Responding to a crisis
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Who says the authorities are not listening to Sri Lanka’s powerful business community? It did – this week with the Simplified VAT (SVAT) system implementation being postponed or deferred to a date in April 2025 against an implementation date of January 2024 following strong objections from exporters.In fact, the business community is appealing to retain the SVAT instead of discontinuing it. It remains to be seen as to whether the current postponement is a means of providing breathing space for the government to reconsider the removal of this tax system or to impose it from April 2025 onwards. Many things can happen within this period as presidential and parliamentary elections are due next year.
VAT (Value Added Tax) is a tax you pay on B2C (business to final consumer) transactions with the rate in Sri Lanka at currently 15 per cent. SVAT is a system that exempts B2B transactions from paying VAT at the point of transaction.
Taxes were also the topic when Ruwanputha, my young economist-friend, called on this sunny Thursday morning. “So the authorities are deferring the implementation of the SVAT scheme following objections raised by the business community, in particular exporters,” he said.
“Yes it appears that businesses would be badly affected if SVAT is scrapped,” I said.
“Efficient collection of taxes seems to be dodging the government badly, particularly in the collection and prompt payment of taxes by the public and businesses,” he said.
“Yes, tax revenue has come down and is nowhere near set targets this year,” I said and proceeded to discuss with Ruwanputha other pressing issues, Sri Lanka is facing amidst a second review with the International Monetary Fund (IMF) taking place this week.
The SVAT removal is a condition in the IMF extended funding facility (EFF) of US$ 2.9 billion. It has been stated here that VAT needs to be implemented fully, while the Government should eliminate exemptions and discontinue the SVAT scheme.
Another worry for the government is issues pertaining to RAMIS (Random Access Management Information System), the online tax system which has given several problems and is not functioning properly.
This week the Joint Apparel Association Forum
(JAAF) welcomed Cabinet approval for the deferment
of the SVAT scheme.
JAAF said it is particularly appreciative of the decision to ensure that a “strong tax repaying mechanism” is in place before proceeding with the removal of SVAT. This decision reflects the dedicated efforts of various stakeholders to protect the industry, for which JAAF was appreciative.
It said this deferment comes at a critical time for apparel exporters who have been grappling with declining exports and, therefore, risk of cash flow disruption if SVAT was removed without a viable refund system being in place. Exporters have pointed out that as an appropriate measure towards repealing the SVAT system, a step-by-step approach is required until a strong tax repaying mechanism is established.
According to earlier reports in the Business Times, the Finance Ministry was on course to introduce an efficient and proper refunding mechanism consequent to the removal of the SVAT system, reverting to the normal VAT scheme.
This action has been taken by the ministry to adhere to the IMF approved economic reform programme, a high ranking Treasury official disclosed.
According to tax policy measures stipulated in the programme, the fiscal authority is committed to significantly speeding up valid VAT refunds and abolishing the SVAT system.
Officials have said that approximately 1.2 per cent of the gross domestic product from the tax revenue could be increased by reactivating the standard VAT.
The Ceylon Chamber of Commerce, which has been agitating for a continuation of the SVAT scheme, was quick to praise the government for reconsidering its decision to abolish the SVAT system given the impact it would have on the functioning of the export industry.
“This comes at a critical time when Sri Lanka has seen a significant dip in exports of over 10 per cent in 2023 so far, along with a staggering 19 per cent decrease in apparel exports with expectation for weak external demand to continue,” it said in a statement.
It said the existing SVAT system was implemented in 2011 to address long-standing inefficiencies and delays in the VAT refund process managed by the Inland Revenue Department (IRD). Before SVAT, many exporters were cash-strapped due to delayed VAT refunds – some for up to five or six years. Alarmingly, a backlog of long outstanding refunds under the SVAT system itself still remains unaddressed. This raises questions about the Government’s capacity to efficiently handle new refund claims in the absence of the SVAT system, thereby casting doubts over the operational feasibility of the planned move.
At this point, my attention was drawn to the conversation by the trio under the margosa tree. “Samahara elavalu wala mila tikak adu wela thiyenwa (Some vegetable prices seem to have come down this week),” said Kussi Amma Sera.
“Nae. Mama market-ekata giyama sanduda, mila wenasak dekke nae (Not really, when I went to the market on Monday the prices were still the same),” noted Serapina.
“Mamath mila aduweemak dekka, rithumaya hinda-da danne nae (I also noticed a drop in prices at the market. Maybe it’s a seasonal drop in prices),” added Mabel Rasthiyadu.
Meanwhile, according to reports reaching the Business Times, the IRD has been directed to put in place an efficient mechanism to accelerate the collection of taxes and held-over taxes amidst increasing tax defaults.
It is stated that the tax amount in default this year as at June 30 is approximately Rs. 7.72 billion while the total outstanding taxes, penalties and interest of the IRD amounted to Rs. 904 billion as at December 31, 2022.
It said that the Finance Ministry is considering several recommendations made by the Parliamentary Committee on Ways and Means towards streamlining tax administration and tackling the issue of default.
It has recommended an assessment done online without the subjective involvement of assessors of the IRD and introduction of a unique identification number to capture all financial transactions aimed at regulating the informal economy and increasing the tax revenue.
At this point, Kussi Amma Sera walked into the room with my second mug of tea and without posing her usual question or query walked out with a smile, leaving me to reflect on the government’s troubled tax system which is not raking in the revenue according to set targets.
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