Wednesday, February 21, 2024

VAT and TIN: Dispel misconceptions

by malinga
January 7, 2024 1:05 am 0 comment 280 views

They say that only two things cannot be avoided in life – death and taxes. Yes, taxes are very much in the news these days in Sri Lanka due to the recent moves by the Government to increase tax revenue.

A debate is raging in the media as well as on the political stages on the imposition of Value Added Tax (VAT) at 18 percent and also on the mandatory registration for the Taxpayer Identification Number (TIN) at the Inland Revenue Department (IRD).

Unfortunately in both cases, the authorities have failed to convey the correct information on VAT and TIN to the public in a cohesive manner, which has led to the circulation of many false narratives and misconceptions about them in social media and even in mainstream media. For example, adequate publicity was not given on VAT-exempt items such as essential foods and infant milk powder.

It is also essential to publicise the items which already had VAT at 15 percent. In effect, the prices of these items will only be increased by three percent. However, there are reports that some traders have added another 18 percent to the existing 15 percent to get a whopping profit. Newspapers quoted one phone vendor as saying that a smartphone that cost Rs.100,000 earlier will now cost Rs.135,000, which is mathematically impossible given that the VAT is only 18 percent. In that case, the new price of the phone should only be around Rs.120,000 (give or take) as there are some other factors also at play.

Indeed, it is vital to stop unscrupulous traders from jacking up the prices of goods in their stores citing VAT as an excuse. First, the VAT is already embedded in the retail prices of most goods. This is why you will not see a separate VAT component in a supermarket bill, for instance. Second, not every business is registered to pay VAT or indeed, has to pay VAT as there is a turnover threshold for VAT. If your barber running a hole-in-the-wall salon says his prices have increased as a result of VAT, it is probably a hair-raising lie.

In any case, consumers should check the Maximum Retail Prices (MRPs) indicated on the goods they buy, lest the trader add a so-called VAT on top of it, unless a pre-VAT price is indicated on the goods sold and VAT is collected at the Point Of Sale (POS). All stores should also display a price list, giving post-VAT prices and the same goes for outlets that provide services, like the aforementioned salon.

A customer’s bill from a well-known bookshop now doing the rounds on social media shows the correct way of adhering to VAT regulations. The bill indicates the outlet’s IRD VAT registration number, the pre-VAT prices of the items and the final price with 18 percent VAT added. This is very transparent as the customer can see the VAT amount upfront. Going forward, all VAT-registered goods and services providers should be told to adopt this model. This is regularly practised in other countries where VAT is levied.

VAT is actually a Goods and Services Tax (GST) in another name and the caveat is that everyone, rich or poor, has to pay it at the POS. These are also called indirect taxes. This, in a nutshell, explains one major shortcoming of our tax structure. Our exchequer derives as much as 80 percent of its revenue from indirect taxes such as VAT and Ports and Airports Levy (PAL), leaving only around 20 percent to be collected from personal income taxes.

Our direct tax base is astonishingly low, compared even with our South Asian neighbours, some of which are poorer than us in strictly economic terms.

The Government is now striving to widen the tax net, so that POS taxes can be reduced and even phased out at some point in the future. The TIN is a step in this direction and one that should have been taken at least around two decades back.

First of all, the IRD and the Government should stress the fact that the TIN is only a statutory requirement and that having a TIN does not automatically make someone liable to pay income tax. In other words, it will be somewhat similar to the National Identity Card (NIC) number or the Social Security Number in the US, which are required for many forms and transactions. In the next few years and decades, it could be just as necessary as the NIC for everyday work and transactions. But at present, the TIN will only come into play if one buys or registers a car, buys a land or a house or engages in any such other business, the idea being that if one can afford to splurge on a car or house, he or she should be in a position to pay some sort of taxes to the authorities.

This logic cannot be faulted. It would hopefully unearth more potential taxpayers who are now more or less dodging the tax net and eventually reduce the VAT burden on the public.

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