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

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