BUSINESS TAXATION

By Mahesh Ranawaka Arachchi

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Section 2 of the V A T Act No. 14 of 2002

Impose VAT

At the time of supply, on every taxable supply of goods or services,made in a taxable period in the course of carrying out of a taxableactivity in Sri Lanka by a registered person.

On the importation of goods into Sri Lanka by any person

On the value of such goods or services at the rates specified in the VAT Act

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Taxable activity is carried on or carried out in Sri Lanka

There must be Taxable activity and taxable supply of good

or services

Supply should be made by Registered person

Any person imports good to Sri Lanka

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Supply of Goods :-The supply of goods shall be deemed to have taken place, on theearliest occurrence of any of the following.

- a payment for the goods is received by the supplier, or

- a payment for the goods is due to the supplier or

- delivery of the goods has been done or

- An invoice is issued in respect of the goods

If the invoice is issued within ten days from the date of delivery ofgoods, the time of supply of such goods is time at which the invoicewas issued.

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Supply of services :-The supply of service shall be deemed to have taken place, on theearliest occurrence of any of the following.

- a payment is received for the services rendered or futureservices, or

- a payment is due for the services rendered or future services,or

- the service was performed, or

- an invoice is issued in respect of the services rendered

If the invoice is issued within ten days from the date of servicesperformed, the time of supply of such goods is time at which theinvoice was issued.

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Hire Purchase Agreement :-In case of hire purchase agreement on the supply of goods, the time ofsupply is the time at which the agreement is entered into.

Agreement other than Hire Purchase :-Time of supply in respect of any agreement other than hire purchaseis when the payment is due or when the payment is received,whichever occurs earlier.

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Following details provided for related to the one transaction which has completed with different states on various time. Based on those states of transaction, decide the time of supply for calculating the VAT liability.

1. Advance received at March 20th , 2018 for requesting to delivery the goods at mid of the April 2018 amount in to Rs. 2,000,000.

2. In terms o f the singed agreement, there has condition to be received amount of Rs. 1,000,000. but, still it has not received.

3. Goods delivered on December 25th, 2018.

4. Invoice was issued on Rs. 6,000,000 at January 15th,2019

If Invoice has issued at December 31th, 2018 ,what would be effected which will be deciding the time of supply.

Supply on Payment Basis :- make an application to CGIR to payment basis.

CGIR has directed any registered person to account for tax on apayment basis under section 23,

time of supply of goods and services supplied by such person isthe time of any payment is received.

Input Tax credits can be claimed if payment is made

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Randinu Construction Company (Pvt) Ltd. has obtained the approval from the Commissioner General to account for tax on payment basis.

1. A Performa invoice was issued for Rs. 6,000,000 on December 14, 2018.

2. One third of invoice value was received on January 20, 2019.

3. Balance amount was received on 05th April 2019.

4. Rs. 2,000,000 worth of material purchased but settlement has made on April 3rd, 2019.

5. A machinery worth of Rs. 3,000,000 was purchased but payment was made on March 10th, 2019.

Determine, on which time those transaction will be considered for VAT calculation.

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Where the consideration is in money,

the value of supply would be the total consideration lessany tax chargeable under the VAT Act and not be less thanthe open market value.

In arriving at the value of supply, the taxes charged such asnation building tax, excise duty etc; are included exceptfor VAT charged.

Where the consideration is not in money or partly in money,

value of supply would be the open market value.

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Specific Application :- Selling of Lottery

Collection from ticket sold xxxx

Less:

Cost of prizes (xxx)

Commission to agent including VAT for it (xxx)

Value of supply for VAT xxxx

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Total collection form “Visusaviya” lottery was Rs. 100,000,000/- forthe quarter ended December 31st 2018 and prized awarded duringthe period was Rs. 20,000,000/. In addition to that 1% commissionspaid to the agent of lottery distributed including VAT forcommission paid .

Determine, the VAT liability for the quarter ended December 31st

2018.

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Specific Application :- Land & improvement

Sales proceed from disposal xxxx

Less:

Market Value of bare land (xxx)

Sales proceed for improvement xxxx

Less:

Cost of improvement at March 31,1998 (xxx)

Value of supply for VAT xxxx

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A land was purchase in 1995 for Rs. 1,000,000. Improvements cost onthe construction of a building was Rs. 2,000,000. out of such cost Rs.500,000 was incurred before March 31st ,1998.

The VAT paid on improvement cost was Rs. 20,000 and foradvertisement for sale of the building was Rs. 50,000.

The market value of the land at the time of sale was of sale was Rs.8,200,000. Total sale price is Rs. 12,000,000.

Determine, the VAT liability for the quarter ended December 31st

2018.

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The VAT is computed on the sale value (value of supply) which is called “output tax”.

When a person buys goods or services or imports goods, the VAT paid on such purchase or importation, known as “input tax”

Net VAT payable computed as follows.

Output Tax

Value of supply x Rate XX

Less: Input Tax (X)

Net VAT payable XX

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VAT Return : Content of the return

1. Identification

2. Calculation of Out Put Tax

3. Calculation of In Put Tax

4. Calculation of Allowable Input Tax

5. Calculation of VAT payable

6. Calculation of Balance VAT payable or Refund Due

7. Declaration of Authorized person

Sample format of VAT return

Link: >>>Asmt_VAT_001_E.pdf17

Any input tax attributable to the supply of goods or services received shall not be deducted in respect of the following,

- Input Tax Not Connected with Taxable Activity or Not included in Value of Taxable Supply.

- Input Tax in respect of Motor Vehicles using for travelling purpose.

- Input Tax Not Supported by Tax Invoice or Customs Goods Declaration.

- Input Tax Not Claimed within the Prescribed Period.

The claim of input tax is restricted only to the extent of the inputtax that is related to the activity of making taxable supplies .

The input taxes related to the non taxable supplies, namely

exempt supplies and

excluded supplies,

are not allow to claim again the Out tax .

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Issued when……

- A registered person who make a taxable supply to any there registered person

- He made the written request within 14 days from time of the supply

- Required to issue a Tax Invoice within 28 days from the time of supply

- No further request for subsequence supply

- Content prescribed on Section 20 of VAT Act.

Engaged in taxable supply and non taxable supply

Input Tax credit that related to taxable supply will be only allowed.

Input tax which are directly identified to taxable supply can be claimed.

Input tax which are incurred commonly , has to be apportioned based on the turnover.

Act does not provide a basis for apportioning the input credit

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Allow to use basis of turnover

Taxable supplies * Input tax for common Expenses

Total Supply

- Taxable supply would include zero rated supplies.

- Total supply would include both the zero rated supplies as well as exempted supplies.

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In the case of zero rated supply, the supply is taxable, butthe rate of VAT is zero percent (0%).

No tax shall be charged in respect of zero rated supply, butthe supply in all other respects be treated as a taxablesupply.

The input tax on the purchase of goods or services to beused for such supply is deductible.

No 100% limitation applicable for Input tax claim.

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The following supplies are specified as zero rated supplies.

- Direct Exports

- Certain identified services provided

- Other services provided to the person outside Sri Lanka

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Other services provided to the person outside Sri Lanka

- Provided by any person in Sri Lanka

- To any person out side Sri Lanka

- To be consumed or utilized out side Sri Lanka

- Payment of Such service in full, received on foreign currency

- Payment received through a Bank in Sri Lanka.

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Excess input tax can be categorized as follows.

• Excess Input Tax arises for the suppliers other than Exportersand Other specified suppliers from taxable period on or after01.01.2011. (On the 100% restriction)

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The excess input tax incurred by the following persons istreated as refundable input tax.

- Zero rated supplier

- Supplier whose payment of VAT is deferred

- Persons who are registered under section 22(7)during

the project implementation period

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Supplier who makes Zero Rated Supplies

- Direct export of goods as well as certain identifiedservices are zero rated supply under section 7 of theVAT Act.

- Technically, zero rated supply is a taxable supply liablefor VAT, but the rate of VAT is 0%.

- The input tax attributable to zero rated supply is arefundable tax.

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Commence a new business or project and during the implementation period.

Obtained the approval from CGIR

Agreed to make taxable supply with in agreed period

Credit for input tax will be given , though there is no taxable supply during that period

Required to submit the monthly return

If taxable supply will not be made with in agreed period, recovery action will be taken to recover the refund realised.

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To solve the cash flow problem of the exporter and other

Supplier whose payment of VAT is deferred

To mitigate the difficulties faced by the exporter and others

for processing the VAT refund

To reduce the work load of the IRD officers for processing the

refund

To eliminate fraud connected with the payment of refund

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Date of effective from April 1st 2011

Person registered under TQB or EDB should also register

under SVAT

The relevant guild line issued and in the order of published

in the gazette No 1910/2 on 16.04.2015

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Under this scheme there will be,

Registered Identified Purchaser –RIP

Registered Identified Suppler -RIS

If any person , total suspended supplies to RIP by a RIS is not less50% of his total supplies such person can be take RIP states as well

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The following persons can be registered as “Registered IdentifiedPurchaser” - “RIP”

Zero rated supplier

Supplier whose payment of VAT is deferred

Persons who are registered under section 22(7) during the project

implementation period

Persons making supplies to Specified project or Strategic

Development Project

Any registered person who makes supplies to the persons referred

to first two above with the value of supply exceeding 50% of the

total supplies.

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Supply to RIP on suspended tax invoice that showing asSuspended Value Added Tax.

Suspended tax invoices should be issued at the time of supply

RISs should get the credit voucher within the time specified

When preparing the VAT return, suspended supply have to bedeclared under out put tax and SVAT credit voucher can beclaimed as credit out of VAT payable

After get registration as RIP IRD will provide the SVAT Credit Vouchersbook in serial order.

RIP as well as their suppliers (referred to as registered identified suppliers“RIS”) are required to register under the SVAT scheme.

Supplies made by RIS to the said RIP are treated as suspended supplytherefore, VAT charged on the invoices issued treaded as suspended VAT.

The RIP’s are required to issue Credit Vouchers to the respective suppliers(RIS) to prove the suspended VAT amount.

Have to be issued credit voucher with 15 days from the end of thecalendar month in which such purchases were made.

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Suspended VAT will not be deductible from output tax and so notrefundable.

Suspended purchases should be used for specified purposes or deemedspecified purpose only.

New credit voucher book will be issued only when used vouchers areproduced to IRD.

.

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Suspended purchases should be used for specified purposes or deemedspecified purpose only,

If used for exempted supply ,

need to be made adjustment under Section 22

If any purchase of good or services which is not qualified to claimedinput tax under VAT act

has to be considered as disallowed under SVAT schema

If suspended purchases will not be used for the specific purpose asgazette.

It will be considered as a taxable supply with a profit margin and

Assessment will be made. In such a situation, penalty will not be waivedoff

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Bad debts Written off Debts Adjustment for VAT Bad debts

In ascertaining the amount of VAT payable for a taxable period,an amount of VAT on bad debt incurred is deductible as Inputtax.

Recovery of Bad Debts

If any amount of bad debt subsequently received, the amountreceived shall be treated as a taxable supply during the taxableperiod in which it was received and shall be liable to VAT as output tax.

Disregarding time bar provision

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Adjustment to Counter party

- Where a bad debt written off is allowed as a deduction for VAT toSuppler.

- if the person whose debt is written off is a registered person.

- the amount of tax allowed as input credit has to be addedback to the output tax of such person (debtor) for thecorresponding period.

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Where a registered person has issued a tax invoice and later it wasidentified a error and an incorrect amount of VAT byUndercharging VAT or Overcharging VAT

To rectify this , entitled to issue,

- a Tax Debit Note or

- a Tax Credit Note,

for the purpose of adjusting the amount of VAT so underchargedor overcharged.

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Allow to adjustment for a tax invoice issued without reissuing afresh invoice.

Issuing two invoices for a supply is prohibited by the VAT Act.

Tax debit note or tax credit note shall be in the specified form.

Adjustment in respect of input tax claimed on original tax invoiceshall be made by a tax debit note or tax credit note issued not laterthan six months after the issue of original tax invoice.

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For Supplier –

- Pay as output tax in case of Tax Debit Note issued(under charge of VAT)

- Claim as input tax in case of Tax Credit Note issued (over charge of VAT)

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For Purchaser –

- Based on the Tax Credit Note issued by the supplier,he shall declare such additional output tax.

- Based on the Tax Debit Note issued by the supplier, hecould claim such additional input tax.

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Error Occurred

Supplier Purchaser

Tax Debit Note

VAT Under Charged

Out Put Tax In put Tax

Tax Credit Note

VAT Over Charged

Input Tax Out Put Tax

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Example: 01

Rs. 5,000,000 worth of tax invoice has issued for providing the services to VAT registered customer. But later it has identified that invoice was issued by under valuing Rs. 1,000,000.

Make necessary adjustment to rectify this issue

Example: 02

Rs. 5,000,000 worth of tax invoice has issued for providing the services to VAT registered customer. But later it has identified that invoice was issued by over valuing Rs. 1,000,000.

Make necessary adjustment to rectify this issue

Error Occurred

Supplier Purchaser

Tax Debit Note

VAT Under Charged for Rs.1,000,000

Out Put Tax1,000,000 @ 15%

= 150,000

In put Tax 150,000

Tax Credit Note

VAT Over Charged for Rs. 1,000,000

Input Tax1,000,000 @ 15%

= 150,000

Out Put Tax150,000

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Director General of Customs may defer the payment of VAT where a guarantee.

Claim such differed VAT in the VAT return as input tax

IRD will issue a credit voucher for such amount of deferred VAT after verifying the requirements.

Credit voucher should be submitted to the Customs to settle the amount of deferred VAT before the due date.

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Deferment for 60 to 90 daysfor a period of 60 days or such other period not exceeding 90 days from the date of importation,

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Deferment facilities are provided to Import of goods for use to manufacture for exports

Import of goods by a person registered under section 22(7)

Import of capital goods for infrastructure project

Purchase of fabric for manufacture of garments for export

Import of capital goods by an exporter

Import of goods by a person registered with SVAT

Import of capital goods by a person registered with SVAT

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Have to be obtained by person who is import the Goods

Not a registered person for VAT

Submit to import documents to TPSU

Collect the certificated by Authorized Person

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