Over 50,000 businesses VAT-freed from January 1

Marking probably the biggest tax overhaul in the history, nearly 54,000 businesses have been freed from the Value Added Tax (VAT) payment requirement with effect from January 01, 2020 as the concessions announced in late November are slowly taking root. 

The new administration led by President Gotabaya Rajapaksa on November 27 announced sweeping tax concessions to revive the business sector, which has long been waiting relief of some sort. 

Among the string of tax concessions were the revision of VAT-free threshold of the small and medium enterprises (SMEs) from Rs.3 million per quarter or Rs.12 million per annum to Rs.75 million per quarter or Rs.300 million per annum. 

Giving effect to it, the Inland Revenue Department this week published a list of tax payers numbering close to 54,000, whose taxable supply has never exceeded Rs.75 million for any taxable period prior to December 31, 2019 and deactivated their VAT registrations with effect from January 01, 2020. Highlighting the implications of the move from January 01, Ernst & Young Sri Lanka said such deactivated persons or businesses are no longer required to issue tax invoices on their business dealings going forward. 

Further, E&Y Sri Lanka also advised its clients not to issue tax invoices to the persons in the list of deactivated persons or non-registered persons when supplying goods or services. 

While the impact on the businesses is yet to be quantified, given its magnitude it is expected to provide a windfall for the SMEs immediately by way of higher earrings for those paying VAT at 15 percent during the last 3 years, higher than the earlier 12 percent. 

Besides, even those businesses, whose quarterly revenue exceed Rs.75 million, will now have to pay VAT at a substantially lower rate of 8 percent, which was reduced from 15 percent, along with the scrapping of 2 percent Nation Building Tax (NBT).

Speaking on the tax cuts, Senior Economic Advisor to the Prime Minister, Ajith Nivard Cabraal said the previous administration squeezed the businesses by way of adding taxes after taxes as they went about addressing one aspect of the economy at a time, which is the tax-to-GDP. 

As a result, Cabraal said the then government lost sight of the broader economy and the economic actors suffered as a result.  

Hence, tax concessions were announced to unleash the potential of the economy, which he believed would provide the immediate stimulus to those businesses, whose survival was threatened. 

However, some economists are of the view that tax concessions should have been given to a few sectors, which are identified as priority sectors by the government. 

Rating agencies have estimated the hit from the tax concessions to the government revenue to be substantial.

They were also skeptical of the efficacy of the tax concessions when the economy is in dire need of structural changes with dearth in key skills and red tape which stifle their ability to grow their top-lines in the first place.