Advanced Business Taxation: Principles and ...

Advanced Business Taxation: Principles and Practices

By V.Anojan


By V.Anojan CAB-II (CASL), AAT (SL), Student, Department of Accounting, Faculty of Management Studies & Commerce, University of Jaffna, Sri Lanka

E-mail

: [email protected]

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


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.


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


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)


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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 Standard rate Luxury rate

- 0% - 12% - 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.


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


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


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.


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.


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 Sales Zero rate supply Output tax Input tax Raw material-non registered Brought forward from last quarter Machinery Raw material registered person Telephone bill Staff meals Transport charge Input tax VAT payable for the quarter

Amount Rates VAT Total 2,500,000 12% 300,000 700,000 0% 0 300,000 300,000 700,000 1,200,000 48,000 60,000

Nil - 32,000 12% 84,000 12% 144,000 12% 5,760 Notallowed 45,000 12% 5,400 (271,160) 28,840


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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 Sales Zero rate supply Output tax Input tax Staff salary paid

Amount Rates VAT Total 3,360,000 12% /112 360,000 500,000 0% 0 360,000 268,800

Motor car

1,344,000

Raw material from local supplier Raw material purchase without tax invoice Electricity paid Machinery VAT paid on imports Telephone bill Staff meals

2,240,000 560,000

Transport charge Input tax Limit of credit Balance input tax carry forward to next quarter

112,000

52,000 896,000 45,000 56,000

Not allowed Not allowed 12% /112 Nil Exempt 12% /112 12% Notallowed 12% /112

240,000 96,000 36,000 5,400 12,000 389,400 (360,000) 29,400

(360,000)


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 30 th 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 Liable supply Zero rate supply Output tax Input tax Raw material – registered person Raw materialnon-registered person Common transport Electricity Salary

Amount Rates VAT Total 3,920,000 12% /112 420,000 400,000 0% 0 420,000

Telephone charges Brought forward from last quarter Input tax

112,000/3 x 2 -


1,792,000 450,000

12% /112 Nil

192,000 -

672,000/3 x 2 156,000/3 x 2 672,000/3 x 2

12% /112 Exempt Not allowed 12% /112 -

48,000 8,000 40,000 288,000 (288,000) 132,000


By V.Anojan

Product-Y Output tax Items Total supply Output tax Input tax Raw material – registered person Common transport Electricity Salary

Amount Rates VAT 900,000 Exempt

Telephone charges Input tax

112,000/3 x 1


Total -

504,000 672,000/3 x 1 156,000/3 x 1 672,000/3 x 1

12% /112 12% /112 Exempt Not allowed 12% /112

54,000 24,000 4,000 82,000 (82,000) -

Input tax cannot be carried forward and claimed, because such supply is a exempt supply product.

Summary 

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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.


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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.


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.