FEATURE -New Social Security Contribution Levy

By Suresh R I Perera, LLB, Attorney at Law, FCMA (UK)

The Social Security Contribution Levy (SSCL) which was proposed in the original Budget 2022 to be imposed at 2.5 per cent on Turnover of Service providers, manufacturers, distributors, wholesale and retail sellers was passed in the Parliament. Originally the budget speech pronounced that it will be effective from 1.4.2022 but the implementation date of 1.7.2022 was specified in the Bill. It will be implemented from October 1, 2022.

SSCL being a tax on turnover, due to its inherent cascading effect will result in prices of goods and services going up in the market. The tax will be levied from persons with more than Rs. 120 million turnover per annum. Nation Building Tax (NBT) which was an identical tax that prevailed during the period 2009 to 2019 was charged at 2 per cent on turnover exceeding Rs 12 million per annum.

However, unlike the NBT, in the case of manufacturers SSCL charge will be only on 85 per cent of the turnover. The NBT Act provided an input tax deduction mechanism for manufacturers which has been substituted with this SSCL exposure being restricted 85 per cent of turnover.

In the case of wholesale and retail sellers only 0.5 per cent of turnover will be exposed to the new tax whereas exposure of the turnover of the distributors will be restricted to 0.25 per cent.

Sri Lanka embraced the concept of “taxation of value addition” as the tool for collection of indirect tax, abandoning the concept of “taxation of turnover” as a means for gathering indirect tax in 1998, as the latter results in tax on tax (cascading effect) hence rejected by many countries.

However due to the weak policy design and shortsighted actions of the tax policy makers, Sri Lanka has become a country that levies indirect tax using both concepts ; “taxation of value addition” as well as “taxation of turnover”.

Pursuant to introducing taxation of value addition in 1998 under the term Goods and Service Tax (GST), it was re named as Value Added Tax (VAT) in 2002.

The policy makers re introduced taxation of turnover, by way of a Defence Levy in 1992, which was re named as National Security Levy later, creating a policy confusion with regard to the levy of indirect tax in the tax regime.

Thereafter in 2009, the tax on turnover was implemented under the term NBT, initially introduced for a very short period to address a funding gap of the Government but continued for more than 10 years until it was abolished in December 2019.

The introduction of the SSCL is a continuation of the policy confusion of the policymakers as to the manner of the collection of indirect tax in Sri Lanka, once again making the system a hybrid one.

This hybrid system is a bane, both to the taxpayers as well as tax administrators. Most of the areas covered by the SSCL (tax base) is overlapping with the VAT base too. If the VAT system with requisite modifications is utilised for the purpose of raising the additional revenue to be collected via SSCL, there will be a reduction of the tax compliance burden to the taxpayers as well as reduction of the effort to be exerted by tax officers for administration of a new tax. On a different perspective many opine that rather than introduction of a new tax which is very similar to NBT under a new name, the administration burden of the tax officers as well as compliance burden of the taxpayers could have been saved even by reviving the NBT Act, which was not repealed but a mere termination was introduced to the chargeability under the NBT Amendment Act No.3 of 2020 with effect from December 1, 2019.

The overlapping of VAT and NBT on financial services is a significant point to be emphasised among other things. The same base being subjected to tax under two distinct rates (15 per cent VAT and 2.5 per cent NBT) with associated duplicated compliance processes breach all norms designing efficient tax system.

SSCL differs from NBT in mere few aspects. The threshold of Rs.120 million per annum instead of Rs. 12 million, in relation to manufacturers the exposure being restricted 85 per cent of the turnover as opposed to input tax credit mechanism, and the list of exemptions being narrowed compared to the exemptions under the NBT Act are the major differences.