The Government is facing an immediate cashflow problem owing to suspension of Value Added Tax ( VAT) and Nation Building Tax (NBT) revision and the delay in the passing of revenue bills in Parliament and issuing necessary circulars, gazette notification relating to amendments made in 2016 budget in an unprecedented manner. Just two months into the [...]

The Sunday Times Sri Lanka

Revenue Bills delay and Tax Revision trigger a cash flow problem

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The Government is facing an immediate cashflow problem owing to suspension of Value Added Tax ( VAT) and Nation Building Tax (NBT) revision and the delay in the passing of revenue bills in Parliament and issuing necessary circulars, gazette notification relating to amendments made in 2016 budget in an unprecedented manner. Just two months into the 2016 budget, it has been revealed at a recent Treasury meeting that the government is facing a cashflow problem.

The cashflow management meeting held at the Treasury was informed that taxes should be put in place soon because the government is desperate for cash. The Treasury has targeted the highest revenue of Rs. 90 billion from the increase in NBT to 4 per cent from 2 per cent and Rs. 25 billion from the revision of VAT in the 2016 budget. According to the Finance Ministry media release, the VAT and NBT proposals will not be effective until the respective amendments are passed by the Parliament.

The VAT rate of 11 per cent will continue while the NBT would be 2 per cent. From the perspective of consumers this is a welcome move and would ensure that there is no justification for suppliers to increase the prices, a tax expert told the Business Times. From the 1st of January 2016, tax payers have been following the VAT and NBT amendments proposed in the Budget 2016.  A press advertisement was published by the Inland Revenue Department informing the public about the revisions proposed in the Budget and the effective date to be from January.

Therefore NBT was administratively implemented at the rate of 4 per cent on turnover from January 2016 while all manufacturers and importers have been charging VAT at the rate 8 per cent and service providers charging VAT at 12.5 per cent. The suspension of the VAT revision in the 2016 budget has created confusion among manufacturers and importers. The increase in the NBT, and the new variable VAT rates were supposed to take effect on January. Accordingly businesses had to change their software, and billing systems to take account of these changes, and of course increased costs to many and most of all to the ultimate consumer, the tax expert said

The delay in the implementation of these indirect taxes has put the businesses in confusion as they had to readjust their soft ware and billing systems, he added.  The VAT system is less complicated and compliance burden is less when only a single VAT rate of 11 percent is being used as opposed to use of two rates of 8 percent and 12.5 percent, he opined. The most effective way to resolve the VAT issues pertaining to the delayed period of its implementation would be to adjust the tax to 11 percent from 1st January where VAT had been charged at 8 percent for goods and 12.5 percent for services, he pointed out.

Maintaining the current VAT rate of 11 percent from 1st January 2016, would ensure that there are no further confusions in claiming input VAT and how to fill the VAT return.  According to Finance Minister Ravi Karunanayake, the VAT system in Sri Lanka was severely distorted due to the ad hoc policies adopted from time to time over the past few years. Under-invoicing of imports, leakages in the value chain and long lists of exemptions resulted in low revenue below expectation

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