Retail, wholesale trade brace for VAT in January 2013
Sri Lanka’s mega retail and wholesale businesses including supermarkets are bracing for the impact of higher taxes from the recent budget which are effective in January. After initial absorption of a new 12 per cent Value Added Tax (VAT), supermarkets and wholesalers and retailers will eventually pass the cost to consumers, traders and industry sources said. Small and medium scale businesses would also be affected. According to the budget, VAT is to be imposed on businesses having over Rs. 500 million in turnover per quarter from 1st January 2013, traders said. This will affect for example supermarkets, florists and funeral services — making even the cost of dying more expensive –, and wholesale traders in Pettah, they pointed out.
The wholesale trade is still awaiting further clarification on the taxes to measure the extent of the impact on profitability, President of the Wholesale Traders Association at Old Moor Street, K. Palaniandi said. He said that they have no alternative other than increasing the wholesale price of goods as they cannot avoid paying higher taxes.
The budget proposal will severely hit entities such as Cargills Ceylon and its supermarket unit Food City, Ceylon Cold Stores and Keells Super, and Richard Pieris and its supermarket subsidiary, Arpico, as well as wholesale traders forced to reduce margins to a great extent.
Kings Super City, Sentra, Sunup, Laugfs, and state-owned Lanka Sathosa which is also being revamped and developed to the ”Mega Stores” concept would be affected if turnovers exceed Rs. 500 million per quarter.
However a senior official of the Finance Ministry assured that the VAT will apply only for certain items without identifying it. The items are yet to be announced which is one of the reasons why traders are seeking clarification and are confused at the moment. Officials from several supermarkets say they plan to absorb the newly imposed VAT but will have to make adjustments elsewhere in order to do so. Though supermarkets are expected to reduce margins of suppliers, the latter is expected to increase their MRP (maximum retail price) which is what the consumer would pay. “Consumer spending has already hit by the rising cost of living,” a major supplier of fast moving consumer goods to super markets told Business Times, adding “spending could further fall apart from buying essentials.”
Asked to clarify the issue, tax consultant N. R. Gajendran said that the budget proposal not only covers supermarkets but all retail and wholesale businesses with an annual turnover of over Rs. 2 billion or Rs 500 million per quarter.
He said that this was the government’s single biggest revenue proposal in the budget which is expected to raise Rs. 5 billion.
Supermarket owners and wholesale traders will have to sell consumer goods at the prescribed or increased price, pushing consumers into difficulty, he added.
“If supermarkets initiate action to unilaterally pass on the higher taxes to customers, their sales volume may decline. Then they will lose the customer base to small grocery shops, as such price increases may be higher than what consumers may be willing to pay for the convenience of shopping and benefits from efficiencies in supermarket operations through discounted prices on some products”, he predicted. He pointed out that this tax is likely to have an adverse impact on Small and Medium Enterprises (SMEs) since supermarkets purchase most of their products from SMEs. “It’s the ‘supermarkets’ that helped SMEs to boom. Supermarkets eliminate the intervention of middlemen to reduce prices. They are purchasing agri produce directly from villagers,” Mr. Gajendran said adding that increased taxation on supermarkets is likely to harm the rural economy as well.
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