VAT changes in Budget

Sri Lanka’s business community is widely expecting adjustments in this week’s budget to the VAT system, a move that could raise taxes, costing more to the producer and in turn to the consumer.

Business analysts said the government plans to permit only raw materials to be deductable for the VAT refund instead of all other inputs including power, telephone charges, etc.

These developments came as business leaders slammed the authorities for long delays in VAT refunds. Hayleys Group Chairman Rajan Yatawara said the government owes them Rs 500 million in VAT refunds for several months forcing the company to borrow exorbitantly and absorb Rs 65 million on interest payments alone.

“Banks are making money because we are funding the government,” he said. Yatawara said Rs 100 million of the refund is a year overdue while another Rs 100 million is overdue between 6 months to a year.

“All kinds of excuses are trotted out by the authorities in the non repayment like the ongoing investment (into the VAT scam) and other issues,” he said.

The Inland Revenue Department (IRD) won’t admit it but it is well known that there is chaos, lack of motivation and fear of victimization at the department that forms part of the delays.

Ceylon Chamber of Commerce officials say a survey revealed VAT dues totalling a staggering Rs 2 billion with another Rs 600 million from returns from non-members.

Equally shocking is the fact that the department has completed processing applications of refunds of a total of Rs 1.5 billion but doesn’t have the money to pay – a fact that was acknowledged to chamber officials.

Mohan Mendis, Chairman of the Exporters Association of Sri Lanka (EASL) said when chamber officials met the IRD Commissioner General A.A.Wijepala a week ago (previous Friday), he said refund cheques have been written but the department didn’t have money to pay this as the Treasury hadn’t released the money.

However two days ago, Wijepala told The Sunday Times FT that there is no shortage of funds as the Treasury has issued funds amounting to Rs1.2 billion within the last month. “The cheques are being written now for VAT claims. We are clearing out the backlog from last year,” he said.

Kulatunga Rajapaksa, President of the National Chamber of Exporters said that when they met President Mahinda Rajapaksa to complain about VAT refunds, they were told a special account – as promised in last year’s budget – has been set up at the Central Bank. Under this 10 percent of the VAT collection on imports by the Customs is credited to the account and the refunds paid out from this.

EASL’s Mendis said Treasury Secretary Dr P.B. Jayasundera promised at a meeting in December 2005 to clear the backlog which didn’t happen

“There are two reasons for the delay -- total disorganization and lack of morale at the IRD because innocent officers are worried they will get dragged into the VAT scam, and that the Treasury is not releasing money,” he said.

He said cheques have been written for payment after a stringent process for the period July to October 2006. “VAT is a huge problem. In some firms, two or three employees are daily going to the IRD to check on the VAT status.”

He also said there are lame excuses offered for the delay in processing like – referring to some old, unpaid taxes, incomplete entries, losing or misplacing documents and suppliers not passed on the VAT returns.

The usual practice is that within 15 days the returns have to be sent and if within 30 days there is no refund, the IRD is obliged to pay interest on the delayed refund.

Another top director from a local conglomerate said SMEs have serious problems unlike big firms that can somehow manage to borrow. These smaller ones will be forced to close down and workers will lose their jobs.