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

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