Sri Lanka’s complicated VAT system becomes more complex

November 16, 2006 (LBO) — The multiple bank value added tax system of Sri Lanka which also has a non recoverable ‘VAT’ tax on financial firms became more complicated with a five percent charge on smaller business and a range of new adjustments. Jewellery manufactures who export would have to pay a one percent ESC on valued only.

The Ports and Airports Development Levy, another device to tax export firms which are enjoying tax holidays, was raised to 3 percent from 2.5 percent.

The PAL has become an important source of revenue, yeilding 20.6 billion rupees in 2006, even more than the budgeted figure of 15.6 billion.


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To be easily implemented and gain optimum yields value added tax should have a single band, in addition to a zero rate for exports, with as few exemptions as possible.

In a move which can potentially broaden the VAT base, small businesses which are on the borderline of VAT threshold of 18 million rupees would be charged a 5 percent rate, until turnover reaches 2.5 million on a voluntary basis, but it would not be recoverable.

Sri Lanka already has a 20 percent ‘VAT’ on financial sector which does not qualify for input credit.

In another move which undermines the VAT regime, input credit for VAT on motor vehicles has been denied.

VAT would not be charged on buses imported by owners who already have a route permit, to replace the old bus.

To promote local industries, VAT on heavy fuel oil, furnace oil and electricity has been exempted.

Films and teledramas sent abroad for further processing, machinery imported for rice mills, tea rubber and coconut processing industries would be exempted from, material imported for the processing and manufacture of leather goods would be exempt from VAT.

Prawns would be exempted from VAT.

VAT on shipping charters would also be removed.

The VAT on high technology medical equipment, and jewellery would be reduced to 5 percent.

Producers, distributors, and suppliers of laboratory facilities for film distribution and material imported to make films would be reduced to 5 percent.

Board of Investment project in export processing zones that use local inputs would be given a VAT deferment facility.

Already BOI firms which import goods do not have to pay VAT at the point of import.

A VAT rebate is also to be given to houses constructed to improve underserved settlements.

However, the markup on the CIF value on imports of people who already pay VAT would be increased from 7 percent to 10 percent.
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Meanwhile, the applicability of the Economic Service Charge, a device used to collect income tax from those who declare tax losses, has been broadened with the threshold reduced from 40 million rupees to 30 million.

ESC charged on wholesale and retail trade, which are thin margin businesses had been reduced to 0.25 percent, (except motor vehicle and liquore) while retail level distributors would be charged only 0.05 percent.

ESC has been reduced to 0.5 percent for Unit Trusts, on entrepot trade, textile and apparel makers and trading houses to 0.1 percent,

The ESC on offshore activities had been removed.

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