VAT input claim

We refer to the press notification dated 11.02.2011 and wish to quote “Any unabsorbed VAT inputs outstanding as at 31.12.2010 calculated under the respective provisions of the VAT Act will be deductible from any output VAT in every month of each taxable period commencing on or after 01.01.2011 subject to:-

- A limit of 10 percent of the total undeducted inputs outstanding as at 31.12.2010: and

- Total input credits (including inputs after 31.12.2010) not exceeding 100 percent of the output VAT

Originally it was agreed to permit 10 percent input claim per taxable period of three months and now it has been increased to 10 percent per month. Tax payers were relieved to observe that corrective action had been taken to recoup the VAT input claim outstanding as at 31.12.2010 in 10 monthly instalments (minimum) instead of 30 months as announced earlier on 28.12.2010.

We are surprised and shocked to hear the actual position taken by the Inland Revenue Department now is to set off unabsorbed input credit against VAT from 01.01.2011 subject to the maximum of 10 percent of the unabsorbed or the 5 percent of the VAT payable if any (after deducting the input tax) whichever is lower.

This requirement has serious adverse effects on tax payers.

It should be noted that if VAT output liability per month since 01.01.2011 is equal to even 10 percent of the VAT input Claim outstanding as at 31.12.2010; it could be recouped in 10 monthly instalments (minimum) according to the original agreement.

Now this will increase to 200 months according to the new 5 percent limit. Further if the tax output liability is equal to 1 percent of the input claim outstanding the recoupment period which increase from 100 to 2,000 months as per new requirement.

This massive build up of VAT input claim outstanding as at 31.12.2010 was made due to the restriction imposed by the Dept. of Inland Revenue to limit the VAT input claim to 85 percent of the VAT output liability since 01.01.2007.

Therefore it was rather frustrating to note that even after four years of accumulation recoupment is taking more than 200 months. (16 1/2 years) and not 10 months as agreed before.

It is not correct for the Government to grant tax relief and concession to taxpayers and cancel same later with retrospective effect.

This results in frustration in the minds of tax payers. It is very important to secure satisfaction of taxpayers which will maximize revenue collection.

It could be considered to permit 5 percent of VAT output liability (gross) per month instead of 5 percent on VAT payable after deducting the input tax as recommended now.

I presume the President looks into this matter and grant suitable relief to tax payers i.e. either deletion of this 5 percent clause or permitting 5 percent on VAT output liability without deducting input tax.

S R Balachandran B.Sc., FCA, FCMA (Sri Lanka) Council Member..The national Chamber of Commerce of Sri Lanka