Govt. introduces “deemed VAT” for transactions with non-VAT payers

• Listens to appeals from 16 trade organisations, measure to be implemented in 2 weeks 
• Says fresh adjustment will not affect 2016 deficit target of 5.4%, reiterates no fresh taxes

By Charumini de Silva and Uditha Jayasinghe 

Responding to appeals by the business community, Finance Minister Ravi Karunanayake yesterday announced the implementation of “deemed VAT” for transactions done with a non-VAT paying party. 

Under the new VAT regulations introduced by the Government in May, all businesses that earn more than Rs. 1 million a month or Rs. 3 million per quarter must be registered to pay VAT. However, those companies registered to pay VAT have to do business with smaller businesses that make less than Rs. 1 million per month and therefore do not have to pay VAT.

In such an instance confusion reigned over what the accepted process should be, which promoted trade organisations to appeal to the Finance Ministry to introduce a new system for VAT calculation and collection. The measure is expected to be implemented for the next two weeks, according to the Finance Minister.  

“We are a Government that listens to the people and we listened to 16 trade organisations on this,” Karunanayake told reporters, adding, “Even the small people are a big part of our economic system.  The biggest fear that we have is a person who is VAT registered doing transactions with a non-VAT person is unable to take control of that input/output basis. So we are stepping in to help that sector, which we think of as very important.” 

Under the new system the non-VAT party can issue an invoice saying no VAT is applicable and the VAT paying party can enter the transaction, which the Government will consider as VAT paid or “deemed VAT”.

The introduction of this measure would not affect Government revenue, the Minister stressed, noting “overall Government revenue will remain on target. Our duty is to ensure that the fiscal deficit is not increased and the target of 5.4% will be met.”      

“We have given an accelerated process to the Inland Revenue Department (IRD) to get the registered into the process and that will be carried out to the letter and we will be doing more revenue collecting. I have asked the IRD to come with those suggestions and within the next two weeks we will make it public.”

One of the plans the Government is considering implementing is appointing five revenue collectors for each region who will oversee different types of taxes, the Finance Minister said. Karunanayake also insisted the broadening of the tax base would create the opportunity for the Government to reduce taxes in the long term.

“We will definitely reduce taxes in the future. This is the maximum. We will not increase anything more than this but for the reduction to take place there has to be an overall accumulative increase.” 

“At the moment the Inland Revenue Department does not have a proper database, which is the first thing we have to do as a Government. We are digitalising the economy for this purpose. Within the next couple of months we will certainly be on top of it. Only 48,000 VAT files exist at the moment. This is a shameful situation.”   

Responding to questions on proposed Customs law reforms Karunanayake insisted the process was still at discussion level and the Government had opened a “white paper” to facilitate changes. He insisted no final decisions had been made.