Confusion over VAT: Is it 11% or 15 %?
A flurry of statements from government leaders as a result of a Supreme Court interim ruling on Value Added Tax (VAT) has caused confusion and uncertainty about the enforcement of this tax. While consumers and traders are in the dark on how the tax should be implemented, the Inland Revenue Department (IRD) on July 12 posted a notice on its website saying the VAT of 15 per cent effective from May 2 has been suspended owing to the court order on July 11. But it didn’t say during this period (of suspension) whether VAT should be implemented or not (at the old rate of 11 per cent), confusing even tax experts some who argued that the 15 per cent VAT is still in force while others said the old 11 per cent rate remains.
Soon after the court issued an interim order on a petition filed by opposition MP Wimal Weerawansa, staying the VAT circular (dated April 29) until the completion of the case, Prime Minister Ranil Wickremesinghe announced that the VAT (Amendment) Bill tabled in Parliament would be approved by end July with the government having a majority. Thereafter it would be effective with retrospective effect (from May 2). A fresh petition in the Supreme Court filed on Thursday by UPFA MP Sisira Jayakody against the bill seeking an order that the proposed legislation needs a 2/3rds majority and a referendum cast another shadow over the tax.
No date has been set for this petition to be heard but if ‘leave to proceed’ is granted, that would further delay the government’s tax revenue targets and the conditions set under the International Monetary Fund (IMF) bailout facility. “With revenue targets in the doldrums, the government may be compelled to quickly impose Capital Gains Tax or some other tax to make up for lost revenue and fulfil the IMF targets,” one expert said. State Minister of Finance Lakshman Yapa Abeywardene also confirmed to the Business Times that the May 2 date of implementation remains but said it is unlikely that the bill will be discussed on July 23 due to new court developments.
VAT has been a cause of confusion since last year. For example Finance Minister Ravi Karunanayake announced in the 2016 budget presented in November last year a two-band VAT rate of 8 and 12.5 per cent (20 per cent) instead of a single rate of 11 per cent, which was enforced in former President Mahinda Rajapaksa’s budget presented on October 24, 2014. However the 2-band rate of 20 per cent was never implemented as the required bill was not presented to parliament. Bypassing that, the Cabinet of Ministers in March accepted a recommendation from Prime Minister Ranil Wickremesinghe to introduce 15 per cent VAT, which was then implemented through an IRD circular and later challenged in the Supreme Court.
VAT has been administratively enforced (by IRD circulars pending gazette notification) over the years and even though deemed illegal was never challenged in courts (until recently) during the Rajapaksa administration. “People were afraid,” one legal expert said. Thus using the old practice, the government went ahead and implemented VAT until it was blocked by a petition to court, an action that was waiting to happen.