A tax is a compulsory payment or contribution made by the citizen of a country to the government for the general benefit of the country. The Government collects revenue form of taxes, charges or borrowings.
In taxation, taxes are imposed two forms. Direct tax and indirect tax are the forms. Nation Building Tax or NBT falls into the indirect tax. The, taxpayer usually doesn’t realize that they are being taxed since the amount of tax is already accounted for with the selling price. Therefore cost of tax is actually borne by the end user.
NBT was introduced to Sri Lanka in 2009 under the Nation Building Tax Act No 9 of 2009 as a social contribution towards the welfare of security forces and rebuild communities and infrastructure facilities affected by terrorism. The tax was initially levied on the turnover of importers, manufacturers, and services providers at a rate of 1% with effected from 1st February 2009. The rate was increased to 3% with effect from 1st May 2009 and up to now 3% of the rate is applied except for the business of manufactures and sale of rice manufactured by locally procured paddy (1.5%). Since the tax was introduced for the specific purpose and the public informed accordingly there was a good response for the payment of taxes.
Estimated revenue for 2009 was Rs. 18 billion and as an administrative authority, the Department of Inland Revenue collected Rs. 27 billion against the estimate of Rs. 18 billion and it contributed 7.71% to the total revenue of the year. The most important feature of the tax was, in case of manufacturers they were entitled to claim input credit on their imports and purchases made from other manufacturers. This type of credit mechanism mitigated the increase of price level of manufactured goods though the NBT was a sales type tax. In addition to the above, certain identified goods and services were not subjected to taxes. Wholesale and retail trade also were out of the chargeability.
Budget 2011 and N.B.T.
NBT is a consumption type tax. Therefore it was more important to decide the stage at which point the tax is to be imposed. This decision involves the choice of the best stage for single stage taxes, as well as the choice between a single and a multiple tage approach. Setting the scope of coverage is a substantive issue when introducing a tax and also extends the coverage and scope of tax, considering the fact that the President as Minister of Finance, proposed to reduce the rate from 3% to 2% and coverage extended to the whole sale and retail trade.
No more Turnover Tax (TT)
It has been proposed to abolish the turnover tax collected by provincial revenue on retail and wholesale trade effective from 1st January 2011. These make the tax system more or less progressive in effect. It reduces the complication of the tax system. Since the turnover tax system resulted to increase the price level due to cascading effect of such taxes, the President stated that the above system causes high cost to small and medium enterprises as well as the consumers and therefore proposed to remove the Provincial Council turnover tax administration.
NBT for wholesale or retail trade
Under this a person engaged in the business of wholesale and retail trade has to register with the Department of Inland Revenue and has to comply with the law relating to the imposition of thE NBT.
NBT Threshold
(Rs. 500,000 per quarter)
According to the current system NBT is charged on the persons whose turnover exceeds Rs.650, 000 per quarter and it has been proposed to reduce the threshold from Rs. 650,000 to 500,000 per quarter. It is further proposed to increase threshold to Rs. 12.5 million per quarter for the following businesses;
- Operating Hotels, Guest houses, restaurant and other similar businesses
- Local Value Added agricultural, rice based products
- Local educational institutions
- Supply of labour (manpower / employment)
On this proposal, a large number of manufacturers and services providers have to register with the Department of Inland Revenue and have to pay NBT. It can be assumed that the consumption base NBT offers a major revenue option.
The NBT is currently excluded for some goods and services. Budget 2011 proposed to extend the exclusion for the service provided to include the following institution:
- Government Institutions (Department) including schools funded by the Government
- SriLankan Airlines Ltd
- Mihin Air (Pvt) Ltd
- SriLankan Airlines Catering Services Ltd
Other Goods or Services excluded:
- Supply of any goods including importation or services to a specific project carried on out of foreign funds or donations received by the Government as approved by the minister
- Importation of raw materials and packing materials for the manufacture of ayurvedic preparation subject to the approval of relevant authority
- Services provided to the port or airline in relation the international transportation
- Services provided in relation to shipbuilding for the international market for payment made in foreign currency
- Services of sub contractors in a construction contract
- Supply of locally developed software.
Import and supply of following articles:
- Bitumen under HS code No 2714
- Tractors
Removal of Exemptions (Exclusions):
The following businesses which were previously excluded from chargeability of NBT will be charged:
- Service or star hotels above the mark of three star.
- Any person registered for optional VAT.
On this proposal, persons whose turnover does not exceed Rs. 3,000,000 and registered with optional VAT now have to pay NBT if the turnover exceeds Rs. 500,000 per quarter.
The new reforms introduced to the NBT simplifies the tax system and also makes it more understandable and more accountable. Thus payment and returns compliance toward the NBT will be more favourable in order to achieve the budget estimate.
The broad direction of tax reform introduced in the 2011 budget should have come as no surprise to anyone. Proposals made to the NBT in the 2011 budget need to be incorporated in the NBT Act for legal effect. |
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