VAT changes effective 14.01.2016

In accordance with Budget proposals 2016, three band VAT rates (0%, 8% & 12-1/2%) were proposed.  During December 2015, the Department of Inland Revenue had confirmed this via Press Notices, as effective from 01.01.2016.

On 14.01.2016, the morning newspapers carried the announcement that these changes are withdrawn and that the former two band rates (0% &11%) are applicable effective from 14.01.2016. Not even 24 hours notice was given, especially with a public, banks & mercantile holiday on 15.01.2016 (Thaipongal). Regrettably, the Department of Inland Revenue officials were unable to explain or confirm these changes when contacted by the ‘disturbed’ public, entrepreneurs, tax consultants etc. who were advised by the officers to request for confirmation from the Ministry. They further confirmed that VAT Returns will not have any changes and that the two band rates will prevail as prior to 31.12.2015.

Corrective action in this regard that may be considered is as follows –

a) The rate reversal to be effective from 15.01.2016

b) Sales of 1 January to 14 January to be included in the VAT return, adjusted according to VAT charged/collected.

i. Rs. 100,000 at 8% be shown as Rs. 72,727 at 11%

ii. Rs. 100,000 at 12-1/2% be shown as Rs. 113,636 at 11%

By this method, only the VAT charged will be payable without distorting the VAT return.

In the case of credit invoices (Not settled) customers may refuse to pay the extra 3% now.

Therefore VAT Returns need to be adjusted as mentioned above.

Customers charged 12.5% may refuse to pay and demand 1-1/2% refund.

Then, the original invoices should be called back and the new VAT and sales figures be over written or stamped on the face of the invoices before refunding. Cancellation of invoices may upset the controls in force. No credit notes should be issued without official alteration of the Invoice.

Where payment has been made at 12-1/2%, VAT return should be adjusted as mentioned above.

Main problem is in the case of large organisation engaged in ‘buying and selling’ (say supermarkets) having turnover exceeding 100m per quarter. They have not charged VAT effective from 01.01.2016 as it was exempted according to Budget proposals notified in the press. Now they cannot increase the selling price by 11% as they have stocks as at 14.01.2016 having VAT embedded at 8% charged by suppliers w.e.f 01.01.2016.

Therefore, VAT embedded in the stocks as at end of 14.01.2016 should be computed and credit be given by the Department of Inland Revenue if the effective date of changing VAT is 15.01.2016. As all large organisation/supermarkets etc. are computerised this is possible. All VAT charged invoices from suppliers (not shown on the purchase invoice) effective 01.01.2016 should be returned to the suppliers and VAT Invoices be obtained. They do not lose, as they have already added same to the sales and no additional VAT will accrue up to 15.01.2016.

The Department of Inland Revenue also will not lose as they refund at 8% and charge at 11% on all sales after 15.01.2016.

This step was taken when GST and VAT were introduced on 01.04.1998 and 01.08.2002. However, when VAT was introduced on ‘buying and selling’ in 2012, the Department of Inland Revenue refused to grant refund (turned a Nelson’s eye).

This continued when thresholds were reduced from 500m to 250m and to 100m per quarter now.

The Ministry of Trade and the Department of Inland Revenue are urged to have discussions with the Trade Chambers, Tax Consultants and Large Enterprises like supermarkets for early corrective action.

S.R. Balachandran (BSc.FCA,FCMA)