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

and for VAT purposes the two components are treated as separate supplies if
they are subject to two different VAT rates. Eg. A bank may charge legal fees,
documentary charges, fax charges etc. in granting a loan. Although they may
be incidental to the main supply they are billed separately and are treated as
separate and distinct supplies for VAT purposes.
• However when ‘supply of goods’ forms part and parcel of a “supply of a service”
then it becomes one composite service which cannot be separated. Eg. The
amount charged for photocopying includes the cost of the paper but that cannot
be separated into “supply of goods” and “supply of a service”. A contractor
supplying the service of constructing a building is supplying one composite
service which includes provision of materials. It cannot be separated into “supply
of goods” and “supply of a service”. Similarly when a vehicle service station is
providing air filters, engine oil etc. for the purpose of the service it cannot be
separated into “sale of goods” and “sale of a service”. It is a supply of one
composite and single service of “servicing the vehicle”.
• However, in such a situation, if the existence of a separate business of retail and
wholesale supply of motor spares, can be established then the sale of motor
spares can be treated as an “excluded supply” as provided in Sec3. The
evidence required to establish the existence of a separate business are (i)
Separate Trade license for the retail and wholesale business from the relevant
local authority and a separate business registration from the relevant provincial
council (ii) Evidence to support that the supply of spare parts is open to general
public and not confined to those who come for vehicle servicing (iii) Maintenance
of separate invoices, books of accounts and other records as required under
Section 3 (and as mentioned in para 2.4.2 and para 15.3) and preparation of
separate Profit & Loss Account and balance sheet for the business of
buying and selling motor spares, oil cans etc. If the existence of a separate
business cannot be established the total amount charged for the service
including the value of spare parts provided shall be treated as the “value of
supply” for VAT purposes. Even prior to the transfer of turnover tax on retail &
wholesale sales to Provincial Councils it was treated in the same manner and
the entire value of supply was treated as the “value of the supply of a service” for
turnover tax purposes and the total value was not separated into two
components called “supply of goods” and “supply of services” (Although the
agency which implements the turnover tax law has undergone change turnover
tax law applicable to the facts of this case and the tax treatment which is a
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