VAT exemptions to be rationalised; new Act coming

Friday, 18 November 2022 00:24 -     - {{hitsCtrl.values.hits}}

  • Revenue forgone due to the VAT exemptions granted to various sectors, including electricity, transport and fuel, estimated to be over 1% of GDP
  • VAT Act has a list of exemptions in excess of 250
  • Government estimates Rs. 1.7 t via taxes on Goods and Services in 2023 up 81% or Rs. 791 b
  • Mandatory electronic tax filing system will be expanded to non-corporate taxpayers, including employees
  • Deficiencies in the RAMIS system at the Inland Revenue Department to be addressed
  • IT-based platforms of the 3 key revenue collection agencies will be linked
  • President says cash economy used to evade taxes and aims to discourage cash transactions and encourage bank/card transactions with specific limits

The Government this week announced several far-reaching proposals concerning the Value Added Tax (VAT) including rationalising exemptions and a new Act.

As per 2023 Budget presented by President and Finance Minister Ranil Wickremesinghe, a new VAT Act will be introduced consolidating the amendments introduced from the year 2002 to the year 2022.

 It also said exemptions specified in the First Schedule to the VAT Act will be rationalised with effect from 1 April 2023.

“A crude estimate suggests that revenue forgone due to the VAT exemptions granted to various sectors, including electricity, transport and fuel, is estimated to be over 1% of GDP. Hence, it is proposed to remove certain exemptions after review. Amendments to the VAT Act to remove certain exemptions will be made effective from 1 April 2023,” President said in justifying the new proposals.

According to Ernst & Young, currently the VAT Act provides the following exemptions in relation to the above sectors:

• Supply of electricity including distribution

• Supply of crude petroleum oil, kerosene, Liquid Petroleum Gas, diesel and aviation fuel, oil for ships or fuel oil specified under HS code 2710.19.60

• Supply of public passengers’ transport services (other than air transport, water transport or transport of tourists, excursion tours and taxi services);

KPMG said currently, the VAT Act has a list of exemptions in excess of 250.

The President also said a list of active VAT registered persons will be published on the Inland Revenue website.

KPMG expressed the view that currently, a list of inactive VAT registered persons are available in the web site along with the parties registered for the SVAT.

KPMG also said the Principal VAT Act No 14 of 2022 was legislated in the year 2022 and thereafter the Principal VAT Act has been amended many times except for years 2010, 2017 and 2020. Currently there are 17 amending Acts to the Principal Act.

Government estimates Rs. 1.7 trillion via taxes on Goods and Services (up by Rs. 791 billion or 81% from 2022 estimates) within the ambitious goal of Rs. 3.4 trillion revenue target for 2023. In the first half VAT collection amounted to Rs. 198 billion up from Rs. 152 billion. Recently VAT on financial sector increased from 15% to 18% and VAT rate on the supply of goods and services was increased to 12% from 8% in 1H 2022 (later rate revised to 15%).

The Government effective 15 November also adjusted the Unit rate (Fixed Rate) of the Customs Import Duty and CESS Levy on 378 selected HS Codes to absorb in line with the Rupee depreciation and for avoidance of under-invoicing and under-valuation at the point of Customs clearance. 

The President emphasised on the need to increase Government revenue saying “it requires no explanation as many of the challenges that we face today is due to the lack of revenue of the Government”. He said the revenue has declined significantly to 8.3% of GDP in 2021, which is one of the lowest in the world.

He said in order to correct this position while correcting the tax cuts introduced in late 2019, the Government presented revenue measures on three occasions i.e. on 30 May 2022, the Interim Budget presented on 30 August 2022 and the Inland Revenue Bill presented in October 2022. The revenue proposals mainly included changes to the income tax and Value Added Tax (VAT) while addressing tax policy gaps and rationalising tax concessions.

“Committed implementation of these tax reforms will help increase revenue in 2023 and beyond enabling us to move away from costly monetary financing (money printing) to cover Government expenditure in the future. The Government is also committed that the tax policy measures are accompanied by the improved efficiency in public spending and fighting corruption,” President said.

Among new proposals, a mandatory electronic tax filing system will be expanded to non-corporate taxpayers, including employees to improve efficiency and increase compliance level. A tax audit and verification program will be implemented. All revenue collecting agencies should conduct a risk-based audit to identify the taxpayer›s inherent risks for the purpose of encouraging compliance.

As part of digitising the tax system, steps will be taken to review and address deficiencies in the RAMIS system at the Inland Revenue Department. Further, the IT based platforms of the three key revenue collection agencies will be linked, allowing them to share information to ensure tax compliance across agencies.

A mechanism will be developed to collect information from other relevant institutions and manage them in a prudent manner.

The Ministry of Finance typically sets revenue targets for the key revenue agencies and tracks the achievement of these targets on a regular basis. In addition, their performance will be monitored by introducing several Key Performance Indicators (KPIs) to revenue collecting agencies, i.e. Inland Revenue Department, Sri Lanka Customs and Excise Department, to measure their efforts.

The 2023 Budget also referred to introducing legislative amendments to improve the efficiency of tax collection at the Departments of Excise and Customs.

Insufficient tax audits, probability of detection, weaknesses in enforcement actions, attitude of the Government spending etc. are observed to be affecting taxpayer›s attitudes and compliance decisions. Considering these facts, a Dedicated Awareness Unit will be established at the IRD to make relevant public and taxpayer awareness with a more focused and consistent approach.

It was stated that the Government has identified the cash economy as one of the tools that is used to evade taxes. Therefore, measures will be taken to discourage cash transactions and encourage bank/card transactions, with specific limits.  


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