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Advanced Business Taxation: Principles and Practices By V.Anojan
Advanced Business Taxation: Principles and
Practices
By
V.Anojan
CAB-II (CASL), AAT (SL), Student, Department of Accounting, Faculty of Management
Studies & Commerce, University of Jaffna, Sri Lanka
E-mail : v.anoabt@gmail.com
Copy Right : Author
First Edition : February 2013
ISBN : 978-955-44200-0-7
Publisher : Mrs.V.Agastina Jayamalar
Printers : Shampavi Printers, No 276, Kasthuriyar Road, Jaffna
Advanced Business Taxation: Principles and Practices By V.Anojan
Chapter 05
Value Added Tax Calculation
Learning Objective
The learning objective of this chapter is explained the principal of the
operation of value added tax, type of supplies, computation of VAT liability
of a residents and administrative provision on VAT.
At the end of the chapter, you should be able to:
Define the key terms under VAT.
Describe the types of supply, registered person and non-registered
person.
Identify the documents required for registration.
Differentiate the exempt supply and zero rate supply.
Calculate the liability VAT of registered person.
Advanced Business Taxation: Principles and Practices By V.Anojan
5.1 Value Added Tax
Value added tax was introduced in August 01, 2002 in accordance with Act No.14 of 2002
VAT Act replaced the Goods and Services Tax (GST) which was almost similar tax on the
consumption of goods and services. Actually VAT is a tax on domestic consumption of
goods and services. The goods imported into Sri Lanka and goods and services supplied
within the territorial limits of Sri Lanka are the subject matter of this tax.
Also it is a one of the good example for indirect tax. The government will receive at the end,
through all the intermediary suppliers in the chain of production and distribution, an amount
equal to the amount paid by the final consumer. VAT shows higher percentage in tax
collection of Sri Lanka. Anybody can be transferred their VAT liabilities on other person.
For the VAT purpose persons are divided in to two major parts such as registered persons and
non-registered persons. Only the VAT is payable a registered persons on every taxable supply
of goods or services, made by him or her in a taxable period in the course of currying on a
taxable activity within Sri Lanka. Also resister persons are liable to pay VAT on the
importation of goods in to the Sri Lanka.
5.2 Persons are divided in to two categories such as
01. Registered persons
Any persons who carry on a taxable activity have to register with CGIR (Commissioner
General of Inland Revenue). If they have the following criteria such as total value of
taxable supplies exceeds LKR 650,000 or equal for a quarter or total value of taxable
supplies exceeds LKR 2.5 million or equal for an annum.
02. Non- registered persons
Any persons who are not fulfill above criteria, will be considered as non- registered
person.
Note
In order to determine the threshold for registration, the following activity will be not included
such as
Exempt items and supplies (certain imports)
Whole sale activity
Retail activity
Above three are excluded from VAT computation.
VAT is charging on the following activities such as
Importers
Suppliers
Services providers
Advanced Business Taxation: Principles and Practices By V.Anojan
De-registration
De-registration cannot be done during the first 12 months period of registration. The
cancelation of registration on completion of 12 months or more is subject to liability on
deemed disposal of remaining stocks, assets prior to cancellation.
5.3 VAT Registration
Firstly a TIN certificate should be applied & obtained from the Tax Payer Services Unit at 1st
floor (South Wing) of the Inland Revenue Building, Chittampalam A. Gardiner Mawatha,
Colombo 02. Thereafter, VAT registration can be completed from the VAT branch at 2nd
floor (South Wing) of the Inland Revenue Building, Chittampalam A. Gardiner Mawatha,
Colombo 02.
Application should be made through VAT Form 11, not later than fifteen days from the date
on which became liable for registration.
Documents required for registration
TIN certificate
Certificate of business registration
In case of limited liable company
Memorandum & articles of association
List of Directors
Certificate of incorporation
Copies of NIC of the proprietors/Directors of the business
Particulars of sales to prove the turnover & monthly bank statements to prove cash
receipts.
Documents to prove that exports were made continuously by such exporters
Responsibilities of a registered person
Display the certificate of registration at a clearly visible place in the business
premises.
Issue tax invoices (to other registered persons).
Keep accounts for relevant periods.
Pay taxes and furnish returns on or before due dates.
Inform the department any change in the following without delay.
Name, Business Place, Ownership, Nature of business etc.
5.4 Taxable periods
Normally in Sri Lanka there are two taxable periods depending mainly on the value of
taxable supplies. VAT return is to be submitted on the basis of taxable period.
Monthly return (one month)
Advanced Business Taxation: Principles and Practices By V.Anojan
Quarterly return (three months)
The period of one month applies to the following situation only
Certain projects fulfill requirements and registered identified purchasers registered
simplified VAT system.
Where the person makes zero rated supplies
The normal taxable period is three months. It would apply to all persons not referred to in the
one month taxable period.
Returns
Monthly Tax Payers - on or before 20th of the following month.
Quarterly Tax Payers - on or before 20th of the following month of the end of the
quarter.
To be handed over to the DPRA unit, 7th floor (North Wing), Inland Revenue building,
Chittampalam A, Gardiner Mawatha, Colombo 02
5.5 VAT Rates & supplies
Only the following two rates are applicable to VAT on or after January 01, 2011.
Standard rate - 12%
Zero rate - 0%
The following three rates were applicable before January 01, 2011.
Zero rate - 0%
Standard rate - 12%
Luxury rate - 20%
Supplies
Taxable supply
Taxable supply means any supply of goods or services made or deemed to be made in Sri
Lanka chargeable with tax and include a supply charged zero rates (zero rate supply) other
than exempt supply. Manufacturers, service providers, business of import and sell and all
importers are liable to VAT other than whole sale and retail sale.
Zero rate supply
Zero rate supply means that the supply is liable to tax, but the rate applied is zero. The zero
rated supplies’ person is entitled to a credit or refund of all input tax paid by him on goods
purchased or imported by him and services used by him, since his output tax is nil.
Advanced Business Taxation: Principles and Practices By V.Anojan
Examples
Exports
Any movable or immovable property outside Sri Lanka
Repairs of any foreign ship or air craft.
Any other goods imported for the purpose of re-export.
International transportation (goods and passengers)
Computer software development for use wholly outside Sri Lanka
Copy right, patent, license, trade mark or similar intellectual property right to the
extent that such right is for use outside Sri Lanka
Client support services outside Sri Lanka.
Exempt supply
Exempt supply is not liable to VAT and cannot register for VAT even voluntarily in respect
of those supplies. Exempt supplies’ person cannot charge VAT and he cannot claim the input
taxes as a credit or refund.
Examples
The supply of
Telecommunication services
Locally manufactured briquettes and pallets using bio mass wastes
Locally developed software
Electricity
Educational services
Health care services
Public passenger transport services
Lease or rent of residential accommodation
Locally manufactured coconut oil
The import or supply of
Coal specified under HS Code Numbers 2701.11, 2701.12 and 2701.19
Environment and tourism sectors
Bitumen under HS Code No 2714
To promote international shopping items
Fashion Jewellery
Rice, rice flour
Wheat, wheat flour, bread
Tea including green leaf
Pharmaceuticals
Computer
Books
Advanced Business Taxation: Principles and Practices By V.Anojan
Retail and wholesale activities
Retail sale and whole sale of any article by a person or other those manufacturers or the
importer has been excluded from the scope of VAT.
However person can be applies for voluntary registration on carrying the business as far as
such goods are not exempted.
Once a person registered voluntarily to charge VAT on whole sale or retail sales, such
registration is applicable to total supplies, other than any exempted products.
5.6 VAT on financial services
The present rate applicable is reduced from 20% to 12% on financial services from January
01, 2011.
The value addition for tax purpose will be calculated after deducting the VAT on financial
services payable.
To ensure an uniformity in the calculation of VAT on financial services, the commissioner
general will issue a guideline specifying the following
The basis of calculation of the profits liable to VAT on financial services
The adjustments to be made where necessary on an acceptable realistic basis
The submission of returns will be bi-annually with payments on monthly basis.
5.7 Tax invoice
The VAT tax invoice is an important document in the administration of tax. The VAT tax
invoice should be issued by a VAT registered tax payer to another VAT registered person
only. Any register VAT person cannot be claimed input VAT without tax invoice so it is one
of the important legal documents.
The VAT tax invoice normally contain the following particulars
Name, address and the VAT registration number of the supplier
Name and address of the person to whom the supply is made
The date on which the tax invoice was issued and its serial number
The date of supply and description of goods and services
The quantity or the volume of supply
Value of supply, VAT charged and the consideration for the supply
The word tax invoice in a conspicuous place
Advanced Business Taxation: Principles and Practices By V.Anojan
5.8 VAT calculation
The VAT is calculating on an Output - Input tax basis. The basic formula of computation of
VAT is as follows.
VAT Payable = Output Tax - Allowable Input Tax
Output tax
The tax chargeable in respect of the supply of Goods or Services made or deemed to have
been made by a registered person under the VAT Act. It is the tax payable on value of
supplies at the relevant rates (0% or 12%).
Input tax
In case of a registered person under this Act, the tax paid on Goods and Services purchased or
imported by the person to be used in his business. The input tax can be set off against output
tax subject to certain restrictions or limits.
Following input taxes are not allowed as credit
On staff salary, cost of meals to employees and motor coaches to transport employees
including maintenance, since the relevant supply is exempted. These inputs are
allowed if above services are out sourced from January 01, 2011.
The input tax on non-taxable supply will be disallowed. Common input tax should be
apportioned proportionately.
On expenses not relevant business
Where not supported with a tax invoice.
Input tax paid without tax invoice.
Input tax on motor cars and double caps used for own travelling purpose on purchase
price, hire purchase, lease rentals, fitted accessories, delivery charges, maintenance
and repair expenses.
Input tax not claimed within 12 months of the date of tax invoice or within 24 months
of any customers’ declaration.
5.9 Restriction on total input tax
The deduction of input tax is restricted to the amount of output tax declared for that period
from January 01, 2011. The past restriction of 85 percent of the output tax was extended to
100 percent from January 01, 2011.
Any input tax balance can be carried forward and claimed in the subsequent period.
However this restriction is not applicable for the followings
A person registered under 22 (7) during the project implementation period.
Input tax related to zero rated supplies.
Advanced Business Taxation: Principles and Practices By V.Anojan
Supplies registered with textile quota board or export development board for the
supply of goods to or certain services to exporters.
5.10 Treatment on Bad Debt
VAT on bad debts written off can be deducted from the output taxes. Because those debts
cannot be recovered, if any bad debts recovered, that amount of bad debt should be
considered as a supply made in the period in which it is collected.
Note
Students ought to consider, the supply amount whether include VAT amount or exclude VAT
amount for the exam point of view.
5.11 Administrative provision on VAT
Refunds
Provisions will be made to credit VAT refund cheques directly to the bank account of the tax
payer.
15 days refunds to be removed and a suspension scheme has introduced.
A proper mechanism to cross check input credit has introduced.
Provisions have incorporated to disregard the claim of refunds in cases where there is no
response within a reasonable time. The time frame is fixed considering the circumstances of
the case.
Appeal provision
Certain administration provisions applicable to income tax appeals are extended to the VAT
Act as well.
Agent
Provisions relating to the taxation of agent on the liability on behalf of the principal are
incorporated.
VAT advance payment
The present provisions referred to in section 26A will be removed.
Proceeding for recovery before a magistrate, the time frame for deferment of proceeding,
similar to section 179 (2) of the Inland Revenue Act is introduced in section 43(1) of the
VAT act.
Penal provisions are introduced for non-payment of VAT on self assessment basis under
installments and the non-submission of return for VAT on financial services.
Advanced Business Taxation: Principles and Practices By V.Anojan
Filling of VAT returns on quarterly basis, provisions are made to file VAT returns on
quarterly basis other than zero rated persons.
Example - 1
Lucky plaza is a foot wears product manufactures. The following informations are available
for the quarter ended March 31, 2012. All figures are in excluding VAT.
Total sales for the quarter LKR 3,200,000
Raw material purchased from non-registered person LKR 300,000
Excess input credit LKR 32,000 carried forward from last quarter.
Purchase machinery LKR 700,000
Raw material purchased from registered person LKR 1,200,000
Telephone bills LKR 48,000
Staff meals expenses LKR 60,000
Transport charges paid to VAT registered person LKR 45,000
The total supply includes LKR 700,000 as zero rate supplies.
Required
Calculate the balance VAT payable for the quarter ended March 31, 2012.
Suggested Answer
Output tax
Items
Amount
Rates
VAT
Total
Sales
2,500,000
12%
300,000
Zero rate supply
700,000
0%
0
Output tax
300,000
Input tax
Raw material-non registered
300,000
Nil
-
Brought forward from last quarter
-
-
32,000
Machinery
700,000
12%
84,000
Raw material registered person
1,200,000
12%
144,000
Telephone bill
48,000
12%
5,760
Staff meals
60,000
Not-
allowed
-
Transport charge
45,000
12%
5,400
Input tax
(271,160)
VAT payable for the quarter
28,840
Advanced Business Taxation: Principles and Practices By V.Anojan
Example - 2
Luxman Super is a manufacture of food products. The following informations are available
for the quarter ended December 31, 2011.
The value of supplies (including VAT) LKR 3,860,000 which includes LKR 500,000
as zero rate supplies.
Staff salaries paid for the quarter LKR 268,800
Motor car purchased LKR 1,344,000; it is used by the manager.
Raw material purchased from local suppliers LKR 2,240,000 (including VAT)
Raw material purchased from registered person LKR 560,000 without tax invoice.
Electricity paid for the quarter LKR 52,000
Machinery purchased LKR 896,000 (including VAT)
VAT paid to customers on imported raw material LKR 36,000
Telephone bills LKR 45,000 (excluding VAT)
Staff meals expenses LKR 56,000
Transport charges paid to VAT registered person LKR 112,000 (including VAT)
Required
Calculate the balance VAT payable for the quarter ended December 31, 2011.
Suggested Answer
Output tax
Items
Amount
Rates
VAT
Total
Sales
3,360,000
12% /112
360,000
Zero rate supply
500,000
0%
0
Output tax
360,000
Input tax
Staff salary paid
268,800
Not
allowed
-
Motor car
1,344,000
Not
allowed
-
Raw material from local supplier
2,240,000
12% /112
240,000
Raw material purchase without tax
invoice
560,000
Nil
-
Electricity paid
52,000
Exempt
-
Machinery
896,000
12% /112
96,000
VAT paid on imports
-
-
36,000
Telephone bill
45,000
12%
5,400
Staff meals
56,000
Not-
allowed
-
Transport charge
112,000
12% /112
12,000
Input tax
389,400
Limit of credit
(360,000)
(360,000)
Balance input tax carry forward to
next quarter
29,400
Advanced Business Taxation: Principles and Practices By V.Anojan
VAT payable for the quarter
0
Example - 3
Star enterprise is a manufactures two products namely X (VAT liable) and Y (VAT
exempted). The unabsorbed input tax at the beginning of the quarter was LKR 40,000.The
following informations are available for the quarter ended 30th September 2012.
Total supplies product A LKR 4,320,000 which includes LKR 400,000 as zero rate
supply.
Total supplies product B LKR 900,000.
Raw material for product A LKR 1,792,000 from registered person
Raw material for product A LKR 450,000 from non-registered person
Raw material for product B LKR 504,000
Common transport expenses paid LKR 672,000 to VAT registered person.
Portion of product A and B are 2:1.
Electricity paid LKR 156,000.
Salary paid LKR 672,000.
Telephone charges LKR 112,000.
Required
Calculate the balance VAT payable for the quarter ended September 30, 2012.
Suggested Answer
Product-X
Output tax
Items
Amount
Rates
VAT
Total
Liable supply
3,920,000
12% /112
420,000
Zero rate supply
400,000
0%
0
Output tax
420,000
Input tax
Raw material – registered person
1,792,000
12% /112
192,000
Raw material- non-registered
person
450,000
Nil
-
Common transport
672,000/3 x 2
12% /112
48,000
Electricity
156,000/3 x 2
Exempt
-
Salary
672,000/3 x 2
Not
allowed
-
Telephone charges
112,000/3 x 2
12% /112
8,000
Brought forward from last quarter
-
-
40,000
Input tax
288,000
(288,000)
VAT payable for the quarter
132,000
Advanced Business Taxation: Principles and Practices By V.Anojan
Product-Y
Output tax
Items
Amount
Rates
VAT
Total
Total supply
900,000
Exempt
-
Output tax
-
Input tax
Raw material – registered person
504,000
12% /112
54,000
Common transport
672,000/3 x 1
12% /112
24,000
Electricity
156,000/3 x 1
Exempt
-
Salary
672,000/3 x 1
Not
allowed
-
Telephone charges
112,000/3 x 1
12% /112
4,000
Input tax
82,000
(82,000)
VAT payable for the quarter
-
Input tax cannot be carried forward and claimed, because such supply is a exempt
supply product.
Summary
Value added tax was introduced in August 01, 2002 in accordance with Act No.14 of
2002 VAT Act replaced the Goods and Services Tax (GST) which was almost similar
tax on the consumption of goods and services.
VAT purpose persons are divided in to two major parts such as registered persons and
non-registered persons.
Only the VAT is payable by a registered persons on every taxable supply of goods or
services, made by him or her in a taxable period in the course of currying on a
taxable activity within Sri Lanka.
Any persons who carry on a taxable activity have to register with CGIR
(Commissioner General of Inland Revenue). If they have the following criteria such
as total value of taxable supplies exceeds LKR 650,000 or equal for a quarter or total
value of taxable supplies exceeds LKR 2.5 million or equal for an annum.
Normally in Sri Lanka there are two taxable periods depending mainly on the value of
taxable supplies. VAT return is to be submitted on the basis of taxable period such as
monthly return and quarterly return.
Taxable supply means any supply of goods or services made or deemed to be made in
Sri Lanka chargeable with tax and include a supply charged zero rates (zero rate
supply) other than exempt supply.
Zero rate supply means that the supply is liable to tax, but the rate applied is zero.
Exempt supplies are not liable to VAT and cannot register for VAT even voluntarily
in respect of those supplies.
Any register VAT person cannot be claimed input VAT without tax invoice so it is
one of the important legal documents.
Advanced Business Taxation: Principles and Practices By V.Anojan
The deduction of input tax is restricted to the amount of output tax declared for that
period from January 01, 2011. The past restriction of 85 percent of the output tax was
extended to 100 percent from January 01, 2011.
Output tax means, the tax chargeable in respect of the supply of Goods or Services
made or deemed to have been made by a registered person under the VAT Act. It is
the tax payable on value of supplies at the relevant rate.
Input tax means, in case of a registered person under this Act, the tax paid on Goods
and Services purchased or imported by the person to be used in his business. The
input tax can be set off against output tax subject to certain restrictions or limits.
Review Questions
01. Briefly explain the history of Sri Lanka VAT system?
02. What do you mean by registered persons and non- registered persons under VAT?
03. Briefly explain about VAT registration?
04. What are the documents required for VAT registration?
05. Explain taxable periods under VAT?
06. Differentiate taxable, zero rate and exempt supply with example under VAT?
07. What are included in VAT tax invoice?
08. Explain the restriction on total input tax for the Y/A 2011/12?
Exercise:
01. Good Luck is a foot wears product manufactures. The following informations are
available for the quarter ended March 31, 2012. All figures are in excluding VAT.
Total sales for the quarter LKR 4,200,000
Raw material purchased from non-registered person LKR 600,000
Excess input credit LKR 22,000 carried forward from last quarter.
Purchase machinery LKR 800,000
Purchase television LKR 80,000
Raw material purchased from registered person LKR 2,400,000
Raw material purchased from registered person LKR 600,000 without tax invoice.
Telephone bills LKR 88,000 (after VAT)
Electricity bill LKR 48,000
Transport charges paid to VAT registered person LKR 60,000
Staff salaries LKR 420,000
Required
Calculate the balance VAT payable for the quarter ended March 31, 2012.
Advanced Business Taxation: Principles and Practices By V.Anojan
02. Lucky Best is a manufacture of food products. The following informations are available
for the quarter ended December 31, 2011.
The value of supplies (including VAT) LKR 4,860,000 which includes LKR 600,000
as zero rate supplies.
Staff salaries paid for the quarter LKR 468,800
Bad debt written off LKR 90,000
Raw material purchased from local suppliers LKR 3,240,000 (including VAT)
Electricity paid for the quarter LKR 62,000
Machinery purchased LKR 896,000 (including VAT)
Staff meals expenses LKR 40,000
VAT paid to customers on imported raw material LKR 46,000
Telephone bills LKR 40,000 (excluding VAT)
Staff Salaries LKR 360,000
Transport charges paid to VAT registered person LKR 224,000 (including VAT)
Air conditioner purchased for owner house LKR 120,000.
Motor car purchased for office usage LKR 1,600,000 but it is used only by the owner.
Required:
Calculate the balance VAT payable for the quarter ended December 31, 2012.
