Refunding unabsorbed VAT input claims

The Value added Tax was introduced on August 1, 2002. VAT payment was made after deducting VAT input claim from VAT output liability.

Excess vat input was transferred to the following month. However, with effect from January 1, 2007 the Inland Revenue Department restricted VAT input claim to the maximum of 85 percent VAT output liability i.e. every month minimum 15 percent of VAT out put liability has to be settled. This has resulted in massive build up of unabsorbed VAT input every month. Tax payers were dissatisfied that they have to borrow money on interest for this unproductive build up.

I am happy to note according to the budget proposal (announced on November 22) VAT input claim from January 1, 2011 would be increased to 100 percent as before.

Regrettably that unabsorbed input as December 31, 2010 will not be refunded to the tax payers.

Instead it will be an allowable expenditure in computing the taxable profit in the following manner.

* If such input credit is related to a revenue expenditure deduction will be allowed in four equal annual instalments which would be set off in four years of assessment commencing from the year of assessment 2010/2011, subject to the provisions specified in Section 25 and 26 of the Inland Revenue Act;

* If the input credit is related to a capital expenditure, the unabsorbed input credit will be treated as part of the capital asset for the purposes of deduction for capital allowances.

This refund has become a bad debt. This is an unfair state of affairs as companies are going to lose in millions due to no fault of theirs.

It was the Inland Revenue Department which has blocked 15 percent vat input claim to secure continuous cash in flow to them and now they are refusing to settle refunds due to the tax payers.

In the past whenever there was a change in the tax system relief measures ere taken so that tax payers did not incur financial losses. I quote below the following.

a. When GST was introduced on April 1, 1998 Turnover tax paid at Customs, embedded in stock in trade as at March 31, 1998 was refunded

b. When VAT was introduced on August 1, 2002 the defence levy paid at Customs embedded in stock in trade as July 31, 2002 was also refunded.

Therefore I appeal to the Finance Ministry to consider refunding the unabsorbed VAT input as at December 31, 2010 in the following manner.

a. Set off against tax liability for 2010/2011 and continue till it is fully settled.

b. Permit the unabsorbed balance to be carried forward and set off against future liabilities as 100 percent claim is permitted now.

I hope that President who has presented a commendable tax free budget - 2011 considers the plight of tax payers and grants proper relief as mentioned in the above.

S R Balachandran BSc, FCA, FCMA (Sri Lanka)

Council Member

The National Chamber of Commerce of Sri Lanka