COPF questions Fin. Min.’s reluctance to adopt VAT amendment recommendations

The Finance Ministry officials have told the Committee on Public Finance (COPF) that the revenue loss incurred from the initial ‘sugar scam’ should be classified as tax foregone, instead of a tax loss.

This was mentioned when the Finance Ministry officials were summoned before the COPF on Tuesday (22).

When asked about the progress of recovering the lost revenue resulting from the initial ‘sugar scam’, as highlighted in the report by the Auditor General, the ministerial officials contended that it should not be classified as a tax loss, but rather as tax foregone due to the reduction of the special commodity levy from Rs. 50 to 25 cents.

Despite this explanation, the COPF members pressed the officials for data on certain companies that had disproportionately profited from this tax adjustment, amounting to Rs. 1.4 billion from six companies, with an additional six companies yet to be investigated.

Further, the COPF, which previously considered the Value Added Tax (Amendment) Bill that removed all VAT exemptions back in November 2023, also inquired as to why the Finance Ministry has failed to adopt the recommendations made by the committee regarding the VAT Amendment Bill.

Accordingly, the COPF recommended to the Finance Ministry to reconsider VAT exemptions for medical equipment, ambulances, high-protein agro foods for children, and agricultural items, which had not been considered by the Ministry.

The VAT (Amendment) Bill also increased the tax from 15% to 18% and decreased the threshold for VAT registration from Rs. 80 million to Rs. 60 million per annum, effective from January 01, 2024, aiming to adjust tax rates and registration requirements in line with the government’s goal to increase revenue to 14% of GDP in Sri Lanka.

Furthermore, the COPF questioned the officials as to why they keep delaying the implementation of VAT on foreign digital and software providers, creating an unequal playing field for domestic digital and software providers.

COPF chair MP Dr. Harsha de Silva pointed out that local travel booking agents are subjected to VAT while websites such as Booking.com are exempted. Since it is merely a change in the interpretation of the law, the Committee pressed officials on why they’re delaying this, but officials stated that they require a new law, which is set to come into effect in April 2025. The Committee further pushed the officials to find a mechanism to collect due taxes and create an equal playing field until they draft a new VAT bill.

Additionally, the COPF deliberated on the Social Security Contribution Levy (Amendment) Bill. This amendment to the Act, which lowers the turnover threshold of registration for the Social Security Contribution Levy from one hundred and twenty million rupees to sixty million rupees per annum, effective from January 01, 2024, was approved by the Committee.