The Value Added Tax (VAT) system, one of the most important sources of tax revenue, is underperforming from the beginning in Sri Lanka mainly due to frequent changes of tax rate and exemptions given on over 130 items in the VAT system and many others.
Noting that Sri Lanka does not have a proper mechanism for tax policy making, Suresh Perera-Principal,Tax and Regulatory-KPMG Sri Lanka stated that inconsistency of policies in Sri Lanka’s tax system and the retrospective laws impacts all the businesses as businesses are not able to plan their capital budgets and many more.
“We do find that even in the middle of the income tax year or the financial year of assessment, rates are changing.That becomes challenging for businesses; nevertheless sometimes it is fascinating for tax consultants to come up with all sorts of explaining aspects, ” Perera told a round table discussion on ‘Role of The Administration In Enhancing Tax Revenue’, organised by Advocata Institute.
When VAT is introduced for the first time in a country; Perera stated that the prices of goods go up naturally in the marketplace; and subsequently prices stabilize after a time. Perera said one of the fundamental rules with regard to VAT administration is that there should not be frequent changes of the VAT rate.
He said in Sri Lanka VAT rate has changed over 12 times since 1998 whereas countries such as New Zealand and Singapore ,known for having success stories of taxing value addition, have changed VAT rate less than five times. Speaking further Perera expressed that in Sri Lanka more than 130 are on the list of exemption as of now and most of the big industries are not in the VAT net.
“This is the very reason why Sri Lanka has a case of basically under performance of the VAT system and we have not been able to honor the fundamental aspects that should be there for the VAT system to be successful.”
For VAT to be successful in a particular jurisdiction; Perera opined that VAT should be extended to cover most of the activities in the country.
“When there is a need for our cash to the state coffers, tax rules are straight away being changed, which should not be the case. There has to be a plan with regard to the tax collection and the tax policy making which we don’t have unfortunately due to the setup in Sri Lanka.”
Speaking on the evolution of the VAT system, Perera said, as far back as in 1998 Sri Lanka decided to abandon the taxation of turnover and embrace the concept of Taxation or value addition.
“The concept of taxing the turnover is widely accepted as not good because it leads to cascading. I think my main complaint with regard to the system is now, in a country you use either the concept of taxing the turnover or taxation of the value addition as the tool for collection of indirect taxes to the state.”
In Sri Lanka, when we analyze from 1998, many times, Sri Lanka has had a hybrid system or in other words, we do have the concept of taxing the turnover as well as taxing the value addition. Perera further said that Sri Lanka needs to do away with the concept of tax on turnover; instead he said all activities should be subject to VAT.
“In other words, we need to cut down the number of exemptions that are on the VAT exemption list,” Perera emphasised.
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