Pay VAT and income tax on time

Dharmadasa Rangalla Deputy Commissioner Inland Revenue Department

Nuclear psychics is simpler than tax law. It is very easy: the reason being its rationality and uniformity, Jerald Rokwald a famous scientist said.

He said so because he had understood the complexity and changing nature of Tax Law.

Annon, another prominent scientist said that both death and taxes are inevitable. However, he said that death is not annual.

Albert Einstein, once named tax as the hardest thing to understand in the world. However no one has denied the importance of taxes.

The main source of income of the Government is the taxes collected by the Inland Revenue Department (IRD).

A tax payer does not receive anything direct or permanent from the Government in return for the taxes he pays to the Government.

He is only entitled to share in common what is given by the Government to the citizen.

A tax is a statutory payment that has to be made to the Government by the individuals and or institutions in a country. The taxpayer is not certainly aware as to how the Governments utilize what he pays as taxes to the Government.

However, it is expected by everyone that the Government would use it for the welfare and benefit of all citizens in the country.

There are two basic tools by which the Government received income by way of taxes in Sri Lanka.

Out of the two VAT (Value Added Tax) assumes importance.

Super power VAT

Some taxes imposed by the Government are charged on an individual and thus it becomes a charge on such person. It is called Direct Tax because the person subject to the tax has to pay it direct out of his personal wealth. However, it should be noted by everyone paying VAT that “Super Power VAT” is not such type of direct tax.

We all pay VAT whenever we make purchases of goods and services and it is included in price of every commodity such as clothes and food items. If it is so, it is clear that VAT is paid by every one of us and borne by us all.

But, at the same item we understand that it is not directly charged on us by the Government. If so, it must be collected by the person who sells us goods and services.

The person who collects the VAT should pay it to the Government. VAT is not lawfully imposed on the buyer of goods and services. The persons who have authorized to collect tax should collect it for the Government.

In this way it is the responsibility of those who have been entrusted with the above task to collect the VAT from the customer, or from the public, by adding the VAT to the prices of goods and services and remit the same to the Government within the time prescribed by law.

Accordingly, it is clear that the real burden of the VAT is undoubtedly on the consumer. The economic burden of the tax is on him and there is no such economic burden on the businessman whose duty is merely to collect it on behalf of the Government. Thus he has only legal burden, that is, the responsibility to collect VAT tax and remit it with correct and complete accounts to the Inland Revenue Department. In transactions specially concerning institutions and organizations, VAT is collected not from the ordinary public but from Government Ministries, Departments, Corporations, Statutory Boards and Private Sector institutions.

In case the persons authorized to collect VAT from consumers retain the tax so collected with them without remitting it to the IRD, it not only causes a huge social injustice but constitutes a breach of law as well.

Everyone collecting VAT should keep in mind that VAT does not form part of their personal income. It is observed that some people seek registration for the VAT with the intent of making it a source of personal income.

It should also be mentioned that majority of those who are authorized to collect VAT, collect it systematically and duly remit to the Department on due dates.

Those who have registered for the VAT for improper purposes as stated above expect to secure huge amounts of additional income in addition to the profits they duly earn in their ordinary transactions. Thus VAT, in a sense, may seem to contain the characteristics of a superpower. However, at this stage we should examine as to who really commands the super power characterized with VAT. People who collect the VAT and default in the payment jump into the thought that they have this so-called superpower, for the presumed competitive edge they would enjoy in the market and the ability of amassing huge wealth at the cost of the customer.

However, they may be unaware of the fact that the real superpower lies in the hand of those who are there to enforce the tax law.

This may be due to their utter ignorance on the one hand of the inherent willful neglect on the other. Some may have won the challenge whereas others are getting to materialize their object in the foregoing context. It would be useful for them to have a clear idea of the real nature of the superpower attached to the VAT.

Accordingly, it becomes the responsibility of the officers in this Department to educate those concerned on this subject, which is attempted in brief as follows:

There is not much weight of superpower in the penalty charged on a person who has defaulted in the payment of tax. It makes no difference even if the penalty charged is 100 percent since he has already benefited from its retention.

As described above, a person who has no economic burden of the tax but only have a legal burden to collect the tax and pay it to the Department may fail in his legal obligation in any of the following ways. 1. Failure by him to furnish returns relevant to the tax he has collected and default in its payment.

2. Understatement of the tax collected by him and it underpayment.

3. Failure to collect tax, maintain records and make payment as required by law.

A person who falls to furnish returns relating to the tax he has collected and defaults in its payment will be liable to a penalty of Rs 50,000. In such case he is required to furnish the relevant return and pay the tax in default together with the tax penalty.

If legal action is instituted in a Magistrate’s Court against a defaulter for failure to furnish returns, he shall be liable to a fine of Rs 25,000 or to a six months imprisonment of both such fine and imprisonment for each return not furnished.

In addition the tax in default should also be paid together with tax penalty. A person registered for VAT is required to furnish returns monthly or quarterly and pay the tax on due dates. It is observed that there are some persons who have not furnished eight to ten returns and defaulted in payment of taxes. If such person is brought before the law for the recovery of the tax in default he will have to undergo an intended period of imprisonment depending on the number of returns that have fallen due. This is the superpower exercised by the Department and the Court relating to the VAT.

Some of those who have been furnishing returns and paying VAT after having been registered for VAT do not pay the correct amount collected as VAT. In the recent past no deterrent action was taken in respect of such tax defaulters.

Therefore, such persons should be made aware of the consequences of not complying with the requirements of the tax law. Defaulting of tax is an offence punishable under the tax law and if found guilty, the offenders could be sentenced to six months imprisonment or liable to a fine of Rs 25,000 or both after a summary trial. Therefore, tax defaulters should clearly understand this position. The public and the business community should also be aware of these facts.

In the case of a private enterprises VAT returns should be furnished by the proprietor, and if it is a partnership business, by the main partner and if a company or any other institute the chief of the institution who receives that return.

Further they are responsible for furnishing such returns. If they do not furnish returns, default and evade tax they will be subjected to punishments stipulated under the law.

Those who commit the above mentioned offences are liable to a fine of Rs 25,000 or six months imprisonment or both after being produced before a magistrate.

In addition to these, the tax law can be applied on those who evade tax and the penalties for such offences are severe.

One side of the superpower attached to VAT is detailed above. There is another side. Some of the persons registered for VAT will be entitled for refunds.

Specially, those who are engaged in the importation of goods and services can claim the VAT so paid on purchases. If it is not received by the appropriate person on the due date properly it will be a severe offence.

He has absolute right to get the cost incurred by him. If a delay occurs due to their own fault, payment should be made adding an interest rate that may be accrued for the delayed periods.

All these are bygones. It is time that we thought about the future. Do your duty properly. If the VAT returns have not been furnished correctly get them corrected and make the payment due, to be error-free.

If VAT is retained without furnishing returns make it a point to pay it to the Department and furnish the return as soon as possible. Should there be anyone liable to pay VAT by law, get registered for VAT, collect the VAT and send it to the Department within the prescribed time.