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26th April 1998

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Are you being cheated?

Has the GST epidemic hit you already? If not watch out it will, soon….

Is your grocer, confectioner, supermarket etc, etc, charging you 12.5% on every thing you buy?

The new Goods and Services tax, which has replaced the turnover tax, is mainly for manufacturers and importers. Those who were liable to pay TT are now charged GST instead.

But unscrupulous retailers are taking advantage of the confusion and ignorance of the general public to make a quick buck. So watch out, don't be the next victim.

The Sunday Times Business has opened this special GST service for its readers, where they are welcome to write in with their GST queries.

We will take your queries to the Inland Revenue Department and publish their answers together with your questions. (Please see page 4 & 6)

So write in with your queries to:

GST Service, The Sunday Times Business, No. 47, W.A.D. Ramanayake Mw, Colombo 2.

GST Everything you wanted to know

The waiting is finally over and GST is now in operation. The new Value Added Tax, in another name was enacted by Goods and Services Act No. 34 of 1996 with effect from April 1.

Though it is 26 days old already, there still is much confusion and a justifiable fear among consumers of being hoodwinked by unscrupulous traders.

Nobody seems to know what exactly GST is (at least nobody we know of!) and the message has not been conveyed to the ordinary citizen despite what the authorities say.

Sensing this, the President herself directed that immediate action be taken to dispel doubts and misconceptions - on GST. Shylock traders are going berserk making ignorance their bliss with the general public who are clueless as to where the line is drawn between GST exempted articles and liable ones.

A number of instances where many a trader had charged GST on top of TT, retailers earning below the stipulated Rs. 500,000 a quarter charging GST and a large majority charging GST without displaying their Registration certificates were reported.

The Sunday Times Business has taken up the crusade on behalf of the general public to find out exactly why a change in corporate taxes was necessary, how it is charged and what its final effect is as on the consumer ....

Priyantha Gamage speaks to the Commissioner General, Inland Revene O. M. Weerasooriya

  • So what really is this GST?

GST or Goods and Service Tax as the Finance Minister introduced in the 1988 Budget is a tax that aims at introducing a consumption tax on a wider base on the concept of value addition.

Hence this is a tax purely on consumption and does not affect either savings or investment.

  • So it is going to be yet another addition to the existing tax burdens of the common man?

No. It is not. GST is a replacement of the Turnover Tax (TT) or the Business Turnover Tax (BTT) as it was called earlier. So you would be paying GST, but no BTT or TT except for certain specified financial and few other services.

But of course, GST is not a tax on the seller/supplier of goods and services. He merely collects it on behalf of the Government. And as all other indirect taxes it is the ultimate consumer of goods and services who pays the GST.

  • What are the advantages of GST as against the TT it replaced?

Many. cascading effect of TT will vanish:

1. Turnover Tax as the Commissioner General, Inland Revenue himself points out is not the best type of tax for an economy. It is a cascading tax ie: a tax on tax that is to say, the more transactions before a good reaches the consumer, the higher the tax element.

So when TT is eliminated the cascading effect will not be there.

(And just imagine we have been paying a tax on tax from 1964 in which year BTT was first introduced!)

2. You are only taxed on the value added: In contrast to the TT that is levied on the total turnover at every stage, under GST you are only paying tax on your value added. ie: at each stage

Example: If one particular good had a value of Rs. 100 when it reached you, and you added another Rs. 10/= to it value you will be paying GST only on Rs. 10/= you added and not on the addition of Rs. 100 + Rs. 10 = Rs. 110.

3. Single Rate:

There is only one rate of GST ie. At 12.5%, which means a lot of convenience and less confusion in tax calculations than the TT system which had three rates of tax at 8%, 12% and 18%.

4. Simplicity and transparency: TT was a very complex tax system lacking transparency under which nobody knew the tax element in a particular good at a specific point of sale.

But the standard rate of 12.5% GST is easier to comprehend and calculate. Hence it offers far more transparency.

5. Self enforcibility due to input credit: "it is easy for us to check back because one man's output tax is another's input credit.

In claiming input credit we can always check back because one should have paid GST for us to allow it", Mr. Weerasooriya said.

Therefore it provides an audit trail which makes it easier for you, your accountant and the fax consultant not forgetting the auditors themselves, he added.

6. It is only levied on consumption:

As GST does not affect savings on investments it promotes economic growth.

7. A boost to Exports:

As the Commissioner-General points out, exports can go out of this country without any indirect tax.

"Earlier nobody knew the tax element in exports. Now it is clear- 12.5% on all. What's more they are getting a refund on all their telephone bills etc. bringing their taxes down further".

So this makes our exports more competitive in the world market and promotes the industry.

8. Accelerates economic growth:

Both 6 and 7 above promote economic growth.

9. Greater reliability and compliance: Unlike TT which was difficult to trace back GST offers a higher degree of compliance and therefore more tax money or at least the same amount could be collected with less toil.

  • You are bragging about GST as if it was the most perfect tax in the world?

Oh, no GST has its own set of weaknesses too.

1. Increased paper-work: You must keep records and accounts of all taxable goods and services you receive or supply in the course of your business, including both standard-rated and zero-rated supplies.

*Records of exempt supplies or independent trading you make should also be kept.

*Summary totals of your input and output tax for each period called the GST account should be maintained in addition.

*What's more these records should be preserved for 5 years unless you have got the consent of the Inland Revenue to do otherwise, due to lack of space or any other acceptable reason.

But you can keep your records on microfilm or microfiche provided copies can be easily produced.

There is adequate facility for Department Assessors to view them when required, plus prior approval of the Department to do so.

2. Addition of new documents.

From the date of registration one has to issue tax invoices, tax debit notes and tax credit notes with the minimum information specified by the department.

3. Unfair competition posed to GST payers from non-payers:

Law-abiding GST payers would be at a disadvantage as against the tax-evaders. And in any line of business tax-evaders are a major threat to those who pay and whose prices are much higher than the evaders as a result.

  • Are we the only country to use GST in the global village?

Of course not. This is in operation right throughout the world. The entire European Economic Community has the Value Added Tax (VAT) and GST is just another name for it.

All developed countries other than USA and Australia, are using GST.

It is said that about 80 countries are into VAT like Japan, Philippines, New Zealand, Korea, Indonesia, Singapore and Canada.

And one reason analysts attribute to the defeat of Conservative candidate Malcolm Fraser in the Australian election is the fact that he opposed VAT.

  • Since GST is replacing TT, it should mean that TT is no more?

Yes and No. Because GST replaces TT except in certain specified financial and other services. So yes TT is no more.

But, the turnover tax or the sales tax as some call it, presently at 1% payable to the Provincial Councils on commercial activities of buying and selling, has to continue. So No, still there is TT payable to Provincial Councils.

  • So with GST there will naturally be an increase in general price levels?

Not really. Because as I mentioned, GST is merely a replacement for TT, which is being charged at the levels of 8%, 12% and 18%.

So taking the generally used 8% rate there will only be an addition of 4.5% to the existing prices, if at all.

But when you consider the input credit you are getting, there could hardly be an increase. In fact the prices should come down according to the Commissioner...

So getting back to the original question of price increases, as Mr. Weerasooriya explains: "None of the items that go into the consumer basket are liable to GST." So a price increase in these most commonly used consumables is unlikely. For instance, bread, rice, rice flour, cement, milk food, dhal, books, petrol and even electricity upto 90 kwh are exempt from GST.

  • You say that there will not be a price increase by GST. But already several milk food manufacturers have raised their prices subsequent to the introduction of GST.

Yes it's true that there was a price-hike by certain manufacturers/distributors. But the Commissioner-General emphasises that GST had nothing to do with it.

In his own words, "only a few companies have increased their prices. If this is a result of GST why haven't others also done so?"

He adds "There is not enough consumer resistance in this country. If the people stopped buying this particular brand they automatically have to bring their prices down."

  • What about computers?

You have a point there. Computers which were exempt from TT earlier are now burdened with GST of 12.5%. So the prices will go up, naturally.

  • On input credit... how do I get my Input Credit back?

You reclaim your input credit by deducting it from your output tax when you fill in your GST return. But please do remember that to reclaim GST as input credit you must hold valid proof to show that you have received taxable supplies.For instance, a valid Tax Invoice on local purchases or a Customs Goods Declaration for imports should be available.

  • What happens if, as you said, my input credit is more than my output tax?

Then you can reclaim the difference from the Inland Revenue.

  • So am I entitled to input credit for all GST components in my purchases in full?

Yes, but only up to the extent your turnover is liable for GST. For instance, if your turnover is not exempted at all you can reclaim 100% input credit. And if 20% of your turnover is exempt you are entitled only to 80% of input credit.

But, as per 'GST guide', you cannot usually reclaim GST you have been charged, -

On a car including fitted accessories, delivery charges, maintenance and running expenses; and,

- On independent trading by way of wholesale or retail activity unless you opt to pay GST on the supplies you make.

  • Who is liable to pay GST?

GST is chargeable on:

* Importers and distributors.

* Manufacturers (including hoteliers) and *Service/ centres.

And every person whose turnover exceeds Rs. 500,000 per quarter ie: any three months ending on the last day of the months of March, June, September or December or whose turnover exeeds Rs. 1,800,000/= in four successive quarters. ie: per annum is liable to pay GST.

And regestration for GST is a must for all imports. For no importers are now allowed to import goods without being registered for GST.

  • Are wholesalers and retailers liable to GST?

No they are not. a wholesale or retail trader who is only engaged in buying and selling as an independent activity are not liable to GST.

But a wholesale or retail trader who is engaged in manufacturing is liable to GST.

And also, wholesale and retail business is exempt from GST because under the 13th Amendment that is a subject matter for the provincial councils. But wholesalers and retailers who import (ie: those who are above the threshold of Rs. 500,000/= and they import) are liable to both GST and the Provincial Councils taxes.

  • What are the rates applicable for GST?

As I said earlier, a standard rate of 12.5% is applicable to each and every activity fairly and squarely.

But a zero (0%) rate applies on:

* export of goods;

* supply of services directly in connection with,

a. any movable or immovable property outside Sri Lanka or

b. repair or maintenance of any foreign ship or aircraft or cargo containers or any goods imported for re-export;

c. any intangible property such as patent, copyright etc. where such property is used outside Sri Lanka; and

d. international transportation (inculding trans-shipment) of goods or passengers

  • What's the difference between exemptions and zero-rates?

Exemptions are not taxable supplies and hence not entitled for input credit. But zero-rated supplies are identified as taxable supplies although no tax is chargeable on them, but input tax incurred in making such supplies can be claimed as credit.

These inputs include both raw materials and services. And as all exports are zero-rated they should be far more competitive outside Sri Lanka, because they are entitled to an input credit on top of being zero-rated or not paying GST.

  • How is registration for GST done?

Registration for GST can be categorised into three major groups:

One: Those selected from the existing TT payers:

At the beginning of the new system all persons whose turnover of any quarter in the period of twelve months ending on 30.09.97 exceeds Rs. 500,000 will be temporarily identified as a prospective GST payer.

These persons who will be sent the Form No. GST 10 will be registered for GST, once the Form is returned duly filled.

But no, you are not going to avoid GST by not sending the GST 10 back. Forced registration will be done on those who have not sent their respective Forms and will be notified of registration.

Two: New registrations: this could be either,

(i.) voluntary or

(ii.) forced.

As the word itself suggests any person who owns up to register for GST can do so. And even those who do not fall under the taxable limits but wish to register for GST to secure other benefits (eg: to show consumers that they pay GST and therefore have business exceeding Rs. 500,000 a quarter for prestige purposes, and a marketing technique are also welcome by the Inland Revenue).

But once you have got registered for GST you cannot get out of the system for two years even if your turnover is less than the minimum Rs. 500,000 a quarter.

For those who do not register voluntarily but are detected by the authorities as being liable, will be registered 'according to information available' and will be notified of his/her registration.Three: Casual Importers.

No person is allowed to import any item after 1.4.98 without being registered for GST.

Those importers who have not got themselves registered must notify the Commissioner-General at least 14 days before the clearing of goods of their intention, making an application with Form GST 12 for registration.

In the case of frequent importers, they will only be registered for this purpose alone and they will not be issued with any returns.

Good and Sevices Exempted from

The supply or import of

> unprocessed produce of any agricultural, horticultural, forestry, animal husbandry, poultry or fishing undertaking;

> potatoes, onions, chillies or vegetable seed;

> rice, rice flour, wheat, wheat flour or all other grains;

> bread of any description; u milk or powdered or condensed milk excluding any article m anufactured/produced from milk;

> water other than in sealed containers/bottles;

> Pharamaceutical products or ayurvedic, siddha, unani or homoeopathic preparations or any raw material used in such production;

> Books other than newspapers, periodicals or magazines;

> dried fish or Maldive fish;

> Sugar, jaggery or sakkara;

> Petrol, kerosene, diesel or liquid petroleum gas;

> Cement including clinker;

> Fertilizer, including rock phosphate;

> Crude petroleum oil;

> Timber;

> Goods at duty free shops for payment in foreign currency;

> Goods and services to diplomatic missions, UNO, its specialised agencies and staff;

> Unused postage/revenue stamps of Lanka or of Provincial Council;

> Tractors to be used for agricultural work;

> Aviation fuel and bunker fuel; supply of

> Services by an educational establishment/school which received grants from state at anytime;

> Financial services;

> Electricity upto 90kwh per consumer per month;

> Healthcare services by medical institutions or professionally qualified persons;

> Hotel accomodation and inbound services by Tourist Board registered Travel Agents to tourists during the 2-year period commencing 01.04.98

> In Sri Lanka of architectural, engineering, quantity surveying or construction management services by a non-resident person to a company cost of the project is above US $50 million;

Import of:

> Any article entitled to duty free clearance under Section 107 of Customs Ordinance or cleared duty free re-importation certificate under schedule A of Customs Ordinance or cleared ex-bond for re-export or for use as ship stores;

> Goods by any organisation approved by the minister of finance proved to be gifts from overseas for distress relief.

> Any project-related article by any person who has an agreement prior to 16.5.96 or prior to the appointed date in respect of a project the total cost of which is above Rs. 500 million with BOI under Section 17 of BOI, Law during 'project implementation period' or upto the date of completion whichever is earlier;

> Any project-related article by any person with an agreement with the BOI under Section 17 of BOI Law for a period of 3 years from the appointed date or until completion of such project whichever is earlier. u Residential accomodation

Supply of:

> Public passenger transport services (other than air or water transport, transport of tourists or excursion tours or tax services) or the import or supply of a motor coach or chassis or a body of a motor coach for such public passenger transport serivce.

Supply and import of:

> Pearls, diamonds, natural or synthetic precious or semi- precious stones, diamond and other powder, precious metals or metals clad with precious metal and gold coins; u Machinery, medical and surgical instruments, apparatus and accessories including medical and dental equipment and ambulances for provision of health services; u Services by a person in Sri Lanka to another person to be consumed or utilized wholly by such other person outside Sri Lanka.

Are consumers being ripped off?

By Asantha Sirimanne and Mel Gunasekera

More instances of local firms ripping consumers off under the guise of GST are coming to light with the Inland Revenue Department or the Fair Trading Commission so far not taking any visible action.

The new law is proving to be a heavy burden on the rich and poor alike with everything from cake to the poor man's phone card shooting up in price, giving the lie to the claims by the government that prices will not go up as a result of GST. Though in theory it may not have to go up much, the regulatory framework in the country is so poor that the authorities are completely impotent.

Lanka Payphones Ltd is one of the firms alleged by customers of making a quick buck.

Under the old system its payphone cards were charged a Turnover Tax at 18 per cent of revenue and with the new law GST at 12.5 per cent prices should have come down.

However Lanka Payphone cards have been jacked up overnight by 12.5 per cent.

A company official who declined to be identified told The Sunday Times Business that they were 'only passing on the GST to the customers'.

Commissioner General of Inland Revenue O. M. Weerasooriya says many companies are making industry price increases under the guise of GST.

"We will be putting up notices showing how the prices should be changed after GST came in," he said.

Under a free market economy the Inland Revenue has no authority to stop firms from raising their prices. But in the case of Lanka Payphones analysts say there may be a case for the Fair Trading Commission as it is a virtual monopoly after its recent tie-up with the second largest operator Metrocard, enabling it to raise prices at will.

It is hoped that with the proposed moves to bring payphone operators under the telecom regulator, some kind of price cap regulation based on cost will be introduced.

While Lanka Payphones seems to be exploiting the poor, at the other extreme food outlets like The Fab seems to be exploiting the rich, by claiming to charge GST, a customer complained. A fruit gateau which was price marked Rs 390 with an 18 per cent turnover tax is now sold not at a reduced price but at Rs. 438.75 (Rs. 390.00+ Rs. 48.75).

One of the reasons errant companies are able to overcharge the consumer is because the turnover based tax system in the country is so complex with a plethora of GST, BTT and Defence levy combining to confuse the public, analysts said. To ensure better compliance economic planners always advocate that tax systems should be made simple but in Sri Lanka the whole process seems to get worse, with each passing year.

The Numbers Game

(Please note that the calculations above are for illustrative purposes only and a standard wholesale price of Rs 95 is assumed. If different discounts are given to traders the calculations would change. If telecom prices have gone up again the cost structure would change but it still does not detract from the fact that the company blames the whole price increase on GST.)

For example a Rs 100 face value payphone card if sold to retailers at Rs 95 would have a TT component of Rs 17.10

Rs 95 x 18 % = Rs 17.10

The actual price of the card exclusive of TT is therefore

Rs 95.00 - Rs 17.10 = Rs 77.90

The GST of 12.5 per cent has to be charged on top of this price, not on Rs 100. If so the applicable GST component would be as follows;

Rs 77.90 x 12.5 % = Rs 9.74

The card should have been sold to the retailer at

Rs 77.90 + Rs 9.74 = Rs 87.64.

The customer should have got a price reduction of Rs 7.36

(Earlier wholesale price (Rs 95) less new wholesale price (Rs 87.64) = Rs 7.36.)

But here is another complication.

The government has also decided to charge a 4.5 per cent defence levy from telecommunications, presumably to make up for any loss suffered by the introduction of GST.

So the defence levy would be at least Rs 3.18. (This is 4.5 per cent of a whole sale price of Rs 90.82).

Even then the company pockets Rs 4.18 (Rs 95.00 - Rs 90.82).

Instead of giving the benefit Lanka Payphones also takes in an additional Rs 12.50 from the consumer.

But that is not all, Payphone companies whose calls were passed through Sri Lanka Telecom also had to pay TT to the SLT. With the GST these charges have also come down from 18 to 12.5 per cent. Note also that the budget reduced TT from 20 per cent to 18 per cent, this tax component (less the defence levy) has also been pocketed by Lanka Payphones.

On top of all this the GST allows Lanka Payphones to claim input credit. That is Lanka Payphones is allowed to set off any TT paid to SLT or indeed any other entity which supplied the company, against the 12.5 GST due from the company. This results in a further tax saving to the company.

But that is not all. On the price list given to retailers (see reproduction of price list) the company charges Rs 12.50 from the retailer as GST which the retailer is instructed to collect from the customers. Note that the company claims in this document that the product is sold at a discount of 5% from the face value of the card or Rs 95.

Even if Lanka Payphones had suddenly decided to increase its wholesale price from Rs 77.90 (the earlier wholesale price less TT) to Rs 95 which we must admit may be within its rights it is still not entitled to charge GST for the Rs 5 margin kept by the retailer because retail trade is completely exempt from GST. Any value added within the retail stage is exempt from GST.

But there are still more complications which again show the utter chaos within the tax system. The retailers, who are exempt from GST have to pay a 1 per cent Business Turnover Tax (BTT) to the provincial council, though it is alleged to be flouted widely, as unlike GST, which has built in features that promote compliance TT is considered less effective.

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