Passing on the VAT benefit to the consumers
The Government of Sri Lanka, in an unprecedented move, has taken measures to reduce the VAT rate from 15 per cent to 8 per cent (a reduction of almost 47 per cent) with effect from December 1, 2019. The requisite legal measure to give effect to this has also been executed by issuing an Order under Section 2A of the VAT Act and published in Gazette No. 2151/52 dated November 29, 2019.
Mr. Suresh R.I Perera.
Hence, subject to a few exceptions, all suppliers of goods and services are required to ensure that VAT is charged only at the rate of 8 per cent on the goods and services supplied by them.
In addition, the Department of Inland Revenue has issued a notice quoting the Ministry of Finance, that with effect from January 1, 2020 the VAT liable threshold of Rs.1 million a month (or Rs.12 million per annum) will be increased up to Rs.25 million a month (or Rs. 300 million per annum), a 25-fold increase. This would ensure that many small and medium scale enterprises would not be charging VAT from January 2020 onwards. This unprecedented reform introduced in the VAT arena is intended to provide relief to consumers by a commensurate reduction in prices of goods and services consumed by them. VAT is the single most and highest revenue generator among the taxes that gathers taxes to the State coffers. According to the Annual Performance Report 2018 of the Department of Inland Revenue, the VAT contributed was Rs.461,650,000 to the Government (net collection). Analysts expect that there will be a significant reduction in the VAT due to the Government stemming from these measures. Whilst every tax benefit intended for the consumers would be at a cost to the Government, it is vital that this tax benefit should be actually passed onto to the consumers.
Prices normally rise
In practice, generally, VAT rate increases result in prices of goods and services in the country increasing by a larger proportion than the rate increase, due to suppliers attempting to make a profit by piggy-backing on the rate of increase of the VAT rate. Sri Lankan consumers have witnessed this phenomena many times in history. In the year 2016, the 11 per cent VAT rate was increased to 15 per cent and the consumers of Sri Lanka witnessed a general hike in prices, barring exceptions in certain areas.
On the other hand, the behaviour of the suppliers is not the same when the Government reduces the rate of VAT on the supply of goods and services. The revenue foregone by the State to provide relief to the consumers would not achieve its purpose unless the Government devices a mechanism for achieving the same. Unfortunately the policy makers and drafters of the Sri Lankan GST and VAT regimes have not addressed the issue to safeguard the best interest of the State and the consumers by ensuring that suppliers do not profiteer at their expense, even though the GST/VAT regime has been in operation in Sri Lanka for almost 21 years. Sri Lankan policy makers could learn a lesson from their Indian counterpart in this regard. The Central Goods and Services Tax Act No 12 of 2017 (the Indian GST law) contains an “anti-profiteering measure” in the law itself. This rule ensures that if the GST rate is reduced in India, such benefit should be passed on by the suppliers to the recipients by way of a commensurate reduction in the prices of goods and services. The Indian law also ensures that the relevant Authority should supervise that the benefits stemming from the reduction in the rate are reflected by a commensurate reduction in the prices. The relevant Authority established in India for this purpose is the “Directorate General of Anti-profiteering Central Board of Indirect Taxes and Customs”. The said legal provision contained in Section 171 of the Central Goods and Services Tax Act No 12 of 2017 is reproduced below for the benefit of the readers:
(1) Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.
(2) The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.
(3) The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed.
Profiteering
The essence of the anti-profiteering rule in India is that if there is a -
(a) reduction in the rate of tax on supply of goods or services, or
(b) benefit of input tax credit available under GST, then a registered person should pass on the benefit to the recipient by a reduction in prices.
Though the Government of Sri Lanka has reduced the VAT rate drastically at a cost to the State revenue, if the benefit of the same is to be enjoyed by the consumers, the suppliers should voluntarily reduce the prices of goods and services commensurate with the rate reduction. While some suppliers may not reduce prices at all, some suppliers may carry out a part reduction in prices whilst semi profiteering to enjoy an advantage sans passing on the full benefit to the consumers. At present there is no legal provision in the VAT Act or Consumer Affairs Authority Act to ensure that the benefit from the VAT reduction is passed on to the consumers.
Therefore, a rule similar to the above should be contained in the VAT Act along with the establishment of an Authority with powers to examine whether the input tax credits availed by a registered person or reduction in the tax rate has resulted in a reduction in the prices of goods and services. Alternatively, the consumer services authority itself could be listed with such powers of enforcement.
(The writer is Principal of the Tax and Regulatory Division of KPMG in Sri Lanka. He can be reached at sperera@kpmg.com).