VAT Guide to Value Added Tax - sri lanka inland revenue ...

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