Inland Revenue Department in Sri Lanka flashes red light as firms charge wrong VAT

Inland Revenue Department officials addressing reporters in Colombo.

ECONOMYNEXT- Sri Lanka’s Inland Revenue Department officials said they have found businesses which have been charging Value Added Tax (VAT) above the reduced rate of 8 percent, and legal action will be taken against them.

“There’s a complaint that the tax benefits are not going to the public and since Tuesday, we have been investigating various businesses,” Deputy Commissioner General Tax Administration H. M. W. C. Bandara said.

President Gotabhaya Rajapaksa, who cut tax rates as a part of his election promise, has repeatedly asked firms to reduce prices of goods and services.

Speaking to reporters in Colombo, Bandara said some bakeries and restaurants were found charging VAT at 15 percent from customers.

“There are provisions in the VAT Act to penalize the offenders,” Bandara said.

“We have published on our website the businesses which are not liable to collect and pay VAT, and we are checking whether they are charging VAT.”

“Businesses have also been asked to display their VAT registration on their premises.”

Department Spokesperson and Deputy Commissioner General Shelton De Soyza said problems may arise if a firm not liable to VAT provides a VAT invoice to a third party liable to the tax, thereby depriving the third party from claiming input VAT.

In such cases, attempts would be made to mediate and reverse the VAT charge, but penalties under the law are also a possibility, he said.

Bandara meanwhile said most of the complaints on higher prices are due to firms having increased their prices to the same as the pre-VAT levels.

“They are not liable for VAT but they are not reducing prices. That is the main problem,” Bandara said.

“However, unless there is a maximum legislated price, the prices can only come down through competition among business owners. When there is competition, each business will try to sell at lower rates, but that will take time,” he said.

Deputy Commissioner General Customer Service, Compliance Support & Promotion R. M. Jayasinghe said as long as businesses follow the reduced VAT rate, they have the freedom to charge however much they want.

In response to a question from a reporter, he admitted it is possible that some firms had kept their prices unchanged amid a depreciating currency in 2018 and the slow growth over the past two years, and may be attempting to recover the lost profits through higher margins at present. (Colombo/Jan17/2020)