Simplified VAT system benefits exporters

Sanjeevi Jayasuriya

The simplified VAT system has new features that benefit the exporters which address the cash flow issues and refund issues. This is an important scheme where it includes an expanded VAT suspension scheme, Inland Revenue Department Deputy Commissioner General Mallika Samarasekera said.

The VAT system of any country applies a destination principle by which total VAT revenue in relation to a good accrues to the country in which the final computation takes place, she said at a seminar held at the Ceylon Chamber of Commerce recently.

The application of this principle therefore requires VAT to be removed from exports. This is achieved by applying a zero rate to export sale and allowing the exporter to recover VAT paid on purchases. This is the only way which goods can be dispatched from a country free of VAT.

A key feature of the invoice-credit form of VAT is that exporters will pay more tax on their purchases than is due on their sales and so can seek refunds of excess credits from the government. While refunding is straightforward in principle, serious problems arise in practice including opportunities for fraud and corruption and denial of refunds by us leads to cash shortages in business, she said.

In theory, VAT refunds should be paid promptly following receipt by the tax authority of a VAT return giving rise to an excess credit. That is the practice of most developed countries. The situation is different in developing countries and transitional countries due to various reasons. However, often it takes a longer period to process some of the refund claims.

“In export oriented countries, such practices can seriously undermine the competitiveness of the export sector. We need to take a cue from developed countries where they have adopted best practices with highly sophisticated systems. This will ensure smooth operation of the simplified VAT scheme”, she said.

A common feature of VAT law is to impose a deadline on the tax authority to pay refunds within a prescribed period starting from the time a claim for a refund is made. The policymakers have often advocated that to make the operation of the VAT to be fair adhering to tight statutory timetables, Samarasekera said.