VAT refunds and the export crisis

If we are to succeed in building up a stable economy there’s no doubt that exports must be given all the encouragement to grow and earn the valuable foreign exchange. For our economy development of the export market is critical.
The export market is distinct from the domestic due to its fierce competitiveness in selling a global product in a global market.
Flowing from this principle it is the established practice to free export goods and commodities from fiscal levies to pave the way for them to operate on a level playing field basis, for this purposes governments have come out with mechanisms such as bonded stores, manufacture in bond, TIEP, duty rebates etc

The Budget for 2007 is just a few days away and it is customary that hope and enthusiasm builds up during this period. Unlike in the past, government budgets are now keenly looked forward by all sections of the community and the preparations also take in to account the representations made by majority of the stakeholders of the economy.

Sri Lanka as a island economy is highly import dependent for her essentials such as food, investment goods, fertilizer and oil etc, given the magnitude of imports it heavily outweighs the exports mostly comprising of garments and commodities in tea, rubber and coconut products.

The recent global oil price hike caused quite a worry for the Sri Lankan government and the ever widening current account has been bridged by private remittances. Time and again this column has stressed the need for a continuing, “Export or perish policy” following the successful export led growth of the eighties which brought resurgence to an ailing economy.

If we are to succeed in building up a stable economy there’s no doubt that exports must be given all the encouragement to grow and earn the valuable foreign exchange. For our economy development of the export market is critical. The export market is distinct from the domestic due to its fierce competitiveness in selling a global product in a global market. Flowing from this principle it is the established practice to free export goods and commodities from fiscal levies to pave the way for them to operate on a level playing field basis, for this purposes governments have come out with mechanisms such as bonded stores, manufacture in bond, TIEP, duty rebates etc.

Liberalization - VAT & GST
Another landmark event of the post liberalization era was the gradual reduction of export duties and today this has been eliminated for most commodities while a moderate cess is being levied which is ploughed back to the respective industries. When Sri Lanka moved to the Goods & Services Tax (GST) in the nineties quite rightly the authorities granted the zero rate status to exporters freeing them from GST. In 2003 GST was abolished and replaced by Valued Added Tax (VAT), however subject to minor variations the mechanisms of VAT was no different to GST.

VAT principle revolves around the input /output tax mechanism where the purchaser of a commodity is entitled to set off the input tax charged to him by an supplier against the output tax payable.

Exporters by virtue of being zero-rated are not liable for output tax hence they are entitled to claim a refund from the Inland Revenue for the input VAT suffered. According to the VAT legislation refunds shall be paid to the claimant within a 45-day period of the claim. However the VAT refund mechanism was never smooth and the refunds have been slow. Consequent to a budget 2006 proposal two relief measures by way of Bank guarantees and VAT suspended scheme was introduced.

It was also during this period that that a massive fraud involving Rs 3.5 billion was detected and the investigations that are continuing revealed facts how VAT refunds have been paid to bogus companies.

VAT delays
The delay of VAT refunds has reached a melting point with grave danger to the export community, as one leading tea exporter quipped “Today we have a major imbalance in our Balance sheet, our major current asset is the VAT refunds receivable which is remaining static while at the same time our major liability - bank overdraft - keeps on increasing with interest, and do not know for how long we can survive”. This is no exaggeration while bigger companies may be able to survive even with difficulty there’s no doubt that a number of smaller companies in exports may put up shutters with long time adverse repercussions on the economy. It is reliably understood that the unpaid VAT refunds amount to billions of rupees which the businesses have to finance with borrowings at high cost,

Export or perish
We reiterate that exports must be competitive to survive in the long term and they cannot survive for long as the bankers are bound to put pressure and may even pursue legal action. The Inland Revenue Department (IRD) seems to be helpless and the response has been that they cannot pay until funds are received from the Treasury. We understand that apart from funding, processing too is an issue to the IRD, but doing nothing is not an option. This is a matter of grave importance to the national economy and not for any one-business organization.

The Treasury and IRD must get together and resolve this crisis. On the other hand we hear that the government revenue has exceeded the targets in 2006 and possibly the bulk of this originates from tax collections. The export crisis must be resolved soonest and exporters should not be allowed to perish.

Wealth Declarations reintroduced?
While on fiscal affairs it is interesting to note the provisions of the Section 98 (1) (e) on the need to provide information on wealth. The return of Income tax for the year 2005/6 may have surprised many taxpayers due to an inclusion of a section requesting information on wealth to be declared, though the amendment came in 2005. Since the abolition of wealth tax following the recommendation of the Taxation commission (for good reasons) there was no legal requirement for the taxpayers to declare wealth. Understandably this is the global trend.