Call for urgent fix of VAT fiasco on supermarkets

The supermarket industry is calling for an urgent meeting between the Finance Ministry and all stakeholders over the new taxes on organised large-scale retail trade.

The move is following industry experts pointing out likely snags in implementing the Budget 2013 proposal of imposing Value Added Tax (VAT) on supermarkets and other larger retail or trading businesses.

In Budget 2013, President and Finance Minister Mahinda Rajapaksa said that the 12% VAT would be applied on entities having over Rs. 500 million in turnover per quarter from 1 January 2013.

Supermarket owners have raised serious concerns over the proposal, which will drive away average consumers in addition to eroding margins.

Industry experts point out that it is not possible for the trade to increase their selling prices by 12% from 1 January to recoup additional losses on account of such VAT imposed in respect of stock balances as at 31 December 2012.  



“Therefore, the VAT input embedded in stock as at 31 December 2012 has to be refunded by the Department of Inland Revenue or to be set off against VAT payable with effect from 1 January 2013,” they added. (See table)

It was recalled that a similar situation arose when GST and VAT were introduced on 1 April 1998 and 1 August 2002  respectively, where BTT embedded in stocks as at 31 March 1998 and the Defence Levy embedded in stocks as at 31 July 2002 were refunded (transitional arrangement).

It has been recommended that the standard procedure to obtain VAT input claim by supermarkets, etc. should be as follows.

Stocks as at 31 December 2012 should be taken either from the computer record or direct counting – auditors should certify this

VAT included could be computed based on invoices submitted by the sellers to the supermarkets. It could be equivalent to 12/112 of the sales invoice received from suppliers if they are liable for VAT (direct VAT input).

It could be equivalent to 12/112 of the purchase value of the distributors who have purchased these stocks from VAT liable importers and manufacturers to be sold to supermarkets. These distributors should insert the value in their sales invoices to supermarket now and certify same (indirect VAT input).

At the Daily FT-organised Post-Budget Forum recently, the new tax on supermarkets came up for questioning. Owners said the slogan “supermarkets are for rich people” was a myth since 75% of the bills were below Rs. 1,000 and only three per cent of the bills were over Rs. 10,000.

CT Smith Stockbrokers said the proposal was expected to negatively impact listed entities with retail arms such as Cargills Ceylon (CARG), Ceylon Cold Stores (CCS), and Richard Pieris (RICH), amidst a potential erosion of margins.

It said taking into account the Maximum Retail Price (MRP) for products, supermarket operators would likely now sell at the prescribed price, impacting price-sensitive consumers who previously benefitted from efficiencies in supermarket operations through discounted prices on some products. However, retail operators are likely to seek a greater margin from suppliers to mitigate the impact, which could then lead to an overall increase in the MRP.

Suppliers in turn will likely increase product prices to protect margins, though the extent of price increases may be limited given tightening macro conditions. Most manufacturers have already taken price increases in 2012YTD to recover cost escalations, which in turn have negatively impacted consumer demand.

“If supermarkets are obliged to unilaterally pass on the higher taxes to customers, the segment may likely see a decline in its customer base to smaller grocery stores, as the possible price increases may be higher than what consumers may be willing to pay for the convenience of shopping at supermarkets,” CT Smith added.

“As the threshold is high, small boutiques and shops will not be liable for these taxes. The use of the tax system to reach the high-spending society will contribute to expand the tax base and also promote equity in taxation,” President said in 2013 Budget presentation.

“Taxing everything in supermarkets was not the consideration. Only VAT-able items will be involved and there will be input credit. As we expand the base, we want to gradually maintain the low tax regime hence this move is a step towards that direction,” Dr. Jayasundera clarified at the FT Budget Forum.