Benefiting from VAT
View(s):For the third week running, the discussion among the trio was about vegetable and rice prices which have skyrocketed.
The hapless vegetable seller, Simon, who unfortunately came around on a day when Kussi Amma Sera was belting out her fury in conversation with Serapina and Mabel Rasthiyadu, got the brunt of the anger over rising prices.
“Aei elavalu mechchara ganang (Why are vegetable prices so high)?” asked a furious Kussi Amma Sera. “Aney Miss, mata baninda epa (Miss, please don’t scold me),” said Simon in resignation. “Aei lamayo, me ganang ekka apita jivath venna baha neda (How can we live with these prices)?” interjected Mabel Rasthiyadu.
Poor Simon continued to face the wrath of the trio with Serapina also joining in, very critical of the high prices of vegetables.
Watching them annoying Simon, I sipped my morning tea and reflected on how the new regime appeared unable to tackle rising prices and in particular the price of rice. It was at this point that the phone rang. It was Arthika, my nonsensical economist friend, on the line.
“I say, friend, greetings for the New Year,” he said. “Same to you,” I replied.
“The changes in the VAT (Value Added Tax) are effective from January 1, right? Will prices of commodities and other VAT items come down in price?” he asked.
“In the general nature of things, that has to happen,” I said.
This week the Inland Revenue Department (IRD) released a list of more than 50,000 companies which are exempt from VAT with effect from January 1 (in line with an earlier government decision) and this exhaustive list includes companies involved in a range of sectors like motor vehicles, construction, printing, food and restaurants, garments, plastics, those engaged in the confectionery business, rice mills, banks, real estate, education, securities and paints among others. Technically, the VAT benefit should be passed onto consumers who paid 15 per cent extra on a range of goods and services they purchased or accessed.
Those exempt from VAT will be companies whose turnover is below Rs. 75 million a quarter or Rs. 300 million a year. The earlier threshold was Rs. 3 million a quarter or Rs. 12 million a year.
While some companies have been exempt from VAT, there are others which benefit from the VAT reduction rate to 8 per cent from 15 per cent.
The plethora of tax benefits announced by the government earlier will result in a loss in revenue of between Rs. 800-900 billion. VAT brings in the highest revenue to the state from among various tax measures.
According to analysts, while the intention of the government is honourable and aimed at reducing prices of commodities, traders often don’t pass this benefit to consumers.
In an article in the Business Times on December 8, tax expert Suresh R.I. Perera lamented the lack of anti-profiteering clauses in Sri Lankan law to act against traders who don’t pass the benefit of reduced VAT to consumers.
“Unfortunately, the policy makers and drafters of the Sri Lankan GST and VAT regimes have not addressed the issue to safeguard the best interest of the state and the consumers by ensuring that suppliers do not profiteer at their expense, even though the GST/VAT regime has been in operation in Sri Lanka for almost 21 years. Sri Lankan policy makers could learn a lesson from their Indian counterpart in this regard. The Central Goods and Services Tax Act No 12 of 2017 (the Indian GST law) contains an ‘anti-profiteering measure’ in the law itself. This rule ensures that if the GST rate is reduced in India, such benefit should be passed on by the suppliers to the recipients by way of a commensurate reduction in the prices of goods and services,” he said, adding: “The Indian law also ensures that the relevant Authority should supervise that the benefits stemming from the reduction in the rate are reflected by a commensurate reduction in the prices.”
Continuing the conversation with Arthika, I told him that the government needs to ensure VAT benefits are passed onto the consumer, otherwise the whole purpose and intention of the reductions and exemptions are lost.
“How does one assess whether the VAT benefit is passed onto the consumer?” he asked. “It’s by simply looking at a bill of sale and checking whether VAT has been charged or not,” I said.
“But there is a fundamental problem here for the consumer. For example, how is a consumer to know that when he purchases goods from a store, that the company producing the goods is exempt from tax and that the bill of sale should be less VAT? The trader can always say that this is a VAT-able item,” Arthika said.
“Oh, that’s a good point. That’s why Suresh Perera’s recommendation suggesting anti-profiteering clauses in the law should be seriously considered by the government. Otherwise, at the end of the day, consumers will be paying the same amount for a VAT-exempt item with no benefit at all,” I said.
Just as I ended my conversation with Arthika, the phone rang again. This time it was ‘DOSAI’ Danny, my verti-clad friend from Trincomalee. “I shay friend….happy New Year,” he said, greeting me. “Same to you, my dear friend,” I replied and then got into a long conversation with him about rice prices, the rice-miller mafia and the struggle by the government to reduce prices.
“The newspapers said that there are three or four millers who have hoarded stocks which is the cause of rising prices. Why can’t they take action against them?” he asked. “Maybe they are politically powerful,” I said in response, just as Kussi Amma Sera brought in my second cup of tea.
Apparently, the hapless Simon had been able to extricate himself from the wrath of the three women, got onto his scooter and sped away.
“Mokakda wunay (What happened)?” I asked Kussi Amma Sera. “Simon, duwala giya (Simon ran away),” she laughed.
Reflecting on the recent changes in VAT, if the benefit is not felt by the people, it would be another hurdle to be overcome by the government ahead of parliamentary elections due in April.