The imposition of the value-added tax (VAT) net has eroded the margins of wholesale and retail businesses in the country and the impact has now begun to be felt through the value chains as the producers too have had to bear some of the impact, Mirror Business observes.

The upmarket fashion retailer, Odel PLC yesterday said its top line growth decelerated to a mere 2 percent in the fourth quarter (January – March) and the gross profit margin dented by 1.8 percent in the FY 2012/13 due to the impact of VAT. The net profit contracted by 20 percent.

“The imposition of VAT on retail trade from January 01, 2013 and the resultant impact was a major reason for the top line growth to decelerate in the last quarter of the year.

The non-availability of input credits on the inventory carried over on transition date and the limited ability to pass the effect through price were the reasons for the erosion of margin,” Odel stated.

Meanwhile, the retailing giant, Cargills (Ceylon) PLC too attributed the retail VAT to its drop in the fourth quarter net profits.

Releasing the March quarter financial statements, the company said its fourth quarter net profit dropped as much as 57 percent below the previous financial year, primarily due to the one-off cost attributed to unrecoverable VAT of the retail sector.

“The lack of transitional provisions to allow for the claiming of input VAT on the closing stock as at 31 December 2012 had a significant impact on the group’s retail business which enjoys peak sales during the 3rd and 4th quarters,” the company said.

While the extension of VAT to retail and wholesale businesses was more or less felt immediately it was communicated through the 2013 Budget, what was not envisaged in the immediate aftermath was the possible impact it would have on the entire business value chain.

The VAT impact has now gone on to squeeze the margins of the producers where they too have had to bear some impact of the VAT on supermarkets.

Bairaha Farms PLC, the biggest poultry producer and the supplier to the supermarkets, saw its net profits falling by as much as 43 percent in the March quarter and the VAT on supermarkets was identified as one of the key reasons for this fall by the research division of John Keells Stockbrokers (Pvt.) Ltd.

The gover nment was under pressure from the International Monetary Fund to increase the tax revenues, which has now fallen below 11.5 percent of the GDP, among the lowest in the region.

(DK)