <strong>VAT</strong><br />
the applicant must declare in cage No. 10 of the application (<strong>VAT</strong> 11) the relevant<br />
activity code number which is applicable <strong>to</strong> his taxable activity. The activity codes are<br />
enumerated in the guide given with the application. The classification of supplies in<strong>to</strong><br />
various activity codes is purely an exercise <strong>to</strong> facilitate computerization and extraction of<br />
statistics under predetermined headings . It does not entitle a registered person <strong>to</strong> apply<br />
the same rate of <strong>VAT</strong> <strong>to</strong> different supplies having the same activity code number. For<br />
example the supply of textiles and supply of yarn have the same activity code number.<br />
But they may be taxed at two different rates.<br />
32
Chapter – 5<br />
Collection, Payment and Recovery<br />
5.1 Collection of <strong>VAT</strong><br />
5.1.1 <strong>VAT</strong> on local supplies<br />
• <strong>VAT</strong> on goods and services supplied in Sri Lanka is charged and collected, by<br />
the Registered Persons who make the supplies from the recipient of goods and<br />
services at the appropriate rates.<br />
• Every registered person should collect <strong>VAT</strong> on supplies made by him in Sri<br />
Lanka in the course of a taxable activity from the recipient of such supplies<br />
irrespective of the status of the recipient. Only exception is that they are not<br />
required <strong>to</strong> collect <strong>VAT</strong> when supplies are made <strong>to</strong> Diplomatic Missions and<br />
Diplomatic Personnel (Chapter 20) If the <strong>VAT</strong> is not collected from any taxable<br />
sales they are treated as tax inclusive sales and 1/6 of the <strong>to</strong>tal sales is treated<br />
as the <strong>VAT</strong> element in such sales.<br />
• Once a person is registered he should charge <strong>VAT</strong> on each taxable supply of<br />
goods and services made by him even if the <strong>to</strong>tal value of his taxable supplies<br />
fall below the taxable threshold.<br />
Eg. Mr. X who imports and sells mo<strong>to</strong>r spare parts is Registered for <strong>VAT</strong>. During the quarter ended<br />
31.12.2002 he has sold only one item for Rs.2000/-. He has also taken spares worth Rs.6000/- for<br />
his personal use. (That means during this quarter his turnover is only 2000/- and value of taxable<br />
supplies is 8000/-). But he should charge <strong>VAT</strong> on each taxable supply<br />
Vat chargeable is 2000 @ 20% = 400<br />
6000 @ 20% = 1200<br />
He should declare 2000 + 6000 = 8000 as the <strong>to</strong>tal “value of supplies” in cage A of the return and<br />
400 + 1200 = 1600 as the “output tax” in Box 1 of the return.<br />
5.1.2 <strong>VAT</strong> on imports<br />
* <strong>VAT</strong> on importation of goods whether the importer is a registered person or<br />
not, and irrespective of the value of import, is subject <strong>to</strong> <strong>VAT</strong> and is<br />
collected by the Direc<strong>to</strong>r General of Cus<strong>to</strong>ms at the appropriate rates. (Unless<br />
the goods are exempt)<br />
• In determining the rate of <strong>VAT</strong> applicable <strong>to</strong> imported goods Cus<strong>to</strong>ms will follow<br />
the H.S. Code. It is a classification of goods under various headings according <strong>to</strong><br />
some nomenclature. The <strong>VAT</strong> rates applicable <strong>to</strong> those goods have been<br />
identified in consultation with the Inland Revenue. Please refer <strong>to</strong> “<strong>VAT</strong> <strong>Guide</strong><br />
& P.R.O – 03/2002 dated 01.08.2002” issued by the Policy Planning and<br />
Research Division of Sri Lanka Cus<strong>to</strong>ms. If there is any inaccuracy and or<br />
inadequacy in<br />
33
the H.S. classification it may be brought <strong>to</strong> the notice of the DGC and CGIR for<br />
necessary amendments. Sometimes there may be difficulties in identifying<br />
goods as declared in import documents. For example the <strong>VAT</strong> Act speaks of<br />
labora<strong>to</strong>ry reagents, raw materials used for pharmaceutical products, medical<br />
instruments, semi-precious s<strong>to</strong>nes etc. But the individual names of these<br />
reagents, products, instruments and s<strong>to</strong>nes may not be appearing in the H.S.<br />
Code or may be appearing under inappropriate H.S. headings so that is it<br />
difficult <strong>to</strong> decide on the <strong>VAT</strong> rate applicable <strong>to</strong> a particular item that is imported.<br />
In such situations CGIR will give directions <strong>to</strong> the Cus<strong>to</strong>ms, with regard <strong>to</strong> the<br />
rate of <strong>VAT</strong> applicable after identifying the items on the basis of expert opinion<br />
and/or recommendations and other material placed before him. Such<br />
recommendations are obtained solely for the purpose of identifying the goods<br />
only (Please see para 10.3) Once the goods are properly identified the rate of<br />
<strong>VAT</strong> will be decided in accordance with the <strong>VAT</strong> Act eventhough an<br />
incorrect rate may appear in the H.S. Code due <strong>to</strong> inadvertence or<br />
inadequacy in classification. However the valuation for the purpose of<br />
calculating <strong>VAT</strong> is the responsibility of the D.G.C as the valuation depends on the<br />
C.I.F <strong>Value</strong>. Even if the goods are imported on N.F.E basis and even if the<br />
goods are exempted from Cus<strong>to</strong>ms duty, the C.I.F will be ascertained by the<br />
Cus<strong>to</strong>ms in accordance with the Cus<strong>to</strong>ms Ordinance for the purpose of<br />
calculating <strong>VAT</strong> and other levies. Importers are advised <strong>to</strong> verify the <strong>VAT</strong> rates<br />
(and exemptions) applicable <strong>to</strong> their intended imports beforehand from the H.S.<br />
Code <strong>Guide</strong> in order <strong>to</strong> avoid any repercussions that may arise after import.<br />
• <strong>VAT</strong> on approved local sales of garments by BOI exporters is also collected from<br />
the buyers by the Cus<strong>to</strong>ms at Rs. 25/- per piece in the same manner as in the<br />
case of imports<br />
5.1.3 Exempt supplies<br />
<strong>VAT</strong> is not collected on exempt supplies of goods & services. List of exempt<br />
supplies are given in Schedule 1 <strong>to</strong> the <strong>VAT</strong> Act. Please see Chapter 10..<br />
5.2 Payment of <strong>VAT</strong> <strong>to</strong> C.G.I.R<br />
As stated in para 2.5 <strong>VAT</strong> is paid in the first instance by the consumers <strong>to</strong> the Registered<br />
Persons from whom they purchase goods & services. Thereafter the Registered<br />
persons are required <strong>to</strong> remit the <strong>VAT</strong> collected by them <strong>to</strong> the Commissioner General of<br />
Inland Revenue as provided in Section 22 of the Act. That Section allows the Registered<br />
Persons <strong>to</strong> deduct the <strong>VAT</strong> paid by them on the goods and services used by them<br />
34
in making the taxable supplies from the amount charged and collected by them -<br />
Section 22(1) Thus it is the responsibility of the Registered Person <strong>to</strong> charge and collect<br />
<strong>VAT</strong> on behalf of the C.G.I.R and <strong>to</strong> pay and account for such collections <strong>to</strong> the CGIR.<br />
5.3 Payments dates<br />
Registered Persons are required <strong>to</strong> pay the <strong>VAT</strong> collected/Collectible in respect of a<br />
taxable period within one month form the end of the taxable period.<br />
5.4 Penalty for default – Sec. 27(1)<br />
Late payment will attract following penalties.<br />
(a) 10% of the amount not paid, plus<br />
(b) 2% of that amount for each month or part thereof<br />
subject <strong>to</strong> a maximum of 100% of the amount in default.<br />
5.5 Where <strong>to</strong> pay ?<br />
Payment must be made <strong>to</strong> one of the assigned branches of the bank of Ceylon.<br />
-Vide Para 8.7<br />
5.6 Recovery of tax<br />
Non payment of <strong>VAT</strong> collected from consumers is an offence against which criminal<br />
proceedings can be initiated. Commissioner General can take one or more of the<br />
following actions against any person who has collected <strong>VAT</strong> from the consumers but not<br />
remitted it <strong>to</strong> the C.G.I.R.<br />
i. Seizure and sale of movable property – Sec. 42(1)<br />
ii. Distraint Action - Seize and sell any immovable property of the defaulter after<br />
obtaining writ of execution from the District Court- Sec. 42(6).<br />
iii. Institute proceedings for recovery before a Magistrate. – Sec. 43(1)<br />
iv. Garnishee Action - Recover the tax from the deb<strong>to</strong>rs of the defaulter or by<br />
seizure of his bank accounts – Sec. 44(1)<br />
5.7 Direc<strong>to</strong>rs liability when the company defaults<br />
When a body corporate has not paid any tax (<strong>VAT</strong>) on or before the due date, the<br />
manager, direc<strong>to</strong>r, secretary or any other principle officer of such body is personally liable<br />
<strong>to</strong> pay the tax, as if he is the ‘defaulter’ unless he proves <strong>to</strong> the satisfaction of the CGIR<br />
that he is not responsible for such default (Sec. 48). This is applicable <strong>to</strong> partners of a<br />
partnership as well- Sec. 48(2) . Vide para 12.5.<br />
Direc<strong>to</strong>rs of a company are also liable <strong>to</strong> pay unpaid <strong>VAT</strong> of a company under liquation<br />
unless it is proved that the default cannot be attributed <strong>to</strong> gross neglect, breach of duty<br />
etc. on the pat of the direc<strong>to</strong>r in relation <strong>to</strong> the affairs of the company. Sec. 57(1).<br />
35
5.8 Payment of tax on Assessments<br />
<strong>Tax</strong> payable on assessments made by an assessor (Vide Chapter 11 ) <strong>to</strong>o is payable<br />
immediately and the tax in default on such assessments <strong>to</strong>o attract penalties as<br />
mentioned above (para 5.4) and liable <strong>to</strong> recovery action by the C.G.I.R as stated in<br />
(para 5.6) The <strong>VAT</strong> payable on assessments made shall be deemed <strong>to</strong> be in default from<br />
the dates as explained below. Para 5.9(ii)<br />
5.9 Recovery Action and <strong>VAT</strong> in default<br />
In order <strong>to</strong> commence recovery proceedings as mentioned above in para 5.6, the <strong>VAT</strong><br />
payable should be deemed <strong>to</strong> be in default and the (Registered) Person concerned<br />
must be deemed <strong>to</strong> be the defaulter. The circumstances in which <strong>VAT</strong> in default can<br />
arise and a person can be a defaulter are as follows.<br />
i. Situations where an issue of an assessment is not necessary Sec. 26(1)<br />
When the <strong>VAT</strong> payable in respect of a taxable period is not paid on due date-i.e<br />
within one month from the end of the taxable period:<br />
This refers <strong>to</strong> all situations covered by Section 28(I)(a),(b) and (c) namely<br />
(a) return not furnished, tax not paid<br />
(b) return furnished but tax not paid or under paid,<br />
(c) return is altered at the request of the registered person but tax not paid<br />
then the tax payable shall be deemed <strong>to</strong> be in default irrespective of whether an<br />
assessment is issued or not because issue of an assessment is not a condition<br />
under Sec. 26(I). Thus a notice of default under Section44(I) can be issued<br />
straightaway. (Question of quantifying the amount in default may arise in (a)<br />
above).<br />
ii.<br />
Situations where an issue of an assessment, additional assessment or an<br />
amended assessment is necessary.<br />
(a) * Return not furnished-but tax paid – less than the amount payable<br />
in the opinion of the assessor.<br />
* Assessment should be issued on the difference Section 28(3)<br />
* The difference shall be deemed <strong>to</strong> be in default with effect from<br />
the date on which such tax ought <strong>to</strong> have been paid for that<br />
taxable period – Section. 28(4)<br />
* Therefore penalty will be calculated from the due date – i.e form<br />
the last day of the month succeeding the last day of the taxable<br />
period and not from the date of issue of assessment.<br />
36
(b) * Return furnished –tax paid – it appears <strong>to</strong> the assessor that the<br />
amount paid is less than the amount payable or chargeable for<br />
that taxable period –<br />
* Additional assessment should be made on the additional amount<br />
that ought <strong>to</strong> have been paid for that taxable period according <strong>to</strong><br />
the judgement of the assessor – sec. 31(I).<br />
* The amount assessed shall be deemed <strong>to</strong> be in default from<br />
the date on which such tax ought <strong>to</strong> have been paid by the<br />
person chargeable with such tax – Sec. 31(2).<br />
* Penalty calculation will be same as (a) above.<br />
(c) * When the due date of payment of <strong>VAT</strong> is deferred by the CGIR<br />
* Such deferred amount or part thereof which will become payable<br />
on settlement of appeal shall be deemed <strong>to</strong> be in default,<br />
* From the original due date of such tax – Sec. 26(2).<br />
(d) * A refund (assessment) made in excess of the amount due or<br />
* A refund on account of any excess input tax claimed.<br />
* Shall be deemed <strong>to</strong> be tax in default from the first day of the<br />
taxable period in which the excess arose if an assessment is<br />
made on that excess amount refunded – Sec.22(8)<br />
(e) * The amount of reduced tax with penalty thereon on final<br />
settlement of appeal.<br />
* Shall be deemed <strong>to</strong> be in default from the date on which such<br />
tax ought <strong>to</strong> have been paid – Sec. 27(2).<br />
5.10 Collection of tax (in default) of a deceased person<br />
For the purpose of recovery of tax in default from deb<strong>to</strong>rs of the defaulter [Para 5.6(iv)]<br />
the defaulter shall include the agent of a person who is in default and in the case of a<br />
deceased person, if the tax payable by him if he were alive is in default, then the<br />
execu<strong>to</strong>r, administra<strong>to</strong>r, any person intermeddles with property of the deceased person or<br />
a person entitle <strong>to</strong> apply for letters of administration is “deemed <strong>to</strong> be a defaulter” Sec.<br />
44(5). However the execu<strong>to</strong>rs liability is limited <strong>to</strong> the deceased persons estate in his<br />
possession plus any part of the estate passed <strong>to</strong> a beneficiary. (For the circumstances in<br />
which the tax payable by a deceased person, if he were alive, is in default? - Please<br />
see para 12.6).<br />
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5.11. Collection of <strong>VAT</strong> on Imports and BOI<br />
As indicated above in para 5.1.2, in terms of Section 2(3) of the <strong>VAT</strong> Act, <strong>VAT</strong> on<br />
importation of goods shall be charged, levied and collected by the Direc<strong>to</strong>r General of<br />
Cus<strong>to</strong>ms as if it is a Cus<strong>to</strong>ms duty. However the DGC has delegated his powers <strong>to</strong> the<br />
BOI in respect of importation of goods by enterprises registered under Section 17 of the<br />
BOI Act. Such enterprises are required <strong>to</strong> submit their Cus-Decs and other import<br />
documents <strong>to</strong> the relevant documentation unit of the BOI. The BOI has documentation<br />
units at their Inves<strong>to</strong>r Services Section in Colombo 01, and at Katunayake, Biyagama<br />
Koggala and Pallekele. Thus, in the case of importation of goods by such enterprises<br />
<strong>VAT</strong> is collected by the BOI and remit it <strong>to</strong> the DGC’s <strong>VAT</strong> collection account. For the<br />
purpose of examination of goods BOI has verification yards at Central Verification<br />
Terminal of the Cus<strong>to</strong>ms Department at Orgodawatta and at Katunayake Air Cargo<br />
Village at the Air Port, with regard <strong>to</strong> goods imported by enterprises outside the<br />
investment promotion zones. In relation <strong>to</strong> goods imported by enterprises within the<br />
zones the goods are examined within the fac<strong>to</strong>ries by the verification officers of the BOI,<br />
stationed in the zones.<br />
* In these cases <strong>VAT</strong> deferment scheme is also moni<strong>to</strong>red by the BOI but is implemented<br />
by the Cus<strong>to</strong>ms<br />
* The <strong>VAT</strong> collected by the BOI on the goods imported by BOI enterprises are remitted <strong>to</strong><br />
the D.G.C’s <strong>VAT</strong> collection account. In addition BOI also pays <strong>VAT</strong> on its own as a <strong>VAT</strong><br />
Registered Person on the documentation charges and examination charges levied by<br />
them on the importers. Such <strong>VAT</strong> is their output tax, and is paid direct <strong>to</strong> the CGIR.<br />
* The other important thing <strong>to</strong> note is that on importation of goods <strong>VAT</strong> is payable<br />
irrespective of the value of imports (that means there is no threshold) and<br />
irrespective of whether the importer is a <strong>VAT</strong> registered person or not provided the<br />
goods are not exempted or excluded from <strong>VAT</strong>.<br />
38
Chapter – 6<br />
Deferment of Collection of <strong>VAT</strong><br />
6.1 Although <strong>VAT</strong> on imported goods is normally collected at the time of import, collection of<br />
<strong>VAT</strong> is deferred by the D.G.C in respect of certain imports. Similarly collection of <strong>VAT</strong><br />
is suspended by the CGIR in respect “tea” sold at the auctions.<br />
6.2 Deferment on Imports<br />
<strong>VAT</strong> will be deferred by the Cus<strong>to</strong>ms or the BOI as the case may be in respect of<br />
following imports. Deferment is done on the production of a bank guarantee.<br />
6.2.1 Deferment for 60 <strong>to</strong> 90 days<br />
i. any goods imported, including any goods received from the cus<strong>to</strong>ms bonded<br />
area, by a registered person who imports or receives such goods <strong>to</strong> be used by<br />
such person for the purpose of manufacture and re-export of the goods so<br />
manufactured;<br />
ii.<br />
any goods imported by any registered person referred <strong>to</strong> in subsection (7) of<br />
section 22, which are project related goods during such project implementation<br />
period;<br />
iii.<br />
iv.<br />
any goods being any plant, or machinery imported for any infrastructure project<br />
funded mainly by a foreign government or any regional or multilateral agency<br />
including the United Nations Organization and its affiliates, during the period of<br />
implementation of such project.<br />
any purchase of fabric, manufactured by a person who has entered in<strong>to</strong> an<br />
agreement with the BOI under Section 17 of that Law for the manufacture of<br />
fabric, by another person who has entered in<strong>to</strong> an agreement with the BOI under<br />
Section 17 for the manufacture of garments for export under such agreement and<br />
utilized such fabric, for the manufacture of garments for export.<br />
6.2.2 Deferment of 12 months<br />
Any goods being plant, machinery or other equipment of high value temporarily<br />
imported in <strong>to</strong> Sri Lanka and re – export within twelve months, for the period up<br />
<strong>to</strong> the date of such re – export.<br />
39
6.3 Approval For Deferment Facility<br />
i. Cus<strong>to</strong>ms Department has established the “<strong>VAT</strong> Deferred Payment Unit” (<strong>VAT</strong> –<br />
DPU, formally GST – DPU) <strong>to</strong> register the enterprises, those who seek the<br />
deferment facility. This Unit is located at the InFac Centre, 4 th Floor, Hemas<br />
Building, Bris<strong>to</strong>l Street, Colombo – 01.<br />
ii.<br />
Enterprises which are eligible for this facility can apply for registration in the<br />
prescribed form (CDP – 10)<br />
iii.<br />
iv.<br />
Non-BOI Sec<strong>to</strong>r - importers who wish <strong>to</strong> avail of this facility should forward their<br />
applications directly <strong>to</strong> the Direc<strong>to</strong>r General of Cus<strong>to</strong>ms (<strong>to</strong> <strong>VAT</strong> – DPU).<br />
BOI – Sec<strong>to</strong>r - Applications should be forwarded through the BOI with their<br />
recommendation.<br />
v. Every such application should be submitted with a bank gurantee (CDP – 2) or a<br />
corporate guarantee (CDP – 3) <strong>to</strong>gether with an irrevocable power of at<strong>to</strong>rney<br />
authorizing the Commissioner General of Inland Revenue (CGIR) <strong>to</strong> remit direct<br />
<strong>to</strong> the Direc<strong>to</strong>r General of Cus<strong>to</strong>ms (DGC), the deferred <strong>VAT</strong> out of the refund<br />
due as per details contained in the monthly returns submitted by them. The<br />
guarantee furnished should be valid for a period of one year.<br />
vi<br />
vii.<br />
Approval granted for deferment facility will be conveyed <strong>to</strong> the respective<br />
enterprises in the prescribed form (CDP – 7)<br />
The date of submission of Cus-Dec at the relevant Cus-Dec processing Unit<br />
(Bonds Division, In Fac Centre or BOI) is treated as the date of importation <strong>to</strong><br />
compute the period of deferment<br />
6.4 Processing of Cus-Decs<br />
i. Importers entitled <strong>to</strong> avail of the deferred payment facility should file an additional<br />
copy of Cus-Dec titled “<strong>VAT</strong> copy” .<br />
ii.<br />
NON BOI Sec<strong>to</strong>r - All Cus-Decs relating <strong>to</strong> imports under the deferment facility<br />
is processed at In Fac Centre and Bonds Division only.<br />
iii.<br />
BOI Sec<strong>to</strong>r - Inves<strong>to</strong>r Services Division of the BOI will coordinate with the Units<br />
serviced by BOI where Cus-Decs are processed for deferment of <strong>VAT</strong>.<br />
40
iv. Cus-Decs will be considered finalized at the point of payment of duty & other<br />
levies if any with the deferment of <strong>VAT</strong>.<br />
v. The “<strong>VAT</strong> copy” will be returned <strong>to</strong> the importer with the “Delivery copy” of the<br />
Cus-Dec.<br />
6.5 Issue of credit vouchers <strong>to</strong> Cus<strong>to</strong>ms/BOI – <strong>to</strong> set off against deferred <strong>VAT</strong><br />
i. Exporters being zero-rated, are entitled <strong>to</strong> a refund of their input taxes<br />
attributable <strong>to</strong> exports. Similarly new ventures approved under Sec. 22(7) are<br />
entitled <strong>to</strong> a refund of their input taxes during the project implementation period.<br />
Both these categories of persons are also entitle <strong>to</strong> <strong>VAT</strong> deferment facility at the<br />
Cus<strong>to</strong>ms in respect of goods imported. The refunds due <strong>to</strong> them will be issued<br />
directly <strong>to</strong> the DGC/BOI in the form of credit voucher <strong>to</strong> be set off against<br />
deferred tax.<br />
Credit vouchers <strong>to</strong> the DGC/BOI will be issued only if a registered person is<br />
entitled <strong>to</strong> a refund for the relevant taxable period. If no refund is due the<br />
deferred <strong>VAT</strong> should be settled immediately.<br />
ii.<br />
iii.<br />
To enable the credit vouchers be issued such persons should comply with<br />
the following requirements.<br />
(a) In the first instant the registered person concerned should ensure that he<br />
is entitled <strong>to</strong> a refund by forwarding his <strong>VAT</strong> return form duly completed<br />
(on Form 20), <strong>to</strong>gether with form 20A giving the details of deferred<br />
amounts and amounts paid up front.<br />
(b) They should ensure that the input tax declared in form 20A is the same,<br />
as input tax declared in Cage 4 of ‘Form 20’.<br />
(c) They should also ensure that the above amounts tally with the figures<br />
furnished by the Cus<strong>to</strong>ms Department <strong>to</strong> the C.G.I.R. Cus<strong>to</strong>ms Dept.<br />
furnish these particulars on a monthly basis within 3 weeks in the<br />
following month.<br />
The credit vouchers <strong>to</strong> the D.G.C will not be generated by the computer until and<br />
unless the figures declared by the importers and the figures furnished by the<br />
Cus<strong>to</strong>ms tally. In the circumstances the importers are advised <strong>to</strong> declare their<br />
actual amount of imports made during a particular taxable period in Forms<br />
20 and 20A furnished for that period.<br />
41
iv.<br />
If an importer declares only part of his imports his figures will not tally with the<br />
Cus<strong>to</strong>ms figures for that month. In such cases the <strong>VAT</strong> return need <strong>to</strong> be<br />
amended which involves a long procedure <strong>to</strong> be fed in<strong>to</strong> the computer system<br />
and an undue delay of the refund will be inevitable. <strong>Tax</strong>payers under<br />
deferment scheme are therefore strongly advised not <strong>to</strong> mixup imports<br />
made during different months. They are required <strong>to</strong> maintain a “Register<br />
of Imports” in chronological order and input tax and output tax <strong>VAT</strong><br />
accounts. The input tax <strong>VAT</strong> account relating <strong>to</strong> local purchases which should<br />
be in chronological order may contain sufficient columns <strong>to</strong> indicate the date of<br />
receipt of tax invoice, tax invoice number, <strong>VAT</strong> registration number of the<br />
supplier, type of supply, value of supply, <strong>VAT</strong> paid and any other particulars that<br />
may be useful <strong>to</strong> ascertain quickly the input tax payable for that period. Vide<br />
para 15.8<br />
(v)<br />
In situations where an exporter is not entitle <strong>to</strong> a refund for a particular taxable<br />
period no credit voucher can be issued <strong>to</strong> the DGC/BOI for that taxable period. If<br />
the refund due is less than the amount of <strong>VAT</strong> deferred the credit voucher will be<br />
limited <strong>to</strong> the amount of refund due and the balance of deferred tax should be<br />
settled immediately.<br />
Eg. For the taxable period 30.09.2002, the return furnished by a registered<br />
person who is an importer of goods for the purpose of manufacture of goods for<br />
export contains the following particulars. He is registered under the <strong>VAT</strong><br />
deferment scheme.<br />
<strong>Value</strong> of Supply Output <strong>Tax</strong><br />
Local supplies 20,000,000 4,000,000<br />
Exports 10,000,000 NIL 4,000,000<br />
Input <strong>Tax</strong><br />
On local purchases 2,800,000<br />
On imports 1,500,000 4 300,000<br />
Refund due 300,000<br />
In this situation although the collection of Rs.1,500,000/- has been deferred by<br />
the Cus<strong>to</strong>ms/BOI the importer is not entitled <strong>to</strong> a credit voucher for the entire<br />
amount. A credit voucher for Rs.300,000/- can be issued so that the importer<br />
can pay the balance 1,200,000/- <strong>to</strong> the Cus<strong>to</strong>ms if it is acceptable <strong>to</strong> the Cus<strong>to</strong>ms<br />
Department. However the Cus<strong>to</strong>ms Dept. is clearing the deferred amounts not<br />
on the basis of a running <strong>to</strong>tal but on an entry wise basis. Therefore the importer<br />
has two options. He can either obtain a refund cheque for 300,000/- from the<br />
42
Inland Revenue and settle the entire Rs.1,500,000/- <strong>to</strong> Cus<strong>to</strong>ms within 60 days<br />
of the deferment or pay Rs.1,200,000/- <strong>to</strong> Inland Revenue and obtain a credit<br />
voucher for Rs.1,500,000/- in favour of DGC.<br />
If the importer is not entitle <strong>to</strong> any refund he should pay the amount payable <strong>to</strong><br />
Inland Revenue forthwith and settle the deferred tax <strong>to</strong> Cus<strong>to</strong>ms/BOI<br />
immediately.<br />
The import register should contain columns <strong>to</strong> indicate the amount deferred, date<br />
of import (i.e the date the deferment was given) and the date of settlement of the<br />
deferred tax. The assessors are required check carefully <strong>to</strong> see whether the<br />
settlement of deferred tax is treated inadequantly as another import and the input<br />
tax is claimed twice on the same import. A properly maintained import<br />
register is therefore an essential record that should be kept by the<br />
importers in the deferred scheme.<br />
In order that the <strong>VAT</strong> deferment scheme is implemented smoothly and that the<br />
government (<strong>VAT</strong>) <strong>revenue</strong>, which would otherwise have been collected before<br />
the goods are released from the Cus<strong>to</strong>ms is protected, the Cus<strong>to</strong>m Department<br />
(and BOI) will ensure that the deferred <strong>VAT</strong> is recovered from the bank<br />
guarantees if not settled within 60 days.<br />
The only exception can be in situations where the Inland Revenue is unable <strong>to</strong><br />
decide whether a credit voucher is due or not for the reason that the cus<strong>to</strong>ms<br />
have not been able <strong>to</strong> forward the detailed figures of import and export made for<br />
that month by the persons registered under the deferment scheme or due <strong>to</strong><br />
some unforeseen circumstances. In such situations the department will inform<br />
the Cus<strong>to</strong>ms/BOI. Otherwise the Cus<strong>to</strong>ms/BOI will follow the legal requirement<br />
<strong>to</strong> proceed with the recovery of the deferred <strong>VAT</strong> from the bank guarantees.<br />
The importers therefore must make a note of the fact that the Inland Revenue will<br />
not interfere with the Cus<strong>to</strong>ms/BOI in their legal duty <strong>to</strong> recover deferred <strong>VAT</strong><br />
within the time stipulated by law.<br />
43
6.6 Deferment on Local Supplies (Tea)<br />
CGIR will suspend the collection of <strong>VAT</strong> due on any tea, supplied by any tea<br />
manufacturer registered under Tea Board Act <strong>to</strong> any auction, conducted by a registered<br />
tea broker if such tea broker has supplied such tea <strong>to</strong> any tea exporter. The tea brokers<br />
and tea manufacturers are required <strong>to</strong> follow the instructions already given for this<br />
purpose and submit necessary documents along with the return.<br />
44
Chapter – 7<br />
Invoicing<br />
7.1 Invoicing<br />
Invoice is the most important and crucial document in the implementation of <strong>VAT</strong>. It is<br />
the key record of the supply of goods and services and the most crucial evidence for the<br />
transaction and the tax liability. It forms the basis on which all registered persons will<br />
account for the input tax and the out put tax.<br />
• Cus.Dec, is treated as the invoice in the case of imported goods.<br />
It is therefore very essential <strong>to</strong> comply with the invoicing rules. Failure <strong>to</strong> comply will be<br />
liable <strong>to</strong> penalties and prosecution.<br />
7.2. Types of Invoices<br />
Any Registered Person who makes a supply of goods & services <strong>to</strong> another person<br />
should issue a<br />
• <strong>Tax</strong> invoice within 28 days from the time of supply if the recipient of supply is<br />
another registered person and a written request is received from such recipient<br />
within 14 days of supply – Section 20 (1)<br />
• Normal Invoice <strong>to</strong> others – Section 20 (6)<br />
7.3 Request for a <strong>Tax</strong> Invoice<br />
The request for a tax invoice must be in writing within 14 days of the time of transaction<br />
stating<br />
- that he is a registered person under the <strong>VAT</strong> Act or<br />
- that he is deemed <strong>to</strong> be a registered person under the <strong>VAT</strong> Act<br />
- the full name and address as appearing in the Certificate of<br />
Registration.<br />
Where a request has been made by a registered person for the purchase of first supply<br />
such person shall not be required <strong>to</strong> make any further requests for subsequent purchases<br />
of supplies from the same supplier.<br />
45
7.4 <strong>Tax</strong> Invoice<br />
<strong>Tax</strong> invoice should contain the following particulars.<br />
a. the name, address and the registration number of the supplier<br />
b. the name and address of the recipient<br />
c. the date of the invoice and the serial number<br />
d. the date of supply and description of goods or services<br />
e. the quantity or volume<br />
f. the value of supply, the tax charged and the consideration for the supply, and<br />
g. the word '<strong>Tax</strong> invoice' at a conspicuous place in such invoice.<br />
Invoices issued prior <strong>to</strong> 01.08.2002.<br />
• Any valid tax invoice issued under GST Act prior <strong>to</strong> 01.08.202 and<br />
• Any Cus-Dec or other document authenticated by the D.G.C and issued under<br />
the GST Act prior <strong>to</strong> 01.08.2002<br />
Are also treated as tax – invoices under the <strong>VAT</strong> Act.<br />
With regard <strong>to</strong> GST invoices that may have <strong>to</strong> be issued after 01.08.2002 please see<br />
paras 7.8 and 22.1<br />
7.5 Invoicing <strong>to</strong> Government Agencies<br />
However any <strong>VAT</strong> registered person supplying taxable goods/services <strong>to</strong> any Ministry,<br />
Department, Provincial Council, Local Govt. Institution, Government Corporation or<br />
Statu<strong>to</strong>ry Body shall indicate the amount of <strong>VAT</strong> charged by him in the relevant invoice,<br />
voucher or other document. (i.e. a tax-invoice should be issued)<br />
7.6 Grace period under Section 79<br />
Non compliance of invoicing requirements is an offence punishable under the Act. Any<br />
person who is unable <strong>to</strong> comply with those requirements due <strong>to</strong> specific problems of<br />
converting existing invoicing systems or computer systems etc. will be given time till 30 th<br />
September 2002 <strong>to</strong> make suitable alterations <strong>to</strong> the systems if such person appraises the<br />
C.G.IR of his difficulties and undertakes <strong>to</strong> issue such invoices complying with such<br />
requirements <strong>to</strong> the maximum possible extent with effect from 01.08.2002.<br />
46
7.7 Normal Invoice<br />
• Normal invoice issued <strong>to</strong> non-registered persons<br />
- should indicate the Registration Number of the supplier<br />
- should not indicate the tax separately.<br />
- It should be a tax inclusive invoice where only the <strong>to</strong>tal<br />
consideration is shown.<br />
• This is also referred <strong>to</strong> as a tax-inclusive invoice or a simplified invoice.<br />
7.8 GST invoices issued prior <strong>to</strong> 01.08.2002 (Sec.20(2)<br />
<strong>Tax</strong> invoices under the <strong>VAT</strong> Act can be issued only in respect of taxable periods<br />
commencing after 01.08.2002. GST has <strong>to</strong> be charged and valid GST invoices have <strong>to</strong><br />
be issued in respect of taxable periods prior <strong>to</strong> 01.08.2002. But valid tax invoices under<br />
the GST Act in respect of supplies made prior <strong>to</strong> 01.08.2002 can be issued even after<br />
01.08.2002. Valid GST invoice can be issued within 14 days from the time of supply.<br />
Eg. Security Services provided in July 2002 is subject <strong>to</strong> GST at 12.5% (and the NSL at<br />
6.5%). Invoice for this can be issued within 14 days of the time of supply. Time of supply<br />
means the time as defined in Sec. 4 of the GST Act which is the same as Sec. 4 of <strong>VAT</strong><br />
Act. (It is not the actual time of a transaction) Therefore GST invoice for such service<br />
may be issued sometime in August 2002. <strong>VAT</strong> cannot be charged and therefore <strong>VAT</strong><br />
invoices cannot be issued in respect of supplies made in taxable periods prior <strong>to</strong><br />
01.08.2002. Therefore the words “valid tax invoice issued under the GST Act prior <strong>to</strong><br />
01.08.2002” are construed <strong>to</strong> mean “valid tax invoice issued under the GST Act in<br />
respect of supplies made prior <strong>to</strong> 01.08.2002”<br />
7.9 Proforma invoice<br />
is not an invoice for <strong>VAT</strong> purposes even though it may contain the necessary details.<br />
7.10 Adjusting errors in tax-invoices<br />
If the amount of <strong>VAT</strong> charged by a tax-invoice issued by a Registered Person is higher<br />
than the amount properly due then he should account for the higher amount in his<br />
records unless he corrects the error with his cus<strong>to</strong>mer by issuing a credit note.<br />
If the amount of tax is lower than the amount properly due he should account for the<br />
correct amount of tax due whether he corrects the error with his cus<strong>to</strong>mer or not. He can<br />
issue a supplementary tax-invoice for the amount under-charged.<br />
47
7.11 Use of tax fraction <strong>to</strong> compute output tax in a normal invoice<br />
A registered person cannot issue a tax invoice <strong>to</strong> a non- registered person. He should<br />
issue a normal invoice depicting only the <strong>to</strong>tal consideration inclusive of <strong>VAT</strong>. <strong>VAT</strong><br />
charged is not separately indicated (para 7.7). In such cases for the purpose of declaring<br />
output tax by the supplier and also if the recipient wishes <strong>to</strong> find out the <strong>VAT</strong> content in<br />
the <strong>to</strong>tal consideration, the tax fraction can be used.<br />
Eg. When Municipal Council (which is registered for <strong>VAT</strong>) issues an invoice <strong>to</strong> a<br />
resident of the area (who is not a registered person) in respect of the supply of<br />
water the invoice will contain the <strong>VAT</strong> registration number of the Municipal<br />
Council, the account number, number of units used and the amount payable. If<br />
the amount payable is 165/- then the output tax pertaining <strong>to</strong> that invoice is<br />
165x 1/11 = Rs.15/-. Because water is liable <strong>to</strong> <strong>VAT</strong> at 10%.<br />
If it is a supply liable <strong>to</strong> <strong>VAT</strong> at 20% then the <strong>to</strong>tal consideration in the invoice multiply by<br />
1/6 will give the amount of <strong>VAT</strong> in that invoice.<br />
48
Chapter – 8<br />
Returns and <strong>VAT</strong> Rates<br />
8.1 <strong>VAT</strong> Returns<br />
• As stated in para 3.6 returns are <strong>to</strong> be furnished either monthly or quarterly.<br />
• If a person is not making 100% zero rated supplies, he will be treated as a<br />
person required <strong>to</strong> submit monthly returns, if his zero rated supplies exceeds<br />
50% of the <strong>to</strong>tal taxable supplies (including zero rated supplies) or if he is in the<br />
deferment scheme. Position will be reviewed once in 6 months <strong>to</strong> check<br />
whether he continues <strong>to</strong> be in that category.<br />
• Returns must be furnished within one month of the last day of the taxable period.<br />
• The quarterly tax payers should submit a return for GST for the month of July<br />
2002 and a <strong>VAT</strong> return for the two months August and September, 2002.<br />
• The registered persons who should furnish monthly returns are enumerated in<br />
para 3.6. Zero Rated Supplies are given in Chapter 25.<br />
• The return is in triplicate. Original is for the Department. First copy is for the<br />
Bank. Second copy is for the tax payer.<br />
8.2 Where <strong>to</strong> submit the return ?<br />
• If tax is payable - return must be submitted <strong>to</strong> an assigned branch of Bank<br />
of Ceylon with the remittance. The bank will retain the<br />
original and the bank copy. You will be given the 2 rd copy.<br />
• If tax is not payable – return must be submitted <strong>to</strong> the <strong>VAT</strong> Branch of the Dept.<br />
8.3 <strong>Tax</strong> Rates<br />
There are 3 rates and a special rate namely<br />
Zero Rate (0%)<br />
Lower Rate (10%)<br />
Standard Rate (20%)<br />
Zero rate :<br />
• Export of goods and<br />
• supply of services in Sri Lanka <strong>to</strong> be consumed outside Sri Lanka including repair<br />
of ships, international transportation etc. as enumerated in Section 7(I)(b)<br />
are zero rated (Section 7)<br />
The list of zero rated supplies of goods and services is given in Chapter 25<br />
49
Lower Rate – 10%<br />
Goods and services referred <strong>to</strong> in 2 nd schedule <strong>to</strong> the Act are taxed at the Lower rate of<br />
10%. When the rate is 10% the tax fraction is 1/11. That means the tax content in a<br />
Normal Invoice (i.e tax inclusive invoice) is 1/11 of the <strong>to</strong>tal consideration including tax.<br />
Standard Rate – 20%<br />
Goods and Services other than<br />
• Exempt goods and Services (Schedule 1)<br />
• Lower (10%) rated goods and services (Schedule 2)<br />
• Zero (0%) rated goods and services (Chapter 25)<br />
Are taxed at 20% (when the rate is 20% tax fraction is 1/6)<br />
Special Rate<br />
Each piece of garment supplied <strong>to</strong> the local market by a B.O.I. garment manufacture<br />
cum exporter with the approval of DGC/BOI is taxed at 25/- per piece. This is<br />
collected by the Cus<strong>to</strong>ms/BOI from the buyer through a Cus-Dec.<br />
N.B: If there are other local sales where Rs.25/- per piece is not charged by the<br />
Cus<strong>to</strong>ms/BOI such sales are liable at the normal rate of 20% on the value of supply on a<br />
tax invoice issued by the supplier (BOI Company) . Such amount should be declared by<br />
the supplier as his output tax.<br />
8.4 Amendment <strong>to</strong> return<br />
If a person wishes <strong>to</strong> amend a return which he has furnished earlier he should apply <strong>to</strong><br />
Deputy Commissioner (<strong>VAT</strong> Refunds) stating the reasons as <strong>to</strong> why the return should be<br />
amended. If the reasons are acceptable necessary adjustment will be made in the<br />
computer and a revised assessment will be issued.<br />
8.5 Monthly Returns and Quarterly Returns<br />
Please see para 3.6<br />
8.6 Returns <strong>to</strong> be furnished by importers entitled <strong>to</strong> <strong>VAT</strong> deferment facility;<br />
• Exporters who import goods for the purpose of manufacturer and re-export<br />
• Persons approved under Sec. 22(7) who import project related goods<br />
Who are entitled <strong>to</strong> <strong>VAT</strong> deferment facility (Para 6.2.1) and are required <strong>to</strong> furnish Form<br />
20A <strong>to</strong>gether with <strong>VAT</strong> return (Form 20) – Para 6.5<br />
50
8.7 Approved Branches of the Bank of Ceylon<br />
Following branches of the Bank of Ceylon have been assigned <strong>to</strong> pay <strong>Value</strong> <strong>Added</strong> <strong>Tax</strong>.<br />
If <strong>VAT</strong> is payable on the basis of the return, the <strong>VAT</strong> return form <strong>to</strong>o should be handed<br />
along with the payment <strong>to</strong> any one of the following branches of the Bank of Ceylon.<br />
Prince Street (Pettah), Central Market Branch (Pettah), Metro Office (Inland<br />
Revenue Building), Corporate Branch, City Branch, Toring<strong>to</strong>n, Union Place,<br />
Wellawatte, Borella, Kollupitiya, Bambalapitiya, Ratmalana, Nugegoda, Kalutara,<br />
Puttalam, Biyagama, Ja-ela, Dehiwala, Maharagama, Homagama, Battaramulla,<br />
Kaduwela, Kurunegala, Negambo, Kandy, Galle, Matara, Anuradhapura, Badulla,<br />
Nuwara-Eliya, Kegalle, Tissamaharamaya, and Deniyaya.<br />
51
Chapter – 9<br />
Calculation of <strong>Tax</strong><br />
9.1 Calculation<br />
Registered persons are required <strong>to</strong> furnish returns and pay <strong>VAT</strong> for each taxable period.<br />
<strong>VAT</strong> payable <strong>to</strong> the C.G.I.R is therefore calculated in respect of a taxable period.<br />
Registered persons who are required <strong>to</strong> submit monthly returns have <strong>to</strong> calculate <strong>VAT</strong><br />
payable/refundable every month. Others, must calculate quarterly. The <strong>VAT</strong> payable in<br />
respect of a taxable period is calculated by deducting input tax applicable <strong>to</strong> that<br />
period from the out put tax applicable <strong>to</strong> that period.<br />
<strong>VAT</strong> payable = Output tax – Input tax<br />
The applicable taxable period depends on the basis of accounting. If a person is<br />
approved <strong>to</strong> declare tax on cash basis he must declare output tax for the taxable period<br />
in which in cash is received and input tax for the taxable period in which the payment is<br />
made.<br />
If the input tax exceeds the output tax a refund will arise.<br />
9.2 The Theory<br />
Roughly the theory behind the above calculation is as follows.<br />
In a production/distribution process,<br />
Input + Wages + Profit = Output<br />
∴ Wages + Profit = Output – Input<br />
But ‘Wages+ Profit’ means the ‘added value’ <strong>to</strong> the “fac<strong>to</strong>rs of production”.<br />
∴ <strong>Value</strong> <strong>Added</strong> = Output – Input<br />
∴ The tax on value addition can be calculated by calculating the tax on (output – input).<br />
This can be done either by applying the tax rate <strong>to</strong> the (output value – input value) or by<br />
computing (output tax – input tax). Sri Lanka follows the latter method which is the<br />
method adopted by OECD countries.<br />
(Some countries may follow the “wages + profits” model but it is not considered desirable<br />
because it is “accounts based” and profits need <strong>to</strong> be identified)<br />
9.3 Output <strong>Tax</strong><br />
• Output tax is the <strong>VAT</strong> charged by a registered person on supply of goods &<br />
services made by him.<br />
• Rs. 25/- per piece of garment, charged by Cus<strong>to</strong>ms or BOI, on approved sale of<br />
garments in the local market by BOI manufacturers constitute part of their output<br />
tax. However the present return form is not designed <strong>to</strong> include that amount as<br />
52
the tax is collected by the Cus<strong>to</strong>ms/BOI. But the number of pieces must be<br />
declared in box “E” of the return in order <strong>to</strong> verify the amount paid.<br />
• Persons who are approved <strong>to</strong> adopt cash basis under Section 23 should declare<br />
output tax only when the cash is received.<br />
• Normally out put tax consist of tax charged at Rs. 20%- (Box 1 of the return), tax<br />
charged at 10% (Box 2 of the return) and special output tax of Rs. 25/- per piece<br />
of garment. But sometimes it is possible that payments may be received after<br />
01.08.2002. relating <strong>to</strong> GST invoices issued before that date. Those who are<br />
submitting returns on cash basis must declare these amounts as output tax in<br />
their <strong>VAT</strong> returns. (For details Sec. Para 22.1.2) Similarly there may be GST<br />
invoices issued in the month of August. Although the GST charged/collected in<br />
respect of these invoices is at 12.5% such amounts must be declared in the 20%<br />
box (i.e Box 1) of the relevant <strong>VAT</strong> return.<br />
• Sale of assets (including mo<strong>to</strong>r vehicles used for travelling) and scrap of a<br />
taxable activity also constitute a taxable supply and output tax must be declared<br />
on such sales. In the valuation of assets for this purpose a reasonable economic<br />
depreciation should be allowed. If an asset was used for both taxable and<br />
exempt activities the disposal value should be considered on a proportionate<br />
basis.<br />
• Output tax must also be declared on self supply of taxable goods and assets<br />
including mo<strong>to</strong>r vehicles used for travelling. An asset or goods from s<strong>to</strong>ck in<br />
trade may be taken out for private use or for an exempt activity of the same<br />
person. If it is permanently transferred for private use it must be treated as a<br />
disposal and market value of the asset should be considered <strong>to</strong> compute out put<br />
tax. If it is temporarily transferred it should be considered as a service and<br />
output tax should be computed on an appropriate value - Sec. 5.(5)(iv)<br />
• Bad debts recovered, Insurance receipts, fringe benefits <strong>to</strong> employees and<br />
bartar transactions if any, are other supplies where output tax should be charged<br />
and declared.<br />
• The open market value of the assets and goods remaining at the time of<br />
cancellation of registration (including mo<strong>to</strong>r vehicles) also constitute a taxable<br />
supply. Vide para 4.8(c ). The output tax on such supply at the appropriate rate<br />
should also be declared in the return. If all the goods and assets are sold <strong>to</strong> a<br />
non-registered person the output tax must be paid on sale price or open market<br />
value which ever is higher. If another registered person continues <strong>to</strong> carry on the<br />
taxable activity with such goods and assets then no output tax is due on such<br />
remaining goods and assets. It must be ensured that output tax will be<br />
53
accounted for in respect of all the goods and assets on which input tax has<br />
been claimed. [Section 16(5)]<br />
• A separate record should be maintained in respect of GST tax declared as<br />
0output tax in <strong>VAT</strong> returns. (Para 22.1.2) A separate record should also be<br />
maintained in respect of supplies made without output tax <strong>to</strong> Diplomatic<br />
personnel (Vide Chapter 20)<br />
• When fringe benefits are made <strong>to</strong> employees, output tax should be paid by the<br />
employer on the value of supply. (The supplier is the employer). If an<br />
employee’s private bill (say a hotel bill) is settled by the employer, the employer<br />
should pay <strong>VAT</strong> on that amount. The bill cannot be a “tax invoice” as the<br />
employee is obtaining the service (or buying goods) as a private individual and<br />
not as a registered person. But that bill may be a <strong>VAT</strong> inclusive bill or a bill<br />
without <strong>VAT</strong> depending on whether the supplier is registered or not. In either<br />
case the employer is required <strong>to</strong> pay <strong>VAT</strong> on that payment (i.e the value of<br />
supply) at 10% or 20% depending on the type of supply. If it is a hotel bill it is a<br />
service liable at 10%. If it is a bill pertaining <strong>to</strong> the purchase of a television it is<br />
liable as a supply of goods at 20%. The employer cannot claim input tax<br />
included in such invoicesa.<br />
9.4 Input tax<br />
Input tax is the <strong>VAT</strong> payable by a registered person;<br />
(a) To another registered person - in respect of goods and services obtained from<br />
such person <strong>to</strong> be used in a taxable activity and<br />
(b) To the Cus<strong>to</strong>ms - in respect of goods imported <strong>to</strong> be used in a taxable activity.<br />
(Garments purchased from a BOI manufacturer cum exporter with the special approval of DGC/BOI<br />
at a special duty of Rs.25/- per piece paid <strong>to</strong> Cus<strong>to</strong>ms is also treated as an import)<br />
9.4.1 Special rules regarding input tax<br />
Mixed activities - Where a supply of goods or services received by a registered<br />
person, or goods imported are used or are <strong>to</strong> be used partly for the purpose of<br />
taxable activity the input tax shall be claimed proportionately except in the case<br />
(iv) below.<br />
ii.<br />
Finance Leasing - In the case of a person providing leasing facilities under the<br />
Finance Leasing Act No. 56 of 2000, the input tax on Goods supplied under a<br />
leasing agreement for a period less than 3 years shall be counted at the rate of<br />
10% even if the tax paid on such goods is more than 10%(Vide Para 18.13.3).<br />
iii.<br />
Tenants - Where an unregistered person leases out his land and buildings in<br />
terms of a tenancy agreement, <strong>to</strong> a registered person, input tax is allowed <strong>to</strong> be<br />
54
claimed on expenses in connection with the services provided on such land and<br />
building, during the tenancy agreement if such registered person provides<br />
sufficient evidence <strong>to</strong> the satisfaction of the CGIR, <strong>to</strong> the effect that the<br />
payments are made by him and the existence of the tenancy agreement.(Eg.<br />
Telephone bills, electricity bills etc. paid by the tenant)<br />
iv.<br />
Electricity - any registered person who has obtained a license under the<br />
Electricity Act No 19 of 1950 and engages in the distribution of electricity may be<br />
allowed input tax on the purchase of electricity for such distribution without<br />
apportioning for disallowable input.<br />
iv.<br />
Cash basis reporting - persons who are approved under Sec. 23 for cash basis<br />
reporting of tax should declare input tax only when the payment is made in<br />
respect of an invoice.<br />
9.4.2 Disallowable input tax – Section 22 (5)<br />
Input tax is relation <strong>to</strong> following supplies and invoices are not deductible<br />
i. Mo<strong>to</strong>r vehicles used for traveling (business or private) including, repairs, lease,<br />
hire, insurance etc.<br />
ii. Purchase of goods or services which are not connected with the taxable activity.<br />
iii. if the supply is not supported by a 'tax invoice' duly issued, and received within<br />
12 months or a cus<strong>to</strong>ms declaration issued in the name of the registered person.<br />
(This does not mean that a tax invoice can be issued within 12 months. It should<br />
be issued within 28 days. It is not valid if it is not issued within 28 days. In<br />
cases where the “tax invoice” has <strong>to</strong> be sent by post ( Ex. Telephone bills) or due<br />
<strong>to</strong> some extra-ordinary circumstances if it is received late anything received after<br />
12 months will be disregarded). Further this 12 months rule have been slipped<br />
out of the final draft/print of the Act. It is expected that it will be res<strong>to</strong>red.<br />
<strong>Tax</strong>payers are advised <strong>to</strong> place the date stamp on the invoices received by post<br />
and <strong>to</strong> prepare the <strong>VAT</strong> Account on the basis of that date. (Vide Para 15.6)<br />
iv. if the input tax contained in a invoice relating <strong>to</strong> a local purchase is not claimed<br />
within 6 months from the date of receipt of the invoice<br />
v. Input tax in a tax-invoice which is not in the name of the Registered Person in<br />
except cases referred <strong>to</strong> in para 9.4.1(iii) and in a Cus-Dec where change in<br />
name is apparent.<br />
vi. change in the use of assets and change in the status of the activity will give<br />
rise <strong>to</strong> input tax adjustments. Eg: Machine purchase for exempt activity is<br />
55
transferred <strong>to</strong> a taxable activity and exempt activity becoming liable after<br />
sometime.<br />
Eg 1. Change in status of the activity - Machine was purchased on 01.08.2002<br />
during <strong>VAT</strong> period for Rs.312,500/- and used in an exempt activity. With an<br />
amendment of <strong>VAT</strong> the status of the activity changed . Activity became a liable<br />
(taxable) activity w.e. from 01.08.2004. If the life time of the machine is 5 years.<br />
<strong>VAT</strong> paid when purchased = 312,500 @ 20% = 62,500/-<br />
Input credit entitlement for <strong>VAT</strong> is calculated as follows.<br />
= Total input tax paid x period of taxable use<br />
Life time of asset<br />
= 62,500 x 3<br />
5<br />
= 37,500/=<br />
vii.<br />
viii.<br />
Eg.2 Change in use - This happens when an asset is used in an exempt activity<br />
and the asset is transferred <strong>to</strong> taxable activity later. Calculation is the same as<br />
above.<br />
Input tax adjustment is due in respect of bad debts written off.<br />
Input tax incurred in providing re-imbursement of personal expenses of an<br />
employee is not allowable since it is not connected <strong>to</strong> the taxable supplies made<br />
by the employer.<br />
9.4.3 Record keeping for input tax<br />
A separate record should be maintained in respect of input tax claimed in<br />
relation <strong>to</strong> GST invoices in <strong>VAT</strong> returns.<br />
9.4.4 Special Input tax (i.e NSL in s<strong>to</strong>cks)<br />
* NSL embedded in the unsold s<strong>to</strong>cks as at 31.07.2002 can be claimed as input<br />
tax by importers who are engaged in importing and selling of goods<br />
imported by them if the goods are not subject <strong>to</strong> any processing before<br />
sale.<br />
IF<br />
* the goods were liable <strong>to</strong> GST if sold prior <strong>to</strong> 01.08.2002.<br />
* goods imported will be available for sale by the same importer<br />
* no deduction has been claimed under any other provision<br />
* the details of the s<strong>to</strong>cks and NSL paid on those goods are submitted <strong>to</strong> the<br />
C.G.I.R. before 31.12.2002 on from <strong>VAT</strong> 24 after a physical s<strong>to</strong>ck - taking or from<br />
computerized records of s<strong>to</strong>cks<br />
The claim can be made only when the CGIR approves the claim. Any<br />
excess input tax is not refunded but can be carried forward indefinitely <strong>to</strong> be<br />
• It is clear from above that any NSL embedded in s<strong>to</strong>cks which were exempt from<br />
set off against future <strong>VAT</strong>.<br />
GST but liable <strong>to</strong> <strong>VAT</strong> will not be considered.<br />
56
9.4.5 Transitional Provision – Sec. 76<br />
- Where the C.G.I.R is satisfied that;<br />
* a registered person or other person<br />
* has paid <strong>VAT</strong> on goods acquired on or after, 01.08.2002 for the<br />
purpose of making an exempt supply and<br />
* such supply has subsequently become a taxable supply and<br />
* such goods are being used in making such taxable supply.<br />
Then<br />
* <strong>VAT</strong> paid on the acquisition of such goods shall be deemed <strong>to</strong><br />
be input tax.<br />
- IF<br />
The goods are being used only partly for a taxable supply then C.G.I.R<br />
shall determine the allowable portion of such input tax.<br />
9.4.6 Input tax on GST invoices – Sec. 22(2)<br />
Input tax not claimed on invoices issued prior <strong>to</strong> 01.08.2002 and on any valid<br />
GST invoices issued after 01.08.2002 may be claimed under <strong>VAT</strong>. (Vide para<br />
7.8). In respect of invoices issued prior <strong>to</strong> 01.08.2002 the six months rule in para<br />
9.4.2(iv) is applicable with effect from 01.08.2002 irrespective of whether the<br />
registered person is on cash basis but cash not paid by that time.<br />
9.4.7 Input tax on Sri Lanka Telecom – Master Invoices<br />
Sri Lanka Telecom issues master invoices <strong>to</strong> subscribers who have several<br />
telephone connections. If such a subscriber is a registered person and claims<br />
input tax on telephone bills an adjustment should be made in respect of<br />
telephones which were not used for the taxable activity. The disallowable <strong>VAT</strong><br />
may be computed by multiplying the <strong>VAT</strong> on the master bill by the fraction <strong>VAT</strong><br />
on Disallowable Bill/<strong>VAT</strong> on Gross Bill<br />
9.5 Burden of <strong>VAT</strong><br />
From the above mentioned method of calculation of <strong>VAT</strong> (paras 9.1 and 9.2) it can be<br />
seen that the burden of <strong>VAT</strong> falls on the “final consumer” only. Final consumer means<br />
the last person in the chain of production and distribution who receives (buys) the goods<br />
or service but does not use it in any taxable activity. He pays the <strong>VAT</strong> <strong>to</strong> his supplier<br />
and not directly <strong>to</strong> the government but the amount paid by him is received by the<br />
government through various stages of production and distribution of that goods or<br />
service. This can be illustrated by a trivial example.<br />
57
Eg. If A is an ice-cream vendor who buys ice-cream in ‘Cans’, put them in ‘Cones’ and<br />
sells them <strong>to</strong> final consumers; He buys the ice-cream in containers (cans) from X and<br />
‘cones’ from Y. Assume all are Registered Persons, and <strong>VAT</strong> on all gods and services is<br />
20%.<br />
X sells Cans at 100/- and charges <strong>VAT</strong> at – 20%<br />
Y sells Cones at 1/- per Cone and charges <strong>VAT</strong> at 20%<br />
Then A spends as follows <strong>Value</strong> of <strong>VAT</strong> Total<br />
supply<br />
X sells a Can of ice cream <strong>to</strong> A 100 20 120<br />
Y sells 10 Cones <strong>to</strong> A 10 2 12<br />
110 22 132<br />
Thus A pays 110/- on goods and 20/- as <strong>VAT</strong> <strong>to</strong> X and 2/- as <strong>VAT</strong> <strong>to</strong> Y. If he sells cones<br />
at 12/- each then<br />
A sells 10 cones @ 12/- per cone 120 24 144<br />
10 2 12<br />
A’s out put tax = 24<br />
A’s input tax = 20 + 2 = 22<br />
∴ <strong>Tax</strong> payable by A = 24 – 22<br />
= 2<br />
* Thus A’s Cus<strong>to</strong>mers pay 24/- as <strong>VAT</strong> <strong>to</strong> ‘A’ but ‘A’ pays only 2/- <strong>to</strong> the<br />
government. But the other 22/- has already been received by the government,<br />
20/- through X and 2/- through Y.<br />
• We can look back further in this chain of production and distribution with the<br />
following details. If X is a manufacturer of ice cream who buys raw materials<br />
from P and Containers from Q then he should pay <strong>VAT</strong> on his raw materials and<br />
on the purchase of Containers as follows.<br />
<strong>Value</strong> of <strong>VAT</strong> Total<br />
Supply<br />
X buys raw material <strong>to</strong> make ice-cream, from P 75 15 90<br />
X buys containers form Q 10 2 12<br />
85 17 102<br />
X sells ice-cream with container <strong>to</strong> A 100 20 120<br />
Then X’s output tax is 20 but input tax is 17 15 3 12<br />
∴ X pays <strong>to</strong> the department only (20-17) = 3<br />
The balance 17/- is coming form P (15/-) and Q (2/-)<br />
* The value addition by A = 120-110 = 10<br />
58
<strong>Tax</strong> on value addition @ 20% = 10 @ 20% = 2<br />
Which is the same as his (output tax - Input tax) = 24 – 22 = 2<br />
* The value addition by X = 100-85 = 15<br />
<strong>Tax</strong> on value addition @ 20% = 15 @ 20% = 3<br />
Which is the same as his (output tax – Input tax) = 20-17 = 3<br />
* Thus the tax on value addition at each point in the chain of production and<br />
distribution is equal <strong>to</strong> the ( Output tax – Input tax) at each point. This is the<br />
amount payable by the Reg. Person at that point. He does not pay anything out<br />
of his own profits or turnover. The set off of input tax at each stage ensures that<br />
tax on tax is not charged and the ultimate consumer bears the full burden of tax.<br />
9.6 Some examples illustrating principles<br />
(1) A partnership, which is a registered person, runs a grocery s<strong>to</strong>re. One partner<br />
<strong>to</strong>ok home some goods on 20.09.2002 for his private use. The market value of<br />
the goods and the usual selling price of the goods is Rs.3500/- (excluding <strong>VAT</strong>).<br />
In the business books the s<strong>to</strong>ck account has been credited by Rs.3,000/- which<br />
is the cost of the goods, and his drawings account has been debited by the same<br />
amount but no <strong>VAT</strong> has been paid. What is the <strong>VAT</strong> implication?<br />
• This is a deemed supply made in the course of carrying on or carrying out a<br />
taxable activity.<br />
• This is a supply made <strong>to</strong> an associated person( see the definition in Sec. 83).<br />
The value of supply is the market value = Rs.3,500/-; Sec. 5(5) (iv)<br />
• <strong>VAT</strong> payable by the partnership = 3,500 x 20%<br />
= 700<br />
• They should declared this amount as output tax in the <strong>VAT</strong> return for the period<br />
ending 30.09.2002.<br />
(2) A registered person owns a furniture shop. He decides <strong>to</strong> give his sister a table<br />
for looking after his child when he is away from home. It was removed <strong>to</strong> sisters<br />
house on 20.09.2002. Market value of the table is Rs.7,500/=. What is the <strong>VAT</strong><br />
implication.<br />
• The supply is made <strong>to</strong> an associate person and the value of supply is the maket<br />
value which is = 7,500/-<br />
• Time of supply is 20.09.2002.<br />
• The Registered person should pay <strong>VAT</strong> for the taxable period ending 30.09.2002<br />
at 7500 @ 20% = 1500/-.<br />
59
(3) In the above case if the registered person himself takes the table home for his<br />
private use?<br />
• Here again a deemed supply occurs and the calculation is same as above.<br />
(4) Mr. Baas (a registered person) is running a garage. After a burglary he lost<br />
some of his valuable <strong>to</strong>ols. He received Rs.20,000/- excluding <strong>VAT</strong> from the<br />
insurance company. Insurance claim was made on 10.08.2002 and it was<br />
received on 25.09.2002.<br />
• Baas should charge <strong>VAT</strong> <strong>to</strong> the insurance company. With his insurance claim he<br />
should issue a <strong>VAT</strong> invoice.<br />
• Time of supply is 10.08.2002.<br />
• <strong>VAT</strong> invoice should indicate his <strong>VAT</strong> registration number, serial number of the<br />
invoice, value of supply which is 20,000/- and <strong>VAT</strong> = 20% of 20,000 = 4,000/= .<br />
• Baas should declare this 4,000/- as output tax for the taxable period ending<br />
30.09.2002.<br />
• For the same period 4,000/- is the input tax in the hands of the insurance<br />
company.<br />
• Insurance company should pay 4,000/- in addition <strong>to</strong> value of loss that is<br />
20,000/- <strong>to</strong> Baas.<br />
• If the claim has been made during GST period then Bass must have charged<br />
GST in his invoice<br />
<strong>Value</strong> of claim = 20,000<br />
GST 12.5% = 2,500<br />
22,500<br />
Although the claim was paid on 20.09.2002 i.e during <strong>VAT</strong> period, the insurance<br />
company must pay only 2,500/- as the payment is made on a valid GST invoice.<br />
Baas should declare 2,500/- as output tax in the; <strong>VAT</strong> return for period ended<br />
30.09.2002 and the corresponding value of supply that should be declared in<br />
cage A of the return is 2500 x 5 = 12,000/- and not 20,000/- (Please see para<br />
22.1)<br />
(5) A registered person purchases a computer for his home use. But it is going <strong>to</strong> be<br />
used in his taxable activity 25% of the time. The cost of the computer is<br />
Rs.125,000/- and <strong>VAT</strong> paid is 125,00/- What is the amount of input tax he can<br />
claim?<br />
• He cannot claim any input tax because the computer (the asset) is not a<br />
business asset.<br />
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• If the asset if purchased for the business and it will be brought in<strong>to</strong> the balance<br />
sheet of the business (i.e the taxable activity) then full input tax on the purchase<br />
will be allowed and an adjustment will be made with regard <strong>to</strong> private use.<br />
(6) A registered person purchased a Van on 20.09.2002 for a mobile (transport)<br />
business carried on by him. He is going <strong>to</strong> use it 70% of the time for the taxable<br />
activity and 30% of the time for private use. Cost of the van is 600,000/- and<br />
<strong>VAT</strong> paid is 120,000/-. What is the input credit available <strong>to</strong> him. During the<br />
taxable period ended 30.09.2002 he spent Rs.60,000/- on insurance and repairs<br />
etc. which includes <strong>VAT</strong>. What are the <strong>VAT</strong> implications.<br />
There are two adjustments that will arise in this situation.<br />
(i)<br />
(ii)<br />
Input tax on purchase<br />
Input tax on running expenditure<br />
(i)<br />
Purchase<br />
Input tax on purchase = 120,000<br />
Amount attributable <strong>to</strong> business use = 120,000 X 70<br />
100<br />
∴Input tax allowable = 84,000<br />
Input tax not allowable = 36,000<br />
======<br />
(ii) Running expenses<br />
Amount spent on private use (including <strong>VAT</strong>) = 60,000x 30 = 18,000<br />
100<br />
<strong>VAT</strong> content in private use = 1/6 x 18,000<br />
∴Input tax not allowable = 3,000<br />
=====<br />
This Rs. 3,000/- will be disallowed for that taxable activity.<br />
The registered person should<br />
Either<br />
• deduct full input tax on the purchase (120,000/-) plus input tax on <strong>to</strong>tal (ie<br />
business + private) running expenditure, in cage 5 of the return and<br />
• add back the disallowable input tax 36,000 + 3,000 = 39,000 in cage 7 of the<br />
return<br />
or<br />
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• claim (deduct) only the allowable portion in cage 5<br />
ie (84,000 + input tax attributable <strong>to</strong> business running expenditure = 84,000 +<br />
1 X 70 x 60,000 = 91,000)<br />
6 100<br />
(Some countries make an adjustment of output tax as well with regard <strong>to</strong> private use i.e<br />
<strong>to</strong>tal value of private use spent by the Company = 18,000. Treating this is a benefit or a<br />
supply made <strong>to</strong> the person who made use of the company vehicle the Company is called<br />
upon <strong>to</strong> pay 18,000 @ 20% = 3,600 as output tax. We do not make such an adjustment)<br />
(7) In the above example if the van is going <strong>to</strong> be used by an executive of the<br />
organization 30% of the time what is the <strong>VAT</strong> implication. (70% transport work)<br />
• <strong>VAT</strong> implication is the same as above.<br />
• Input tax on purchase :<br />
Amount allowable = 84,000<br />
• Input tax on private running expenses :<br />
Amount not allowable = 3,000<br />
(8) In the same example (No.6) if the registered person will be terminating the<br />
mobile business one year later on 30.09.2003 and if the market value of the Van<br />
on that day will be 300,000/- what will be the <strong>VAT</strong> implication?.<br />
• At the time of termination the value of the remaining assets of<br />
the taxable activity = 300,000/-<br />
This is a deemed supply - Sec.16(5)<br />
* <strong>Value</strong> of the deemed supply = 300,000/-<br />
Output tax payable @ 20% = 60,000/-<br />
(Although 30% was used for private purposes full value of disposal is liable <strong>to</strong> <strong>VAT</strong>)<br />
(9) In the example No. 6 if the van is taken completely for private purposes (i.e 30%<br />
is converted <strong>to</strong> 100%) What is the adjustment?.<br />
Adjustment is the same as above. An asset in the business balance sheet is<br />
transferred for private use of the owner.<br />
<strong>Value</strong> of supply for private use = Market <strong>Value</strong> – Section 5(5)(iv)<br />
= 300,000/-<br />
<strong>VAT</strong> payable = 300,000 @ 20%<br />
= 60,000/-<br />
(In this type of cases the extent of private use can be estimated on the basis of<br />
the distance travelled for private use and business use. If the private use is<br />
commenced a few years after the purchase a reasonable proportion of the input<br />
tax on purchase will be disallowed depending on the life time of the asset. If the<br />
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life time is six years and the private use was commenced two years after the date<br />
of purchase the amount disallowable (i.e <strong>to</strong> be added back) in the 3 rd year will be<br />
120,000 x 4 x 30 = 56,000/-)<br />
6 100<br />
(10) In the above example the situation will be different if the asset is used 70% in a<br />
taxable activity and 30% in an exempt activity carried on by the same registered<br />
person and the van is transferred completely <strong>to</strong> the exempt activity, the output<br />
tax adjustment will be as follows.<br />
(i) Adjustment on input tax relating <strong>to</strong> purchase = same<br />
(ii) Adjustment on input tax relating <strong>to</strong> usage = same<br />
(iii) Adjustment on output tax relating <strong>to</strong> disposal :- as follows.<br />
• If the van is transferred <strong>to</strong>tally for the exempt supply (market value = 300,000/-)<br />
The value of supply of asset from<br />
taxable activity <strong>to</strong> exempt activity = 300,000 x 70<br />
100<br />
= 210,000/-<br />
Output tax payable = 210,000 x 20<br />
100<br />
= 42,000/-<br />
(11) A Company (registered person) provides fringe benefits <strong>to</strong> an executive officer<br />
during tax period ended on 30.09.2002 as follows:<br />
Overseas travel - 75,000<br />
Medical benefits - 5,000<br />
Free transport - 6,000<br />
Other benefits - 4,000<br />
90,000<br />
What is the output tax payable by the company?<br />
A. Overseas travel is a zero-rated supply (Vide Chapter 25) . Medical benefits and<br />
official transport are exempt supplies (Vide Chapter 10). Therefore only the<br />
other supplies amounting <strong>to</strong> Rs.4,000/- is liable at 20%. The company should<br />
pay 800/- as output tax. The company is also not entitled any input credit that<br />
can be attributed <strong>to</strong> exempt supplies (Medical & transport)<br />
(12) A Registered person has a jackpot machine at his hotel. He cleared the<br />
machine on 30.09.2002 and he banked and the money on 01.10.2002. Amount<br />
in the machine was Rs.16,800/- What is the <strong>VAT</strong> implication?<br />
• This is a taxable supply. Time of supply is 30.09.2002. Therefore <strong>VAT</strong> should<br />
be paid for the taxable period ended 30.09.2002.<br />
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• “<strong>Value</strong> of Supply” has <strong>to</strong> be ascertained by using the tax fraction because the<br />
gross collection is treated as including <strong>VAT</strong>.<br />
Thus <strong>VAT</strong> inclusive consideration = 16,800<br />
<strong>VAT</strong> = 1/6 x 16,800<br />
= 2,800<br />
∴ <strong>Value</strong> of supply = 14,000<br />
• The registered person should declare this amount as output tax in his <strong>VAT</strong> return<br />
for the taxable period ended 30.09.2002.<br />
• The same treatment is applicable <strong>to</strong> other coin operated machines.<br />
(13) A sports club which is a registered person runs a raffle. The tickets were sold<br />
during GST period. The raffle was drawn on 30.09.2002. The results were<br />
published on 07.10.2002. The <strong>to</strong>tal collection amounted <strong>to</strong> Rs.750,000/- and the<br />
cost of the prizes amounted <strong>to</strong> Rs.350,000/- What is the <strong>VAT</strong> implication?<br />
• This is a taxable supply. Time of supply is 30.09.2002. Therefore <strong>VAT</strong> should<br />
be paid for the period ended 30.09.2002.<br />
• <strong>Value</strong> of supply = 750,000 – 350,000 = 300,000/-<br />
• <strong>VAT</strong> payable = 1/6 x 300,000 = 50,000/-<br />
• The reason for using the tax fraction is that the collections are treated as <strong>VAT</strong><br />
inclusive.<br />
(14) A registered person dealing in computers and accessories offered a part<br />
exchange ( a trade off) of a computer <strong>to</strong> a cus<strong>to</strong>mer. <strong>Value</strong> of the new computer<br />
is Rs.125,000/- excluding <strong>VAT</strong>. The market value of the old Computer (excluding<br />
<strong>VAT</strong>) is Rs.30,000/- Cus<strong>to</strong>mer pays the balance 95,000/- <strong>to</strong> the dealer<br />
(Computers are liable <strong>to</strong> <strong>VAT</strong> at 10%.)<br />
* <strong>Value</strong> of supply by the dealer = 125,000<br />
<strong>VAT</strong> at 10% = 12,500/-<br />
Cus<strong>to</strong>mer should pay 12,500/- as <strong>VAT</strong> <strong>to</strong> the dealer in addition <strong>to</strong> 95,000/-<br />
• Dealer should declare this 12,500/- as output tax.<br />
• In this case if the Cus<strong>to</strong>mer is also a registered person then he should charge<br />
30,000/- @ 10% = 3,000/- as <strong>VAT</strong> <strong>to</strong> the dealer. Cus<strong>to</strong>mer should declare this<br />
amount as his output tax and 12,500/- will be his input tax. Rs.3,000/- will be the<br />
input tax in the hands of the dealer.<br />
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(15) A contrac<strong>to</strong>r who is a registered person also has given out some houses on<br />
rent. He uses some timber which he has purchased for his contract works, for<br />
the purpose of some urgent repairs needed for the houses given on rent. The<br />
market value of the timber used is 20,000/- What is the <strong>VAT</strong> implication?<br />
• Renting of residential houses being an exempt activity, the using of timber in that<br />
activity becomes a deemed supply from the taxable activity <strong>to</strong> the exempt<br />
activity.<br />
<strong>Value</strong> of supply = 20,000<br />
<strong>VAT</strong> payable = 20,000 x 20%<br />
= 4,000/-<br />
• The contrac<strong>to</strong>r should declare this amount as his output tax.<br />
(16) Mr. B, a registered person is an insurance and transport agent. He purchases a<br />
Van <strong>to</strong> be used, for both transport business and private purposes. He has<br />
ascertained that the business (transport)use of the vehicle <strong>to</strong> be 70% and private<br />
use and insurance travelling <strong>to</strong> be 30%. Van was purchased from another<br />
registered person, an importer on 01.09.2002, for a <strong>to</strong>tal consideration of<br />
Rs.720,000/- including <strong>VAT</strong> (i.e value = 600,000 and <strong>VAT</strong> = 120,000). During<br />
the taxable period ended on 30.09.2002 his insurance income (commission)<br />
transport income and van running expenses are as follows.:-<br />
Income<br />
Life insurance commission = 300,000<br />
Mo<strong>to</strong>r & other insurance commission = 600,000<br />
900,000<br />
Transport income = 500,000<br />
(All excluding <strong>VAT</strong>) 1,400,000<br />
Expenses<br />
<strong>Value</strong><br />
<strong>VAT</strong><br />
Mo<strong>to</strong>r insurance 18,000 3,600<br />
Fuel (Petrol) 15,000 -<br />
Spare Parts 10,000 2,000<br />
Repairs 5,000 -<br />
48,000 5,600<br />
What is the <strong>VAT</strong> implication ?<br />
• B should charge <strong>VAT</strong> <strong>to</strong> the insurance company on the commission (Life<br />
insurance commission is also liable <strong>to</strong> <strong>VAT</strong> although life insurance premium is<br />
exempted).<br />
65
<strong>VAT</strong> chargeable = 900,000 x 20%<br />
= 180,000/-<br />
• B should also charge <strong>VAT</strong> on transport charges = 500,000 X 20%<br />
= 100,000/-<br />
• B should declare these amounts as his output tax in his <strong>VAT</strong> return for the<br />
taxable period ended 30.09.2002.<br />
• B’s <strong>VAT</strong> return, value of supply = 1,400,000<br />
Output tax (<strong>VAT</strong>) 180,000 + 100,000 = 280,000<br />
• Insurance company should pay 180,000/- in addition <strong>to</strong> 900,000/- <strong>to</strong> B and claim<br />
that amount as input tax in its <strong>VAT</strong> return for the same taxable period. Persons<br />
who hired his van should pay Rs. 100,000/- as <strong>VAT</strong> in addition <strong>to</strong> transport<br />
charges of 500,000<br />
• Input tax on purchase<br />
Input tax paid on the purchase of van = 120,000/-<br />
Amount attributable <strong>to</strong> business(transport)use = 120,000 @ 70%<br />
∴ Input tax allowable = 84,000/-<br />
• Input tax on expenses<br />
Total <strong>VAT</strong> paid on running expenses = 5,600/-<br />
Amount attributable <strong>to</strong> business use = 5,600 x 70<br />
100<br />
= 3,920/-<br />
Total input tax that can be claimed by B for = 84,000 + 3,920<br />
the taxable period ended on30.09.2002<br />
∴ Input tax allowable = 87,920/-<br />
* If there are no other transactions the amount payable <strong>to</strong> government.<br />
= Output tax-Input tax<br />
= 280,000 – 87,920<br />
= 192,080/-<br />
N.B<br />
If the vehicle was used only for insurance business then it becomes a travelling vehicle<br />
and no input tax is due.<br />
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10.1 Exemption from payment of <strong>VAT</strong><br />
Chapter – 10<br />
Exemptions<br />
• Section 8 of the Act exempts certain “supplies” of goods and services (including<br />
certain imports) from <strong>VAT</strong>. The exempt “supplies” are enumerated in the First<br />
Schedule <strong>to</strong> the Act.<br />
• What is exempted is the “supply” (including imports) and not the persons (ie.<br />
individuals and organizations) Thus irrespective of the person importing<br />
goods or the person receiving the “supply”, if the “supply” is exempted then the<br />
“receiver” of the supply, (or the importer) is not required <strong>to</strong> pay <strong>VAT</strong> on such<br />
supply/import. The only instance where individuals and organizations are<br />
exempted from <strong>VAT</strong> is the exemption of Diplomatic Missions and privileged<br />
individuals and organizations qualified under the Diplomatic Privillages Act NO. 9<br />
of 1996. There <strong>to</strong>o the exemption is limited <strong>to</strong> certain supplies and certain<br />
imports as identified by the C.G.I.R (vide Chapter 20).<br />
• Thus all individuals and organizations whether they are Ministries, Departments<br />
Non profit making organizations, Religious Institution etc., other than those<br />
privileged individuals and organizations, are required <strong>to</strong> pay <strong>VAT</strong> when they<br />
import goods and when they receive “supplies” of goods and services from<br />
Registered Persons, if the “import” or the “supply” is not exempted.<br />
10.2 Exemption from charging <strong>VAT</strong><br />
The Act does not provide any exemption in this regard. If the value of the taxable<br />
supplies made by any person exceeds the registrable threshold then such person<br />
(whether an individual or an organization) should register for <strong>VAT</strong> and charge <strong>VAT</strong> on the<br />
taxable supplies made by such person. The status of the individual or the nature of the<br />
organization is irrelevant.<br />
10.3 Imports (Exemption)<br />
• Out of the goods enumerated in the H.S. Code classification the Cus<strong>to</strong>ms has<br />
identified the <strong>VAT</strong> exempt goods in consultation with Inland Revenue. They are<br />
clearly indicated in that <strong>VAT</strong> <strong>Guide</strong> & PRO – 03/2002 dated 01.08.2002.<br />
67
• The Direc<strong>to</strong>r General of Cus<strong>to</strong>ms and the CGIR have no authority <strong>to</strong> exempt<br />
other goods, categorised under other H.S. Codes, on the basis of<br />
recommendations made by other Ministries/Authorities. There is provision under<br />
the Cus<strong>to</strong>ms Ordinance <strong>to</strong> exempt certain goods from Cus<strong>to</strong>ms Duty on the basis<br />
of such recommendations, but the <strong>VAT</strong> Act No. 14 of 2002 does not permit such<br />
an action. However as stated in para 5.1.2 there may be certain<br />
inaccuracies/inadequacies in the H.S. classification and if it becomes necessary<br />
<strong>to</strong> identify a certain imported item, recommendations may be obtained form<br />
appropriate authorities for the purpose of identification. For example raw<br />
materials used in pharmaceutical, Ayurvedic and other preparations are exempt<br />
from <strong>VAT</strong> but in order <strong>to</strong> identify these raw materials recommendations from<br />
Health Authorities are obtained. Similarly medical and surgical instruments, their<br />
accessories and labora<strong>to</strong>ry reagents are exempt. But the individual names of<br />
some of these items may not appear at all in the H.S. <strong>Guide</strong> and some may<br />
appear under inappropriate headings. In such situations if the CGIR is satisfied,<br />
on the basis of such recommendations or on the basis of materials produced<br />
before him, that the item imported is a medical or surgical instrument or an<br />
accessory or a labora<strong>to</strong>ry reagent as the case may be then exemption will be<br />
granted. But, as stated earlier in para 5.1.2 such recommendations will be<br />
solely for the purpose of identifying the goods only. For example labora<strong>to</strong>ry<br />
equipments are not specifically exempted in the <strong>VAT</strong> Act. Thus unless such an<br />
equipment can also be described as a medical or surgical instrument, no<br />
recommendations will be entertained <strong>to</strong> exempt it simply because it is used in<br />
Hospitals. Further simply because labora<strong>to</strong>ry reagents are exempted labora<strong>to</strong>ry<br />
equipments cannot be exempted, as it is not provided in the <strong>VAT</strong> Act.<br />
• Minister of Finance can exempt from <strong>VAT</strong> on the import of certain goods, by<br />
approved organizations if the goods are received as gifts or the supply is directly<br />
funded by foreign organizations for the relief of distress caused by natural<br />
disasters etc. (Item xvi of Schedule 1)<br />
• Import of personal items and samples worth Rs. 10,000/- or less in relation <strong>to</strong><br />
business by parcel post or courier is also exempt from <strong>VAT</strong>. This is in addition <strong>to</strong><br />
the <strong>VAT</strong> Exemption on personal goods which are qualified under Passenger<br />
Baggage (exemption) Regulations for Cus<strong>to</strong>ms Duty purposes.(Items xxxii and<br />
xv)<br />
10.4 Imports – Exemption of BOI Undertakings – Item xx<br />
i. Undertaking approved after 01.04.1998<br />
Exemption is available on<br />
68
• prescribed project related articles<br />
• Only if they make exempt supplies after the completion of the project.<br />
• Until the completion of the project or till 31.07.2004 whichever is earlier.<br />
ii. All undertakings approved prior <strong>to</strong> 16.05.1996 and undertakings with<br />
project cost exceeding Rs. 500 Million and approved prior <strong>to</strong> 01.04.1998 -<br />
are also still entitled <strong>to</strong> the exemption from <strong>VAT</strong> on the import of project related<br />
articles during the project implementation period or until the completion of the<br />
project whichever is earlier if such undertakings have not yet reached these<br />
dates.<br />
10.5 Following clarifications may be noted with regard <strong>to</strong> exemptions provided in the first<br />
schedule.<br />
10.5.1 Unprocessed Agricultural Produce – item (i)(a)<br />
• Live trees, and other plants, roots, branches, leaves, flowers, tubes, seeds, fruits<br />
and nuts of trees and other plants in natural form not otherwise processed.<br />
• Coconut shells and pairings can be considered as unprocessed for the purpose<br />
of exemption but charcoal is not.<br />
• Vegetables, lac, gums, resins and other vegetable saps and extracts.<br />
• Straws, husks, shells, skins of trees and other plants in raw form not chemically<br />
treated or otherwise processed; other than plants in natural form.<br />
• Any kind of semi processed rubber.<br />
10.5.2 Unprocessed Horticultural Produce – Item (i)(b)<br />
Live trees and plants of a garden, branches, foliage, roots, flowers, nuts of trees<br />
and plants of a garden.<br />
10.5.3 Unprocessed fishing products item (i)(d)<br />
• Fish & Prawns – Live, chilled or frozen<br />
• Skin, shells, bones and other parts<br />
• (Prawns include shrimps, crabs and lobsters)<br />
10.5.4 Unprocessed Timber products – item (i)(e)<br />
Fuel wood, wood in logs, poles, sticks, particles, billets, piles, stakes or similar<br />
form in rough but not chemically treated /or not suitable for manufacture of an<br />
article.<br />
10.5.5 Bread – item (iii)<br />
Any bread product is exempted but stuffed or filled bread and buns are not.<br />
Serving bread in a hotel/restaurant is also not exempted.<br />
69
10.5.6 Milk – item (iv)<br />
• Liquid milk not made out of powdered milk or any grain is exempted. This<br />
includes fresh milk, skimmed milk including sweetened or flavored but not vitamin<br />
enriched, Condensed milk but excluding any other products made out of milk<br />
such as butter, margarine, yogurt, cheese, ice-cream etc.<br />
• Infant powdered milk is exempted. This includes infants milk foods, vitamin<br />
enriched infants milk formulae.<br />
10.5.7 Supply of Educational Services item (vi)<br />
For the definition of “educational establishment”. Please see the Rulings –<br />
Chapter 24 – Para 5 & Para 18<br />
10.5.8. Books – item (vii)<br />
Books include, loose leaf, fully printed books, Telephone Direc<strong>to</strong>ries, Annual<br />
Reports & Maps. Writing pads and other media of data s<strong>to</strong>rage such as<br />
cassettes, diskettes, microfilms are not. Magazines & Journals are excluded.<br />
10.5.9 Financial Services – Item (xi)<br />
(a) Exchange of Currency<br />
* Any fee or commission charged in consideration of exchange of currency<br />
will be exempted. Similarly any gains arising from exchange of currency<br />
will be exempted if the exchange is done in the course of a “financial<br />
service”.<br />
* “Currency” means any bank note or other currency of any country, other<br />
than when used as a collec<strong>to</strong>r’s peice, investment article, item of<br />
numismatic interest, or otherwise than as a medium of exchange.<br />
(b)<br />
The issue, allotment or transfer of ownership, of any Note, order for<br />
payment, cheque or letter of credit is exempt<br />
Any fee or commission charged for these services will be exempted.<br />
Issue means the creation of the relevant document. “Payment and<br />
collection” means the receipt of and presentation by a banker in the<br />
process of collection of proceeds covered by the document. Payment for<br />
travelers cheques and postal money orders are also covered by this<br />
70
provision. Au<strong>to</strong>matic payments from accounts, au<strong>to</strong>matic teller machine<br />
transactions, electronic fund transfers etc. <strong>to</strong>o are covered.<br />
Transfer of ownership will cover any transfer.<br />
(c)<br />
The issue, allotment, transfer of ownership, drawing, acceptance or<br />
endorsement of any debt security, being any interest in or right <strong>to</strong><br />
be paid money is exempt.<br />
Debt securities include deposits with banks and finance companies and<br />
other financial institutions, transferable certificates of unsecured notes,<br />
promissionary notes, convertible notes, bills of exchange, mortgages and<br />
contribu<strong>to</strong>ry mortgages, debts, government s<strong>to</strong>cks, treasury bills etc.<br />
(d)<br />
The issue, allotment and transfer of ownership of any equity<br />
security, participa<strong>to</strong>ry security is exempt.<br />
Equity security includes company shares, share options and rights<br />
“Participa<strong>to</strong>ry Security” means that of an investment jointly undertaken<br />
by more than 5 people or managed by a professional manager Eg. Unit<br />
Trusts, Common Funds.<br />
The activities of the s<strong>to</strong>ck exchange are covered under this in relation <strong>to</strong><br />
transfer of ownership of quoted shares. The activities of unit trusts and<br />
fund managers of unit trusts are also covered<br />
(e)<br />
(f)<br />
(g)<br />
(h)<br />
S<strong>to</strong>ck Brokers.<br />
Although the issue allotment, transfer of an equity security or a<br />
participa<strong>to</strong>ry security is exempt form <strong>VAT</strong> the services rendered by the<br />
agents of such broking firms are not.<br />
Underwriting<br />
Fees charged by the underwriter is exempt.<br />
Provision of loans, advances and credit is exempted<br />
Any type of a guarantee is not considered under this. Interest on loans<br />
are exempted but penal interest etc. charged on lease rentals is not<br />
exempted.<br />
Hire Purchase<br />
The finance charges in a hire purchases agreement were exempted<br />
under GST but in the <strong>VAT</strong> Act it is restricted <strong>to</strong> finance charges in<br />
respect of second hand goods. Please see comments in para 17.2(ii)<br />
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(i) Insurance – xi(i)<br />
• Only the supply of Life Insurance, Agrahara Insurance and Crop<br />
Insurance are exempt. The premiums collected on other insurances are<br />
liable <strong>to</strong> <strong>VAT</strong>. When life insurance is combined with other insurances<br />
like medical/health the exemption should be given proportionately.<br />
• Re-insurance made locally is also liable <strong>to</strong> <strong>VAT</strong>.<br />
• Re-insurance outside Sri Lanka is not liable.<br />
• Insurance Commissions including life insurance are all liable<br />
• Insurance premiums on international travel insurance policies and<br />
marine insurance polices in relation <strong>to</strong> destinations outside Sri Lanka<br />
from other destinations outside Sri Lanka are liable <strong>to</strong> <strong>VAT</strong> at 0% if the<br />
payment is received in foreign currency.<br />
• Insurance compensation is liable <strong>to</strong> <strong>VAT</strong> as an indemnity as per<br />
definition of supply of service and as explained in para 3.3.<br />
N.B. Although the financial services enumerated above are exempted any fee<br />
charged by a broker or an adviser in arranging such financial service and fee<br />
charged for giving of advice in relation <strong>to</strong> such services are not exempted. Eg.<br />
Fee charged by an accountant in advising the best form of investment in relation<br />
<strong>to</strong> exempt financial services<br />
10.5.10 Diplomatic Missions (item xii)<br />
Please see Chapter 20<br />
10.5.11 Duty Free shops – Item (xiii)<br />
The exemption is applicable only <strong>to</strong> the import and sale of goods for foreign<br />
currency. Sale of locally purchased goods even for foreign currency is not<br />
exempt.<br />
10.5.12 Postage Stamps<br />
Only the stamps are exempted. Envelopes are not exempted. Thus in the case<br />
of supply or import of stamped envelopes the cost of envelope is not covered.<br />
10.5.13. Public Passenger Transport – item (xvii)<br />
• Supply of public passenger transport (land) services other than <strong>to</strong>urist transport,<br />
excursion <strong>to</strong>urs, taxi services, air transport and mo<strong>to</strong>r transport,<br />
AND<br />
72
• Payment of lease rental on mo<strong>to</strong>r coaches used for public passenger transport<br />
services with seating capacity 28 or more passenger seats are exempt.<br />
• Please note, that supply or import of a bus for public passenger transport<br />
service is not exempted even if the seating capacity exceeds 28 seats. Only the<br />
transport service is exempted, Supply of leasing facility is exempted depending<br />
on the seating capacity.<br />
10.5.14 Provision of Services in Sri Lanka <strong>to</strong> be consumed outside Sri Lanka(Item<br />
xxii)<br />
i. The consumption of services outside Sri Lanka while the services are<br />
performed in Sri Lanka can be observed in many different situations.<br />
ii. Computer software may be developed in Sri Lanka <strong>to</strong> be used outside Sri<br />
Lanka.<br />
iii. Consultancy services, client support services etc may be provided in Sri<br />
Lanka through internet <strong>to</strong> be consumed outside Sri Lanka.<br />
iv. Service may be performed in Sri Lanka relating <strong>to</strong> use of intellectual property<br />
(such as patents, copy rights) outside Sri Lanka<br />
v. Services provided in Sri Lanka relating <strong>to</strong> property outside Sri Lanka is<br />
treated as consumed outside Sri Lanka.<br />
vi. In the above mentioned situations the contracts <strong>to</strong> supply the service may<br />
be concluded in Sri Lanka but under the <strong>VAT</strong> principles the services are<br />
treated as performed in Sri Lanka but utilized outside Sri Lanka. In the same<br />
vein when services are performed in Sri Lanka in connection with property in<br />
Sri Lanka or business in Sri Lanka owned by or carried on by a person outside<br />
Sri Lanka such services are treated as consumed in Sri Lanka although the<br />
decisions may be taken <strong>to</strong> accept or reject the services at a place<br />
outside Sri Lanka.<br />
vi. Thus if any fees is paid for the introduction of a prospective cus<strong>to</strong>mer etc<br />
<strong>to</strong> a foreign principle or for preparing a market research report and if the<br />
matter ends there then such payments can be treated as payments for<br />
services performed in Sri Lanka and consumed outside Sri Lanka because<br />
that is paid before the commencement of any business in Sri Lanka by that<br />
foreign principle. But if the foreign principle commences business in Sri<br />
Lanka with such cus<strong>to</strong>mer and services are continued <strong>to</strong> be supplied in<br />
respect of that business as well, such as canvassing for orders etc. then the<br />
<strong>to</strong>tal payment received will be treated as a payment for a service performed<br />
73
in Sri Lanka and consumed in Sri Lanka although there may be an element<br />
of discretion involved <strong>to</strong> accept or reject the service at the principle place of<br />
business which is outside Sri Lanka. Thus exemption or zero – rating is not<br />
applicable <strong>to</strong> such services.<br />
vii. If the payment is made in rupees for services consumed outside Sri Lanka as<br />
explained above then such payments will be exempted from <strong>VAT</strong>. (if the<br />
payment is made in foreign currency through a bank then it is zero-rated-<br />
Vide para 25.6)<br />
viii. In the case of services performed in Sri Lanka, in relation <strong>to</strong> a business in Sri<br />
Lanka carried on by a person outside Sri Lanka, the method of calculation of<br />
the payment due may be a useful guideline <strong>to</strong> decide where the services<br />
were consumed or utilized. If the payment due is calculated on the basis of<br />
the volume of business transacted in Sri Lanka then the services performed<br />
by the agent in Sri Lanka is treated as having consumed in Sri Lanka. Any<br />
“Commission” paid as the term implies relates <strong>to</strong> volume of business or the<br />
business activity that is carried on in Sri Lanka and is liable <strong>to</strong> <strong>VAT</strong> at 20%.<br />
ix. Difficulty may arise in a situation where a person in Sri Lanka is performing<br />
services in Sri Lanka <strong>to</strong> a foreign principle in relation <strong>to</strong> recruitment of<br />
personnel for jobs abroad. If a person is supplying, say, nurses or students<br />
<strong>to</strong> a foreign hospital or a foreign university via-e-mail or internet such<br />
services can be treated as consumed abroad. However if a representative is<br />
available in Sri Lanka for the purpose of recruitment then such services are<br />
liable <strong>to</strong> <strong>VAT</strong> at 20% because (a) the services are performed in Sri Lanka<br />
and (b) the services are utilized in Sri Lanka as both the service provider and<br />
the recipient are in Sri Lanka at the time of supply.<br />
10.5.15.Residential Accommodation (Item xxiii)<br />
For the purpose of exemption residential accommodation includes houses, flats,<br />
apartments, or quarters designed solely for “residential purposes. Hotels, Guest<br />
Houses, and other places meant for short term stay are not included.<br />
Commercial premises are not exempted even if they are used sometimes for<br />
residential purposes.<br />
10.5.16 Health Care Services – Item xxiv)<br />
• Exemption is available only when such services are<br />
i. provided by medical institutions or<br />
ii. provided by professionally qualified persons providing such care.<br />
74
• Thus, <strong>to</strong>urist hotels providing such care <strong>to</strong> guests are not medical institutions<br />
and therefore do not fall under this exemption unless their Health Care Centres<br />
are entities separate form the hotels and registered separately as medical<br />
institutions.<br />
• Please see Rulings in Chapter 24 <strong>to</strong> see what is meant by Health Care<br />
Services, what is meant by Medial Institution and, what is meant by<br />
professionally qualified persons providing health care.<br />
• In the case of professionally qualified persons providing health care services the<br />
exemption can be enjoyed by the qualified person and not by the institution<br />
which employs such a person.<br />
10.5.17 Supply of pharmaceuticals – item(xxxiii)<br />
Any product falls within Chapter 30, H.S Heading 29.36 of Cus<strong>to</strong>ms H.S. Code<br />
classification. Cosmetic products are not exempted.<br />
10.5.18 Ayurveda, Siddha, Unani and Homeapathy, Products – item (xxxiv)<br />
• This means medicaments, products and other preparations produced or made<br />
under the systems of Siddha, Unani, Deshiya Chikitsa and other systems of<br />
medicine and surgery indigenous <strong>to</strong> Asian countries as prescribed in Gazette<br />
Extra Ordinary No.347/12 of 04.05.1985 published by the Principle Collec<strong>to</strong>r of<br />
Cus<strong>to</strong>ms and any other mixture, powder, compound or capsules as approved by<br />
the Ayurveda Sangetha Committee and Homeopathy products which are<br />
produced or made under the system of medicine established by Dr. Henneman.<br />
• The exemption is available only if the medical preparation has an end use<br />
confined <strong>to</strong> therapeutic or prophylactic effect and has <strong>to</strong> be purchased on<br />
physician’s prescription. The “Common areated medicated drinks” are not<br />
exempted. (The relevant certification or approval should be indicated in the<br />
lables)<br />
10.5.19 Agricultural Trac<strong>to</strong>rs – item (xxxv)<br />
• Trac<strong>to</strong>rs(four wheel or two wheel) used exclusively for agricultural/<br />
horticultural/farming activities.<br />
• The accessories such as ploughs, Disc Harrows, seeders, planters and<br />
transplanters, manure spreades and fertilizer distribu<strong>to</strong>rs and related machinery<br />
for trac<strong>to</strong>r including harrows, scarifier, cultiva<strong>to</strong>r weeders and Hoes but not the<br />
trailers<br />
75
Chapter – 11<br />
Refunds<br />
11.1 Unlike in refunds in the case of income tax and other taxes refund of input tax in <strong>Value</strong><br />
<strong>Added</strong> <strong>Tax</strong> constitute a very predominant feature of the tax, in any country. Refunds<br />
may arise in two ways namely<br />
• Refunds arising from input tax being in excess of output tax during a particular<br />
taxable period.<br />
• Refunds arising from overpayment due <strong>to</strong> inadvertancy, ignorance settlement of<br />
appeal etc.<br />
11.2 Refunds arising from excess input tax<br />
Excess input tax arises, at the end of a particular taxable period will be refunded at the<br />
end of that taxable period except in the case of importers with activity code number 6700<br />
(Vide para 4.13). This is a deviation from the former GST procedure where the excess<br />
input tax was not immediately refunded . In the case of importers with activity code 6700,<br />
i.e who re-sell the goods imported without subjecting them <strong>to</strong> any processing can carry<br />
forward the excess input tax <strong>to</strong> the next taxable period and any excess from that taxable<br />
period <strong>to</strong> the next succeeding period and so on.<br />
11.3. When is refund made ?<br />
Within 2 months from the last day of the taxable period.<br />
Thus<br />
• Monthly return cases – monthly refunds<br />
• Quarterly; return cases – quarterly refunds<br />
11.4 Refund of Excess input tax – Special Cases – Section 22(7)<br />
Input tax incurred before commencement of commercial production<br />
i. If a person who has commenced a new enterprise proves <strong>to</strong> the satisfaction of<br />
the CGIR that he will undertake <strong>to</strong> commence commercial operations and <strong>to</strong><br />
make taxable supplies within 30 months of the date of commencement.<br />
76
* Credit for input tax will be given during the project implementation period<br />
in spite of the fact that there is no output tax during that period. The<br />
output tax = 0 and therefore the input tax will be refunded.<br />
* Such persons are required <strong>to</strong> furnish monthly returns and monthly<br />
refunds will be made <strong>to</strong> them.<br />
ii.<br />
Even BOI enterprises are required <strong>to</strong> get this approval from C.G.I.R in order <strong>to</strong><br />
get this facility.<br />
iii<br />
If such new enterprise is importing project related goods (i.e goods required<br />
before the commencement of commercial production) then they are also entitled<br />
<strong>to</strong> deferment facility at the Cus<strong>to</strong>ms as explained in para 6.2.1. In these cases<br />
the refund due <strong>to</strong> them is issued <strong>to</strong> the Cus<strong>to</strong>ms after verifying from the Cus-<br />
Decs, the <strong>VAT</strong> payable <strong>to</strong> Cus<strong>to</strong>ms. They are therefore not required <strong>to</strong> pay <strong>VAT</strong><br />
up front at the Cus<strong>to</strong>ms. But they should maintain <strong>VAT</strong> accounts and registers<br />
of import as explained in para 15.7<br />
iv<br />
CGIR can extend the period of 30 months if he is satisfied that commercial<br />
production cannot commence within that period.<br />
11.5 Refund of Excess input tax – Zero rated supplies<br />
• In the case of zero – rated supplies output tax = 0. Input tax will therefore have<br />
<strong>to</strong> be refunded.<br />
• If a person has more than 50% zero–rated supplies or if he has less than 50%<br />
zero-rated supplies but he is in the <strong>VAT</strong> deferment scheme then such person is<br />
required <strong>to</strong> file monthly returns and monthly refunds will be granted if entitled <strong>to</strong>.<br />
• If his zero-rated supplies is less than 50% of the <strong>to</strong>tal supplies then the monthly<br />
refund will be restricted <strong>to</strong> the <strong>VAT</strong> deferred, if any, at the Cus<strong>to</strong>ms or he will be<br />
treated as a quarterly taxpayer.<br />
• Once you are registered as a more than 50% case, i.e as an entity entitled <strong>to</strong><br />
monthly refund of input tax, the position will be reviewed once in six months <strong>to</strong><br />
check whether you continue <strong>to</strong> be in that category.<br />
11.6 Refunds of Excess input tax under G.S.T<br />
Excess input tax in GST returns will not be carried forward <strong>to</strong> <strong>VAT</strong> returns. They will be<br />
separately refunded except in the case of importers mentioned above.<br />
77
11.7 Set off of refunds against future tax<br />
The computer will generate as above, a separate refund for each taxable period, and<br />
therefore if a refund has <strong>to</strong> be set off against a future tax it can only be done after the<br />
return form is processed and the overpayment statement (Form <strong>VAT</strong> 26) is generated by<br />
the computer as the existing computer programmes are not geared <strong>to</strong> retain refunds for<br />
future set off. <strong>Tax</strong> payers are therefore advised not <strong>to</strong> set off past refunds in their returns.<br />
Any such claim maybe made separately on Form <strong>VAT</strong> 26 when it is received. It is<br />
generally issued after 14 days of furnishing the returns.<br />
11.8 Assessment of undue input tax claim<br />
If a refund is issued in excess of the amount due such excess refund can be re-assessed<br />
at any time irrespective of time bar.<br />
11.9 Refunds arising from over payments etc.<br />
• In the case of a refund arising on settlement or determination of an appeal the<br />
due date for the refund will be 90 days from the date of settlement with the<br />
Assessor or the date of determination by the C.G.I.R..<br />
• In other cases the due date will be 90 days from the date of claim.<br />
• Interest will be due on refunds made after the due date and any interest paid will<br />
be an income in the hands of the recipient for the purpose of income tax.<br />
11.10 Claims for refund of <strong>VAT</strong> charged, collected and remitted ot CGIR at the higher rate<br />
when the correct rate should have been the lower rate.<br />
In such situations refunds will be made only if the CGIR is satisfied that the claimant<br />
not be unduly enriched by such a refund.<br />
will<br />
The evidence required <strong>to</strong> satisfy the CGIR is that there should be a demand from another<br />
registered person who has obtained the supplies from the claimant at the higher rate<br />
<strong>to</strong>gether with a request <strong>to</strong> CGIR <strong>to</strong> adjust his input tax claim made in respect of such<br />
excess payment. If the claimant has charged and collected <strong>VAT</strong> at the higher rate<br />
inadvertently from ordinary consumers who are not registered persons such excess<br />
should be remitted <strong>to</strong> CGIR in the same way as <strong>VAT</strong> charged and collected illegally by a<br />
non-registered supplier.<br />
78
Chapter – 12<br />
Assessments<br />
12.1 Power <strong>to</strong> make assessments<br />
An assessor has the power <strong>to</strong> make assessment on a registered person,<br />
- who fails <strong>to</strong> furnish a return – Sec. 28(1)(a)<br />
- who fails <strong>to</strong> pay tax, after furnishing the return – Sec.28(1)(b)<br />
- who requests for alternations <strong>to</strong> the return submitted – Sec. 28(1)(c )<br />
- who fails <strong>to</strong> furnish a return but tax is paid which in the opinion of the<br />
assessor is less than the amount payable – Sec. 28(3)<br />
- who has obtained a refund or claimed input tax, in excess of the amount<br />
due - Sec. 22(8)<br />
- who has furnished a return but the assessor does not accept the return<br />
- Sec. 29<br />
• The Assessor shall assess the amount of tax, which such person, in the<br />
judgement of the Assessor, ought <strong>to</strong> have paid. The notice of assessment may<br />
relate <strong>to</strong> one or more taxable periods.<br />
• Where an assessor does not accept a return furnished by the registered person,<br />
he shall communicate in writing ‘why’ the return is not accepted. (Sec. 29)<br />
12.2 Power <strong>to</strong> make additional assessments<br />
• The assessor also has the power <strong>to</strong> make additional assessment when a<br />
registered person has for any taxable period furnishes a return but has paid tax<br />
an mount less than the proper amount. (Sec. 31).<br />
• The amount assessed is deemed <strong>to</strong> be tax in default and is liable <strong>to</strong> penalty from<br />
the date such tax ought <strong>to</strong> have been paid. Vide Para 5.9<br />
12.3 Time Bar – Sec. 33<br />
• Three year time bar is applicable in respect of assessment and additional<br />
assessments unless fraud is alleged.<br />
• To make an assessment three years is counted from the last day of the taxable<br />
period if a return has been duly furnished as per Section 21(I)<br />
79
• To make an additional assessment 3 years is counted from the date of the<br />
original assessment made as per Section 31 or made in the absence of a return.<br />
• Only a return furnished on or before the date specified in Section 21(I) may be<br />
treated as a return furnished under Section 21(I).<br />
12.4 Issuing Assessments on rejecting returns<br />
As stated above, where an assessor does not accept a return furnished by a Registered<br />
Person he is required <strong>to</strong> communicate <strong>to</strong> such person by letter sent through registered<br />
post “why” he is not accepting the return. This is a deviation from the corresponding<br />
provision in the Inland Revenue Act. (Section 115(3) of the Act No.28 of 1979 and<br />
Section 138(3) of the Act No.38 of 2000). The deviation is intentional. The Inland<br />
Revenue Act provides that the Assessor shall communicate……… his “reasons” for<br />
not accepting the return where as GST Act No.36 of 1998 and <strong>VAT</strong> Act No.14 of 2002<br />
provide that the Assessor shall communicate…..why he is not accepting the return.<br />
The word “reasons” has been omitted in both GST and <strong>VAT</strong> Acts. The cause for this is<br />
the recent trend in attempting <strong>to</strong> attribute a harsh or restrictive meaning <strong>to</strong> the word<br />
“reasons” in the Inland Revenue Act. At present a practice has been developed, at<br />
least as a matter of routine, <strong>to</strong> challenge the validity or the legality of every assessment.<br />
(on income tax) on the grounds that the reasons are inadequate in the sense that they<br />
are not in the nature of judicial reasoning. However, unlike under the Inland Revenue Act<br />
where the tax is paid out of taxpayers private profits, <strong>Value</strong> <strong>Added</strong> <strong>Tax</strong>, (as explained in<br />
Chapter 9), is a tax collected on behalf of the government by the Registered Person from<br />
the consumers. Therefore by the time a return is furnished the tax (<strong>VAT</strong>) is already<br />
collected. The registered persons are not required <strong>to</strong> give reasons <strong>to</strong> the consumers<br />
when <strong>VAT</strong> is added <strong>to</strong> the prices of Goods and Services which they supply <strong>to</strong> the<br />
consumers. That is a legal obligation imposed upon them. They cannot refrain from<br />
charging <strong>VAT</strong> <strong>to</strong> the consumers by applying their own interpretations <strong>to</strong> the law. In<br />
cases of doubt they should consult the department and charge <strong>VAT</strong> accordingly.<br />
Thus <strong>VAT</strong> should be collected on all taxable goods and services supplied by a registered<br />
person and the <strong>VAT</strong> so collected should be in the hands of the registered person by the<br />
time a return for that period is furnished by such person. Under the circumstances it was<br />
considered an impediment <strong>to</strong> the protection of <strong>revenue</strong>, if the assessments which are<br />
otherwise correct, are quashed (by courts), on a purely technical ground of formulating<br />
reasons in the letters of communication issued by the assessors when there is sufficient<br />
and adequate appellate procedure laid down in the Act, in order <strong>to</strong> contest an<br />
assessment, if dis-satisfied. As held by the Court of Appeal in 1984 in Gunaratne Vs.<br />
Jayawardena, the department is of the view that when rejecting a return giving an<br />
indication or a clue <strong>to</strong> the taxpayer as <strong>to</strong> where he has gone wrong in his return is<br />
80
sufficient communication of reasons. This is the most recent judgement on this issue.<br />
In these circumstances it was considered necessary <strong>to</strong> deviate from the more strict<br />
wording as appearing in the corresponding section of the Inland Revenue Act.<br />
This does not mean that the assessors should not exercise care in communicating why a<br />
return is rejected. The fact that most assessors, not being legal officers, may not be able<br />
<strong>to</strong> or may not find the time <strong>to</strong>, formulate reasons in a manner applicable <strong>to</strong> legal<br />
submissions, especially in a context where each one of them is required <strong>to</strong> handle an<br />
extremely large allocation (a few thousand files) is a sailent point <strong>to</strong> ponder. At times the<br />
reasons adduced in their letters of communications may be interpreted as conclusions<br />
rather than reasons. But the protection of government <strong>revenue</strong> as covered by these<br />
assessments, which are factually correct, is also of paramount importance. After all<br />
the purpose of the reasons is <strong>to</strong> enable an aggrieved party <strong>to</strong> formulate his grounds of<br />
appeal. In this scenario it was thought that if the assessments are correct on facts and<br />
law, leaving room in the legislation <strong>to</strong> annual assessments on a purely technical ground<br />
such as deficiency in the formulation of reasons by the assessor is not the proper thing<br />
because a genuine taxpayer who does not want <strong>to</strong> evade an issue can always get any<br />
doubts cleared if the (reasons) communication appear <strong>to</strong> be not clear or not adequate.<br />
However if a Registered Person is aggrieved by the assessment such person is not<br />
denied a fair hearing, under the rules of natural justice, which is a matter that succeeds<br />
the issue of an assessment (if aggrieved) and not a matter that preceeds the issue<br />
of an assessment. The Act provides a very clearly laid down procedure for the purpose<br />
of providing a fair hearing for an aggrieved party. While the procedural rules of natural<br />
justice have <strong>to</strong> be observed when the statuary provisions are silent on the procedure <strong>to</strong><br />
be adopted (and only when a taxpayers rights are affected by administrative action?) it<br />
must be emphasized that the <strong>VAT</strong> Act provides clearly the procedure <strong>to</strong> be adopted when<br />
an assessment is issued and when the assessee is aggrieved by the assessment.<br />
The view that the procedural rules of natural justice should be adhered <strong>to</strong> only when the<br />
taxpayers rights are affected by administrative action has also been considered . A<br />
taxpayers’ rights will be affected not when a charge sheet (i.e a notice of assessment) is<br />
issued but when and if the recovery proceedings are initiated without recourse <strong>to</strong> a<br />
hearing.<br />
Further, on the basis of a consensus reached at the GST review committee the<br />
assessors <strong>to</strong>o have been advised administratively <strong>to</strong> wait for one month as far as<br />
practicable, after the issue of the letter communicating why the return is rejected, so that<br />
81
a genuine taxpayer who does not wish <strong>to</strong> adopt delaying tactics can immediately come<br />
forward and properly present his case or obtain the necessary clarifications from the<br />
Assessor.<br />
12.5. Assessment on Partnerships<br />
Normally assessments are made on registered persons – Sec. 28. Although a<br />
partnership is recognized as a person for <strong>VAT</strong> purposes (Sec. 83) it is not a legal person<br />
<strong>to</strong> institute any legal proceedings for recovery of any tax in default. However Sec. 48(2)<br />
provides that it shall be lawful <strong>to</strong> take action against any partner as if he is responsible for<br />
such default unless he proves <strong>to</strong> the contrary. Thus an assessment on a partnership<br />
may be issued in the name of the precedent partner or any other partner.<br />
12.6 Assessments on Execu<strong>to</strong>rs<br />
Assessments/additional assessments in respect of periods prior <strong>to</strong> death of a deceased<br />
person can be made within 3 years from the last day of the taxable period in which death<br />
occurred – Sec. 54(1)(6).<br />
82
Chapter – 13<br />
Appeals<br />
Any appeal against an assessment, additional assessment or penalty must be made within 30<br />
days <strong>to</strong> the CGIR.<br />
• Hold over of tax in a special situation :<br />
* On appeal, CGIR may defer the due date of payment of tax:<br />
- if a request <strong>to</strong> that effect is made in writing, and<br />
- if it is proved that the <strong>VAT</strong> has not been charged by the<br />
appellant on the alleged supplies.<br />
* Pre requisites <strong>to</strong> entertain an appeal :<br />
In order <strong>to</strong> entertain an appeal against an assessment/additional assessment<br />
- tax payable on the basis of the return furnished by him and any penalty<br />
accrued up<strong>to</strong> the date of notice of assessment must be paid.<br />
- if the assessment/additional assessment is in the absence of a return<br />
the petition of appeal should accompany a return and proof of<br />
payment of tax and penalty thereon.<br />
- C.G.I.R. may consider an extension of time <strong>to</strong> pay in cases where<br />
appellant has suffered serious financial hardship.<br />
* Appeals against the assessments are settled in one of the following stages.<br />
The first step - Agreement with Assessor, failing<br />
The second step - Determination by CGIR, if not satisfied<br />
The third step - Appeal <strong>to</strong> the Board of Review, if not satisfied<br />
The final step - State a case <strong>to</strong> the Court of Appeal and then <strong>to</strong><br />
Supreme Court<br />
The procedure is the same as that under the Inland Revenue Act.<br />
Chapter – 14<br />
83
Penalties<br />
<strong>Tax</strong> payers should comply with the requirements imposed under the <strong>VAT</strong> Law. Failure <strong>to</strong> do so<br />
will result in the imposition of penalties by the CGIR or fines and terms of imprisonment by a<br />
Magistrate. Fines and penalties in respect of some of the offences are given below.<br />
Late Registration - fine not exceeding 25000 and/or term of<br />
imprisonment not exceeding 6 months by Magistrate<br />
Failure <strong>to</strong> file the return - Penalty not exceeding 50000/- by CGIR or<br />
Rs.25,000/- fine and or 6 months imprisonment by<br />
Magistrate. Sec. 21(10)<br />
Failure <strong>to</strong> pay tax on due<br />
Dates - 10% of unpaid tax plus 2% for each<br />
subsequent months up <strong>to</strong> 100% of the tax<br />
Incorrect return - Twice the amount of tax under paid plus<br />
Rs. 25000.<br />
Non compliance of the * Fine between Rs.25,000/and 250,000/-Sec.20(8)<br />
requirements <strong>to</strong> issue a tax * Should the offence continues after<br />
invoice<br />
conviction Rs,500/- per each day. Sec.20(8)<br />
Issue a tax invoice<br />
when not entitled <strong>to</strong> * Fine Rs.25,000/- and /or six months<br />
imprisonment – Sec. 67<br />
For non-displaying of registration * Penalty of Rs.50,000/- - Sec. 15(5)<br />
Certificate and non-displaying<br />
of exempt supplies<br />
Sec. 67 of the Act deals with other penal provisions.<br />
84
Chapter - 15<br />
Accounting Basis & Record Keeping<br />
15.1 Accounting<br />
• Invoice Basis<br />
Every registered person shall account for <strong>VAT</strong> on an invoice basis ie output tax<br />
must be declared in the taxable period in which an invoice is issued and input<br />
tax must be declared in the taxable period in which an invoice is received.<br />
• Cash Basis<br />
However any person engaged in a taxable activity where it is not possible <strong>to</strong><br />
collect payments quickly for the supplies made by him (eg. Contrac<strong>to</strong>rs) can<br />
obtain approval from the C.G.I.R under Section 23 <strong>to</strong> account for tax (<strong>VAT</strong>) on a<br />
cash basis Once the approval is obtained for cash basis reporting such person<br />
is required <strong>to</strong> declare his out put tax when the cash is received and input tax<br />
only when the payment is made.<br />
• All directions issued by the CGIR under Sec. 23 of the GST Act giving approval<br />
for cash basis accounting are valid for <strong>VAT</strong>.<br />
15.2 Keeping of Records<br />
• Registered persons are required <strong>to</strong> keep and maintain records in respect of the<br />
taxable activity carried on by them <strong>to</strong> enable the officers of the C.G.I.R <strong>to</strong><br />
ascertain the liability.<br />
• The form of the records <strong>to</strong> be maintained and the particulars <strong>to</strong> be set forth<br />
therein are as prescribed by gazette extra-ordinary 1024/8 of 21.04.1998 for GST<br />
purposes.<br />
• Records include books of accounts (whether in manual, mechanical or electrical<br />
format) recording receipts for payments or income or expenditure and include,<br />
all documents that are necessary <strong>to</strong> verify the entries in such books of accounts,<br />
details of any warehouses and s<strong>to</strong>ck of goods etc. as are enumerated in Section<br />
64(3) of the Act.<br />
85
15.3 Keeping of records regarding excluded supplies of buying and selling<br />
Retail and wholesale sales are not liable <strong>to</strong> <strong>VAT</strong> unless the registered person is<br />
specifically registered <strong>to</strong> collect <strong>VAT</strong> on such sales. But if a supplier is unable <strong>to</strong> satisfy<br />
the C.G.I.R as <strong>to</strong> the source from where the goods were acquired then such goods are<br />
liable <strong>to</strong> <strong>VAT</strong>. The evidence required with regard <strong>to</strong> the acquisition of goods <strong>to</strong> satisfy the<br />
C.G.I.R was published by a press notice on 07.07 2000. It is valid for <strong>VAT</strong> purposes as<br />
well.<br />
According <strong>to</strong> this press notice, if any person claims that his supplies are excluded from<br />
<strong>VAT</strong> for the reason that the supplies constitute local buying and selling only, then he<br />
should maintain following minimum registers & documents as evidence with regard <strong>to</strong><br />
acquisition of such goods in order <strong>to</strong> satisfy the C.G.I.R<br />
1. Register of goods acquired locally – (cash or credit)<br />
This register should contain the following details<br />
(a) Date of the transaction<br />
(b) Name and Address of the supplier (including the business Name)<br />
(c) Category of goods and quantity/volume<br />
(d) Whether imported goods or locally manufactured goods<br />
(e) Consideration and the mode of payment<br />
(f) Amount of GST paid, if any<br />
2. The relevant bills and tax invoices (chronologically arranged)<br />
When these details cannot be produced or incorrect details have been kept the<br />
relevant supplies will not be considered as excluded supplies (when the<br />
relevant supplies cannot treated as excluded supplies 1/6 of the <strong>to</strong>tal sales will<br />
be treated as <strong>VAT</strong> payable as output tax)<br />
However, the above requirements will not be applicable <strong>to</strong> goods exempted from<br />
the tax.<br />
15.4 Keeping of records regarding supplies made <strong>to</strong> Diplomatic Personnel<br />
Please see para 20.5<br />
15.5 Other Records<br />
• As stated in Chapter 21 a record must be maintained with regard <strong>to</strong> any GST tax<br />
declared in a <strong>VAT</strong> return as output tax or input tax as the case may be.<br />
86
15.6 <strong>VAT</strong> Account<br />
Every Registered person should keep a record of the summary of the output tax charged<br />
and input tax payable in respect of each taxable period. This is called a <strong>VAT</strong> Account.<br />
This should be prepared on the basis of the invoices issued and invoices received and<br />
not on the basis of actual payments.<br />
In case of cash basis tax payers they can provide a separate column <strong>to</strong> indicate the date<br />
of payment in the “input tax <strong>VAT</strong> Account” Register and date of receipt of cash in the<br />
“output tax <strong>VAT</strong> Account “ register. Similarly they can have additional columns <strong>to</strong> enable<br />
the other required details <strong>to</strong> be extracted such as input tax directly attributable <strong>to</strong><br />
exempt supplies etc. These registers should be available for inspection by the officers of<br />
the Department<br />
15.7 Register of Imports and Register of Exports<br />
Importers, especially those who are under deferred facility should maintain a Register of<br />
Imports and Register of Exports on a monthly basis in chronological order. A Register of<br />
Exports should be maintained where applicable.<br />
In the absence of an Output <strong>Tax</strong> - <strong>VAT</strong> ACCOUNT and Input <strong>Tax</strong><br />
– <strong>VAT</strong> ACCOUNT in relation <strong>to</strong> local supplies, Register of Imports<br />
in relation <strong>to</strong> imports made and a Register of Exports in relation <strong>to</strong><br />
Exports made during each month, the claims for input credit maybe<br />
subject <strong>to</strong> rejection.<br />
• The Register of Imports can have the Cus-Dec No., CIF value, <strong>VAT</strong> paid at the<br />
Cus<strong>to</strong>ms and the Date of payment, amount and date of <strong>VAT</strong> deferred and date of<br />
payment of deferred <strong>VAT</strong>..<br />
• The Register of Exports can have the Export Cus-Dec No., <strong>Value</strong> of Export,<br />
Invoice No. , Boat Note Reference etc.<br />
• All the entries should be in chronological order.<br />
87
15.8 Example of a <strong>VAT</strong> Account<br />
<strong>VAT</strong> Account – Output <strong>Tax</strong>(Supplies made)<br />
<strong>Tax</strong>able Period From …………….. <strong>to</strong> ………………<br />
Item<br />
No.<br />
1.<br />
2.<br />
3.<br />
.<br />
.<br />
Date of<br />
Issue of<br />
invoice or tax<br />
invoice<br />
Total for the <strong>Tax</strong>able Period<br />
Serial No. of Invoice or <strong>Tax</strong><br />
invoice in respect of supplies<br />
made<br />
Output <strong>Tax</strong> charged<br />
<strong>Value</strong> of<br />
Supply<br />
(made) @ 10% @ 20%<br />
Date of<br />
Receipt<br />
cash/<br />
Cheque<br />
of<br />
<strong>VAT</strong> Account – Input <strong>Tax</strong> (Supplies received)<br />
<strong>Tax</strong>able Period From …………….. <strong>to</strong> ………………<br />
Item<br />
No.<br />
1.<br />
Date of<br />
Receipt<br />
of <strong>Tax</strong><br />
invoice<br />
Serial No.<br />
of tax<br />
invoice<br />
Suppliers<br />
<strong>VAT</strong><br />
Reg. No<br />
Description<br />
of the<br />
purchase<br />
Name of<br />
the<br />
supplier<br />
<strong>Value</strong> of<br />
Supply<br />
received)<br />
Input tax<br />
Payable<br />
@ @<br />
10% 20<br />
%<br />
Date of<br />
Payment<br />
of cash<br />
2.<br />
3.<br />
.<br />
.<br />
Total for the <strong>Tax</strong>able Period<br />
• Cash basis Registered Persons and those who make exempt supplies can have<br />
the following additional columns.<br />
<strong>Tax</strong>able Period<br />
During which<br />
Payment is made<br />
Input <strong>Tax</strong> directly<br />
attributable <strong>to</strong> taxable<br />
Supplies<br />
Input <strong>Tax</strong> Directly<br />
attributable <strong>to</strong><br />
Exempt supplies<br />
88
Chapter – 16<br />
Import & Export of Goods & <strong>VAT</strong><br />
16.1 Export of goods – zero-rating<br />
What is meant by an export or an exporter is not defined in the Act. Exports are within<br />
the scope of <strong>VAT</strong> and are subject <strong>to</strong> <strong>VAT</strong> at zero-percent. Zero-rating is available only if<br />
the supplier of goods export such goods – Sec. 7(1)(a). what is meant by this is that<br />
the zero rating is available <strong>to</strong> the direct exporter only. Subject <strong>to</strong> this<br />
• All exports of goods<br />
* irrespective of the nature of goods and<br />
* including exempt goods<br />
* irrespective of the person exporting<br />
are zero rated. (Please see Chapter 25)<br />
• As stated above zero-rating is available <strong>to</strong> the direct exporter only. The<br />
registered person must have the relevant export documents in his name in order<br />
<strong>to</strong> be zero-rated. Submission of an export order and the export Cus-dec is not<br />
sufficient. Documents such as Boat Note <strong>to</strong> verify that the goods have been<br />
loaded <strong>to</strong> the ship or air-craft are essential. The other necessary documents may<br />
be the (export) invoice, bill of lading or air-way bill, certificate of shipment etc. In<br />
the case of exports by parcel post or courier service <strong>to</strong>o documentary evidence<br />
should be available <strong>to</strong> prove that the export has in fact taken place. If a third<br />
party is handling the export on behalf of the exporter (eg. a fright forwarder)<br />
sufficient documentary evidence <strong>to</strong> that effect should also be available.<br />
• Any person who is exporting the export quota belongs <strong>to</strong> another person will not<br />
be eligible for zero-rating (i.e ship through transactions)<br />
16.2 Deemed Exporter<br />
• Deemed exports are not zero rated because zero rating is available only <strong>to</strong> the<br />
actual export<br />
• The supply by the deemed exporter <strong>to</strong> the actual exporter must be considered as<br />
a local sale/local supply.<br />
• When a trading house or some other person which receives an export order get<br />
the required goods manufactured and exported through a manufacturer engaged<br />
in manufacture and export of such goods then the actual exporter is the<br />
manufacture. It is the manufacture cum exporter who is entitled <strong>to</strong> zero-rating. If<br />
89
the trading house or the other person who obtained the export order supplies the<br />
raw-materials <strong>to</strong> the manufacturer it becomes a local supply of goods (such a<br />
local supply is excluded from <strong>VAT</strong> in the case of an approved trading house<br />
which imports and supply fabric <strong>to</strong> a BOI manufacture for manufacture & export<br />
garments vide para 2.4.1) The export proceeds becomes part of the turnover of<br />
the manufacturer. In any event zero-rating cannot be granted <strong>to</strong> two<br />
registered persons in respect of the same export.<br />
• In order <strong>to</strong> claim input credit the exporter must have been registered for <strong>VAT</strong>.<br />
The importers identification number which is sometimes called the temporary<br />
registration number is not sufficient.<br />
• Local sales for foreign currency will not be considered as exports eg. Sale of<br />
jewellery for foreigners who will pay in foreign currency and take them out of the<br />
country.<br />
16.3 Buying & Selling and Import & Export<br />
16.3.1 Mixed Activities<br />
A person may<br />
(a) exports part of goods he buys locally<br />
(b) sell the other part locally Local purchase<br />
(c) exports part of the good he imports<br />
(d) sell the balance imports locally. Imports<br />
16.3.2 Compulsory Registration<br />
• If the value of (a) +C) +(d) other than the value of local sale of exempt imported<br />
goods, exceeds the taxable threshold such person is liable <strong>to</strong> be registered<br />
compulsorily for activities (a),(c) and (d) only. (i.e excluding local buying and<br />
selling)<br />
• Such person also can come under voluntary registration in respect of (a), (c) and<br />
(d) only.<br />
• If such person is registered for (a),(c) and (d) only (i.e local buying and selling<br />
excluded) then he cannot claim input credit in respect of local buying and<br />
selling. Records must be kept <strong>to</strong> enable <strong>to</strong> identify easily, the items which were<br />
bought and sold locally. Please see para 15.3<br />
• Department will be careful <strong>to</strong> check whether input tax has been claimed<br />
incorrectly in such cases.<br />
90
16.3.3 Voluntary registration for buying and selling in addition <strong>to</strong> import and<br />
export<br />
• A person engaged in activities as described in 16.3.1 can register for local<br />
buying and selling part of his activity i.e (b) in addition <strong>to</strong> others i.e (a),(c) and(d) .<br />
In such event he should declare out put tax on local buying and selling also and<br />
claim input tax on the same. Please see last para in 4.3.(ii)<br />
• Records must be maintained <strong>to</strong> identify such activities. Vide Para 15.3<br />
16.4 Concessions available <strong>to</strong> Exporters<br />
i. Concessions are available in respect of import of goods made by<br />
• Exporter who import goods for manufacture and export of goods so<br />
manufactured.<br />
• Exporters in BOI sec<strong>to</strong>r who import fabric for the purpose of manufacture and<br />
export of garments and<br />
• Certain indirect exporters who import fabric for manufacturer & export of<br />
garments through other s in BOI Sec<strong>to</strong>r.<br />
ii. Concessions are also available <strong>to</strong> BOI garment Manufacturers cum Exporters<br />
(a) when they purchase fabric from BOI manufacturers of fabric and<br />
(b) when they transfer fabric imported by them <strong>to</strong> any other person<br />
for manufacture and export of garments<br />
Please see table.<br />
91
16.4 Concessions available <strong>to</strong> Exporters<br />
Type of Exporter Type of Concession Available for<br />
BOI manufacturer of<br />
garments for export<br />
<strong>VAT</strong> exclusion<br />
(<strong>VAT</strong> is not charged by<br />
Cus<strong>to</strong>ms/BOI)<br />
i. Import of fabric<br />
(for such manufacture & export o<br />
ii. Transfer of such fabric<br />
• With or without value additio<br />
• <strong>to</strong> any person (not necessa<br />
• for manufacture & export o<br />
(a) Any manufacturer and<br />
exporter of goods so<br />
manufactured.<br />
(b) If it is a new enterprise<br />
approved under Sec.<br />
22(7)<br />
Indirect Exporter i.e<br />
Trading House<br />
Any other Exporter approved<br />
under Sec.22(7) which is a<br />
new Enterprise<br />
<strong>VAT</strong>– Deferment<br />
(By Cus<strong>to</strong>ms/BOI)<br />
<strong>VAT</strong> – deferment<br />
<strong>VAT</strong>– Non collection of deferred<br />
Amount (C.G.I.R will pay <strong>to</strong><br />
DGC)<br />
<strong>VAT</strong> – exclusion<br />
<strong>VAT</strong> Refund<br />
i. Purchase of fabric<br />
• from a BOI manufacturer o<br />
• for the purpose of manufact<br />
export<br />
(a) * Import of goods(including ma<br />
* for the purpose of manufactu<br />
(b) * Import of project related items<br />
implementation period.<br />
i. Import of fabric<br />
* for manufacturer and export o<br />
* through a BOI manufacturer c<br />
garments<br />
On <strong>VAT</strong> paid on the import of proj<br />
project implementation period<br />
92
16.5 Refund of Input tax attributable <strong>to</strong> exports<br />
As the exports are zero-rated an exporter will be entitled <strong>to</strong> recover the input tax<br />
attributable <strong>to</strong> exports. That is the input tax included in the supplies used by him which<br />
enabled him <strong>to</strong> make the export are set off against any output tax payable by him. If<br />
there is no output tax the entire amount of input tax is refunded. He is thus able <strong>to</strong> make<br />
the export without the incidence of <strong>VAT</strong>. Export of <strong>VAT</strong> exempt goods are also entitled <strong>to</strong><br />
zero-rating. Section 76 of the Act provides that input tax paid on the acquisition of goods<br />
for the purpose of making an exempt supply shall be deemed <strong>to</strong> be an input tax if such<br />
supply subsequently becomes a taxable supply. Thus the input tax attributable <strong>to</strong> supply<br />
of goods used in making an export under any circumstances can be recovered by the<br />
exporter.<br />
16.6. <strong>Tax</strong>able Period of an Exporter<br />
<strong>Tax</strong>able period of an exporter is one month provided 50% or more of his <strong>to</strong>tal taxable<br />
supplies (including exports) are zero-rated supplies. Vide para 3.6. Such person should<br />
furnish monthly returns unless he opts <strong>to</strong> file returns quarterly Sec. 83.<br />
16.7 IMPORTS<br />
i. Although what is meant by an exporter is not defined in the Act what is meant<br />
by “importation” is defined <strong>to</strong> include<br />
(a) (i). bringing of goods in<strong>to</strong> Sri Lanka by any person or<br />
(ii) goods received form Cus<strong>to</strong>ms bonded area and<br />
(b) purchase of goods on a sale by<br />
(i) the D.G.C<br />
(ii) Sri Lanka Ports Authority or<br />
(iii) the C.G.I.R<br />
for the levy of tax and other dues<br />
iii. Bringing of a ship or an aircraft in<strong>to</strong> Sri Lanka <strong>to</strong> be registered under the<br />
necessary regulations in Sri Lanka amount <strong>to</strong> an importation of a ship or an<br />
aircraft. The importation of a ship is excluded form <strong>VAT</strong> – Sec. 2(3)(e)<br />
iv. <strong>VAT</strong> on importation of goods are charged and collected by the D.G.C as if it<br />
were a Cus<strong>to</strong>ms Duty and as if all the goods imported in<strong>to</strong> Sri Lanka are dutiable<br />
and liable <strong>to</strong> Cus<strong>to</strong>ms Duty. Sec. 2.3. Thus <strong>VAT</strong> is chargeable even if the goods<br />
are exempt from Cus<strong>to</strong>ms Duty. Please see comments made in paras 5.1.2,<br />
5.11 and 10.3<br />
93
v. Importation of services are not recognized in the Cus<strong>to</strong>ms Ordinance.<br />
However a supply of a service which constitute a taxable activity, carried on or<br />
carried out in Sri Lanka by a person outside Sri Lanka is liable <strong>to</strong> <strong>VAT</strong> under <strong>VAT</strong><br />
Act. Vide Eg. 2 in para 3.7 (ii)<br />
vi. In the case of importation computer soft ware the question will arise as <strong>to</strong><br />
whether they are goods or services. Normalized mass produced common<br />
software which can be used by any person and which may be received in<br />
diskettes, magnetic tapes, discs and games packages etc is treated as goods<br />
whereas specific cus<strong>to</strong>mized software is treated as services. (vide para 3.3)<br />
vii. <strong>VAT</strong> on importation of goods is calculated on the “value of supply” which is =<br />
(CIF + Cus. Duty + Any surcharge + Cess + Ex. Spl. Duty) at 10% or 20% as the<br />
case may be. - Vide para 3.8(2)<br />
16.8 Imports by non-registered persons : <strong>VAT</strong> is chargeable on the importation of goods by<br />
any person whether he is a registered person or not if the goods are liable <strong>to</strong> <strong>VAT</strong>. If<br />
the importer is not a registered person he is required <strong>to</strong> obtain an Importers<br />
Identification Number from the <strong>VAT</strong> Branch in order <strong>to</strong> clear the goods from the<br />
Cus<strong>to</strong>ms.<br />
16.9. Deferment of <strong>VAT</strong> on Imports : The D.G.C is required <strong>to</strong> defer the collection of <strong>VAT</strong> for<br />
a period of 60 days in respect of certain goods as enumerated in Section 2(3) – Vide<br />
Chapter 6 and 16.10, 16.11.<br />
16.10 Exemption of Imports by BOI companies Please see para 10.4<br />
16.11 Exemption of imports made in personal baggages, and import of personal goods<br />
and business samples through courier and parcel post - Please see para 10.3<br />
16.12 Exemption of Imports - Other items – are enumerated in the First Scheduled <strong>to</strong> the<br />
Act. Please see Annexure 2<br />
16.13 Exclusion of Imports by approved trading houses – Please see para 2.4.1 (iii)<br />
16.14 Input tax on goods imported by a registered person which are not used in a taxable<br />
activity or partly used in a taxable activity - shall be allowed on a proportionate basis<br />
section 22 (3)<br />
94
16.15 Cus<strong>to</strong>m Bonded Area – What is meant by a Cus<strong>to</strong>ms Bonded Area is defined in Section<br />
83 of the Act. Bonded areas means ware – houses approved under various provisions<br />
of the Cus<strong>to</strong>ms Ordinance. Free Trade Zones declared by the Board of Investment of<br />
Sri Lanka which are subject <strong>to</strong> moni<strong>to</strong>ring by the Department of Cus<strong>to</strong>ms are also treated<br />
as bonded areas. No <strong>VAT</strong> is charged on the imported goods if they are transferred <strong>to</strong> a<br />
Cus<strong>to</strong>ms Bonded Area. But <strong>VAT</strong> is charged when they are removed from the bonded<br />
area as the removal tantamount <strong>to</strong> an import according <strong>to</strong> the definition of import. There<br />
are seven Free Trade Zones approved as bonded areas at Katunayake, Biyagama,<br />
Koggala, Pallekele, Migirigama, Malwatta and Watupitiwala. If any goods are transferred<br />
out of these bonded areas even for processing purposes <strong>VAT</strong> is payable as an import.<br />
Vide para 16.7 (I) (a) (ii).<br />
95
Chapter – 17<br />
Hire Purchase Transactions & <strong>VAT</strong><br />
17.1 Hire purchase agreement means an agreement under which goods are sold and<br />
i. the possession of goods is delivered by the owner <strong>to</strong> a person on condition that<br />
such person pays an agreed amount in periodical installments : and<br />
viii. either the property in goods will be passed <strong>to</strong> the hire -purchaser on the payment<br />
of the last installment or an option <strong>to</strong> purchase the goods can be exercised in<br />
accordance with the terms of the agreement.<br />
17.2 The <strong>VAT</strong> treatment of a hire-purchase conditional sale or a credit sale transaction is<br />
based on the premise that unlike in the case of a lease transaction where only the<br />
possession of goods passes <strong>to</strong> the lessee while the ownership remains with the lessor, in<br />
the case of a hire-purchase conditional sale or a credit sale both the possession and the<br />
ownership in goods passes <strong>to</strong> the hire-purchaser. Thus for <strong>VAT</strong> purposes an hirepurchase<br />
conditional sale or a credit sale is treated as having two components namely<br />
(i) Supply of goods and<br />
(ii) Supply of a financial service<br />
Thus the <strong>to</strong>tal consideration in the invoice pertaining <strong>to</strong> a hire-purchase transaction may<br />
have a “cash price” component and a “hire-purchase charges” component. The hirepurchase<br />
charges component is in effect a finance charge. If the hire-purchase charge is<br />
not separately disclosed <strong>to</strong> the cus<strong>to</strong>mer the <strong>to</strong>tal consideration is treated as the cash<br />
price of goods.<br />
i. The “value of supply” in the “supply of goods” component, as explained in para<br />
3.8(5), is the cash price of goods determined in accordance with the provisions of<br />
the Consumer Credit Act No. 29 of 1982 or the market value of goods,<br />
whichever is higher, in the case of new goods. If they are second hand goods<br />
(i.e if they have been used in Sri Lanka for more than 12 months) then the value<br />
of supply is the value as per agreement less hire-purchase charges. The hirepurchase<br />
company should charge <strong>VAT</strong> on this value at the rate applicable <strong>to</strong> the<br />
particular goods. If the goods belong <strong>to</strong> 20% category (Eg. Television, mo<strong>to</strong>r<br />
cycle) then 20% of the value of supply as computed above should be charged as<br />
<strong>VAT</strong>. If the goods belong <strong>to</strong> 10% category (Eg. Computers, refrigera<strong>to</strong>rs, airconditioners)<br />
then 10% of the value of supply should be charged as <strong>VAT</strong>. If the<br />
goods are exempt as per First Schedule <strong>to</strong> the <strong>VAT</strong> Act supply of goods<br />
component in a hire-purchase sale will be exempted from <strong>VAT</strong>.<br />
96
ii. (a) The financial services component was exempt from GST under<br />
item (xvi)(h) of the exemption list provided the finance charge or the<br />
hire-purchase charge is separately disclosed <strong>to</strong> the purchaser.<br />
(b)<br />
However, it appears that the <strong>VAT</strong> Act has brought about a change by<br />
restricting the exemption <strong>to</strong> the financial charges of second hand goods<br />
only. Vide item (xi)(h) of the First Schedule <strong>to</strong> the <strong>VAT</strong> Act. Please see<br />
the preambles <strong>to</strong> the two items i.e item (xvi) of the GST Act and<br />
item (xi) of the <strong>VAT</strong> Act. They both speak of exemption of financial<br />
services only and not of exemption of “supply of goods’<br />
(c)<br />
It is noted that the intention was <strong>to</strong> exempt both components (i.e both<br />
finance charge and supply of goods) in the case of second hand goods<br />
while exempt only the finance charges component in the case of new<br />
goods. It is expected that this will be clarified by an amendment <strong>to</strong> the<br />
law.<br />
(d)<br />
The exemption of finance or hire-purchase charges depends on the fact<br />
whether it is separately disclosed <strong>to</strong> the purchaser or not. If it is not<br />
separately disclosed and only the <strong>to</strong>tal consideration is disclosed then<br />
the <strong>to</strong>tal consideration is treated as the price charged for supply of<br />
goods. Question of exempting finance charges does not arise.<br />
17.3 The following example will illustrate the <strong>VAT</strong> treatment of a hire-purchase transaction<br />
under the existing provisions and under the intended clarification.<br />
Eg 1 -. The Buyer B purchased a new computer from the hire-purchase company H on<br />
hire purchase terms. The cash price is Rs.125,000/- and the finance charges amount <strong>to</strong><br />
Rs.33,000/- so that the <strong>to</strong>tal hire-purchase price is Rs. 158,000/- The hire-purchase<br />
charge is disclosed separately <strong>to</strong> the buyer B. The other terms are that an initial payment<br />
of Rs.50,000/- should be made while the balance Rs.108,000/- should be paid in 36<br />
installments of Rs.3000/- per month. Assume that the cash price determined in<br />
accordance with the Consumer Credit Act and the market value do not exceed<br />
Rs.125,000/- Computers are categorized as industrial machinery and the rate of <strong>VAT</strong> is<br />
10%. Then the invoice from H <strong>to</strong> B must contain the following minimum details:<br />
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(a)<br />
Under the existing provisions<br />
<strong>Value</strong> of Supply <strong>VAT</strong> Total<br />
Cash price/market value 125,000 + 12,500 = 137,500<br />
Hire-purchase charges 33,000 6,600 = 39,600<br />
(Rate is 20% because it is 158,000 19,100 = 177,100<br />
not specified)<br />
Initial payment 50,000 + 19,100 = 69,100<br />
(b)<br />
Under the expected clarification<br />
<strong>Value</strong> of Supply <strong>VAT</strong> Total<br />
Cash price/market value 125,000 + 12,500 = 137,500<br />
Finance/hire-purchase charges 33,000 Exempt = 33,000<br />
158,000 12,500 = 170,000<br />
Initial payment 50,000 + 12,500 = 62,500<br />
(c)<br />
(d)<br />
(e)<br />
‘B’ should pay <strong>VAT</strong> (Rs.12,500/-) at the time of signing the agreement. ‘H’ should<br />
declare that amount as output tax for the particular taxable period during which<br />
the agreement was signed because the “time of supply” in the case of a hirepurchase<br />
sale is the time at which the agreement is singed. However the Seller<br />
H is not entitle <strong>to</strong> full input credit on the purchase value of the hire-purchase<br />
s<strong>to</strong>ck (i.e the computer) because his supply value is partly exempted. The<br />
allowable portion will be<br />
= 125 X actual input tax paid. The balance will have <strong>to</strong> be added back if it has<br />
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been already claimed. If the finance charges are not separately disclosed <strong>to</strong> the<br />
buyer then <strong>VAT</strong> is chargeable on the full value of supply – i.e 158,000/- @ 10%<br />
which is equal <strong>to</strong> 15,800/-<br />
If the market value is more than 125,000/- (say 130,000/-) then <strong>VAT</strong> payable on<br />
the supply of goods component will be 130,000/- @ 10% = 13,000/-<br />
The exemption on finance charges is available only if the seller ‘H’ himself<br />
provides the hire-purchase credit facility. If the seller (say a retailer) sells only<br />
the goods while the finance facility is provided through a third party (a finance<br />
company) then the seller should charge <strong>VAT</strong> on the full consideration which will<br />
invariably be an enhanced price than the normal price because it will include<br />
finance charges. But in this type of a situation the buyer pays this price <strong>to</strong> the<br />
finance company in installments while the finance company pays the retailer only<br />
the price of the goods after retaining the finance charges. The cus<strong>to</strong>mer should<br />
pay <strong>VAT</strong> <strong>to</strong> the retailer on the full value (i.e <strong>to</strong>tal consideration, which includes<br />
finance charge even if it is separately disclosed) for which the retailer should<br />
issue an invoice <strong>to</strong> the buyer (Vide Chapter 27).<br />
If the computer is a second hand one (i.e a one that has been used in Sri<br />
Lanka for more than 12 moths).<br />
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• Under the existing provisions the finance charges component will be<br />
exempted while the cash price component is liable <strong>to</strong> <strong>VAT</strong>.<br />
• Under the expected clarification both the cash price and finance charges<br />
will be exempted from <strong>VAT</strong> and the company H is no entitled <strong>to</strong> any<br />
input credit on such hire-purchase s<strong>to</strong>cks.<br />
• The tax payers are expected <strong>to</strong> follow the latter method.<br />
Eg.2 - ‘B” is not a registered person for <strong>VAT</strong>. He imports a vehicle for Rs.1,000,000/-<br />
(C.I.F) <strong>VAT</strong> paid <strong>to</strong> cus<strong>to</strong>m is Rs.200,000/-. Thus his <strong>to</strong>tal cost is 1,200,000/-.<br />
He goes in for a hire-purchase with a hire-purchase company “H”.<br />
Transfer of vehicle form B <strong>to</strong> H is a separate supply. But it is not a liable <strong>to</strong> <strong>VAT</strong><br />
because B is not a registered person. Price at which the vehicle will be<br />
transferred is Rs.1,200,000/-<br />
• Supply of the vehicle by H <strong>to</strong> B under a hire-purchase credit sale is another<br />
supply. This is liable <strong>to</strong> <strong>VAT</strong>, Usually the value of supply is 1,200,000/-. But in<br />
this type of situations where the supply is, made <strong>to</strong> the same original owner who<br />
is not entitled <strong>to</strong> input credit an adjustment will be made in respect of uncliamable<br />
input. Sec. 6(5). Vide para 3.8(5)<br />
Thus adjusted value of supply = 1,200,000 – 200,000<br />
= 1,000,000<br />
<strong>VAT</strong> payable @ 20% = 200,000/-<br />
The original owner, who bought the vehicle on hire-purchase terms, must pay<br />
200,000/- as <strong>VAT</strong> <strong>to</strong> the hire-purchase company in addition <strong>to</strong> <strong>VAT</strong> paid<br />
(Rs.200,000) <strong>to</strong> Cus<strong>to</strong>ms. Hire-purchase company H should declare this amount<br />
as output tax.<br />
17.4 Re-possession of goods by the Hire purchase Co.<br />
• If the hire- purchaser defaults payment the hire purchase company has the right<br />
<strong>to</strong> re-posses the goods. The company usually re-sell the goods <strong>to</strong> a 3 rd party and<br />
proceeds are taken in satisfaction of the whole or part of the debt outstanding.<br />
Following supplies can be identified in such a situation.<br />
• Re-possession by the hire-purchase company constitute a separate supply. The<br />
supplier is the defaulting hire-purchaser and the consideration for the supply is<br />
the settlement of the debit. If the hire-- purchaser is a registered person and if<br />
the goods are not exempt he must issue a tax invoice <strong>to</strong> the hire-purchase<br />
company and charge <strong>VAT</strong>. The “value of supply” on which <strong>VAT</strong> is calculated is<br />
the amount of the debt that is settled which is usually the sale price of the asset<br />
99
y the hire-purchase company <strong>to</strong> the 3 rd party. Accordingly the hire-purchaser<br />
should declare output tax on that amount. The hire-purchase company can claim<br />
input tax credit on the <strong>VAT</strong> paid <strong>to</strong> the defaulting hire-purchaser.<br />
• The sale by the hire-purchase company <strong>to</strong> a 3 rd party is another supply. The<br />
company must charge and collect <strong>VAT</strong> from the 3 rd party buyer and declare<br />
output tax. The value of supply on which <strong>VAT</strong> should be calculated is the sale<br />
price or the market value whichever is higher.<br />
• It can be observed that there is no additional liability on the hire-purchase<br />
company if the sale price <strong>to</strong> the 3 rd party is not less than the market value<br />
provided the amount of the, debt settled is the same as the ‘sale price’. In a very<br />
rare case where the hire-purchase company is generous enough <strong>to</strong> give a refund<br />
from the sale proceeds, <strong>to</strong> the defaulting hire-purchaser an adjustment must be<br />
made <strong>to</strong> the ‘value of supply’ by the hirer.<br />
17.5 When the retailer sells goods <strong>to</strong> a finance company who then sells <strong>to</strong> the<br />
consumer on a Hire-purchase Agreement<br />
Some times it is possible that the consumer selects the goods from a retailer and then<br />
the Finance Company/Hire Purchase Company buys them and sell them on hire <strong>to</strong> the<br />
consumer on hire-purchase terms<br />
In such situations there are two taxable supplies namely<br />
i. Retailer <strong>to</strong> Finance Co. (Sale of Goods)<br />
ii. Finance Co. <strong>to</strong> Consumer (Hire Purchase transaction)<br />
The hire-purchase transaction between the Finance Company & the consumer can be<br />
dealt with as per 17.3. above.<br />
17.6 When the retailer sells goods <strong>to</strong> the consumer under a Hire-Purchase Agreement <strong>to</strong><br />
which the retailer and consumer are parties and then retailer assigns the<br />
rights/interest in the agreement <strong>to</strong> a Finance Co. for a consideration equal <strong>to</strong> the<br />
amount unpaid by the consumer.<br />
This is a situation where tax retailer directly provides a hire-purchase sale <strong>to</strong> the<br />
consumer while at the same time the hire purchase agreement is assigned <strong>to</strong> the finance<br />
company.<br />
In this case <strong>to</strong>o two supplies can be identified<br />
i. Retailer’s sale <strong>to</strong> consumer is under a Hire Purchase Agreement which can be<br />
dealt with as per para 17.3<br />
ii. The assignment of the Hire-Purchase Agreement. (This may be exempted as a<br />
Financial Service)<br />
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17.7 Hire- Purchase inputs<br />
• input tax credit is available on the goods sold on hire-purchase terms, if the<br />
purchase invoice is in the name of the hire-purchase company. However if the<br />
finance charges included in the hire- purchase agreement is exempt from <strong>VAT</strong>,<br />
the input tax attributable <strong>to</strong> finance charges will not be allowed.<br />
• As far as possible input tax directly attributable <strong>to</strong> finance charges should be<br />
ascertained. Otherwise it can be claimed on a proportionate basis. Vide<br />
17.3(b).<br />
• When the hire-purchase of second hand goods are exempted no input tax credit<br />
will be allowed on such goods. If it has already been claimed when the goods<br />
were purchased it should be added back when the goods are sold on hirepurchase<br />
terms.<br />
17.8. Rent purchase transactions are not treated in the same manner as hire-purchase<br />
transactions for <strong>VAT</strong> purposes. The deed value of the property sold on rent purchase<br />
terms is treated as the value of supply. Generally residential houses, whether they are<br />
sold on rent purchase terms or not, are exempt from <strong>VAT</strong> unless they fall within the liable<br />
category under item (xxiii) of First Schedule <strong>to</strong> the <strong>VAT</strong> Act (That is when the residential<br />
houses are supplied by a BOI company engaged in a housing project of which the project<br />
cost exceeds US $ 10 Million). The <strong>VAT</strong> liability on the supply on rent purchase terms of<br />
commercial buildings and liable residential houses will be calculated on the full value of<br />
the transaction.<br />
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Chapter - 18<br />
Leasing & <strong>VAT</strong><br />
18.1 Lease means a transfer of the right of possession of an asset for use by another person<br />
for a term in return for a consideration. There are two types of leases namely finance<br />
leases and operating leases. However there is no difference in treatments in <strong>VAT</strong><br />
between the two types of leases other than the application of rates as per para 18.3<br />
below.<br />
18.2 In a leasing transaction only the possession of goods passes <strong>to</strong> the lessee while the title<br />
remains in the lessor. It is therefore not a supply of goods. Under the definition (Section<br />
83), any supply which is not a supply of goods is a supply of a service. As no supply of<br />
goods is involved the “value of supply” is not the value of goods (as in hire-purchase) but<br />
the amount of the “lease rental”.<br />
18.3 The rate of <strong>VAT</strong> is 20% except when the leasing facility is supplied under Finance<br />
Leasing Act No.56 of 2000 where the rate is 10%.<br />
18.4 <strong>VAT</strong> is exempted on the supply of leasing facilities <strong>to</strong> mo<strong>to</strong>r coaches which are used for<br />
public passenger transport services if the seating capacity is 28 or more passenger<br />
seats. (Note that the supply/import of such buses is not exempted only the lease is<br />
exempted)<br />
18.5 The “time of supply”, i.e the time at which the liability arises, is the earliest of the due<br />
date or the date of receipt of rentals. However any advance received will be liable <strong>to</strong> <strong>VAT</strong><br />
in the taxable period in which such advance was received.<br />
Eg. A lease agreement (for a van) under Finance Leasing Act No.56 of 2000 consist of<br />
26 lease rentals of Rs.20,000/- per month and an advance of an amount equivalent <strong>to</strong> 10<br />
rentals. i.e Rs.200,000/- <strong>to</strong> be paid on 01.09.2002. The 26 rentals are <strong>to</strong> be paid monthly<br />
with effect from September 2002. By 30.09.2002 lessee has paid as agreed but by<br />
31.12.2002 he is in arrears of two installments. The leasing company is submitting<br />
quarterly returns and an option is available under the agreement <strong>to</strong> purchase the van for<br />
a sum of Rs.75,000/- on termination on of the least.<br />
• Generally advance is also treated as a lease installment. Therefore in the <strong>VAT</strong><br />
period ending on 30.09.2002 we have the advance of 200,000/- and one<br />
installment of 20,000/-. The <strong>VAT</strong> treatment will be as follows:-<br />
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<strong>VAT</strong> period ending on 30.09.2002<br />
Type of supply/ <strong>Value</strong> of supply Rate <strong>Tax</strong><br />
Payment<br />
Rs.<br />
Leasing Advance 200,000 10% 20,000<br />
Lease installment(September) 20,000 10% 2,000<br />
22,000<br />
(Please also refer <strong>to</strong> para 18.15)<br />
<strong>VAT</strong> period ending on 31.12.2002<br />
Type of supply/ <strong>Value</strong> of supply Rate <strong>Tax</strong><br />
Payment<br />
Rs.<br />
Lease installments 20,000x3<br />
60,000 10% 6,000<br />
Although only one installment is paid during this period the lessor (leasing Co.) must<br />
declare output tax on accrual basis except in the case of non-performing leases as<br />
explained below.<br />
No adjustment is due when the arrears are received and if the advances are set off.<br />
18.6 Non-performing leases<br />
Cash basis accounting has been allowed for GST for non-performing leases. This<br />
approval can be continued <strong>to</strong> apply for <strong>VAT</strong>. Non-performing lease means any lease<br />
agreement under which six(6) or more consecutive lease rentals are in arrears. In such<br />
situations accrual basis as above (para 18.5) can be applied up<strong>to</strong> the 5 th rental in arrear<br />
and from 6 th rental in arrear onwards cash basis can be adopted. The output tax can be<br />
declared only when the cash is received. Bad debt relief can be claimed in respect of<br />
output tax already paid on accrual basis.<br />
18.7 Interest and other Charges<br />
The extra amounts charged under a lease agreement such as penalty charges, penal<br />
interest or interest etc. will be considered as part of the rentals and liable <strong>to</strong> <strong>VAT</strong><br />
irrespective of the description given <strong>to</strong> such charges.<br />
18.8 Re-scheduling of lease payments<br />
• There is no additional <strong>VAT</strong> if there is no additional payment.<br />
• <strong>VAT</strong> should be calculated and paid on the new rentals.<br />
• If an additional payment is <strong>to</strong> be made by the lessee <strong>VAT</strong> should be charged on<br />
such additional payment.<br />
• Re-scheduled installments (i.e new rentals) are treated as rentals under a new<br />
supply (new lease) and <strong>VAT</strong> should be paid on the full value of the new rentals<br />
although part of the arrears under the former lease may be included in the new<br />
103
installments. Any <strong>VAT</strong> not recovered under the former lease amounts <strong>to</strong> bad<br />
debt.<br />
18.9 Termination of a lease<br />
• As explained in para 3.8(8) if the payment made by the lessee at the end of the<br />
lease period, <strong>to</strong> acquire asset is less than 10% of the <strong>to</strong>tal amount payable<br />
under the lease agreement then the final payment made for the purpose of<br />
acquiring the asset is considered as another lease installment. <strong>Value</strong> of<br />
supply = last payment, Rate = rate applicable <strong>to</strong> the particular lease.<br />
• If the final payment charged is more than 10%, then it will be considered as a<br />
“separate supply of goods”. <strong>VAT</strong> will be charged on the value of supply acquired.<br />
<strong>Value</strong> of supply = the amount paid <strong>to</strong> acquire the asset. The rate of <strong>VAT</strong> is the<br />
rate applicable <strong>to</strong> “supply of goods”. If it is a car or van or mo<strong>to</strong>r cycle it is liable<br />
at 20%. If it is a passenger bus with 28 or more passenger seats or a refrigera<strong>to</strong>r<br />
it is liable at 10%.<br />
• Eg: 1 - In the above example (para 18.5) the <strong>to</strong>tal amount payable under the<br />
lease is 200,000 + 26 x 20,000 = 720,000. At the end of the lease the amount<br />
payable <strong>to</strong> acquire the asset is 75,000/-. It is more than 10% of the <strong>to</strong>tal and it is<br />
considered as a supply of a van for 75,000/-. Thus the <strong>VAT</strong> payable is 75,000 @<br />
20% = 15,000/-. If the final amount payable is 50,000/- then it is subject <strong>to</strong> <strong>VAT</strong><br />
as another leasing installment ie. 50,000/- @ 10% = 5,000/-. (if the lease is not<br />
under Finance Leasing Act No.56 of 2000 then the lease installments are also<br />
taxed at 20% - operating leases may fall in<strong>to</strong> this category)<br />
• Premature Termination<br />
Eg.2 – If the lessee wants <strong>to</strong> terminate the lease at the end of the 18 th installment<br />
and acquire the van an if the lessor agrees <strong>to</strong> transfer the van for a payment<br />
equivalent <strong>to</strong> balance eight (8) installments plus an additional sum of 25,000/-<br />
then the amount payable <strong>to</strong> acquire the lorry is 20,000x8+ 25,000 = 185,000/-<br />
This is not treated as payment of leasing installments in advance because<br />
the lease comes <strong>to</strong> an end after 18 months and a separate transaction<br />
begins. The <strong>to</strong>tal amount paid under the lease is 200,000 + 18 x 20,000 =<br />
560,000/-. As 185,000 is greater than 10% of 560,000 this is treated as a supply<br />
of van for 185,000/- and <strong>VAT</strong> payable by the lessee is 185,000/- @ 20% =<br />
37,500/-. This is output tax in the hands of the lessor and input tax in the hands<br />
of the lessee. If the final payment was less than 10% of 560,000/- then it is<br />
treated as another leasing installment and taxed at the rate applicable <strong>to</strong> the<br />
lease. This case being a lease under Finance leasing Act the rate is 10%.<br />
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18.10. Re-possession of the leased asset.<br />
• If the asset is re-possessed by the lessor there will be no <strong>VAT</strong> liability because<br />
the leasing company is the owner of the asset.<br />
• Any sale of re-possessed goods amounts <strong>to</strong> a separate supply of “supply of<br />
goods ‘and any’ re-lease” amounts <strong>to</strong> a new lease.<br />
• Sale proceeds of the repossessed asset should be first set off against the <strong>VAT</strong><br />
payable on the arrears of installments. The balance should be set-off against<br />
<strong>VAT</strong> payable on the sale.<br />
18.11 Termination due <strong>to</strong> damage etc.<br />
• If the asset given on lease becomes unusable due <strong>to</strong> damage or some other<br />
reason and the lease agreement is terminated on that grounds there is no <strong>VAT</strong><br />
due on such termination because it does not amount <strong>to</strong> a separate supply. This<br />
is a termination by returning the unusable goods.<br />
• If there are any arrears of lease installments at the time of termination the lessee<br />
has <strong>to</strong> pay <strong>VAT</strong> on such arrears.<br />
• If the returned asset is unusable <strong>to</strong> the extent that it cannot any more be<br />
considered as part of the (leasing) s<strong>to</strong>ck then the lessor should consider it as a<br />
“disposal of goods” and <strong>VAT</strong> must be paid on the value of disposal i.e the market<br />
value if any.<br />
• If any insurance or indemnity is received then out put tax must be declared on<br />
such receipt. If the indemnity is on a <strong>to</strong>tal loss then the out put tax payable is not<br />
on the market value but on the insurance claim . The <strong>VAT</strong> on the insurance<br />
claim is paid <strong>to</strong> the lessor by the insurance company. (please see examples<br />
given in para 3.3).<br />
18.12 Removals from leasing s<strong>to</strong>ck<br />
• If the goods <strong>to</strong> be given on lease (leasing s<strong>to</strong>ck) is used for other purposes such<br />
as renting, given on loan, use of the asset in other projects and private use etc.<br />
such transfers can be treated as disposals depending on the circumstances.<br />
Then there is no lease but a different kind of a supply takes place. The amount<br />
received for that supply or the market value of the goods as the case may be<br />
should be treated as the value of supply.<br />
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18.13 Leasing inputs<br />
• Leasing inputs can be claimed only when the leasing company (lessor)acquires<br />
the leasing s<strong>to</strong>ck in their name.<br />
18.13.1 Leasing Inputs – lessee transfers his own goods <strong>to</strong> lessor<br />
• If lessee acquire goods/asset in the first instance and then go in for a lease with<br />
a leasing company then the leasing company cannot claim input tax on the<br />
acquisition of the asset as it was incurred by the lessee himself. The lessee has<br />
paid <strong>VAT</strong> on its acquisition or import and later he has <strong>to</strong> pay <strong>VAT</strong> again on lease<br />
rentals. All this is input tax in the hands of the lessee if he is a registered person.<br />
• In such cases the intended lessee being the owner has <strong>to</strong> transfer the asset <strong>to</strong><br />
the leasing company and then request for a lease. Thus if the intended lessee is<br />
a registered person he has <strong>to</strong> charge <strong>VAT</strong> on such transfer <strong>to</strong> the leasing<br />
company. That becomes input tax in the hands of the leasing company.<br />
18.13.2 Leasing inputs - lessee pays part of the sale price <strong>to</strong> vender<br />
Sometimes it is also possible that the intended lessee pays part of the sale price<br />
<strong>to</strong> vender of the asset and other part by the intended lessor. Thereafter the lease<br />
agreement may be signed for the balance amount. In such cases there are 3<br />
transactions.<br />
• sale of goods by vendor <strong>to</strong> (intended) lessee<br />
• sale of goods by vendor <strong>to</strong> (intended) lessor<br />
• Lease transaction between lessor and lessee.<br />
Output tax and input tax should be calculated in respect of each transaction if they all are<br />
registered persons.<br />
• Vendor charges output tax on the lessee (as a supply of goods) which is input tax<br />
in his hands.<br />
• Vendor charges output tax on the lessor (as a supply of goods) on the balance<br />
amount which is input tax in his hands.<br />
• Lessor charges output tax on lease rentals (as a lease) which is input tax in the<br />
hands of the lessee.<br />
18.13.3 Leasing inputs – Early settlement before 3 years<br />
*<br />
In the case of a leasing facility under a leasing agreement under the Finance<br />
Leasing Act No. 26 of 2000 if the leasing facility is for a period of less than 3<br />
years then the input tax in the hands of the lessor is restricted <strong>to</strong> 10% even if the<br />
<strong>VAT</strong> paid on the purchase of the leased asset is 20%. This is applicable even<br />
when there is an early settlement of a lease within 3 years.<br />
* Eg. If it is assumed that the leasing company has purchased the van in the<br />
earlier example for a sum of Rs.600,000/- from an importer, then the Company<br />
106
would have paid Rs.120,000/- as 20% <strong>VAT</strong> on 600,000/-. This is input tax in the<br />
hands of the leasing company which they would have claimed in the <strong>VAT</strong> return<br />
when the van was purchased. But subsequently if it is given on lease for a<br />
period less than 3 years or if the lease has been settled within 3 years (as in<br />
example 2 of para 18.9) then the leasing company is not entitled <strong>to</strong> 120,000/-<br />
input tax credit. They are entitled <strong>to</strong> only 10% of 600,000/- = 60,000/- as input<br />
tax on the purchase of the van. Therefore Rs.60,000/- should be added back as<br />
disallowable input tax in the <strong>VAT</strong> Return when the short term lease was given or<br />
when the early settlement was made.<br />
18.13.4 Leasing inputs – Lessee makes a down payment <strong>to</strong> lessor<br />
It is also possible that lessee make a down payment <strong>to</strong> the leasing company<br />
(either directly or through the vender of the asset) on account of a leasing<br />
transaction. Then such amount should be treated as an advance by the leasing<br />
company and they should charge <strong>VAT</strong> (collect output tax) on that amount.<br />
Otherwise the amount received will be treated as <strong>VAT</strong> inclusive. In such<br />
situations the leasing company can claim input tax on the <strong>to</strong>tal value of asset on<br />
the invoice issued by the vendor but they have <strong>to</strong> account for output tax on the<br />
advance and then on leasing installments as in example given in para 18.5.<br />
Please also see para 18.15.<br />
18.14 Exemption under <strong>VAT</strong> Act.<br />
• Leasing of public passenger mo<strong>to</strong>r coaches with 28 or more passenger seating<br />
capacity is exempt from <strong>VAT</strong>. (whether the leasing is under Finance leasing Act<br />
or not) It should be emphasized that only the leasing facility is exempted.<br />
Supply (i.e sale or import) of a mo<strong>to</strong>r coach used for public passenger transport<br />
services is not exempted although it was exempted under GST.<br />
• In the circumstances, in the case of such mo<strong>to</strong>r coaches, although the leasing<br />
installments are exempted the settlement of leasing facility or early settlement of<br />
leasing facility (that means purchase of the Coach for a certain sum of money at<br />
the termination of the lease) is subject <strong>to</strong> <strong>VAT</strong> if the amount payable exceeds<br />
10% of the <strong>to</strong>tal amount paid under lease agreement as explained in para 18.9.<br />
The rate of <strong>VAT</strong> is the rate applicable <strong>to</strong> particular asset (coach) at the market<br />
value of the asset. Thus, the Finance Company should declare output tax on<br />
the final payment received but they are not entitled <strong>to</strong> any input tax on that<br />
coach as it was used in an exempt activity.<br />
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18.15 Leasing Advance<br />
Sometimes it is possible that the leasing advance be treated as a supply different from<br />
leasing and as a supply not specified in the <strong>VAT</strong> Act. In that case the advance should be<br />
taxed at 20% irrespective of the type of asset leased. Then in the example in para 18.5<br />
Rs. 200,000/- advance will be taxed at 20% while the lease installment is taxed at 10%).<br />
A ruling <strong>to</strong> this effect will be issued shortly This is applicable <strong>to</strong> advance payments which<br />
will not be set off against subsequent rentals..<br />
18.16 Leasing of immovable properties<br />
The time of supply is the same as in the case of finance leasing described under para<br />
18.5. Any advance is taxed at the time of payment of advance at the rate applicable <strong>to</strong><br />
(lease) rent.<br />
18.17 Some Examples<br />
Eg.1 Bank B on 20.09.2002 purchases a bus with seating capacity more than 28 seats<br />
from the importer A in order <strong>to</strong> give it on lease <strong>to</strong> C who is in public passenger transport<br />
business. The leasing is under the Finance Leasing Act. A,B, and C are all registered<br />
persons. B files returns monthly while the others are quarterly taxpayers. Price paid is<br />
Rs.1,600,000 + <strong>VAT</strong>. It was leased <strong>to</strong> C on 05.10.2002 on terms that C should pay<br />
300,000/- advance at the time if signing the agreement plus 72 monthly installments of<br />
25,000/- each (i.e six years). In addition C was required <strong>to</strong> insure the bus as the<br />
exclusive user and <strong>to</strong> assign the insurance policy <strong>to</strong> the bank. After July 2003 the<br />
installments went in<strong>to</strong> arrears and in August 2004 the bus met with an accident. The<br />
insurance company D paid in November 2004 accident damages for a claim of 350,000/-<br />
made in Oc<strong>to</strong>ber 2004 and the bank recovered arrears from the insurance claim. C<br />
decides <strong>to</strong> settle the lease prematurely and purchase the bus on 28.02.2005. i.e after<br />
paying 30 installments. Amount payable <strong>to</strong> purchase as decided by the bank is<br />
equivalent <strong>to</strong> 15% less than the balance 42 installments i.e Rs.892,500/- What are the<br />
<strong>VAT</strong> implications?<br />
<strong>Tax</strong>able Period ending 30.09.2002<br />
A - Importer A’s Output tax on the sale of the bus = 16,000,000 @ 10%<br />
= 160,000/-<br />
because the <strong>VAT</strong> rate applicable <strong>to</strong> passenger bus with more than 28 seats is 10%.<br />
B - Banks input tax on the purchase of the bus = NIL<br />
because input tax credit on leasing s<strong>to</strong>ck is not allowed as the leasing installments are exempt from<br />
<strong>VAT</strong> in respect passenger bus with more than 28 passenger seats.<br />
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<strong>Tax</strong>able Period (month) Oc<strong>to</strong>ber 2002<br />
B - Bank B’s output tax on the leasing advance = 300,000 @ 20%<br />
= 60,000/-.<br />
provided the leasing advance is treated as a separate supply which is different from leasing<br />
installments and as a supply liable <strong>to</strong> <strong>VAT</strong> as indicated in para 18.15.<br />
B - Banks output tax on leasing installment = NIL<br />
(because leasing installments are exempt from <strong>VAT</strong> in the case of a passenger bus with more than<br />
28 seats).<br />
<strong>Tax</strong>able Period ending 31.12.2002<br />
C - The transporter C’s input tax on the leasing advance 60,000/- is not allowed<br />
because he uses the bus in an exempt activity.<br />
<strong>Tax</strong>able period (month) ending Oc<strong>to</strong>ber 2004<br />
B - No implications<br />
C - Quarterly taxpayer – no implications till December<br />
D - Quarterly tax payer – same<br />
<strong>Tax</strong>able Period ending 31 December 2004<br />
C - <strong>Tax</strong> invoice from C <strong>to</strong> insurance company D on the<br />
Insurance claim:<br />
<strong>Value</strong> of supply = 350,000<br />
<strong>VAT</strong> = 70,000<br />
Total = 420,000<br />
∴output tax of C on the insurance claim = 70,000/-<br />
(because insurance claim is liable <strong>to</strong> <strong>VAT</strong> at 20%.)<br />
D - Input tax of D on the insurance claim = 70,000/-<br />
B- Bank B the absolute owner of the bus and the assignee of the insurance policy who<br />
forwards the insurance claim on behalf of C can recover the lease arrears from August<br />
2003 <strong>to</strong> November 2004 which is = 16 x 25,000/- = 400,000/-. But the amount of the claim<br />
is not sufficient <strong>to</strong> recover this amount because insurance claim is only 350,000/-. The<br />
<strong>VAT</strong> Rs.70,000/- belongs <strong>to</strong> C. Thus C has <strong>to</strong> pocket out the balance 50,000/- in order <strong>to</strong><br />
settle the arrears.<br />
<strong>Tax</strong>able Period (month) ending 28.02.2005<br />
B - Bank B must charge <strong>VAT</strong> on the disposal of bus because the amount payable <strong>to</strong> buy the<br />
bus which is Rs.892,500/- is more than 10% of the <strong>to</strong>tal amount payable under the lease<br />
which is 10% of 2,100,000/- = 210,000/-<br />
∴ Rs.892,500/- is not treated as another leasing installment.<br />
109
Thus output tax of B on the termination of lease and<br />
disposal of bus = 892,500/- @ 10%<br />
= 89,250/-<br />
(because the <strong>VAT</strong> rate applicable <strong>to</strong> this bus is 10%)<br />
This transaction being treated as something outside the lease, input tax credit may be allowed for<br />
the Bank B on the following basis.<br />
Input tax of B<br />
(allowable portion)<br />
= (Input tax paid) x Unexpired Lease period<br />
Total lease Period<br />
= 160,000 x 42<br />
72<br />
= 93,333/-<br />
<strong>Tax</strong>able period ending 31.03.2005<br />
C paid Rs.89,250/- as <strong>VAT</strong> <strong>to</strong> bank in February on the termination of the lease and purchase of the bus. But<br />
Input tax of C on termination of lease 89,250/- is not allowed in the hands of C because he uses the bus in<br />
an exempt activity.<br />
Input tax on insurance premiums<br />
Lessee C who has insured the bus as the exclusive user is not entitled <strong>to</strong> input credit on insurance<br />
premiums because passenger transport services is exempt from <strong>VAT</strong>. what is stated above.<br />
Eg: 2 – If in the above case there was a <strong>to</strong>tal loss after the accident and the insurance claim was<br />
Rs.1,100,000/- what is the <strong>VAT</strong> implication ?<br />
If it is a <strong>to</strong>tal loss the insurance claim can be treated as payment for the disposal of the bus and be taxed at<br />
the rate applicable <strong>to</strong> supply of a bus (i.e 10%) and not at 20%.<br />
∴ Output tax of C = 1,100,000 @ 10%<br />
= 110,000/-<br />
Input tax of D = 110,000/-<br />
But the entire 1,100,000/- will be appropriated by the bank which forwards the insurance claim on be behalf<br />
of C leaving only Rs.110,000/- <strong>VAT</strong> <strong>to</strong> C because the bus belongs <strong>to</strong> B.<br />
Eg 3 - In the above example, if it was a lorry (lessee is in lorry transport business)then leasing installments<br />
are liable <strong>to</strong> <strong>VAT</strong>. The rate of <strong>VAT</strong> is 10% because the lease is under Finance Leasing Act.<br />
Sale of Bus by A and purchase by B<br />
Output tax of seller A = 1,600,000 @ 20%<br />
= 320,000/-<br />
Input tax on Bank B = 320,000/-<br />
Leasing Advance<br />
Output tax of bank B = 300,000 @ 20%<br />
= 60,000/-<br />
Input tax on lessee C = 60,000/-<br />
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Leasing Installments<br />
Liable <strong>to</strong> <strong>VAT</strong> on accrual basis till 5 th installment in arrear is till December 2003. From January 2003 <strong>to</strong><br />
November 2004 bank can declare output tax on cash basis. Rate is 10%<br />
Insurance claim<br />
Same as before<br />
Termination of lease & disposal<br />
* Output tax of bank B = 892,500 @ 20%<br />
(<strong>Tax</strong>able period February 2005) = 178,500/-<br />
Input tax on the bank will have <strong>to</strong> be restricted <strong>to</strong> 10%. But input tax has already been claimed by the bank<br />
@ 20% when the lease was given in Oc<strong>to</strong>ber 2002. Amount claimed is 320,000/-. Therefore 160,000/-<br />
should be added back in the <strong>VAT</strong> return of the bank for the month February 2005.<br />
Input tax of bank B <strong>to</strong> be added back = 160,000/-<br />
(<strong>Tax</strong>able Period February 2005)<br />
input tax on lessee- <strong>Tax</strong>able period 31.03.2005 = 178,500/-<br />
Input tax on insurance premiums<br />
The lessee who insures the vehicle as the exclusive user is entitled <strong>to</strong> input tax credit on insurance<br />
premiums in addition <strong>to</strong> input tax credit on leasing installments, leasing advances etc.<br />
111
Chapter – 19<br />
Mortgages<br />
19.1 Mortgage loan is not liable <strong>to</strong> <strong>VAT</strong> because it is a financial service that is exempted.<br />
Item (xi(g) of the First Schedule. Any fees paid <strong>to</strong> a bank for the supply of a mortgage<br />
facility is a supply of a financial service and is exempt from <strong>VAT</strong>. Mortgage loan<br />
installments are also exempt from <strong>VAT</strong><br />
19.2 If the mortgagor (the deb<strong>to</strong>r) has defaulted and the mortgagee i.e the lender (Bank or the<br />
Financial Institution as the case may be) has auctioned the property mortgaged in<br />
satisfaction of the debt following supplies can be identified.<br />
19.3 If the lender sells the property after the property gets vested in the lender in terms of<br />
some written law then:-<br />
• vesting of the property in the lender is a supply form the defaulting mortgagor <strong>to</strong><br />
lender. The consideration for the supply is the settlement of debt.<br />
• Sale by auction is another supply.<br />
19.4 Vesting<br />
* If the mortgagor (ie. the deb<strong>to</strong>r) is a registered person he must charge <strong>VAT</strong> on<br />
the Bank or the financial institution as the case may be and declare that amount<br />
as output tax It is input tax in the hands of the bank/financial institution.<br />
• The “value of supply” on which <strong>VAT</strong> is calculated will be the amount of the loan<br />
settled by vesting. The “time of supply” i.e the time at which the liability arises<br />
will be the time the loan is settled. This may perhaps be a date after the auction.<br />
19.4 Sale by Auction<br />
The Bank must charge <strong>VAT</strong> on the buyer calculated on the sale price and declare it as<br />
output tax.<br />
19.6 The property cannot be treated as a sale of an asset used in an exempt activity by the<br />
bank/financial institution because the lender Bank became the owner of the asset only at<br />
the time of vesting. It is in fact not used by the lender in any activity whether exempt or<br />
not. The possibility is that the original owner (mortgagor) would have been using it in his<br />
taxable activity until it was vested in the bank<br />
19.7 The auctioneer is liable on the commission if he is registered. He should charge <strong>VAT</strong> on<br />
the bank declare it as output. It is input tax in the hands of the bank.<br />
19.8 Sale of pawned articles <strong>to</strong>o will be treated in the same manner.<br />
112
Chapter- 20<br />
Diplomatic Missions & <strong>VAT</strong><br />
20.1 (a) Diplomatic Missions and Organizations <strong>to</strong> which Diplomatic Privileges Act No. 9<br />
of 1996 applies, and<br />
(b) Diplomatic Personnel of such missions or organizations are exempt from <strong>VAT</strong><br />
on the following supplies :-<br />
• On the import of goods (including import under a temporary admission carnet for<br />
re-export) and<br />
• On the supply of goods and services obtained by them in Sri Lanka.<br />
The exemption in the case of Diplomatic Personnel is subject <strong>to</strong> the following<br />
conditions:-<br />
i. Reciprocal benefits should be available <strong>to</strong> their counter parts from Sri Lanka and<br />
ii. Goods and Services <strong>to</strong> which such reciprocal benefits are available must be<br />
identified as such by the C.G.I.R<br />
• Thus if any goods or services used by the Diplomatic personnel of the Sri Lankan<br />
Mission in any other country is exempt from <strong>VAT</strong> (or corresponding sales tax) in<br />
that country then the Diplomatic Personnel of the Mission of that country in Sri<br />
Lanka <strong>to</strong>o will be exempted from <strong>VAT</strong> in Sri Lanka in respect of such goods<br />
and services. The exemption is based on the basis of reciprocity only.<br />
• This is the only instance where persons (individuals and organizations) are<br />
exempted from payment of <strong>VAT</strong>. The exemption is applicable <strong>to</strong> payment of<br />
<strong>VAT</strong> and not for charging and collecting <strong>VAT</strong> if they undertake <strong>to</strong> carry on taxable<br />
activities/businesses.<br />
20.2 Following goods and services have been identified by the C.G.I.R for the purpose<br />
of exemption as being commonly exempted in all the countries.<br />
Goods<br />
• Any goods purchased locally or imported or supply of goods from Cus<strong>to</strong>ms<br />
Bonded warehouses and duty free shops with the approval of the Ministry of<br />
Foreign Affairs.<br />
Services<br />
• Telecom Services including internet<br />
• Electricity Services<br />
• Services provided by star class hotels<br />
• Buildings on rent/lease<br />
113
• Services provided by international schools<br />
• Security and jani<strong>to</strong>rial services<br />
• Supply of land and buildings <strong>to</strong> such organizations<br />
• Repairs & maintenance of buildings of such organisations<br />
• Maintenance Services on vehicles or other equipments owned by such<br />
organizations.<br />
• Supply of office equipment(computers, pho<strong>to</strong> copiers, fax machines etc) <strong>to</strong> such<br />
organisations<br />
• Cus<strong>to</strong>ms clearing services, transport services<br />
• Courier services, and insurance services provided <strong>to</strong> such organisations<br />
• The services provided by an Auctioneer <strong>to</strong> such organisations<br />
This list is now being reviewed <strong>to</strong> check whether reciprocal benefits are available in other<br />
countries with the information obtained from Sri Lankan Missions abroad with the<br />
assistance of the Ministry of Foreign Affairs.<br />
20.3 i. All the individuals working in or working for a Diplomatic Mission are not<br />
privileged persons. They are being separately identified by the Ministry of<br />
Foreign Affairs and an identity card (white colour) is issued <strong>to</strong> them. If they<br />
produce that Identify Card when they purchase above mentioned goods and<br />
services the supplier must not charge and collect <strong>VAT</strong> from them.<br />
ii. Diplomats with white identity cards are not entitle <strong>to</strong> <strong>VAT</strong> exemption on all the<br />
goods and services. At present the above mentioned goods and services have<br />
been identified as commonly exempted in all the countries. However on review if<br />
it is observed that some countries do not offer reciprocal benefits <strong>to</strong> Diplomats<br />
from Sri Lanka the names of these countries and the particular goods and<br />
services for which reciprocal benefits are not available will be separately<br />
published. Then the suppliers are not permitted <strong>to</strong> supply free of <strong>VAT</strong>, such<br />
goods and services, <strong>to</strong> Diplomats from those countries.<br />
20.4 It is the responsibility of the supplier <strong>to</strong> identify correctly the person or the organisation<br />
before making supplies free of <strong>VAT</strong>.<br />
20.5 The registered persons who makes such supplies <strong>to</strong> Diplomatic Missions and Privileged<br />
persons are not entitled <strong>to</strong> claim any input tax on such supplies and also they are<br />
required <strong>to</strong> keep adequate records of such supplies <strong>to</strong> Diplomats. The record should<br />
be available for inspection by the officers.<br />
20.6 If any person is not a privileged person he is not entitled <strong>to</strong> the <strong>VAT</strong> exemption<br />
irrespective of the fact that funds are provided by his/her Diplomatic Mission/organisation<br />
<strong>to</strong> purchase or obtain above mentioned goods/services. (eg. The International Schools<br />
114
must charge <strong>VAT</strong> on the fees paid for children of Non-Diplomatic staff even though the<br />
funds may have been provided by the Diplomatic Mission. White identity card is the<br />
criteria for identification of a privileged individual.<br />
20.7 The other services which are not identified will be dealt with on a case by case basis.<br />
20.8 Telecom & Electricity Board will be informed, on a case by case basis, not <strong>to</strong> charge<br />
<strong>VAT</strong> in respect of buildings rented or leased by Diplomatic Missions during the period of<br />
tenancy.<br />
20.9. Diplomatic Missions include Embassies, High Commissions, U.N.O. and its agencies and<br />
other recognized organizations.<br />
115
Chapter - 21<br />
Some Obligations Under <strong>VAT</strong><br />
21.1 Registered Person<br />
• Every Registered person shall display the certificate of registration prominently in<br />
his place/places of taxable activity.<br />
• Shall display the list of exempt goods and services in his place/places of taxable<br />
activity.<br />
• Shall issue ‘<strong>Tax</strong> Invoice” <strong>to</strong> another registered person and “Normal Invoice” <strong>to</strong><br />
others.<br />
• Shall print clearly the <strong>VAT</strong> registration number on all invoices whether they are<br />
“tax-invoices” or “Normal invoices”.<br />
• Shall issue tax invoice only once for each supply. If it becomes necessary <strong>to</strong><br />
issue a duplicate subsequently the words COPY ONLY must be marked clearly<br />
across the invoice<br />
• Shall maintain prescribed records of accounts, invoices etc. for a period of 5<br />
years.<br />
• Shall notify the CGIR of any changes.[para 4.8]<br />
21.2 General<br />
• Any importer, if he is not registered for <strong>VAT</strong>, must register in advance for<br />
clearing goods, irrespective of the value of imports.<br />
• Every person must apply for registration within 15 days of becoming liable <strong>to</strong><br />
charge <strong>VAT</strong><br />
• Maintain proper and sufficient records for <strong>VAT</strong> purposes as prescribed under<br />
Section 64(2) (The Gazette notice issued under Section 65of GST Act<br />
prescribing the records for GST purposes is valid for <strong>VAT</strong> until such time as a<br />
new gazette is issued when required). Vide Chapter 15<br />
• Maintain <strong>VAT</strong> Accounts (Input <strong>Tax</strong> and Output tax) and Registers of Import and<br />
Export (Vide Para 15.7)<br />
• Furnish a return within prescribed date.<br />
• Make payments by the due dates.<br />
116
Chapter – 22<br />
Transitional arrangements and other matters<br />
22.1 Transitional arrangements<br />
22.1.1 Input <strong>Tax</strong><br />
i. If a valid GST invoice is received during <strong>VAT</strong> period the input tax<br />
(although at 12.5%) should be declared in the relevant <strong>VAT</strong> return<br />
depending on whether the recipient is on cash basis or invoice basis<br />
ii. If the recipient is on invoice basis, input tax on a valid GST invoice received in<br />
<strong>VAT</strong> period must be claimed when the invoice is received even if it is received<br />
during <strong>VAT</strong> period.<br />
iii. If he is on cash basis input tax on a GST invoice must be claimed when<br />
the cash is paid subject <strong>to</strong> the condition that it must be claimed within six<br />
months of the receipt of invoice eventhough the cash may be paid in<br />
<strong>VAT</strong> period.<br />
x. If a person on cash basis, makes a payment during <strong>VAT</strong> period, in respect<br />
of a GST invoice received prior <strong>to</strong> 01.08.2002 the claim for deduction of<br />
input tax is allowed in the <strong>VAT</strong> return although it is at 12.5%. But the<br />
payment must be made within six months from 01.08.2002. It is also<br />
possible that input tax may be claimed in the <strong>VAT</strong> return on GST invoice<br />
raised and received after 01.08.2002. (eg. GST invoice raised on 12.08.2002<br />
in respect of security services provided in July 2002) and received on<br />
20.08.2002). This is because a GST invoice can be issued within 14 days of the<br />
time of supply. (Vide para 7.8).<br />
22.1.2 Output <strong>Tax</strong><br />
i. If a valid GST invoice is being issued during <strong>VAT</strong> period (as explained in<br />
para 7.8 the time of supply is not the time of transaction but the time as defined<br />
in Sec. 4 of the GST/<strong>VAT</strong> Acts) then the supplier has <strong>to</strong> declare as output tax<br />
(the GST tax of 12.5%) in the <strong>VAT</strong> return for the relevant taxable period<br />
depending on whether the supplier is on invoice basis or cash basis.<br />
ii. If the supplier is on invoice basis the output tax (of 12.5%) must be<br />
declared in the <strong>VAT</strong> return for the period during which the invoice was<br />
issued.<br />
iii. If the supplier is on cash basis the output tax (of 12.5%) must be declared<br />
in the <strong>VAT</strong> return when the payment is received.<br />
iv. In both cases (12.5% GST tax) has <strong>to</strong> be declared as output tax in the <strong>VAT</strong><br />
return. There is no special cage provided in the <strong>VAT</strong> return for this<br />
purpose. This tax should be declared in 20% tax cage i.e. Cage No.1.<br />
117
However an adjusted figure must be declared as the “<strong>Value</strong> of Supply” in<br />
Cage A of the return so that 20% of that value is equal <strong>to</strong> the output tax<br />
declared. Thus, it is not the “actual” value of supply” but an “adjusted<br />
figure” which is equal <strong>to</strong> tax multiplied, by 5 has <strong>to</strong> be declared as ‘value<br />
of supply’ in cage A.<br />
Eg: GST invoice issued on 12.08.2002 in respect of security services<br />
provided in July 2002 is as follows.<br />
Rs.<br />
<strong>Value</strong> of supply 20,000<br />
GST @ 12.5% 2,500<br />
Supply + GST 22,500<br />
NSL @ 6.5% 1,462<br />
Total consideration 13,962<br />
This Rs.2500/- must be declared as output tax in cage 1 of the <strong>VAT</strong><br />
return for the relevant taxable period depending on the accounting basis<br />
of the supplier. However the value of supply should be declared as<br />
2500x 5 = 12,5000/- and not as 20,000/- because 20% of 12,500 =<br />
2,500/-.<br />
N.B. In respect of taxable periods on or after 01.08.2002 the <strong>VAT</strong> will be<br />
at 20% but there will be no NSL.<br />
22.2. Bad debts<br />
If a bad debt written off during GST period is received during <strong>VAT</strong> period it will be taxed<br />
at the GST rate at which it was written off. That means 1/9 of the amount recovered<br />
should be declared in Cage 1 of the <strong>VAT</strong> return as output tax and 5/9 should be declared<br />
in Cage A as the value of supply.<br />
Ex. A registered person supplied services <strong>to</strong> a non-registered person (say construct a<br />
house) for 100,000/- in 1999. Following invoice was issued.<br />
<strong>Value</strong> of supply - 100,000<br />
GST @ 12.5% - 12,500<br />
Total consideration 112,500<br />
This 125,000/- was written off as a bad debt in April 2002. But 90,000/- was recovered<br />
on 30.09.2002.<br />
• Amount recovered Rs.90,000/- is treated as a part payment inclusive of <strong>VAT</strong>.<br />
The tax content (fraction) in the <strong>to</strong>tal consideration = 12,500<br />
112,500<br />
= 1/9<br />
∴ The tax (GST) content in the (part payment )<br />
of 90,000/- = 1/9 x 90,000<br />
= 10,000/-<br />
118
∴ “<strong>Value</strong> of supply” in 90,000 = 8/9 x90,000<br />
= 80,000/-<br />
This 10,000/- should be declared as the output tax in the <strong>VAT</strong> return.<br />
However, as it is paid during <strong>VAT</strong> period the “value of supply” that should be<br />
declared (in Cage A) of <strong>VAT</strong> return is not 80,000/- but an adjusted figure.<br />
The adjusted value of supply = 10,000x5<br />
= 50,000/-<br />
22.3 <strong>Tax</strong> Debit Notes and Credit Notes<br />
• If the supplier of goods or services has undercharged or overcharged the<br />
recipient (in respect of <strong>VAT</strong>) the supplier is entitle <strong>to</strong> issue a tax-debit Note or a<br />
tax credit note as the case may be for the purpose of adjusting the amount<br />
undercharged or overcharged.<br />
• The supplier shall pay the amount of out put tax if he has paid less or deduct as<br />
input tax the amount which he has over paid as output tax.<br />
• The recipient <strong>to</strong>o should make similar appropriate adjustments on receipt of a tax<br />
debit note or tax credit note.<br />
• Debit Notes & Credit Notes should be in specified forms.<br />
22.4 Gazette Notices<br />
The following gazette notices issued under the GST Act are valid for <strong>VAT</strong> purposes.<br />
i. Gazette Extra Ordinary No. 1024/8 of 21.04.1998 regarding keeping of records<br />
for GST purposes<br />
ii. Gazette Extra Ordinary No. 1201/9 of 11.09.2001 regarding zero-rating of<br />
international transportation.<br />
22.5 Other Approvals<br />
i. The approvals given under Section22(6) of the GST Act are valid <strong>to</strong> be applied<br />
under Sec. 22(7) of the <strong>VAT</strong> Act.<br />
ii. The approvals given under Section 23 of the GST Act <strong>to</strong> declare output tax and<br />
input tax on cash basis is valid under Sec. 23 of the <strong>VAT</strong>. Act.<br />
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Chapter 23<br />
Construction Contracts<br />
23.1 <strong>VAT</strong> Treatment<br />
<strong>VAT</strong> treatment of construction contracts differs from others for the reason that on one<br />
hand they consist of “progress payments” which cannot be predicted in advance<br />
with regard <strong>to</strong> the amount payable as well as the time at which the payment will fall due<br />
and on the other hand they may be based on non-reviewable agreements where the <strong>to</strong>tal<br />
consideration cannot be changed. This might create problems, if the tax rate changes<br />
while the contract is in progress, if it is not provided for in the agreement.<br />
23.2 Time of Supply and Invoicing<br />
The contrac<strong>to</strong>r should charge <strong>VAT</strong> at the “time of supply”. The time of supply is the<br />
time at which a claim for a “progress payment” is made. The claim for a progress<br />
payment generally takes the form of a work measurement statement of the work done<br />
up<strong>to</strong> the time of the claim. The contrac<strong>to</strong>r should issue a “TAX Invoice” depicting the<br />
“value of supply” as agreed upon in respect of a claim for progress payment and the <strong>VAT</strong><br />
payable thereon <strong>to</strong>gether with other necessary particulars required under Sec. 20(1).<br />
Sometimes the claim or the work measurement statement itself can be treated as the “tax<br />
invoice” if the words “<strong>Tax</strong> Invoice” are printed prominently <strong>to</strong>gether with other necessary<br />
particulars. However the “time of supply” is the time at which the claim is made which is<br />
the time at which payment arises. Thus if a claim for a “progress payment” is made<br />
during <strong>VAT</strong> period in respect of work done during GST period a <strong>VAT</strong> invoice should be<br />
issued under <strong>VAT</strong>. (because the work was handed over and the payment arised during<br />
this period.)<br />
23.3 Retention<br />
If, in case of a progress payment, a retention is made, the retention should be taxed only<br />
at the time the retention will be paid (in future). At the time of supply, only the “net<br />
progress payment” should be charged <strong>to</strong> <strong>VAT</strong>. Retention should be charged at the rate<br />
prevailing at the time of payment.<br />
23.4 Advance Payment<br />
If an advance is payable, the “time of supply” is the time that the advance is due and the<br />
advance should be charged <strong>to</strong> <strong>VAT</strong> at the rate applicable at that time. If the advance was<br />
payable during GST period then GST is chargeable on the advance. It was a final tax on<br />
the advance. No adjustment is due when the advance is se<strong>to</strong>ff subsequently.<br />
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23.5. Invoicing in <strong>VAT</strong> period for work done in GST period<br />
i. As stated above (23.2) the “time of supply” is the time at which a claim for a<br />
progress payment is made. Thus if a progress payment claim is made during<br />
<strong>VAT</strong> period in respect of work done in GST period a <strong>VAT</strong> invoice should be<br />
issued. However if the entire construction was completed before 31.07.2002 and<br />
the claim is made within 14 days as provided in the GST Act a GST invoice<br />
should be issued.<br />
ii. In the case of progress payments where the claim is made in <strong>VAT</strong> period for the<br />
work done in GST period question will arise if the <strong>VAT</strong> rate is higher than the<br />
GST rate while the contract agreement is non-reviewable. If the <strong>to</strong>tal<br />
consideration (including tax) cannot be changed in terms of the contract<br />
agreement and other laws governing contracts then the amount payable can be<br />
treated as <strong>VAT</strong> inclusive. <strong>VAT</strong> component can be computed by applying the tax<br />
fraction.<br />
23.6 Cash Basis<br />
Contrac<strong>to</strong>rs can obtain approval from the CGIR under Sec. 23 of the <strong>VAT</strong> Act <strong>to</strong> declare<br />
“output tax” and “Input tax” in their <strong>VAT</strong> returns on cash basis. In such cases where GST<br />
charged is received during <strong>VAT</strong> period and in the first category of cases referred <strong>to</strong> in<br />
para 23.5(i) where GST charged have <strong>to</strong> be declared as output tax in <strong>VAT</strong> returns the<br />
(12.5% GST) tax should be declared in 20% tax cage, i.e Box 1 of the <strong>VAT</strong> Return. Then<br />
the “value of supply” which should be declared in Box A should be adjusted in such a way<br />
that 20% of the value in Box A = Output tax declared. Thus in such cases the “adjusted<br />
value of supply” that should be declared in Box A is equal <strong>to</strong> tax multiply by five.<br />
23.7 Tenders<br />
In case of the tenders (both construction contracts and supply contracts) the tenderer<br />
should indicate the <strong>VAT</strong> due on the contract as a separate item. In evaluating the<br />
contract the <strong>VAT</strong> component may be ignored but keeping in mind that if the contract is<br />
awarded <strong>to</strong> a <strong>VAT</strong> registered person <strong>VAT</strong> has <strong>to</strong> be paid in addition <strong>to</strong> the agreed value.<br />
Even though the contrac<strong>to</strong>r may not be a registered person at the time of awarding the<br />
contract, he may subsequently be compelled <strong>to</strong> obtain registration. Thus all Ministries,<br />
Government Departments, Corporations and statu<strong>to</strong>ry bodies, Provincial Councils and<br />
Local Government Institutions, should make a note of the fact that their suppliers should<br />
be considered as registered for <strong>VAT</strong> if the amount payable under a contract within one<br />
year exceeds Rs.1.8 million or amount payable within 3 months exceeds Rs.500,000/-<br />
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Government agencies mentioned above are expected <strong>to</strong> call for a <strong>VAT</strong> clearance<br />
certificate issued by the <strong>VAT</strong> Branch before releasing the retention payment or before<br />
commencement of the payment of <strong>VAT</strong> component in invoices submitted by the<br />
tenderers and contrac<strong>to</strong>rs <strong>to</strong> whom <strong>VAT</strong> is payable in excess of 25,000/= Please also<br />
refer <strong>to</strong> Public Finance Circular NO.364 of 20.10.1998 which was issued under GST. It<br />
is expected that a new circular will be issued under <strong>VAT</strong>. (New Circular No.364(3) dated<br />
30.09.2002 has now been issued)<br />
23.8 <strong>VAT</strong> Rates<br />
i. Under <strong>VAT</strong> there is a special definition for a “construction contrac<strong>to</strong>r or a subcontrac<strong>to</strong>r”.<br />
The construction contrac<strong>to</strong>rs and sub-contrac<strong>to</strong>rs enumerated in that<br />
definition are subject <strong>to</strong> <strong>VAT</strong> at 10%. Other construction contrac<strong>to</strong>rs and sub<br />
contrac<strong>to</strong>rs are subject <strong>to</strong> <strong>VAT</strong> at 20%. If any person enters in<strong>to</strong> a contract - with<br />
another person - <strong>to</strong> provide for that person;<br />
Services in constructing of<br />
• a building<br />
• a road<br />
• a bridge<br />
• water supply system<br />
• drainage system<br />
• sewerage system<br />
• electricity generation and transmission system<br />
• any other infra-structure<br />
then he is a construction contrac<strong>to</strong>r.<br />
It should be a new building, a new road a new bridge and so on. Contracts for<br />
renovation, repairs and maintenance, supply contracts such as supply of pre-mix<br />
concrete and other goods, contracts for interior work and engineering surveying<br />
and architectural contracts (unless they fall under professional services) are all<br />
liable <strong>to</strong> <strong>VAT</strong> at 20%. (All these services were earlier liable <strong>to</strong> GST at 12.5%<br />
and NSL at 6.5% but with the introduction of <strong>VAT</strong> in order <strong>to</strong> grant some<br />
incentive <strong>to</strong> construction industry only the construction alone and not other<br />
ancillary services, has been granted the lower rate. The other ancillary<br />
services such as supply of material etc. are common <strong>to</strong> new constructions as well<br />
as <strong>to</strong> existing ones and are taxed at 20%).<br />
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ii.<br />
Construction contrac<strong>to</strong>r means the person who enters in<strong>to</strong> an agreement directly<br />
with the owner of the property <strong>to</strong> construct any one of the items enumerated<br />
above. Sub-contrac<strong>to</strong>r is the person who enters in<strong>to</strong> an agreement <strong>to</strong> construct<br />
any one of such items with the direct contrac<strong>to</strong>r and not with the owner.<br />
iii.<br />
Computer hardware is classified under industrial machinery and therefore supply<br />
of computer hardware is taxed at 10%. However repairs and other services<br />
including software is liable at 20%.<br />
23.9 Infra-structure<br />
For the purpose of this section infra-structure include the following:<br />
• supply and installation of lifts<br />
• supply and installation of concrete poles <strong>to</strong> C.E.B is not construction of infrastructure<br />
but if it includes supply and installation of poles and then do the<br />
construction of the distribution line for which the wires and other material are<br />
provided by C.E.B, then it can be treated as a construction contract (or a subcontract<br />
as the case may be ) in constructing an infra-structure .<br />
• supply and installation of air-conditioning system <strong>to</strong>gether with a building <strong>to</strong><br />
house the main air-conditioner plant. (This does not include supply and<br />
installation of small air-conditioners, it should be an air-conditioning system)<br />
• Infra-structure should relate <strong>to</strong> the items described in the definition i.e a building,<br />
a road, a bridge …etc. (Eg. Construction of infra-structure relating <strong>to</strong> a clock<br />
<strong>to</strong>wer is not covered)<br />
23.10 If the contractee under takes <strong>to</strong> pay the <strong>VAT</strong> on behalf of the contrac<strong>to</strong>r<br />
Sometime with certain contrac<strong>to</strong>rs (specially foreign contrac<strong>to</strong>rs) the contractual<br />
agreement, provides the contractee <strong>to</strong> undertake <strong>VAT</strong> payment on behalf of the<br />
contrac<strong>to</strong>r. In such situations the contractee should obtain a separate <strong>VAT</strong> registration<br />
number on behalf of the contrac<strong>to</strong>r. <strong>VAT</strong> returns should also be furnished by the<br />
contractee along with the payment. Any input credit available <strong>to</strong> the contrac<strong>to</strong>r may be<br />
claimed in the <strong>VAT</strong> return which is furnished on behalf of the contrac<strong>to</strong>r. This<br />
arrangement is no possible when the contrac<strong>to</strong>r is providing services <strong>to</strong> a number of<br />
clients.<br />
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Chapter – 24<br />
Rulings<br />
24.1 Following rulings which have been given <strong>to</strong> various institutions under GST are valid for<br />
<strong>VAT</strong> purposes.<br />
24.2 Telecom Services – Sri Lanka Telecom<br />
i. International Traffic Revenue – For all International incoming telephone calls,<br />
Telex etc. <strong>revenue</strong> is collected by the relevant foreign telecom authorities. These<br />
collections are shared with SLTL for using Sri Lanka net work. The same basis<br />
is adopted <strong>to</strong> calls originated from Sri Lanka.<br />
The share from foreign telecom authorities will be exempt from GST/<strong>VAT</strong>.<br />
ii.<br />
International Leased Circuits – These circuits have been provided by SLTI <strong>to</strong><br />
local agents in Sri Lanka for which the payments are made by the principal<br />
outside Sri Lanka. These circuits are physically connected from Sri Lanka <strong>to</strong> the<br />
respective foreign country through under sea cables or via satellite. These are<br />
used as dedicated lines by the local agent and the foreign principal <strong>to</strong><br />
communicate and transfer data. Under the Malburn Agreement many Telecom<br />
Authorities in the world have exempted this <strong>revenue</strong> from <strong>VAT</strong>/GST. We also<br />
exempt such <strong>revenue</strong> form GST/<strong>VAT</strong>.<br />
24.3 Telecom Services - Other Telecom Providers<br />
i. International Roaming – Under this system cellular phones can be used outside<br />
Sri Lanka free of GST/<strong>VAT</strong>, if the connection is between two places out of Sri<br />
Lanka and on incoming calls <strong>to</strong> Sri Lanka. The calls originated from Sri Lanka<br />
and other charges paid from Sri Lanka will be liable <strong>to</strong> GST/<strong>VAT</strong>.<br />
ii.<br />
Agencies providing telecom facilities - All such persons should register if the<br />
gross collection exceeds the registration limit. They should calculate output tax<br />
also on <strong>to</strong>tal collection and claim input tax on the payment made <strong>to</strong> SLTI and<br />
GST/<strong>VAT</strong> paid on other inputs.<br />
iii.<br />
Import and sale of all telecom equipments including payphone cards are<br />
liable <strong>to</strong> GST/<strong>VAT</strong>. Payphone cards are considered as a supply of a future<br />
services.<br />
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24.4. Invoicing - Special Arrangements –<br />
i. Master Invoice - Sri Lanka Telecom - With the introduction of a discount<br />
system by S.L. Telecom a requirement of a Master invoice has arisen. This will<br />
be applicable <strong>to</strong> any subscriber having a number of telephone connections. In<br />
such cases the SLT will issue a Master invoice showing the discount and the<br />
<strong>VAT</strong>. They will not show the <strong>VAT</strong> in the individual bills covered by the master<br />
Invoice.<br />
A Master invoice will be issued only where all the telephones were subscribed by<br />
the same person.<br />
A problem may arise in ascertaining disallowable <strong>VAT</strong> input tax if one or more<br />
telephones covered by the Master invoice have not been used in making taxable<br />
supplies. In such cases the disallowable <strong>VAT</strong> may be calculated using the<br />
following formula.<br />
Disallowable Telephone Total Bill x <strong>VAT</strong> charged in the Master Invoice<br />
Master Invoice Gross Bill<br />
When the GST/<strong>VAT</strong> input tax has been claimed using the Master invoice the<br />
individual bills covered by the Master invoice should be checked and make the<br />
necessary adjustments using the above formula.<br />
ii.<br />
Central Invoicing - Several Companies in one Group<br />
This is a ruling given <strong>to</strong> one group of companies and this can be approved <strong>to</strong> be<br />
extended <strong>to</strong> similar groups under exactly similar circumstances if a request is<br />
made. In order <strong>to</strong> streamline the procurement of goods/services for the<br />
companies under the group and <strong>to</strong> enjoy the economic benefits they wanted <strong>to</strong><br />
have the invoices from the suppliers <strong>to</strong> be received by one central company and<br />
debit the expenditure only <strong>to</strong> the other companies on some valid basis. Entire<br />
GST/<strong>VAT</strong> will be claimed by the central company who receive the invoice. In this<br />
case all institutions covered will be registered persons making only taxable<br />
supplies.<br />
This has been agreed subject <strong>to</strong> the following conditions:<br />
• This method should be applicable only <strong>to</strong> the services and not for goods.<br />
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• None of the companies covered by this scheme should engaged in<br />
exempt/excluded supplies.<br />
• Adjustments on fringe benefits, self supplies etc. in relation <strong>to</strong> such services<br />
should be made by the individual Companies not withstanding that they do not<br />
claim input tax.<br />
• Any GST/<strong>VAT</strong> payment due from participating companies should be made<br />
without considering the input tax situation of the central company.<br />
• The company should consider the full amount of input. Companies should not<br />
make any adjustments for income tax purposes.<br />
24.5 Exemption of Educational Services<br />
• Supply of educational services are exempted if they are provided by (i) an<br />
educational establishment (ii) government schools or (iii) schools funded by the<br />
government.<br />
• An educational establishment means a higher educational institution established<br />
under the Universities Act or the Buddhist and Pali Universities Act or any<br />
recognized institution providing vocational training or re-training or an<br />
incorporated examination body.<br />
For this purpose<br />
i. “Recognized Institutions’ means any government department, any Provincial<br />
Council, any Local Government Authority and any board or body which has been<br />
established by or under any law other than Companies Act No.17 of 1982 with<br />
capital wholly or partly provided by way of a grant or loan from the Government.<br />
ii.<br />
iii.<br />
“A school funded by the Government” means any school in receipt of funds from<br />
the government <strong>to</strong> meet the salary bill.<br />
Educational Services do not include – sale of goods from school shops, sale of<br />
school uniforms, and sports clothing etc., receipt of commission for allowing<br />
sales by outside organizations, conducting carnivals, exhibitions or fairs etc.,<br />
renting premises and other fund raising activities.<br />
24.6 Exclusion of local buying and selling<br />
By virtue of Section 3 if a supplier of goods is unable <strong>to</strong> satisfy the C.G.I.R as <strong>to</strong> the<br />
source from where the goods supplied by him were acquired then such supplies will not<br />
be treated as local buying and selling of goods and will be subject <strong>to</strong> <strong>VAT</strong>. In order <strong>to</strong><br />
satisfy the C.G.I.R. evidence in the form of following records are required.<br />
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i. A record of local purchases of goods (whether for cash or on credit) which should<br />
contain the following details.<br />
(a) Date of transaction<br />
(b) Name and address (including business name) of the person from whom<br />
the goods were acquired.<br />
(c) Type of goods and quantity/capacity<br />
(d) Whether imported goods or local goods?<br />
(e) Consideration paid and nature of payment(Cash cheque etc.).<br />
(f) If GST/<strong>VAT</strong> has been paid on purchases, the amount paid.<br />
ii.<br />
Chronologically arranged receipts and tax invoices in respect of such purchases.<br />
24.7 Issues relating <strong>to</strong> insurance<br />
• Primary Insurance - Collection of premia (other than pure life insurance) is<br />
liable <strong>to</strong> GST/<strong>VAT</strong>. When the life insurance is combined with other insurance like<br />
medical/health it has <strong>to</strong> be apportioned.<br />
• Re-insurance – Local - This is a part of an insurance business and therefore<br />
GST/<strong>VAT</strong> has <strong>to</strong> be charged on the premia other than on life insurance.<br />
• Re-insurance – Foreign - The insurance companies who pay re-insurance<br />
premia <strong>to</strong> companies outside Sri Lanka need not pay GST/<strong>VAT</strong> on such<br />
insurance premia because the supply and consumption of service take place<br />
outside Sri Lanka.<br />
• Insurance Claims - If the repair should take place in an assigned garage, and<br />
if the garage is a registered person, the garage should charge GST/<strong>VAT</strong> and<br />
issue a tax-invoice <strong>to</strong> the insurance company. The garage should declare that<br />
amount as output tax. Insurance company can claim it as input credit (Owner is<br />
not involved)<br />
- If the owner has <strong>to</strong> repair the vehicle on his own and submit bills <strong>to</strong> the<br />
Insurance Company:<br />
- In such cases the insurance company has no contract with the garage.<br />
The garage owner, if registered, should charge <strong>VAT</strong> and issue a taxinvoice<br />
in respect of repair charges. The insurance company should pay<br />
<strong>VAT</strong> only on such invoice and not on any other invoices that may be<br />
produced by the owner of the vehicle in respect of spare parts which he<br />
may have purchased for the purpose of such repair. There should be<br />
only one invoice form the garage and the value of supply may include the<br />
value of spare parts supplied by the owner. The insurance company is<br />
not obliged <strong>to</strong> reimburse <strong>VAT</strong> <strong>to</strong> the owner in respect of spare parts<br />
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which he has supplied <strong>to</strong> the garage for the purpose of the repair<br />
although he may have obtained tax-invoices in the name of the<br />
insurance company from the suppliers of spare parts.<br />
- In either case the insurance company is not liable <strong>to</strong> pay <strong>VAT</strong> <strong>to</strong> any<br />
person who not being a registered person is not entitle <strong>to</strong> issue a tax<br />
invoice <strong>to</strong> the insurance company.<br />
24.8 Exemption of Health Care Services<br />
Health Care Services provided by Medical Institutions or by professionally qualified<br />
persons providing such care are exempted from <strong>VAT</strong>.<br />
• Health Care Services means - Medical services, Public Health Services and<br />
related labora<strong>to</strong>ry services relating <strong>to</strong> patient care including medical consultation<br />
and diagnosis and/or prophylactic, therapeutic or surgical treatment for persons.<br />
• Medical Institutions means - Institutions which look after patient care and<br />
include both private and State run hospitals and dispensaries registered under<br />
Medical Ordinance No.26 of 1927, Ayurveda Act No. 31 of 1961 or Homeopathy<br />
Act No.7 of 1970.<br />
• Professionally qualified person providing health care services means -<br />
Persons who are authorized under the Medical Ordinance, (Medical Officers,<br />
Medical Specialist and Registered Medical Practitioners) Ayurveda Act or<br />
Homeopathy Act <strong>to</strong> practice as Medical Practitioners, Consultants, or in any other<br />
capacity in Medical Care and/or <strong>to</strong> provide medical treatments <strong>to</strong> persons<br />
suffering form any decease.<br />
• The supply of service followed by invoicing should be done either by a<br />
medical institution or by a professionally qualified person providing health care. If<br />
the professionally qualified person is employed by an institution that institution<br />
will not get the benefit of exemption unless it is a registered medical institution.<br />
24.9 Exemption of Financial Services<br />
(i) Colombo S<strong>to</strong>ck Exchange<br />
• Fees received from the following functions are liable <strong>to</strong> <strong>VAT</strong><br />
i. Listing Fees – (i.e the fees charged form each of the listed companies<br />
for enjoying the status of a listed company in the s<strong>to</strong>ck exchange).<br />
ii. Quotation Fees – (i.e the admission fee charged from companies<br />
seeking <strong>to</strong> obtain membership of the s<strong>to</strong>ck exchange)<br />
iii. Cus<strong>to</strong>dian Bank fees – (i.e the fixed fee charged from each of the<br />
Cus<strong>to</strong>dian Banks registered with the s<strong>to</strong>ck exchange for participating in<br />
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exchange operation and the fee based on the number of trades through<br />
each Cus<strong>to</strong>dian Bank)<br />
iv. Commercial Services - Services such as charges for computer<br />
information, providing “data signal”, and remote data link.<br />
• Fees or Commission on the following are treated as receipts form exempt<br />
supplies.<br />
i. Bankers fees – i.e fees payable by brokering firms (member) in order <strong>to</strong><br />
operate as members of the s<strong>to</strong>ck exchange – fixed charge<br />
ii. Commission on Brokerage - Share of brokerage commission for<br />
transactions through the s<strong>to</strong>ck exchange.<br />
iii. Fees from clients (Listed companies) – charges received form listed<br />
companies based on the number of transactions as a fee for moni<strong>to</strong>ring<br />
of deposi<strong>to</strong>ry operations.<br />
v. Brokers entrance fees – Entrance fees payable by new firms <strong>to</strong> obtain<br />
a broker license.<br />
(ii). S<strong>to</strong>ck Brokering Firms (i.e Members of the Colombo S<strong>to</strong>ck Exchange)<br />
The services rendered by s<strong>to</strong>ck brokering firms in relation <strong>to</strong> the issue, allotment<br />
or transfer of ownership of any equity security or participa<strong>to</strong>ry security can be<br />
considered as exempt financial services. However the services rendered by the<br />
agents of such brokering firms cannot be considered in the same way and<br />
therefore such services are liable <strong>to</strong> <strong>VAT</strong>.<br />
(iii)<br />
(iv)<br />
Unit Trusts<br />
A unit of a Unit Trust can be considered as participa<strong>to</strong>ry security and the issue,<br />
allotment or transfer of such participa<strong>to</strong>ry security can be exempted under<br />
financial services. The exemption may be applicable for the following receipts of<br />
the Unit Trusts as well.<br />
i. Interest income received from bank deposits, commercial paper,<br />
debentures, repurchase agreements and other debt instruments.<br />
ii. Capital gains received by way of sale of equity securities and debt<br />
securities.<br />
Cus<strong>to</strong>dian Services<br />
This includes holding of cus<strong>to</strong>mer funds and settlement of brokers on receiving<br />
instructions from clients for which settlement function a quarterly fee is levied<br />
from the cus<strong>to</strong>mer. These services are liable <strong>to</strong> <strong>VAT</strong>. However, settlement fees<br />
collected by banks for services in connection with carrying out of cus<strong>to</strong>mers<br />
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instructions can be exempted if such services are in relation <strong>to</strong> the payment of<br />
any Note or Order for payment.<br />
(v)<br />
Credit Card Operations<br />
Fees paid in connection with the take over of the merchant deb<strong>to</strong>r can be exempt<br />
on the basis that it is a transfer of ownership of a debt security.<br />
(vi) Other Services provided by Banks and Financial Institutions (Ruling<br />
issued under <strong>VAT</strong><br />
All the services provided by banks whether they are ancillary services or not are<br />
not essentially financial services for the purpose of <strong>VAT</strong>, For the purpose of<br />
<strong>VAT</strong> many of the supplies by the banks are treated as “mixed supplies” and the<br />
strictly financial services component for <strong>VAT</strong> purposes can be separated. Thus.<br />
• Leasing, Management Services, Consultancy Services and Commission earned<br />
form Investment Management Services<br />
• Courier Services, Provision of safety lockers, sale of unwanted articles, sale of<br />
properties mortgaged.<br />
• Legal fees on granting of loans and other legal fees recovered form cus<strong>to</strong>mers.<br />
• Pho<strong>to</strong>copy charges, telex/fax charges<br />
• Commission earned from providing cus<strong>to</strong>dian services, insurance services.<br />
• Credit card joining fees<br />
• Non refundable tender deposits<br />
• Other income such as income from entrepreneur development activities.<br />
Are treated as “separate supplies” which are taxable and not treated as supply<br />
of financial services<br />
24.10 International Permits<br />
Charges for issuing international permits are liable <strong>to</strong> <strong>VAT</strong> since the service is provided <strong>to</strong><br />
a person in Sri Lanka. However, any amount included as a government charge may be<br />
considered as a re-imbursement of expenditure and may be excluded from the “<strong>Value</strong> of<br />
supply”<br />
24.11 Film Exhibi<strong>to</strong>rs<br />
Film exhibi<strong>to</strong>rs are liable <strong>to</strong> be registered for <strong>VAT</strong> as agents of the Film Corporation and<br />
other irrespective of whether the value of supply is below or above the taxable threshold.<br />
They are required <strong>to</strong> file monthly <strong>VAT</strong> returns. However they may not charge <strong>VAT</strong> on<br />
other activities if the “value of supply” of other activities is below the threshold. If the<br />
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value of supply of other activities are above the threshold “output tax” from “exhibition of<br />
films” and “output tax” on other activities can be declared in the same return.<br />
24.12 <strong>VAT</strong> Invoicing on advertising<br />
i. Advertising in media (in news papers, Radio, T.V. etc) is often done through<br />
agents. The media gets 85% of the charge and the agent gets 15%. If it is done<br />
through an agent, the agent should issue a tax-invoice for the “whole amount”<br />
and account for output tax if the agent is a Registered Person.<br />
ii. Then the media (Newspaper, Radio, TV) should issue a tax-invoice on their<br />
share of 85%, <strong>to</strong> the agent and charge output tax <strong>to</strong> the agent. By using this<br />
invoice the agent can claim that amount as input tax.<br />
iii. In addition both the media and the agent can claim input tax credit on other<br />
relevant items of expenditure.<br />
iv. The payment for Arts work, Models, or any other inputs in relation <strong>to</strong> the<br />
production of advertisement . (Radio/TV commercials) cannot be deducted from<br />
the gross amount when arriving at the “<strong>Value</strong> of supply” for <strong>VAT</strong> purposes.<br />
However, if these service providers are registered persons they will issue tax<br />
invoices and the media or the agent can claim input tax.<br />
v. If the “agent is not registered” for <strong>VAT</strong> then the media should charge <strong>VAT</strong> on<br />
the full value of the service provided. The agent cannot charge <strong>VAT</strong> on the<br />
commission of 15%.<br />
vi. If the above method is not adopted then the media should directly invoice the<br />
client on the full value + <strong>VAT</strong> and the agent can claim his 15% commission +<br />
<strong>VAT</strong> if applicable from the media.<br />
vii If the business is directly done by media without an agent the media should<br />
directly invoice the client, “value of supply + <strong>VAT</strong>”.<br />
24.13 The following rulings have also been issued under <strong>VAT</strong>.<br />
Renting of Co-owned properties<br />
The renting or leasing of a property by its co-owners (or undivided share holders) of such<br />
property amounts <strong>to</strong> a taxable activity carried on by the co-owners (or the undivided<br />
share holders as the case may be) which is different from any other taxable activity that<br />
may be carried on by an individual co-owner or some of the co-owners.<br />
i. If the rent received by the co-ownership exceeds the threshold it should obtain<br />
registration for <strong>VAT</strong> as a “Registered Person” which is separate and distinct from<br />
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ii.<br />
iii.<br />
any other registration that may have been obtained by an individual co-owner or<br />
some of the co-owners because a co-ownership is defined as a ‘person’ for <strong>VAT</strong><br />
purposes under Sec. 83 of the Act.<br />
If the identical co-owners are renting several properties all such rents should be<br />
considered under one-registration (and they should be amalgamated for the<br />
purpose of calculating the threshold) even if the share of rent may be different<br />
from different properties in terms of the title <strong>to</strong> the properties. It is like several<br />
partnerships carried on by identical partners while the profit sharing ratio is<br />
different in different partnerships The reason is <strong>VAT</strong> is chargeable by a<br />
Registered Person" ”and not by a "<strong>Tax</strong>able Activity". (Vide Para 4.12).<br />
An individual co-owner’s rental income which he receives on his own form a<br />
different property will not be amalgamated with his share of rent from the coownership<br />
if the co-ownership is liable <strong>to</strong> be registered separately; However if<br />
the co-ownership’s rental income is below the threshold and is not registered for<br />
<strong>VAT</strong> then for the purpose of calculating the threshold, the individual co-owners<br />
share of rent will be amalgamated with his “value of supplies’ from other ‘taxable<br />
supplies’ which he may be supplying.<br />
24.14. Entrance fees of a club<br />
The definition of taxable activity in the case of a club includes only (i) receipts of<br />
subscriptions and (ii) provision of facilities <strong>to</strong> its members and others for a consideration.<br />
Thus “entrance fees” appear <strong>to</strong> be outside the scope of taxable activity. However in<br />
terms of item (xx) of Schedule 2 <strong>to</strong> the <strong>VAT</strong> Act subscription can be constructed <strong>to</strong> mean<br />
membership fees and similar charges. Thus.<br />
“if the entrance fees is similar <strong>to</strong> membership fees in the sense that it entitles a<br />
members <strong>to</strong> continue as a member or <strong>to</strong> other benefits enjoyed by a member<br />
such as voting rights etc., or if it is charged in consideration of other facilities<br />
offered by the club or the payment of entrance fees makes the person entitles <strong>to</strong><br />
other facilities then entrance fees is treated as subscription or a charge similar <strong>to</strong><br />
membership fees and is subject <strong>to</strong> <strong>VAT</strong> at 10%.<br />
The rules and regulations and or the constitution of the club will enable this <strong>to</strong> be<br />
determined. In case the entrance fees is not a charge similar <strong>to</strong> membership fees which<br />
can be subject <strong>to</strong> <strong>VAT</strong>, the input credit attributable <strong>to</strong> that part of the receipts will be<br />
disallowed (Any claim should be forwarded <strong>to</strong> file <strong>VAT</strong>/Gen/18)<br />
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24.15 Management Companies<br />
Sometimes it is possible that a hotel or an estate is managed by a management company<br />
and the management [company is the registered person which is registered for <strong>VAT</strong> with<br />
the C.G..R while the hotel or the estate has no registration on its own. But invoices in<br />
respect of certain services obtained by the hotel or the estate (such as telephone, water<br />
and electricity) may be received in its own name and not in the name of the management<br />
company. They are not entitle <strong>to</strong> ask for ‘tax invoices’ because the hotel or the estate is<br />
not a registered person. In such situations the management company can obtain prior<br />
approval from the CGIR <strong>to</strong> apply the tax fraction in order claim input tax in respect of<br />
such invoices. (claim should be forwarded <strong>to</strong> File <strong>VAT</strong>/Gen/18)<br />
24.16 Input tax on assets purchased in the name of partners<br />
Partnership being a non legal entity, sometimes it may not be possible <strong>to</strong> purchase<br />
certain assets in the name of a partnership. The asset and the invoice in such situations<br />
maybe in the name of an individual partner and the partnership, although a Registered<br />
Person, will be without a tax invoice while input tax has been paid in respect of that asset.<br />
In such cases the partnership should obtain prior approval from the C.G.I.R in order<br />
claim input tax in respect of such assets by applying the tax fraction by forwarding<br />
i. evidence <strong>to</strong> the effect that the asset was purchased out of partnership funds and<br />
ii. a letter of confirmation singed by the precedent partner <strong>to</strong> the effect that the<br />
asset will be brought in<strong>to</strong> the partnership balance sheet.<br />
(claim should be forwarded <strong>to</strong> File <strong>VAT</strong>/Gen/18)<br />
24.17 Project cost of BOI Companies engaged in housing projects<br />
The project cost of BOI companies engaged in housing projects for the purpose of liability<br />
<strong>to</strong> <strong>VAT</strong> as envisaged in item (xxiii) of the First Schedule <strong>to</strong> the <strong>VAT</strong> Act should be the<br />
actual cost of the project under taken and not the capital or the investment in the<br />
company.<br />
24.18 Educational Services(professional bodies)<br />
Although some professional bodies which conduct professional examinations or provide<br />
vocational training may qualify as recognized institutions (within the meaning of<br />
educational establishment) in view of the fact that their capital have been contributed<br />
wholly or partly by the government (vide 24.5) the following will not be treated as exempt<br />
educational services.<br />
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i. Membership fees and or subscriptions<br />
ii. Sale of books, journals and magazines; any royalties and other miscellaneous<br />
income.<br />
The exempt educational services will be restricted <strong>to</strong><br />
(a) student membership fees,<br />
(b) examination fees and tuition fees<br />
24.19. Premature termination of lease in the case of coaches used in public passenger<br />
transport services<br />
If the coach has more than 28 seats the leasing company is not entitled <strong>to</strong> input credit in<br />
relation <strong>to</strong> purchase of the coach because lease installments are exempt from <strong>VAT</strong>.<br />
When the lease is terminated within 3 years the leasing company is required <strong>to</strong> charge<br />
<strong>VAT</strong> on the amount payable (by the lessee) <strong>to</strong> acquire the coach if such amount exceeds<br />
10% of the <strong>to</strong>tal amount payable under the lease. In such situations therefore both the<br />
purchase and sale (of the coach) are liable <strong>to</strong> <strong>VAT</strong> while no input credit is allowed in<br />
respect of <strong>VAT</strong> paid on the purchase value. In order <strong>to</strong> overcome the cascading effect<br />
that may arise due <strong>to</strong> this treatment the leasing company will be allowed input credit on<br />
the basis of the following formula.<br />
Input credit allowable = ( Actual input tax paid) x Unexpired lease<br />
period<br />
Total lease period<br />
(Please see Ex. 2 in para 18.17)<br />
24.20 Structured leasing<br />
Certain leasing companies allow the lessees <strong>to</strong> pay leasing installments on a seasonal<br />
basis in cases where the lessee’s income is seasonal and not regular. For example<br />
farmers engaged in paddy cultivation do not have regular income. Their income is<br />
seasonal. Some leasing companies allow leasing installments in respect of leased<br />
trac<strong>to</strong>rs <strong>to</strong> be paid during the seasons only. In order <strong>to</strong> do this they either fix large lease<br />
installments for the seasons by allowing grace periods in between the seasons or allow<br />
the lease installments during the off seasons <strong>to</strong> go in<strong>to</strong> arrears without any penalty so<br />
that such arrears can be paid during the seasons. This type of leasing, which is known<br />
as structured leasing, <strong>to</strong>o should be subject <strong>to</strong> <strong>VAT</strong> in the same manner as other leases.<br />
Any advance should not be treated as a leasing installment. Large installments or<br />
amounts paid during the seasons can be treated as normal installments. Any amount<br />
payable in order <strong>to</strong> purchase the asset at the termination of the lease should be treated<br />
as a separate transaction if such amount exceeds 10% of the <strong>to</strong>tal amount payable under<br />
the lease. If the asset is transferred on the payment of the last installment, that<br />
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installment is treated as the amount payable <strong>to</strong> purchase the asset and not as a leasing<br />
installment. ,If the initial payment exceeds 10% of the <strong>to</strong>tal payable under the lease it is<br />
treated as an advance and not as a leasing installments.<br />
24.21. Condominium property management committees<br />
The contributions or amounts paid by the occupiers of houses in a condominium property<br />
<strong>to</strong> the management committee formed in terms of Apartment Ownership Law of 1973 for<br />
the provision of common facilities <strong>to</strong> the property will not be treated as subscriptions or<br />
membership fees paid by members of a club. Such payments, which is usually based on<br />
the floor area occupied by each person are treated as payments for supply of services.<br />
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Chapter – 25<br />
Zero Rated Supplies<br />
25.1 Section 7 of the Act provides that certain “supplies” be zero- rated. Broadly these<br />
supplies can be categorized in<strong>to</strong> two groups viz.<br />
i. Goods<br />
Export of goods by the supplier himself and<br />
(Please see para 16.1)<br />
ii. Services<br />
Services connected <strong>to</strong> exports, international transportation, property outside Sri<br />
Lanka and certain services consumed outside Sri Lanka.<br />
25.2 When a supply is zero-rated no tax shall be charged on such supply but it is treated as a<br />
taxable supply in all other respects. That means input tax in relation <strong>to</strong> such supplies<br />
made by a registered person can be deducted from his output tax. If all his supplies are<br />
zero-rated then such persons out put tax is zero and input tax will be refunded.<br />
25.3 Section 7(i)(b)(iv) provides that “the international transportation (including transshipment)<br />
of goods or passengers as are specified by the C.G.I.R by a Notification published in the<br />
Gazette will be zero-rated. In this connection the Services specified by the C.G.I.R are<br />
specified in gazette – extra ordinary NO.1201/9 of 11.09.2001. This is an important area<br />
in zero-rating.<br />
25.4 International Transportation is defined in Sec. 80, <strong>to</strong> mean – any service directly<br />
related <strong>to</strong> the transportation of goods or passengers –<br />
(a) from a place in Sri Lanka <strong>to</strong> a place out side Sri Lanka;<br />
(b) from a place outside Sri Lanka <strong>to</strong> a place in Sri Lanka up<strong>to</strong> the point of landing<br />
unless such services are carried out under a specified carriage contract<br />
according <strong>to</strong> the Documents of Carriage issued by a freight forwarder who<br />
is registered with the Central Bank of Sri Lanka.<br />
(c) From a place outside Sri Lanka <strong>to</strong> another place outside Sri Lanka.<br />
• This excludes landing, delivery and other services in relation <strong>to</strong> imports. That<br />
means they are not zero-rated.<br />
• Exports:- Freight forwarding from a fac<strong>to</strong>ry in Sri Lanka <strong>to</strong> a destination abroad<br />
will be zero-rated. Services obtained from others are not zero-rated.<br />
• Zero rating is available only <strong>to</strong> the international transporter who in fact<br />
undertakes <strong>to</strong> transport goods/passengers. Thus the charterer of a ship or aircraft<br />
for international transportation of goods or passengers will qualify for zerorating<br />
but not the owner of the ship or aircraft who hired it or supplied it <strong>to</strong> the<br />
charterer.<br />
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• Any other services including coastal and <strong>inland</strong> transportation services for a<br />
local cus<strong>to</strong>mers will be liable <strong>to</strong> <strong>VAT</strong>.<br />
• Outbound travel being international transportation of passengers is zero-rated.<br />
But it is not applicble for commission received by the local agent.<br />
25.5 Following general guide lines may be used in deciding <strong>to</strong> zero rate export of goods and<br />
supply of services under <strong>VAT</strong> Act.<br />
Sec.7(1)(a) Export of Goods – Submission of “export cusdec” is not sufficient.<br />
Goods should have been in fact loaded in<strong>to</strong> the ship/air craft. Basic<br />
document is Boat Note(Please see para 16.1) Persons exporting only<br />
exempt goods <strong>to</strong>o can register for <strong>VAT</strong> and come under zero-rating.<br />
Sec.7(1)(b)(i) Services directly connected with any movable/immovable property<br />
outside Sri Lanka - If the services are performed in Sri Lanka in<br />
relation <strong>to</strong> any property out of Sri Lanka such services are zero rated.<br />
(Eg. A lawyer’s report on land outside Sri Lanka, a valuation report on a<br />
property outside Sri Lanka, advertising and insurance services in<br />
relation <strong>to</strong> property outside Sri Lanka. maintenance via internet of<br />
software used overseas etc. being services directly connected with<br />
property situated outside Sri Lanka are zero-rated. However a<br />
business organization out side Sri Lanka will not fall under this and<br />
hence the management of such a business cannot be zero rated).<br />
Other examples are<br />
Eg. 1 – A Sri Lankan insurance company issuing insurance cover <strong>to</strong> client’s mo<strong>to</strong>r vehicle<br />
which is in India. The service of insuring is zero-rated because it is a service directly<br />
connected with immovable property outside Sri Lanka.<br />
Eg.2 – A Sri Lankan film (registered person) sells apartments in Australia on behalf of a<br />
client in Sri Lanka. The commission received is zero rated for the same reason as above<br />
i.e a service provided in Sri Lanka but directly connected with immovable property<br />
outside Sri Lanka.<br />
It must be noted that in this type of situations the contract <strong>to</strong> supply the services may<br />
have been concluded in Sri Lanka but yet the services are zero rated because the<br />
services are directly connected with property outside Sri Lanka. (Please se discussion in<br />
para 25.6)<br />
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(ii)<br />
(iii)<br />
(iv)<br />
Services directly connected with any repair of any foreign ship or<br />
aircraft – is zero rated Foreign ship/Aircraft means a ship or aircraft<br />
registered in a foreign country or owned by a person not in Sri Lanka (It<br />
may as will be a chartered/leased vessel or aircraft) Repair does not<br />
include maintenance.<br />
Services directly connected with the repair/refurbishment of marine<br />
cargo containers.- (These should be containers currently in use and not<br />
the containers transferred along with the goods).<br />
Services directly connected with any goods imported for re-export -<br />
This is applicable <strong>to</strong> goods imported for re-export without any processing<br />
(Entre-pot trade)<br />
Services directly connected with the use outside Sri Lanka of any<br />
intellectual property such as patents, copyrights etc. Eg.<br />
Preparation of agreements, consultations or any other advise etc., on<br />
such use of property.<br />
Services directly connected with the “International transportation”<br />
of goods/passengers - This will include trans-shipment. For the<br />
definition of international transportation see para 25.4. Zero rating is<br />
available <strong>to</strong> the carrier who may be the charterer of the ship or air craft<br />
but not the owner unless the owner himself undertakes the transport.<br />
Following will be considered as services directly connected with international<br />
transportation for the purpose of zero-rating: (Vide Gazette No.1201/9 of 11.09.2001 and<br />
1246/21 of 26.07.2002.)<br />
(a) Services provided by airlines, and shipping lines engaged in<br />
International transportation - Any other mode of transport included in<br />
a “package” will not qualify.<br />
(Only up<strong>to</strong> a harbour or airport in Sri Lanka in the case of imports –<br />
landing/delivery are excluded).<br />
(b) Following services provided by the Airport and Aviation Services (Sri<br />
Lanka) Ltd.,<br />
i. Aircraft landing/parking, over flying<br />
ii. Aircraft over flying, or<br />
iii. Provision of day rooms & showers <strong>to</strong> transit passengers<br />
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(d)<br />
(e)<br />
(f)<br />
(c)<br />
Following services provided by Sri Lanka Ports Authority (SLPA) in<br />
relation <strong>to</strong> the international shipping only -<br />
i. SLPA Tariff – Section I -Navigation and related services<br />
ii. SLPA Tariff–Section II -Stevedoring and Harbour Tonnage Dues<br />
iv. SLPA Tariff – Section III – Landing & delivery and shipping<br />
(Excluding landing/delivery of imports unless such services are<br />
carried out under a specified carriage contract according <strong>to</strong> the<br />
documents of carriage issued by a freight forwarder who is<br />
registered with the Central Bank of Sri Lanka); and<br />
iv. SLPA Tariff – Section IV – General Services rendered <strong>to</strong><br />
International Shipping lines.<br />
v. SLPA Tariff – Section V – Hiring Services rendered <strong>to</strong><br />
International Shipping lines<br />
Services provided by statu<strong>to</strong>ry bodies (S.L. Cus<strong>to</strong>ms, Sri Lanka<br />
Freight Bureau) <strong>to</strong> international shipping lines and their agents -<br />
Cus<strong>to</strong>ms charges, Sri Lanka Freight Bureau Registration fees and other<br />
fees and charges <strong>to</strong> international shipping lines and their representatives<br />
Services provided by the General Sales Agents and licensed<br />
Agents of International airlines - i.e Commission earned on<br />
international transportation.<br />
Services provided by freight forwarders etc. – Services provided by<br />
freight forwarders (agents) or their local representatives who are<br />
registered with the Central Bank of Sri Lanka under the provisions of the<br />
Exchange Control Act, facilitating international transportation, and where<br />
such services are evidenced by a document of carriage covered by<br />
a Freight Forwarders All Risk Legal Liability Insurance Policy<br />
issued in favour of the local freight forwarder (Gazette Extra Ordinary<br />
1246/21 of 26.07.2002)<br />
(g) Inland Depot Services <strong>to</strong> shipping lines engaged in international<br />
transportation - these services are in connection with container<br />
depots – (s<strong>to</strong>ring, repairing etc.); – Pre-repair inspection of cargo<br />
containers in order <strong>to</strong> report the serviceable condition <strong>to</strong> the shipping<br />
line will not be zero rated. However moni<strong>to</strong>ring the refrigeration after<br />
the repair (if it is a requirement under the contract) is zero-rated.<br />
(h) Ancillary Services - These will include the following -<br />
Ship chandelling – Supply of various goods <strong>to</strong> international shipping lines<br />
Supply of stationery <strong>to</strong> international shipping lines<br />
Supply of laundry services <strong>to</strong> international shipping lines<br />
Supply of garbage removal services <strong>to</strong> international shipping lines<br />
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Supply of facilities for crew change/recruitment of international shipping<br />
lines (other than meals provided in hotels)<br />
Launch hire received form international shipping lines<br />
Advertising services provided <strong>to</strong> international shipping lines – listing<br />
vessels in the shipping list<br />
Container handling charges levied on shipping lines engaged in<br />
international transportation.<br />
(i) Services provided for repositioning of empty cargo containers - ie<br />
Container transport and other services.(Eg. Repairing, s<strong>to</strong>ring, handling<br />
where such services are provided <strong>to</strong> shipping lines engaged in<br />
international transportation)<br />
(j) Ship/Aircraft Surveying – These are for registration purposes such as<br />
Loyd’s Register<br />
(k) Maintenance, broking or management of any ship or aircraft - If<br />
such services are provided <strong>to</strong> the owner, opera<strong>to</strong>r or agent of such<br />
ship/aircraft engaged in international transportation.<br />
(l) Insurance Services – Covering ships/aircrafts engaged in international<br />
transportation and cargo both outward/inward up<strong>to</strong> landing.<br />
(m) Courier Services - Directly connected <strong>to</strong> international transportation of<br />
goods other than imports from the point of landing.<br />
(n) Services provided by Air Lanka Catering Services Ltd – To any<br />
international air line engaged in transportation of goods/passengers<br />
(o) Ground handling services – In relation <strong>to</strong> any aircraft engaged in<br />
international transportation.<br />
(p) General Sales Agents – Zero-rating applicable <strong>to</strong> Air Lines can be<br />
extended <strong>to</strong> services rendered by General Sales Agents directly in<br />
relation <strong>to</strong> international transportation. Sub-Agents are not zero-rated.<br />
(q) Container Related Services and Trucking Services – Following<br />
container services and Trucking services are zero rated.<br />
Activity Description Billed <strong>to</strong> <strong>VAT</strong> Status<br />
Container related services<br />
1. S<strong>to</strong>rage (a) Rental on s<strong>to</strong>rage of containers belonging <strong>to</strong> Shipping Line/ Zero rated<br />
International shipping lines<br />
Agent<br />
(b) Rental on s<strong>to</strong>rage of containers <strong>to</strong> third parties<br />
who have hired the containers form shipping lines Exporerts Standard Rate<br />
2. Lift on/off (a) Charges for loading/unloading containers belonging Shipping line/<br />
<strong>to</strong> shipping lines Agent Zero rated<br />
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(b) Charges for loading/unloading containers <strong>to</strong> third<br />
parties Exporters Standard Rate<br />
3. Repairs Repair of containers belonging <strong>to</strong> the Shipping Lines Shipping Line/ Zero Rated<br />
Agent<br />
4. Washing Washing of containers belonging <strong>to</strong> the Shipping lines - do - Zero Rated<br />
5. Yard OT Charge levied on clients of Shipping lines The client Standard Rate<br />
6. Trailer Repair Repair of trailer belonging <strong>to</strong> the shipping lines Shipping line/ Zero rated<br />
Agent<br />
7. “Sub Yard” Bills Same treatment as for “main yard”<br />
8. Stuffing Loading of export cargo in<strong>to</strong> a container and Shipping line/<br />
transporting <strong>to</strong> port Agent/ Zero rated<br />
Freight Forwarder<br />
(If transport is subcontracted if will be standard rated)<br />
When billed <strong>to</strong> an importer/exporter - Standard Rate<br />
9. De-stuffing Unloading of Cargo from a container Any person Standard Rate<br />
10. Cargo rent Rent on s<strong>to</strong>rage of import/export cargo Shipping line/<br />
Agent<br />
Zero rated<br />
Freight Forwarder<br />
When billed <strong>to</strong> an exporter - Standard Rated<br />
11. Multi-Country Loading unloading of bonded cargo & Shipping line/<br />
Consolidation transhipment activities Agent Zero rated<br />
Fright Forwarder<br />
Entrepot Traders<br />
12. Warehouse Renting/leasing of warehouse space Any person Standard Rated<br />
Rent<br />
Trucking Services<br />
1. Import (a) Charges levied for transporting loaded container Any person Standard Rated<br />
<strong>to</strong> the importer’s go-down<br />
(b) Re-positioning of empty container Freight forwarder Standard Rated<br />
2. Export Charges levied for transporting a loaded container Importer/<br />
from the exporters go down <strong>to</strong> port Freight Forwarder Zero rated<br />
3. Inter Terminal Transporting containers belonging <strong>to</strong> Shipping line/ Zero rated<br />
the Shipping lines between terminals<br />
Agent<br />
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4. Yard <strong>to</strong> Port Transporting containers belonging <strong>to</strong> the Shipping lines Shipping line/<br />
and Vice-Versa between port and yard Agent Zero rated<br />
5. Yard <strong>to</strong> Yard Transporting containers from yard <strong>to</strong> yard Shipping line/ Zero rated<br />
Agent<br />
If billed <strong>to</strong> a third party - Standard rated<br />
Note: If a third party has provided the trucking service <strong>to</strong> the relevant person (importer/exporter/freight forwarder etc.)<br />
such supply will be standard rated.<br />
N.B. i. Entry permit fees, vehicle parking fees, landing and parking fees(domestic), rentals & concessions<br />
and other miscellaneous charges imposed by the Airport and Aviation Department are liable <strong>to</strong> <strong>VAT</strong>.<br />
ii. The services provided by off line carriers (i.e Air lines and ships) which do not call at any part in Sri<br />
Lanka but provided services via an agent in Sri Lanka being services provided outside Sri Lanka are<br />
exempted. The agents commission <strong>to</strong>o is exempted.<br />
iii. In the above mentioned situations discussed under Section 7(1)(b) it can be observed that in many<br />
cases the contract of service (whether in relation <strong>to</strong> property outside Sri Lanka or in relation <strong>to</strong> other<br />
matters outside Sri Lanka) may be concluded in Sri Lanka while the service is utilized outside Sri<br />
Lanka. The zero-rating or other matters connected <strong>to</strong> a “supply” is not determined on the basis of<br />
the place where the contract is concluded <strong>to</strong> provide the supply.<br />
25.6 i. Provision of Services in Sri Lanka <strong>to</strong> be consumed outside Sri Lanka<br />
Section 7(1)(b)(v), (vi) and (vii) all deal with provision of services in Sri Lanka <strong>to</strong><br />
be consumed outside Sri Lanka for which payment is received in foreign currency<br />
through a bank. Comments made under para 10.5.14 are also applicable here.<br />
The difference is that, under zero rating the payment should be in foreign<br />
currency through a bank whereas under exemption the payment should be in<br />
local currency or foreign currency but not through a bank.<br />
ii.<br />
Special mention should be made about sub- section 7(1)(b)(vii) because it is<br />
stated in general terms while the other sub-sections enumerate specific<br />
situations where the services provided in Sri Lanka are utilized outside Sri Lanka.<br />
The scope of Section; 7(1)(b) is clear from all the other sub-sections and Sub-<br />
Section 7(1)(b)(vii) cannot be extended <strong>to</strong> cover different situations.<br />
For instance if the supply of a service originates in Sri Lanka and finally such<br />
service is utilized in the course of carrying on or carrying out a business in Sri<br />
Lanka by a foreign principle then such service is not treated as consumed<br />
outside Sri Lanka even though the decisions <strong>to</strong> accept or reject the service may<br />
be taken at the head office in a foreign country. Under Section 7(1)(b)(vii) what<br />
is material is the actual place of business in the course of carrying on carrying<br />
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out of which, the services are in fact utilized. That means the (place of the<br />
business) where such services are in fact utilized is as important as the place of<br />
the taxable activity from where the services are originated but not the place<br />
where the decisions are taken on behalf of that business which utilizes the<br />
services. In other words the place where the contract is concluded <strong>to</strong> accept the<br />
services is not material. It may also be useful <strong>to</strong> quote from a foreign judgement<br />
with regard <strong>to</strong> the concept of supply in <strong>Value</strong> <strong>Added</strong> <strong>Tax</strong>.<br />
“The concept of making a supply for purposes of <strong>VAT</strong> is not identical with<br />
the performance of an obligation for the purpose of law of contracts even<br />
where the obligation consist in the provision of goods and services” ϒ<br />
Thus the commission paid in foreign currency <strong>to</strong> a Sri Lankan agent by a foreign<br />
principle for canvassing orders and other connected activities in Sri Lanka in the<br />
course of carrying on or carrying out a business in Sri Lanka by that foreign<br />
principle, does not tantamount <strong>to</strong> a payment for services supplied in Sri Lanka <strong>to</strong><br />
be consumed outside Sri Lanka for the purpose of zero-rating as envisaged in<br />
sub-section 7 (1) (b)(vii) of the Act. The services consumed outside Sri Lanka<br />
as envisaged in that –sub-section should be consumed in a manner similar <strong>to</strong> the<br />
consumption of services mentioned in other sub-sections, specially subsection(v)<br />
and sub-section ( vi) . What matters is the actual place of<br />
consumption of services and not the place where the decisions are taken.<br />
Please see para 10.5.14<br />
The commission is paid on the basis of volume of business transacted in Sri<br />
Lanka with the help of a an agent in Sri Lanka and the business is transacted in<br />
Sri Lanka as a result of the services performed in Sri Lanka ; then the services<br />
are treated as being consumed in Sri Lanka . The presence of an agent or<br />
representative in Sri Lanka, <strong>to</strong> supply services makes things completely different<br />
from a situation where business is transacted by other means such as internet.<br />
The services of the agent in Sri Lanka falls within either Section 9 or Section 55<br />
of the Act depending on the facts of the case.<br />
ϒ Laws J. in Cus<strong>to</strong>ms & Excise Commissioners V. Reed Personnel Services (1995) STC. 588<br />
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Chapter - 26<br />
Travel Trade, Tourism and Hotel Industry.<br />
26.1 Travel Products<br />
i. All travel products provided in Sri Lanka are liable <strong>to</strong> <strong>VAT</strong> if the provider is a<br />
registered person.<br />
(Eg. Air fares for local and international travel, bus fares and car hires for <strong>to</strong>urists<br />
excursion <strong>to</strong>urs etc., services provided by Hotels Guest houses, Rest Houses<br />
and Restaurants and included in a travel package are also liable <strong>to</strong> <strong>VAT</strong>).<br />
ii. Tour Opera<strong>to</strong>rs and Agents<br />
• Tour opera<strong>to</strong>rs performs the role of the wholesalers in the industry in that they<br />
package various travel accommodation components in<strong>to</strong> a marketable <strong>to</strong>ur. That<br />
<strong>to</strong>ur will either be sold directly by the <strong>to</strong>ur opera<strong>to</strong>r or through an agent either in<br />
Sri Lanka or overseas.<br />
• Sales marketed in Sri Lanka constitute domestic travel which is liable <strong>to</strong> <strong>VAT</strong> as<br />
explained below (para 26.2)<br />
• Sales marketed outside Sri Lanka by out-bound <strong>to</strong>ur opera<strong>to</strong>rs are also liable <strong>to</strong><br />
<strong>VAT</strong> (para 26.3).<br />
iii.<br />
General Sales Agents (G.S.AA)<br />
General sales agents normally represent overseas principles as their Master<br />
agents in Sri Lanka and sells overseas facilities on behalf of the principle. For the<br />
performance of that service they receive a marketing fee and an over-rider<br />
commission. The overseas service component of the <strong>to</strong>ur is not liable <strong>to</strong> <strong>VAT</strong><br />
but the commission received by the GSA is liable <strong>to</strong> Sri Lanka <strong>VAT</strong>.<br />
26.2 Domestic Travel<br />
i. This means excursion <strong>to</strong>urs and <strong>to</strong>urs arranged for <strong>to</strong>urists etc., with or without<br />
hotel facilities but not public passenger transport services.<br />
ii. If an agent arranges the <strong>to</strong>ur the agent receives a commission from the <strong>to</strong>ur<br />
opera<strong>to</strong>r (ie the supplier). Supplier should charge <strong>VAT</strong> on his price and the<br />
agent should charge <strong>VAT</strong> <strong>to</strong> the supplier on the commission if both are registered<br />
persons. The payment can be in one of the following ways.<br />
(a) Cus<strong>to</strong>mer pays the agent<br />
(b) Cus<strong>to</strong>mer pays the supplier direct after confirmation of booking through<br />
agent.<br />
iii. (a) If the sale price is Rs.1000/- and the cus<strong>to</strong>mer pays agent<br />
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<strong>Value</strong> of Supply Commission Net Proceeds<br />
Paid <strong>to</strong> Agent Retained by Agent paid <strong>to</strong> the<br />
(say 10%)<br />
supplier by the<br />
agent<br />
Sale price 1000 100 900<br />
<strong>VAT</strong> @ 20% 200 20 180<br />
1200 120 1080<br />
• Cus<strong>to</strong>mer pays 1200/- <strong>to</strong> the agent and he keeps 120/- of which 20/- he should<br />
pay as output tax.<br />
• The supplier should pay 200/- as output tax and deduct 20/- as input tax paid <strong>to</strong><br />
agent.<br />
• If the agent is not registered then the agent will not retain 20/- and the suppliers<br />
output tax will be 200/- without any deduction of input tax in relation <strong>to</strong> agents<br />
commission. Net proceeds <strong>to</strong> the supplier will then be 900+200 = 1100<br />
(b) Cus<strong>to</strong>mer pays the supplier: -<br />
<strong>Value</strong> of Supply Commission Amount Retained<br />
paid <strong>to</strong> Supplier paid <strong>to</strong> Agent by Supplier<br />
by the cus<strong>to</strong>mer (say 10%)<br />
Sale price 1000 100 900<br />
<strong>VAT</strong> @ 20% 200 20 180<br />
1200 120 1080<br />
• Here again the final position is the same but the money is first received by the<br />
supplier who in turn pays commission <strong>to</strong> the agent for which the agent charges<br />
20% <strong>VAT</strong>.<br />
• The output tax <strong>to</strong> be declared by the agent is 20/-. In the case of the supplier<br />
output tax is 200/- and input tax is 20/-.<br />
• Both the supplier and the agent can claim other input taxes in relation <strong>to</strong> other<br />
expenses incurred during the course of this taxable activity.<br />
26.3 Out Bound Travel<br />
i. Transportation of passengers outside Sri Lanka is zero-rated because it is a<br />
service consumed outside Sri Lanka. Thus no <strong>VAT</strong> is payable by the consumer<br />
on any out-bound travel products such as Air-fares and ship-fares. But the<br />
commission received by a local travel agent is liable <strong>to</strong> <strong>VAT</strong>.<br />
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ii.<br />
iii.<br />
But “travel insurance“ and “goods purchased in Sri Lanka and taken out of Sri<br />
Lanka” are not zero-rated. They are subject <strong>to</strong> <strong>VAT</strong> at rates applicable <strong>to</strong> supply<br />
of service (insurance) and supply of goods respectively.<br />
Services provided by General Sales Agents (GSAA) and other licensed agents in<br />
relation <strong>to</strong> (international) travel are also zero-rated. However any other agent, if<br />
he is a registered person should charge <strong>VAT</strong> <strong>to</strong> his client and declare ‘output ‘<br />
tax.<br />
iv.<br />
The commission received by local agent on out-bound travel is liable <strong>to</strong> <strong>VAT</strong> at<br />
20%.<br />
v. The out-bound <strong>to</strong>ur opera<strong>to</strong>r should charge <strong>VAT</strong> on the rupee value of the gross<br />
selling price of that portion of the <strong>to</strong>ur which is related <strong>to</strong> any service <strong>to</strong> be<br />
performed within Sri Lanka. (i.e local portion) The exchange rate should be the<br />
rate at the time of sale and no adjustment will be made for the difference, if any,<br />
in the net <strong>revenue</strong> received.<br />
vi.<br />
If the product is sold <strong>to</strong> a cus<strong>to</strong>mer through an overseas agent <strong>VAT</strong> is payable by<br />
the Sri Lankan supplier on the local portion of the final selling price <strong>to</strong> that<br />
cus<strong>to</strong>mer. The local portion may be ascertained on a suitable proportionate<br />
basis.<br />
vii.<br />
Marketing costs overseas and funds sent overseas <strong>to</strong> support marketing<br />
activities <strong>to</strong> be performed outside Sri Lanka will not attract <strong>VAT</strong>.<br />
viii.<br />
Overseas agent’s commission is liable <strong>to</strong> <strong>VAT</strong> if he is registered.<br />
ix. If the product is sold <strong>to</strong> an overseas agent who then independently markets and<br />
on-sells that product <strong>to</strong> a cus<strong>to</strong>mer overseas, then <strong>VAT</strong> is payable by the Sri Lankan<br />
supplier on the local portion of the selling price of the product <strong>to</strong> that agent.<br />
26.4 In-bound Travel<br />
i. <strong>VAT</strong> will be charged <strong>to</strong> the overseas cus<strong>to</strong>mer on in-bound travel products since<br />
all the services are consumed in Sri Lanka.<br />
ii.<br />
If the in-bound <strong>to</strong>ur opera<strong>to</strong>r is billing the overseas cus<strong>to</strong>mer for the entire <strong>to</strong>ur<br />
including hotel charges the rate of <strong>VAT</strong> is 10%.<br />
146
iii.<br />
iv.<br />
In such situations the hotel is billing the agent/<strong>to</strong>ur opera<strong>to</strong>r for the cus<strong>to</strong>mers<br />
stay in Hotel. Such bills <strong>to</strong>o should <strong>to</strong> subject <strong>to</strong> <strong>VAT</strong> at 10%. This is the output<br />
tax for the hotel and input tax for the <strong>to</strong>ur opera<strong>to</strong>r.<br />
If the <strong>to</strong>ur-opera<strong>to</strong>r/agent is billing only for the travel portion and the hotel is<br />
separately billing the cus<strong>to</strong>mer the hotel bill is subject <strong>to</strong> <strong>VAT</strong> at 10%. The local<br />
<strong>to</strong>ur portion which is separately billed by the agent/<strong>to</strong>ur opera<strong>to</strong>r is subject <strong>to</strong> Vat<br />
at 20%.<br />
v. If the product is sold <strong>to</strong> a cus<strong>to</strong>mer through an overseas agent then <strong>VAT</strong> is<br />
payable by the Sri Lankan supplier on the final selling price <strong>to</strong> that cus<strong>to</strong>mer.<br />
The <strong>to</strong>tal consideration may be treated as <strong>VAT</strong> inclusive and the output tax<br />
should be declared by the supplier.<br />
vi.<br />
vii.<br />
viii.<br />
Marketing costs incurred overseas and funds sent overseas <strong>to</strong> support marketing<br />
activities <strong>to</strong> be performed outside Sri Lanka will not attract <strong>VAT</strong>.<br />
Overseas agent’s commission is liable <strong>to</strong> <strong>VAT</strong> if he is registered.<br />
If the local <strong>to</strong>ur opera<strong>to</strong>r (supplier) sells the in-bound travel product <strong>to</strong> an<br />
overseas agent, who then independently markets and on-sells that product <strong>VAT</strong><br />
is payable by the Sri Lankan supplier on the selling price <strong>to</strong> that agent.<br />
26.5 Hotel Industry<br />
Following are the rates of <strong>VAT</strong> that should be applied by Hotels.<br />
Rooms sales, Food sales, A’la carte sales, Buffet and catering for weddings can be<br />
considered under the lower rate of 10%. Laundry if it is billed <strong>to</strong> the guest by the hotel<br />
and if the laundry service is part and parcel of the taxable activity carried on by the hotel<br />
then it can be considered under the lower rate. If the laundry is a separate entity and if<br />
its turnover is not a part of the hotel’s turnover then it should be taxed at higher rate of<br />
20% for <strong>VAT</strong>. Letting convention halls is subject <strong>to</strong> <strong>VAT</strong> at 20% except in cases coming<br />
under 26.5.<br />
All other services such as locker sales, Telephone, Swimming pool tickets, pho<strong>to</strong> copy<br />
charges, beverages (whether package or outlet), wedding hall hires, miscellaneous<br />
sales(exhibitions, animation, cockage etc), commissions, service charges, herbal fitness<br />
etc, should be taxed at 20%.<br />
147
26.6 <strong>VAT</strong> ON MICE Tourism<br />
<strong>VAT</strong> rate applicable <strong>to</strong> the services in relation <strong>to</strong> MICE <strong>to</strong>urism rendered by Professional<br />
Conference and Exhibition Organizers (PECO) is 10%. This is applicable <strong>to</strong> Professional<br />
Conference Organizers and Professional Exhibition Organizers only if they are members<br />
of the Sri Lanka Conventions Bureau. Lower rate is confined <strong>to</strong> MICE <strong>to</strong>urism only – ie<br />
Meetings, Incentive Travel, Conventions and exhibitions conducted by PEC00.<br />
148
Chapter – 27<br />
Some useful hints<br />
1. Supply of goods<br />
i. Sale of goods by a partnership is treated as a sale by the body of persons<br />
although partnership is not a legal entity <strong>to</strong> own the goods and passing of<br />
exclusive ownership as the owner may not be present. The same is applied <strong>to</strong><br />
the sale of fixed assets of the partnership.<br />
ii. Similarly sale of liquor etc. by a club <strong>to</strong> its members is treated as supply of<br />
goods. The management owns the goods and the ownership change hands<br />
when they are sold for a consideration <strong>to</strong> its members. The members cannot<br />
claim that they consume their own liquor/food. The same applies when a supply<br />
is made <strong>to</strong> a partner by a partnership.<br />
iii. In the same vein sale of s<strong>to</strong>len goods is liable <strong>to</strong> <strong>VAT</strong> not withstanding that sale<br />
is voidable and passing of exclusive ownership as the owner is absent.<br />
iv. Input tax incurred before registration for <strong>VAT</strong> is not allowable.<br />
v. Input tax paid after registration but in respect of supplies received before<br />
registration is also not allowed.<br />
vi. Input tax paid after registration but before the commencement of commercial<br />
operations (That is before the commencement of making taxable supplies) will<br />
be allowed because the definition of “taxable activity” includes any activity in<br />
connection with the commencement or cessation of a trade, business,<br />
profession, voccasion etc. Vide Para 3.7(i)(c ) This is provided in Section 22(7)<br />
of the Act subject <strong>to</strong> the conditions laid down therein. – Vide Para 11.4<br />
vii. Goods s<strong>to</strong>len if covered by an insurance compensation is considered as a<br />
taxable supply. Insurance company must pay <strong>VAT</strong>. This may be considered<br />
under the second limb of the definition of supply of service para 3.3.<br />
viii. Samples supplied <strong>to</strong> actual or potential cus<strong>to</strong>mers without any charge and not<br />
from items ordinarily available for sale and supplies for testing and market<br />
research without any charge are not taxable supplies.<br />
ix. Bartar transaction (i.e exchange of goods/services without cash payment or<br />
with part payment) should be considered as two separate supplies (because the<br />
consideration for a supply may be in money or otherwise than in money). If both<br />
parties are registered both should account for <strong>VAT</strong>. If only one party is<br />
registered he should account for <strong>VAT</strong>. <strong>Tax</strong> base is the market value of<br />
goods/services exchanged.<br />
149
x. Supply of goods & vehicles free of charge <strong>to</strong> share holders or employees for nonbusiness<br />
use is a taxable supply taxed at open market value.<br />
xi. No output tax can be charged in respect of supplies made prior <strong>to</strong> registration<br />
even if the payment is received after registration. If the output tax is charged<br />
incorrectly it should be remitted <strong>to</strong> the CGIR.<br />
2. Supply of Services<br />
i. Direc<strong>to</strong>rs fees under normal circumstances is not a taxable supply. If the<br />
Direc<strong>to</strong>r is appointed as part of a wider taxable activity. eg. under a contract for<br />
service, then that direc<strong>to</strong>rs fee will be subject <strong>to</strong> <strong>VAT</strong><br />
ii. Court fines are not subject <strong>to</strong> <strong>VAT</strong> because they are not paid as a consideration<br />
for a supply.<br />
iii. Deposits, if refundable, is not a taxable supply unless it is set off against some<br />
amount receivable.<br />
iv. Deposits if not refundable is considered as a supply. Forfeiture of a deposit<br />
becomes a taxable supply if it is in the course of the taxable activity.<br />
v. Booking fees is a supply of service. (Please note that although outbound travel<br />
products are exempt from <strong>VAT</strong> (Para 26.3) any overseas hotel booking fees<br />
charged by a Sri Lankan <strong>to</strong>ur opera<strong>to</strong>r is liable <strong>to</strong> <strong>VAT</strong>).<br />
vi. Reimbursement – of and expense is liable <strong>to</strong> <strong>VAT</strong> it cannot be split in <strong>to</strong> parts<br />
unless it consists of statu<strong>to</strong>ry charges such as amount paid <strong>to</strong> government,<br />
cus<strong>to</strong>ms etc incurred by the client where the invoice is in the name of the client<br />
and no margin has been kept by him in his claims and no input tax is claimed by<br />
him.<br />
vii. Fringe benefits <strong>to</strong> employees – Following fringe benefits will not be subject <strong>to</strong><br />
<strong>VAT</strong>.<br />
- Free use of mo<strong>to</strong>r car on which no input credit has been allowed<br />
- Travelling in a mo<strong>to</strong>r coach provided by the employer<br />
- Residential accommodation provided by the employer<br />
- Health care services provided by the employer<br />
viii. Activities carried on for pleasure (eg. hobbies, private recreation pursuits)<br />
represent final consumption and no <strong>VAT</strong> is payable. Vide para 3.7<br />
ix. In the case of supplies involving finance companies<br />
- If the finance company becomes the owner of the goods then<br />
* supply from trader <strong>to</strong> finance company is a separate supply.<br />
* supply from finance company <strong>to</strong> cus<strong>to</strong>mer is a separate supply<br />
* supply from finance company <strong>to</strong> cus<strong>to</strong>mer may involve supply of goods<br />
and supply of credit which is an exempt supply<br />
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- If the finance company does not become the owner of goods i.e when the<br />
purchase is financed by a loan agreement goods are supplied directly by the<br />
trader <strong>to</strong> the cus<strong>to</strong>mer. Finance company enters in<strong>to</strong> a separate transaction<br />
with the cus<strong>to</strong>mer <strong>to</strong> make a supply of a credit facility.<br />
* supply from trader <strong>to</strong> cus<strong>to</strong>mer is a supply of goods where the value of<br />
supply is the value of goods and not the amount received from the<br />
finance company.<br />
* supply from finance company <strong>to</strong> cus<strong>to</strong>mer is a supply of credit<br />
x. Donations <strong>to</strong> schools – If the donation is in fact for a supply of a service(eg.<br />
admission of a child or for some other consideration) <strong>VAT</strong> should be charged on<br />
that supply. The school should declare output tax if it is Registered for <strong>VAT</strong>. If<br />
no <strong>VAT</strong> is charged 1/11 of the donation will be treated as output tax.<br />
xi. Indenting agents, who introduce importers from Sri Lanka, for their principle<br />
resident abroad, is rendering a service in Sri Lanka and <strong>VAT</strong> is payable on the<br />
commission even though it is received in foreign currency.(Vide Para 25.6)<br />
xii. Management consultancy services etc. provided by persons outside Sri Lanka,<br />
for persons in Sri Lanka by using documents, records other information or<br />
technical devices in Sri Lanka via internet, e-mail or by other means with the<br />
assistance or permission form a person in Sri Lanka may have <strong>to</strong> be treated as<br />
services performed in Sri Lanka and the fees charged by the service provider<br />
may be liable <strong>to</strong> <strong>VAT</strong> if the service provider can be deemed <strong>to</strong> be a person<br />
registered for <strong>VAT</strong>. The recipient company in Sri Lanka can be treated as an<br />
agent of the foreign supplier.<br />
xiii. Printing - In the case of printing if the printer is only providing the service of<br />
printing while the Cus<strong>to</strong>mer provides the paper then it amounts <strong>to</strong> supply of a<br />
service which is liable <strong>to</strong> <strong>VAT</strong> at 20%. However if the printer undertakes the<br />
entire work, whether it is on his own or for a cus<strong>to</strong>mer, the supply by the printer<br />
tantamounts <strong>to</strong> a supply by a manufacturer. The items so manufactured should<br />
be subject <strong>to</strong> <strong>VAT</strong> at the rates applicable <strong>to</strong> such items as a supply of goods by<br />
a manufacture. Eg. Excise Books, Cheque Books, Ledger Books, Diaries,<br />
Newspapers and Writing Pads etc. 20%. Magazines and Journals 10%. Text<br />
Books and other items of similar nature such as Annual Reports, Audit Reports,<br />
Administration Reports, Gazettes and Maps etc. are exempted.<br />
xiv. Supply of Mixed Services & Composite Services - Sometimes provision of a<br />
service may consist of supplies of several distinct services. For example a<br />
lawyer or some other consultant may charge separately for his written<br />
submission and typing work. This is sometimes referred <strong>to</strong> as a “mixed supply”<br />
151
and for <strong>VAT</strong> purposes the two components are treated as separate supplies if<br />
they are subject <strong>to</strong> two different <strong>VAT</strong> rates. Eg. A bank may charge legal fees,<br />
documentary charges, fax charges etc. in granting a loan. Although they may<br />
be incidental <strong>to</strong> the main supply they are billed separately and are treated as<br />
separate and distinct supplies for <strong>VAT</strong> purposes.<br />
• However when ‘supply of goods’ forms part and parcel of a “supply of a service”<br />
then it becomes one composite service which cannot be separated. Eg. The<br />
amount charged for pho<strong>to</strong>copying includes the cost of the paper but that cannot<br />
be separated in<strong>to</strong> “supply of goods” and “supply of a service”. A contrac<strong>to</strong>r<br />
supplying the service of constructing a building is supplying one composite<br />
service which includes provision of materials. It cannot be separated in<strong>to</strong> “supply<br />
of goods” and “supply of a service”. Similarly when a vehicle service station is<br />
providing air filters, engine oil etc. for the purpose of the service it cannot be<br />
separated in<strong>to</strong> “sale of goods” and “sale of a service”. It is a supply of one<br />
composite and single service of “servicing the vehicle”.<br />
• However, in such a situation, if the existence of a separate business of retail and<br />
wholesale supply of mo<strong>to</strong>r spares, can be established then the sale of mo<strong>to</strong>r<br />
spares can be treated as an “excluded supply” as provided in Sec3. The<br />
evidence required <strong>to</strong> establish the existence of a separate business are (i)<br />
Separate Trade license for the retail and wholesale business from the relevant<br />
local authority and a separate business registration from the relevant provincial<br />
council (ii) Evidence <strong>to</strong> support that the supply of spare parts is open <strong>to</strong> general<br />
public and not confined <strong>to</strong> those who come for vehicle servicing (iii) Maintenance<br />
of separate invoices, books of accounts and other records as required under<br />
Section 3 (and as mentioned in para 2.4.2 and para 15.3) and preparation of<br />
separate Profit & Loss Account and balance sheet for the business of<br />
buying and selling mo<strong>to</strong>r spares, oil cans etc. If the existence of a separate<br />
business cannot be established the <strong>to</strong>tal amount charged for the service<br />
including the value of spare parts provided shall be treated as the “value of<br />
supply” for <strong>VAT</strong> purposes. Even prior <strong>to</strong> the transfer of turnover tax on retail &<br />
wholesale sales <strong>to</strong> Provincial Councils it was treated in the same manner and<br />
the entire value of supply was treated as the “value of the supply of a service” for<br />
turnover tax purposes and the <strong>to</strong>tal value was not separated in<strong>to</strong> two<br />
components called “supply of goods” and “supply of services” (Although the<br />
agency which implements the turnover tax law has undergone change turnover<br />
tax law applicable <strong>to</strong> the facts of this case and the tax treatment which is a<br />
152
consequence of that law did not change. In the circumstances the question of<br />
Provincial Council turnover tax will not arise unless the existence of a separate<br />
business of retail and wholesale sales is established)<br />
• But in the case of air –travel, the in flight catering service is considered as an<br />
integral part of the supply of passenger transport service by air. The reason is<br />
unlike in the case of bank loans where the cus<strong>to</strong>mer (i.e. the recipient of the<br />
supply) is billed after the occurrence of each event (ie each supply) the air<br />
passenger pays in advance for one composite service. The price paid in<br />
advance for the air ticket includes in flight catering services that are provided in<br />
that particular air line. If the supply of liquor etc. are separately charged then it<br />
amounts <strong>to</strong> a separate supply.<br />
xv<br />
Sweep Ticket Agents - Sweep tickets are not sold as goods or commodities and<br />
the sale of sweep tickets are not governed by the Sale of Goods Ordinance.<br />
The ticket is only a <strong>to</strong>ken for the buyer <strong>to</strong> participate in a (lottery) draw conducted<br />
by the lottery organizer. The agent may sell on a commission basis, the tickets<br />
belonging <strong>to</strong> the lottery organizer or sometimes for business convenience he (the<br />
agent) may be asked <strong>to</strong> purchase the tickets outright at a discounted price with<br />
no right <strong>to</strong> return the unsold tickets. In the latter case the agent is doing buying<br />
and selling sweep tickets but it is debatable whether he does retail and wholesale<br />
business with sweep tickets because on one hand they are not sold as goods or<br />
commodities and on the other hand the s<strong>to</strong>cks will have no value and are not<br />
salable after the draw. The purpose of the sale is not <strong>to</strong> sell sweep tickets as<br />
a commodity (such as printed material or <strong>to</strong>ilet paper) but <strong>to</strong> sell them as<br />
permits <strong>to</strong> enter in<strong>to</strong> the draw. After the draw people throw away the tickets if<br />
there is no prize. Therefore the sale of sweep tickets is not an excluded supply,<br />
consisting of retail or wholesale supply of goods, as envisaged in Section 3 of the<br />
Act. The agent is supplying a service <strong>to</strong> the lottery organizer whether he buy and<br />
sell tickets or whether he sells them on commission basis (The service is the<br />
enrollment of clients for the draw). In the former case he is allowed <strong>to</strong> keep a predetermined<br />
margin and re-sell the tickets and in the latter case he is allowed <strong>to</strong><br />
retain an agreed commission on the final sale value. The margin kept by the<br />
agent or the commission retained by him as the case may be, is the “value of<br />
supply” by the agent <strong>to</strong> the principle. The department’s view is that <strong>VAT</strong> is<br />
chargeable on the margin kept by the agent or the commission retained by him,<br />
which is the consideration for the supply of service by the agent <strong>to</strong> the principle<br />
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(i.e the lottery organizer) on which turnover tax was charged prior <strong>to</strong> the<br />
introduction of GST, but no turnover tax is payable on the sale value of the<br />
sweep ticket because there is neither a retail or wholesale business nor a sale of<br />
goods or commodities which are pre-requisites for charging turnover tax on the<br />
<strong>to</strong>tal sale proceeds. Even when Department was implementing the turnover tax<br />
on retail and wholesale sales prior <strong>to</strong> 1991 the sale of sweep tickets was not<br />
treated as a sale liable <strong>to</strong> turnover tax but only the commission or discount was<br />
treated as liable. As stated earlier the legal provisions leading <strong>to</strong> the tax<br />
treatment applicable <strong>to</strong> the facts of this case did not change although the taxing<br />
authority has changed. Therefore the question of Provincial turnover tax does<br />
not arise and the agent should register for <strong>VAT</strong> if the <strong>to</strong>tal commission or the<br />
margin exceeds the taxable threshold. The agent should issue a tax invoice <strong>to</strong><br />
the lottery organizer and charge <strong>VAT</strong> which he should declare as output tax.<br />
Otherwise 1/6 of the commission/margin is treated as output tax.<br />
Xvi<br />
Layby Sales - In the case of layby sales the cus<strong>to</strong>mer deposits some money<br />
(sometimes the deposits may be made from time <strong>to</strong> time) with a view <strong>to</strong> purchase<br />
some goods but no transaction occurs until the cus<strong>to</strong>mer finally purchase the<br />
goods and takes possession of the goods. This is different from an advance<br />
because an advance is paid when a transaction is concluded. Layby deposits<br />
are refundable and the transaction is not concluded at the time of the deposit.<br />
The time of supply of goods is the time at which the transaction is concluded<br />
usually by taking possession of the goods. The layby deposit is not treated as a<br />
consideration for any supply. But if the cus<strong>to</strong>mer changes his mind and request<br />
for a refund of the deposit the layby seller may sometimes forfeits a part of the<br />
deposit. If he forfeits part of the deposit that part is treated as a consideration for<br />
supply of a service.<br />
3. Local Government authorities<br />
Local government authorities and provincial councils are frequently engaged in taxable<br />
activities and are liable <strong>to</strong> be registered and required <strong>to</strong> charge and collect <strong>VAT</strong> on the<br />
(taxable) supplies made by them.<br />
i. Exemptions<br />
The following supplies made by them are exempt from <strong>VAT</strong> and they are not<br />
required <strong>to</strong> charge and collect <strong>VAT</strong> on such levies.<br />
154
1. Assessment rates<br />
2. <strong>Tax</strong>es on vehicles and animals<br />
3. Sales taxes on businesses and professions<br />
4. Entertainment tax on cinemas<br />
5. <strong>Tax</strong> on sale of lands and tax on undeveloped lands<br />
6. All kinds of penalties (Eg. Penalty for unauthorized constructions)<br />
7. Rents on residential dwellings<br />
8. Charges for public library services<br />
9. Charges for health cares services (The health care centres of local<br />
authorities are treated as medical institutions)<br />
10. Charges for educational services if they are normal educational services<br />
as provided in government schools (Eg. Special computer training<br />
classes are not exempt. But any pre-school nurseries conducted by<br />
local authorities can be exempted.)<br />
11. Crema<strong>to</strong>ria and burial charges<br />
12. Interest on loans given <strong>to</strong> employees<br />
Therefore any input tax paid on goods and services obtained for the purpose of supplying<br />
the above services will not be eligible for deduction.<br />
They are also not required <strong>to</strong> pay <strong>VAT</strong> on the following.<br />
13. L.L.D.F. loans received by local authorities<br />
14. Court fines received by local authorities<br />
15. Stamp duties received by local authorities<br />
16. Interest on Fixed deposits<br />
17. All grants allocated <strong>to</strong> the council/Sabha if not related <strong>to</strong> a supply<br />
18. All sums appropriated by the parliament if not related <strong>to</strong> a supply and<br />
input is not claimed on spending of such grants.<br />
ii. Goods and Services liable at 10%<br />
Local authorities (and provincial councils) are required <strong>to</strong> charge & collect <strong>VAT</strong><br />
at 10% on the following services provided by them –<br />
1. Water supply charges<br />
2. Electricity supply charges in excess of 30 kwh per month.<br />
3. Charges made by restaurants and guest houses carried on by them.<br />
4. Sale of any goods enumerated in the Second Schedule <strong>to</strong> the Act<br />
155
The <strong>VAT</strong> charged on above should be declared as output tax. They are required<br />
<strong>to</strong> pay 10% <strong>VAT</strong> on the following services obtained by them<br />
5. Construction contracts<br />
(only the construction contracts enumerated in para 23.8 )<br />
6. Land transport of goods<br />
iii. Goods and Services liable at 20%<br />
They are required <strong>to</strong> charge and collect <strong>VAT</strong> at 20% on all other goods and<br />
services provided by them including the following.<br />
1. Trade Licences of all kinds (Eg. Slaughter house licences, licencing of<br />
offensive and dangerous trades and places)<br />
2. Charges for name boards and banners<br />
3. Vehicle parking fees<br />
4. Scavenging charges<br />
5. Sale of building applications charges and charges for issue of certificate<br />
of conformity, charges for any other certificates and any registration<br />
charges, charge for extracts of deeds etc, charges for the approval of<br />
survey plans for blocking out of lands, charges for marking street lines,<br />
entertainment taxes not being on cinemas.<br />
6. Rents, <strong>to</strong>lls and fees charged for public markets, rent or lease of other<br />
commercial buildings, any other <strong>to</strong>lls<br />
7. Sale or lease of markets<br />
8. Public Auction of property seized, sale of materials of buildings pulled<br />
down<br />
9. Seize and sale of stray cattle and other animals<br />
10. Sale of tender forms, sale of fixed assets and scrap<br />
11. Supply of any other goods and services<br />
156
Annexure 1<br />
ENTERPRISES UNDER BOARD OF INVESTMENT<br />
B.O.I. Enterprises <strong>to</strong>o are governed by the provisions of the <strong>VAT</strong> Act. The B.O.I has set out in a<br />
circular the manner in which the <strong>VAT</strong> Act applies <strong>to</strong> their enterprises. The contents of the circular<br />
are reproduced below. The Department was not able <strong>to</strong> check whether the circular is strictly in<br />
accordance with the provisions of the Act before this guide was given for printing. However it is<br />
inserted in<strong>to</strong> this guide for the benefit of the tax payers.<br />
1. PROJECTS LOCATED IN EXPORT PROCESSING ZONES (EPZZ)<br />
1.1 IMPORTS<br />
<strong>VAT</strong> is not payable on import of project related items by the projects located in the following<br />
zones.<br />
• Katunayake Export Processing Zone<br />
• Biyagama Export Processing Zone<br />
• Koggala Export Processing Zone<br />
• Kandy Industrial Park, Pallekelle<br />
• Malwatte Export Processing Park<br />
• Mirigama Export Processing Zone<br />
• Wathupitiwala Export Processing Zone<br />
If goods are removed from the Zones, the enterprises should submit a Cusdec for the payment of<br />
<strong>VAT</strong>. However, these enterprises have the option <strong>to</strong> pay <strong>VAT</strong> either on upfront or deferred basis<br />
at the time of imports, so that, the enterprises could remove their goods from the EPZZ for<br />
various purposes, such as washing, embroidery, etc,. without submission of a Cusdec.<br />
1.2 TRANSFERS<br />
1.2.1 Imported Fabric from a Garment manufacturer <strong>to</strong> inter or intra Zone project or<br />
BOI garment manufacturer outside EPZ :-<br />
On a transfer application Cusdec is not necessary.<br />
1.2.2 Other imported materials except fabric <strong>to</strong> inter or intra zone project :-<br />
Permitted without <strong>VAT</strong> on a Transfer application.<br />
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1.2.3 Other imported materials except fabric <strong>to</strong> an outside EPZ BOI Project :_<br />
Submission of a Cusdec for payment of <strong>VAT</strong> on market value.<br />
1.2.4 Goods from a Cus<strong>to</strong>ms Sales Bond <strong>to</strong> an EPZ project :-<br />
With BOI approval on submission of a Cusdec/GRN <strong>to</strong> Sri Lanka Cus<strong>to</strong>ms but <strong>VAT</strong> is payable,<br />
only if there is a value addition including profit mark-up.<br />
.<br />
1.2.5 Goods imported or manufactured out of imported materials by a TIEP<br />
manufacturing bond or infac project <strong>to</strong> an EPZ project :-<br />
On a <strong>Tax</strong> invoice <strong>to</strong> the market value, subject <strong>to</strong> submission of a Cusdec/GRN <strong>to</strong> SLC<br />
with the prior approval of BOI.<br />
1.2.6 Goods from a EPZ project <strong>to</strong> a Cus<strong>to</strong>ms Bond :-<br />
Permitted on submission of a Cusdec <strong>to</strong> the SLC by the recipient. <strong>VAT</strong> is payable on<br />
the basis of sales invoice <strong>to</strong> Cus<strong>to</strong>ms.<br />
1.3 REMOVAL OF GOODS FROM AN EPZ FOR PROCESSING AND RETURN<br />
1.3.1 Removal of goods for Processing and Return, Sub-Contracts, etc.:-<br />
Permitted on submission of a Cusdec by the transferor for payment of <strong>VAT</strong> <strong>to</strong> the value of the<br />
product including any value addition upfront or deferred basis.<br />
If same goods are required <strong>to</strong> remove again, <strong>VAT</strong> is payable only at first instance. Enterprise<br />
should submit documentary evidence <strong>to</strong> this regard.<br />
<strong>Tax</strong> invoice <strong>to</strong> be issued by the processor for processing charges.<br />
1.3.2 Locally purchased goods for processing and return :-<br />
Permitted on submission of a Processing and Return Application. A <strong>Tax</strong> invoice <strong>to</strong> be<br />
issued for the processing charges by the processor.<br />
1.4 SALES<br />
1.4.1 Imported goods <strong>to</strong> inter or intra zone project :-<br />
<strong>VAT</strong> is not payable existing procedure <strong>to</strong> continue.<br />
1.4.2 Manufactured goods including fabric <strong>to</strong> inter or intra zone project :-<br />
On a <strong>Tax</strong> invoice for the value addition only.<br />
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1.4.3 Imported goods (except fabric for garment manufactures) or manufactured goods <strong>to</strong><br />
export oriented or non-export oriented outside EPZ BOI project :-<br />
Permitted on submission of a Cusdec by the recipient for the payment of <strong>VAT</strong> i.e. for imported<br />
items on the material value and for manufactured items for the mark-up value.<br />
In case of imported fabric for garment manufacturers <strong>VAT</strong> is not payable, however BOI approval<br />
<strong>to</strong> be obtained.<br />
1.4.4 Imported or manufactured goods <strong>to</strong> TIEP manufacturing bond or infac project :-<br />
Permitted on submission of a Cusdec for payment of <strong>VAT</strong> on market value <strong>to</strong> Sri Lanka Cus<strong>to</strong>ms<br />
by the recipient with BOI approval.<br />
1.4.5 Imported or manufactured goods <strong>to</strong> a non-BOI project, home consumption or <strong>to</strong> an individual :-<br />
Permitted if the BOI enterprise is entitled <strong>to</strong> sell such goods on submission of a Cusdec<br />
for the payment of duty. <strong>VAT</strong> and other levies <strong>to</strong> Sri Lanka Cus<strong>to</strong>ms. In the case of sale of<br />
finished garments Rs.25/= per piece will have <strong>to</strong> be paid.<br />
1.4.6 Imported goods except fabric or manufactured goods by an outside EPZ BOI project <strong>to</strong> an<br />
EPZ project:-<br />
Permitted on declaration of goods <strong>to</strong> BOI Security at Main gate of relevant EPZ along with a tax<br />
invoice on the market value (original + copy) and production of goods <strong>to</strong> BOI Verification Unit.<br />
BOI prior approval is necessary.<br />
In case of fabric <strong>VAT</strong> is not payable, but prior BOI approval should be obtained.<br />
1.4.7 Imported or manufactured goods by TIEP, manufacturing bonds or Infac project <strong>to</strong> an EPZ<br />
project:-<br />
Permitted on submission of a Cusdec/GRN <strong>to</strong> be processed at SLC by the seller. Goods should<br />
be declared <strong>to</strong> the BOI Security at the Main gate of EPZ with a copy of invoice and production of<br />
goods <strong>to</strong> BOI verification. Prior BOI approval is necessary.<br />
1.5 SUB-CONTRACTS<br />
1.5.1 To inter or intra zone project :-<br />
<strong>Tax</strong> invoice <strong>to</strong> be issued by the processor for the processing charges.<br />
1.5.2 To a BOI project located outside EPZ:-<br />
159
The sub-contract awarder should pay <strong>VAT</strong> upfront of deferred basis prior <strong>to</strong> removal on<br />
a Cusdec. Processor <strong>to</strong> issue a <strong>Tax</strong> invoice for the processing charges.<br />
1.5.3 EPZ project undertakes for a BOI or non-BOI export oriented outside EPZ project :-<br />
Permitted on the request of the EPZ enterprise subject <strong>to</strong> production of goods at the time of<br />
bringing in and out of EPZ. <strong>Tax</strong> invoice <strong>to</strong> be issued for the processing charges by the processor.<br />
1.6 REMOVAL OF MACHINERY AND EXQUIPMENT FOR REPAIRS AND LOANS:-<br />
1.6.1 Maximum of 05 Nos. machines or parts of a particular category :-<br />
Permitted <strong>to</strong> remove without payment of <strong>VAT</strong>.<br />
1.6.2 Machines given or taken on loan basis for temporary use and return :-<br />
No <strong>VAT</strong> is chargeable. Present format and procedure will continue.<br />
1.7 REMOVAL OF SAMPLES<br />
1.7.1 Removal <strong>to</strong> a buying office or buyer's representative is not subject <strong>to</strong> payment of <strong>VAT</strong>.<br />
The present BOI controlling system will continue.<br />
2. PROJECTS LOCATED OUTSIDE EPZZ ENGAGED IN DIRECT EXPORT OF GOODS AND<br />
SERVICES (ENTERPRISES REGISTERED FOR DEFERRED FACILITY)<br />
2.1 IMPORTS<br />
2.1.1 Project related items needed for the establishment of project can be imported exempted from<br />
payment of <strong>VAT</strong> for the following categories, during the project implementation period as<br />
specified in the agreement or up <strong>to</strong> the date of completion of project whichever is earlier.<br />
BOI enterprises signed agreements prior <strong>to</strong> 16/05/1996<br />
And,<br />
BOI enterprises signed agreements prior <strong>to</strong> 01/04/1998 where the <strong>to</strong>tal cost of investment is not<br />
less than Rs.500 million.<br />
2.1.2 The following projects which are permitted <strong>to</strong> import project related items on the exemption of<br />
payment of <strong>VAT</strong> for a period of two years from the appointed date of <strong>VAT</strong> or until the completion<br />
of the project specified in the agreement which ever is earlier.<br />
(a)<br />
Housing and Health care project.<br />
160
(b)<br />
(c)<br />
(d)<br />
(e)<br />
Projects engaged in unprocessed agricultural products including fishing<br />
(not including liable agricultural produced).<br />
Wheat flour milling projects.<br />
Project producing liquid fresh milk (flavoured or not).<br />
Any other projects engaged solely in producing any other goods exempted under the first<br />
schedule <strong>to</strong> the <strong>VAT</strong> Act.<br />
2.1.3 Except fabric by the BOI approved garment manufacturers, all project related goods are permitted<br />
on deferment of <strong>VAT</strong> by the export oriented project including garment manufacturers if they<br />
export more than 50% of the value of the output directly.<br />
2.2 TRANSFERS<br />
2.2.1 Imported goods except fabric for garment manufacturers <strong>to</strong> another outside EPZ<br />
enterprise :-<br />
Permitted on submission of a request along with a <strong>Tax</strong> invoice for the market value (original +<br />
copy) issued by the transferor <strong>to</strong> the IS Dept.<br />
2.2.2 To a TIEP manufacturing bond or infac project :-<br />
Permitted on submission of a <strong>Tax</strong> invoice for the market value _ Cusdec/GRN processed at SLC<br />
by the transferee subject <strong>to</strong> BOI formalities.<br />
2.2.3 From TIEP, manufacturing bond or Infac project under SLC <strong>to</strong> outside BOI project:-<br />
Permitted on submission of a tax invoices for the market value + Cusdec/GRN processed at SLC<br />
by the transferor subject <strong>to</strong> BOI formalities.<br />
2.2.4 To a project in an EPZ:-<br />
Permitted on declaration of goods <strong>to</strong> BOI security at the Main Gate at EPZ on producing goods<br />
along with <strong>VAT</strong> invoice for the market value (Original + copy). Prior approval <strong>to</strong> be obtained.<br />
2.2.5 From a Cus<strong>to</strong>ms sales bond <strong>to</strong> outside EPZ project:-<br />
With BOI approval on submission of a Cusdec with payment of <strong>VAT</strong> on market value. However,<br />
in respect of fabric if the recipient is a garment manufacturer, <strong>VAT</strong> ins not payable.<br />
2.3 SALES<br />
161
2.3.1 Imported goods (except fabric) or manufactured goods <strong>to</strong> another outside EPZ project:-<br />
Permitted on submission of a <strong>Tax</strong> invoice on the market value (Original + copy) the IS<br />
Dept. by the recipient.<br />
2.3.2 To another export-oriented project under SLC (TIEP manufacturing bond or infac project):-<br />
Permitted subject <strong>to</strong> BOI formalities on processing of a Cusdec/GRN at SLC on a tax invoice on<br />
the market value by the recipient.<br />
2.3.3 From non-BOI (TIEP manufacturing bond or Infac project) <strong>to</strong> outside EPZZ project:-<br />
A Cusdec/GRN <strong>to</strong> be processed at the SLC by the seller and submission <strong>to</strong> the IS Dept. of the<br />
BOI with a <strong>Tax</strong> invoice by the BOI project.<br />
2.3.4 To the local market within permissible limit of the agreement:-<br />
On payment of Cus<strong>to</strong>ms duty and <strong>VAT</strong> as determined by SLC on submission of a Cusdec by the<br />
buyer <strong>to</strong> the SLC.<br />
2.4 SUB-CONTRACTS<br />
2.4.1 Between outside BOI projects and BOI or non-BOI projects located in or outside EPZ:-<br />
Permitted on a request made by the sub-contrac<strong>to</strong>r on the prescribed format. Processor <strong>to</strong> issue<br />
a <strong>Tax</strong> invoice for the processing charges.<br />
3. TRADING HOUSES LOCATED INSIDE EPZZ<br />
3.1 IMPORTS<br />
3.1.1 The procedure relating <strong>to</strong> imports effected by enterprises located inside EPZZ will apply.<br />
3.2 TRANSFERS<br />
3.2.1 Imported goods <strong>to</strong> another inter or intra EPZ project for manufacture and return:-<br />
Not liable for tax. However, the processor should issue a <strong>Tax</strong> invoice for the processing charges.<br />
3.2.2 Imported goods except fabric <strong>to</strong> another BOI or non-BOI project located outside EPZ for<br />
manufacture and return:-<br />
Payment of <strong>VAT</strong> on submission of a Cusdec <strong>to</strong> the market value of the goods on upfront or<br />
deferred basis. A <strong>Tax</strong> invoice <strong>to</strong> be issued by the processor for the processing charges.<br />
3.3 SALES/PURCHASES<br />
162
3.3.1 Purchasing manufactured goods from inter or intra zone project for export purposes :-<br />
The seller <strong>to</strong> issue a <strong>Tax</strong> invoice for value addition.<br />
3.3.2 Purchase of manufactured goods from a BOI or non-BOI project located outside EPZZ for<br />
export :-<br />
Submit an export Cusdec indicating the name and location of the manufactured enterprise in<br />
cage 51 of the export Cusdec for consideration of deferred facility for the manufacturing<br />
enterprise. The seller should issue a <strong>Tax</strong> invoice on the market value. In case of purchase of<br />
goods from a non-BOI project prior approval <strong>to</strong> be obtained from SLC and also goods <strong>to</strong> be<br />
exported should be verified by SLC.<br />
4. TRADING HOUSES LOCATED OUTSIDE EPZZ<br />
4.1 IMPORTS<br />
4.1.1 The same procedure relating <strong>to</strong> imports effected by export-oriented enterprises located<br />
outside EPZZ will apply. Additional details <strong>to</strong> be obtained from the IS Dept.<br />
4.2 SALES/PURCHASES<br />
4.2.1 Purchase of goods from BOI or non-BOI export-oriented projects located outside EPZ:-<br />
Seller <strong>to</strong> issue a <strong>Tax</strong> invoice for the market value.<br />
In case of purchased of goods from a non-BOI project prior approval <strong>to</strong> be obtained from SLC<br />
and export of goods should be verified by SLC.<br />
4.2.2 Manufactured goods from an EPZ enterprise :-<br />
The trading house submit a Cusdec prior <strong>to</strong> removal of goods for payment of <strong>VAT</strong> upfront or<br />
deferred basis., But if the goods are directly exported from the manufacturer's premises, a <strong>Tax</strong><br />
invoice for the market value should be issued and non Cusdec is issued for the payment of <strong>VAT</strong>.<br />
5. FABRIC MANUFACTGURING ENTERPRISES LOCATED INSIDE EPZZ<br />
5.1 IMPORTS<br />
5.1.1 The procedure relating <strong>to</strong> imports effected by enterprises in EPZZ will apply.<br />
5.2 SALES<br />
5.2.1 To inter or intra EPZ garment manufacturing project :-<br />
Permitted on a <strong>Tax</strong> invoice for the value addition.<br />
163
5.2.2 To BOI garment manufacturing projects located outside EPZ :-<br />
On submission of a Cusdec for the payment of <strong>VAT</strong> for value addition value on deferred or<br />
upfront basis.<br />
5.2.3 To export-oriented project under TIEP, manufacturing bond or Infac:-<br />
Submission of a Cusdec by the recipient <strong>to</strong> SLC for the payment of <strong>VAT</strong> on market value either<br />
on upfront or deferred basis.<br />
6. FABRIC MANUFACTURERS LOCATED OUTSIDE EPZZ<br />
6.1 IMPORTS<br />
6.1.1 Import of following raw materials by the BOI fabric manufacturers are allowed <strong>VAT</strong> free.<br />
• Yarn<br />
• Grey cloth<br />
• Dyes used for manufacture of fabric<br />
• Chemicals used for manufacture of fabric<br />
• Finished cloth for processing<br />
• Fibre<br />
However, in order <strong>to</strong> avail this facility fabric manufacturers should export more than 51% of the<br />
value of the output either directly or indirectly or combination of both. Facility will be withdrawn if<br />
they fall short of this minimum export level. A guarantee should be given <strong>to</strong> this effect <strong>to</strong> the IS<br />
Dept.<br />
6.2 SALES<br />
6.2.1 To a garment manufacturing project in EPZ :-<br />
Permitted on submission of a Cusdec by the recipient for the payment of <strong>VAT</strong> on market value on<br />
deferred or upfront basis.<br />
6.2.2 To another garment manufacturing BOI project located outside EPZ:-<br />
Permitted on submission of a Cusdec by the recipient for the market value for payment of <strong>VAT</strong>.<br />
6.2.3 To an export-oriented garment manufacturer under SLC (TIEP manufacturing bond of<br />
Infac):-<br />
164
Permitted on submission of a Cusdec <strong>to</strong> SLC by the recipient for the payment of <strong>VAT</strong> on market<br />
value.<br />
7. OTHER PROJECTS NOT MENTIONED ABOVE<br />
7.1 IMPORTS<br />
7.1.1 All other projects should pay <strong>VAT</strong> on upfront at the point of imports at the rates applicable for all<br />
projects related items.<br />
7.2 SALES<br />
7.2.1 To other BOI projects in or outside zones:-<br />
Permitted on issue of a <strong>Tax</strong> invoice for market value subject <strong>to</strong> submission of a Cusdec/GRN <strong>to</strong><br />
be processed at SLC by the buyer.<br />
7.2.2 To TIEP Manufacture-in-Bonds or Infac projects:-<br />
Permitted on issue of a <strong>Tax</strong> invoice for market value subject <strong>to</strong> submission of a Cusdec/GRN <strong>to</strong><br />
be processed at SLC by the buyer.<br />
7.2.3 Construction materials like steel <strong>to</strong> BOI enterprises :-<br />
The purchasing BOI enterprise should obtain prior approval of BOI and payment of <strong>VAT</strong> on<br />
market value on a tax invoice.<br />
7.2.4 All other local sales need prior approval as per the agreement and is subject <strong>to</strong> payment of duty,<br />
<strong>VAT</strong> and other levies.<br />
165
Annexure - 2<br />
First Schedule <strong>to</strong> the <strong>VAT</strong> Act<br />
The Following supplies or imports are exempt from <strong>VAT</strong>. This is a summarized version of the list. For the<br />
exact version please refer <strong>to</strong> the Act.<br />
Goods<br />
i. The supply or import of<br />
(a)<br />
(b)<br />
(c)<br />
(d)<br />
(e)<br />
(f)<br />
Unprocessed Agricultural products other than pota<strong>to</strong>es, onions, chillies, all other<br />
grains excluding rice and paddy, planting material<br />
Unprocessed horticultural products<br />
Unprocessed animal husbandry products other than any variety of meat and live<br />
birds including day old chicks<br />
Unprocessed fishing products<br />
Unprocessed forestry products other than timber.<br />
Cardamom, cinnamon, cloves, nutmeg, pepper, desiccated coconut, rubber,<br />
paddy and seed paddy.<br />
ii.<br />
The supply or import of Rice, rice flour, wheat, wheat flour and eggs<br />
iii. The supply or import of bread of any description .<br />
iv.<br />
The supply or import of liquid milk(not made out of powdered milk or any grain) and<br />
infants powdered milk.<br />
v. The supply of Air crafts helicopters and temporary import of any plant machinery,<br />
equipments which are re-exported within 12 months from the date of import.<br />
vi.<br />
vi.<br />
vii.<br />
viii.<br />
ix.<br />
The supply of import Books other than cheque books, magazines, periodicals, news<br />
papers diaries, ledger books and exercise books.<br />
The supply of import kerosene, bunker fuel and aviation fuel.<br />
The supply of import of crude Petroleum oil<br />
Pharmaceutical products (other than cosmetics) and raw materials<br />
Ayurvedic, Siddha, Unani or Homeopathic preparations (other than cosmetics) and raw<br />
materials<br />
x. Medical machinery, surgical instruments, medical and dental equipment and ambulances<br />
xi.<br />
Artificial limbs, crutches, hearing aids and accessories wheel chairs, prepared culture<br />
media, diagnostic or labora<strong>to</strong>ry reagents, surgical glows, contact lenses X-ray tubes,<br />
white canes for Blind and Braille typewriters and parts<br />
166
xii.<br />
xiii.<br />
xiv.<br />
Pearls, diamonds, diamond power, precious s<strong>to</strong>nes, precious metals, and gold coins<br />
Unused postage or <strong>revenue</strong> stamps<br />
Import and supply of goods at any; duty free shop for foreign currency.<br />
xv. Temporary import of high value plant, machinery, equipment etc. <strong>to</strong> be exported within 12<br />
months.<br />
xvi.<br />
xvii.<br />
xviii.<br />
Any goods imported by or supplied <strong>to</strong> any diplomatic mission or other privileged person<br />
under the Vienna convention and identified as such by the Commissioner General of<br />
Inland Revenue.<br />
Passenger’s Baggage(Exemption) entitlements, duty free re-importation and ships s<strong>to</strong>res<br />
Import of goods by; approved organizations for relief of distress, charitable or religious<br />
purposes<br />
(a)<br />
(b)<br />
Import of approved project related articles by any BOI company<br />
approved before 16 th May 1996 or before 1 st April 1998 with a <strong>to</strong>tal cost of the<br />
project not less than Rs.500 Million.<br />
import of approved project related articles by any BOI project which will make<br />
exempt supplies on the completion of the project for a period of 02 years form 1 st<br />
August 2002.<br />
xix<br />
xx<br />
xxi<br />
xxii<br />
Xxiii<br />
Import of non-business articles and samples worth rs.10,000/- or less<br />
Supply of goods used in Sri Lanka for a period not less than 12 months under any hire<br />
purchase agreement<br />
Fire or subsidized meals <strong>to</strong> employees at their places of work<br />
Supply of residential houses other than by a BOI company which has entered in<strong>to</strong> an<br />
agreement on or after 01 st April 2001 with a project cost not less than US dollars 10<br />
million or its equivalent.<br />
Agricultural trac<strong>to</strong>rs and a agricultural machinery.<br />
Services<br />
1. Educational services provided by a recognized educational establishment Government<br />
school or higher educational establishment funded by the government.<br />
2. Public library services<br />
3. Specified financial services including life insurance, Agrahara Insurance and Crop &<br />
Lives<strong>to</strong>ck Insurance<br />
167
4. Supply of any services <strong>to</strong> any Diplomatic mission or other privileged person under the<br />
Vienna Convention and identified as such by the Commissioner general of Inland<br />
Revenue.<br />
5. Approved public Passenger Transport Services (excluding air or water transport <strong>to</strong>urist<br />
transport, excursion <strong>to</strong>urs and taxi services.)<br />
6. Leasing facilities on mo<strong>to</strong>r coaches with 28 or more seats used in public passenger<br />
transport<br />
7. Electricity not exceeding 30 kwh per month consumer<br />
8. Supply of services consumed outside Sri Lanka for which the payment was made in<br />
rupees<br />
9. Lease or rent of residential accommodation other than by a BOI company which has<br />
entered in<strong>to</strong> an agreement on or after 1 st April 2001 with a project cost not less than US<br />
dollars 10 million or its equivalent.<br />
10. Supply of health care services by a medical institution other than by a BOI company<br />
which has entered in<strong>to</strong> an agreement on or after 1 st April 2001 with a project cost not less<br />
than US dollars 10 million or its equivalent.<br />
11. Supply of Health Cares Services by a professionally qualified person.<br />
12. Supply of services by a restaurant situated beyond the Immigration point at any airport.<br />
13. Free or subsidized transportation of employees between their homes and place of work.<br />
14. Services in relation <strong>to</strong> burials and cremations<br />
168
Annexure - 3<br />
Second Schedule <strong>to</strong> the <strong>VAT</strong> Act<br />
The supply or import of the following goods and services are taxed at 10%. This is a summarized<br />
version. For the exact version please refer <strong>to</strong> the <strong>VAT</strong> Act.<br />
Goods<br />
1. Coconut-Poonac-Prawn-feed and Poultry feed<br />
2. Tea, Copra and coconut oil<br />
3. Pota<strong>to</strong>es, onions and chillies<br />
4. Planting materials and vegetable seeds<br />
5. Live birds, day old chicks, dressed chicken and parts and all other unprocessed meat<br />
6. Magazines and journals<br />
7. Powered milk (other than infants’ milk) and condensed milk<br />
8. Lentils, sugar, jaggery and sakkara<br />
9. Dried fish and Maldive fish<br />
10. Fertilizer including rock phosphate<br />
11. Water, LP Gas, petrol and Diesel<br />
12. Bicycles and Mo<strong>to</strong>r bicycles<br />
13. Mo<strong>to</strong>r coaches, chassis or bodies with 28 or more seating capacity, used for public<br />
passenger transport.<br />
14. Pho<strong>to</strong> voltaic, solar batteries, CFL lamps and spare parts and Solar Home systems<br />
15. Industrial machinery classified under H.S. Code (Chapter 84) excluding fans and parts,<br />
air conditioners, refrigera<strong>to</strong>rs, cabinets for refrigera<strong>to</strong>rs, dish washing machines<br />
(household type) personal weighing machines, lawn or sports ground rollers and parts,<br />
lawn movers and parts, house old washing machines and house hold type sewing<br />
machines.<br />
16. Electric mo<strong>to</strong>rs, genera<strong>to</strong>rs and spare parts, electric generating sets, and spare parts<br />
classified under H.S. Codes – 85.01.,85.02 and 85.03<br />
17. Cinematic firms (other than vedio films) and Theatrical productions<br />
169
Services<br />
1. Electricity more than 30 kwh, per month per consumer and bulk supply of electricity <strong>to</strong> the<br />
national grid.<br />
2. Construction contrac<strong>to</strong>r’s or sub contrac<strong>to</strong>r’s services<br />
3. Hotels, Guest Houses, Restaurants etc. and inbound <strong>to</strong>urs<br />
4. Exhibition of films or dramas<br />
5. Liable educational services<br />
6. Services provided by the Foreign Employment Bureau of Sri Lanka<br />
7. Leasing facilities<br />
8. Land transportation of goods<br />
9. Services provided by qualified professionals and those who carry on specified vocations.<br />
170
Appendix – I<br />
Comparison of the value of imported goods under<br />
GST and <strong>VAT</strong><br />
Assume that the C.I.F value of goods imported is Rs.100/-, Cus<strong>to</strong>ms Duty is levied at 25% ( & surcharge<br />
at 10%) and that the goods are not liable <strong>to</strong> Excise (special provisions) Levy and Cess.<br />
i. Under GST regime (prior <strong>to</strong> 01.08.2002)<br />
GST = (C.I.F + Cus Duty + Surcharge + Ex.Spl.Duty+ Cess) x 12.5<br />
100<br />
= (100 + 25 + 10 + 0 + 0) x 12.5<br />
100<br />
= 16.87<br />
NSL = (C.I.F + Cus Duty ) x 125 x 6.5<br />
100 100 In the Calculation of the<br />
NSL<br />
= (100 + 25 ) x 125 x 6.5 the surcharge on Cus<strong>to</strong>ms Duty<br />
100 100 is not taken in<strong>to</strong> account<br />
= 10.15<br />
∴Total landed cost after taxes = CIF + Cus Duty + Surcharge + GST + NSL +<br />
(Excluding Stamp Duty)<br />
Ex.Spl.Duty+Cess<br />
= 100 + 25 + 10 + 16.87 + 10.15 + 0 + 0<br />
= 162.02<br />
ii. Under <strong>VAT</strong> Regime – (After 01.08.2002)<br />
<strong>VAT</strong> = (C.I.F + Cus Duty + Ex.Spl.Duty+ Cess) x 20<br />
100<br />
= (100 + 25 + 0 + 0) x 20<br />
100<br />
= 25<br />
∴Total landed cost after taxes = CIF + Cus Duty + <strong>VAT</strong>+ Ex.Spl.Duty + Cess<br />
(Excluding Port Development Levy)<br />
= 100 + 25 + 25 + 0 + 0<br />
= 150<br />
iii.<br />
Sale price <strong>to</strong> the Consumers<br />
If the importer is a registered person be should charge and collect <strong>VAT</strong> from the consumers <strong>to</strong><br />
whom the imported goods are sold. But in deciding the sale price he need not take in<strong>to</strong> account<br />
the GST or <strong>VAT</strong> paid <strong>to</strong> the Cus<strong>to</strong>ms as it does not form part of his cost.<br />
171
Sale before 01.08.2002 – GST Regime<br />
Landed cost = 162.02<br />
GST paid <strong>to</strong> Cus<strong>to</strong>ms = 16.87<br />
∴ Actual cost = 145.15<br />
Assume the profit margin = 15.00<br />
∴ Sale price (Marked price) = 160.15<br />
GST payable @ 2.5% = 20.01<br />
Final price <strong>to</strong> the consumer = 180.16<br />
<strong>VAT</strong> payable <strong>to</strong> the government = Output tax – Input tax<br />
= 20.01 – 16.87<br />
= 3.14<br />
(*Note: The importer can afford <strong>to</strong> sell it at a price (160.15) below the landed price (162.02)<br />
because the GST paid <strong>to</strong> Cus<strong>to</strong>ms (16.87) which is included in the landed price is not a<br />
part of his cost since it can be recovered by way of a deduction from the amount payable<br />
<strong>to</strong> the government.<br />
Sale after 01.08.2002 – <strong>VAT</strong> Regime<br />
Case 1 – If the goods imported before 01.08.2002 are sold after 01.08.2002<br />
In this situation an importer is entitled <strong>to</strong> a special input credit Sec.78(i) That is even the<br />
NSL embeded in the s<strong>to</strong>cks remaining unsold as at 31.07.2002 is treated as input tax.<br />
Vide para 9.4.4<br />
∴ Input tax allowable = 16.87 + 10.15<br />
Landed price = 162.02<br />
∴ Actual cost <strong>to</strong> the importer = 162.02 – (16.87 + 10.15)<br />
= 135.00<br />
Assume the same profit margin = 15.00<br />
∴ Marked price for sale = 150.00<br />
<strong>VAT</strong> at 20% = 20.00<br />
Final price <strong>to</strong> the consumer = 180.00<br />
<strong>VAT</strong> payable <strong>to</strong> the government = Output tax – Input tax<br />
= 30 – 16.87 – 10.15<br />
= 2.98<br />
Thus it can be seen that the importer can keep the same profit margin as during GST period but<br />
sell the goods at a lower final price <strong>to</strong> the consumer than during GST regime if the other (non-tax)<br />
fac<strong>to</strong>rs remain unchanged.<br />
172
Case 2 - When the goods imported after 01.08.2002 are sold<br />
Landed price = 150.00<br />
<strong>VAT</strong> paid <strong>to</strong> Cus<strong>to</strong>ms = 25.00<br />
∴ Actual cost <strong>to</strong> the importer = 125.00<br />
Assume the same profit margin = 15.00<br />
∴ Marked sale price = 140.00<br />
<strong>VAT</strong> @20% = 28.00<br />
∴ Final sale price <strong>to</strong> the consumer = 168.00<br />
• Therefore under <strong>VAT</strong> an importer can keep the same profit margin as under GST but sell<br />
the goods <strong>to</strong> the consumer at final price very much lower (168/-) than under GST,<br />
(180.16) assuming other non-tax fac<strong>to</strong>rs remain unchanged.<br />
• It was observed that the <strong>VAT</strong> paid <strong>to</strong> cus<strong>to</strong>ms does not form part of the cost <strong>to</strong> the<br />
importer. Similarly <strong>VAT</strong> charged by him on the sale price does not form part of his<br />
turnover because that is a statu<strong>to</strong>ry collection made on behalf of the government (The<br />
importer is required <strong>to</strong> pay 1% of 140/- i.e Rs.1.40 as turnover tax <strong>to</strong> the Provincial<br />
Council. In the previous case where the sale price was 150/- he is required <strong>to</strong> pay<br />
Rs.1.50 as T.T.)<br />
N.B. Unlike in turnover tax, <strong>VAT</strong> on sales is not an amount received or receivable in<br />
respect of the transaction but an amount charged separately and statu<strong>to</strong>rily on behalf of<br />
the government which the supplier has <strong>to</strong> account for in respect of each invoice.<br />
(whereas under T.T. the liability of the supplier is based not on the amount of T.T<br />
indicated in the invoice but on the basis of a pooled turnover.)<br />
Price difference between <strong>VAT</strong> Registered Person and Un-registered Person<br />
• The other important thing <strong>to</strong> note is that if the person importing and selling the above<br />
goods is not a <strong>VAT</strong> registered person then the <strong>VAT</strong> paid at the Cus<strong>to</strong>ms becomes part of<br />
the cost of his goods. Then in the last case referred <strong>to</strong> above his cost is Rs.150/- and he<br />
cannot afford <strong>to</strong> price mark the goods at Rs.140/-. In order <strong>to</strong> keep the same profit<br />
margin of Rs.15/- the unregistered person should sell them at 150 + 15 = 165. Thus<br />
there cannot be a significant (final) price difference between the registered person and<br />
the unregistered person because the registered person is also entitled <strong>to</strong> input credit on<br />
other expenses such as electricity, telephone, transport vehicles etc. in addition <strong>to</strong> input<br />
credit (of 25/-) on <strong>VAT</strong> paid <strong>to</strong> Cus<strong>to</strong>ms. The <strong>VAT</strong> registered persons price may then,<br />
perhaps be less than the price of the un-registered person. In any event the price<br />
difference can never be as high as the <strong>VAT</strong> rate . (i.e 20%)<br />
iv.<br />
The effective rate of <strong>VAT</strong> on imports<br />
(a) The above example represents a case where the rate of Cus<strong>to</strong>ms Duty = 25%.<br />
When CIF = 100 and CD = 25% then GST = 16.87 and NSL = 10.15. The the<br />
effective rate when GST and NSL taken <strong>to</strong>gether as a percentage of CIF = 16.87<br />
+ 10.15 = 27.02%.<br />
(b) Similarly when the Cus<strong>to</strong>ms Duty = 10%.<br />
173
GST = (CIF + CD + Surcharge + Ex.Spl.Duty +Cess) x 12.5%<br />
= (100 + 10 + 10 + 0 + )) x 12.5<br />
100<br />
= 15<br />
and NSL = (CIF + CD) x 1.25 x 6.5%<br />
= (100 + 10) 125 x 6.5<br />
100 100<br />
= 8.93<br />
and the effective rate = 15 + 8.93 = 23.93%<br />
(c) When the Cus<strong>to</strong>ms Duty is = 35%, it can be seen that, GST = 18.12,<br />
NSL = 10.96 and therefore the effective rate is 29.08%<br />
(d) Under the <strong>VAT</strong> regime <strong>to</strong>o <strong>VAT</strong> payable on imports can be calculated when CD =<br />
10%, 25% or 35% by using the formula<br />
<strong>VAT</strong> = (CIF + CD+ Ex.Spl.Duty + Cess) 10% or 20% as the case may be<br />
the relevant values are given in the following table in respect of goods for which<br />
excise (Special Provisions) Duty and Cess Duty are not applicable.<br />
Effective rate as a % of CIF<br />
Cus<strong>to</strong>ms Duty<br />
%<br />
10<br />
(12.5%)<br />
GST<br />
% CIF<br />
15<br />
(6.5%)<br />
NSL<br />
% CIF<br />
8.93<br />
GST<br />
+<br />
NSL<br />
% CIF<br />
23.93<br />
( 10%)<br />
<strong>VAT</strong><br />
% CIF<br />
11<br />
(20%)<br />
<strong>VAT</strong><br />
% CIF<br />
22<br />
25<br />
16.87<br />
10.15<br />
27.02<br />
12.50<br />
25<br />
35<br />
18.12<br />
10.96<br />
29.08<br />
13.50<br />
27<br />
v. <strong>VAT</strong> Rates<br />
Subject <strong>to</strong> few exceptions<br />
• 20% rate has been fixed for the goods which were earlier liable <strong>to</strong> both GST (12.5%) and<br />
NSL (6.5%) such as telecommunication services, electrical goods, mo<strong>to</strong>r vehicles,<br />
• 10% rate has been fixed for goods which were earlier liable either only <strong>to</strong> GST (eg.<br />
Supply of electricity, leasing and transport) or only <strong>to</strong> NSL (Eg. Bread, Milk, Sugar)<br />
• Introduction of only one indirect tax (<strong>VAT</strong>) instead of two taxes (GST & NSL) in respect of<br />
the same transaction has simplified <strong>to</strong> some extent the tax base and the tax structure<br />
relating <strong>to</strong> indirect taxes administered by the CGIR.<br />
174
Appendix – 2<br />
Income Treatment of <strong>VAT</strong><br />
Income <strong>Tax</strong> is charged on profits and income. In computing profits of any trade, business,<br />
profession or vocation, the expenditure as well as the income, consist of payments and receipts which<br />
include <strong>VAT</strong>. If the person whose profits are computed is a Registered Person for <strong>VAT</strong> then such person<br />
is entitled <strong>to</strong> deduct <strong>VAT</strong> included in the supplies used by him (i.e input tax) from the <strong>VAT</strong> charged and<br />
collected by him (i.e output tax) on behalf of the government and the therefore <strong>VAT</strong> does not form part of<br />
his cost as explained in the example in Appendix– 1. Inland Revenue Act recognizes this principle and in<br />
the circumstances a <strong>VAT</strong> registered person is not entitle <strong>to</strong><br />
i. deduct <strong>VAT</strong> (i.e input tax) included in the expenses incurred in the production of income<br />
in computing the profits – Sec. 24(I)(v) of the Inland Rev. Act, and<br />
ii. deduct <strong>VAT</strong> (input tax) included in the capital assets in computing depreciation etc. –<br />
Sec. 23(7)(f)(iv)<br />
Similarly,<br />
iii.<br />
iv.<br />
The output tax included in the supplies (i.e sales) made by such person is not part of his<br />
turnover, and<br />
The output tax included in the disposal of capital assets will not be treated as part of the<br />
sale proceeds -–Sec. 23(7)(c )<br />
However adjustments are due in respect of disallowable <strong>VAT</strong> such as <strong>VAT</strong> paid on<br />
expenses relating <strong>to</strong> mo<strong>to</strong>r vehicles etc. As the registered person is not entitle recover<br />
such <strong>VAT</strong>, such amounts will be treated as part of his cost. Adjustments are also due in<br />
relation <strong>to</strong> bad debts written off and bad debts recovered. The <strong>VAT</strong> element in such<br />
amounts should be excluded.<br />
There may also be situations where only a part of the supplies are taxable. In such<br />
cases the input tax is either apportioned or will be allowed only <strong>to</strong> the extent that input<br />
tax is directly attributable <strong>to</strong> the taxable supplies. The amount of input tax that is not<br />
allowed for <strong>VAT</strong> purposes will be treated as part of the cost for income tax purposes.<br />
The “<strong>VAT</strong> Account” which is required <strong>to</strong> be maintained under Sec. 64(I) of the <strong>VAT</strong> Act by<br />
a registered person (as stated in para 15.6) is a useful record which can be used <strong>to</strong> make<br />
these adjustments. In the ‘Input <strong>Tax</strong> <strong>VAT</strong> Account”, they can provide a separate columns<br />
175
<strong>to</strong> indicate the date of payment of cash, in the case of cash basis taxpayers, and a<br />
column <strong>to</strong> indicate whether the input is directly attributable <strong>to</strong> an exempt supply.<br />
Appendix – 3<br />
Proposed Changes <strong>to</strong> <strong>VAT</strong> Law<br />
1. Following changes and amendments have been proposed <strong>to</strong> the <strong>VAT</strong> Act which includes mainly<br />
the changes proposed by the Budget speech presented <strong>to</strong> the Parliament on 06.11.2002<br />
2. <strong>VAT</strong> on Retail and Wholesale Trading<br />
<strong>VAT</strong> will be introduced <strong>to</strong> retail and wholesale supply of goods with effect from 01.07.2003.<br />
Section3 of the Act will be suitably modified.<br />
3. <strong>VAT</strong> on Financial Services<br />
The financial services which are presently exempted under items (xi)(a) <strong>to</strong> (xi)(h) of the First<br />
Schedule read with Section 8 of the <strong>VAT</strong> Act will be liable <strong>to</strong> <strong>VAT</strong> with effect from 01.01.2003<br />
provided such services are supplied by “specified institutions” – namely<br />
(a) A Licensed Commercial Bank within the meaning of the Banking Act NO. 30 of 1988<br />
(b) A Finance Company registered under the Finance Companies Act No. 78 of 1988.<br />
(c) A Licensed Specialized Bank within the meaning of Banking Act NO. 30 of 1988.<br />
However it has been proposed <strong>to</strong> use the “additive model” (i.e wages + profits) and not the<br />
substrative model i.e (Output – Input) as discussed in para 9.2 as the base for calculating the<br />
tax. Thus the banks and financial institutions will have <strong>to</strong> compute their profits monthly in order <strong>to</strong><br />
adopt this method as they will be required <strong>to</strong> furnish monthly returns. A separate Chapter will be<br />
introduced <strong>to</strong> the <strong>VAT</strong> Act <strong>to</strong> deal with taxation of financial services for <strong>VAT</strong> purposes.<br />
However the Life Insurance, Agrahara insurance and crop insurance as specified in item (xi(i) will<br />
continue <strong>to</strong> be exempted.<br />
Any financial services supplied by other institutions <strong>to</strong>o will continue <strong>to</strong> be exempted. Eg.<br />
Commission charged for exchange of foreign currency by approved money changes and <strong>to</strong>urist<br />
hotels.<br />
176
4. Import of Ships<br />
Exclusion from <strong>VAT</strong> as per Section 2(3) (e) will be applicable (Vide Para 2.4.1)only till<br />
31.12.2002. Any ship imported thereafter will be eligible for deferment of <strong>VAT</strong> by the Cus<strong>to</strong>ms for<br />
a period of 36 months which should be settled in quarterly installments. Other requirements,<br />
such as furnishing of a bank guarantee etc., as are required in other cases of deferment, are<br />
applicable. The second proviso <strong>to</strong> Section 2(3) will be suitably amended.<br />
5. Local Sale of Garments by Manufacturers Cum Exporters of garments – Sec. 22(1)<br />
This facility will be extended <strong>to</strong> non-BOI Sec<strong>to</strong>r exporters as well. They will therefore be required<br />
<strong>to</strong> make such sales, through a Cus-Dec with the approval of the Cus<strong>to</strong>ms/BOI and charge 25/-<br />
per piece as <strong>VAT</strong> which will be collected by the Cus<strong>to</strong>ms from the buyers. This 25/- is the output<br />
tax of the manufacturer and the same procedure as in explained in para 9.3 is applicable.<br />
6. Input tax on Mo<strong>to</strong>r Vehicles<br />
Section 22(6) will be amended <strong>to</strong> allow 50% of the input tax in respect of Mo<strong>to</strong>r vehicles used in a<br />
taxable activity – effective from 01.01.2002.<br />
7. Issue of Assessments<br />
Section 28 & 33 will be amended by deleting last para of Sec. 28 and introducing at the end of<br />
Section33 the following paragraph “For the purpose of this Chapter any notice of assessment<br />
may refer <strong>to</strong> one or more taxable periods”. This will enable an assessment or an additional<br />
assessment <strong>to</strong> be issued covering several taxable periods<br />
8. Assessments for Fraud and willful evation - Time Bar<br />
No assessment can be made on fraud or willful evasion if detected after 5 years.<br />
9. Appeal settlement period – Sec. 34<br />
The period within which appeal <strong>to</strong> be settled will be reduced <strong>to</strong> two years.<br />
10. Board of Review – Sec. 35<br />
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The period within which the Board of Review should give a determination on an appeal will also<br />
be restricted <strong>to</strong> two years.<br />
11. Recovery Proceedings – Sec. 48<br />
Recovery proceedings <strong>to</strong> be initiated within 5 years.<br />
12. Refunds – Sec.58<br />
Application <strong>to</strong> be made within 3 years.<br />
13. Definition of Goods – Sec. 83<br />
Will be amended <strong>to</strong> fall in line with the administrative ruling given in example 3 of para 3.3 of this<br />
brochure.<br />
14. Exemptions – Schedule 1<br />
Item xxvi – exemption of medical and dental equipments and ambulances etc. is withdrawn and<br />
will be taxed at 10%.<br />
15. Hire-purchase of second land goods<br />
Item (xi)(h) of the exemption list will be amended <strong>to</strong> clarify the position that hier-purchase of<br />
second hand goods will be exempted from <strong>VAT</strong> as mentioned in para 17.2.<br />
16. Lower rate 10% - Schedule 2<br />
Item xviii - will be amended so that any leasing advance and any payment made for early<br />
settlement of a lease <strong>to</strong> acquire the asset if the amount exceeds 10% of the <strong>to</strong>tal payable under<br />
the agreement will not be considered as leasing payments (Please see para 18.15) Any initial<br />
payment which cannot be set off against subsequent installments is an advance for this purpose.<br />
Item xx – MICE <strong>to</strong>urism will be taxed at 10%. (This will give effect <strong>to</strong> para 26.6).<br />
Items xxii <strong>to</strong> xxvii - supply and import of, textile and hand loom products, ships, jewellery, maize<br />
and medical equipments etc will be brought under 10% category.<br />
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Telephone Numbers<br />
Any person wishing <strong>to</strong> seek clarifications with regard <strong>to</strong> any matter contained in this brochure may kindly<br />
contact the following or any Senior Assessor or Assessor of the <strong>VAT</strong> Branch.<br />
Name Designation Contact Tele Nos.<br />
Mr. A.A. Wijepala - Deputy Commissioner - 343176<br />
421241 - 2663<br />
Mr. R.K.H. Kaluarachchi - Deputy Commissioner - 342097<br />
(Regarding <strong>VAT</strong> Refunds) 421241 - 2613<br />
Dr. P.P.A Hameed - Deputy Commissioner - 342095<br />
421241- 2555<br />
Mr. H.M. Premaratne Banda - Deputy Commissioner - 328697<br />
(Regarding GST Refunds) 421241 – 2511<br />
<strong>VAT</strong> Refunds<br />
Mr. A.G de Z Jayathilake - Senior Assessor - 328427<br />
421241 – 2664<br />
Mrs. P. Rohini - Senior Assessor - 451741<br />
421241 - 2654<br />
<strong>VAT</strong> Registration<br />
Mrs. Priya Fernando - Senior assessor - 451740<br />
421241 – 2675<br />
Mrs. W.A.S. Chandrasekara - Senior Assessor - 451740<br />
421241 – 2677<br />
Mrs. Wasana Siriwardana - Assessor - 421241 – 2522<br />
General Information<br />
Audit – 1<br />
Miss. Dhammika Gunathilake - Senior Assessor - 451736<br />
421241 - 2670<br />
Mr. A.W. Abeypitiya - Senior Assessor - 451738<br />
421241 – 2660<br />
Mrs. W. Anulawathie - Senior Assessor - 541741<br />
421241 – 2668<br />
Audit – 2<br />
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Mrs. S.N.P. Abrew - Senior Assessor - 328427<br />
421241 – 2653<br />
Mr. D.B. Dissanayake - Senior Assessor - 421241 – 2614<br />
Audit –3<br />
Mrs. K. Dahanayake - Senior Assessor - 331849<br />
421241 – 2553<br />
Mr. I.B.M Senaviratne - Senior Assessor - 331849<br />
421241 – 2559<br />
Mr. P.G.K. Samaratunga - Senior Assessor - 421241 – 2558<br />
GST Refunds<br />
Mr. A.N. Guruge - Senior Assessor - 430809<br />
421241 – 2521<br />
Mr. W.M.P.N.B. Wanigasekera – Senior Assessor - 331859<br />
421241 - 2518<br />
Financial Services<br />
Miss. Dhammika Gunathilake - Senior Assessor - 451736<br />
421241 - 2670<br />
Mr. K.N.C.N. Perera - Senior Assessor - 421241 – 2561<br />
Collection<br />
Mr. W.S.K. De Costa - Senior Assessor - 451739<br />
421241 - 2679<br />
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